SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
-----------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission file number 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
---------------
(Exact Name of Registrant as Specified in Its Charter)
California 86-0198983
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1 SunAmerica Center, Los Angeles, California 90067-6022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (310)772-6000
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 .
--- ---
The number of shares outstanding of the registrants Common Stock on March
31, 1995 was as follows:
Common Stock, par value $1,000 per share, 3,511 shares outstanding
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
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Part I - Financial Information
Consolidated Balance Sheet -
March 31, 1995 and September 30, 1994 (Unaudited) 3
Consolidated Income Statement -
Three Months and Six Months Ended March 31, 1995 and 1994
(Unaudited) 4
Consolidated Statement of Cash Flows -
Six Months Ended March 31, 1995 and 1994 (Unaudited) 5-6
Note to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-18
Part II - Other Information 19
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, September 30,
1995 1994
-------------- -------------
ASSETS
Investments:
Cash and short-term investments $ 179,229,000 $ 157,438,000
Bonds, notes and redeemable
preferred stocks:
Available for sale, at fair value
(amortized cost: March 1995,
$1,220,909,000; September 1994,
$1,108,271,000) 1,161,351,000 1,026,120,000
Held for investment, at amortized cost
(fair value: March 1995, $170,794,000;
September 1994, $180,247,000) 165,335,000 175,885,000
Mortgage loans 104,659,000 108,332,000
Common stocks, at fair value (cost:
March 1995, $10,543,000; September 1994,
$8,789,000) 8,655,000 7,550,000
Real estate 57,290,000 89,539,000
Other invested assets 62,941,000 67,208,000
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Total investments 1,739,460,000 1,632,072,000
Variable annuity assets 4,509,284,000 4,486,703,000
Accrued investment income 16,656,000 17,565,000
Deferred acquisition costs 408,056,000 416,289,000
Other assets 49,380,000 49,497,000
-------------- --------------
TOTAL ASSETS $6,722,836,000 $6,602,126,000
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
March 31, September 30,
1995 1994
-------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $1,506,907,000 $1,437,488,000
Payable to brokers for purchases of
securities 108,012,000 124,624,000
Income taxes currently payable 26,663,000 12,331,000
Other liabilities 63,253,000 58,891,000
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Total reserves, payables
and accrued liabilities 1,704,835,000 1,633,334,000
-------------- --------------
Variable annuity liabilities 4,509,284,000 4,486,703,000
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Subordinated notes payable to Parent 34,000,000 34,000,000
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Deferred income taxes 59,445,000 64,567,000
-------------- --------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 252,876,000 252,876,000
Retained earnings 177,375,000 152,088,000
Net unrealized losses on debt and
equity securities available for sale (18,490,000) (24,953,000)
-------------- --------------
Total shareholder's equity 415,272,000 383,522,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,722,836,000 $6,602,126,000
============== ==============
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED INCOME STATEMENT
For the three months and six months ended March 31, 1995 and 1994
(Unaudited)
Three months Six months
------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Investment income $32,089,000 $34,119,000 $60,334,000 $65,515,000
----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts (17,957,000) (16,203,000) (34,623,000) (34,677,000)
Senior indebtedness --- (3,000) (16,000) (3,000)
Subordinated notes payable
to Parent (608,000) (595,000) (1,203,000) (1,190,000)
----------- ----------- ----------- -----------
Total interest expense (18,565,000) (16,801,000) (35,842,000) (35,870,000)
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 13,524,000 17,318,000 24,492,000 29,645,000
----------- ----------- ----------- -----------
NET REALIZED INVESTMENT LOSSES (577,000) (7,528,000) (5,368,000) (20,320,000)
----------- ----------- ----------- -----------
Fee income:
Variable annuity fees 19,675,000 19,630,000 40,032,000 39,122,000
Asset management fees 6,662,000 8,127,000 13,687,000 16,476,000
Net retained commissions 5,345,000 4,926,000 9,971,000 9,550,000
----------- ----------- ----------- -----------
TOTAL FEE INCOME 31,682,000 32,683,000 63,690,000 65,148,000
----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges 1,909,000 1,348,000 3,366,000 2,500,000
General and administrative
expenses (13,030,000) (12,609,000) (25,716,000) (25,921,000)
Amortization of deferred
acquisition costs (12,009,000) (10,282,000) (23,951,000) (19,715,000)
Other, net (354,000) 1,886,000 826,000 2,669,000
----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES (23,484,000) (19,657,000) (45,475,000) (40,467,000)
----------- ----------- ----------- -----------
PRETAX INCOME 21,145,000 22,816,000 37,339,000 34,006,000
Income tax expense (6,445,000) (7,815,000) (12,052,000) (11,890,000)
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES 14,700,000 15,001,000 25,287,000 22,116,000
Cumulative effect of change in
accounting for income taxes --- --- --- (20,463,000)
----------- ----------- ----------- -----------
NET INCOME $14,700,000 $15,001,000 $25,287,000 $1,653,000
=========== =========== =========== ===========
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended March 31, 1995 and 1994
(Unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,287,000 $ 1,653,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to fixed annuity
contracts 34,623,000 34,680,000
Net realized investment losses 5,368,000 20,320,000
Accretion of net discounts on investments (3,673,000) (395,000)
Amortization of goodwill 584,000 584,000
Provision for deferred income taxes (8,603,000) 5,416,000
Cumulative effect of change in
accounting for income taxes --- 20,463,000
Change in:
Deferred acquisition costs (3,767,000) (24,226,000)
Other assets (467,000) (5,445,000)
Income taxes currently payable 14,332,000 5,268,000
Other liabilities 1,083,000 1,481,000
Other, net 928,000 3,152,000
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NET CASH PROVIDED BY OPERATING ACTIVITIES 65,695,000 62,951,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (316,021,000) (729,173,000)
Bonds, notes and redeemable preferred
stocks held for investment --- (1,808,000)
Mortgage loans --- (12,075,000)
Other investments, excluding short-term
investments (7,036,000) (16,871,000)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 199,084,000 642,581,000
Real estate 35,328,000 31,103,000
Other investments, excluding short-term
investments 312,000 3,238,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 19,434,000 72,817,000
Bonds, notes and redeemable preferred
stocks held for investment 10,824,000 12,577,000
Other investments, excluding short-term
investments 13,192,000 13,347,000
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NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (44,883,000) 15,736,000
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended March 31, 1995 and 1994
(Unaudited)
1995 1994
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CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts $146,409,000 $ 36,318,000
Net exchanges to (from) the fixed accounts
of variable annuity contracts 45,812,000 (38,220,000)
Withdrawal payments on fixed annuity
contracts (140,047,000) (126,526,000)
Claims and annuity payments on fixed
annuity contracts (17,397,000) (15,818,000)
Net repayments of other short-term
financings (33,798,000) (92,265,000)
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NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 979,000 (236,511,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 21,791,000 (157,824,000)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 157,438,000 500,624,000
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $179,229,000 $342,800,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 664,000 $ 460,000
============ ============
Income taxes paid, net of refunds received $ 465,000 $ 1,586,000
============ ============
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
Anchor National Life Insurance Company (the "Company") is an indirect
wholly-owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion
of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's consolidated financial
position as of March 31, 1995 and September 30, 1994, the results of its
consolidated operations for the three and six months ended March 31, 1995
and 1994 and its consolidated cash flows for the six months ended March 31,
1995 and 1994. The results of operations for the three and six months
ended March 31, 1995 are not necessarily indicative of the results to be
expected for the full year. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the fiscal year ended September 30,
1994, contained in the Company's Annual Report on Form 10-K. Certain items
have been reclassified to conform to the current period's presentation.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial condition
and results of operations of Anchor National Life Insurance Company (the
"Company") for the three months and six months ended March 31, 1995 and 1994.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $14.7 million in the second quarter of 1995, compared with $15.0
million in the second quarter of 1994. For the six months, such income
amounted to $25.3 million in 1995, compared with $22.1 million in 1994. The
cumulative effect of the change in accounting for income taxes resulting from
the implementation of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of
$20.4 million in the first quarter of fiscal 1994. Accordingly, net income
amounted to $1.7 million for the six months of 1994.
PRETAX INCOME totaled $21.1 million in the second quarter of 1995 and $22.8
million in the second quarter of 1994. For the six months, pretax income
totaled $37.3 million in 1995, compared with $34.0 million in 1994. The $3.3
million improvement in year to date pretax income primarily resulted from
decreased net realized investment losses, partially offset by declines in net
investment income and fee income and an increase in 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, decreased to $13.5 million in the second quarter
of 1995 from $17.3 million in the second quarter of 1994. These amounts
represent net investment spreads of 3.30% on average invested assets (computed
on a daily basis) of $1.64 billion in the second quarter of 1995 and 4.46% on
average invested assets of $1.55 billion in the second quarter of 1994. For
the six months, net investment income decreased to $24.5 million in 1995 from
$29.6 million in 1994, representing net investment spreads of 3.05% and 3.76%,
respectively, on average invested assets of $1.61 billion and $1.58 billion,
respectively. These declines primarily resulted from declines in investment
yield and increases in the rates paid on average fixed annuity contracts.
Investment income totaled $32.1 million in the second quarter of 1995,
compared with $34.1 million in the second quarter of 1994. For the six months,
investment income totaled $60.3 million in 1995, compared with $65.5 million
in 1994. These declines resulted primarily from decreased investment yields,
partially offset by a higher level of average invested assets. The yield on
average invested assets totaled 7.84% in the second quarter of 1995, compared
with 8.79% in the second quarter of 1994. For the six months, the yield on
average invested assets decreased to 7.51% in 1995 from 8.30% in 1994. Yields
are computed without subtracting net realized investment losses. If net
realized investment losses were included in the computation, the yields would
be 7.70% in the second quarter of 1995, 6.85% in the second quarter of 1994,
6.84% in the six months of 1995 and 5.73% in the six months of 1994. Over the
last six fiscal quarters, the Company's yields (before considering net realized
investment losses) on average invested assets have ranged from 7.17% to 8.79%;
however, there can be no assurance that the Company will achieve similar yields
in future periods.
Decreased investment yields primarily resulted from decreased contributions
from the Company's partnership investments. Investment income includes $0.5
million of partnership income in the second quarter of 1995, compared with $4.6
million in the second quarter of 1994. This income represents a yield of 4.53%
on related average invested assets of $46.9 million in the second quarter of
1995, versus 59.64% on average partnership assets of $31.2 million in the
second quarter of 1994. For the six months, partnership income totaled $0.9
million in 1995 (representing a yield of 3.68%) and $7.1 million in 1994
(representing a yield of 42.63%).
The Company has historically enhanced investment yield through its use of
dollar roll transactions ("Dollar Rolls"). Although the Company continues to
use these programs, their use did not have a significant impact on investment
income in fiscal 1995. (See "Asset-Liability Matching" for additional
discussion of Dollar Rolls and Total Return Agreements).
Total interest expense aggregated $18.6 million in the second quarter of 1995
and $16.8 million in the second quarter of 1994. For the six months, interest
expense aggregated $35.8 million in 1995, compared with $35.9 million in 1994.
The average rate paid on all interest-bearing liabilities increased to 4.85%
in the second quarter of 1995 from 4.46% in the second quarter of 1994. For
the six months, the average rate paid on all interest-bearing liabilities
increased to 4.76% in 1995 from 4.67% in 1994. Interest-bearing liabilities
averaged $1.53 billion during the second quarter of 1995, compared with $1.51
billion during the second quarter of 1994. For the six months, interest
bearing liabilities averaged $1.51 billion in 1995, compared with $1.54 billion
in 1994.
NET REALIZED INVESTMENT LOSSES totaled $0.6 million in the second quarter of
1995 and $7.5 million in the second quarter of 1994 and include impairment
writedowns of $2.0 million and $3.1 million, respectively. Therefore, net
gains from sales of investments totaled $1.4 million in the second quarter of
1995 and $4.4 million in the second quarter of 1994. For the six months, net
realized investment losses totaled $5.4 million in 1995, compared with $20.3
million in 1994 and included impairment writedowns of $3.8 million and $9.7
million, respectively. Therefore, for the six months net losses from sales of
investments totaled $1.6 million in 1995 and $10.6 million in 1994.
Net losses in 1995 include $4.8 million of net losses ($0.6 million in the
second quarter) realized on $206.4 million of sales of bonds ($160.1 million
in the second quarter). These bond sales include sales of certain CMOs and
asset-backed securities, high yield investments, U.S. Treasury securities and
MBSs, all which were primarily made to maximize total return.
Net losses in 1994 include $10.5 million of net losses ($4.4 million in the
second quarter) realized on $489.4 million of sales of bonds ($266.6 million
in the second quarter). These bond sales include sales of MBSs made primarily
to acquire other MBSs that were then used in Dollar Rolls. In addition, bond
sales include sales of high-yield investments primarily made to improve the
overall credit quality of the portfolio.
Impairment writedowns include additional provisions applied to bonds
amounting to $3.8 million in 1995 ($2.0 million in the second quarter) and $9.7
million in 1994 ($3.1 million in the second quarter). Impairment writedowns
in the first quarter of 1995 included $1.8 million of additional provisions
applied to certain interest-only strips ("IOs"). IOs, a type of MBS used as
an asset-liability matching tool to hedge against rising interest rates, are
investment grade securities that give the holder the right to receive only the
interest payments on a pool of underlying mortgage loans. At March 31, 1995,
the amortized cost of the IOs held by the Company was $7.6 million and their
fair value was $10.3 million.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $19.7
million in the second quarter of 1995 and $19.6 million in the second quarter
of 1994. For the six months, variable annuity fees totaled $40.0 million in
1995, compared with $39.1 million in 1994. Variable annuity assets averaged
$4.40 billion during the second quarter of 1995 and $4.47 billion during the
second quarter of 1994. For the six months, variable annuity assets averaged
$4.41 billion in 1995, compared with $4.37 billion in 1994. Variable annuity
premiums, which exclude premiums allocated to the fixed accounts of variable
annuity products, have aggregated $503.7 million since March 31, 1994.
Variable annuity premiums declined to $109.2 million in the second quarter of
1995 from $248.6 million in the second quarter of 1994. For the six months,
variable annuity premiums totaled $211.0 million in 1995 and $476.9 million in
1994. These declines in premiums can be attributed, in part, to a rising
demand for fixed-rate investment options, including the fixed accounts of
variable annuities, as prevailing interest rates increased during the latter
half of the 1994 fiscal year and during fiscal 1995. The Company has
encountered increased competition in the variable annuity marketplace in fiscal
1994 and 1995 and anticipates that the market will remain highly competitive
for the foreseeable future.
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 and private accounts by SunAmerica Asset Management Corp. Such fees
totaled $6.7 million on average assets managed of $2.03 billion in the second
quarter of 1995 and $8.1 million on average assets managed of $2.46 billion in
the second quarter of 1994. For the six months, asset management fees totaled
$13.7 million on average assets managed of $2.07 billion in 1995, compared with
$16.5 million on average assets managed of $2.50 billion in 1994. Asset
management fees decreased primarily due to a decline in the market value of
assets managed and redemptions since March 31, 1994, both a reflection of
adverse market conditions for fixed-income and equity securities which can be
attributed, in part, to rising interest rates during the latter half of the
1994 fiscal year and into fiscal 1995. Mutual fund sales in 1995 also were
affected by these adverse market conditions. Sales of mutual funds, excluding
sales of money market funds, totaled $30.9 million in the second quarter of
1995, compared with $124.0 million in the second quarter of 1994. For the six
months, such sales totaled $60.5 million in 1995, compared with $236.3 million
in 1994.
NET RETAINED COMMISSIONS are primarily derived from commissions on the sales
of nonproprietary investment products by the Company's broker-dealer
subsidiary, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$5.3 million in the second quarter of 1995 and $4.9 million in the second
quarter of 1994. For the six months, net retained commissions totaled $10.0
million in 1995, compared with $9.6 million in 1994. Sales of nonproprietary
products (mainly mutual funds and general securities) totaled $1.34 billion in
the second quarter of 1995 and $1.33 billion in the second quarter of 1994.
For the six months, sales of nonproprietary products totaled $2.27 billion in
1995, compared with $2.50 billion in 1994. Net retained commissions are not
proportionate to sales primarily due to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $1.9 million in the
second quarter of 1995, compared with $1.3 million in the second quarter of
1994. For the six months, surrender charges totaled $3.4 million in 1995 and
$2.5 million in 1994. Surrender charges generally are assessed on annuity
withdrawals at declining rates during the first five to seven years of the
contract. Withdrawal payments, which include surrenders and lump-sum annuity
benefits, totaled $235.6 million in the second quarter of 1995 and $204.5
million in the second quarter of 1994. These payments represent 16.2% and
13.9%, respectively, of average fixed and variable annuity reserves. For the
six months, withdrawal payments totaled $448.1 million in 1995 and $347.4
million in 1994, and represent 15.4% and 12.0%, respectively, of average fixed
and variable annuity reserves. Withdrawals include variable annuity payments
from the separate accounts totaling $164.1 million in the second quarter of
1995, $133.6 million in the second quarter of 1994, $308.1 million in the six
months of 1995 and $222.0 million in the six months of 1994. Variable annuity
surrenders have increased primarily due to surrenders on a closed block of
business, policies coming off surrender charge restrictions and increased
competition in the marketplace. In addition, fixed annuity surrenders have
increased largely due to policies coming off surrender charge restrictions.
Management anticipates that withdrawal rates will remain relatively stable for
the foreseeable future and the Company's investment portfolio has been
structured to provide sufficient liquidity for anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $13.0 million in the second
quarter of 1995, compared with $12.6 million in the second quarter of 1994.
For the six months, general and administrative expenses totaled $25.7 million
in 1995, compared with $25.9 million in 1994, and represent 0.8% of average
total assets. General and administrative expenses remain closely controlled
through a company-wide cost containment program.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded
during the 1994 periods primarily due to additional fixed and variable annuity
and mutual fund sales and the subsequent amortization of related deferred
commissions and other acquisition costs. Amortization of all deferred
acquisition costs totaled $12.0 million in the second quarter of 1995 and $10.3
million in the second quarter of 1994. For the six months, such amortization
totaled $24.0 million in 1995 and $19.7 million in 1994.
INCOME TAX EXPENSE totaled $6.4 million in the second quarter of 1995 and
$7.8 million in the second quarter of 1994, representing effective tax rates
of 30% and 34%, respectively. For the six months, income tax expense totaled
$12.1 million in 1995, compared with $11.9 million in 1994, representing
effective tax rates of 32% and 35%, respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $23.9 million to $415.3 million at March
31, 1995 from $391.4 million at December 31, 1994. This increase primarily
reflects $14.7 million of net income and a $9.2 million decrease in net
unrealized losses on debt and equity securities available for sale charged
directly to shareholder's equity.
TOTAL ASSETS increased by $195.7 million to $6.72 billion at March 31, 1995
from $6.53 billion at December 31, 1994, principally due to increases in
invested assets and variable annuity assets.
INVESTED ASSETS at March 31, 1995 totaled $1.74 billion, compared with $1.70
billion at December 31, 1994. This $39.0 million increase primarily resulted
from an increase in reserves for fixed annuity contracts and a decrease in net
unrealized losses on debt and equity securities available for sale.
The Company managed most of its investments internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. The Company carries
the portion of its portfolio of bonds, notes and redeemable preferred stocks
that is available for sale (the "Available for Sale Portfolio") at estimated
fair value. The remaining portion of its portfolio of bonds, notes and
redeemable preferred stocks is held for investment and is carried at amortized
cost.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for
investment and the Available for Sale Portfolio (the "Bond Portfolio"), at
March 31, 1995, had an aggregate amortized cost that exceeded its fair value
by $54.1 million (including net unrealized losses of $59.6 million on the
Available for Sale Portfolio). The aggregate amortized cost of the Bond
Portfolio was $88.7 million above its fair value at December 31, 1994
(including net unrealized losses of $91.0 million on the Available for Sale
Portfolio). The decrease in net unrealized losses on the Bond Portfolio since
December 31, 1994 principally resulted from a decrease in prevailing long-term
interest rates and the corresponding effect on the Bond Portfolio.
Approximately $1.39 billion or 99.9% of the Bond Portfolio (at amortized
cost) at March 31, 1995 was rated by Standard and Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's") or under comparable statutory rating
guidelines established by the National Association of Insurance Commissioners
("NAIC") and implemented by either the NAIC or the Company. At March 31, 1995,
approximately $1.25 billion (at amortized cost) was rated investment grade by
one or both of these agencies or under the NAIC guidelines, including $948.6
million of U.S. government/agency securities and mortgage-backed securities
("MBSs").
At March 31, 1995, the Bond Portfolio included $133.2 million (fair value,
$126.2 million) of bonds not rated investment grade by S&P, Moody's or the
NAIC. Based on their March 31, 1995 amortized cost, these bonds accounted for
1.97% of the Company's total assets and 7.40% of 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 intends that its holdings of such securities not exceed current levels,
but its policies may change from time to time, including in connection with any
possible acquisition. The Company had no material concentrations of non-
investment grade securities at March 31, 1995.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1995.
Rated Bonds By Rating Classification
(Dollars in thousands)
Issues not rated by S&P(Moody's)
Issues Rated by S&P(Moody's) By NAIC Category Total
- - - - ---------------------------------------------- ----------------------------------- ----------------------------------
Estimated NAIC Estimated Percent of Estimated
S&P (Moody's) Amortized fair category Amortized fair Amortized invested fair
category(1) cost value (2) cost value cost assets(3) value
- - - - --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
AAA+ to A-
(Aaa to A3) $709,229 $673,911 1 $322,429 $324,297 $1,031,658 52.77% $998,208
BBB+ to BBB-
(Baa1 to Baa3) 79,374 73,434 2 142,600 132,729 221,974 12.82 206,163
BB+ to BB-
(Ba1 to Ba3) 2,395 2,388 3 20,029 19,914 22,424 2.05 22,302
B+ to B-
(B1 to B3) 76,226 71,459 4 24,993 22,724 101,219 4.29 94,183
CCC+ to C-
(Caa to C) 1,906 1,906 5 6,999 7,197 8,905 0.42 9,103
D - - 6 639 639 639 0.15 639
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $869,130 $823,098 $517,689 $507,500 $1,386,819 $1,330,598
========== ========== ========== ========== ========== ==========
(1) S&P rates debt securities in eleven rating categories, 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 nine rating categories, from Aaa (the highest) to C
(extremely poor prospects of attaining 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. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both
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) rating groups listed above, with categories 1 and 2 considered investment
grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its
implementation of NAIC rating guidelines.
(3) At amortized cost.
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $87.9 million at March 31, 1995. Secured
Loans are primarily originated by money center or investment banks or are
originated directly by the Company. Secured Loans are senior to subordinated
debt and equity, and virtually all are secured by assets of the issuer. At
March 31, 1995, Secured Loans consisted of loans to 11 borrowers spanning 10
industries, with no industry concentration constituting more than 17% of these
assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation
in these transactions has enabled the Company to improve its investment yield.
The majority of the Company's Secured Loans are not rated by S&P or Moody's.
However, 85% of the Secured Loans (at amortized cost) are rated in NAIC
categories 1 and 2. Although, as a result of restrictive financial covenants,
Secured Loans involve greater risk of technical default than do publicly traded
investment grade securities, management believes that generally the risk of
loss upon default for its Secured Loans is mitigated by their financial
covenants and senior secured positions.
MORTGAGE LOANS aggregated $104.7 million at March 31, 1995 and consisted
of 16 first mortgage loans with an average loan balance of approximately
$6.5 million, collateralized by properties located in 8 states. Approximately
45% of the portfolio was office, 20% was hotel, 19% was retail and 16% was
multifamily residential. At March 31, 1995, approximately 23% of the portfolio
was secured by properties located in New Jersey, 20% of the portfolio was
secured by properties located in Colorado and approximately 19% of the
portfolio was secured by properties located in California. No more than 12%
of the portfolio was secured by properties in any other single state. At March
31, 1995, there were no construction, takeout, farm or land loans and there
were 2 loans with outstanding balances of $20 million or more, which loans
collectively aggregated approximately 43% of the portfolio. At March 31, 1995,
approximately 28% of the mortgage loan portfolio consisted of loans with
balloon payments due before April 1, 1998. At March 31, 1995, there were no
loans delinquent by more than 90 days. There were no loans foreclosed upon and
transferred to real estate in the balance sheet during fiscal 1995. At March
31, 1995, one mortgage loan having an aggregate carrying value of $10.3 million
had been previously restructured. No mortgage loans were restructured during
the 1994 or 1995 fiscal years.
Approximately 66% of the mortgage loans in the portfolio at March 31,
1995 were seasoned loans underwritten to the Company's standards and purchased
at or near par from another financial institution which was downsizing its
portfolio. 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
represent a higher level of risk for the industry than have mortgage loans
secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans, and the effects of general
economic conditions on these commercial properties. However, due to the
seasoned nature of the Company's mortgage loans and its strict underwriting
standards, the Company believes that it has reduced the risk attributable to
its mortgage loan portfolio while maintaining attractive yields.
REAL ESTATE aggregated $57.3 million at March 31, 1995 and consisted of
non-income producing land in the Phoenix, Arizona metropolitan area. The
Company has undertaken to dispose of this Phoenix-area land during the next one
to two years, either to affiliated or nonaffiliated parties, and SunAmerica
Inc., the ultimate parent, has guaranteed that the Company will receive its
statutory carrying value of these assets.
OTHER INVESTED ASSETS aggregated $62.9 million at March 31, 1995,
including $48.5 million of investments in limited partnerships and an aggregate
of $14.4 million of miscellaneous investments, including policy loans,
collateralized mortgage obligation residuals and leveraged leases. The
Company's limited partnership interests primarily include partnerships,
accounted for by using the cost method of accounting, that invest mainly in
equity securities.
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 maturities 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 maturities are priced over the
yield curve and general competitive conditions within the industry. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
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 annuity 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 maturities. The Company's
fixed-rate products incorporate surrender charges or other limitations on when
contracts can be surrendered for cash to encourage persistency and discourage
withdrawals. Approximately 59% of the Company's fixed annuity reserves had
surrender penalties or other restrictions at March 31, 1995.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. The cash flow obtained from MBSs
helps to maintain the anticipated spread, while providing desired liquidity.
At March 31, 1995, the weighted average life of the Company's investments was
approximately four-and-one-quarter years and the portfolio had a duration of
approximately three-and-three-eighths years. Weighted average life is defined
as the average time to receipt of all principal, incorporating the effects of
scheduled amortization and expected prepayments, weighted by book value.
Duration is a common measure for the price sensitivity of a fixed-income
security or portfolio to changes in interest rates. It is the weighted average
time to receipt of all expected cash flows, both principal and interest,
including the effects of scheduled amortization and expected prepayments, in
which the weight attached to each year of receipt is the proportion of the
present value of cash to be received during that year to the total present
value of the portfolio.
The Company also seeks to provide liquidity, while enhancing its spread
income, by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls
and by investing in MBSs. 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. Dollar Rolls are similar to
Reverse Repos except that the repurchase involves securities that are only
substantially the same as the securities sold and the arrangement is not
collateralized, nor is it governed by a repurchase agreement. 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 enhance its spread income and match its assets and liabilities. The primary
risk associated with Dollar Rolls and Reverse Repos is the risk associated with
counterparty nonperformance. The Company believes, however, that the
counterparties to its Dollar Rolls and Reverse Repos are financially
responsible and that the counterparty risk associated with those transactions
is minimal. Counterparty risk associated with Dollar Rolls is further
mitigated by the Company's participation in an MBS trading clearinghouse. The
sell and buy transactions that are submitted to this clearinghouse are marked
to market on a daily basis and each participant is required to over-
collateralize its net loss position by 30% with either cash, letters of credit
or government securities. 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.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value 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 collateral (if
any), 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.
The carrying values of bonds that are determined to have declines in
value that are other than temporary are reduced to net realizable value and no
further accruals of interest are made. Mortgage loan writedowns 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 (at amortized cost)
that are in default as to the payment of principal or interest, totaled $2.4
million at March 31, 1995, all of which were unsecured non-investment grade
bonds, and $4.6 million at December 31, 1994. At March 31, 1995, defaulted
investments constituted 0.1% of total invested assets at amortized cost and the
fair value was equal to the amortized cost. At December 31, 1994, defaulted
investments constituted 0.3% of total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At March 31,
1995, approximately $657.0 million of the Company's Bond Portfolio had an
aggregate unrealized gain of $17.9 million, while approximately $729.2 million
had an aggregate unrealized loss of $72.0 million. In addition, the Company's
investment portfolio also currently provides approximately $17.3 million of
monthly cash flow from scheduled principal and interest payments.
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 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-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. 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.
REGULATION
The Company is subject to regulation and supervision by the states in
which it is authorized to transact business. State insurance laws establish
supervisory agencies with broad administrative and supervisory powers related
to granting and revoking licenses to transact business, regulating marketing
and other trade practices, operating guaranty associations, licensing agents,
approving policy forms, regulating certain premium rates, regulating insurance
holding company systems, establishing reserve requirements, prescribing the
form and content of required financial statements and reports, performing
financial and other examinations, determining the reasonableness and adequacy
of statutory capital and surplus, regulating the type and amount of investments
permitted, limiting the amount of dividends that can be paid without first
obtaining regulatory approval and other related matters.
In recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies. The NAIC has recently approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. These initiatives include new
investment reserve requirements, risk-based capital standards and restrictions
on an insurance company's ability to pay dividends to its stockholders. The
NAIC is also currently developing model laws to govern insurance company
investments. Current proposals are still being debated and the Company is
monitoring developments in this area and the effects any change would have on
the Company.
SunAmerica Asset Management is registered with the Securities and
Exchange Commission (the "Commission") as a registered 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 and the mutual funds are subject to regulation and examination
by the Commission. In addition, variable annuities and the related separate
accounts of the Company are subject to regulation by the Commission under the
Securities Act of 1933 and the Investment Company Act of 1940.
The Company's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the
National Association of Securities Dealers, Inc. (the "NASD"). The NASD has
broad administrative and supervisory powers relative to all aspects of business
and may examine the subsidiary's business and accounts at any time.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - - - ------------------------------------------
No exhibits are filed with this report and no Current Report on Form 8-K was
filed during the six months ended March 31, 1995.
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
-----------------------------------
Registrant
Dated May 12, 1995 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Director
(Principal Financial Officer)
Dated May 12, 1995 /s/ N. SCOTT GILLIS
---------------------------- -----------------------------------
N. Scott Gillis
Senior Vice President and Controller
(Principal Accounting Officer)