SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File No. 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Incorporated in Arizona 86-0198983
IRS Employer
Identification No.
1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant's telephone number, including area code: (310) 772-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No
--
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
--
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MARCH
28, 2000 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Anchor National Life Insurance Company, including its wholly owned
subsidiaries, (The "Company") is an indirect wholly owned subsidiary of American
International Group, Inc. ("AIG"), an international insurance and financial
services holding company. At December 31, 1998, the Company was a wholly owned
indirect subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1,
1999, SunAmerica Inc. merged with and into AIG in a tax-free reorganization that
has been treated as a pooling of interests for accounting purposes. Thus,
SunAmerica Inc. ceased to exist on that date. However, immediately prior to the
date of the merger, substantially all of the net assets of SunAmerica Inc. were
contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc.,
a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name
to SunAmerica Inc. ("SunAmerica").
The Company ranks among the largest U.S. issuers of variable annuities.
Complementing these annuity operations are the Company's guaranteed investment
contract ("GIC") operations, its asset management operations and its wholly
owned and affiliated broker-dealer operations, which provide a broad range of
financial planning and investment services through more than 8,600 independent
registered representatives nationwide. At December 31, 1999, the Company managed
$32.47 billion of assets, consisting of $26.87 billion of assets on its balance
sheet and $5.60 billion of assets managed in mutual funds.
The Company is incorporated in Arizona and maintains its principal
executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022,
telephone (310) 772-6000. The Company has no employees; however, employees of
SunAmerica and its other subsidiaries perform various services for the Company.
SunAmerica had approximately 2,500 employees at December 31, 1999, approximately
1,500 of whom perform services for the Company as well as for certain of its
affiliates.
The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of 45 to 64 grew
from 46 million to 60 million during the 1990s, making this age group the
fastest-growing segment of the U.S. population. Between 1988 and 1998, annual
industry premiums from fixed and variable annuities and fund deposits increased
from $103.87 billion to $229.47 billion. During the same period, annual
industry sales of mutual funds, excluding money market accounts, rose from $95.1
billion to $1.06 trillion.
Benefiting from continued strong growth of the retirement savings market,
industry sales of tax-deferred savings products have represented, for a number
of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its life insurance
operations on the sale of annuities and GICs.
The Company's six affiliated broker-dealers comprise the largest network of
independent registered representatives in the nation and the fifth-largest
securities sales force, based on industry data. Its wholly owned or affiliated
broker-dealers accounted for approximately one-third of the Company's total
annuity sales in 1999. The Company also distributes its products and services
through an extensive network of independent broker-dealers, full-service
securities firms, independent general insurance
1
agents, major financial institutions and, in the case of its GICs, by marketing
directly to banks, municipalities, asset management firms and direct plan
sponsors and through intermediaries, such as managers or consultants servicing
these groups.
The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance their marketing efforts. Its use of optical disk imaging and artificial
intelligence has substantially reduced the more traditional paper-intensive life
insurance processing procedures, reducing annuity processing and servicing costs
and improving customer service. This has also enabled the Company to more
efficiently assimilate acquired business. The Company has also implemented
technology to interface with its wholly owned or affiliated broker-dealers,
which enables the Company to more effectively market its products and help the
affiliated financial professionals to better serve their clients.
In recent years, the Company has enhanced its marketing efforts and
expanded its offerings of fee-based products such as variable annuities and
mutual funds, resulting in significantly increased fee income. Fee income has
also expanded through the receipt of broker-dealer net retained commissions,
resulting primarily from increased demand for long-term investment products.
The Company's fee-generating businesses entail no portfolio credit risk and
require significantly less capital support than its fixed-rate business, which
generates net investment income.
For the year ended December 31, 1999, the Company's net investment income
(including net realized investment losses) and fee income by primary product
line or service are as follows:
NET INVESTMENT AND FEE INCOME
Primary product or
Amount Percent service
------ ------- ------------------
(In thousands)
Net investment income
(including net realized
investment losses). . . . $ 144,596 24.1% Fixed-rate products
--------------- ------
Fee income:
Variable annuity fees . . 306,417 51.1 Variable annuities
Net retained commissions. 51,039 8.5 Broker-dealer sales
Asset management fees . . 43,510 7.2 Mutual funds
Universal life insurance
fees. . . . . . . . . . 23,290 3.9 Fixed-rate universal
life insurance
Surrender charges . . . . 17,137 2.9 Fixed- and variable-
rate products
Other fees. . . . . . . . 13,999 2.3
--------------- ------
Total fee income. . . . . 455,392 75.9
--------------- ------
Total . . . . . . . . . . . $ 599,988 100.0%
=============== ======
For financial information on the Company's business segments, see Part IV -
"Notes to Consolidated Financial Statements - Note 14 - Business Segments".
The business segments defined by the Company for disclosure under the
requirements of Financial Accounting Standards No. 131, "Disclosures about
2
Segments of an Enterprise and Related information," are Annuity Operations,
Asset Management Operations and Broker-Dealer Operations. Annuity Operations
are discussed in the following four sections, and Asset Management and
Broker-Dealer Operation are discussed on pages 6 and 7 respectively.
ANNUITY OPERATIONS
Founded in 1965, the Company is an Arizona-chartered company licensed in 49
states and the District of Columbia which markets flexible-premium variable
annuities and GICs. It has a "AAA" (Extremely Strong) financial strength rating
from Standard & Poor's Corporation ("S&P"), a "AAA"(Highest) rating from Duff &
Phelps Credit Rating Co. ("DCR"), an "Aaa"(Exceptional) rating from Moody's
Investors Service ("Moody's") and an "A++" (Superior) rating from industry
analyst A.M. Best Company.
In addition to distributing its variable annuity products through its six
wholly owned or affiliated broker-dealers, the Company distributes its products
through over 800 other independent broker-dealers, full-service securities firms
and financial institutions as well as through independent general insurance
agents. In total, more than 55,000 independent sales representatives nationally
are licensed to sell the Company's annuity products.
On December 31, 1998, the Company acquired the individual life business and
the individual and group annuity business of MBL Life Assurance Corporation
("MBL Life"), via a 100% coinsurance transaction. The Company assumed reserves
in this acquisition totaling $5,793,256,000, including $3,460,503,000 of fixed
annuity contracts, $2,308,742,000 of universal life insurance contracts and
$24,011,000 of guaranteed investment contracts. Policyholders of MBL annuity
products were required to transfer their funds into an existing product of the
Company or one of its affiliates by December 31, 1999 in order to receive the
policy enhancements due under the MBL Life rehabilitation agreement. Over 92%
of the deferred annuity reserves had either been transferred or surrendered by
December 31, 1999.
Included in the block of business acquired from MBL Life were policies
whose owners are residents of New York State ("the New York Business"). On July
1, 1999, the New York Business was acquired by the Company's New York affiliate,
First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance
agreement, and the remainder of the business converted to assumption
reinsurance, which superseded the coinsurance agreement. As part of this
transfer, invested assets equal to $678,272,000, life reserves equal to
$282,247,000, group pension reserves equal to $406,118,000, and other net assets
of $10,093,000 were transferred to FSA.
Substantially all of the Company's revenues are derived from the United
States.
ANNUITY OPERATIONS - VARIABLE ANNUITIES
The variable annuity products of the Company offer investors a broad
spectrum of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income through the
sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features similar to those offered by fixed
annuities, but differ in that the contractholder's rate of return is generally
dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the
contractholder. Because the investment risk is borne by the
3
customer in all but the fixed-rate account options, these products require
significantly less capital support than fixed annuities.
The Company's flagship Polaris variable annuity products are multimanager
variable annuities that offer investors a choice of more than 25 variable funds
and a number of guaranteed fixed-rate funds. Polaris sales have increased
significantly in recent years due to enhanced distribution efforts and growing
consumer demand for flexible retirement savings products that offer a variety of
equity, fixed-income and guaranteed fixed account investment choices.
At December 31, 1999, total variable product reserves were $22.27 billion,
of which $19.95 billion were held in separate accounts. The Company's variable
annuity products incorporate surrender charges to encourage persistency. At
December 31, 1999, 82% of the Company's variable annuity reserves held in the
separate accounts were subject to surrender penalties. The Company's variable
annuity products also generally limit the number of transfers made in a
specified period between account options without the assessment of a fee. The
average size of a new variable annuity contract sold by the Company in 1999 was
approximately $52,000.
ANNUITY OPERATIONS - FIXED ANNUITIES AND GICs
The Company's general account obligations are fixed-rate products,
including fixed annuity and universal life contracts issued in prior years and
fixed-rate options of its variable annuity contracts. Although the Company's
annuity contracts remain in force an average of seven to ten years, a majority
(approximately 83% at December 31, 1999) of the annuity contracts, as well as
the universal life contracts, reprice annually at discretionary rates determined
by the Company. In repricing, the Company takes into account yield
characteristics of its investment portfolio, surrender assumptions and
competitive industry pricing, among other factors.
The Company augments its retail annuity business with the sale of
institutional products. At December 31, 1999, the Company had $284.6 million of
fixed-maturity, variable-rate GIC obligations that reprice periodically based
upon certain defined indexes and $21.0 million of fixed-maturity, fixed-rate
GICs acquired from MBL Life. Of the total GIC portfolio at December 31, 1999,
approximately 68% was sold to asset management firms, 16% was sold to banks, 9%
was sold to state and local government entities and 7% was sold to corporations.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its fixed annuity, universal life and GIC obligations.
The Company seeks to achieve a predictable spread between what it earns on its
assets and what it pays on its liabilities by investing principally in
fixed-rate securities. The Company's fixed annuity and universal life products
incorporate surrender charges and its GIC products incorporate other
restrictions in order to encourage persistency. Approximately 48% of the
Company's fixed annuity, universal life and GIC reserves had surrender penalties
or other restrictions at December 31, 1999.
INVESTMENT OPERATIONS
The Company believes that its fixed-rate liabilities should be backed by a
portfolio principally composed of fixed-rate investments that generate
predictable rates of return. The Company does not have a specific target rate
of return. Instead, its rates of return vary over time depending on a variety
of factors, including the current interest rate environment, the slope of the
yield curve, the spread at which fixed-rate investments are priced over the
yield curve, default rates and general economic conditions.
4
The Company manages most of its invested assets internally. Its portfolio
strategy is constructed with a view to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability matching,
liquidity and safety.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At December 31, 1999, these assets had an
aggregate fair value of $5.05 billion with a duration of 3.2. The Company's
fixed-rate liabilities include fixed annuity, GIC and universal life reserves
and subordinated notes. At December 31, 1999, these liabilities had an
aggregate fair value (determined by discounting future contractual cash flows by
related market rates of interest) of $4.81 billion with a duration of 4.1. For
the years ended December 31, 1999 and September 30, 1998 and 1997, the Company's
yields on average invested assets were 7.11%, 8.53% and 7.97%, respectively; its
average rates paid on all interest-bearing liabilities were 5.00%, 5.49% and
5.46%, respectively; it realized net investment spreads of 2.24%, 3.34% and
2.77%, respectively, on average invested assets; and net realized investment
gains and losses were 0.27%, 0.75% and 0.66%, respectively, of average invested
assets.
The Company's general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio. However,
the Company has determined that all of its portfolio of bonds, notes and
redeemable preferred stocks (the "Bond Portfolio") is available to be sold in
response to changes in market interest rates, changes in relative value of asset
sectors and individual securities, changes in prepayment risk, changes in credit
quality outlook for certain securities, and the Company's need for liquidity and
other similar factors.
The following table summarizes the Company's investment portfolio at
December 31, 1999:
SUMMARY OF INVESTMENTS
Carrying Percent of
value portfolio
--------------- -----------
(In thousands)
Cash and short-term investments . . . . . $ 475,162 8.6%
U.S. government securities. . . . . . . . 22,884 0.4
Mortgage-backed securities. . . . . . . . 1,412,134 25.4
Other bonds, notes and redeemable
preferred stocks. . . . . . . . . . . . 2,518,151 45.4
Mortgage loans. . . . . . . . . . . . . . 674,679 12.2
Policy loans. . . . . . . . . . . . . . . 260,066 4.7
Investment in separate account seed money 141,499 2.5
Partnerships. . . . . . . . . . . . . . . 4,009 0.1
Real estate . . . . . . . . . . . . . . . 24,000 0.4
Other invested assets . . . . . . . . . . 19,385 0.3
--------------- -----------
Total investments . . . . . . . . . . . . $ 5,551,969 100.0%
=============== ===========
5
At December 31, 1999, the Bond Portfolio (excluding $4.5 million of
redeemable preferred stocks) included $3.81 billion of bonds rated by S&P,
Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") or the National
Association of Insurance Commissioners ("NAIC"), and $138.5 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At December 31, 1999, approximately $3.57 billion of the Bond Portfolio
was investment grade, including $1.43 billion of U.S. government/agency
securities and mortgage-backed securities.
At December 31, 1999, the Bond Portfolio included $377.1 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
1.4% of the Company's total assets and 6.8% of its invested assets.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $373.6 million at December 31, 1999. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
December 31, 1999, Secured Loans consisted of loans to 66 borrowers spanning 17
industries, with 13% of these assets concentrated in utilities and 11%
concentrated in financial institutions. No other industry concentration
constituted more than 7% of these assets.
Mortgage loans aggregated $674.7 million at December 31, 1999 and consisted
of 136 commercial first mortgage loans with an average loan balance of
approximately $5.0 million, collateralized by properties located in 29 states.
Approximately 36% of this portfolio was office, 17% was multifamily residential,
10% was hotels, 10% was manufactured housing, 9% was industrial, 5% was retail
and 13% was other types. At December 31, 1999, approximately 36% and 11% of
this portfolio were secured by properties located in California and New York,
respectively, and no more than 8% of this portfolio was secured by properties
located in any other single state.
At December 31, 1999, the carrying value (after impairment writedowns) of
all investments in default as to the payment of principal or interest totaled
$1.5 million, which constituted less than 0.1% of total invested assets.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
and Liquidity."
MUTUAL FUNDS AND INVESTMENT SERVICES
Through its registered investment advisor, SunAmerica Asset Management
Corp. ("SunAmerica Asset Management"), and its related distributor, the Company
earns fee income by distributing and managing a diversified family of mutual
funds and by providing professional management of individual, corporate and
pension plan portfolios. The Company offers investors an array of equity,
fixed-income, money market and tax-exempt mutual funds. Sales growth in recent
years is primarily due to sales of the Company's "Style Select Series" product,
which was introduced in November 1996. The "Style Select Series" is a group of
mutual funds that are each managed by three industry-recognized fund managers.
In 1999, one "Focus Portfolio" was added to the "Style Select Series",
increasing to ten the number of portfolios. The Focus Portfolios utilize three
leading independent money managers, each of whom manages one-third of the
portfolio by choosing ten favorite stocks. In 1999, the Company introduced the
Focused Value Portfolio. This portfolio, along with the two existing Focus
Portfolios introduced in 1998, climbed to over $1.28 billion in assets. Founded
in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management
managed approximately $7.56 billion of assets at December 31,
6
1999, including mutual fund assets, private accounts and certain of the variable
annuity assets of the Company and its affiliates.
The SunAmerica mutual funds are distributed nationally through a network of
approximately 450 financial institutions and unaffiliated broker-dealers, as
well as by the Company's broker-dealer subsidiary and its affiliated
broker-dealers.
BROKER-DEALER
The Company owns two broker-dealers, Royal Alliance Associates, Inc.
("Royal") and SunAmerica Capital Services, Inc. ("SACS"). SACS underwrites
proprietary mutual fund sales only and does not sell to the public. Royal sells
proprietary insurance products and mutual funds, as well as a full range of
non-proprietary investment products. Royal currently has a network of
approximately 2,900 representatives.
REGULATION
The Company, in common with other insurers, is subject to regulation and
supervision by the states and other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally has
its source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to approval
of policy forms and rates, the standards of solvency that must be met and
maintained, including risk based capital measurements, the licensing of insurers
and their agents, the nature of and limitations on investments, restrictions on
the size of risks which may be insured under a single policy, deposits of
securities for the benefit of policyholders, methods of accounting, periodic
examinations of the affairs of insurance companies, the form and content of
reports of financial condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the
protection of policyholders rather than security holders.
Risk-based capital ("RBC") standards are designed to measure the adequacy
of an insurer's statutory capital and surplus in relation to the risks inherent
in its business. The RBC standards consist of formulas that establish capital
requirements relating to insurance, business, asset and interest rate risks.
The standards are intended to help identify companies which are
under-capitalized and require specific regulatory actions in the event an
insurer's RBC is deficient. The RBC formula develops a risk- adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the target
level of statutory surplus varies not only as a result of the insurer's size,
but also on the risk profile of the insurer's operations. The statutory capital
and surplus of the Company exceeded its RBC requirements by a considerable
margin as of December 31, 1999.
Federal legislation has been recently enacted allowing combinations between
insurance companies, banks and other entities. It is not yet known what effect
this legislation will have on insurance companies. In addition, from time to
time, Federal initiatives are proposed that could affect the Company's
businesses. Such initiatives include employee benefit plan regulations and tax
law changes affecting the taxation of insurance companies and the tax treatment
of insurance and other investment products. Proposals made in recent years to
limit the tax deferral of annuities or otherwise modify the tax rules related to
the treatment of annuities have not been enacted. While certain of such
proposals, if implemented, could have an adverse effect on the Company's sales
of affected products, and, consequently, on its results of operations, the
Company believes these
7
proposals have a small likelihood of being enacted, because they would
discourage retirement savings and there is strong public and industry opposition
to them.
SunAmerica Asset Management Corp., a subsidiary of the Company, is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940. The mutual funds that it markets are subject to regulation under
the Investment Company Act of 1940. SunAmerica Asset Management Corp. and the
mutual funds are subject to regulation and examination by the SEC. In addition,
variable annuities and the related separate accounts of the Company are subject
to regulation by the SEC under the Securities Act of 1933 and the Investment
Company Act of 1940.
The Company's broker-dealer subsidiaries are subject to regulation and
supervision by the states in which they transact business, as well as by the SEC
and the National Association of Securities Dealers ("NASD"). The SEC and the
NASD have broad administrative and supervisory powers relative to all aspects of
business and may examine each subsidiary's business and accounts at any time.
The SEC also has broad jurisdiction to oversee various activities of the Company
and its other subsidiaries.
COMPETITION
The businesses conducted by the Company are highly competitive. The
Company competes with other life insurers, and also compete for customers' funds
with a variety of investment products offered by financial services companies
other than life insurance companies, such as banks, investment advisors, mutual
fund companies and other financial institutions. During 1998, net annuity
premiums written among the top 100 companies range from approximately $100
million to approximately $10 billion annually. The Company together with its
affiliates ranks in the top quartile of this group. The Company believes the
primary competitive factors among life insurance companies for
investment-oriented insurance products, such as annuities and GICs, include
product flexibility, net return after fees, innovation in product design, the
claims-paying ability rating and the name recognition of the issuing company,
the availability of distribution channels and service rendered to the customer
before and after a contract is issued. Other factors affecting the annuity
business include the benefits (including before-tax and after-tax investment
returns) and guarantees provided to the customer and the commissions paid.
Competitors of SunAmerica Asset Management include a large number of mutual
fund organizations, both independent and affiliated with other financial
services companies, including banks and insurance companies.
The Company's broker-dealer faces competition from regional firms and
large, national full service and discount brokerage firms.
ITEM 2. PROPERTIES
The Company's executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company,
through an affiliate, also leases office space in Woodland Hills, California.
The Company's broker-dealer and asset management subsidiaries lease offices in
New York, New York.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.
8
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further liabilities and
costs will not have a material adverse impact upon the Company's financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the quarter ending December 31, 1999 to a
vote of security-holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company and its subsidiaries should be
read in conjunction with the consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations, both of which are included
elsewhere herein.
Year Ended Three Months Ended Years Ended September 30,
------------------------------------------
December 31, 1999 December 31, 1998 1998 1997 1996 1995
----------------- ---------------- --------- --------- --------- ---------
(In thousands)
RESULTS OF OPERATIONS
Net investment income . . . $ 164,216 $ 26,583 $ 86,872 $ 73,201 $ 56,843 $ 50,083
Net realized investment
gains (losses). . . . . . (19,620) 271 19,482 (17,394) (13,355) (4,363)
Fee income. . . . . . . . . 455,392 83,330 290,362 213,146 169,505 145,105
General and administrative
expenses. . . . . . . . . (154,665) (21,993) (96,102) (98,802) (81,552) (64,457)
Amortization of deferred
acquisition costs . . . . (116,840) (27,070) (72,713) (66,879) (57,520) (58,713)
Annual commissions. . . . . (40,760) (6,624) (18,209) (8,977) (4,613) (2,658)
------------------- --------- --------- --------- --------- ---------
Pretax income . . . . . . . 287,723 54,497 209,692 94,295 69,308 64,997
Income tax expense. . . . . (103,025) (20,106) (71,051) (31,169) (24,252) (25,739)
------------------- --------- --------- --------- --------- ---------
NET INCOME. . . . . . . . . $ 184,698 $ 34,391 $138,641 $ 63,126 $ 45,056 $ 39,258
=================== ========= ========= ========= ========= =========
The results of operations of the Company for 1999 are affected by the
acquisition of business from MBL Life on December 31, 1998 (See Note 4 of the
accompanying consolidated financial statements).
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
At December 31, At September 30,
--------------------- ------------------------------------------------
1999 1998 1998 1997 1996 1995
----------- ----------- ----------- ----------- ---------- ----------
(In thousands)
FINANCIAL POSITION
Investments . . . . . . . . . $ 5,551,969 $ 8,306,943 $ 2,734,742 $ 2,608,301 $2,329,232 $2,114,908
Variable annuity assets
held in separate accounts . 19,949,145 13,767,213 11,133,569 9,343,200 6,311,557 5,230,246
Deferred acquisition costs. . 1,089,979 866,053 539,850 536,155 443,610 383,069
Deferred income taxes 53,445 --- --- --- --- ---
Other assets. . . . . . . . . 229,956 206,124 142,107 85,573 144,578 55,474
----------- ----------- ----------- ----------- ---------- ----------
TOTAL ASSETS. . . . . . . . . $26,874,494 $23,146,333 $14,550,268 $12,573,229 $9,228,977 $7,783,697
=========== =========== =========== =========== ========== ==========
Reserves for fixed annuity
contracts . . . . . . . . . $ 3,254,895 $ 5,500,157 $ 2,189,272 $ 2,098,803 $1,789,962 $1,497,052
Reserves for universal life
insurance contracts 1,978,332 2,339,194 --- --- --- ---
Reserves for guaranteed
investment contracts. . . . 305,570 306,461 282,267 295,175 415,544 277,095
Variable annuity liabilities
related to separate
accounts. . . . . . . . . . 19,949,145 13,767,213 11,133,569 9,343,200 6,311,557 5,230,246
Other payables and accrued
liabilities . . . . . . . . 413,610 171,143 157,551 157,546 120,638 227,953
Subordinated notes payable
to affiliates . . . . . . . 37,816 209,367 39,182 36,240 35,832 35,832
Deferred income taxes --- 105,772 95,758 67,047 70,189 73,459
Shareholder's equity. . . . . 935,126 747,026 652,669 575,218 485,255 442,060
----------- ----------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY. . . . $26,874,494 $23,146,333 $14,550,268 $12,573,229 $9,228,977 $7,783,697
=========== =========== =========== =========== ========== ==========
The financial position of the Company as of December 31, 1998 and thereafter is
affected by the acquisition of business from MBL Life (See Note 4 of the
accompanying consolidated financial statements).
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Anchor National Life Insurance Company (the "Company") for the
three years ended December 31, 1999, September 30, 1998 and 1997 follows.
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the three- month period ended
December 31, 1998 was a transition period.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings and profitability of
the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $184.7 million in 1999, compared with $138.6 million in
1998 and $63.1 million in 1997. On December 31, 1998, the Company acquired the
individual life business and the individual and group annuity business of MBL
Life Assurance Corporation (the "Acquisition"). Since the Acquisition was
accounted for under the purchase method of accounting, results of operations
include those of the Acquisition only from its date of acquisition.
Consequently, the operating results for 1999 are not comparable with those of
1998 and 1997. On a pro forma basis, using the historical financial information
of the acquired business and assuming that the Acquisition had been consummated
on October 1, 1996, the beginning of the prior-year periods discussed herein,
net income would have been $158.9 million and $83.4 million for the years ended
September 30, 1998 and 1997, respectively.
PRETAX INCOME totaled $287.7 million in 1999, $209.7 million in 1998 and
$94.3 million in 1997. The 37.2% improvement in 1999 over 1998 primarily
resulted from increased fee income and higher net investment
12
income, partially offset by higher net realized investment losses, increased
general and administrative expenses and increased amortization of deferred
acquisition costs. The 122.4% improvement in 1998 over 1997 primarily resulted
from increased fee income and higher net realized investment gains, partially
offset by increased annual commissions and increased amortization of deferred
acquisition costs.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $164.2 million in 1999 from $86.9
million in 1998 and $73.2 million in 1997. These amounts equal 2.24% on average
invested assets (computed on a daily basis) of $7.34 billion in 1999, 3.34% on
average invested assets of $2.60 billion in 1998, and 2.77% on average invested
assets of $2.65 billion in 1997. On a pro forma basis, assuming the Acquisition
had been consummated on October 1, 1996, net investment income on related
average invested assets would have been 1.32% and 1.14% in the years ended
September 30, 1998 and 1997, respectively. The improvement in 1999 net
investment yields over these pro forma amounts reflects a redeployment of assets
received in the Acquisition into higher yielding investment categories.
Net investment spreads include the effect of income earned on the
difference between average invested assets and average interest-bearing
liabilities. Average invested assets exceeded average interest-bearing
liabilities by $187.8 million in 1999, $140.4 million in 1998 and $126.5 million
in 1997. The difference between the Company's yield on average invested assets
and the rate paid on average interest-bearing liabilities (the "Spread
Difference") was 2.11% in 1999, 3.04% in 1998 and 2.51% in 1997. On a pro forma
basis, assuming the Acquisition had been consummated on October 1, 1996, the
Spread Difference would have been 1.31% and 1.13% for the years ended September
30, 1998 and 1997, reflecting primarily the effect of the lower yielding assets
received in the Acquisition.
Investment income (and the related yields on average invested assets)
totaled $522.0 million (7.11%) in 1999, compared with $222.0 million (8.53%) in
1998 and $210.8 million (7.97%) in 1997. Both the significant increases in
investment income and the decreases in the related yields in 1999 as compared
with 1998 and 1997 principally resulted from the Acquisition. The invested
assets associated with the Acquisition included high-grade corporate, government
and government/agency bonds and cash and short-term investments, which are
generally lower yielding than a significant portion of the invested assets that
comprise the remainder of the Company's portfolio. The increased yield in 1998
over 1997 includes the effects of an increasing proportion of mortgage loans in
the Company's portfolio, which on average have higher yields than that of the
Company's overall portfolio. Also in 1998, the Company experienced higher
returns on its investments in partnerships. On a pro forma basis, assuming the
Acquisition had been consummated on October 1, 1996, the yield on related
average invested assets would have been 6.59% and 6.41% in the years ended
September 30, 1998 and 1997, respectively.
Investment income and related yields in all periods also reflect the
Company's investments in limited partnerships. Partnership income decreased to
$13.1 million, (a yield of 24.66% on related average assets of $53.2 million) in
1999, compared with $25.8 million (a yield of 185.62% on related average assets
of $13.9 million) in 1998, and $7.1 million (a yield of 16.17% on related
average assets of $44.0 million) in 1997. Partnership income is based primarily
upon cash distributions received from limited partnerships, the operations of
which the Company does not influence. Consequently, such income is not
predictable and there can be no assurance that the Company will realize
comparable levels of such income in the future.
13
Total interest expense equaled $357.7 million in 1999, $135.1 million in
1998 and $137.6 million in 1997. The average rate paid on all interest-bearing
liabilities was 5.00% in 1999, compared with 5.49% in 1998 and 5.46% in 1997.
Interest-bearing liabilities averaged $7.15 billion during 1999, compared with
$2.46 billion during 1998 and $2.52 billion during 1997. Total interest expense
in 1999 and related average rates paid reflect the effects of the Acquisition.
On a pro forma basis, assuming the Acquisition had been consummated on October
1, 1996, the average rate paid on all interest-bearing liabilities would have
been 5.28% in the years ended September 30, 1998 and 1997, respectively, and
interest-bearing liabilities would have averaged $7.84 billion and $7.89
billion, respectively, in those years. The decreases in the overall rates paid
in 1999 result primarily from a generally lower interest rate environment in
1999.
GROWTH IN AVERAGE INVESTED ASSETS since 1998 largely resulted from the
impact of the Acquisition. Changes in average invested assets also reflect
sales of fixed annuities and the fixed account options of the Company's variable
annuity products ("Fixed Annuity Premiums"), and renewal premiums on its
universal life product ("UL Premiums") acquired in the Acquisition, partially
offset by net exchanges from fixed accounts into the separate accounts of
variable annuity contracts. Fixed Annuity Premiums and UL Premiums totaled
$2.10 billion in 1999, compared with $1.51 billion in 1998 and $1.10 billion in
1997, and are largely premiums for the fixed accounts of variable annuities.
Such premiums have increased principally because of greater customer allocation
of new premium dollars to the fixed account options of variable products,
particularly from the Acquisition business, resulting in greater inflows into
the one-year and six-month fixed accounts of these products. Such fixed
accounts are principally used for dollar-cost averaging into the variable
accounts. Accordingly, the Company anticipates that it will see a large portion
of these premiums transferred into the variable funds. These premiums represent
27%, 72% and 61%, respectively, of the related reserve balances at the beginning
of the respective periods. The decrease in 1999 premiums when expressed as a
percentage of related reserve balances results from the impact of the
Acquisition. When premium and reserve balances resulting from the Acquisition
are excluded, the resulting premiums represent 94% of the beginning fixed
annuity reserve balance in 1999.
There were no guaranteed investment contract ("GIC") premiums in 1999. GIC
premiums totaled $5.6 million in 1998 and $55.0 million in 1997. GIC surrenders
and maturities totaled $19.7 million in 1999, $36.3 million in 1998 and $198.1
million in 1997. The Company does not actively market GICs; consequently,
premiums and surrenders may vary substantially from period to period. The GICs
issued by the Company generally guarantee the payment of principal and interest
at fixed or variable rates for a term of three to five years. GICs that are
purchased by banks for their long-term portfolios or by state and local
governmental entities either prohibit withdrawals or permit scheduled book value
withdrawals subject to the terms of the underlying indenture or agreement. GICs
purchased by asset management firms for their short-term portfolios either
prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270
days. In pricing GICs, the Company analyzes cash flow information and prices
accordingly so that it is compensated for possible withdrawals prior to
maturity.
NET REALIZED INVESTMENT LOSSES totaled $19.6 in 1999, compared to net
realized investment gains of $19.5 million in 1998 and net realized investment
losses of $17.4 million in 1997. Net realized investment gains (losses) include
impairment writedowns of $6.1 million in 1999, $13.1 million in 1998, and $20.4
million in 1997. Thus, net gains (losses) from sales and redemptions of
investments totaled $13.5 million of losses in 1999, $32.6 million of gains in
1998 and $3.0 million of gains in 1997.
14
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $4.43 billion in 1999, $2.23 billion in 1998 and $2.62 billion in
1997. Sales of investments result from the active management of the Company's
investment portfolio, including assets received as part of the Acquisition.
Because redemptions of investments are generally involuntary and sales of
investments are made in both rising and falling interest rate environments, net
gains and losses from sales and redemptions of investments fluctuate from period
to period, and represent 0.18%, 1.25%, and 0.11% of average invested assets for
1999, 1998 and 1997, respectively. Active portfolio management involves the
ongoing evaluation of asset sectors, individual securities within the investment
portfolio and the reallocation of investments from sectors that are perceived to
be relatively overvalued to sectors that are perceived to be relatively
undervalued. The intent of the Company's active portfolio management is to
maximize total returns on the investment portfolio, taking into account credit,
option, liquidity and interest-rate risk.
Impairment writedowns include $6.1 million of provisions applied to bonds
in 1999, $9.4 million of provisions applied to partnerships in 1998 and $15.7
million of provisions applied to non-income producing land owned in Arizona in
1997. The statutory carrying value of this land had been guaranteed by the
Company's former ultimate parent, SunAmerica Inc. SunAmerica Inc. made a capital
contribution of $28.4 million on December 31, 1996 to the Company through the
Company's direct parent, SunAmerica Life Insurance Company (the "Parent"), in
exchange for the termination of its guaranty with respect to this land.
Accordingly, the Company reduced the carrying value of this land to estimated
fair value to reflect the full termination of the guaranty. Impairment
writedowns represent 0.08%, 0.50%, and 0.77% of average invested assets for
1999, 1998 and 1997, respectively. For the five years ended December 31, 1999,
impairment writedowns as a percentage of average invested assets have ranged
from 0.06% to 0.77% and have averaged 0.40%. Such writedowns are based upon
estimates of the net realizable value of the applicable assets. Actual
realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $306.4
million in 1999, $200.9 million in 1998 and $139.5 million in 1997. The
increased fees reflect growth in average variable annuity assets, principally
due to the receipt of variable annuity premiums, net exchanges into the separate
accounts from the fixed accounts of variable annuity contracts and increased
market values, partially offset by surrenders. Variable annuity fees represent
1.9%, 1.9%, and 1.8% of average variable annuity assets for 1999, 1998 and 1997,
respectively. Variable annuity assets averaged $16.15 billion in 1999, $10.70
billion during 1998 and $7.55 billion during 1997. Variable annuity premiums,
which exclude premiums allocated to the fixed accounts of variable annuity
products, aggregated $1.70 billion in 1999, $1.82 billion in 1998 and $1.27
billion in 1997. These amounts represent 12%, 19% and 20% of variable annuity
reserves at the beginning of the respective periods. Such premiums have
decreased in 1999 principally because of greater customer allocation of new
premium dollars to the fixed account options of variable products, particularly
from the Acquisition business, resulting in greater inflows into the one-year
and six-month fixed accounts of these products. Transfers from the fixed
accounts of the Company's variable annuity products to the separate accounts
(see "Growth in Average Invested Assets") are not classified in variable annuity
premiums (in accordance with generally accepted accounting principles).
Accordingly, changes in variable annuity premiums are not necessarily indicative
of the ultimate allocation by customers among fixed and variable account options
of the Company's variable annuity products.
Sales of variable annuity products (which include premiums allocated
15
to the fixed accounts) ("Variable Annuity Product Sales") amounted to $3.66
billion, $3.33 billion and $2.37 billion in 1999, 1998 and 1997, respectively.
Variable Annuity Product Sales primarily reflect sales of the Company's flagship
variable annuity, Polaris. The Polaris products are multimanager variable
annuities that offer investors a choice of more than 25 variable funds and a
number of guaranteed fixed-rate funds. Increases in Variable Annuity Product
Sales are due, in part, to enhanced distribution efforts and consumer demand for
flexible retirement savings products that offer a variety of equity, fixed
income and guaranteed fixed account investment choices.
The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time, Federal
initiatives are proposed that could affect the taxation of variable annuities
and annuities generally (See "Regulation").
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's subsidiary and
affiliate broker-dealers, after deducting the substantial portion of such
commissions that is passed on to registered representatives. Net retained
commissions totaled $51.0 million in 1999, $48.6 million in 1998 and $39.1
million in 1997. Broker-dealer sales (mainly sales of general securities,
mutual funds and annuities) totaled $13.40 million in 1999, $14.37 billion in
1998 and $11.56 billion in 1997. Fluctuations in net retained commissions may
not be proportionate to fluctuations in sales primarily due to changes in sales
mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $43.5 million on
average assets managed of $4.19 billion in 1999, $29.6 million on average assets
managed of $2.89 billion in 1998 and $25.8 million on average assets managed of
$2.34 billion in 1997. Asset management fees are not necessarily proportionate
to average assets managed, principally due to changes in product mix. Mutual
fund sales, excluding sales of money market accounts, aggregated $1.48 billion
in 1999, compared with $853.6 million in 1998 and $454.8 million in 1997. The
increase in sales during 1999 and 1998 resulted in part from increased sales of
the Company's "Style Select Series" product. The "Style Select Series" is a
group of mutual funds that are each managed by three industry-recognized fund
managers. In 1999, the number of portfolios in the "Style Select Series"
increased by one "Focus Portfolio" to ten. The Focus Portfolios utilize three
leading independent money managers, each of whom manages one-third of the
portfolio by choosing ten favorite stocks. Sales of the "Style Select Series"
products totaled $938.5 million in 1999, compared to $550.6 million in 1998 and
$267.8 million in 1997. Redemptions of mutual funds, excluding redemptions of
money market accounts, amounted to $571.5 million in 1999, $402.5 million in
1998 and $412.8 million in 1997, which represent 16.8%, 17.5% and 22.0%,
respectively, of average related mutual fund assets.
UNIVERSAL LIFE INSURANCE FEES result from the universal life insurance
contract reserves acquired in the Acquisition and the ongoing receipt of renewal
premiums on such contracts, and comprise mortality charges, up-front fees earned
on premiums received and administrative fees, net of the excess mortality
expense on these contracts. Universal life insurance fees amounted to $23.3
million in 1999. Such fees represent 1.10% of average reserves for universal
life insurance contracts for 1999. Since the Acquisition occurred on December
31, 1998, there were no such fees earned in 1998 or 1997.
16
SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $17.1 million in 1999 (including $1.5 million
attributable to the Acquisition), $7.4 million in 1998 and $5.5 million in 1997.
Surrender charges generally are assessed on withdrawals at declining rates
during the first seven years of a contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $3.12 billion in 1999
(including $1.58 billion attributable to the Acquisition), $1.14 billion in 1998
and $1.06 billion in 1997. These payments when expressed as a percentage of
average fixed and variable annuity and universal life reserves are 13.8% (7.0%
attributable to the Acquisition), 9.0% and 11.2% for 1999, 1998 and 1997,
respectively. The relatively high surrenders in the acquisition block of
business were expected and occurred because July 1, 1999 was the first time
since 1991 that these policyholders were able to surrender their policies
without a moratorium fee. Excluding the effects of the Acquisition, withdrawal
payments represent 8.3% of related average fixed and variable annuity reserves
in 1999. Withdrawals include variable annuity withdrawals from the separate
accounts totaling $1.34 billion (8.3% of average variable annuity reserves),
$952.1 million (8.9% of average variable annuity reserves) and $822.0 million
(10.9% of average variable annuity reserves) in 1999, 1998 and 1997,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $154.7 million in 1999,
compared with $96.1 million in 1998 and $98.8 million in 1997. The increases in
1999 over 1998 principally reflect the increased costs related to the business
acquired in the Acquisition and expenses related to servicing the Company's
growing block of variable annuity policies. General and administrative expenses
remain closely controlled through a company-wide cost containment program and
continue to represent less than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $116.8 million
(including $8.9 million attributable to the Acquisition) in 1999, compared with
$72.7 million in 1998 and $66.9 million in 1997. The increases in amortization
were primarily due to additional fixed and variable annuity and mutual fund
sales and the subsequent amortization of related deferred commissions and other
direct selling costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears
to maintain the persistency of certain of the Company's variable annuity
contracts. Substantially all of the Company's currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. Annual commissions totaled $40.8 million in 1999,
$18.2 million in 1998 and $9.0 million in 1997. The increases in annual
commissions since 1997 reflect increased sales of annuities that offer this
commission option and gradual expiration of the initial fifteen-month periods
before such payments begin. The Company estimates that over 55% of its variable
annuity product liabilities are currently subject to such annual commissions.
Based on current sales, this percentage is expected to increase in future
periods.
INCOME TAX EXPENSE totaled $103.0 million in 1999, compared with $71.1
million in 1998 and $31.2 million in 1997, representing effective tax rates of
36% in 1999, 34% in 1998 and 33% in 1997.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 25.2% to $935.1 million at December 31, 1999
from $747.0 million at December 31, 1998, due principally to $184.7 million of
net income recorded in 1999, partially offset by a $110.9 million increase in
accumulated other comprehensive loss. In addition, the Company received a
$114.3 million net capital contribution from the Parent (see Note
17
10 of Notes to Consolidated Financial Statements).
INVESTED ASSETS at December 31, 1999 totaled $5.55 billion, compared with
$8.31 billion at December 31, 1998. The decrease in invested assets in 1999
compared to 1998 is primarily due to the expected high surrenders in the
business acquired in the Acquisition. The Company manages most of its invested
assets internally. The Company's general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has determined that all of its portfolio of
bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available
to be sold in response to changes in market interest rates, changes in relative
value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Company's need
for liquidity and other similar factors.
THE BOND PORTFOLIO, which constituted 71% of the Company's total investment
portfolio, had an amortized cost that was $202.6 million greater than its
aggregate fair value at December 31, 1999, compared with an excess of $3.9
million at December 31, 1998. The net unrealized losses on the Bond Portfolio
in 1999 principally reflect the recent increase in prevailing interest rates and
the corresponding effect on the fair value of the Bond Portfolio at December 31,
1999.
At December 31, 1999, the Bond Portfolio (excluding $4.5 million of
redeemable preferred stocks) included $3.81 billion of bonds rated by Standard &
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps
Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch") or the
National Association of Insurance Commissioners ("NAIC"), and $138.5 million of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At December 31, 1999, approximately $3.57 billion of the Bond
Portfolio was investment grade, including $1.43 billion of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At December 31, 1999, the Bond Portfolio included $376.1 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
1.4% of the Company's total assets and 6.8% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
December 31, 1999.
The table on the next page summarizes the Company's rated bonds by rating
classification as of December 31, 1999.
18
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
Issues not rated by S&P/Moody's/
Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total
- ------------------------------------------- --------------------------------- -----------------------------------
S&P/(Moody's) Estimated NAIC Estimated Estimated Percent of
[DCR] {Fitch} Amortized fair category Amortized fair Amortized fair invested
category (1) cost value (2) cost value cost value assets
- ------------------- ---------- ---------- --------- ---------- ---------- ---------- ---------- -----------
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} . . . $2,809,442 $2,663,519 1 $ 167,810 $ 168,798 $2,977,252 $2,832,317 51.01%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 636,752 609,079 2 133,351 131,111 770,103 740,190 13.33
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}. . . 71,360 67,472 3 0 0 71,360 67,472 1.22
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 290,407 275,381 4 10,876 9,970 301,283 285,351 5.14
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}. . . 17,357 11,638 5 13,867 11,523 31,224 23,161 0.42
CI to D
[DD]
{D} . . . . . . . 0 0 6 131 131 131 131 0.00
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $3,825,318 $3,627,089 $ 326,035 $ 321,533 $4,151,353 $3,948,622
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
19
Footnotes to the table of Rated Bonds by Rating Classification
-----------------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Moody's rates debt securities in rating
categories ranging from Aaa (the highest) to C (extremely poor prospects of ever
attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debt's relative standing within the
rating category. A security rated Baa3 or higher is considered investment
grade. DCR rates debt securities in rating categories ranging from AAA (the
highest) to DD (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on the
highest of the S&P, Moody's, DCR and Fitch ratings if rated by multiple
agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for
nondefaulted bonds plus one category, 6, for bonds in or near default. These
six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed
above, with categories 1 and 2 considered investment grade. The NAIC categories
include $138.5 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
20
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $373.6 million at December 31, 1999. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
December 31, 1999, Secured Loans consisted of $73.0 million of publicly traded
securities and $300.6 million of privately traded securities. These Secured
Loans are composed of loans to 66 borrowers spanning 17 industries, with 13% of
these assets concentrated in utilities and 11% concentrated in financial
institutions. No other industry concentration constituted more than 7% of these
assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $674.7 million at December 31, 1999 and consisted
of 136 commercial first mortgage loans with an average loan balance of
approximately $5.0 million, collateralized by properties located in 29 states.
Approximately 36% of this portfolio was office, 17% was multifamily residential,
10% was hotels, 10% was manufactured housing, 9% was industrial, 5% was retail,
and 13% was other types. At December 31, 1999, approximately 36% and 11% of
this portfolio were secured by properties located in California and New York,
respectively, and no more than 8% of this portfolio was secured by properties
located in any other single state. At December 31, 1999, there were 10 mortgage
loans with outstanding balances of $10 million or more, which collectively
aggregated approximately 30% of this portfolio. At December 31, 1999,
approximately 31% of the mortgage loan portfolio consisted of loans with balloon
payments due before January 1, 2003. During 1999, 1998 and 1997, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.
At December 31, 1999, approximately 12% of the mortgage loans were seasoned
loans underwritten to the Company's standards and purchased at or near par from
other financial institutions. Such loans generally have higher average interest
rates than loans that could be originated today. The balance of the mortgage
loan portfolio has been originated by the Company under strict underwriting
standards. Commercial mortgage loans on properties such as offices, hotels and
shopping centers generally represent a higher level of risk than do mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans and the more immediate effects
of general economic conditions on these commercial property types. However, due
to the strict underwriting standards utilized, the Company believes that it has
prudently managed the risk attributable to its mortgage loan portfolio while
maintaining attractive yields.
POLICY LOANS aggregated $260.1 million at December 31, 1999, compared to
$320.7 million at December 31, 1998. This decrease was primarily due to
repayment of policy loans by surrendering policyholders from the Acquisition.
PARTNERSHIP INVESTMENTS totaled $4.0 million at December 31, 1999,
constituting investments in 6 separate partnerships with an average size of
21
approximately $0.7 million. These partnerships are accounted for by using the
cost method of accounting and are managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including 8 separate issuers. The risks generally associated with partnerships
include those related to their underlying investments (i.e., equity securities
and debt securities), plus a level of illiquidity, which is mitigated to some
extent by the existence of contractual termination provisions.
SEPARATE ACCOUNT SEED MONEY totaled $141.5 million at December 31, 1999,
consisting of seed money for mutual funds used as investment vehicles for the
Company's variable annuity separate accounts.
OTHER INVESTED ASSETS aggregated $19.4 million at December 31, 1999,
compared with $15.2 million at December 31, 1998, and consist of collateralized
bond obligations.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed-rate investments are priced
over the yield curve, default rates and general economic conditions. Its
portfolio strategy is constructed with a view to achieve adequate risk-adjusted
returns consistent with its investment objectives of effective asset-liability
matching, liquidity and safety. The Company's fixed-rate products incorporate
surrender charges or other restrictions in order to encourage persistency.
Approximately 48% of the Company's fixed annuity, universal life and GIC
reserves had surrender penalties or other restrictions at December 31, 1999.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At December 31, 1999, these assets had an
aggregate fair value of $5.05 billion with a duration of 3.2. The Company's
fixed-rate liabilities include fixed annuity, GIC and universal life reserves
and subordinated notes. At December 31, 1999, these liabilities had an
aggregate fair value (determined by discounting future contractual cash flows by
related market rates of interest) of $4.81 billion with a duration of 4.1. The
Company's potential exposure due to a 10% decrease in prevailing interest rates
from their December 31, 1999 levels is a loss of approximately $22.4 million,
representing an increase in the fair value of its fixed-rate liabilities that is
not offset by an increase in the fair value of its fixed-rate assets. Because
the Company actively manages its assets and liabilities and has strategies in
place to minimize its exposure to loss as interest rate changes occur, it
expects that actual losses would be less than the estimated potential loss.
22
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity, universal life and GIC products, allocating its available cash flow
amongst its various investment portfolio sectors and maintaining sufficient
levels of liquidity. Because the calculation of duration involves estimation
and incorporates assumptions, potential changes in portfolio value indicated by
the portfolio's duration will likely be different from the actual changes
experienced under given interest rate scenarios, and the differences may be
material.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements ("Swap Agreements") to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate changes.
The Company typically utilizes Swap Agreements to create a hedge that
effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At December 31, 1999, the Company had one outstanding Swap
Agreement with a notional principal amount of $21.5 million. This agreement
matures in December 2024.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount
of principal and interest payments may fluctuate as a result of prepayments of
the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is
minimal. It is the Company's policy that these agreements are entered into with
counterparties who have a debt rating of A/A2 or better from both S&P and
Moody's. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Company's Swap Agreements typically hedge
variable-rate assets or liabilities, and interest rate fluctuations that
adversely affect the net cash received or paid under the terms of a Swap
Agreement would be offset by increased interest income earned on the
variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of its
decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the security's projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual prepayment
experience monthly to reassess the relative attractiveness of the
23
security with the intent to maximize total return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrower's recent financial performance, news reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral. For investments in partnerships, management reviews
the financial statements and other information provided by the general partners.
The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment on mortgage loans are based on losses expected by management to be
realized on transfers of mortgage loans to real estate, on the disposition and
settlement of mortgage loans and on mortgage loans that management believes may
not be collectible in full. Accrual of interest is suspended when principal and
interest payments on mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $0.9 ($0.2 million of bonds and
$0.7 million of mortgage loans) at December 31, 1999, and constituted less than
0.1% of total invested assets. At December 31, 1998, defaulted investments
totaled $1.9 million, including $1.2 million of bonds and $0.7 million of
mortgage loans, and constituted less than 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At December 31, 1999, approximately $484.1 million of the Company's Bond
Portfolio had an aggregate unrealized gain of $18.0 million, while approximately
$3.47 billion of the Bond Portfolio had an aggregate unrealized loss of $220.5
million. In addition, the Company's investment portfolio currently provides
approximately $46.4 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity and GIC products have been more than sufficient in amount
to satisfy the Company's liquidity needs. As the Company anticipated, liquidity
needs were unusually high this past year due to the Acquisition. Short-term
investments were sold as needed to satisfy these current cash requirements.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through
incoming cash flow, the sale of short-term or floating-
24
rate instruments or Reverse Repos on the Company's substantial MBS segment of
the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an
unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities and
GICs. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
CONTINGENT LIABILITIES are discussed in Note 9 of the accompanying
consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of the
accompanying consolidated financial statements.
YEAR 2000
The year 2000 issue arose from computer programs written using two digits
rather than four digits to define the applicable year. This possibly could have
caused a failure of the information technology systems (IT systems) and other
equipment containing imbedded technology (non-IT systems) in the year 2000. The
Company implemented a plan to address the Year 2000 issue and to assess Year
2000 issues relating to third parties with which the Company has critical
relationships. The Company's cost to make necessary repairs had no significant
impact on its results of operations. The Company has not experienced any
business disruption from the Year 2000 issue. Its IT and non-IT systems were
compliant on January 1, 2000, and there have been no problems related to any
third parties compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's Disclosure and
Analysis of Financial Condition and Results of Operations on pages 22 and 23
herein. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," will be effective for the
Company as of January 1, 2001. Therefore, it is not included in the
accompanying financial statements. The Company has not completed its analysis
of the effect of SFAS 133, but management believes that it will not have a
material impact on the Company's results of operations, financial condition or
liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of Anchor National Life Insurance Company
(the "Company") as of March 29, 2000 are listed below, together with information as to
their ages, dates of election and principal business occupation during the last five
years (if other than their present business occupation).
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position Position Last Five Years** From-To
---- --- -------- -------- ----------------- -------
Eli Broad*. . . . 66 Chairman, 1994 Cofounded SAI
Chief Executive in 1957
Officer and
President of
the Company
Chairman, Chief 1986
Executive Officer
and President of
SunAmerica Inc.
("SAI")
Jay S. Wintrob* . 42 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman and 1998
Chief Operating
Officer of SAI
James R. Belardi* 42 Senior Vice 1992 (Joined SAI in 1986)
President of the
Company
Executive Vice 1995
President of SAI
Marc H. Gamsin* . 44 Senior Vice 1999 Executive Vice President 1998 to
President of the SunAmerica Investments, Present
Company Inc. (GA)
Senior Vice 1996 Executive Vice President, 1997-1998
President of SAI SunAmerica Investments,
Inc. (DE)
Partner, O'Melveny & 1976-1996
Myers, LLP
Jana W. Greer*. . 47 Senior Vice 1994 (Joined SAI in 1974)
President of the
Company
Senior Vice
President of SAI 1992
<FN>
____________________________________
* Also services as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
26
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position Position Last Five Years** From-To
---- --- -------- -------- ------------------- -------
Susan L. Harris* . . 42 Senior Vice 1994 Vice President, 1994-1995
President and General Counsel-
Secretary of the Corporate Affairs and
Company Secretary of SAI
Senior Vice 1995
President,
General Counsel
and Secretary of
SAI (Joined SAI in 1985)
N. Scott Gillis* . . 46 Senior Vice 2000 Senior Vice President 1994-1999
President of the and Controller,
Company SunAmerica Life Insurance
Vice President of 1997 Companies ("SLC")
SAI (Joined SAI in 1985)
Gregory M. Outcalt . 37 Senior Vice 2000 Vice President, SLC 1993-1999
President of the (Joined SAI in 1986)
Company
Edwin R. Raquel. . . 42 Senior Vice 1995 Vice President, 1990-1995
President and Actuary, SLC
Chief Actuary
of the Company
David R. Bechtel . . 32 Vice President 1998 Vice President, 1996-1998
and Treasurer of Deutsche Morgan
the Company Grenfell, Inc.
Vice President 1998 Associate, 1995-1996
and Treasurer of UBS Securities LLC
SAI Associate, 1994
Wachtell Lipton Rosen
& Katz
P. Daniel Demko, Jr. 50 Vice President 1999 Executive Vice President, 1998 to
of the Company SunAmerica Retirement Present
Markets, Inc.
President & Vice 1995-1998
Chairman, Global Health
Network, LLC
Owner, P. Demko Company 1992-1995
J. Franklin Grey . . 47 Vice President 1994 Vice President of 1994 to
of the Company Certain SLC Present
<FN>
____________________________________
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
27
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position Position Last Five Years** From-To
---- --- -------- -------- ------------------ -------
Kevin J. Hart. . . . 45 Vice President 1999 Executive Vice President, 1995 to
of the Company SunAmerica Retirement Present
Markets, Inc.
National Sales Manager, 1991-1995
American Skandia Life
Assurance Corporation
Edward P. Nolan, Jr. 50 Vice President 1993 (Joined SAI in 1989)
of the Company
Stewart R. Polakov . 40 Vice President 2000 Vice President, 1997-1999
of the Company SunAmerica Financial,
division of the Company
Director, Investment 1994-1997
Accounting, SAI
(Joined SAI in 1991)
Scott H. Richland. . 37 Vice President 1994 Senior Vice President 1997-1998
of the Company and Treasurer of SAI
Senior Vice 1997 Vice President and 1995-1997
President of SAI Treasurer of SAI
Vice President and 1994-1995
Assistant Treasurer
of SAI
(Joined SAI in 1990)
<FN>
____________________________________
* Also services as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
28
ITEM 11. EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
The following table shows the cash compensation paid or earned, based on
these allocations, to the chief executive officer and top four executive
officers of the Company whose allocated compensation exceeds $100,000 for
services rendered in all capacities to the Company during 1999:
Name of Individual or Capacities In Allocated Cash
Number in Group Which Served Compensation
----------------------- ---------------------- --------------
Eli Broad . . . . . . . . Chairman, Chief Executive $1,717,681
Officer and President
Jay S. Wintrob. . . . . . Executive Vice President 858,159
Jana Waring Greer . . . . Senior Vice President 673,541
Daniel P. Demko . . . . . Vice President 521,513
Scott H. Richland . . . . Vice President 273,303
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is an indirect wholly owned subsidiary of American
International Group, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the index set forth on page F-1 of this report.
EXHIBITS
Exhibit
No. Description
- ------ -----------
2(a) Purchase and Sale Agreement, dated as of July 15, 1998, by and among
the Company, SunAmerica Inc. ("SAI"), First SunAmerica Life Insurance Company
and MBL Life Assurance Corporation, is incorporated herein by reference to
Exhibit 2(e) to SAI's 1998 Annual Report on Form 10-K, filed December 21, 1998.
3(a) Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance on December 22,
1995, is incorporated herein by reference to Exhibit 3(a) to the Company's
quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed
February 14, 1996.
3(b) Amended and Restated Bylaws, as adopted January 1, 1996, is
incorporated herein by reference to Exhibit 3(b) to the Company's quarterly
report on Form 10-Q for the quarter ended December 31, 1995, filed February 14,
1996.
4(a) Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance on December 12,
1996. See Exhibit 3(a).
4(b) Amended and Restated Bylaws, as adopted January 1, 1996. See Exhibit
3(b).
10(a) Amendment to the Subordinated Loan Agreement for Equity Capital,
dated as of August 22, 1996, between the Company's subsidiary, SunAmerica
Capital Services, Inc. ("SACS") and SAI, extending the maturity date to
September 30, 1999 of a Subordinated Loan Agreement for Equity Capital, dated as
of September 30, 1992, defining SAI's rights with respect to the 9% notes due
September 29, 1996, is incorporated herein by reference to Exhibit 10(f) to the
Company's Form 10-K, filed December 19, 1996.
10(b) Subordinated Loan Agreement for Equity Capital, dated as of July 24,
1996, between the Company's subsidiary, Royal Alliance Associates, Inc. and SAI,
defining SAI's rights with respect to the 9% notes due August 23, 1999 is
incorporated herein by reference to Exhibit 10(k) to the Company's Form 10-K,
filed December 19, 1996.
10(c) Amendment to the Subordinated Loan Agreement for Equity Capital,
dated as of September 3, 1996, between the Company's subsidiary, SunAmerica
Asset Management Corp., and SAI, extending the maturity date to September 13,
1999 of a Subordinated Loan Agreement for Equity Capital, dated as of September
3, 1993, defining SAI's rights with respect to the 7% notes due September 13,
1996, is incorporated herein by reference to Exhibit 10(l) to the Company's Form
10-K, filed December 19, 1996.
10(d) Subordinated Loan Agreement for Equity Capital, dated as of February
19, 1997, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 9% notes due Exhibit March 14, 2000, is incorporated herein
by reference to Exhibit 10(a) to Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1997, filed May 15, 1997.
30
Exhibit
No. Description
- ------ -----------
10(e) Subordinated Loan Agreement for Equity Capital, dated as of April 29,
1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 8.5% notes due June 27, 2001, is incorporated herein by
reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1998, filed August 14, 1998.
10(f) Subordinated Loan Agreement for Equity Capital, dated as of June 3,
1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 8.5% notes due July 30, 2001, is incorporated herein by
reference to Exhibit 10(b) to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1998, filed August 14, 1998.
10(g) Subordinated Loan Agreement for Equity Capital, dated as of August
25, 1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 8.5% notes due October 30, 2001, is incorporated herein by
reference to Exhibit 10(g) to the Company's Form 10-K, filed December 23, 1998.
10(h) Subordinated Loan Agreement for Equity Capital, dated as of March 12,
1999, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 8.5% notes due April 30, 2002, is incorporated herein by
reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1999, filed May 14, 1999.
10(i) Subordinated Loan Agreement for Equity Capital, dated as of August 9,
1999, between the Company's subsidiary, SACS, and SAI, defining SAI's rights
with respect to the 8% notes due September 30, 2002, is incorporated herein by
reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1999, filed November 15, 1999.
10(j) Asset Lease Agreement, dated June 26, 1998, between the Company and
Aurora National Life Assurance Company ("Aurora"), relating to a lease from
Aurora of certain information relating to single premium deferred annuities, is
incorporated herein by reference by Exhibit 10(h) to the Company's Form 10-K,
filed December 23, 1998.
21 Subsidiaries of the Company.
27 Financial Data Schedule
REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the three months ended December
31, 1999.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By/s/ N. SCOTT GILLIS
------------------------
N. Scott Gillis
March 30, 2000 Senior Vice President and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- ------------------------------- ------------------------- --------------
/s/ ELI BROAD . . . . . . . . Chairman, Chief Executive March 30, 2000
- -------------------------------
Eli Broad . . . . . . . . Officer and President
(Principal Executive Officer)
/s/ N. SCOTT GILLIS . . . . . Senior Vice President and March 30, 2000
- -------------------------------
N. Scott Gillis . . . . . Director (Principal
Financial Officer)
/s/ GREGORY M. OUTCALT. . . . Senior Vice President and March 30, 2000
- -------------------------------
Gregory M. Outcalt. . . . Controller (Principal
Accounting Officer)
/s/ JAY S. WINTROB. . . . . . Executive Vice President March 30, 2000
- -------------------------------
Jay S. Wintrob. . . . . . and Director
/s/ JAMES R. BELARDI. . . . . Senior Vice President, March 30, 2000
- -------------------------------
James R. Belardi. . . . . Treasurer and Director
/s/ MARC H. GAMSIN. . . . . . Senior Vice President March 30, 2000
- -------------------------------
Marc H. Gamsin. . . . . . and Director
/s/ JANA W. GREER . . . . . . Senior Vice President March 30, 2000
- -------------------------------
Jana W. Greer . . . . . . and Director
/s/ SUSAN L. HARRIS . . . . . Senior Vice President, March 30, 2000
- -------------------------------
Susan L. Harris . . . . . Secretary and Director
/s/ EDWIN R. RAQUEL . . . . . Senior Vice President March 30, 2000
- -------------------------------
Edwin R. Raquel . . . . . and Chief Actuary
32
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number(s)
------------
Report of Independent Accountants . . . . . . . . . F-2
Consolidated Balance Sheet - December 31, 1999,
December 31, 1998, and September 30, 1998 . . . . . F-3 to F-4
Consolidated Statement of Income and Comprehensive
Income - Year Ended December 31, 1999, Three Months
Ended December 31, 1998, Years Ended September 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows - Year Ended
December 31, 1999, Three Months Ended December 31,
1998, Years Ended September 30, 1998 and 1997 . . . F-6 to F-7
Notes to Consolidated Financial Statements. . . . . F-8 to F-37
F-1
Report of Independent Accountants
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income and of cash flows
present fairly, in all material respects, the financial position of Anchor
National Life Insurance Company and its subsidiaries (the "Company") at December
31, 1999, December 31, 1998, and September 30, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999, for the
three months ended December 31, 1998 and for each of the two fiscal years in the
period ended September 30, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
January 31, 2000
F-2
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
December 31, December 31, September 30,
1999 1998 1998
--------------- --------------- ---------------
ASSETS
Investments:
Cash and short-term investments . . . . $ 475,162,000 $ 3,303,454,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
December 1999, $4,155,728,000;
December 1998, $4,252,740,000;
September 1998, $1,934,863,000) . . . 3,953,169,000 4,248,840,000 1,954,754,000
Mortgage loans. . . . . . . . . . . . . 674,679,000 388,780,000 391,448,000
Policy loans. . . . . . . . . . . . . . 260,066,000 320,688,000 11,197,000
Separate account seed money 141,499,000 --- ---
Common stocks available for sale,
at fair value (cost: December 1999,
$0; December 1998, $1,409,000;
September 1998, $115,000) --- 1,419,000 169,000
Partnerships. . . . . . . . . . . . . . 4,009,000 4,577,000 4,403,000
Real estate . . . . . . . . . . . . . . 24,000,000 24,000,000 24,000,000
Other invested assets . . . . . . . . . 19,385,000 15,185,000 15,036,000
--------------- --------------- ---------------
Total investments . . . . . . . . . . . 5,551,969,000 8,306,943,000 2,734,742,000
Variable annuity assets held in separate
accounts. . . . . . . . . . . . . . . . 19,949,145,000 13,767,213,000 11,133,569,000
Accrued investment income . . . . . . . . 60,584,000 73,441,000 26,408,000
Deferred acquisition costs. . . . . . . . 1,089,979,000 866,053,000 539,850,000
Receivable from brokers for sales of
securities. . . . . . . . . . . . . . . 54,760,000 22,826,000 23,904,000
Income taxes currently receivable --- --- 5,869,000
Deferred income taxes 53,445,000 --- ---
Other assets. . . . . . . . . . . . . . . 114,612,000 109,857,000 85,926,000
--------------- --------------- ---------------
TOTAL ASSETS. . . . . . . . . . . . . . . $26,874,494,000 $23,146,333,000 $14,550,268,000
=============== =============== ===============
See accompanying notes
F-3
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
December 31, December 31, September 30,
1999 1998 1998
---------------- ---------------- ---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts . . . $ 3,254,895,000 $ 5,500,157,000 $ 2,189,272,000
Reserves for universal life insurance
contracts 1,978,332,000 2,339,194,000 ---
Reserves for guaranteed investment
contracts. . . . . . . . . . . . . . . . 305,570,000 306,461,000 282,267,000
Payable to brokers for purchases of
securities 139,000 --- 50,957,000
Income taxes currently payable 23,490,000 11,123,000 ---
Modified coinsurance deposit liability 140,757,000 --- ---
Other liabilities. . . . . . . . . . . . . 249,224,000 160,020,000 106,594,000
---------------- ---------------- ---------------
Total reserves, payables
and accrued liabilities. . . . . . . . . 5,952,407,000 8,316,955,000 2,629,090,000
---------------- ---------------- ---------------
Variable annuity liabilities related to
separate accounts. . . . . . . . . . . . . 19,949,145,000 13,767,213,000 11,133,569,000
---------------- ---------------- ---------------
Subordinated notes payable to affiliates . . 37,816,000 209,367,000 39,182,000
---------------- ---------------- ---------------
Deferred income taxes --- 105,772,000 95,758,000
---------------- ---------------- ---------------
Shareholder's equity:
Common Stock . . . . . . . . . . . . . . . 3,511,000 3,511,000 3,511,000
Additional paid-in capital . . . . . . . . 493,010,000 378,674,000 308,674,000
Retained earnings. . . . . . . . . . . . . 551,158,000 366,460,000 332,069,000
Accumulated other comprehensive
income (loss). . . . . . . . . . . . . . (112,553,000) (1,619,000) 8,415,000
---------------- ---------------- ---------------
Total shareholder's equity . . . . . . . . 935,126,000 747,026,000 652,669,000
---------------- ---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . $26,874,494,000 $23,146,333,000 $14,550,268,000
================ ================ ===============
See accompanying notes
F-4
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Year Ended Three Months Ended Years Ended September 30,
-----------------------------
December 31, 1999 December 31, 1998 1998 1997
---------------------------------- ------------- --------------
Investment income. . . . . . . . $ 521,953,000 $ 54,278,000 $ 221,966,000 $ 210,759,000
------------------- ------------- -------------- --------------
Interest expense on:
Fixed annuity contracts. . . . (231,929,000) (22,828,000) (112,695,000) (109,217,000)
Universal life insurance
contracts (102,486,000) --- --- ---
Guaranteed investment
contracts. . . . . . . . . . (19,649,000) (3,980,000) (17,787,000) (22,650,000)
Senior indebtedness. . . . . . (199,000) (34,000) (1,498,000) (2,549,000)
Subordinated notes payable
to affiliates. . . . . . . . (3,474,000) (853,000) (3,114,000) (3,142,000)
------------------- ------------- -------------- --------------
Total interest expense . . . . (357,737,000) (27,695,000) (135,094,000) (137,558,000)
------------------- ------------- -------------- --------------
NET INVESTMENT INCOME. . . . . . 164,216,000 26,583,000 86,872,000 73,201,000
------------------- ------------- -------------- --------------
NET REALIZED INVESTMENT
GAINS (LOSSES) . . . . . . . . (19,620,000) 271,000 19,482,000 (17,394,000)
------------------- ------------- -------------- --------------
Fee income:
Variable annuity fees. . . . . 306,417,000 58,806,000 200,867,000 139,492,000
Net retained commissions . . . 51,039,000 11,479,000 48,561,000 39,143,000
Asset management fees. . . . . 43,510,000 8,068,000 29,592,000 25,764,000
Universal life insurance
fees 23,290,000 --- --- ---
Surrender charges. . . . . . . 17,137,000 3,239,000 7,404,000 5,529,000
Other fees . . . . . . . . . . 13,999,000 1,738,000 3,938,000 3,218,000
------------------- ------------- -------------- --------------
TOTAL FEE INCOME . . . . . . . . 455,392,000 83,330,000 290,362,000 213,146,000
------------------- ------------- -------------- --------------
GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . . . . (154,665,000) (21,993,000) (96,102,000) (98,802,000)
------------------- ------------- -------------- --------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS. . . . . . . (116,840,000) (27,070,000) (72,713,000) (66,879,000)
------------------- ------------- -------------- --------------
ANNUAL COMMISSIONS . . . . . . . (40,760,000) (6,624,000) (18,209,000) (8,977,000)
------------------- ------------- -------------- --------------
PRETAX INCOME. . . . . . . . . . 287,723,000 54,497,000 209,692,000 94,295,000
Income tax expense . . . . . . . (103,025,000) (20,106,000) (71,051,000) (31,169,000)
------------------- ------------- -------------- --------------
NET INCOME . . . . . . . . . . . 184,698,000 34,391,000 138,641,000 63,126,000
------------------- ------------- -------------- --------------
Other comprehensive income
(loss), net of tax:
Net unrealized gains (losses)
on debt and equity securities
available for sale:
Net unrealized gains
(losses) identified in
the current period . . . . (118,669,000) (10,249,000) (4,027,000) 16,605,000
Less reclassification
adjustment for net
realized (gains) losses
included in net income . . 7,735,000 215,000 (5,963,000) 7,321,000
------------------- ------------- -------------- --------------
OTHER COMPREHENSIVE INCOME
(LOSS) . . . . . . . . . . . . (110,934,000) (10,034,000) (9,990,000) 23,926,000
------------------- ------------- -------------- --------------
COMPREHENSIVE INCOME . . . . . . $ 73,764,000 $ 24,357,000 $ 128,651,000 $ 87,052,000
=================== ============= ============== ==============
See accompanying notes
F-5
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Three Months Ended Years Ended September 30,
---------------------------------
December 31, 1999 December 31, 1998 1998 1997
----------------- ------------------- --------------- ----------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income. . . . . . . . . . . . $ 184,698,000 $ 34,391,000 $ 138,641,000 $ 63,126,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts . . 231,929,000 22,828,000 112,695,000 109,217,000
Universal life insurance
contracts 102,486,000 --- --- ---
Guaranteed investment
contracts . . . . . . . . 19,649,000 3,980,000 17,787,000 22,650,000
Net realized investment
losses (gains). . . . . . . 19,620,000 (271,000) (19,482,000) 17,394,000
Amortization (accretion) of
net premiums (discounts)
on investments. . . . . . . (18,343,000) (1,199,000) 447,000 (18,576,000)
Universal life insurance
fees (23,290,000) --- --- ---
Amortization of goodwill. . . 776,000 356,000 1,422,000 1,187,000
Provision for deferred
income taxes. . . . . . . . (100,013,000) 15,945,000 34,087,000 (16,024,000)
Change in:
Accrued investment income . . . 9,155,000 (1,512,000) (4,649,000) (2,084,000)
Deferred acquisition costs. . . (208,228,000) (34,328,000) (160,926,000) (113,145,000)
Other assets. . . . . . . . . . (5,661,000) (21,070,000) (19,374,000) (14,598,000)
Income taxes currently
payable . . . . . . . . . . . 12,367,000 16,992,000 (38,134,000) 10,779,000
Other liabilities . . . . . . . 49,504,000 5,617,000 (2,248,000) 14,187,000
Other, net. . . . . . . . . . . . 15,087,000 5,510,000 (5,599,000) 418,000
------------------- --------------- ---------------- ----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES. . . . . . . . . . . . 289,736,000 47,239,000 54,667,000 74,531,000
------------------- --------------- ---------------- ----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks. . . . . . . (4,130,682,000) (392,515,000) (1,970,502,000) (2,566,211,000)
Mortgage loans. . . . . . . . . (331,398,000) (4,962,000) (131,386,000) (266,771,000)
Other investments, excluding
short-term investments (227,268,000) (1,992,000) --- (75,556,000)
Sales of:
Bonds, notes and redeemable
preferred stocks. . . . . . . 2,660,931,000 265,039,000 1,602,079,000 2,299,063,000
Other investments, excluding
short-term investments. . . . 65,395,000 142,000 42,458,000 6,421,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks. . . . . . . 1,274,764,000 37,290,000 424,393,000 376,847,000
Mortgage loans. . . . . . . . . 46,760,000 7,699,000 80,515,000 25,920,000
Other investments, excluding
short-term investments. . . . 33,503,000 853,000 67,213,000 23,940,000
Cash and short-term investments
acquired in coinsurance
transaction with MBL Life
Assurance Corporation --- 3,083,211,000 --- ---
Short-term investments
transferred to First
SunAmerica Life Insurance
Company in assumption
reinsurance transaction with
MBL Life Assurance Corporation (371,634,000) --- --- ---
------------------- --------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES. . . . . . . (979,629,000) 2,994,765,000 114,770,000 (176,347,000)
------------------- --------------- ---------------- ----------------
F-6
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended Three Months Ended Years Ended September 30,
---------------------------------
December 31, 1999 December 31, 1998 1998 1997
--------------------------------- --------------- ----------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Premium receipts on:
Fixed annuity contracts. . . . $ 2,016,851,000 $ 351,616,000 $ 1,512,994,000 $1,097,937,000
Universal life insurance
contracts 78,864,000 --- --- ---
Guaranteed investment
contracts --- --- 5,619,000 55,000,000
Net exchanges from the fixed
accounts of variable annuity
contracts. . . . . . . . . . . (1,821,324,000) (448,762,000) (1,303,790,000) (620,367,000)
Withdrawal payments on:
Fixed annuity contracts. . . . (2,232,374,000) (41,554,000) (191,690,000) (242,589,000)
Universal life insurance
contracts (81,634,000) --- --- ---
Guaranteed investment
contracts. . . . . . . . . . (19,742,000) (3,797,000) (36,313,000) (198,062,000)
Claims and annuity payments on:
Fixed annuity contracts. . . . (46,578,000) (9,333,000) (40,589,000) (35,731,000)
Universal life insurance
contracts (158,043,000) --- --- ---
Net receipts from (repayments
of) other short-term
financings . . . . . . . . . . (129,512,000) 9,545,000 (10,944,000) 34,239,000
Net receipt/(payment) related
to a modified coinsurance
transaction 140,757,000 (170,436,000) 166,631,000 ---
Receipts from issuance of
subordinated note payable
to affiliate --- 170,436,000 --- ---
Net of capital contributions
and return of capital 114,336,000 70,000,000 --- 28,411,000
Dividends paid --- --- (51,200,000) (25,500,000)
------------------- --------------- ---------------- ---------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES . . . . . . (2,138,399,000) (72,285,000) 50,718,000 93,338,000
------------------- --------------- ---------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS . . . (2,828,292,000) 2,969,719,000 220,155,000 (8,478,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD . . . . . 3,303,454,000 333,735,000 113,580,000 122,058,000
------------------- --------------- ---------------- ---------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD . . . . . . . . $ 475,162,000 $3,303,454,000 $ 333,735,000 $ 113,580,000
=================== =============== ================ ===============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid on indebtedness. . $ 3,787,000 $ 1,169,000 $ 3,912,000 $ 7,032,000
=================== =============== ================ ===============
Net income taxes paid
(refunded) . . . . . . . . . . $ 190,126,000 $ (12,302,000) $ 74,932,000 $ 36,420,000
=================== =============== ================ ===============
See accompanying notes
F-7
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company, including its wholly owned subsidiaries,
(the "Company") is an Arizona-domiciled life insurance company which conducts
its business through three segments: annuity operations, asset management
operations and broker-dealer operations. Annuity operations include the sale and
administration of deposit-type insurance contracts, including fixed and variable
annuities, universal life contracts and guaranteed investment contracts. Asset
management operations, which include the distribution and management of mutual
funds, are conducted by SunAmerica Asset Management Corp. Broker-dealer
operations include the sale of securities and financial services products, and
are conducted by Royal Alliance Associates, Inc.
The Company is an indirect wholly owned subsidiary of American International
Group, Inc. ("AIG"), an international insurance and financial services holding
company. At December 31, 1998, the Company was a wholly owned indirect
subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1, 1999,
SunAmerica Inc. merged with and into AIG in a tax-free reorganization that has
been treated as a pooling of interests for accounting purposes. Thus,
SunAmerica Inc. ceased to exist on that date. However, immediately prior to the
date of the merger, substantially all of the net assets of SunAmerica Inc. were
contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc.,
a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name
to SunAmerica Inc. ("SunAmerica").
The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government, and
policies of state and other regulatory authorities. The level of sales of the
Company's financial products is influenced by many factors, including general
market rates of interest, the strength, weakness and volatility of equity
markets, and terms and conditions of competing financial products. The Company
is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets managed in mutual funds
and held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated in
consolidation. Certain items have been reclassified to conform to the current
period's presentation.
F-8
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Under generally accepted accounting principles, premiums collected on the
non-traditional life and annuity insurance products, such as those sold by the
Company, are not reflected as revenues in the Company's statement of earnings,
as they are recorded directly to policyholders liabilities upon receipt.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
INVESTED ASSETS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholder's equity.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Policy loans are carried at unpaid balances. Separate
account seed money consists of seed money for mutual funds used as investment
vehicles for the Company's variable annuity separate accounts and is valued at
market. Limited partnerships are accounted for by the cost method of
accounting. Real estate is carried at cost, reduced by impairment provisions.
Other invested assets include collateralized bond obligations.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of the
investments.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or received on
interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Investment Income or Interest
Expense in the income statement. Initially, Swap Agreements are designated as
hedges and, therefore, are not marked to market. However, when a hedged
asset/liability is sold or repaid before the related Swap Agreement matures, the
Swap Agreement is marked to market and any gain/loss is classified with any
gain/loss realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting change
in fair value is included in Investment Income in the income
F-9
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
statement. When a Swap Agreement that is designated as a hedge is terminated
before its contractual maturity, any resulting gain/loss is credited/charged to
the carrying value of the asset/liability that it hedged and is treated as a
premium/discount for the remaining life of the asset/liability.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, universal life insurance
fees, surrender charges and direct administrative expenses. Costs incurred to
sell mutual funds are also deferred and amortized over the estimated lives of
the funds obtained. Deferred acquisition costs ("DAC") consist of commissions
and other costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to DAC equal to the change in amortization that
would have been recorded if such securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. The change
in this adjustment, net of tax, is included with the change in accumulated other
comprehensive income/(loss) that is credited or charged directly to
shareholder's equity. DAC has been increased by $29,400,000 at December 31,
1999, increased by $1,400,000 at December 31, 1998, and decreased by $7,000,000
at September 30, 1998 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting
from the receipt of variable annuity premiums are segregated in separate
accounts. The Company receives administrative fees for managing the funds and
other fees for assuming mortality and certain expense risks. Such fees are
included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $22,206,000 at December 31, 1999, is amortized
by using the straight-line method over periods averaging 25 years and is
included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts,
universal life insurance contracts and guaranteed investment contracts are
accounted for as investment-type contracts in accordance with Statement of
Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified
coinsurance transaction described in Note 8 is recorded as a deposit liability.
F-10
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FEE INCOME: Variable annuity fees, asset management fees, universal life
insurance fees and surrender charges are recorded in income as earned. Net
retained commissions are recognized as income on a trade date basis.
INCOME TAXES: The Company files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Its federal income tax return
is consolidated with those of its direct parent, SunAmerica Life Insurance
Company (the "Parent"), and its affiliate, First SunAmerica Life Insurance
Company. Income taxes have been calculated as if the Company filed a separate
return. Deferred income tax assets and liabilities are recognized based on the
difference between financial statement carrying amounts and income tax bases of
assets and liabilities using enacted income tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 addresses the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 was postponed by
SFAS 137, and now will be effective for the Company as of January 1, 2001.
Therefore, it is not included in the accompanying financial statements. The
Company has not completed its analysis of the effect of SFAS 133, but management
believes that it will not have a material impact on the Company's results of
operations, financial condition or liquidity.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was adopted for the year ended
December 31, 1999 and is included in Note 14 of the accompanying financial
statements.
3. FISCAL YEAR CHANGE
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the consolidated financial statements
include the results of operations and cash flows for the three-month transition
period ended December 31, 1998. Such results are not necessarily indicative of
operations for a full year. The consolidated financial statements as of and for
the three months ended December 31, 1998 were originally filed as the Company's
unaudited Transition Report on Form 10-Q.
Results for the comparable prior year period are summarized below.
Three Months Ended
December 31, 1997
-----------------
Investment income . . . . . . 59,855,000
Net investment income . . . . 26,482,000
Net realized investment gains 20,935,000
Total fee income. . . . . . . 63,984,000
Pretax income . . . . . . . . 67,654,000
Net income. . . . . . . . . . 44,348,000
=================
F-11
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITION
On December 31, 1998, the Company acquired the individual life business and the
individual and group annuity business of MBL Life Assurance Corporation ("MBL
Life") ("the Acquisition"), via a 100% coinsurance transaction, for a cash
purchase price of $128,420,000. As part of this transaction, the Company
acquired assets having an aggregate fair value of $5,718,227,000, composed
primarily of invested assets totaling $5,715,010,000. Liabilities assumed in
this acquisition totaled $5,831,266,000, including $3,460,503,000 of fixed
annuity reserves, $2,308,742,000 of universal life reserves and $24,011,000 of
guaranteed investment contract reserves. The excess of the purchase price over
the fair value of net assets received amounted to $104,509,000 at December 31,
1999, after adjustment for the transfer of the New York business to First
SunAmerica Life Insurance Company (see below), and is included in Deferred
Acquisition Costs in the accompanying consolidated balance sheet. The income
statement for the year ended December 31, 1999 includes the impact of the
Acquisition. On a pro forma basis, assuming the Acquisition had been
consummated on October 1, 1996, the beginning of the prior-year periods
discussed within, investment income would have been $517,606,000 and net income
would have been $158,887,000 for the year ended September 30, 1998. For the
year ended September 30, 1997, investment income would have been $506,399,000
and net income would have been $83,372,000.
Included in the block of business acquired from MBL Life were policies whose
owners are residents of New York State ("the New York Business"). On July 1,
1999, the New York Business was acquired by the Company's New York affiliate,
First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance
agreement, and the remainder of the business converted to assumption reinsurance
in the Company, which superseded the coinsurance agreement. As part of this
transfer, invested assets equal to $678,272,000, life reserves equal to
$282,247,000, group pension reserves equal to $406,118,000, and other net assets
of $10,093,000 were transferred to FSA.
The $128,420,000 purchase price was allocated between the Company and FSA based
on the estimated future gross profits of the two blocks of business. The
portion allocated to FSA was $10,000,000.
As part of the Acquisition, the Company received $242,473,000 from MBL to pay
policy enhancements guaranteed by the MBL Life rehabilitation agreement to
policyholders meeting certain requirements. A primary requirement was that
annuity policyholders must have converted their MBL Life policy to a policy type
currently offered by the Company or one of its affiliates by December 31, 1999.
The enhancements are to be credited in four installments on January 1, 2000,
June 30, 2001, June 30, 2002 and June 30, 2003, to eligible policies still
active on each of those dates. On December 31, 1999 the enhancement reserve for
such payments totaled $223,032,000, which includes interest accredited at 6.75%
on the original reserve. Of this amount, $69,836,000 was credited to
policyholders in February 2000 for the January 1, 2000 installment.
F-12
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
Estimated
Amortized Fair
Cost Value
-------------- --------------
AT DECEMBER 31, 1999:
Securities of the United States
Government. . . . . . . . . . $ 24,688,000 $ 22,884,000
Mortgage-backed securities. . . 1,505,729,000 1,412,134,000
Securities of public utilities. 114,933,000 107,596,000
Corporate bonds and notes . . . 1,676,006,000 1,596,469,000
Redeemable preferred stocks . . 4,375,000 4,547,000
Other debt securities . . . . . 829,997,000 809,539,000
-------------- --------------
Total . . . . . . . . . . . . $4,155,728,000 $3,953,169,000
============== ==============
AT DECEMBER 31, 1998:
Securities of the United States
Government. . . . . . . . . . $ 6,033,000 $ 6,272,000
Mortgage-backed securities. . . 546,790,000 553,990,000
Securities of public utilities. 208,074,000 205,119,000
Corporate bonds and notes . . . 2,624,330,000 2,616,073,000
Redeemable preferred stocks . . 6,125,000 7,507,000
Other debt securities . . . . . 861,388,000 859,879,000
-------------- --------------
Total . . . . . . . . . . . . $4,252,740,000 $4,248,840,000
============== ==============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government. . . . . . . . . . $ 84,377,000 $ 88,239,000
Mortgage-backed securities. . . 569,613,000 584,007,000
Securities of public utilities. 108,431,000 106,065,000
Corporate bonds and notes . . . 883,890,000 884,209,000
Redeemable preferred stocks . . 6,125,000 6,888,000
Other debt securities . . . . . 282,427,000 285,346,000
-------------- --------------
Total . . . . . . . . . . . . $1,934,863,000 $1,954,754,000
============== ==============
F-13
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS (Continued)
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of December 31,
1999, follow:
Estimated
Amortized Fair
Cost Value
-------------- --------------
Due in one year or less. . . $ 199,679,000 $ 199,198,000
Due after one year through
five years . . . . . . . . 552,071,000 530,289,000
Due after five years through
ten years. . . . . . . . . 1,243,298,000 1,187,044,000
Due after ten years. . . . . 654,951,000 624,504,000
Mortgage-backed securities . 1,505,729,000 1,412,134,000
-------------- --------------
Total. . . . . . . . . . . $4,155,728,000 $3,953,169,000
============== ==============
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
F-14
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS (Continued)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
Gross Gross
Unrealized Unrealized
Gains Losses
----------- --------------
AT DECEMBER 31, 1999:
Securities of the United States
Government. . . . . . . . . . $ 47,000 $ (1,852,000)
Mortgage-backed securities. . . 3,238,000 (96,832,000)
Securities of public utilities. 13,000 (7,350,000)
Corporate bonds and notes . . . 10,222,000 (89,758,000)
Redeemable preferred stocks 172,000 ---
Other debt securities . . . . . 4,275,000 (24,734,000)
----------- --------------
Total . . . . . . . . . . . . $17,967,000 $(220,526,000)
=========== ==============
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 239,000 $ ---
Mortgage-backed securities. . . 9,398,000 (2,198,000)
Securities of public utilities. 926,000 (3,881,000)
Corporate bonds and notes . . . 22,227,000 (30,484,000)
Redeemable preferred stocks 1,382,000 ---
Other debt securities . . . . . 2,024,000 (3,533,000)
----------- --------------
Total . . . . . . . . . . . . $36,196,000 $ (40,096,000)
=========== ==============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 3,862,000 $ ---
Mortgage-backed securities. . . 15,103,000 (709,000)
Securities of public utilities. 2,420,000 (4,786,000)
Corporate bonds and notes . . . 31,795,000 (31,476,000)
Redeemable preferred stocks 763,000 ---
Other debt securities . . . . . 5,235,000 (2,316,000)
----------- --------------
Total . . . . . . . . . . . . $59,178,000 $ (39,287,000)
=========== ==============
There were no gross unrealized gains on equity securities available for
sale at December 31, 1999. Gross unrealized gains on equity securities
available for sale aggregated $10,000 and $54,000 at December 31, 1998 and
September 30, 1998, respectively. There were no unrealized losses at December
31, 1999, December 31, 1998, or September 30, 1998.
F-15
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS (Continued)
Gross realized investment gains and losses on sales of investments are as
follows:
Year Ended Three Months Ended Years Ended September 30,
---------------------------
December 31, 1999 December 31, 1998 1998 1997
---------------------- ------------------- ------------ -------------
BONDS, NOTES AND
REDEEMABLE PREFERRED
STOCKS:
Realized gains . . . $ 8,333,000 $ 6,669,000 $ 28,086,000 $ 22,179,000
Realized losses. . . (26,113,000) (5,324,000) (4,627,000) (25,310,000)
COMMON STOCKS:
Realized gains . . . 4,239,000 12,000 337,000 4,002,000
Realized losses (11,000) (9,000) --- (312,000)
OTHER INVESTMENTS:
Realized gains --- 573,000 8,824,000 2,450,000
IMPAIRMENT WRITEDOWNS. (6,068,000) (1,650,000) (13,138,000) (20,403,000)
------------------- ------------ ------------- -------------
Total net realized
investment gains
and losses . . . . . $ (19,620,000) $ 271,000 $ 19,482,000 $(17,394,000)
=================== ============ ============= =============
The sources and related amounts of investment income are as follows:
Year Ended Three Months Ended Years Ended September 30,
-------------------------
December 31,1999 December 31, 1998 1998 1997
----------------- ------------------- ----------- -------------
Short-term investments . $ 61,764,000 $ 4,649,000 $ 12,524,000 $ 11,780,000
Bonds, notes and
redeemable preferred
stocks . . . . . . . . 348,373,000 39,660,000 156,140,000 163,038,000
Mortgage loans . . . . . 47,480,000 7,904,000 29,996,000 17,632,000
Common stocks 7,000 --- 34,000 16,000
Real estate. . . . . . . (525,000) 13,000 (467,000) (296,000)
Cost-method partnerships 6,631,000 352,000 24,311,000 6,725,000
Other invested assets. . 58,223,000 1,700,000 (572,000) 11,864,000
------------------- ----------- ------------- -------------
Total investment
income . . . . . . . $ 521,953,000 $54,278,000 $221,966,000 $210,759,000
=================== =========== ============= =============
Expenses incurred to manage the investment portfolio amounted to $10,014,000 for
the year ended December 31, 1999, $500,000 for the three months ended December
31, 1998, $1,910,000 for the year ended September 30, 1998 and $2,050,000 for
the year ended September 30, 1997, and are included in General and
Administrative Expenses in the income statement. Investment expenses have
increased significantly because the size of the portfolio increased as a result
of the Acquisition.
F-16
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS (Continued)
At December 31, 1999, the following investments exceeded 10% of the Company's
consolidated shareholder's equity of $935,126,000:
Amortized Fair
Cost Value
------------ ------------
Provident Institutional Funds Inc.
Del Treasury Trust Fund. . . . . 113,000,000 113,000,000
Salomon Smith Barney Repurchase
Agreement. . . . . . . . . . . . 97,000,000 97,000,000
------------ ------------
Total. . . . . . . . . . . . . . $210,000,000 $210,000,000
============ ============
At December 31, 1999, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 36% of the aggregate
carrying value of the portfolio secured by properties located in California and
approximately 11% by properties located in New York. No more than 8% of the
portfolio was secured by properties in any other single state.
At December 31, 1999, bonds, notes and redeemable preferred stocks included
$377,149,000 of bonds and notes not rated investment grade. The Company had no
material concentrations of non-investment-grade assets at December 31, 1999.
At December 31, 1999, the carrying value of investments in default as to
the payment of principal or interest was $1,529,000, composed of $870,000 of
bonds and $659,000 of mortgage loans. Such nonperforming investments had an
estimated fair value of $872,000.
As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments. At December 31,
1999, the Company had one outstanding Swap Agreement with a notional principal
amount of $21,538,000, which matures in December 2024. The net interest paid
amounted to $215,000 for the year ended December 31, 1999, $54,000 for the three
months ended December 31, 1998, $278,000 for the year ended September 30, 1998,
and $125,000 for the year ended September 30, 1997, and is included in Interest
Expense on Guaranteed Investment Contracts in the income statement.
At December 31, 1999, $7,418,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to
F-17
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
reasonable estimates of the fair value of only the Company's financial
instruments. The disclosures do not address the value of the Company's
recognized and unrecognized nonfinancial assets (including its real estate
investments and other invested assets except for cost-method partnerships) and
liabilities or the value of anticipated future business. The Company does not
plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential
taxes are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based
principally on independent pricing services, broker quotes and other independent
information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
SEPARATE ACCOUNT SEED MONEY: Carrying value is the market value of the
underlying securities.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for
by using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized contracts
are valued based on the present value of future cash flows at current pricing
rates.
RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and
F-18
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
single life premium life contracts are assigned a fair value equal to
current net surrender value.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of a hedging Swap Agreement, determined from independent
broker quotes.
RECEIVABLE FROM/PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such
obligations represent transactions of a short-term nature for which the carrying
value is considered a reasonable estimate of fair value.
MODIFIED COINSURANCE DEPOSIT LIABILITY: Fair value is based on discounting
the liability by the appropriate cost of funds, and therefore approximates
carrying value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of
contracts in the accumulation phase are based on net surrender values. Fair
values of contracts in the payout phase are based on the present value of future
cash flows at assumed investment rates.
SUBORDINATED NOTES PAYABLE TO AFFILIATES: Fair value is estimated based on
the quoted market prices for similar issues.
F-19
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments at
December 31, 1999, December 31, 1998 and September 30, 1998 compared with their
respective carrying values, are as follows:
Carrying Fair
Value Value
--------------- ---------------
DECEMBER 31, 1999:
ASSETS:
Cash and short-term investments . . . $ 475,162,000 $ 475,162,000
Bonds, notes and redeemable
preferred stocks. . . . . . . . . . 3,953,169,000 3,953,169,000
Mortgage loans. . . . . . . . . . . . 674,679,000 673,781,000
Separate account seed money . . . . . 141,499,000 141,499,000
Common stocks --- ---
Cost-method partnerships. . . . . . . 4,009,000 9,114,000
Variable annuity assets held in
separate accounts . . . . . . . . . 19,949,145,000 19,949,145,000
Receivable from brokers for sales
of securities . . . . . . . . . . . 54,760,000 54,760,000
LIABILITIES:
Reserves for fixed annuity contracts. 3,254,895,000 3,053,660,000
Reserves for universal life insurance
contracts . . . . . . . . . . . . . 1,978,332,000 1,853,442,000
Reserves for guaranteed investment
contracts . . . . . . . . . . . . . 305,570,000 305,570,000
Payable to brokers for purchases
of securities . . . . . . . . . . . 139,000 139,000
Modified coinsurance deposit
liability . . . . . . . . . . . . . 140,757,000 140,757,000
Variable annuity liabilities related
to separate accounts. . . . . . . . 19,949,145,000 19,367,834,000
Subordinated notes payable to
affiliates. . . . . . . . . . . . . 37,816,000 38,643,000
=============== ===============
DECEMBER 31, 1998:
ASSETS:
Cash and short-term investments . . . $ 3,303,454,000 $ 3,303,454,000
Bonds, notes and redeemable
preferred stocks. . . . . . . . . . 4,248,840,000 4,248,840,000
Mortgage loans. . . . . . . . . . . . 388,780,000 411,230,000
Separate account seed money --- ---
Common stocks . . . . . . . . . . . . 1,419,000 1,419,000
Cost-method partnerships. . . . . . . 4,577,000 12,802,000
Variable annuity assets held in
separate accounts . . . . . . . . . 13,767,213,000 13,767,213,000
Receivable from brokers for sales
of securities . . . . . . . . . . . 22,826,000 22,826,000
LIABILITIES:
Reserves for fixed annuity contracts. 5,500,157,000 5,437,045,000
Reserves for universal life
insurance contracts . . . . . . . . 2,339,194,000 2,339,061,000
Reserves for guaranteed investment
contracts . . . . . . . . . . . . . 306,461,000 306,461,000
Variable annuity liabilities related
to separate accounts. . . . . . . . 13,767,213,000 13,287,434,000
Subordinated notes payable to
affiliates. . . . . . . . . . . . . 209,367,000 211,058,000
=============== ===============
F-20
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Carrying Fair
Value Value
--------------- ---------------
SEPTEMBER 30, 1998:
ASSETS:
Cash and short-term investments. . . $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks . . . . . . . . . 1,954,754,000 1,954,754,000
Mortgage loans . . . . . . . . . . . 391,448,000 415,981,000
Separate account seed money --- ---
Common stocks. . . . . . . . . . . . 169,000 169,000
Cost-method partnerships . . . . . . 4,403,000 12,744,000
Variable annuity assets held in
separate accounts. . . . . . . . . 11,133,569,000 11,133,569,000
Receivable from brokers for sales
of securities. . . . . . . . . . . 23,904,000 23,904,000
LIABILITIES:
Reserves for fixed annuity contracts 2,189,272,000 2,116,874,000
Reserves for guaranteed investment
contracts. . . . . . . . . . . . . 282,267,000 282,267,000
Payable to brokers for purchases
of securities. . . . . . . . . . . 50,957,000 50,957,000
Variable annuity liabilities related
to separate accounts . . . . . . . 11,133,569,000 10,696,607,000
Subordinated notes payable to
affiliates . . . . . . . . . . . . 39,182,000 41,272,000
=============== ===============
7. SUBORDINATED NOTES PAYABLE TO AFFILIATES
At December 31, 1998, Subordinated Notes Payable to Affiliates included a
surplus note (the "Note") payable to its immediate parent, SunAmerica Life
Insurance Company (the "Parent"), for $170,436,000. On June 30, 1999, the
Parent cancelled the Note and forgave the interest earned. Funds received were
reclassified to Additional Paid-in Capital in the accompanying consolidated
balance sheet.
Subordinated notes and accrued interest payable to affiliates totaled
$37,816,000 at interest rates ranging from 8% to 9% at December 31, 1999, and
require principal payments of $5,400,000 in 2000, $10,000,000 in 2001 and
$22,060,000 in 2002.
8. REINSURANCE
The business which was assumed from MBL Life is subject to existing reinsurance
ceded agreements. At December 31, 1998, the maximum retention on any single
life was $2,000,000, and a total credit of $5,057,000 was taken against the life
insurance reserves, representing predominantly yearly renewable term
reinsurance. In order to limit even further the exposure to loss on any single
insured and to recover an additional portion of the benefits paid over such
limits, the Company entered into a reinsurance treaty effective January 1, 1999
under which the Company retains no more than $100,000 of risk on any
F-21
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. REINSURANCE (Continued)
one insured life. At December 31, 1999, a total reserve credit of $3,560,000
was taken against the life insurance reserves. With respect to these
coinsurance agreements, the Company could become liable for all obligations of
the reinsured policies if the reinsurers were to become unable to meet the
obligations assumed under the respective reinsurance agreements. The Company
monitors its credit exposure with respect to these agreements. However, due to
the high credit ratings of the reinsurers, such risks are considered to be
minimal.
On August 1, 1999, the Company entered into a modified coinsurance transaction,
approved by the Arizona Department of Insurance, which involved the ceding of
approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company
(Hawaii), a non-affiliated stock life insurer. The transaction is accounted for
as reinsurance for statutory reporting purposes. As part of the transaction,
the Company received cash in the amount of $150,000,000 and recorded a
corresponding deposit liability. As payments are made to the reinsurer, the
deposit liability is relieved. The cost of this program, $3,621,000 in 1999, is
classified as General and Administrative Expenses in the income statement.
On August 11, 1998, the Company entered into a similar modified coinsurance
transaction, approved by the Arizona Department of Insurance, which involved the
ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance
Company (Cayman), a Cayman Islands stock life insurance company, effective
December 31, 1997. As a part of this transaction, the Company received cash
amounting to approximately $188,700,000, and recorded a corresponding reduction
of DAC related to the coinsured annuities. As payments were made to the
reinsurer, the reduction of DAC was relieved. Certain expenses related to this
transaction were charged directly to DAC amortization in the income statement.
The net effect of this transaction in the income statement was not material.
On December 31, 1998, the Company recaptured this business. As part of this
recapture, the Company paid cash of $170,436,000 and recorded an increase in DAC
of $167,202,000 with the balance of $3,234,000 being recorded as DAC
amortization in the income statement.
9. CONTINGENT LIABILITIES
The Company has entered into four agreements in which it has provided liquidity
support for certain short-term securities of municipalities and non-profit
organizations by agreeing to purchase such securities in the event there is no
other buyer in the short-term marketplace. In return the Company receives a fee.
The maximum liability under these guarantees is $359,400,000. The Company's
Parent currently shares in the liabilities and fees of two of these agreements.
The Parent's share in these liabilities will increase by $150,000,000 subsequent
to December 31, 1999, and the Company's share will decrease to $209,400,000.
Management does not anticipate any material future losses with respect to these
liquidity support facilities.
F-22
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CONTINGENT LIABILITIES (Continued)
The Company is involved in various kinds of litigation common to its businesses.
These cases are in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses relating
to such litigation are adequate and any further liabilities and costs will not
have a material adverse impact upon the Company's financial position, results of
operations or cash flows.
The Company's current financial strength and counterparty credit ratings from
Standard & Poor's are based in part on a guarantee (the "Guarantee") of the
Company's insurance policy obligations by American Home Assurance Company
("American Home"), a subsidiary of AIG, and a member of an AIG intercompany
pool, and the belief that the Company is viewed as a strategically important
member of AIG. The Guarantee is unconditional and irrevocable, and
policyholders have the right to enforce the Guarantee directly against American
Home.
The Company's current financial strength rating from Moody's is based in part on
a support agreement between the Company and AIG (the "Support Agreement"),
pursuant to which AIG has agreed that AIG will cause the Company to maintain a
policyholder's surplus of not less than $1 million or such greater amount as
shall be sufficient to enable the Company to perform its obligations under any
policy issued by it. The Support Agreement also provides that if the Company
needs funds not otherwise available to it to make timely payment of its
obligations under policies issued by it, AIG will provide such funds at the
request of the Company. The Support Agreement is not a direct or indirect
guarantee by AIG to any person of any obligation of the Company. AIG may
terminate the Support Agreement with respect to outstanding obligations of the
Company only under circumstances where the Company attains, without the benefit
of the Support Agreement, a financial strength rating equivalent to that held by
the Company with the benefit of the support agreement. Policyholders have the
right to cause the Company to enforce its rights against AIG and, if the Company
fails or refuses to take timely action to enforce the Support Agreement or if
the Company defaults in any claim or payment owed to such policyholder when due,
have the right to enforce the Support Agreement directly against AIG.
American Home does not publish financial statements, although it files statutory
annual and quarterly reports with the New York State Insurance Department, where
such reports are available to the public. AIG is a reporting company under the
Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and
quarterly reports on Form 10-Q, which are available from the Securities and
Exchange Commission.
F-23
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value Common
Stock. At December 31, 1999, December 31, 1998 and September 30, 1998, 3,511
shares were outstanding.
Changes in shareholder's equity are as follows:
Year Ended Three Months Ended Years Ended September 30,
-----------------------
December 31, 1999 December 31, 1998 1998 1997
-------------------- ------------------- ----------- ------------
ADDITIONAL PAID-IN
CAPITAL:
Beginning balances . . $ 378,674,000 $308,674,000 $308,674,000 $280,263,000
Reclassification of
Note by the Parent 170,436,000 --- --- ---
Return of capital (170,500,000) --- --- ---
Capital contributions
received 114,250,000 70,000,000 --- 28,411,000
Contribution of
partnership
investment 150,000 --- --- ---
------------------- ------------- ------------- -------------
Ending balances. . . . . $ 493,010,000 $378,674,000 $308,674,000 $308,674,000
=================== ============= ============= =============
RETAINED EARNINGS:
Beginning balances . . $ 366,460,000 $332,069,000 $244,628,000 $207,002,000
Net income . . . . . . 184,698,000 34,391,000 138,641,000 63,126,000
Dividends paid --- --- (51,200,000) (25,500,000)
------------------- ------------- ------------- -------------
Ending balances. . . . . $ 551,158,000 $366,460,000 $332,069,000 $244,628,000
=================== ============= ============= =============
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS):
Beginning balances . $ (1,619,000) $ 8,415,000 $ 18,405,000 $ (5,521,000)
Change in net
unrealized gains
(losses) on debt
securities
available for sale (198,659,000) (23,791,000) (23,818,000) 57,463,000
Change in net
unrealized gains
(losses) on equity
securities
available for sale (10,000) (44,000) (950,000) (55,000)
Change in adjustment
to deferred
acquisition costs. 28,000,000 8,400,000 9,400,000 (20,600,000)
Tax effects of net
changes. . . . . . $ 59,735,000 5,401,000 5,378,000 (12,882,000)
------------------- ------------- ------------- -------------
Ending balances. . . . . $ (112,553,000) $ (1,619,000) $ 8,415,000 $ 18,405,000
=================== ============= ============= =============
F-24
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY (Continued)
Dividends that the Company may pay to its shareholder in any year without
prior approval of the Arizona Department of Insurance are limited by statute.
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior approval
of the Insurance Commissioner is limited to the lesser of either 10% of the
preceding year's statutory surplus or the preceding year's statutory net gain
from operations less equity in undistributed income or loss of subsidiaries
included in net investment income if, after paying the dividend, the Company's
capital and surplus would be adequate in the opinion of the Arizona Department
of Insurance. No dividends were paid in the year ended December 31, 1999 or the
three months ended December 31, 1998. Dividends in the amounts of $51,200,000
and $25,500,000 were paid on June 4, 1998 and April 1, 1997, respectively.
Dividends of $69,000,000 were paid on March 1, 2000.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the year ended December 31,
1999 was $261,539,000. The statutory net loss for the year ended December 31,
1998 was $98,766,000. The statutory net income for the year ended December 31,
1997 totaled $74,407,000. The Company's statutory capital and surplus totaled
$694,621,000 at December 31, 1999, $443,394,000 at December 31, 1998 and
$537,542,000 at September 30, 1998.
On June 30, 1999, the Parent cancelled the Company's surplus note payable of
$170,436,000 and funds received were reclassified to Additional Paid-in Capital
in the accompanying consolidated balance sheet. On September 9, 1999, the
Company paid $170,500,000 to its Parent as a return of capital. On September
14, 1999 and October 25, 1999, the Parent contributed additional capital to the
Company in the amounts of $54,250,000 and $60,000,000, respectively. Also on
December 31, 1999, the Parent made a $150,000 contribution of partnership
investments.
F-25
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
Net Realized
Investment
Gains (Losses) Operations Total
--------------- ------------- --------------
YEAR ENDED DECEMBER 31, 1999:
Currently payable . . . . . . . $ 6,846,000 $196,192,000 $ 203,038,000
Deferred. . . . . . . . . . . . (13,713,000) (86,300,000) (100,013,000)
--------------- ------------- --------------
Total income tax expense
(benefit) . . . . . . . . . $ (6,867,000) $109,892,000 $ 103,025,000
=============== ============= ==============
THREE MONTHS ENDED DECEMBER
31, 1998:
Currently payable . . . . . . . $ 740,000 $ 3,421,000 $ 4,161,000
Deferred. . . . . . . . . . . . (620,000) 16,565,000 15,945,000
--------------- ------------- --------------
Total income tax expense. . . $ 120,000 $ 19,986,000 $ 20,106,000
=============== ============= ==============
YEAR ENDED SEPTEMBER 30, 1998:
Currently payable . . . . . . . $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred. . . . . . . . . . . . (550,000) 34,637,000 34,087,000
--------------- ------------- --------------
Total income tax expense. . . $ 3,671,000 $ 67,380,000 $ 71,051,000
=============== ============= ==============
YEAR ENDED SEPTEMBER 30, 1997:
Currently payable . . . . . . . $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred. . . . . . . . . . . . (2,258,000) (13,766,000) (16,024,000)
--------------- ------------- --------------
Total income tax expense
(benefit) . . . . . . . . . $ (5,893,000) $ 37,062,000 $ 31,169,000
=============== ============= ==============
F-26
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
Income taxes computed at the United States federal income tax rate of 35% and
income taxes provided differ as follows:
Year Ended Three Months Ended Years Ended September 30,
---------------------------
December 31, 1999 December 31, 1998 1998 1997
--------------- ------------- ------------ ------------
Amount computed at
statutory rate . . . . . $ 100,703,000 $19,074,000 $73,392,000 $33,003,000
Increases (decreases)
resulting from:
Amortization of
differences between
book and tax bases
of net assets
acquired . . . . . . 609,000 146,000 460,000 666,000
State income taxes,
net of federal tax
benefit. . . . . . . 7,231,000 1,183,000 5,530,000 1,950,000
Dividends-received
deduction. . . . . . (3,618,000) (345,000) (7,254,000) (4,270,000)
Tax credits. . . . . . (1,346,000) (1,296,000) (318,000)
Other, net . . . . . . (554,000) 48,000 219,000 138,000
------------------- ------------ ------------ ------------
Total income tax
expense. . . . . . . $ 103,025,000 $20,106,000 $71,051,000 $31,169,000
=================== ============ ============ ============
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at December 31, 1999. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
F-27
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The
significant components of the liability for Deferred Income Taxes are as
follows:
December 31, December 31, September 30,
1999 1998 1998
-------------- -------------- --------------
DEFERRED TAX LIABILITIES:
Investments. . . . . . . . . . $ 23,208,000 $ 18,174,000 $ 17,643,000
Deferred acquisition costs . . 272,697,000 222,943,000 223,392,000
State income taxes . . . . . . 5,203,000 3,143,000 2,873,000
Other liabilities. . . . . . . 18,658,000 13,906,000 144,000
Net unrealized gains on debt
and equity securities
available for sale --- --- 4,531,000
-------------- -------------- --------------
Total deferred tax liabilities $ 319,766,000 258,166,000 248,583,000
-------------- -------------- --------------
DEFERRED TAX ASSETS:
Contractholder reserves. . . . (261,781,000) (148,587,000) (149,915,000)
Guaranty fund assessments. . . (2,454,000) (2,935,000) (2,910,000)
Deferred income (48,371,000) --- ---
Other assets --- --- ---
Net unrealized losses on
debt and equity securities
available for sale (60,605,000) ( 872,000) ---
-------------- -------------- --------------
Total deferred tax assets. . . (373,211,000) (152,394,000) (152,825,000)
-------------- -------------- --------------
Deferred income taxes. . . . . $ (53,445,000) $ 105,772,000 $ 95,758,000
============== ============== ==============
12. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
which requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
adoption of SFAS 130 did not have an impact on the Company's results of
operations, financial condition or liquidity. Comprehensive income amounts for
the prior year are disclosed to conform to the current year's presentation.
F-28
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMPREHENSIVE INCOME (Continued)
The before tax, after tax, and tax benefit (expense) amounts for each component
of the increase or decrease in unrealized losses or gains on debt and equity
securities available for sale for both the current and prior periods are
summarized below:
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ----------- --------------
YEAR ENDED DECEMBER 31,
1999:
Net unrealized losses on debt and
equity securities available
for sale identified in the
current period. . . . . . . . . $(217,259,000) $ 76,041,000 $(141,218,000)
Increase in deferred acquisition
cost adjustment identified in
the current period. . . . . . . 34,690,000 (12,141,000) 22,549,000
-------------- ------------- --------------
Subtotal. . . . . . . . . . . . . (182,569,000) 63,900,000 (118,669,000)
-------------- ------------- --------------
Reclassification adjustment for:
Net realized losses included
in net income . . . . . . . . 18,590,000 (6,507,000) 12,083,000
Related change in deferred
acquisition costs . . . . . . (6,690,000) 2,342,000 (4,348,000)
-------------- ------------- --------------
Total reclassification
adjustment. . . . . . . . . . 11,900,000 (4,165,000) 7,735,000
-------------- ------------- --------------
Total other comprehensive
loss. . . . . . . . . . . . . . $(170,669,000) $ 59,735,000 $(110,934,000)
============== ============= ==============
THREE MONTHS ENDED DECEMBER 31,
1998:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period. . . . . . . . . $(24,345,000) $ 8,521,000 $(15,824,000)
Increase in deferred acquisition
cost adjustment identified in
the current period. . . . . . . 8,579,000 (3,004,000) 5,575,000
------------- ------------ -------------
Subtotal. . . . . . . . . . . . . (15,766,000) 5,517,000 (10,249,000)
------------- ------------ -------------
Reclassification adjustment for:
Net realized losses included
in net income . . . . . . . . 510,000 (179,000) 331,000
Related change in deferred
acquisition costs . . . . . . . (179,000) 63,000 (116,000)
------------- ------------ -------------
Total reclassification
adjustment. . . . . . . . . . 331,000 (116,000) 215,000
------------- ------------ -------------
Total other comprehensive loss. . $(15,435,000) $ 5,401,000 $(10,034,000)
============= ============ =============
F-29
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME (Continued)
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ----------- -------------
YEAR ENDED SEPTEMBER 30,
1998:
Net unrealized losses on debt and
equity securities available
for sale identified in the
current period. . . . . . . . . $(10,281,000) $ 3,598,000 $(6,683,000)
Increase in deferred acquisition
cost adjustment identified in
the current period. . . . . . . 4,086,000 (1,430,000) 2,656,000
------------- ------------ ------------
Subtotal. . . . . . . . . . . . . (6,195,000) 2,168,000 (4,027,000)
------------- ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income . . . . . . . . (14,487,000) 5,070,000 (9,417,000)
Related change in deferred
acquisition costs . . . . . . . 5,314,000 (1,860,000) 3,454,000
------------- ------------ ------------
Total reclassification
adjustment. . . . . . . . . . (9,173,000) 3,210,000 (5,963,000)
------------- ------------ ------------
Total other comprehensive loss. . $(15,368,000) $ 5,378,000 $(9,990,000)
============= ============ ============
YEAR ENDED SEPTEMBER 30,
1997:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period. . . . . . . . . $ 40,575,000 $(14,201,000) $26,374,000
Decrease in deferred acquisition
cost adjustment identified in
the current period. . . . . . . (15,031,000) 5,262,000 (9,769,000)
------------- ------------- ------------
Subtotal. . . . . . . . . . . . . 25,544,000 (8,939,000) 16,605,000
------------- ------------- ------------
Reclassification adjustment for:
Net realized losses included
in net income . . . . . . . . 16,832,000 (5,891,000) 10,941,000
Related change in deferred
acquisition costs . . . . . . (5,569,000) 1,949,000 (3,620,000)
------------- ------------- ------------
Total reclassification
adjustment. . . . . . . . . . 11,263,000 (3,942,000) 7,321,000
------------- ------------- ------------
Total other comprehensive
income. . . . . . . . . . . . . $ 36,807,000 $(12,881,000) $23,926,000
============= ============= ============
F-30
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies: SunAmerica
Securities, Inc.; Advantage Capital Corp.; Financial Services Corp.; Sentra
Securities Corp.; and Spelman & Co. Inc. Commissions paid to these
broker-dealers totaled $37,435,000 in the year ended December 31, 1999,
$6,977,000 in the three months ended December 31, 1998, and $32,946,000 in the
year ended September 30, 1998 and $25,492,000 in the year ended September 30,
1997. These broker-dealers, when combined with the Company's wholly owned
broker-dealer, represent a significant portion of the Company's business,
amounting to approximately 35.6% of premiums in the year ended December 31, 1999
and the three months ended December 31, 1998, 33.6% in the year ended September
30, 1998 and 36.1% in the year ended September 30, 1997.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from its Parent and SunAmerica, an
indirect parent. Amounts paid for such services totaled $105,059,000 for the
year ended December 31, 1999, $21,593,000 for the three months ended December
31, 1998, $84,975,000 for the year ended September 30, 1998 and $86,116,000 for
the year ended September 30, 1997. The marketing component of such costs during
these periods amounted to $53,385,000, $9,906,000, $39,482,000 and $31,968,000,
respectively, and are deferred and amortized as part of Deferred Acquisition
Costs. The other components of such costs are included in General and
Administrative Expenses in the income statement.
At December 31, 1999 and 1998, the Company held bonds with a fair value of
$50,000 and $84,965,000, respectively, which were issued by its affiliate,
International Lease Finance Corp. The amortized cost of these bonds is equal to
the fair value. At September 30, 1998 and 1997, the Company held no investments
issued by any of its affiliates.
During the year ended December 31, 1999, the Company transferred short-term
investments and bonds to FSA with an aggregate fair value of $634,596,000 as
part of the transfer of the New York Business from the Acquisition (See Note 7).
The Company recorded a net realized loss of $5,144,000 on the transfer of these
assets.
During the year ended December 31, 1999, the Company purchased certain invested
assets from SunAmerica for cash equal to their current market value of
$161,159,000.
For the three months ended December 31, 1998, the Company made no purchases
or sales of invested assets from or to the Parent or its affiliates.
During the year ended September 30, 1998, the Company sold various invested
assets to SunAmerica for cash equal to their current market value of
$64,431,000. The Company recorded a net gain aggregating $16,388,000 on such
transactions.
During the year ended September 30, 1998, the Company purchased certain
invested assets from SunAmerica, the Parent and CalAmerica Life Insurance
Company ("CalAmerica"), a wholly-owned subsidiary of the Parent that has since
merged into the Parent, for cash equal to their current market value which
aggregated $20,666,000, $10,468,000
F-31
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED-PARTY MATTERS (Continued)
and $61,000, respectively.
During the year ended September 30, 1997, the Company sold various invested
assets to the Parent and CalAmerica for cash equal to their current market value
of $15,776,000 and $15,000, respectively. The Company recorded a net gain
aggregating $276,000 on such transactions.
During the year ended September 30, 1997, the Company purchased certain
invested assets from the Parent and CalAmerica for cash equal to their current
market value of $8,717,000 and $284,000, respectively.
14. BUSINESS SEGMENTS
Effective January 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," which requires the reporting of certain
financial information by business segment. For the purpose of providing segment
information, the Company has three business segments: annuity operations, asset
management operations and broker-dealer operations. The annuity operations
focus primarily on the marketing of variable annuity products and the
administration of the universal life business acquired from MBL Life in 1998
(See Note 4). The Company's variable annuity products offer investors a broad
spectrum of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income on
investments in the variable options and net investment income on the fixed-rate
options. The asset management operations are conducted by the Company's
registered investment advisor subsidiary, SunAmerica Asset Management Corp.
("SunAmerica Asset Management"), and its related distributor. SunAmerica Asset
Management earns fee income by distributing and managing a diversified family of
mutual funds, by managing certain subaccounts within the Company's variable
annuity products and by providing professional management of individual,
corporate and pension plan portfolios. The broker-dealer operations are
conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates,
Inc. ("Royal"), which sells proprietary annuities and mutual funds, as well as a
full range of non-proprietary investment products.
F-32
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS (Continued)
Summarized data for the Company's business segments follow:
Asset Broker
Annuity Management Dealer
Operations Operations Operations Total
------------ ----------- ----------- ----------
YEAR ENDED DECEMBER 31,
1999:
Total assets . . . . . . . $26,649,310,000 $150,966,000 $74,218,000 $26,874,494,000
Expenditures for long-
lived assets --- 2,563,000 2,728,000 5,291,000
Investment in subsidiaries --- --- --- ---
Revenue from external
customers. . . . . . . . 790,697,000 54,652,000 41,185,000 886,534,000
Intersegment revenue --- 62,998,000 8,193,000 71,191,000
---------------- ------------- ------------ ----------------
Total revenue. . . . . . . 790,697,000 117,650,000 49,378,000 957,725,000
================ ============= ============ ================
Investment income. . . . . 511,914,000 9,072,000 967,000 521,953,000
Interest expense . . . . . (354,263,000) (3,085,000) (389,000) (357,737,000)
Depreciation and
amortization expense . . (95,408,000) (23,249,000) (3,234,000) (121,891,000)
Income from unusual
transactions --- --- --- ---
Pretax income. . . . . . . 199,333,000 67,779,000 20,611,000 287,723,000
Income tax expense . . . . (65,445,000) (28,247,000) (9,333,000) (103,025,000)
Income from extraordinary
items --- --- --- ---
Net income . . . . . . . . $ 133,888,000 $ 39,532,000 $11,278,000 $ 184,698,000
================ ============= ============ ================
Significant non-cash
items $ --- $ --- $ --- $ ---
================ ============= ============ ================
F-33
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS (Continued)
Asset Broker-
Annuity Management Dealer
Operations Operations Operations Total
------------ ----------- ----------- ----------
THREE MONTHS ENDED
DECEMBER 31, 1998:
Total assets . . . . . . . $22,982,323,000 $104,473,000 $59,537,000 $23,146,333,000
Expenditures for long-
lived assets --- 328,000 1,005,000 1,333,000
Investment in subsidiaries --- --- --- ---
Revenue from external
customers. . . . . . . . 103,626,000 11,103,000 9,605,000 124,334,000
Intersegment revenue --- 11,871,000 1,674,000 13,545,000
---------------- ------------- ------------ ----------------
Total revenue. . . . . . . 103,626,000 22,974,000 11,279,000 137,879,000
================ ============= ============ ================
Investment income. . . . . 53,149,000 971,000 158,000 54,278,000
Interest expense . . . . . (26,842,000) (752,000) (101,000) (27,695,000)
Depreciation and
amortization expense . . (23,236,000) (4,204,000) (561,000) (28,001,000)
Income from unusual
transactions --- --- --- ---
Pretax income. . . . . . . 36,961,000 13,092,000 4,444,000 54,497,000
Income tax expense . . . . (12,978,000) (5,181,000) (1,947,000) (20,106,000)
Income from extraordinary
items --- --- --- ---
Net income . . . . . . . . $ 23,983,000 $ 7,911,000 $ 2,497,000 $ 34,391,000
================ ============= ============ ================
Significant non-cash
items $ --- $ --- $ --- $ ---
================ ============= ============ ================
F-34
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS (Continued)
Asset Broker-
Annuity Management Dealer
Operations Operations Operations Total
------------ ----------- ----------- ----------
YEAR ENDED SEPTEMBER 30,
1998:
Total assets . . . . . . . $14,389,922,000 $104,476,000 $ 55,870,000 $14,550,268,000
Expenditures for long-
lived assets --- 477,000 5,289,000 5,766,000
Investment in subsidiaries --- --- --- ---
Revenue from external
customers. . . . . . . . 410,011,000 34,396,000 39,729,000 484,136,000
Intersegment revenue --- 40,040,000 7,634,000 47,674,000
---------------- ------------- ------------- ----------------
Total revenue. . . . . . . 410,011,000 74,436,000 47,363,000 531,810,000
================ ============= ============= ================
Investment income. . . . . 218,044,000 2,839,000 1,083,000 221,966,000
Interest expense . . . . . (131,980,000) (2,709,000) (405,000) (135,094,000)
Depreciation and
amortization expense . . (60,731,000) (14,780,000) (1,770,000) (77,281,000)
Income from unusual
transactions --- --- --- ---
Pretax income. . . . . . . 148,084,000 39,207,000 22,401,000 209,692,000
Income tax expense . . . . (44,706,000) (15,670,000) (10,675,000) (71,051,000)
Income from extraordinary
items --- --- --- ---
Net income . . . . . . . . $ 103,378,000 $ 23,537,000 $ 11,726,000 $ 138,641,000
================ ============= ============= ================
Significant non-cash
items $ --- $ --- $ --- $ ---
================ ============= ============= ================
F-35
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS (Continued)
Asset Broker-
Annuity Management Dealer
Operations Operations Operations Total
------------ ------------ ----------- ----------
YEAR ENDED SEPTEMBER 30,
1997:
Total assets . . . . . . . $12,440,311,000 $ 81,518,000 $51,400,000 $12,573,229,000
Expenditures for long-
lived assets --- 804,000 4,527,000 5,331,000
Investment in subsidiaries --- --- --- ---
Revenue from external
customers. . . . . . . . 317,061,000 28,655,000 31,678,000 377,394,000
Intersegment revenue --- 22,790,000 6,327,000 29,117,000
---------------- ------------- ------------ ----------------
Total revenue. . . . . . . 317,061,000 51,445,000 38,005,000 406,511,000
================ ============= ============ ================
Investment income. . . . . 208,382,000 1,445,000 932,000 210,759,000
Interest expense . . . . . (134,416,000) (2,737,000) (405,000) (137,558,000)
Depreciation and
amortization expense . . (55,675,000) (16,357,000) (689,000) (72,721,000)
Income from unusual
transactions --- --- --- ---
Pretax income. . . . . . . 58,291,000 19,299,000 16,705,000 94,295,000
Income tax expense . . . . (16,318,000) (7,850,000) (7,001,000) (31,169,000)
Income from extraordinary
items --- --- --- ---
Net income . . . . . . . . $ 41,973,000 $ 11,449,000 $ 9,704,000 $ 63,126,000
================ ============= ============ ================
Significant non-cash
items $ --- $ --- $ --- $ ---
================ ============= ============ ================
Substantially all of the Company's revenues are derived from the United
States.
The accounting policies of the segments are as described in the summary of
significant accounting policies (Note 2). The Parent makes expenditures for
long-lived assets for the annuity operations segment and allocates depreciation
of such assets to the annuity operations segment. The annuity operations and
asset management operations pay commissions to Royal for sales of their
proprietary products. Approximately 90% of these commission payments are in
turn paid to registered representatives of Royal, with the remainder of the
revenue reflected in Net Retained Commissions. In addition, premiums from
variable annuity policies sold by the Company are held in trusts that are owned
by the Company, although the assets directly support policyholder obligations.
SunAmerica Asset Management is the Investment Advisor for all of the subaccounts
of these trusts, for which service it receives fees which are direct expenses of
the trusts. Such fees are reported as Variable Annuity Fees in the consolidated
income statement and are shown as intersegment revenues in the business segments
disclosure above, although there is no corresponding expense on the books of any
segment.
The annuity operations segment's products are marketed through over 800
independent broker-dealers, full-service securities firms and financial
institutions, in addition to the Company's affiliated broker-dealers.
Those independent selling organizations
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS (Continued)
responsible for over 10% of sales represented 12.0% of sales in the year
ended December 31, 1999, 14.7% in the three months ended December 31, 1998,
16.8% in the year ended September 30, 1998, and 18.4% and 10.2% in the year
ended September 30, 1997. Registered representatives sell products for the
Company's asset management operations and sell products offered by the
broker-dealer operations. Revenue from any single registered representative or
group of registered representatives do not compose a material percentage of
total revenues in either the asset management operations or the broker-dealer
operations.
15. SUBSEQUENT EVENTS
On March 1, 2000, the Company paid dividends of $69,000,000 to the Parent.
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