Pre-Effective Amendment to Registration Statement for a Separate Account (Unit Investment Trust) — Form N-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-4 EL/A Pre-Effective Amendment to Registration Statement 83± 317K
for a Separate Account (Unit Investment
Trust)
8: EX-99.B10 Independent Auditors' Consent 1 6K
9: EX-99.B13 Calculation of Performance Information 35± 145K
10: EX-99.B15 Organizational Chart 1 7K
2: EX-99.B3 Form of Principal Underwriters Agreement 2± 13K
3: EX-99.B6(I) Articles of Incorporation 25± 83K
4: EX-99.B6(II) Amendment to Bylaws 23± 87K
5: EX-99.B8(I) Participation Agreement 16± 74K
6: EX-99.B8(II) Form of Participation Agreement 20± 76K
7: EX-99.B9 Opinion and Consent of Counsel 2± 9K
N-4 EL/A — Pre-Effective Amendment to Registration Statement for a Separate Account (Unit Investment Trust)
Document Table of Contents
File Nos. 333-25663
811-08178
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. ___ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 1 [X]
(Check appropriate box or boxes.)
American Fidelity Separate Account B
_________________________________________
(Exact Name of Registrant)
American Fidelity Assurance Company
_________________________________________
(Name of Depositor)
2000 N. Classen Blvd., Oklahoma City, Oklahoma 73106
____________________________________________________________ __________
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (405) 523-2000
Name and Address of Agent for Service
Stephen P. Garrett
Senior Vice President
Law & Governmental Affairs Dept.
American Fidelity Corporation
2000 N. Classen Blvd.
Oklahoma City, OK 73106
Copies to:
Lynn K. Stone
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
Registrant is registering an indefinite number of securities under the
Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
CROSS REFERENCE SHEET
(Required by Rule 495)
[Download Table]
Item No. Location
-------- ----------------------
PART A
Item 1. Cover Page Cover Page
Item 2. Definitions Glossary of Terms
Item 3. Synopsis Summary
Item 4. Condensed Financial Information Not Applicable
Item 5. General Description of Registrant, Depositor,
and Portfolio Companies Investment Options,
American Fidelity,
the Separate Account
Item 6. Deductions and Expenses Expenses
Item 7. General Description of Variable Annuity
Contracts The AFAdvantage
Variable Annuity
Item 8. Annuity Period Annuity Provisions
Item 9. Death Benefit Death Benefit
Item 10. Purchases and Contract Value How to Purchase the
AFAdvantage Variable
Annuity
Item 11. Redemptions Withdrawals
Item 12. Taxes Taxes
Item 13. Legal Proceedings. Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information Table of Contents of
the Statement of
Additional Information
CROSS REFERENCE SHEET (CONT'D)
(Required by Rule 495)
[Download Table]
Item No. Location
-------- --------------------
PART B
Item 15. Cover Page Cover Page
Item 16. Table of Contents. Table of Contents
Item 17. General Information and History General Information
and History of the
Company
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters Distributor
Item 21. Calculation of Performance Data Performance
Information
Item 22. Annuity Payments. Annuity Provisions
Item 23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered, in Part C to this Registration Statement.
PART A
THE AFADVANTAGE VARIABLE ANNUITY
issued by
AMERICAN FIDELITY SEPARATE ACCOUNT B
and
AMERICAN FIDELITY ASSURANCE COMPANY
___________, 1997
This prospectus describes the AFAdvantage Variable Annuity offered by American
Fidelity Assurance Company (American Fidelity, our, us or we). Our home office
is 2000 N. Classen Boulevard, Oklahoma City, Oklahoma 73106.
The annuity is a fixed and variable deferred annuity policy which has 10
Investment Options - the Guaranteed Interest Account Option and the following
Portfolios :
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch American Balanced Fund
Merrill Lynch International Equity Focus Fund
Merrill Lynch High Current Income Fund
DREYFUS STOCK INDEX FUND
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
Small Company Stock Portfolio
Please read this prospectus carefully before investing and keep it for future
reference. It contains important information about the AFAdvantage Variable
Annuity.
To learn more about the annuity offered by this prospectus, you can obtain a
copy of the Statement of Additional Information (SAI) dated _________, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this prospectus. The Table of Contents of the SAI
is found on the last page of this prospectus. For a free copy of the SAI, call
us at (800) 662-1106 or write us at: P.O. Box 25523, Oklahoma City, Oklahoma
73125-0523.
INVESTMENT IN A VARIABLE ANNUITY IS SUBJECT TO RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL. THE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND 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 SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
GLOSSARY OF TERMS
SUMMARY
FEE TABLE
THE AFADVANTAGE VARIABLE ANNUITY
Policy Owner
Joint Owner
Beneficiary
Assignment of the Policy
ANNUITY PROVISIONS
Annuity Date
Selection of an Annuity Option
Annuity Payments
Annuity Options
HOW TO PURCHASE THE AFADVANTAGE VARIABLE ANNUITY
Purchase Payments
Allocation of Purchase Payments
Right to Examine Policy
Accumulation Units
INVESTMENT OPTIONS
Portfolios
Guaranteed Interest Account Option
Voting Rights
Substitution
Transfers
Transfers during the Accumulation Phase
Transfers during the Annuity Phase
Automatic Dollar Cost Averaging
Asset Rebalancing
PERFORMANCE
EXPENSES
Insurance Charges
Mortality and Expense Risk Charge
Administrative Charge
Distribution Expense Charge
Policy Maintenance Charge
Withdrawal Charge
Reduction or Elimination of the Withdrawal Charge
Transfer Fee
Premium Taxes
Income Taxes
Portfolio Expenses
TAXES
Annuities in General
Qualified and Non-Qualified Policies
Tax Treatment of Withdrawals - Non-Qualified Policies
Tax Treatment of Withdrawals - Qualified Policies
Tax Treatment of Withdrawals - Tax-Sheltered Annuities
Diversification
WITHDRAWALS
Systematic Withdrawal Program
Suspension of Payments or Transfers
LOANS
DEATH BENEFIT
Death Benefit Amount
Death of Owner Before Annuity Date
Death of Annuitant Before the Annuity Date
Death of Owner After the Annuity Date
Death of Annuitant After the Annuity Date
OTHER INFORMATION
American Fidelity
The Separate Account
Legal Proceedings
Distribution
Administration
Financial Statements
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
GLOSSARY OF TERMS
Some of the terms used in this prospectus are technical. To help you understand
these terms, we have defined them below and have capitalized them throughout the
prospectus.
ACCOUNTS: The Guaranteed Interest Account and the Portfolios.
ACCOUNT VALUE: The value of your Policy in the Investment Options during the
Accumulation Phase.
ACCUMULATION PHASE: Until you decide to begin receiving Annuity Payments, your
annuity is in the Accumulation Phase.
ACCUMULATION UNIT: The unit of measurement we use to keep track of the value of
your Policy invested in the Portfolios during the Accumulation Phase.
ANNUITANT: The natural person on whose life Annuity Payments are based.
ANNUITY DATE: The date Annuity Payments begin. You can choose the month and year
in which Annuity Payments will begin.
ANNUITY OPTIONS: You can choose among available pay-out plans for your Annuity
Payments. These are referred to as Annuity Options.
ANNUITY PAYMENTS: You can receive regular income payments from your Policy.
These are referred to as Annuity Payments.
ANNUITY PHASE: The period during which we make Annuity Payments.
ANNUITY UNIT: The unit of measurement we use to calculate your Annuity Payments
during the Annuity Phase.
BENEFICIARY: The person or entity you name to receive any death benefits.
FUNDS: Merrill Lynch Variable Series Funds, Inc., Dreyfus Stock Index Fund, The
Dreyfus Socially Responsible Growth Fund, Inc. and Dreyfus Variable Investment
Fund.
GUARANTEED INTEREST ACCOUNT OPTION: An investment option within our general
account which earns interest credited by us.
INVESTMENT OPTIONS: The Portfolios and the Guaranteed Interest Account Option.
JOINT OWNER: The Policy can be owned by you and your spouse (the Joint Owner).
NON-QUALIFIED: If you do not purchase the Policy under a Qualified plan, your
Policy is referred to as a Non-Qualified Policy.
POLICY: The AFAdvantage Variable Annuity.
POLICY ANNIVERSARY: The anniversary of the date your Policy was issued.
POLICY OWNER: The person or entity entitled to ownership rights under a
Policy.
POLICY YEAR: The annual period which begins on the date your Policy was issued
and each anniversary of that date.
PORTFOLIOS: The variable investment options available under the Policy. Each
Portfolio has its own investment objective and is invested in a Fund or a
corresponding portfolio of a Fund.
PURCHASE PAYMENT: The money you invest to buy the Policy.
QUALIFIED: Policies purchased under special tax qualification rules (examples:
Individual Retirement Annuities, 403(b) Tax-Sheltered Annuities, H.R. 10 and
Corporate Pension and other qualified retirement plans).
TAX DEFERRAL: Tax deferral means that you are not taxed on earnings or
appreciation on the assets in your Policy until you take money out of your
Policy.
SUMMARY
The following information is a summary of some of the more important features of
your annuity Policy. More detailed information is contained in the corresponding
sections of this prospectus.
THE AFADVANTAGE VARIABLE ANNUITY. This prospectus describes the flexible premium
variable and fixed deferred annuity policy offered by American Fidelity
Assurance Company (American Fidelity). It is a contract between you, the Policy
Owner, and American Fidelity, an insurance company. The Policy provides a means
for investing on a Tax-Deferred basis in the Portfolios and the Guaranteed
Interest Account Option. The AFAdvantage Variable Annuity is designed for people
seeking long-term Tax-Deferred accumulation of assets, generally for retirement
or other long-term purposes. The Tax-Deferred feature is most attractive to
people in high federal and state tax brackets. You should not buy the Policy if
you are looking for a short-term investment or if you cannot accept the risk of
getting back less money than you put in.
Like all deferred annuities, your Policy has two phases: the Accumulation Phase
and the Annuity Phase. During the Accumulation Phase, you invest money in your
annuity and your earnings accumulate on a Tax-Deferred basis. Your earnings are
based on the investment performance of the Portfolios you selected and/or the
interest rate earned on the money you have in the Guaranteed Interest Account.
You can withdraw money from your Policy during the Accumulation Phase. During
the Accumulation Phase, the earnings are taxed as income only when you make a
withdrawal. A federal tax penalty may apply if you make withdrawals before age
59 1/2. The Annuity Phase occurs when you begin receiving regular payments from
your Policy. Among other factors, the amount of the payments you may receive
during the Annuity Phase will depend upon the amount of money you are able to
accumulate in your Policy during the Accumulation Phase.
ANNUITY PROVISIONS. You can receive monthly Annuity Payments from your Policy
under an Annuity Option. During the Annuity Phase, payments can come from the
Portfolios and/or the Guaranteed Interest Account.
HOW TO PURCHASE THE AFADVANTAGE VARIABLE ANNUITY. You may make purchase payments
at any time during the Accumulation Phase. Each payment must be at least $25.
You must complete an application and make your first Purchase Payment to
purchase the Policy.
INVESTMENT OPTIONS. You may allocate your money to the Guaranteed Interest
Account Option of American Fidelity or the following Portfolios:
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch American Balanced Fund
Merrill Lynch International Equity Focus Fund
Merrill Lynch High Current Income Fund
DREYFUS STOCK INDEX FUND
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
Small Company Stock Portfolio
The Portfolios offer professionally managed investment choices and are fully
described in the attached prospectuses for the Funds. You can make or lose money
in the Portfolios, depending upon market conditions.
The Guaranteed Interest Account Option offers an interest rate that is
guaranteed by us. While your money is in the Guaranteed Interest Account Option,
the interest your money will earn (subject to a withdrawal charge on any
withdrawals from the Guaranteed Interest Account) is guaranteed by American
Fidelity.
EXPENSES. The following are the annual insurance charges which are deducted from
the average daily value of your Policy allocated to the Portfolios every year:
Mortality and Expense Risk Charge - 1.25%; Administrative Charge - .15%; and
Distribution Expense Charge - .10%. Each year we also deduct a $30 policy
maintenance charge from your Policy. There are also annual expenses of the
Portfolios which range from .30% to .96% of the average daily value of the
Portfolios, depending upon the Portfolio(s) you invest in.
You can transfer between accounts up to 12 times a Policy Year during the
Accumulation Phase. After that the charge is the lesser of $25 or 2% of the
amount transferred. You may make one transfer a Policy Year during the Annuity
Phase. The one transfer is free.
During the first Policy Year, any withdrawals you make will have a withdrawal
charge. After the first Policy Year, you may make a withdrawal of up to 10% of
the value of your Policy once each Policy Year without incurring a withdrawal
charge (referred to as the "free withdrawal amount"). If you do not use the free
withdrawal amount in any year, it may not be carried forward and used the next
Policy Year.
The withdrawal charge is a percentage of the amount withdrawn in excess of the
free withdrawal amount as shown below:
[Download Table]
Policy Year Withdrawal Charge %
-------------------- -------------------
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 2%
8 1%
9 + 0%
American Fidelity may assess a state premium tax charge which ranges from 0-4.0%
(depending upon the state).
TAXES. Your earnings are not taxed until you take them out. In most cases, if
you take money out, earnings come out first and are taxed as income. If you are
younger than 59 1/2 when you take money out, you may be charged a federal tax
penalty on the taxable amounts withdrawn, which in most cases is 10% on the
taxable amounts. Payments during the Annuity Phase are considered partly a
return of your original investment. That part of each payment is not taxable as
income. If the Policy is tax-qualified, the entire payment may be taxable.
WITHDRAWALS. You may make a withdrawal at any time during the Accumulation
Phase. There may be limits to the amount you can withdraw from a Qualified Plan.
Any partial withdrawal must be for at least $250 (there are exceptions for
withdrawals allowed under 403(b) and 401 hardship provisions), but a withdrawal
must not reduce the value of your Policy below $100. This requirement is waived
if the partial withdrawal is pursuant to the Systematic Withdrawal Program. You
may request a withdrawal or elect the Systematic Withdrawal Program. Of course,
you may also have to pay income tax and a tax penalty on any money you take out.
DEATH BENEFIT. If you or the Annuitant die during the Accumulation Phase, the
person you have selected as your Beneficiary will receive a death benefit.
OTHER INFORMATION.
Free Look. If you cancel the Contract within 20 days after receiving it, we
will refund you the greater of the Purchase Payment paid or the value of your
Policy as of the earlier of the date we receive the Policy at our home office or
the date our agent receives the Policy.
No Probate. In most cases, when you die, your Beneficiary will receive the
death benefit without going through probate.
INQUIRIES. If you have any questions about your AFAdvantage Variable Annuity or
need more information, please contact us at:
American Fidelity Assurance Company
Annuity Services Department
P.O. Box 25523
Oklahoma City, OK 73125-0523
(800) 662-1106
FEE TABLE
OWNER TRANSACTION EXPENSES
[Download Table]
Withdrawal Charge
(as a percentage of
the amount withdrawn)
(see Note 2 below) Policy Year Withdrawal Charge
----------- ------------------
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 2%
8 1%
9+ 0%
[Download Table]
Transfer Fee No charge for first 12 transfers in a Policy
Year during the Accumulation Phase and no
charge for one transfer allowed each Policy
Year during the Annuity Phase; thereafter the
fee is the lesser of $25 or 2% of the amount
transferred.
Policy Maintenance Charge $30 per Policy per Policy Year.
[Download Table]
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Administrative Charge .15%
Distribution Expense Charge .10%
-----
Total Separate Account Annual Expenses 1.50%
FUND ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
[Enlarge/Download Table]
Other
Expenses
Management (after expense Total Annual
Fees reimbursement) Expenses
----------- ---------------------------- -------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS INC.
Merrill Lynch Prime Bond Fund .44% .05% .49%
Merrill Lynch Special Value Focus Fund .75% .06% .81%
Merrill Lynch American Balanced Fund .55% .05% .60%
Merrill Lynch International Equity Focus Fund .75% .14% .89%
Merrill Lynch High Current Income Fund .49% .05% .54%
DREYFUS STOCK INDEX FUND .245% .055% .30%
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.* .72% .24% .96%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio .75% .08% .83%
Small Company Stock Portfolio* .56% .19% .75%
<FN>
* From time to time, The Dreyfus Corporation and, in the case of The Dreyfus
Socially Responsible Growth Fund, Inc., NCM Capital Management Group, Inc., may
waive all or part of their fees and/or voluntarily assume certain Fund expenses.
As of the date of this Prospectus, certain fees are being waived or expenses
being assumed, in each case on a voluntary basis. Without such waivers or
reimbursements, the Management Fees, Other Expenses and Total Annual Expenses
that would have been incurred for the fiscal year ended December 31, 1996 would
be - The Dreyfus Socially Responsible Growth Fund, Inc.: .75%, .24% and .99%;
and Dreyfus Variable Investment Fund - Small Company Stock Portfolio: .75%, .19%
and .94%. There is no guarantee that any fee waivers or expense reimbursements
will continue in the future.
</FN>
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if: (a) you surrender your Policy at the end of each
time period; or (b) if your Policy is not surrendered or is annuitized:
[Download Table]
Time Periods
1 Year 3 Years
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund a) $122.83 a) $188.54
b) $ 42.25 b) $127.19
Merrill Lynch Special Value Focus Fund a) $125.87 a) $197.39
b) $ 45.46 b) $136.66
Merrill Lynch American Balanced Fund a) $123.84 a) $191.59
b) $ 43.35 b) $130.46
Merrill Lynch International Equity Focus Fund a) $126.51 a) $199.59
b) $ 42.26 b) $139.01
Merrill Lynch High Current Income Fund a) $123.29 a) $189.93
b) $ 42.75 b) $128.68
DREYFUS STOCK INDEX FUND a) $121.08 a) $183.24
b) $ 40.34 b) $121.53
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. a) $127.15 a) $201.51
b) $ 46.96 b) $141.06
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio a) $125.96 a) $197.94
b) $ 45.66 b) $137.24
Small Company Stock Portfolio a) $125.22 a) $195.74
b) $ 44.86 b) $134.89
THE ANNUAL EXPENSES OF THE PORTFOLIOS ARE BASED ON DATA PROVIDED BY THE FUNDS.
WE HAVE NOT INDEPENDENTLY VERIFIED SUCH DATA.
1. The purpose of the Fee Table is to show you the various expenses you can
expect to incur directly or indirectly with the Policy. The Fee Table reflects
expenses of the Separate Account as well as the Portfolios.
2. Under certain circumstances, you can make a withdrawal without incurring
the withdrawal charge. (See Expenses - Withdrawal Charge.)
3. Premium taxes are not reflected. They may apply.
4. The assumed average Policy size is $1,360. The $30 policy maintenance
charge is reflected in the examples as $22.06.
5. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
As of the date of this prospectus, the sale of the AFAdvantage Variable
Annuity had not begun. Therefore, no condensed financial information is
presented.
THE AFADVANTAGE VARIABLE ANNUITY
An annuity is a contract between you, the Policy Owner, and an insurance company
(in this case American Fidelity), where the insurance company promises to pay
you (or someone else you choose) an income in the form of Annuity Payments
beginning on a date chosen by you. Until you decide to begin receiving Annuity
Payments, your annuity is in the Accumulation Phase. Once you begin receiving
Annuity Payments, your Policy is in the Annuity Phase. If you or the Annuitant
die during the Accumulation Phase, American Fidelity will pay a death benefit to
your Beneficiary.
The Policy benefits from Tax Deferral. Tax deferral means that you are not taxed
on earnings or appreciation on the assets in your Policy until you take money
out of your Policy.
The Policy is called a variable annuity because you can choose among the
available Portfolios and, depending upon market conditions, you can make or lose
money in any of these Portfolios. If you select the variable annuity portion of
the Policy, the amount of money you are able to accumulate in your Policy during
the Accumulation Phase depends in part upon the investment performance of the
Portfolio(s) you select. The Annuity Payments you will receive during the
Annuity Phase can come from the Portfolios and/or the Guaranteed Interest
Account.
The Guaranteed Interest Account Option offers an interest rate that is
guaranteed by American Fidelity. If you select the Guaranteed Interest Account
Option, your money will be placed with our other general assets. If you select
the Guaranteed Interest Account Option, the amount of money you are able to
accumulate in your Policy during the Accumulation Phase depends upon the total
interest credited to your Policy.
POLICY OWNER . You, as the Policy Owner, have all the rights under the Policy.
You can name a new Policy Owner. A change of Owner will revoke any prior
designation of Owner. Any ownership changes must be sent to our home office on a
form we accept. The change will go into effect when it is signed, subject to any
payments we make or other actions we take before we record it. American Fidelity
will not be liable for any payment made or action taken before it records the
change. The Policy Owner is as designated at the time the Policy is issued,
unless changed. A CHANGE OF OWNERSHIP MAY BE A TAXABLE EVENT.
JOINT OWNER . The Policy can be owned by Joint Owners. If Joint Owners are
named, any Joint Owner must be the spouse of the other Owner. Upon the death of
either Owner, the surviving spouse will be the primary Beneficiary. Any other
Beneficiary designation will be treated as a contingent Beneficiary unless
otherwise indicated in a form we accept.
BENEFICIARY . The Beneficiary is the person(s) or entity you name to receive any
death benefit. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. If the Beneficiary and the Policy Owner or Annuitant,
as applicable, die at the same time, we will assume that the Beneficiary died
first for purposes of payment of the death benefit. You can name any Beneficiary
to be an irrevocable Beneficiary. The interest of an irrevocable Beneficiary
cannot be changed without his or her consent.
You can change the Beneficiary at any time during the Annuitant's life. To do
so, you need to send a request to our home office. The request must be on a form
we accept. The change will go into effect when signed, subject to any payments
we make or actions we take before we record the change. A change cancels all
prior Beneficiaries, except a change will not cancel any irrevocable Beneficiary
without his or her consent. The interest of the Beneficiary will be subject to:
any assignment of the Policy which is binding on us, and any Annuity Option in
effect at the Annuitant's death.
ASSIGNMENT OF THE POLICY
During the Annuitant's life, you can assign some or all of your rights under the
Policy to someone else. A signed copy of the assignment must be sent to our home
office on a form we accept. The assignment will go into effect when it is
signed, subject to any payments we make or other actions we take before we
record it. We are not responsible for the validity or effect of any assignment.
If there are irrevocable Beneficiaries, you need their consent before assigning
your ownership rights in the Policy. Any assignment made after the death benefit
has become payable will be valid only with our consent. If the Policy is
assigned, your rights may only be exercised with the consent of the assignee of
record. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the Policy is issued pursuant to a Qualified plan, there may be limitations
on your ability to assign it.
ANNUITY PROVISIONS
ANNUITY DATE
You can receive regular monthly income payments (Annuity Payments) under your
Policy. You can choose the month and year in which those payments begin. We call
that date the Annuity Date. You can select an Annuity Date at any time during
the Accumulation Phase. You must notify us of this date at least 30 days prior
to the date you want your Annuity Payments to begin. Prior to the Annuity Date,
you may change the Annuity Date by written request. Any change must be requested
at least 30 days prior to the new Annuity Date. Your Annuity Date must be the
first day of a calendar month. The Annuity Date may not be later than the
earlier of when the Annuitant reaches attained age 85 or the maximum date
permitted under state law. Your Annuity Date cannot be any earlier than 30
days after you buy the Contract.
SELECTION OF AN ANNUITY OPTION
You can choose among income plans. We call those Annuity Options. A selection to
receive Annuity Payments under an Annuity Option must be made at least 30 days
prior to the Annuity Date. If no option is selected, Option 2 with 120 monthly
payments guaranteed will automatically be applied. Prior to the Annuity Date,
you may change the Annuity Option selected by written request. Any change must
be requested at least 30 days prior to the Annuity Date. If an option is based
on life expectancy, we will require proof of the payee's date of birth.
ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments. Annuity Payments can be made
on a variable basis (which means they will be based on the investment
performance of the Portfolios) and/or on a fixed basis (which means they will
come from the Guaranteed Interest Account). However, payments under Option 4 can
only come from the Guaranteed Interest Account (fixed annuity). Depending on
your election, the value of your Policy (adjusted for the policy maintenance
charge and any taxes) will be applied to provide the Annuity Payment. If no
election has been made 30 days prior to the Annuity Date, amounts in the
Guaranteed Interest Account will be used to provide a fixed annuity and amounts
in the Portfolios will be used to provided a variable annuity. If you choose
to have any portion of your Annuity Payments come from the Portfolio(s), the
dollar amount of your payment will depend upon 3 things: 1) the value of your
Policy in the Portfolio(s) on the Annuity Date, 2) the assumed investment rate
used in the annuity table for the Policy, and 3) the performance of the
Portfolios you selected. You can choose either a 3%, 4% or 5% assumed investment
rate. If you do not choose an assumed investment rate, the assumed investment
rate will be 3%. If the actual performance exceeds the 3% assumed rate (or
whichever rate you choose), your Annuity Payments will increase. Similarly, if
the actual rate is less than 3% (or whichever rate you choose), your Annuity
Payments will decrease. The amount of the first Annuity Payment will depend
on the Annuity Option elected and the age of the Annuitant at the time the first
payment is due.
ANNUITY OPTIONS
You can choose one of the following Annuity Options or any other Annuity Option
acceptable to us. After Annuity Payments begin, you cannot change the Annuity
Option.
OPTION 1. LIFETIME ONLY ANNUITY: We will make monthly payments during the life
of the Annuitant. If this option is elected, payments will stop when the
Annuitant dies.
OPTION 2. LIFETIME ANNUITY WITH GUARANTEED PERIODS: We will make monthly
payments for the guaranteed period selected during the life of the Annuitant.
When the Annuitant dies, any amounts remaining under the guaranteed period
selected will be distributed to the Beneficiary at least as rapidly as they were
being paid as of the date of the Annuitant's death. The guaranteed period may be
10 years or 20 years.
OPTION 3. JOINT AND SURVIVOR ANNUITY: We will make monthly payments during the
joint lifetime of the Annuitant and a Joint Annuitant. Payments will continue
during the lifetime of the surviving Annuitant and will be computed on the basis
of 100%, 66 2/3% or 50% of the Annuity Payment in effect during the joint
lifetime.
OPTION 4. PERIOD CERTAIN: We will make monthly payments for a specified period.
The specified period must be at least five years and cannot be more than 30
years. This option is available as a fixed annuity only.
HOW TO PURCHASE THE AFADVANTAGE VARIABLE ANNUITY
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy the Policy. You may make
Purchase Payments at any time during the Accumulation Phase. You may increase,
decrease, or change the frequency of such payments. However, each Purchase
Payment must be for at least $25. If in any year no Purchase Payments are made,
the Policy will not lapse. We reserve the right to reject any application or
Purchase Payment. We may deduct amounts from Purchase Payments for premium
taxes, if any. At the time you buy the Policy, you and the Annuitant cannot be
older than 85 years old, or the maximum age permitted under state law.
ALLOCATION OF PURCHASE PAYMENTS
We will allocate the first net Purchase Payment to one or more Investment
Options according to your instructions. We will allocate subsequent Purchase
Payments in the same manner as the first unless you change your instructions.
You may change the allocations of Investment Options by using a form we accept.
We reserve the right to limit the available Investment Options from which you
may choose. All allocations must be in whole percentages, and must not be less
than $25.
Once we receive your Purchase Payment and application, we will issue your Policy
and allocate your first Purchase Payment within 2 business days. If you do not
give us all of the information we need, we will contact you to get it. If for
some reason we are unable to complete this process within 5 business days, we
will either send back your money or get your permission to keep it until we get
all of the necessary information. We will credit your subsequent Purchase
Payments to your Policy within one business day. Our business day closes when
the New York Stock Exchange closes, which is usually at 4:00 p.m. Eastern time.
RIGHT TO EXAMINE POLICY
If you change your mind about owning the Policy, you can cancel it within 20
days after receiving it. When you cancel the Policy within this time period, we
will not assess a withdrawal charge. If you return the Policy, it will be void
from the beginning and we will refund to you the greater of: the Purchase
Payments paid, or the value of your Policy as of the earlier of the date we
receive the Policy at our home office, or the date our agent receives the
Policy.
ACCUMULATION UNITS
The value of the portion of your Policy allocated to the Portfolios will go up
or down depending upon the investment performance of the Portfolio(s) you
choose. The value of your Policy will also depend on the expenses of the Policy.
In order to keep track of the value of your Policy, we use a measurement called
an Accumulation Unit. During the Annuity Phase, we call the unit an Annuity
Unit.
Every business day we determine the value of an Accumulation Unit for a share of
a Portfolio by multiplying the Accumulation Unit value for the previous period
by a factor for each Portfolio for the current period. The factor for each
Portfolio is determined by:
1. dividing the value of the underlying Portfolio share at the end of
the current period by the value of an underlying Portfolio share for the
previous period; and
2. subtracting from that amount any mortality and expense risk,
administrative and distribution expense charges.
The value of an Accumulation Unit may go up or down from day to day.
When you make a Purchase Payment, we credit your Policy with Accumulation Units.
The number of Accumulation Units credited is determined by dividing the amount
of the Purchase Payment allocated to a Portfolio by the value of the
Accumulation Unit for that Portfolio.
We calculate the value of an Accumulation Unit for each Portfolio after the New
York Stock Exchange closes each day and then credit your Policy accordingly.
EXAMPLE:
On Thursday we receive an additional Purchase Payment of $100 from you. You
direct this to go to the Merrill Lynch Special Value Focus Fund investment
option. When the New York Stock Exchange closes on that Thursday, we
determine that the value of an Accumulation Unit for the Merrill Lynch
Special Value Focus Fund is $10.75. We then divide $100 by $10.75 and credit
your Policy on Thursday night with 9.30 Accumulation Units for the Merrill Lynch
Special Value Focus Fund.
INVESTMENT OPTIONS
When you buy the Policy you can allocate your money to the Portfolios listed
below and/or the Guaranteed Interest Account.
PORTFOLIOS
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc. is an open-end management investment
company with sixteen separate funds. Merrill Lynch Asset Management, L.P. is the
investment adviser to the Funds. The following Funds are available under the
Policy:
Merrill Lynch Prime Bond Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch American Balanced Fund
Merrill Lynch International Equity Focus Fund
Merrill Lynch High Current Income Fund
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified, management investment
company. The Dreyfus Corporation serves as the Fund's manager. Dreyfus has hired
its affiliate, Mellon Equity Associates, to serve as the Fund's index fund
manager and provide day-to-day management of the Fund's investments.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end, diversified
management investment company. The Dreyfus Corporation serves as the Fund's
investment adviser. NCM Capital Management Group, Inc. serves as the Fund's
sub-investment adviser and provides day-to-day management of the Fund's
portfolio.
THE DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund is an open-end management investment company
with thirteen portfolios. The Dreyfus Corporation serves as the investment
adviser. The following Funds are available under the Policy:
Growth and Income Portfolio
Small Company Stock Portfolio
Additional Portfolios and/or Funds may be available in the future.
Shares of the Funds are issued and redeemed in connection with investments in
and payments under certain variable annuity contracts and variable life
insurance policies of various life insurance companies which may or may not be
affiliated. The Funds do not believe that offering their shares in this manner
will be disadvantageous to you. Nevertheless, the Board of Trustees or the
Boards of Directors, as applicable, intend to monitor events in order to
identify any material irreconcilable conflicts which may possibly arise and to
determine what action, if any, should be taken. If such a conflict were to
occur, one or more insurance company separate accounts might withdraw its
investments in a Portfolio. An irreconcilable conflict might result in the
withdrawal of a substantial amount of a Portfolio's assets which could adversely
affect such Portfolio's net asset value per share.
YOU SHOULD READ THE PROSPECTUSES FOR THE FUNDS CAREFULLY BEFORE INVESTING. THEY
CONTAIN DETAILED INFORMATION ABOUT THE PORTFOLIOS AND ARE ATTACHED TO THIS
PROSPECTUS. You can obtain a copy of the Statement of Additional Information
for the Portfolios by contacting American Fidelity's Service Office at: (800)
662-1106, P.O. Box 25523, Oklahoma City, Oklahoma 73125-0523.
GUARANTEED INTEREST ACCOUNT OPTION
The Guaranteed Interest Account Option is an investment option within our
general account which earns interest credited by us.
Because of certain exemptive and exclusionary provisions, interests in the
Guaranteed Interest Account are not registered under the Securities Act of 1933
and the Guaranteed Interest Account is not registered as an investment company
under the Investment Company Act of 1940. Therefore, neither the Guaranteed
Interest Account nor any interests in it are subject to the provisions of these
Acts. The Company has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosure in this prospectus relating to the
Guaranteed Interest Account Option. Disclosures regarding the Guaranteed
Interest Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
VOTING RIGHTS
American Fidelity is the legal owner of the Portfolio shares. However, American
Fidelity believes that when a Portfolio solicits proxies in conjunction with a
shareholder vote, it is required to obtain from you and other Policy Owners
instructions as to how to vote those shares. When we receive those instructions,
we will vote all of the shares we own in proportion to those instructions.
Should we determine that we are no longer required to comply with the above, we
will vote the shares in our own right.
SUBSTITUTION
American Fidelity may substitute one of the Portfolios you have selected with
another Portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intention to
do this.
TRANSFERS
You may direct us to make transfers between all Investment Options. A transfer
request must be in a form we accept. We reserve the right to limit the number of
transfers that may be made. If you elect to use this transfer privilege, we will
not be liable for transfers made as instructed by you. All transfers must be in
whole percentages. All transfers made on a given date count as one transfer.
We reserve the right, at any time and without prior notice, to end, suspend or
change the transfer privilege.
TRANSFERS DURING THE ACCUMULATION PHASE. If you make more than 12 transfers in a
Policy Year, there is a transfer fee deducted. The fee is the lesser of $25 per
transfer or 2% of the amount transferred. The minimum amount which you can
transfer is $500 from an Account or your entire value in the Account. All
transfers must be in whole percentages.
TRANSFERS DURING THE ANNUITY PHASE. You may make transfers among the Portfolios.
You may also make transfers from the Portfolios to the Guaranteed Interest
Account Option to provide for a fixed annuity. You may only make one transfer
each Policy year during the Annuity Phase. There is no transfer fee charged for
the one transfer. You cannot make a transfer from your fixed annuity to a
Portfolio.
AUTOMATIC DOLLAR COST AVERAGING
Automatic Dollar Cost Averaging allows you to systematically transfer a set
amount each quarter from any Investment Option (source account) to any of
the other Investment Option(s). By allocating amounts on a regular schedule
as opposed to allocating the total amount at one particular time, you may be
less susceptible to the impact of market fluctuations. Automatic Dollar
Cost Averaging is only available during the Accumulation Phase. The minimum
amount which can be transferred each quarter is $500 from each source account.
If you participate in Automatic Dollar Cost Averaging, the transfers made under
the program are taken into account in determining any transfer fee.
ASSET REBALANCING
Once your money has been allocated among the Investment Options, the performance
of the Investment Options may cause your allocation to shift. You can direct us
to automatically rebalance your Policy to return to your original percentage
allocations by selecting our Asset Rebalancing service. The transfer date will
be the 1st day after the end of the Policy year. Asset Rebalancing is only
available during the Accumulation Phase. If you participate in Asset
Rebalancing, the transfers made under the program are taken into account in
determining any transfer fee.
PERFORMANCE
American Fidelity may periodically advertise performance based on the historical
performance of the various Portfolios. American Fidelity will calculate
performance by determining the percentage change in the value of an Accumulation
Unit by dividing the increase (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 insurance charges, policy maintenance charge and
expenses of the Portfolios. It does not reflect the deduction of any applicable
withdrawal charge. Results calculated without the withdrawal charge will be
higher. American Fidelity may also advertise cumulative total return
information. Cumulative total return is determined the same way except that the
results are not annualized. Any advertisement will also include average annual
total return figures which reflect the deduction of the insurance charges,
policy maintenance charge, withdrawal charges and the expenses of the Portfolio.
For periods starting prior to the date the Policies were first offered, the
performance will be based on the historical performance of the corresponding
Portfolios, modified to reflect the charges and expenses of the AFAdvantage
Variable Annuity as if the Policies had been in existence during the period
stated in the advertisement. These figures should not be interpreted to reflect
actual historic performance.
More detailed information regarding how performance is calculated is found
in the SAI.
Any past performance does not guarantee future results of the Portfolios.
EXPENSES
There are charges and other expenses associated with the Contract that will
reduce your investment return. These charges and expenses are:
INSURANCE CHARGES
We deduct insurance charges each day. We do this as part of the calculation of
the value of the Accumulation Units during the Accumulation Phase and the
Annuity Units during the Annuity Phase. The insurance charges are: 1) the
mortality and expense risk charge; 2) the administrative charge; and 3) the
distribution expense charge.
MORTALITY AND EXPENSE RISK CHARGE . This charge is equal, on an annual
basis, to 1.25% of the average daily value of the Policy invested in a
Portfolio, after the deduction of expenses. This charge compensates us for all
the insurance benefits provided by your Policy (for example, the guarantee of
annuity rates, the death benefits, certain expenses related to the Policy, and
for assuming the risk (expense risk) that the current charges will be
insufficient in the future to cover the cost of administering the Policy).
ADMINISTRATIVE CHARGE . This charge is equal, on an annual basis, to .15%
of the average daily value of the Policy invested in a Portfolio, after the
deduction of expenses. This charge may be increased but will never be more than
.25% of the average daily value of the Policy invested in a Portfolio. This
charge, together with the policy maintenance charge (which is explained below),
is for all the expenses associated with the administration of the Policy. Some
of these expenses include: preparation of the Policy, confirmations, annual
reports and statements, maintenance of Policy records, personnel costs, legal
and accounting fees, filing fees, and computer and systems costs.
DISTRIBUTION EXPENSE CHARGE . This charge is equal, on an annual basis, to
.10% of the average daily value of the Policy invested in a Portfolio, after the
deduction of expenses. This charge may be increased but will never be more than
.25% of the average daily value of the Policy invested in a Portfolio. This
charge compensates American Fidelity for the costs associated with the
distribution of the Policies.
POLICY MAINTENANCE CHARGE
Every Policy Year American Fidelity deducts $30 from your Policy as a policy
maintenance charge. American Fidelity reserves the right to change the policy
maintenance charge, however, it will never be more than $36 per year. The charge
will be deducted pro-rata from the Accounts. During the Accumulation Phase, the
policy maintenance charge will be deducted on each Policy Anniversary. If you
make a total withdrawal on other than a Policy Anniversary, the full policy
maintenance charge will be deducted at the time of the withdrawal. During the
Annuity Phase, the charge will be deducted pro-rata from Annuity Payments.
WITHDRAWAL CHARGE
Withdrawals may be subject to a withdrawal charge. During the Accumulation
Phase, you can make withdrawals from your Policy (see the "Withdrawals"
section). During the first Policy Year, all withdrawals will have a withdrawal
charge. After the first Policy Year, you can make a withdrawal of up to 10% of
the value of your Policy (at the time you request the withdrawal) once each
Policy Year without incurring a withdrawal charge (free withdrawal amount). If
you do not use the free withdrawal amount in any year, it cannot be carried
forward to the next Policy Year.
The withdrawal charge is a percentage of the amount withdrawn in excess of the
free withdrawal amount as shown below:
[Download Table]
Policy Year Withdrawal Charge %
-------------------- -------------------
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 2%
8 1%
9+ 0%
The withdrawal charge is calculated at the time of each withdrawal and will
never exceed 8% of the total Purchase Payments. For partial withdrawals, the
charge will be deducted from the value of your Policy remaining. No withdrawal
charge will be applied when a death benefit is paid or payment under any annuity
option providing at least seven annual or 72 monthly payments.
The withdrawal charge compensates us for expenses associated with selling the
Policy.
NOTE: For tax purposes, withdrawals are considered to have come from the last
money you put into the Policy. Thus, for tax purposes, earnings are considered
to come out first. THERE ARE LIMITS TO THE AMOUNT YOU CAN WITHDRAW FROM A
QUALIFIED PLAN KNOWN AS SECTION 403(b) PLAN. See Taxes and the discussion in the
SAI.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
American Fidelity will reduce or eliminate the amount of the withdrawal charge
when the Policy is sold under circumstances which reduce its sales expenses.
Some examples are: if there is a large group of individuals that will be
purchasing the Policy or a prospective purchaser already had a relationship with
American Fidelity. American Fidelity will not deduct a withdrawal charge under a
Policy issued to an officer, director or employee of American Fidelity or any of
its affiliates. Any circumstances resulting in the reduction or elimination of
the withdrawal charge requires our prior approval.
TRANSFER FEE
There is no charge for the first 12 transfers in a Policy Year during the
Accumulation Phase. Thereafter, the fee is the lesser of $25 or 2% of the amount
transferred. During the Annuity Phase, there is no charge for the one transfer
allowed during each Policy Year.
The transfer fee is deducted from the Investment Option which is the source of
the transfer. If your entire interest in an Investment Option is being
transferred, the transfer fee will be deducted from the amount being
transferred. If you make transfers from multiple Investment Options, the
transfer fee will be deducted pro-rata from each source Investment Option.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. American Fidelity is responsible for the payment
of these taxes and will make a deduction from the value of your Policy for them.
Some of these taxes are due when the Policy is issued, others are due when
Annuity Payments begin. It is our current practice to pay any premium taxes when
they become payable to the states. Premium taxes generally range from 0% to
4.0%, depending on the state.
INCOME TAXES
American Fidelity will deduct from the Policy any income taxes which it may
incur because of the Policy. Currently, American Fidelity is not making any such
deductions.
PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the various
Portfolios which are described in the attached prospectuses for the Funds.
TAXES
NOTE: AMERICAN FIDELITY HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS A
GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU SHOULD
CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. WE HAVE INCLUDED
ADDITIONAL INFORMATION REGARDING TAXES IN THE STATEMENT OF ADDITIONAL
INFORMATION.
ANNUITIES IN GENERAL
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Basically, these rules provide that you will not be taxed on the earnings on the
money held in your annuity until you take the money out. This is referred to as
Tax Deferral. There are different rules regarding how you will be taxed
depending upon how you take the money out and the type of Policy - Qualified or
Non-Qualified (see following sections).
You, as the Owner, will not be taxed on increases in the value of your Policy
until a distribution occurs - either as a withdrawal or as Annuity Payments.
When you make a withdrawal you are taxed on the amount of the withdrawal that is
earnings. For Annuity Payments, different rules apply. A portion of each Annuity
Payment you receive will be treated as a partial return of your Purchase
Payments and will not be taxed. The remaining portion of the Annuity Payment
will be treated as ordinary income. How the Annuity Payment is divided between
taxable and non-taxable portions depends upon the period over which the Annuity
Payments are expected to be made. Annuity Payments received after you have
received all of your Purchase Payments are fully includible in income.
When a Non-Qualified Policy is owned by a non-natural person (e.g., a
corporation or certain other entities other than tax-qualified trusts), the
Policy will generally not be treated as an annuity for tax purposes. This means
that the Policy may not receive the benefits of Tax-Deferral. Income may be
taxed as ordinary income every year.
QUALIFIED AND NON-QUALIFIED POLICIES
If you purchase the Policy under a Qualified plan, your Policy is referred to as
a Qualified Policy. Examples of Qualified plans are: Individual Retirement
Annuities (IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b)
Policies), H.R. 10 Plans (sometimes referred to as Keogh plans) and Corporate
Pension and Profit-Sharing Plans.
If you do not purchase the Policy under a Qualified plan, your Policy is
referred to as a Non-Qualified Policy.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED POLICIES
If you make a withdrawal from your Policy, the Code treats such a withdrawal as
first coming from earnings and then from your Purchase Payments. In most cases,
such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a tax penalty. The amount of the penalty
is equal to 10% of the amount that is includible in income. Some withdrawals
will be exempt from the penalty. They include any amounts: (1) paid on or after
the taxpayer reaches age 59 1/2; (2) paid after the Owner dies; (3) paid if the
taxpayer becomes totally disabled (as that term is defined in the Code); (4)
paid in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer; (5) paid under an
immediate annuity; or (6) which come from purchase payments made prior to August
14, 1982.
The Policy provides that when the Annuitant dies prior to the Annuity Date, a
death benefit will be paid to the Beneficiary. If the Owner is not the
Annuitant, such payments made when the Annuitant dies do not qualify for the
death of Owner exception described above, and will be subject to the 10% tax
penalty unless the Beneficiary is 59 1/2 years old or one of the other
exceptions to the penalty applies.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED POLICIES
The above information describing the taxation of Non-Qualified Policies does not
apply to Qualified Policies. In the case of a withdrawal under a Qualified
Policy, a ratable portion of the amount received is taxable, generally based on
the ratio of your cost basis to your total accrued benefit under the retirement
plan. The Code imposes a 10% penalty tax on the taxable portion of any
distribution from qualified retirement plans, including Policies issued and
qualified under Code Sections 403(b) (Tax-Sheltered Annuities), 408(b)
(Individual Retirement Annuities) and 401 (H.R. 10 and Corporate Pension and
Profit-Sharing Plans). To the extent amounts are not includible in gross income
because they have been properly rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax penalty will not apply
to the following distributions: (a) if distribution is made on or after the date
on which the Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner or Annuitant (as applicable) or the
joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his designated beneficiary; (d) distributions to an Owner or
Annuitant (as applicable) who has separated from service after he has attained
age 55; (e) distributions made to the Owner or Annuitant (as applicable) to the
extent such distributions do not exceed the amount allowable as a deduction
under Code Section 213 to the Owner or Annuitant (as applicable) for amounts
paid during the taxable year for medical care; (f) distributions made to an
alternate payee pursuant to a qualified domestic relations order; and (g)
distributions from an Individual Retirement Annuity for the purchase of medical
insurance (as described in Section 213(d)(1)(D) of the Code) for the Owner or
Annuitant (as applicable) and his or her spouse and dependents if the Owner or
Annuitant (as applicable) has received unemployment compensation for at least 12
weeks. This exception will no longer apply after the Owner or Annuitant (as
applicable) has been re-employed for at least 60 days. The exceptions stated in
items (d) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in item (c) applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
A more complete discussion of withdrawals from Qualified Policies is contained
in the SAI.
TAX TREATMENT OF WITHDRAWALS - TAX-SHELTERED ANNUITIES
The Code limits the withdrawal of purchase payments made by owners from certain
Tax-Sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his/her job; (3) dies; (4) becomes disabled (as that term
is defined in the Code); or (5) in the case of hardship. However, in the case of
hardship, the owner can only withdraw the purchase payments and not any
earnings.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. American Fidelity believes that the Portfolios are being
managed so as to comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, and not American
Fidelity would be considered the owner of the shares of the Portfolios. If this
occurs, it will result in the loss of the favorable tax treatment for the
Policy. It is unknown to what extent under federal tax law Owners are permitted
to select Portfolios, to make transfers among the Portfolios or the number and
type of Portfolios Owners may select from. If any guidance is provided which is
considered a new position, then the guidance would 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
Policy, could be treated as the owner of the Portfolios.
Due to the uncertainty in this area, American Fidelity reserves the right to
modify the Policy in an attempt to maintain favorable tax treatment.
WITHDRAWALS
You can have access to the money in your Policy: (1) by making a withdrawal
(either a partial or a total withdrawal); (2) by receiving Annuity Payments; or
(3) when a death benefit is paid to your Beneficiary. Withdrawals can only be
made during the Accumulation Phase.
You may withdraw all or some of the value of your Policy, minus taxes due, if
any, minus the withdrawal charge and policy maintenance charge. You must apply
for a withdrawal using a form we accept. Any partial withdrawal amount must be
at least $250, with exceptions for hardship. This requirement is waived if the
partial withdrawal is pursuant to the Systematic Withdrawal Program (see below).
After a withdrawal, the value of your Policy cannot be less than $100. Any
amount withdrawn will be deducted pro-rata from the Investment Options. If you
want to withdraw amounts in any other proportion, you must tell us using a form
we accept.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL
YOU MAKE.
There are limits to the amount you can withdraw from a Qualified plan referred
to as a 403(b) plan. For a more complete explanation see - Taxes and the
discussion in the SAI.
SYSTEMATIC WITHDRAWAL PROGRAM
After the first Policy year, you can participate in a Systematic Withdrawal
Program in lieu of the 10% free withdrawal option. If the total amount of
systematic withdrawals during a Policy Year exceeds the 10% free withdrawal
amount, a withdrawal charge will be incurred. During the Policy Year that
systematic withdrawals begin, the 10% free withdrawal amount will be based on
the value of your Policy on the business day before you request systematic
withdrawals. The request must be made on a form we accept. During subsequent
years, the free withdrawal amount will be based on the value of your Policy on
the last Policy Anniversary. Systematic withdrawals can be made monthly,
quarterly or semi-annually. We reserve the right to limit the terms and
conditions under which systematic withdrawals can be elected and to stop
offering any or all systematic withdrawals at any time.
INCOME TAXES AND TAX PENALTIES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
SUSPENSION OF PAYMENTS OR TRANSFERS
American Fidelity may be required to suspend or postpone payments for
withdrawals or transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of the Fund shares is
not reasonably practicable or American Fidelity cannot reasonably value the Fund
shares;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
American Fidelity has reserved the right to defer payment for a withdrawal or
transfer from the Guaranteed Interest Account for the period permitted by law
but not for more than six months.
LOANS
If you purchased your Policy under a 403(b) Qualified plan, we may make a loan
to you at any time before Annuity Payments begin. However, no loans will be made
during the first Policy Year. The security for the loan will be the value of
your Policy in the Guaranteed Interest Account. The loan cannot be more than the
lesser of $50,000 or one-half of the value of your Policy in the Guaranteed
Interest Account. Under certain circumstances, the $50,000 limit may be reduced.
The minimum loan we will make is $2,500 (which can be changed by us at our
discretion).
If a loan payment is not made within 60 days of the date a payment is due, the
outstanding loan balance (principal plus interest) will become due and payable.
If not repaid, the loan balance plus interest will be considered in default and
will be treated as taxable income for the tax year of the default. Satisfaction
of any unpaid loan balance plus interest from the Guaranteed Interest Account
will only occur when you qualify for a plan distribution under the federal tax
guidelines. If the loan is in default and you do not yet qualify for a
distribution to satisfy the outstanding loan balance, the loan will continue to
accrue interest which, if not paid by you, will be taxable income in the tax
year accrued. Any amounts which may become taxable will be reported as plan
distributions and will be subject to income tax and tax penalties, if
applicable.
Upon your death, the Beneficiary will receive the death benefit reduced by the
loan balance. If Annuity Payments begin while there is an outstanding loan, the
value of the Guaranteed Interest Account will be reduced by the loan balance.
DEATH BENEFIT
DEATH BENEFIT AMOUNT
The death benefit will be the greater of: (1) the Purchase Payments you have
made, less any money you have taken out and any applicable withdrawal charges;
or (2) the value of your Policy minus the policy maintenance charge and taxes,
if any, determined on the business day we receive proof of death and an election
for the payment period.
DEATH OF OWNER BEFORE ANNUITY DATE
If you or any Joint Owner dies before the Annuity Date, the death benefit will
be paid to your Beneficiary. When any Joint Owner dies, the surviving Joint
Owner, if any, will be treated as the primary Beneficiary. Any other person
chosen as a Beneficiary at the time of death will be treated as a contingent
Beneficiary. The death benefit will be paid under one of the following death
benefit options.
Death Benefit Options:
If you or any Joint Owner dies before the Annuity Date, a Beneficiary who is not
your spouse must elect the death benefit to be paid under one of the following
options:
1. lump sum payment;
2. payment of the entire death benefit within five years of the date of
your death or the death of any Joint Owner; or
3. payment of the death benefit under any Annuity Option. If this option is
chosen, the annuity must be distributed over the lifetime of the Beneficiary or
over a period not extending beyond the life expectancy of the Beneficiary; and
the distribution must begin within one year of the date of your death or any
Joint Owner's death.
Any portion of the death benefit not applied under an Annuity Option within one
year of the date of death must be distributed within five years of the date of
death.
If the Beneficiary is your spouse (spousal Beneficiary), he or she may:
1. choose to continue the Policy in his or her own name at the current
value of the Policy;
2. choose a lump sum payment of the death benefit; or
3. apply the death benefit to an Annuity Option.
If the deceased Owner was also the Annuitant and the spousal Beneficiary
continues the Policy or applies the death benefit to an Annuity Option, the
spousal Beneficiary will become the new Annuitant.
If a lump sum payment is requested, we will pay the amount within seven days
of receipt of proof of death and the election, unless the Suspension or Deferral
Payments Provision is in effect. Payment to the Beneficiary (other than a lump
sum payment) may only be elected during the 60 day period beginning with the
date we receive proof of death. If the Beneficiary does not select a payment
method during the 60 day period after we receive proof of death, the death
benefit will be paid in a lump sum.
DEATH OF ANNUITANT BEFORE THE ANNUITY DATE
If you are not the Annuitant and the Annuitant dies before the Annuity Date, the
death benefit will be paid to the Beneficiary. The death benefit will be paid in
a lump sum and must be paid in full within five years of the date of death. If
the Owner is a non-individual (e.g., a corporation), the death of the Annuitant
will be treated as the death of the Owner.
DEATH OF OWNER AFTER THE ANNUITY DATE
If you, or any Joint Owner who is not the Annuitant, die during the Annuity
Period, any remaining payments under the Annuity Option elected will continue at
least as rapidly as they were being paid at your death or such Joint Owner's
death. When any Owner dies during the Annuity Period, the Beneficiary becomes
the Owner. Upon the death of any Joint Owner during the Annuity Period, the
surviving Joint owner, if any, will be treated as the primary Beneficiary. Any
other Beneficiary designation on record at the time of death will be treated as
a contingent Beneficiary.
DEATH OF ANNUITANT AFTER THE ANNUITY DATE
If the Annuitant dies on or after the Annuity Date, the death benefit, if any,
will be as set forth in the Annuity Option elected. Death benefits will be paid
at least as rapidly as they were being paid at the Annuitant's death.
OTHER INFORMATION
AMERICAN FIDELITY
American Fidelity Assurance Company (American Fidelity), 2000 N. Classen
Boulevard, Oklahoma City, Oklahoma 73106 is an Oklahoma stock life insurance
company organized in 1960. American Fidelity is licensed to conduct life,
annuity and accident and health insurance business in forty-nine states and the
District of Columbia. American Fidelity is a wholly owned subsidiary of American
Fidelity Corporation since 1974.
THE SEPARATE ACCOUNT
American Fidelity established a separate account, American Fidelity Separate
Account B (Separate Account), to hold the assets that underlie the Policies. Our
Board of Directors adopted a resolution to establish the Separate Account under
Oklahoma insurance law on September 20, 1996. American Fidelity has registered
the Separate Account with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940. The Separate Account
is divided into sub-accounts. Each sub-account invests in a Portfolio.
The assets of the Separate Account are held in American Fidelity 's name on
behalf of the Separate Account and legally belong to American Fidelity. However,
those assets that underlie the Policies, are not chargeable with liabilities
arising out of any other business we may conduct. All the income, gains and
losses (realized or unrealized) resulting from these assets are credited to or
charged against the Policies and not against any other Policies we may issue.
LEGAL PROCEEDINGS
There are no pending material legal proceedings affecting the Separate Account,
American Fidelity or American Fidelity Securities, Inc.
DISTRIBUTION
American Fidelity Securities, Inc. (AFS, Inc.) acts as the distributor of the
Policies. AFS, Inc. is a wholly-owned subsidiary of American Fidelity.
ADMINISTRATION
American Fidelity performs certain administrative services regarding the
Policies. The administrative services include issuance of the Policies and
maintenance of Policy Owner's records.
FINANCIAL STATEMENTS
The financial statements of American Fidelity have been included in the
Statement of Additional Information. No financial statements of the Separate
Account have been included because, as of the date of this prospectus, the
Separate Account had no assets.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
General Information and History of the Company
Experts
Legal Opinions
Distributor
Reduction or Elimination of the Withdrawal Charge
Performance Information
Tax Status
Annuity Provisions
Financial Statements
[Download Table]
________________________________________________________________________
__________________
__________________
__________________
FRONT
-----
American Fidelity Assurance Company
Annuity Services Department
P.O. Box 25523
Oklahoma City, OK 73125-0523
________________________________________________________________________
________________________________________________________________________
Please send me, at no charge, the Statement of Additional Information
dated __________, 1997, for the AFAdvantage Variable Annuity issued by
American Fidelity Assurance Company.
(Please print or type and fill in all information)
BACK ________________________________________________________________________
-----
Name
________________________________________________________________________
Address
________________________________________________________________________
City State Zip Code
________________________________________________________________________
Form #
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE AND FIXED DEFERRED
ANNUITY POLICIES
ISSUED BY
AMERICAN FIDELITY SEPARATE ACCOUNT B
AND
AMERICAN FIDELITY ASSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED _____, 1997, FOR THE INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE AND FIXED DEFERRED ANNUITY POLICIES WHICH ARE REFERRED
TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE US AT:
AMERICAN FIDELITY ASSURANCE COMPANY, ANNUITY SERVICES DEPARTMENT, P.O. BOX
25523, OKLAHOMA CITY, OK 73125-0523, (800) 662-1106.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED _____, 1997.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY OF THE COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTOR
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
CALCULATION OF PERFORMANCE INFORMATION
TAX STATUS
ANNUITY PROVISIONS
FINANCIAL STATEMENTS
GENERAL INFORMATION AND HISTORY OF THE COMPANY
American Fidelity Assurance Company ("Company") was organized in the State of
Oklahoma in 1960 and during its existence has never changed its name. Neither
the sales of variable annuity contracts nor the sales of any other insurance
product by the Company have ever been suspended by any state where the Company
has done or is presently doing business.
The Company is a wholly owned subsidiary of American Fidelity Corporation, an
insurance holding company. The stock of American Fidelity Corporation is
controlled by a family investment partnership, Cameron Enterprises, A Limited
Partnership, an Oklahoma limited partnership ("CELP"). In accordance with the
partnership agreement, management of the affairs of CELP is vested in five
managing general partners: William M. Cameron, William E. Durrett, Edward C.
Joullian, III, John W. Rex and Theodore M. Elam.
EXPERTS
The financial statements of the Company as of and for the year ended
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996, included in this Statement of Additional Information
have been audited by KPMG Peat Marwick LLP.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut, has provided
advice on certain matters relating to the federal securities and income
tax laws in connection with the Policies.
DISTRIBUTOR
American Fidelity Securities, Inc., a wholly-owned subsidiary of the Company,
acts as the distributor. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the Withdrawal Charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the withdrawal charge will be determined by the Company after
examination of the following factors: 1) the size of the group; 2) the total
amount of purchase payments expected to be received from the group; 3) the
nature of the group for which the Policies are purchased, and the persistency
expected in that group; 4) the purpose for which the Policies are purchased and
whether that purpose makes it likely that expenses will be reduced; and 5) any
other circumstances which the Company believes to be relevant to determining
whether reduced sales or administrative expenses may be expected. None of the
reductions in charges for sales is contractually guaranteed.
The withdrawal charge will be eliminated when the Policies are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the withdrawal charge be permitted
where the reduction or elimination will be unfairly discriminatory to any
person.
CALCULATION OF PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. All performance advertising will include quotations of
standardized total return, calculated in accordance with standard methods
prescribed by rules of the Securities and Exchange Commission, to facilitate
comparison with standardized total return advertised by other variable annuity
separate accounts. Standardized total return advertised for a specific period is
found by first taking a hypothetical $1,000 investment in a Portfolio on the
first day of the period at the offering price, which is the Accumulation Unit
value per unit (initial investment) and computing the ending redeemable value
(redeemable value) of that investment at the end of the period. The redeemable
value is then divided by the initial investment which is then expressed as a
percentage. Standardized total return reflects the expenses of the Portfolio,
the deduction of a policy maintenance charge and a mortality and expense risk,
distribution expense and administrative charges. The redeemable value also
reflects the effect of any applicable withdrawal charge that may be imposed at
the end of the period. No deduction is made for premium taxes which may be
assessed by certain states.
Nonstandardized total return may also be advertised. Nonstandardized total
return may be for periods other than those required to be presented or may
otherwise differ from standardized total return.
The standardized total return quotations will be current to the last day of the
calendar quarter preceding the date on which an advertisement is submitted for
publication. The standardized total return will be based on calendar quarters
and will cover at least periods of one, five, and ten years, or a period
covering the time the Portfolio has been in existence if it has not been in
existence for one of the prescribed periods. If Accumulation Units for the
Policies have not been in existence for as long as the corresponding Portfolio,
the standardized total return and nonstandardized total return quotations will
show what the investment performance of Accumulation Units would have been
(reduced by the applicable charges) had they been held in a Portfolio for the
period quoted (see below).
Quotations of standardized total return and nonstandardized total return are
based upon historical earnings and will fluctuate. Past performance does not
guarantee future results. Factors affecting the performance of a Portfolio
include general market conditions, operating expenses and investment management.
An Owner's value upon a withdrawal of a Policy may be more or less than the
original purchase payment.
PERFORMANCE INFORMATION
The Accumulation Units of the Separate Account are new and therefore have no
performance history. However, the corresponding Portfolios have been in
existence for some time and consequently have investment performance history. In
order to demonstrate how the historical investment experience of the Portfolios
affects Accumulation Unit values, the following performance information was
developed. The information is based upon the historical experience of the
Portfolios and is for the periods shown.
ACTUAL PERFORMANCE WILL VARY AND THE HYPOTHETICAL RESULTS SHOWN ARE NOT
NECESSARILY REPRESENTATIVE OF FUTURE RESULTS. Performance for periods ending
after those shown may vary substantially from the examples shown below. Chart 1
shows the performance of the Accumulation Units calculated for a specified
period of time assuming an initial Purchase Payment of $1,000 allocated to each
Portfolio and a deduction of all charges and deductions (see "Expenses" in the
prospectus). Chart 2 is identical to Chart 1 except that it does not reflect the
deduction of the withdrawal charge. Chart 3 shows cumulative total return with
the deduction of all charges. Chart 4 shows cumulative total return without the
deduction of the withdrawal charge. The performance figures in all 4 charts also
reflect the actual fees and expenses paid by each Portfolio. The percentage
increases are determined by subtracting the initial Purchase Payment from the
ending value and dividing the remainder by the beginning value. All calculations
do not reflect the deduction of any premium taxes.
HISTORICAL FUND PERFORMANCE FOR PERIODS ENDING 12/31/96:
[Download Table]
CHART 1 - AVERAGE ANNUAL TOTAL RETURN
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
Merrill Lynch Variable Series
Funds, Inc.
Prime Bond Fund 10.13% 1.85% 3.39% 4/20/82
Special Value Focus Fund -4.50% 6.05% 2.73% 4/20/82
American Balanced Fund -2.90% 3.56% 5.87% 6/01/88
International Equity Focus Fund -5.97% N/A 0.26% 7/01/93
High Current Income Fund -1.39% 7.26% 7.36% 4/20/82
Dreyfus Stock Index Fund 9.71% 9.34% 8.83% 9/29/89
The Dreyfus Socially
Responsible Growth Fund, Inc. 8.42% N/A 12.49% 10/07/93
Dreyfus Variable Investment Fund
Growth and Income Portfolio 7.95% N/A 20.72% 5/02/94
Small Company Stock Portfolio N/A N/A -4.97% 5/01/96
[Download Table]
CHART 2 - TOTAL RETURN WITHOUT WITHDRAWAL CHARGES
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
Merrill Lynch Variable Series
Funds, Inc.
Prime Bond Fund -2.31% 2.60% 3.39% 4/20/82
Special Value Focus Fund 3.50% 6.83% 2.73% 4/20/82
American Balanced Fund 5.10% 4.32% 5.87% 6/01/88
International Equity Focus Fund 2.03% N/A 1.59% 7/01/93
High Current Income Fund 6.61% 8.05% 7.36% 4/20/82
Dreyfus Stock Index Fund 17.71% 10.14% 8.96% 9/29/89
The Dreyfus Socially
Responsible Growth Fund, Inc. 16.42% N/A 14.10% 10/07/93
Dreyfus Variable Investment Fund
Growth and Income Portfolio 15.95% N/A 22.88% 5/02/94
Small Company Stock Portfolio N/A N/A 7.01% 5/01/96
[Download Table]
CHART 3- CUMULATIVE TOTAL RETURN
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
Merrill Lynch Variable Series
Funds, Inc.
Prime Bond Fund -10.13% 9.58% 39.61% 4/20/82
Special Value Focus Fund -4.50% 34.13% 30.96% 4/20/82
American Balanced Fund -2.90% 19.12% 63.19% 6/01/88
International Equity Focus Fund -5.97% N/A 0.91% 7/01/93
High Current Income Fund -1.39% 41.96% 103.52% 4/20/82
Dreyfus Stock Index Fund 9.71% 56.27% 84.83% 9/29/89
The Dreyfus Socially
Responsible Growth Fund, Inc. 8.42% N/A 46.34% 10/07/93
Dreyfus Variable Investment Fund
Growth and Income Portfolio 7.95% N/A 65.28% 5/02/94
Small Company Stock Portfolio N/A N/A -3.36% 5/01/96
[Download Table]
CHART 4- CUMULATIVE TOTAL RETURN WITHOUT WITHDRAWAL CHARGES
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
Merrill Lynch Variable Series
Funds, Inc.
Prime Bond Fund -2.31% 13.67% 39.61% 4/20/82
Special Value Focus Fund 3.50% 39.14% 30.96% 4/20/82
American Balanced Fund 5.10% 23.57% 63.19% 6/01/88
International Equity Focus Fund 2.03% N/A 5.67% 7/01/93
High Current Income Fund 6.61% 47.26% 103.52% 4/20/82
Dreyfus Stock Index Fund 17.71% 62.11% 86.51% 9/29/89
The Dreyfus Socially
Responsible Growth Fund, Inc. 16.42% N/A 53.24% 10/07/93
Dreyfus Variable Investment Fund
Growth and Income Portfolio 15.95% N/A 73.28% 5/02/94
Small Company Stock Portfolio N/A N/A 4.64% 5/01/96
TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE POLICIES.
PURCHASERS BEAR THE COMPLETE RISK THAT THE POLICIES MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
GENERAL
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Policy until distribution occurs, either in
the form of a lump sum payment or as annuity payments under the Annuity Option
elected. For a lump sum payment received as a total surrender (total redemption)
or death benefit, the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Policy. For Non-Qualified Policies, this cost
basis is generally the purchase payments, while for Qualified Policies there may
be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includable 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 Policy (adjusted for any period certain or refund feature)
bears to the expected return under the Policy. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Policy (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 Policy has been recovered (i.e. when the total of the
excludable amounts equal the investment in the Policy) are fully taxable. The
taxable portion is taxed at ordinary income rates. For certain types of
Qualified Plans there may be no cost basis in the Policy within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Policies
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.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. 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 Policy as
an annuity contract would result in imposition of federal income tax to the
Policy Owner with respect to earnings allocable to the Policy prior to the
receipt of payments under the Policy. The Code contains a safe harbor provision
which provides that annuity contracts such as the Policies meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Policies. 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.
The Code provides that 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."
The Company intends that all Portfolios underlying the Policies will be managed
by the investment advisers for the Portfolios in such a manner as to comply with
these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the Owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the Owner to be
considered as the owner of the assets of the Separate Account resulting in the
imposition of federal income tax to the Owner with respect to earnings allocable
to the Policy prior to receipt of payments under the Policy.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Policy in an attempt to maintain favorable tax treatment.
MULTIPLE POLICIES
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year period to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
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. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year
period.
POLICIES OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase payments
for the Policies will be taxed currently to the Owner if the Owner is a
non-natural person, e.g., a corporation or certain other entities. Such Policies
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to Policies held by a trust or other
entity as an agent for a natural person nor to Policies held by qualified plans.
Purchasers should consult their own tax counsel or other tax adviser before
purchasing a Policy to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Policy may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Policies.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary, or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
(c) the portion of the distributions not includible in gross income (i.e.
returns of after-tax contributions). Participants should consult their own tax
counsel or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED POLICIES
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 59 1/2; (b) after the death of the Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his Beneficiary; (e) under an immediate annuity; or (f)
which are allocable to purchase payments made prior to August 14, 1982.
The Policy provides that upon the death of the Annuitant prior to the Annuity
Date, the death benefit will be paid to the named Beneficiary. Such payments
made upon the death of the Annuitant who is not the Owner of the Policy do not
qualify for the death of Owner exception described above, and will be subject to
the ten (10%) percent distribution penalty unless the Beneficiary is 59 1/2
years old or one of the other exceptions to the penalty applies.
The above information does not apply to Qualified Policies. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Policies.
(See "Tax Treatment of Withdrawals - Qualified Policies.")
QUALIFIED PLANS
The Policies offered by the Prospectus are designed to be suitable for use under
various types of Qualified Plans. Because of the minimum purchase payment
requirements, the Policies may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each Qualified Plan varies with
the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Policies issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Policies comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Policies may be used. Such descriptions are not exhaustive
and are for general informational 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 Policy issued under a Qualified Plan.
Policies issued pursuant to Qualified Plans include special provisions
restricting Policy provisions that may otherwise be available and described in
this Statement of Additional Information. Generally, Policies 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 withdrawal
penalties and restrictions may apply to surrenders from Qualified Policies. (See
"Tax Treatment of Withdrawals - Qualified Policies.")
a. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Policies for the benefit of their employees. Such
contributions are not includable in the gross income of the employee until the
employee receives distributions from the Policy. The amount of contributions to
the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals Qualified Policies" and "Tax-Sheltered Annuities -
Withdrawal Limitations.") Employee loans are allowed under these Policies. Any
employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment and the tax consequences of loans.
b. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Policies.") Under
certain conditions, distributions from other IRAs and other Qualified Plans may
be rolled over or transferred on a tax-deferred basis into an IRA. Sales of
Policies 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 Policies to be qualified
as Individual Retirement Annuities should obtain competent tax advice as to the
tax treatment and suitability of such an investment.
c. 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 until distributed from
the Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Policies.")
Purchasers of Policies for use with an H.R. 10 Plan should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Policies 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 employees until distributed from the plan. The tax
consequences to participants may vary depending upon the particular plan design.
However, the Code places limitations and restrictions on all plans including on
such items as: amount of allowable contributions; form, manner and timing of
distributions; transferability of benefits; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; and the tax
treatment of distributions, withdrawals and surrenders. (See "Tax Treatment of
Withdrawals - Qualified Policies.") Purchasers of Policies for use with
Corporate Pension or Profit Sharing Plans should obtain competent tax advice as
to the tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED POLICIES
In the case of a withdrawal under a Qualified Policy, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Policy. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Policies
issued and qualified under Code Sections 403(b) (Tax-Sheltered Annuities),
408(b) (Individual Retirement Annuities) and 401 (H.R. 10 and Corporate Pension
and Profit-Sharing Plans). To the extent amounts are not includible in gross
income because they have been properly rolled over to an IRA or to another
eligible Qualified Plan, no tax penalty will be imposed. The tax penalty will
not apply to the following distributions: (a) if distribution is made on or
after the date on which the Owner or Annuitant (as applicable) reaches age 59
1/2; (b) distributions following the death or disability of the Owner or
Annuitant (as applicable) (for this purpose disability is as defined in Section
72(m)(7) of the Code); (c) after separation from service, distributions that are
part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his designated beneficiary; (d) distributions to
an Owner or Annuitant (as applicable) who has separated from service after he
has attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order; and
(g) distributions from an Individual Retirement Annuity for the purchase of
medical insurance (as described in Section 213(d)(1)(D) of the Code) for the
Owner or Annuitant (as applicable) and his or her spouse and dependents if the
Owner or Annuitant (as applicable) has received unemployment compensation for at
least 12 weeks. This exception will no longer apply after the Owner or Annuitant
(as applicable) has been re-employed for at least 60 days. The exceptions stated
in items (d) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in item (c) applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
Generally, distributions from a Qualified Plan must commence no later than April
1 of the calendar year following the later of: (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2 ; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
value which represents contributions by the Owner and does not include any
investment results. The limitations on withdrawals apply only to salary
reduction contributions made after the end of the plan year beginning in 1988,
and to income attributable to such contributions and to income attributable to
amounts held as of the end of the plan year beginning in 1988. The limitations
on withdrawals do not affect rollovers and transfers between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY PAYOUT
An owner may elect a variable annuity payout. Variable annuity payments reflect
the investment performance of the Funds in accordance with the allocation of the
value of the Policy to the Funds during the Annuity Period. Variable annuity
payments are not guaranteed as to dollar amount.
The Company will determine the number of Annuity Units payable for each payment
by dividing the dollar amount of the first annuity payment by the Annuity Unit
value for each applicable Fund on the Annuity Date. This sets the number of
Annuity Units for each applicable Fund. The number of Annuity Units payable
remains the same unless an owner transfers a portion of the annuity benefit to
another Fund or to a fixed annuity. The dollar amount is not fixed and will
change from month to month.
The dollar amount of the variable annuity payments for each applicable Fund
after the first payment is determined by multiplying the fixed number of Annuity
Units per payment in each Fund by the Annuity Unit value for the last valuation
period of the month preceding the month for which the payment is due. This
result is the dollar amount of the payment for each applicable Fund. The total
dollar amount of each variable annuity payment is the sum of all variable
annuity payments reduced by the applicable portion of the policy maintenance
charge.
VARIABLE ANNUITY UNIT
The value of any annuity unit for each Fund was arbitrarily set initially at
$10. The Annuity unit value at the end of any subsequent valuation period is
determined as follows:
1. The net investment factor for the current valuation period is multiplied
by the value of the Annuity Unit for the Fund for the immediately preceding
valuation period.
2. The result is then divided by the assumed investment rate factor which
equals 1.00 plus the assumed investment rate for the number of days since the
preceding valuation date.
An Owner can choose either a 3%, 4%, or 5% assumed investment rate. If one is
not chosen, the assumed investment rate will be 3%.
The assumed investment rate is the assumed rate of return used to determine the
first annuity payment for a variable annuity option. A higher assumed investment
rate will result in a higher first payment. Choice of a lower assumed investment
rate will result in a lower first payment. Payments will increase whenever the
actual return exceeds the chosen rate. Payments will decrease whenever the
actual return is less than the chosen rate.
FIXED ANNUITY PAYOUT
The dollar amount of each fixed annuity payment will be at least as great as
that determined in accordance with the 3% Annuity Table. The fixed annuity
provides a 3% annual guaranteed interest rate on all Annuity Options. The
Company may pay or credit excess interest on a fixed annuity at its discretion.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Policies.
AMERICAN FIDELITY ASSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995, AND FOR
EACH OF THE YEARS IN THE THREE-YEAR
PERIOD ENDED DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Fidelity Assurance Company:
We have audited the accompanying consolidated balance sheets of American
Fidelity Assurance Company and subsidiaries (the Company) as of December 31,
1996 and 1995, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Fidelity
Assurance Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
March 14, 1997
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
[Download Table]
Assets 1996 1995
------------------------------------------------------ ---------- ---------
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $251,034 and $241,533 in 1996 and
1995, respectively) $ 251,944 233,313
Fixed maturities available-for-sale, at fair value
(amortized cost of $551,856 and $546,401
in 1996 and 1995, respectively) 559,121 572,717
Equity securities, at fair value:
Preferred stocks (cost $4,600 in 1995) - 2,700
Common stocks (cost $9,692 and $6,192 in
1996 and 1995, respectively) 12,046 7,460
Mortgage loans on real estate, net 130,508 121,641
Investment real estate, at cost (less accumulated
depreciation of $7,047 and $7,816 in 1996
and 1995, respectively) 18,954 25,685
Policy loans 8,359 8,165
Short-term and other investments 12,763 9,347
---------- ---------
993,695 981,028
---------- ---------
Cash 15,962 14,726
Accrued investment income 14,248 13,770
Accounts receivable:
Uncollected premiums 21,665 16,518
Reinsurance receivable 36,794 28,947
Other 12,341 10,329
---------- ---------
70,800 55,794
---------- ---------
Deferred policy acquisition costs 162,497 152,415
Other assets 6,954 7,807
Separate account assets 98,896 74,767
---------- ---------
Total assets $1,363,052 1,300,307
========== =========
See accompanying notes to consolidated financial statements.
[Download Table]
Liabilities and Stockholder's Equity 1996 1995
------------------------------------------------------- ---------- ---------
Policy liabilities:
Reserves for future policy benefits:
Life and annuity $ 102,820 99,036
Accident and health 121,097 106,992
Unearned premiums 2,376 1,972
Benefits payable 33,178 26,027
Funds held under deposit administration contracts 556,665 542,808
Other policy liabilities 85,068 88,239
---------- ---------
901,204 865,074
---------- ---------
Other liabilities:
Net deferred income tax liability 48,278 52,115
General expenses, taxes, licenses and fees payable
and other liabilities 34,125 29,868
---------- ---------
82,403 81,983
---------- ---------
Notes payable 19,839 19,042
Separate account liabilities 98,896 74,767
---------- ---------
Total liabilities 1,102,342 1,040,866
---------- ---------
Stockholder's equity:
Common stock, par value $10 per share. 250,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 19,916 17,718
Net unrealized holding gain on investments
available-for-sale, net of deferred tax expense
of $3,367 and $9,656 in 1996 and
1995, respectively 6,252 16,028
Retained earnings 232,042 223,195
---------- ---------
Total stockholder's equity 260,710 259,441
Commitments and contingencies (notes 9, 10, 11, and 13)
Total liabilities and stockholder's equity $1,363,052 1,300,307
========== =========
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
1996 1995 1994
----------- -------- --------
Revenues:
Premiums:
Life and annuity $ 24,187 24,514 25,012
Accident and health 166,057 156,960 194,382
----------- -------- --------
190,244 181,474 219,394
Net investment income 67,502 65,326 57,079
Other 11,250 12,190 8,102
----------- -------- --------
Total revenues 268,996 258,990 284,575
----------- -------- --------
Benefits:
Benefits paid or provided:
Life and annuity 18,539 18,849 17,604
Accident and health 93,858 74,219 109,796
Interest credited to funded contracts 28,386 27,635 24,251
Increase in reserves for future policy benefits:
Life and annuity (net of increase in reinsurance
reserves ceded of $11, $53, and $8 in 1996,
1995, and 1994, respectively) 4,336 4,619 4,994
Accident and health (net of increase (decrease) in
reinsurance reserves ceded of $2,941, $(441), and
$2,109 in 1996, 1995, and 1994, respectively) 13,259 15,535 7,888
----------- -------- --------
158,378 140,857 164,533
----------- -------- --------
Expenses:
Selling costs 47,105 48,784 56,684
Other operating, administrative and general expenses 44,942 42,586 39,066
Taxes, other than income taxes, and licenses and fees 6,535 6,250 6,184
Increase in deferred policy acquisition costs (10,082) (11,902) (6,507)
----------- -------- --------
88,500 85,718 95,427
----------- -------- --------
Total benefits and expenses 246,878 226,575 259,960
----------- -------- --------
Income from continuing operations before income taxes 22,118 32,415 24,615
Income taxes from continuing operations:
Current 4,421 10,443 4,506
Deferred 4,650 554 7,248
----------- -------- --------
9,071 10,997 11,754
----------- -------- --------
Net income from continuing operations 13,047 21,418 12,861
Income from discontinued operations (net of applicable
income tax expense of $646) - - 2,006
----------- -------- --------
Net income $ 13,047 21,418 14,867
=========== ======== ========
Net income per share from continuing operations $ 52.19 85.67 51.44
=========== ======== ========
Net income per share $ 52.19 85.67 59.47
=========== ======== ========
See accompanying notes to consolidated financial statements.
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
[Download Table]
Net
Additional Unrealized
Common Paid-in Holding Retained
Stock Capital Gain Earnings
------- ---------- ----------- ---------
Balance at December 31, 1993 $ 2,500 11,890 5,103 189,210
Net income - - - 14,867
Investments transferred to available-
for-sale, net of deferred taxes - - 4,400 -
Decrease in unrealized holding gain,
net of deferred taxes - - (8,554) -
Capital contributed by parent - 1,743 - -
Dividends - - - (2,300)
------- ---------- ----------- ---------
Balance at December 31, 1994 2,500 13,633 949 201,777
Net income - - - 21,418
Investments transferred to available-
for-sale, net of deferred taxes - - 8,828 -
Increase in unrealized holding gain,
net of deferred taxes - - 6,251 -
Capital contributed by parent on
sale of AFI - 4,085 - -
------- ---------- ----------- ---------
Balance at December 31, 1995 2,500 17,718 16,028 223,195
Net income - - - 13,047
Decrease in unrealized holding gain,
net of deferred taxes - - (9,776) -
Capital contributed by parent - 2,198 - -
Dividends - - - (4,200)
------- --------- ----------- ---------
Balance at December 31, 1996 $ 2,500 19,916 6,252 232,042
======= ========== =========== =========
See accompanying notes to consolidated financial statements.
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
[Enlarge/Download Table]
1996 1995 1994
---------- --------- ---------
Cash flows from operating activities:
Net income $ 13,047 21,418 14,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 935 876 1,142
Accretion of discount on investments (469) (605) (233)
Realized gains on investments (1,793) (2,423) (1,755)
Increase in deferred policy acquisition costs (10,082) (11,902) (6,507)
Increase in accrued investment income (478) (1,819) (899)
(Increase) decrease in accounts receivable (15,006) 847 (11,360)
Increase in policy liabilities 36,130 66,489 43,438
Increase (decrease) in general expenses, taxes, licenses and
fees payable and other liabilities 4,257 256 (3,704)
Deferred income taxes 4,650 554 7,248
Other 840 471 (1,508)
---------- --------- ---------
Total adjustments 18,984 52,744 25,862
---------- --------- ---------
Net cash provided by operating activities 32,031 74,162 40,729
---------- --------- ---------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity 26,867 73,984 96,526
Fixed maturities available-for-sale 166,678 36,640 25,419
Equity securities 5,708 5,635 3,286
Mortgage loans on real estate 15,736 12,426 18,657
Real estate 9,101 7,677 627
Net (increase) decrease in short-term and other investments (3,416) 3,283 23,149
Purchase of investments:
Fixed maturities held-to-maturity (45,961) (60,439) (105,841)
Fixed maturities available-for-sale (171,753) (164,417) (91,023)
Equity securities (4,580) (4,249) (6,981)
Mortgage loans on real estate (24,671) (14,328) (14,972)
Real estate (907) (2,820) (891)
Policy loans, net (194) (305) (281)
Cash received from sale of AFI to AFC, net of cash transferred - 21,005 -
Contributions from discontinued operations - - 2,006
---------- --------- ---------
Net cash used in investing activities (27,392) (85,908) (50,319)
---------- --------- ---------
(Continued)
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
[Enlarge/Download Table]
1996 1995 1994
------------ -------- --------
Cash flows from financing activities:
Dividends paid to parent $ (4,200) - (2,300)
Capital contribution from parent - 4,085 -
Proceeds from notes payable 9,075 7,095 16,396
Repayment of notes payable (8,278) (5,849) (10,221)
------------ -------- --------
Net cash (used in) provided by financing activities (3,403) 5,331 3,875
------------ -------- --------
Net increase (decrease) in cash 1,236 (6,415) (5,715)
Cash at beginning of year 14,726 21,141 26,856
------------ -------- --------
Cash at end of year $ 15,962 14,726 21,141
============ ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable $ 1,340 1,478 1,420
============ ======== ========
Federal income taxes $ 7,100 12,500 4,068
============ ======== ========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax (benefit) expense of
$(6,289), $15,554, and $(1,746) in 1996, 1995, and 1994,
respectively. $ (9,776) 15,079 (4,154)
============ ======== ========
Investments transferred to available-for-sale $ - 300,850 86,493
============ ======== ========
Supplemental disclosure of noncash financing activities:
Capital contribution from parent in the form of a
note receivable $ - - 1,743
============ ======== ========
Capital contribution from parent through forgiveness
of deferred tax liability $ 2,198 - -
============ ======== ========
See accompanying notes to consolidated financial statements.
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
American Fidelity Assurance Company (AFA or the Company) and subsidiaries
provide a variety of financial services. The principal subsidiary of AFA for the
years ended December 31, 1996 and 1995, is Security General Life Insurance
Company (SGLI), a life insurance company. Principal subsidiaries for the year
ended December 31, 1994, include SGLI; American Fidelity Insurance Company
(AFI), a property and casualty insurance company; and Cimarron Insurance Company
(CIC), a property and casualty insurance company. The Company and its insurance
subsidiaries are subject to state insurance regulations and periodic
examinations by state insurance departments.
AFA is licensed in 49 states and the District of Columbia. AFA is represented by
approximately 250 salaried managers and agents, and over 3,000 brokers.
Activities of AFA are largely concentrated in the group disability income, group
and individual annuity, and individual medical markets. In addition, individual
and group life business is also conducted. The main thrust of AFA's sales is
worksite marketing of voluntary products through the use of payroll deduction.
The Company sells these voluntary products through a salaried sales force that
is broken down into two divisions: the Association Group Division (AGD) and
American Fidelity Educational Services (AFES). AGD specializes in voluntary
disability income insurance programs aimed at selected groups and associations
and is funded by employees through payroll deductions. AFES focuses on marketing
to public school employees with ancillary insurance products such as disability
income, tax sheltered annuities, life insurance, dread disease, and accidental
death and dismemberment. The expertise gained by the Company in worksite
marketing of voluntary products is used by the Brokerage Division in developing
products to meet special situations and focuses on marketing to a broad range of
employers through independent broker agencies and agents interested in getting
into or enhancing their payroll deduction capability.
A significant portion of the Company's business consists of group and individual
annuities. The Company's earnings related to these products are impacted by
conditions in the overall interest rate environment. Additionally, the Company
has recently taken measures to reduce its involvement with major medical
products in order to concentrate on its more profitable lines of business.
For the year ended December 31, 1994, AFI was a subsidiary of AFA. AFI
specializes in the underwriting of preferred and standard private passenger
automobile, full coverage commercial automobile, commercial property, and ocean
marine coverages. Other products include inland marine, miscellaneous casualty
lines, and general fire lines. Miscellaneous liability products insuring service
contracts and mechanical breakdown insurance are offered via financial
institutions, manufacturers, and franchised automobile dealers. All business,
except for certain mechanical breakdown insurance, is produced by approximately
800 independent agents throughout Texas, Oklahoma, Kansas, and Louisiana. In
1995, AFA sold AFI to its parent, American Fidelity Corporation (AFC). (See Note
12.)
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which vary in some respects from
statutory accounting practices prescribed or permitted by state insurance
departments. (See Note 2.) The consolidated financial statements include the
accounts and operations of AFA and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates. Principal estimates that could change
in the future are the actuarial assumptions used in establishing deferred policy
acquisition costs and policy liabilities.
INVESTMENTS
Management determines the appropriate classification of investments at the time
of purchase. If management has the intent and the Company has the ability at the
time of purchase to hold the investments until maturity, they are classified as
held-to-maturity and carried at amortized cost. Investments to be held for
indefinite periods of time and not intended to be held-to-maturity are
classified as available-for-sale and carried at fair value. Fair value of
investments available-for-sale are based on quoted market prices.
The effect of any unrealized holding gains or losses on securities
available-for-sale are reported as a separate component of stockholder's equity,
net of deferred taxes. Transfers of securities between categories are recorded
at fair value at the date of transfer.
Fixed maturities held-to-maturity and short-term investments (bonds, notes, and
redeemable preferred stocks) are reported at cost, adjusted for amortization of
premium or accretion of discount because it is management's intent to hold these
investments to maturity. Equity securities (common and nonredeemable preferred
stocks) are reported at current fair value. Mortgage loans on real estate are
reported at the unpaid balance less an allowance for possible losses. Investment
in real estate is carried at cost less accumulated depreciation. Investment in
real estate, excluding land, is depreciated on a straight-line basis using
estimated lives ranging from 6 to 35 years. Policy loans are reported at the
unpaid balance.
Realized gains or losses on disposal of investments are determined on a
specific-identification basis and are included in the accompanying consolidated
statements of income.
Because the Company's primary business is in the insurance industry, the Company
holds a significant amount of assets that are matched with its liabilities in
relation to maturity and interest margin. In order to maximize earnings and
minimize risk, the Company invests in a diverse portfolio of investments. The
portfolio is diversified by geographic region, investment type, underlying
collateral, maturity, and industry.
Management does not believe the Company has any significant concentrations of
credit risk. The investment portfolio includes fixed maturities, equity
securities, mortgage loans, real estate, policy loans, and short-term
investments. The Company's portfolio does not include any fixed maturities that
are low investment- grade and have a high-yield ("junk bonds"). The Company
limits its risks by investing in fixed maturities and equity securities of rated
companies; mortgage loans adequately collateralized by real estate; selective
real estate supported by appraisals; and policy loans collateralized by policy
cash values. In addition, the Company performs due diligence procedures prior to
making mortgage loans. These procedures include evaluations of the credit-
worthiness of the mortgagees and/or tenants and independent appraisals. Certain
fixed maturities are guaranteed by the United States government.
The Company periodically reviews its investment portfolio to determine if
allowances for possible losses are necessary. In connection with this
determination, management reviews published market values, credit ratings,
independent appraisals, and other valuation information. While management
believes that the allowances are adequate, adjustments may be necessary in the
future due to changes in economic conditions. In addition, regulatory agencies
periodically review investment valuation as an integral part of their
examination process. Such agencies may require the Company to recognize
adjustments to the losses based upon available information and judgments of the
regulatory examiners at the time of their examination.
RECOGNITION OF PREMIUM REVENUE AND COSTS
Revenues from life, payout annuity (with life contingencies), and accident and
health policies represent premiums recognized over the premium-paying period and
are included in life, annuity, and accident and health premiums. Expenses are
associated with earned premiums to result in recognition of profits over the
life of the policies. Expenses include benefits paid to policyholders and the
change in the reserves for future policy benefits.
Revenues from accumulation policies, which are included in other revenues,
represent amounts assessed against policyholders. Such assessments are
principally surrender charges. Policyholder account balances for accumulation
annuities consist of premiums received, plus credited interest, less accumulated
policyholder assessments. Policyholder account balances are reported in the
consolidated balance sheets as funds held under deposit administration
contracts. Expenses for accumulation annuities represent interest credited to
policyholder account balances.
Revenues from most universal life policies, which are included in other
revenues, represent amounts assessed against policyholders. Such assessments are
principally mortality charges, surrender charges, and policy service fees.
Policyholder account balances consist of premiums received plus credited
interest, less accumulated policyholder assessments. Policyholder account
balances are reported in the consolidated balance sheets as other policy
liabilities. Expenses include interest credited to policyholder account balances
and benefits in excess of account balances returned to policyholders.
POLICY ACQUISITION COSTS
The Company defers costs which vary with and are primarily related to the
production of new business. Deferred costs associated with life, annuity,
universal life, and accident and health insurance policies consist principally
of field sales compensation, direct response costs, underwriting and issue
costs, and related expenses. Deferred costs associated with life policies are
amortized (with interest) over the anticipated premium paying period of the
policies using assumptions that are consistent with the assumptions used to
calculate policy reserves. Deferred costs associated with annuities and
universal life policies are amortized over the life of the policies at a
constant rate based on the present value of the estimated gross profit to be
realized. Deferred costs related to accident and health insurance policies are
amortized over the anticipated premium paying period of the policies based on
each subsidiary's experience.
POLICY LIABILITIES
Life and annuity and accident and health policy benefit reserves are primarily
calculated using the net level reserve method. The net level reserve method
includes assumptions as to future investment yields, withdrawal rates, mortality
rates, and other assumptions based on each subsidiary's experience. These
assumptions are modified as necessary to reflect anticipated trends and include
provisions for possible unfavorable deviation.
Reserves for benefits payable are determined using case-basis evaluations and
statistical analyses. These reserves represent the estimate of all benefits
incurred but unpaid. The estimates are periodically reviewed and, as adjustments
become necessary, they are reflected in current operations. Although such
estimates are the Company's best estimate of the ultimate value, the actual
results may vary from these values in either direction.
REINSURANCE
The Company accounts for reinsurance transactions as prescribed by Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" (Statement 113).
Statement 113 requires the reporting of reinsurance transactions relating to the
balance sheet on a gross basis and precludes immediate gain recognition on
reinsurance contracts.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
EQUIPMENT
Equipment, which is included in other assets, is stated at cost and is
depreciated on a straight-line basis using estimated lives of 3 to 10 years.
Additions, renewals, and betterments are capitalized. Expenditures for software,
maintenance, and repairs generally are expensed. Upon retirement or disposal of
an asset, the asset and related accumulated depreciation are eliminated and any
related gain or loss is included in income.
SEPARATE ACCOUNT
The Company maintains a separate account under Oklahoma insurance law designated
as American Fidelity Variable Annuity Fund A (the Fund). The Fund is an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. Under Oklahoma law, the assets of the Fund are
segregated from the Company's assets. The Fund's assets primarily consist of
equity securities, cash, and cash equivalents. The Company acts as investment
manager of the Fund, assumes certain expense risks, and provides sales and
administrative services.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares
outstanding. During the years ended December 31, 1996, 1995, and 1994, the
weighted average number of shares was 250,000.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
(2) STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file statutory
financial statements with state insurance regulatory authorities. Accounting
principles used to prepare these statutory financial statements differ from
financial statements prepared on the basis of generally accepted accounting
principles.
The Company and its principal insurance subsidiary reported statutory net income
for the years ended December 31 as follows (in thousands):
[Download Table]
1996 1995 1994
------------ ------ ------
(Unaudited)
AFA $ 13,227 30,510 11,882
SGLI 176 306 610
The Company and its principal insurance subsidiary reported statutory
stockholder's equity at December 31 as follows (in thousands):
[Download Table]
1996 1995
------------ -------
(Unaudited)
AFA $ 146,033 137,099
SGLI 3,302 3,158
Retained earnings of the Company and its insurance subsidiaries are restricted
as to payment of dividends by statutory limitations applicable to insurance
companies. Without prior approval of the state insurance department, dividends
that can be paid by the Company or an insurance subsidiary are generally limited
to the greater of (a) 10% of statutory capital and surplus, or (b) the statutory
net gain from operations. These limitations are based on the amounts reported
for the previous calendar year.
The Oklahoma Insurance Department has adopted risk based capital (RBC)
requirements for life insurance companies. These requirements are applicable to
the Company and its principal subsidiary, SGLI. The RBC calculation serves as a
benchmark for the regulation of life insurance companies by state insurance
regulators. RBC provides for surplus formulas similar to target surplus formulas
used by commercial rating agencies. The formulas specify various weighting
factors that are applied to statutory financial balances or various levels of
activity based on the perceived degree of risk, and are set forth in the RBC
requirements. The amount determined under such formulas is called the authorized
control level RBC (ACLC).
The RBC guidelines define specific capital levels based on a company's ACLC that
are determined by the ratio of the company's total adjusted capital (TAC) to its
ACLC. TAC is equal to statutory capital, plus the Asset Valuation Reserve and
any voluntary investment reserves, 50% of dividend liability, and certain other
specified adjustments. Companies where TAC is less than or equal to 2.0 times
ACLC are subject to certain corrective actions, as set forth in the RBC
requirements.
At December 31, 1996, the statutory TAC of the Company and SGLI significantly
exceeds the level requiring corrective action.
(3) INVESTMENTS
Investment income for the years ended December 31 is summarized below (in
thousands):
[Download Table]
1996 1995 1994
--------- ------- -------
Interest on fixed maturities $ 58,271 53,931 47,177
Dividends on equity securities 44 139 457
Interest on mortgage loans 11,747 11,543 11,922
Investment real estate income 3,295 4,055 2,990
Interest on policy loans 1,281 1,200 1,128
Interest on short-term investments 120 571 348
Net realized gains on investments 1,793 2,423 1,755
Other 1,186 1,071 (94)
--------- ------- -------
77,737 74,933 65,683
Less investment expenses (10,235) (9,607) (8,604)
--------- ------- -------
Net investment income $ 67,502 65,326 57,079
========= ======= =======
Net realized gains (losses) and the changes in unrealized gains (losses) on
investments for the years ended December 31 are as follows (in thousands):
[Enlarge/Download Table]
1996 1995 1994
----------------------------------------------------------------------
Realized Unrealized Realized Unrealized Realized Unrealized
---------- ---------- -------- ---------- -------- ----------
Fixed maturities
held-to-maturity $ (1,127) - 581 - 216 -
Fixed maturities
available-for-sale 573 (19,051) 271 31,529 129 (4,703)
Equity securities 27 2,986 611 (896) 1,396 (1,197)
Real estate 2,398 - 1,436 - (129) -
Mortgage loans (68) - (196) - 116 -
Other (10) - (280) - 27 -
---------- ----------- --------- ----------- --------- -----------
$ 1,793 (16,065) 2,423 30,633 1,755 (5,900)
========== =========== ========= =========== ========= ===========
Included in the above realized gains (losses) is the (decrease) increase in the
allowance for possible losses on mortgage loans of $(790,000), $235,000, and
$(248,000) in 1996, 1995, and 1994, respectively, and the increase (decrease) in
the allowance for losses on investment real estate of $117,000 and $(70,000) in
1996 and 1995, respectively. In addition, the Company realized net gains
(losses) of approximately $1,000, $(11,000), and $106,000 during 1996, 1995, and
1994, respectively, on investments in fixed maturities that were called or
prepaid.
In December 1995, the Company transferred investments with an estimated fair
value and an amortized cost of approximately $300,850,000 and $287,269,000,
respectively, from the held to-maturity portfolio to the available-for-sale
portfolio at their estimated fair value in response to the guidance included in
the Financial Accounting Standards Board Special Report, "A Guide to
Implementation of Statement 115." This guidance offered a one-time reassessment
opportunity, without calling into question the intent of the Company to hold
other securities to maturity in the future. At the date of transfer, the net
unrealized gain on the transferred securities was approximately $13,581,000 and
was included as an increase in stockholder's equity, net of deferred taxes.
HELD-TO-MATURITY
The amortized cost and estimated fair value of investments in fixed maturities
held-to-maturity are as follows (in thousands):
[Enlarge/Download Table]
December 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ---------- ---------- ---------
U.S. Treasury securities and obli-
gations of U.S. government
corporations and agencies $ 9,925 365 - 10,290
Corporate securities 142,209 1,078 (2,271) 141,016
Mortgage-backed securities 99,810 1,146 (1,228) 99,728
------------------ ---------- ----------- ---------
Totals $ 251,944 2,589 (3,499) 251,034
================== ========== =========== =========
[Enlarge/Download Table]
December 31, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 5,701 617 - 6,318
Corporate securities 125,939 4,520 (216) 130,243
Mortgage-backed securities 101,673 3,432 (133) 104,972
------------------ ---------- ----------- ---------
Totals $ 233,313 8,569 (349) 241,533
================== ========== =========== =========
The amortized cost and estimated fair value of investments in fixed maturities
held-to-maturity at December 31 are shown below (in thousands) by contractual
maturity. Expected maturities will differ from contractual maturities because
the issuers of such securities may have the right to call or prepay obligations
with or without call or prepayment penalties.
[Download Table]
1996
---------------------
Estimated
Amortized Fair
Cost Value
---------- ---------
Due in one year or less $ 6,006 6,020
Due after one year through five years 9,979 10,122
Due after five years through ten years 51,479 51,488
Due after ten years 84,670 83,676
---------- ---------
152,134 151,306
Mortgage-backed securities 99,810 99,728
---------- ---------
$ 251,944 251,034
========== =========
Proceeds from sales of investments in fixed maturities held-to-maturity during
1996, 1995, and 1994 were approximately $7,948,000, $33,685,000, and
$10,946,000, respectively. Gross gains of approximately $33,000, $1,022,000, and
$31,000 and gross losses of approximately $1,161,000, $430,000, and $141,000,
respectively, were realized on those sales. In 1996, 1995, and 1994, changes in
circumstances caused the Company to change its intent to hold these securities
to maturity. These changes primarily consisted of the significant deterioration
in the issuers' creditworthiness in 1996, 1995, and 1994, and the impact of a
subsidiary's coinsurance and assumption agreement with an unaffiliated company
in 1994.
AVAILABLE-FOR-SALE
The gross unrealized holding gains on equity securities available-for-sale were
$2,369,000 and $1,367,000 in 1996 and 1995, respectively. Gross unrealized
holding losses on equity securities available-for-sale were $15,000 and
$1,999,000 in 1996 and 1995, respectively.
The amortized cost and estimated fair value of investments in fixed maturities
available-for-sale are as follows (in thousands):
[Enlarge/Download Table]
December 31, 1996
------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
------------------ ---------- ---------- ---------
U.S. Treasury securities and
Obligations of U.S. government
Corporations and agencies $ 86,884 1,627 (674) 87,837
Corporate securities 353,707 7,074 (2,414) 358,367
Mortgage-backed securities 111,265 2,135 (483) 112,917
------------------ ---------- ----------- ---------
Totals $ 551,856 10,836 (3,571) 559,121
================== ========== =========== =========
[Enlarge/Download Table]
December 31, 1995
------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
------------------ ---------- ---------- ---------
U.S. Treasury securities and
Obligations of U.S. government
Corporations and agencies $ 89,143 4,462 - 93,605
Obligations of states and political
subdivisions 11,564 159 - 11,723
Corporate securities 330,140 17,336 (134) 347,342
Mortgage-backed securities 115,554 4,912 (419) 120,047
------------------ ---------- ----------- ---------
Totals $ 546,401 26,869 (553) 572,717
================== ========== =========== =========
The amortized cost and estimated fair value of investments in fixed maturities
available-for-sale at December 31 are shown below (in thousands) by contractual
maturity. Expected maturities will differ from contractual maturities because
the issuers of such securities may have the right to call or prepay obligations
with or without call or prepayment penalties.
[Download Table]
1996
---------------------
Estimated
Amortized Fair
Cost Value
---------- ---------
Due in one year or less $ 19,197 19,362
Due after one year through five years 138,587 142,004
Due after five years through ten years 222,672 224,815
Due after ten years 60,135 60,023
Mortgage-backed securities 111,265 112,917
---------- ---------
$ 551,856 559,121
========== =========
Proceeds from sales of investments in fixed maturities available-for-sale were
approximately $136,577,000, $31,944,000, and $24,344,000 in 1996, 1995, and
1994, respectively. Gross gains of approximately $1,257,000, $359,000, and
$441,000 and gross losses of approximately $684,000, $88,000, and $312,000 were
realized on those sales in 1996, 1995, and 1994, respectively.
The home office building is included in real estate investments. The Company and
its subsidiaries occupy approximately 45% of the building. An additional 35% of
the building is occupied by companies affiliated through common ownership.
At December 31, 1996 and 1995, investments with carrying values of approximately
$5,282,000 and $5,279,000, respectively, were on deposit with state insurance
departments as required by statute.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments (in thousands) and the fair
value estimates, methods, and assumptions are set forth below:
[Download Table]
1996 1995
-------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
Financial assets:
Cash $ 15,962 15,962 14,726 14,726
Short-term and other investments 12,763 12,763 9,347 9,347
Accounts receivable 34,006 34,006 26,847 26,847
Accrued investment income 14,248 14,248 13,770 13,770
Reinsurance receivables on paid and
unpaid benefits 36,794 36,794 28,947 28,947
Policy loans 8,359 8,359 8,165 8,165
Fixed maturities held-to-maturity 251,944 251,034 233,313 241,533
Fixed maturities available-for-sale 559,121 559,121 572,717 572,717
Equity securities 12,046 12,046 10,160 10,160
Mortgage loans 130,508 137,978 121,641 128,300
Financial liabilities:
Certain policy liabilities 613,151 596,386 590,638 575,100
Other liabilities 34,125 34,125 29,868 29,868
Notes payable 19,839 19,758 19,042 19,459
CASH, SHORT-TERM AND OTHER INVESTMENTS, ACCOUNTS RECEIVABLE, ACCRUED INVESTMENT
INCOME, REINSURANCE RECEIVABLES ON PAID AND UNPAID BENEFITS, AND OTHER
LIABILITIES
The carrying amount of these financial instruments approximates fair value
because they mature within a relatively short period of time and do not present
unanticipated credit concerns.
POLICY LOANS
Policy loans have average interest rates of 6.6% and 7.6% as of December 31,
1996 and 1995, respectively, and have no specified maturity dates. The aggregate
fair value of policy loans approximates the carrying value reflected on the
consolidated balance sheets. These loans typically carry an interest rate that
is tied to the crediting rate applied to the related policy and contract
reserves. Policy loans are an integral part of the life insurance policies which
the Company has in force and cannot be valued separately.
FIXED MATURITY INVESTMENTS
The fair value of fixed maturity investments is estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain securities is not readily available through
market sources other than dealer quotations, so fair value estimates are based
on quoted market prices of similar instruments, adjusted for the differences
between the quoted instruments and the instruments being valued.
EQUITY SECURITIES
The fair value of equity securities investments of the Company is based on bid
prices published in financial newspapers or bid quotations received from
securities dealers.
MORTGAGE LOANS
Fair values are estimated for portfolios of loans with similar characteristics.
Mortgage loans are segregated into either commercial or residential categories,
and have average net yield rates of 8.92% and 9.25% for December 31, 1996 and
1995, respectively. The fair value of mortgage loans was calculated by
discounting scheduled cash flows to maturity using estimated market discount
rates of 7.71% and 7.08% for December 31, 1996 and 1995, respectively. These
rates reflect the credit and interest rate risk inherent in the loan.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information. The fair value of certain residential loans is based on the
approximate fair value of the underlying real estate securing the mortgages.
CERTAIN POLICY LIABILITIES
Certain policies sold by the Company are investment-type contracts. These
liabilities are segregated into two categories: deposit administration funds and
immediate annuities which do not have life contingencies. The fair value of the
deposit administration funds is estimated as the cash surrender value of each
policy less applicable surrender charges. The fair value of the immediate
annuities without life contingencies is estimated as the discounted cash flows
of expected future benefits less the discounted cash flows of expected future
premiums, using the current pricing assumptions. The carrying amount of all
other policy liabilities approximates fair value.
[Enlarge/Download Table]
December 31, 1996 December 31, 1995
--------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------- ---------- -------- ----------
(in thousands) (in thousands)
Funds held under deposit
administration contracts $ 556,665 540,105 542,808 527,400
Annuities 56,486 56,281 47,830 47,700
NOTES PAYABLE
The fair value of the Company's notes payable is estimated by discounting the
scheduled cash flows of each instrument through the scheduled maturity. The
discount rates used are similar to those used for the valuation of the Company's
commercial mortgage loan portfolio.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument, nor do they reflect income taxes on differences between fair value
and tax basis of the assets. Because no established exchange exists for a
significant portion of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
(5) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and related
expenses. Information relating to the increase in deferred policy acquisition
costs, is summarized as follows (in thousands):
[Download Table]
Life Accident
and Annuity and Health Total
------------- ----------- --------
Year ended December 31, 1996:
Deferred costs $ 7,088 22,145 29,233
Amortization (6,437) (12,714) (19,151)
------------- ----------- --------
Net increase $ 651 9,431 10,082
============= =========== ========
Year ended December 31, 1995:
Deferred costs 9,234 17,516 26,750
Amortization (3,385) (11,463) (14,848)
------------- ----------- --------
Net increase $ 5,849 6,053 11,902
============= =========== ========
Year ended December 31, 1994:
Deferred costs 6,253 21,766 28,019
Amortization (3,344) (18,168) (21,512)
------------- ----------- --------
Net increase $ 2,909 3,598 6,507
============= =========== ========
(6) RESERVES FOR FUTURE POLICY BENEFITS
Reserves for life and annuity future policy benefits as of December 31 are
principally based on the interest assumptions set forth below (in thousands):
[Enlarge/Download Table]
Interest
1996 1995 Assumptions
-------- ------ ---------------
Life and annuity reserves:
Issued prior to 1970 $ 3,305 3,342 4.75%
Issued 1970 through 1980 28,792 28,831 6.75% to 5.25%
Issued after 1982 (indeterminate premium products) 530 486 10.00% to 8.50%
Issued through 1987 (SGLI acquisition) 1,423 1,378 11.00%
Issued 1981 - 1994 (all other)) 27,357 26,335 8.50% to 7.00%
Issued after 1994 (all other) 1,701 737 7.00%
Life contingent annuities 30,151 29,262 Various *
Group term life waiver of premium disabled lives 5,105 4,530 6.00%
All other life reserves 4,456 4,135 Various
-------- ------
$102,820 99,036
======== ======
These reserves are revalued as limited-pay contracts. As a result, the
reserve is somewhat greater than the present value of future benefits and
expenses at these interest rates, i.e., the actual interest rates required to
support the reserves are somewhat lower than the rates shown.
Assumptions as to mortality are based on the Company's prior experience. This
experience approximates the 1955-60 Select and Ultimate Table (individual life
issued prior to 1981), the 1965-70 Select and Ultimate Table (individual life
issued in 1981 and after) and the 1960 Basic Group Table (all group issues).
Assumptions for withdrawals are based on the Company's prior experience. All
assumptions used are adjusted to provide for possible adverse deviations.
(7) LIABILITY FOR BENEFITS PAYABLE
The provisions for benefits pertaining to prior years decreased in 1996 by
approximately $1,850,000 primarily due to the improvement in the loss ratios of
life cancer products. The provisions for benefits pertaining to prior years
decreased in 1995 by approximately $8,858,000 primarily due to releasing
reserves of a group terminated in 1995 and improvement in the loss ratios of
cancer products.
(8) NOTES PAYABLE
Notes payable as of December 31 is summarized as follows:
[Enlarge/Download Table]
1996 1995
--------------- ------
(in thousands)
5.91% line of credit, due in 1998, interest due monthly $ 3,500 -
5.971% line of credit, due in 1998, interest due monthly 5,000 -
6.84% line of credit, due in 2000, interest due monthly 4,000 4,000
8.4% mortgage loan, due in monthly installments of $25,000 (including interest) to 2010 2,383 2,472
8.4% mortgage loan, due in monthly installments of $22,000 (including interest) to 2027 2,902 2,921
Other 2,054 1,996
Various notes payable, paid in 1996 - 7,653
--------------- ------
$ 19,839 19,042
=============== ======
The promissory notes are guaranteed by AFC. The mortgage loans are secured by
mortgages on the home office building and other investment real estate. The
mortgage loans are also secured by an assignment of the leases on investment
real estate and the portion of the home office building leased to others.
AFA has a $20,000,000 line of credit with the Federal Home Loan Bank of Topeka.
The line of credit is secured by securities pledged as collateral by AFA with
carrying amount of approximately $26,000,000 at December 31, 1996. The
collateral required for this line of credit at December 31, 1996, was
$14,706,000. The pledged securities are held in the Company's name in a
custodial account at Boatmen's First National Bank of Oklahoma to secure current
and future borrowings. To participate in this available credit, AFA purchased
28,912 shares of Federal Home Loan Bank of Topeka common stock for $2,844,550 in
1994 and an additional 4,314 shares in 1996, with a total carrying value of
approximately $3,322,600 at December 31, 1996. AFA has outstanding advances of
$5,000,000, $4,000,000 and $3,500,000 at December 31, 1996, at fixed interest
rates of 5.971%, 6.84%, and 5.91%, respectively.
The Company has unused lines of credit of $7,500,000 at December 31, 1996.
Interest expense for the years ended December 31, 1996, 1995, and 1994, totaled
approximately $1,319,000, $1,482,000, and $1,366,000, respectively.
Scheduled maturities (excluding interest) of the above indebtedness at December
31, 1996, are as follows (in thousands):
[Download Table]
1997 $ 422
1998 9,576
1999 191
2000 4,208
2001 227
Thereafter 5,215
-------
$19,839
=======
(9) INCOME TAXES
Total income tax expense in the accompanying consolidated statements of income
differs from the federal statutory rate of 35% principally due to correction of
prior year estimate of deferred tax liability to parent in 1996 and 1994.
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, are presented below (in
thousands):
[Download Table]
1996 1995
--------- --------
Deferred tax assets:
Investment real estate, principally due to
valuation allowances $ 311 101
Other investments 428 677
Life and health reserves 12,956 12,309
Other liabilities 1,433 255
--------- --------
Total gross deferred tax assets 15,128 13,342
--------- --------
Deferred tax liabilities:
Fixed maturities (3,010) (9,694)
Equity securities, principally due to difference in
fair value and cost (824) (2,643)
Deferred policy acquisition costs (51,937) (49,011)
Other assets (7,635) (4,109)
--------- --------
Total gross deferred tax liabilities (63,406) (65,457)
--------- --------
Net deferred tax liability $(48,278) (52,115)
========= ========
Management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the deferred tax
assets reported on the consolidated balance sheets.
The Company and its subsidiaries are included in AFC's consolidated federal
income tax return. Income taxes are reflected in the accompanying consolidated
financial statements as if the Company and its subsidiaries were separate tax
paying entities. At December 31, 1996 and 1995, other accounts receivable
includes income taxes receivable from AFC and other members of the consolidated
group of approximately $4,988,000 and $4,771,000, respectively.
Prior to 1984, life insurance companies were taxed under the 1959 Tax Act on the
lesser of taxable income or gain from operations plus one-half of any excess of
gain from operations over taxable investment income. The one-half of the excess
of the gain from operations was accumulated in a special memorandum tax account
known as the "policyholders surplus account" (PSA). Accumulations at December
31, 1996 were approximately $8,161,000 for AFA. Pursuant to the Tax Reform Act
of 1984, the PSA was "frozen" at the December 31, 1983, amount and, accordingly,
no further additions to the PSA will be made. These excess amounts in the PSA
will become taxable at the regular corporate tax rate, if distributions to
stockholders exceed certain stated amounts or if certain criteria are not met.
No provision for deferred federal income taxes applicable to the PSA has been
made because management is of the opinion that no distribution of the PSA will
be made in the foreseeable future.
(10) REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
Management believes that all reinsurers presently used are financially sound and
will be able to meet their contractual obligations; therefore, no allowance for
uncollectible amounts has been included in the financial statements. At December
31, 1996, reinsurance receivables with a carrying value of approximately
$11,688,000 were associated with two reinsurers. At December 31, 1995,
reinsurance receivables with a carrying value of approximately $8,962,000 were
associated with a single reinsurer.
Reinsurance agreements in effect for life insurance policies vary according to
the age of the insured and the type of risk. Retention amounts for life
insurance range from $500,000 on group life to $250,000 on individual life
coverages, with slightly lower limits on accidental death benefits. At December
31, 1996 and 1995, the face amounts of life insurance in force that are
reinsured amounted to approximately $403,000,000 (approximately 6.3% of total
life insurance in force) and $278,000,000 (approximately 4.8% of total life
insurance in force), respectively.
Reinsurance agreements in effect for accident and health insurance policies vary
with the type of coverage. Retention limits range from $75,000 for individual
cancer coverage to $250,000 for major medical coverage.
Reinsurance agreements reduced benefits paid for life and accident and health
policies by approximately $61,730,000, $52,318,000, and $33,127,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
Since 1990, the Company has been involved in a reinsurance agreement with one of
its subsidiaries, SGLI. This agreement was amended in 1994 which allowed SGLI to
cede most of its individual major medical business to an unaffiliated company.
This transaction consists of a coinsurance agreement. The transaction was
approved by the Oklahoma Insurance Department. The resulting gain of
approximately $2,500,000 is included in other revenue in the 1994 consolidated
statement of income.
In 1995, AFA and SGLI entered into an assumption agreement whereby AFA assumed
all of SGLI's remaining rights and insurance liability in force. The assumption
is pending policyholder approval, as certain states allow as much as three years
for policy holders to reject an assumption.
(11) EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries participate in a pension plan (the Plan)
covering all employees who have satisfied longevity and age requirements. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
The Plan's funded status as of December 31 is summarized as follows (in
thousands):
[Download Table]
1996 1995
--------- -------
Actuarial present value of benefit obligation:
Vested benefits $ 11,248 11,150
Nonvested benefits 1,420 1,582
--------- -------
Total accumulated benefit obligation $ 12,668 12,732
========= =======
Projected benefit obligation for service rendered to date 14,679 14,809
Plan assets, at fair value 16,864 14,175
--------- -------
Plan assets in excess of (less than) projected benefit
obligation 2,185 (634)
Unrecognized transition amount (443) (605)
Unrecognized prior service cost due to plan amendment 521 607
Unrecognized net loss 370 3,542
--------- -------
Prepaid pension cost included in other assets $ 2,633 2,910
========= =======
In determining the projected benefit obligation, the weighted average assumed
discount rate used was 7.5% and 7% in 1996 and 1995, respectively. The rate of
increase in future salary levels was 5.0% in 1996 and 1995. The expected
long-term rate of return on assets used in determining net periodic pension cost
was 9.5% and 8.25% in 1996 and 1995, respectively. Plan assets are invested in
short-term investments and in an unallocated deposit administration contract
with SGLI.
Net periodic pension cost for the years ended December 31 included the following
(in thousands):
[Download Table]
1996 1995 1994
-------- ------- ------
Service costs - benefits earned during period $ 1,237 1,025 1,193
Interest cost 1,054 919 951
Return on plan assets (3,711) (2,455) (547)
Net amortization and deferral 2,421 1,366 (130)
-------- ------- ------
Net periodic pension cost $ 1,001 855 1,467
======== ======= ======
The Company participates in a defined contribution thrift and profit sharing
plan as provided under section 401(a) of the Internal Revenue Code, which
includes the tax deferral feature for employee contributions provided by section
401(k) of the Internal Revenue Code. The Company contributed approximately
$822,000, $831,000, and $852,000 to this plan during the years ended December
31, 1996, 1995, and 1994, respectively.
(12) DISCONTINUED OPERATIONS
Effective January 1, 1995, AFA sold AFI to AFC for approximately $28,717,000. In
connection with this sale, AFC contributed capital of approximately $4,085,000
to AFA as reflected in the accompanying consolidated statement of stockholder's
equity. AFI's net income for the year ended December 31, 1994 is reflected as
income from discontinued operations in the accompanying consolidated statements
of income.
(13) COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 1996, 1995, and 1994, was
approximately $5,674,000, $5,133,000, and $5,219,000, respectively. A portion of
rent expense relates to leases that expire or are cancelable within one year.
The aggregate minimum annual rental commitments as of December 31, 1996, under
noncancellable long-term leases for office space are as follows (in thousands):
[Download Table]
1997 $306
1998 225
1999 116
2000 57
2001 19
The Company has pledged approximately $30,940,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.
The Company has outstanding mortgage loan commitments of approximately
$13,182,000 and $7,755,000 at December 31, 1996 and 1995, respectively.
In the normal course of business, there are various legal actions and
proceedings pending against the Company and its subsidiaries. In management's
opinion, the ultimate liability, if any, resulting from these legal actions will
not have a material adverse effect on the Company's financial position.
(14) LEASES
The Company leases various real estate properties to nonaffiliates under
operating lease agreements, with lease expiration dates ranging from 1997
through 2001. The properties leased are included in the consolidated balance
sheets as investment real estate with the related debt included in notes
payable. Rental income on these properties is included in the consolidated
statements of income as net investment income.
Investments in real estate held for lease can be summarized as follows (in
thousands):
[Download Table]
1996 1995
------ ------
Land and buildings $4,857 13,864
Less accumulated depreciation 1,567 3,612
------ ------
Net investment 3,290 10,252
Less indebtedness 884 6,119
------ ------
Investment net of indebtedness $2,406 4,133
====== ======
Future minimum rentals on noncancellable operating leases can be summarized as
follows (in thousands):
[Download Table]
Year ended December 31,
------------------------------
1997 $ 706
1998 547
1999 174
2000 111
2001 40
------
Total future minimum rentals $1,578
======
(15) RELATED PARTY TRANSACTIONS
The Company and its subsidiaries lease automobiles, furniture, and equipment
from a partnership that owns a controlling interest in AFC. These operating
leases are cancelable upon one month's notice. During the years ended December
31, 1996, 1995, and 1994, rentals paid under these leases were approximately
$2,966,000, $2,955,000, and $3,154,000, respectively.
During the years ended December 31, 1996, 1995, and 1994, the Company and its
subsidiaries paid management fees and investment advisory fees to AFC totaling
approximately $16,536,000, $17,885,000, and $12,259,000, respectively.
Short-term and other investments at December 31, 1995 include notes receivable
from AFC totaling approximately $6,485,000 which were repaid in 1996. During the
years ended December 31, 1996, 1995, and 1994, the Company recorded investment
income on the notes from AFC of approximately $481,000, $699,000, and $656,000,
respectively.
AFC and several of its subsidiaries rent office space in the home office
building from the Company. During the years ended December 31, 1996, 1995, and
1994, the Company received rental income from AFC and several of its
subsidiaries of approximately $1,280,000, $1,281,000, and $1,077,000,
respectively.
During 1996, AFC contributed capital of approximately $2,198,000 through
forgiveness of a deferred tax liability owed by AFA to AFC.
An officer of AFC serves on the board of directors of a financial institution in
which the Company maintains cash balances.
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - BUSINESS SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1996, 1995, and 1994
are included in the table below.
Assets and related investment income are allocated based upon related insurance
reserves which are backed by such assets. Other operating expenses are allocated
in relation to the mix of related revenues.
[Download Table]
1996 1995 1994
------------- --------- --------
TOTAL REVENUES:
American Fidelity Education Services Division $ 142,493 129,628 113,890
Association Group Division 99,979 96,140 90,658
Brokerage Division 24,558 31,898 78,406
Non insurance operations 1,966 1,324 1,621
------------- --------- --------
$ 268,996 258,990 284,575
============= ========= ========
PRETAX EARNINGS:
American Fidelity Education Services Division 14,275 16,034 4,818
Association Group Division 9,349 5,751 13,275
Brokerage Division (1,903) 10,113 6,765
Non insurance operations 397 517 (243)
------------- --------- --------
$ 22,118 32,415 24,615
============= ========= ========
TOTAL ASSETS:
American Fidelity Education Services Division 922,671 885,216
Association Group Division 197,225 181,426
Brokerage Division 239,986 231,774
Non insurance operations 3,170 1,891
------------- ---------
$ 1,363,052 1,300,307
============= =========
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
[Enlarge/Download Table]
Ceded Assumed Percentage
Gross to Other From Other Net of Amount
Amount Companies Companies Amount Assumed to Net
----------- --------- ---------- ------ --------------
Year ended December 31, 1996
Life insurance in force $ 6,276,241 403,148 125,101 5,998,194 2.09%
=========== ========= ========== ========= ===============
Premiums:
Life insurance 23,240 1,907 2,854 24,187 11.80%
Accident and health insurance 248,054 82,040 43 166,057 0.03%
----------- --------- ---------- --------- ---------------
Total premiums $ 271,294 83,947 2,897 190,244 11.83%
=========== ========= ========== ========= ===============
Year ended December 31, 1995
Life insurance in force $ 5,679,074 277,982 131,621 5,532,713 2.38%
=========== ========= ========== ========= ===============
Premiums:
Life insurance 23,527 1,758 2,745 24,514 11.20%
Accident and health insurance 231,340 74,385 5 156,960 0.00%
----------- --------- ---------- --------- ---------------
Total premiums $ 254,867 76,143 2,750 181,474 11.20%
=========== ========= ========== ========= ===============
Year ended December 31, 1994
Life insurance in force $ 5,158,468 346,885 140,023 4,951,606 2.83%
=========== ========= ========== ========= ===============
Premiums:
Life insurance 23,199 797 2,610 25,012 10.43%
Accident and health insurance 261,729 67,347 - 194,382 0.00%
----------- --------- ---------- --------- ---------------
Total premiums $ 284,928 68,144 2,610 219,394 10.43%
=========== ========= ========== ========= ===============
See accompanying independent auditor's report.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
The following financial statements for the Company are included in Part B
hereof:
1. Independent Auditors' Report.
2. Consolidated Balance Sheets as of December 31, 1996 and 1995.
3. Consolidated Statements of Income for the Years ended December 31, 1996,
1995, and 1994.
4. Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995, and 1994.
5. Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994.
6. Notes to Consolidated Financial Statements - December 31, 1996 and 1995.
B. EXHIBITS
1. Resolution of Board of Directors of the Company authorizing the
establishment of the Separate Account.*
2. Not Applicable.
3. Form of Principal Underwriters Agreement.
4. (i) Individual Variable and Fixed Deferred Annuity*
(ii) Loan Rider*
(iii) 403(b) Annuity Rider*
(iv) Individual Retirement Annuity Rider*
5. Application Form.*
6. (i) Copy of Articles of Incorporation of the Company.
(ii) Copy of the Bylaws of the Company.
7. Not Applicable.
8. (i) Form of Fund Participation Agreement between the Company and Merrill
Lynch Variable Series Funds, Inc.
(ii) Form of Fund Participation Agreement between the Company and each of
Dreyfus Variable Investment Fund, The Dreyfus Socially Responsible Growth
Fund, Inc. and Dreyfus Life and Annuity Index Fund, Inc. (d/b/a Dreyfus
Stock Index Fund.)
9. Opinion and Consent of Counsel.
10. Consent of Independent Auditors.
11. Not Applicable.
12. Not Applicable.
13. Calculation of Performance Information.
14. Not Applicable.
15. Company Organizational Chart.
27. Not Applicable.
*Incorporated by reference to Registrant's Form N-4 electronically filed on
April 23, 1997.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the Executive Officers and Directors of the Company:
Name and Principal Position and Offices
Business Address* with Depositor
----------------------- -----------------------------------
Lynda L. Cameron Director
William M. Cameron Vice Chairman and Chief Executive
Officer, Director
David R. Carpenter Senior Vice President, Treasurer
William E. Durrett Chairman of the Board, Director
Stephen P. Garrett Senior Vice President, Secretary
Edward C. Joullian, III Director
Kenneth D. Klehm Senior Vice President
Alfred L. Litchenburg Senior Vice President
John W. Rex President, Chief Operating Officer,
Director
Galen P. Robbins, M.D. Director
3433 N.W. 56th
Oklahoma City, OK
John D. Smith Director
P.O. Box 18832
Atlanta, GA
* The principal business address for all officers and directors listed above is
2000 N. Classen Boulevard, Oklahoma City, Oklahoma except as noted above.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Company organizational chart is included as Exhibit 15.
ITEM 27. NUMBER OF CONTRACT OWNERS
Not Applicable.
ITEM 28. INDEMNIFICATION
The Bylaws of the Company (Article VIII, Section 3) provide, in part, that:
(a) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), amounts paid in settlement (whether with
or without court approval), judgments, fines actually and reasonably incurred by
him in connection with such action, suit, or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendre or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify every person who is or was a party or
is or was threatened to be made a party to any threatened, pending, or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee,
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, or agent or in any other capacity
of or in another corporation, or a partnership, joint venture, trust, or other
enterprise, or by reason of any action alleged to have been taken or not taken
by him while acting in such capacity, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such threatened, pending, or completed action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation. The termination of any such threatened or
actual action or suit by a settlement or by an adverse judgment or order shall
not of itself create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation. Nevertheless, there shall be no indemnification
with respect to expenses incurred in connection with any claim, issue, or matter
as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation, unless, and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as such court shall deem proper.
(c) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Subsections (a) and (b) hereof, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with such defense.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not Applicable.
American Fidelity Securities, Inc. ("AFS, Inc.") is the principal underwriter
for the Policies. The following persons are the officers and directors of AFS,
Inc. The principal business address for each officer and director of AFS, Inc.
is 2000 N. Classen Blvd., Oklahoma City, Oklahoma 73106.
[Download Table]
(b) Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ------------------------------------
William E. Durrett Director, Chairman, President
David R. Carpenter Director, Senior Vice President,
Treasurer, Chief Financial Officer
Marvin R. Ewy Director, Vice President, Secretary,
Chief Operations Officer
Nancy K. Steeber Vice President, Operations Officer
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
David R. Carpenter, Senior Vice President and Treasurer, whose address is 2000
N. Classen Blvd., Oklahoma City, OK 73106, maintains physical possession of the
accounts, books or documents of the Separate Account required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
d. American Fidelity Assurance Company ("Company") hereby represents that
the fees and charges deducted under the Policies described in the Prospectus, in
the aggregate, are reasonable in relation to the services rendered, the expenses
to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, the Registrant has caused this Registration Statement to be
signed on its behalf in the City of Oklahoma City and State of Oklahoma, on this
1st day of October, 1997.
AMERICAN FIDELITY SEPARATE ACCOUNT B
(Registrant)
By: AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)
By: /s/ JOHN W. REX
_________________________________________
John W. Rex
AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)
By: /s/ JOHN W. REX
_________________________________________
John W. Rex
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
[Download Table]
Signature Title Date
-------------------------- ------------------------ -------
Vice Chairman, Chief
/s/ WILLIAM M. CAMERON* Executive Officer and 10/1/97
----------------------- -------
William M. Cameron Director (Principal
Executive Officer)
/s/ WILLIAM E. DURRETT Chairman of the Board 10/1/97
---------------------- -------
William E. Durrett and Director
LYNDA L. CAMERON* Director 10/1/97
---------------------- -------
Lynda L. Cameron*
/s/ JOHN W. REX Director, President and 10/1/97
---------------------- -------
John W. Rex Chief Operating Officer
EDWARD C. JOULLIAN, III* Director 10/1/97
--------------------------- -------
Edward C. Joullian, III
GALEN P. ROBBINS, M.D.* Director 10/1/97
------------------------- -------
Galen P. Robbins, M.D.
JOHN D. SMITH* Director 10/1/97
----------------------- -------
John D. Smith*
Senior Vice President,
/s/ DAVID R. CARPENTER Controller & Treasurer 10/1/97
---------------------- -------
David R. Carpenter (Principal Financial
Officer)
*By /s/ JOHN W. REX
______________________________________
John W. Rex, Power of Attorney
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM N-4
FOR
AMERICAN FIDELITY SEPARATE ACCOUNT B
AMERICAN FIDELITY ASSURANCE COMPANY
INDEX TO EXHIBITS
EXHIBIT NO.
EX-99.B3 Form of Principal Underwriters Agreement.
EX-99.B6(i) Articles of Incorporation of the Company.
EX-99.B6(ii) Bylaws of the Company.
EX-99.B8(i) Form of Fund Participation Agreement between
the Company and Merrill Lynch Variable Series Fund, Inc.
EX-99.B8(ii) Form of Fund Participation Agreement between
the Company and each of Dreyfus Variable Investment Fund, The
Dreyfus Socially Responsible Growth Fund, Inc. and Dreyfus Life
and Annuity Index Fund, Inc. (d/b/a Dreyfus Stock Index Fund.)
EX-99.B9 Opinion and Consent of Counsel.
EX-99.10 Consent of Independent Auditors.
EX-99.B13 Calculation of Performance Information.
EX-99.B15 Company Organizational Chart.
Dates Referenced Herein and Documents Incorporated by Reference
| This ‘N-4 EL/A’ Filing | | Date | | Other Filings |
|---|
| |  |
| Filed on: | | 10/10/97 |
| | 4/23/97 | | N-4 EL, N-8A |
| | 3/14/97 |
| | 12/31/96 |
| | 9/20/96 |
| | 12/31/95 |
| | 1/1/95 |
| | 12/31/94 |
| | 12/31/93 |
| | 1/1/93 |
| List all Filings |
4 Subsequent Filings that Reference this Filing
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