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 September 30, 1997
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
DECEMBER 22, 1997 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 (the "Company") is an indirect
wholly owned subsidiary of SunAmerica Inc. (the "Parent"), a financial services
company specializing in retirement savings and investment products and
services. 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 9,000
independent registered representatives nationwide. At September 30, 1997, the
Company held $15.16 billion of assets, consisting of $12.57 billion of assets
on its balance sheet and $2.59 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
the Parent and its other subsidiaries perform various services for the Company.
The Parent has approximately 2,000 employees, approximately 1,000 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 will grow from 46 million to 60 million during the 1990s, making this age
group the fastest-growing segment of the U.S. population. Between 1986 and
1996, annual industry premiums from fixed and variable annuities and fund
deposits increased from $82 billion to $179 billion. During the same period,
annual industry sales of mutual funds, excluding money market accounts, rose
from $216 billion to $685 billion.
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 four wholly-owned or affiliated broker-dealers comprise the
largest network of independent registered representatives in the nation and the
fourth-largest securities sales force, based on industry data. Its wholly
owned or affiliated broker-dealers accounted for approximately one-third of the
Company's consolidated annuity sales in fiscal 1997. The Company also
distributes its products and services through an extensive network of
independent broker-dealers, full-service securities firms, independent general
insurance agents, major financial institutions and, in the case of its GICs,
by marketing directly to banks, municipalities, asset management firms 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 its marketing efforts. Its use of optical disk imaging and artificial
1
intelligence has substantially eliminated the more traditional paper-intensive
life insurance processing procedures, reducing annuity processing and servicing
costs and improving customer service. The Company is also implementing
technology to interface with its wholly owned or affiliated broker-dealers,
which will enable 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 the expansion of the Company's wholly owned broker-
dealer network and 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 September 30, 1997, 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) $ 55,807 20.7% Fixed-rate products
--------- -----
Fee income:
Variable annuity fees 139,492 51.9 Variable annuities
Net retained commissions 39,143 14.5 Broker-dealer sales
Surrender charges 5,529 2.1 Fixed- and variable-rate
products
Asset management fees 25,764 9.6 Mutual funds
Other fees 3,218 1.2
--------- -----
Total fee income 213,146 79.3
--------- -----
Total $ 268,953 100.0%
========= =====
For financial information on the Company's business segments, see Part
IV - "Notes to Consolidated Financial Statements - Note 10 - Business
Segments."
2
LIFE INSURANCE 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 an "AA-" (Excellent) claims-paying ability rating
from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff
& Phelps Credit Rating Co. ("DCR") and an "A2" (Good) 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
four wholly owned or affiliated broker-dealers, the Company distributes its
products through over 650 other independent broker-dealers, full-service
securities firms and financial institutions as well as through independent
general insurance agents. In total, more than 42,000 independent sales
representatives nationally are licensed to sell the Company's annuity products.
FIXED ANNUITIES AND GICs
The Company's general account obligations include fixed-rate products,
including fixed-rate annuities issued in prior years, and fixed-rate account
options of its variable annuity contracts. Although the Company's contracts
remain in force an average of seven to ten years, a majority (approximately 83%
at September 30, 1997) reprice annually at discretionary rates determined by
the Company. In repricing, the Company takes into account yield
characteristics of its investment portfolio, annuity surrender assumptions and
competitive industry pricing among other factors.
The Company augments its retail annuity sales effort with the marketing
of institutional products. At September 30, 1997, the Company had $295.2
million of fixed-maturity, variable-rate GIC obligations that reprice
periodically based upon certain defined indexes. Of the total GIC portfolio
at September 30, 1997, approximately 70% was sold to asset management firms,
24% was sold to banks and 6% was sold to state and local government entities.
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 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-rate products incorporate surrender charges or other
restrictions in order to encourage persistency. Approximately 77% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at September 30, 1997.
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
3
dependent upon the investment performance of the particular equity, fixed-
income, money market or asset allocation fund(s) selected by the
contractholder. Because the investment risk is borne by the customer in all
but the fixed-rate account options, these products require significantly less
capital support than fixed annuities. At September 30, 1997, total variable
product reserves were $11.00 billion, $9.34 billion of which were in the
separate accounts. The Company's variable annuity products incorporate
surrender charges to encourage persistency. At September 30, 1997, 77% of the
Company's variable annuity reserves held in the separate account 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 1997 was approximately $45,000.
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 the
current interest rate environment, the slope of the yield curve, the spread at
which fixed-rate investments are priced over the yield curve, and general
economic conditions. 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 September 30, 1997, these assets
had an aggregate fair value of $2.48 billion with a duration of 3.4. The
Company's fixed-rate liabilities include fixed annuities and GICs. At
September 30, 1997, these liabilities had an aggregate fair value (determined
by discounting future contractual cash flows by related market rates of
interest) of $2.32 billion with a duration of 1.3. For the years ended
September 30, 1997, 1996 and 1995, the Company's yields on average invested
assets were 7.97%, 7.50% and 7.62%, respectively; its average rates paid on all
interest-bearing liabilities were 5.46%, 5.25% and 4.99%, respectively; and it
realized net investment spreads of 2.77%, 2.59% and 2.95%, respectively, on
average invested assets. Net realized investment losses were 0.11%, 0.12% and
0.02% of average invested assets in 1997, 1996 and 1995, respectively.
4
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, the Company's need for
liquidity and other similar factors.
The following table summarizes the Company's investment portfolio at
September 30, 1997:
SUMMARY OF INVESTMENTS
Amortized Percent of
cost portfolio
--------------- ----------
(In thousands)
Cash and short-term investments $ 113,580 4.4%
U.S. Government securities 18,496 0.7
Mortgage-backed securities 636,018 24.8
Other bonds, notes and redeemable
preferred stocks 1,287,971 50.3
Mortgage loans 339,530 13.3
Real estate 24,000 0.9
Common stocks 271 0.0
Other invested assets 143,722 5.6
--------------- ----------
Total investments $ 2,563,588 100.0%
=============== ==========
At September 30, 1997, the Bond Portfolio (at amortized cost, excluding
$6.1 million of redeemable preferred stocks) included $1.82 billion of bonds
rated by S&P, Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") the
National Association of Insurance Commissioners ("NAIC") and $124.4 million of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At September 30, 1997, approximately $1.72 billion of the Bond
Portfolio was investment grade, including $650.3 million of U.S.
government/agency securities and mortgage-backed securities.
At September 30, 1997, the Bond Portfolio included $216.9 million, (at
amortized cost, with a fair value $227.2 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these non-
investment-grade bonds accounted for 1.7% of the Company's total assets and
8.5% of its invested assets.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $329.3 million at September 30, 1997.
Secured Loans are senior to subordinated debt and equity, and are secured by
assets of the issuer. At September 30, 1997, Secured Loans consisted of loans
to 80 borrowers spanning 28 industries, with 17% of these assets (at amortized
cost) concentrated in financial institutions. No other industry concentration
constituted more than 10% of these assets.
5
Mortgage loans aggregated $339.5 million at September 30, 1997 and
consisted of 73 commercial first mortgage loans with an average loan balance
of approximately $4.7 million, collateralized by properties located in 21
states. Approximately 23% of this portfolio was multifamily residential, 18%
was office, 14% was manufactured housing, 13% was hotels, 11% was retail, 11%
was industrial and 10% was other types.
At September 30, 1997, the amortized cost (after impairment writedowns)
of all investments in default as to the payment of principal or interest
totaled $1.4 million (fair value $1.4 million), which constituted 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 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. These mutual funds offer investors an array of
equity, fixed-income, money market and tax-exempt portfolios. Founded in 1983
and acquired by the Company in January 1990, SunAmerica Asset Management
managed approximately $3.03 billion of assets at September 30, 1997, 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 400 financial institutions and unaffiliated broker-dealers,
as well as by the Company's broker-dealer subsidiary and its affiliated broker-
dealer subsidiaries.
BROKER-DEALER
The Company owns a broker-dealer, Royal Alliance Associates, Inc.,
acquired by the Company in January 1990. As a result of the Company's ongoing
recruitment of independent registered representatives and the transfer of
representatives from an affiliated broker-dealer, the Company has increased its
network of representatives from approximately 3,000 at September 30, 1996 to
approximately 3,500 at September 30, 1997.
REGULATION
The Company is subject to regulation and supervision by the insurance
regulatory agencies of the states in which it is authorized to transact
business. State insurance laws establish supervisory agencies with broad
administrative and supervisory powers. Principal among these powers are
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
6
holding company systems, establishing reserve requirements, prescribing the
form and content of required financial statements and reports, performing
financial, market conduct and other examinations, determining the
reasonableness and adequacy of statutory capital and surplus, defining
acceptable accounting principles, regulating the type, valuation and amount of
investments permitted, and limiting the amount of dividends that can be paid
and the size of transactions that can be consummated without first obtaining
regulatory approval.
During the last decade, 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 or allowing combinations between insurance companies, banks
and other entities. In recent years, the NAIC has approved and recommended to
the states for adoption and implementation several regulatory initiatives
designed to reduce the risk of insurance company insolvencies and market
conduct violations. These initiatives include investment reserve requirements,
risk-based capital standards, codification of insurance accounting principles,
new investment standards and restrictions on an insurance company's ability to
pay dividends to its stockholders. The NAIC is also currently developing model
laws relating to product design and illustrations for annuity products.
Current proposals are still being debated and the Company is monitoring
developments in this area and the effects any changes would have on the
Company.
SunAmerica Asset Management is registered with the SEC as a registered
investment advisor under the Investment Advisors 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 SEC. In addition, variable annuities and the
related separate accounts of the Company are subject to regulation by the
Securities and Exchange Commission (the "SEC") 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 SEC
and the National Association of Securities Dealers ("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.
COMPETITION
The businesses conducted by the Company are highly competitive. The
Company's life insurance operations compete 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. Within the U.S. life insurance industry, the 100 largest writers
of individual and group annuities account for approximately 95% of total net
annuity premiums written. Net annuity premiums written among the top 100
companies range from less than $100 million to more than $9 billion annually.
The Company together with its affiliates ranks in the top quartile of this
7
group. Certain of these companies and other life insurers with which the
Company competes are significantly larger and have available to them much
greater financial and other resources. 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. The Company, through
an affiliate, also leases office space in Torrance and 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.
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 or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fiscal year 1997 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.
8
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. Certain items have been reclassified to conform to the
current year's presentation.
Years ended September 30,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
RESULTS OF OPERATIONS
Net investment income $ 73,201 $ 56,843 $ 50,083 $ 58,996 $ 48,912
Net realized investment losses (17,394) (13,355) (4,363) (33,713) (22,247)
Fee income 213,146 169,505 145,105 141,753 123,567
General and administrative expenses (98,802) (81,552) (64,457) (54,363) (50,783)
Provision for future guaranty fund
assessments --- --- --- --- (4,800)
Amortization of deferred acquisition costs (66,879) (57,520) (58,713) (44,195) (30,825)
Annual commissions (8,977) (4,613) (2,658) (1,158) (312)
-------- -------- -------- -------- --------
Pretax income 94,295 69,308 64,997 67,320 63,512
Income tax expense (31,169) (24,252) (25,739) (22,705) (21,794)
-------- -------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 63,126 45,056 39,258 44,615 41,718
Cumulative effect of change in accounting
for income taxes --- --- --- (20,463) ---
-------- -------- -------- -------- --------
NET INCOME $ 63,126 $ 45,056 $ 39,258 $ 24,152 $ 41,718
======== ======== ======== ======== ========
9
ITEM. 6 SELECTED CONSOLIDATED FINANCIAL DATA (continued)
At September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In thousands)
FINANCIAL POSITION
Investments $ 2,608,301 $2,329,232 $2,114,908 $1,632,072 $2,093,100
Variable annuity assets 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Deferred acquisition costs 536,155 443,610 383,069 416,289 336,677
Other assets 83,283 120,136 55,474 67,062 71,337
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
=========== =========== =========== =========== ===========
Reserves for fixed annuity
contracts $2,098,803 $1,789,962 $1,497,052 $1,437,488 $1,562,136
Reserves for guaranteed
investment contracts 295,175 415,544 277,095 --- ---
Variable annuity liabilities 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Other payables and accrued
liabilities 155,256 96,196 227,953 195,134 495,308
Subordinated notes payable
to Parent 36,240 35,832 35,832 34,712 34,432
Deferred income taxes 67,047 70,189 73,459 64,567 38,145
Shareholder's equity 575,218 485,255 442,060 383,522 371,093
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
=========== =========== =========== =========== ===========
10
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 in the period ended September 30, 1997 follows. 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 $63.1 million in 1997, compared with $45.1 million in
1996 and $39.3 million in 1995.
PRETAX INCOME totaled $94.3 million in 1997, $69.3 million in 1996 and
$65.0 million in 1995. The 36.1% improvement in 1997 over 1996 primarily
resulted from increased fee income and net investment income, partially offset
by higher general and administrative expenses and increased amortization of
deferred acquisition costs. The 6.6% improvement in 1996 over 1995 primarily
resulted from increased net investment income and significantly increased fee
income, partially offset by increased net realized investment losses and
additional general and administrative expenses.
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 $73.2 million in 1997 from $56.8
million in 1996 and $50.1 million in 1995. These amounts equal 2.77% on
11
average invested assets (computed on a daily basis) of $2.65 billion in 1997,
2.59% on average invested assets of $2.19 billion in 1996 and 2.95% on average
invested assets of $1.70 billion in 1995.
Net investment spreads include the effect of income earned on the excess
of average invested assets over average interest-bearing liabilities. This
excess amounted to $126.5 million in 1997, $142.9 million in 1996 and $108.4
million in 1995. The difference between the Company's yield on average
invested assets and the rate paid on average interest-bearing liabilities (the
"Spread Difference") was 2.51% in 1997, 2.25% in 1996 and 2.63% in 1995.
Investment income (and the related yields on average invested assets)
totaled $210.8 million (7.97%) in 1997, compared with $164.6 million (7.50%)
in 1996 and $129.5 million (7.62%) in 1995. These increased yields in 1997
include the effects of a greater proportion of mortgage loans in the Company's
portfolio. On average, mortgage loans have higher yields than that of the
Company's overall portfolio. In addition, the Company experienced higher
returns on its investments in partnerships. The increases in investment income
in 1997 and 1996 also reflect increases in average invested assets.
Partnership income increased to $6.7 million (a yield of 15.28% on
related average assets of $44.0 million) in 1997, compared with $4.1 million
(a yield of 10.12% on related average assets of $40.2 million) in 1996 and $5.1
million (a yield of 10.60% on related average assets of $48.4 million) in 1995.
Partnership income is based 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.
Total interest expense equalled $137.6 million in 1997, $107.8 million
in 1996 and $79.4 million in 1995. The average rate paid on all interest-
bearing liabilities was 5.46% in 1997, compared with 5.25% in 1996 and 4.99%
in 1995. Interest-bearing liabilities averaged $2.52 billion during 1997,
compared with $2.05 billion during 1996 and $1.59 billion during 1995.
The increases in the overall rates paid on interest-bearing liabilities
during 1997 and 1996 primarily resulted from the impact of certain promotional
one-year interest rates offered on the fixed account portion of the Company's
Polaris variable annuity product. The increase in the overall rates paid on
all interest-bearing liabilities during 1996 was also impacted by the growth
in average reserves for GICs, which generally bear higher rates of interest
than fixed annuity contracts. Average GIC reserves were $340.5 million in 1996
and $60.8 million in 1995. Most of the Company's GICs are variable rate and
are repriced quarterly at the then-current interest rates.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the sales
of the Company's fixed-rate products, consisting of both fixed annuity premiums
(including those for the fixed accounts of variable annuity products) and GIC
premiums. Fixed annuity premiums totaled $1.10 billion in 1997, compared with
$741.8 million in 1996 and $284.4 million in 1995. The premiums for the fixed
accounts of variable annuities have increased primarily because of increased
sales of the Company's Polaris product and greater inflows into the one-year
fixed account of that product. The Company has observed that many purchasers
of its variable annuity contracts allocate new premiums to the one-year fixed
account and concurrently elect the option to dollar cost average into one or
more variable funds. Accordingly, the Company anticipates that it will see a
large portion of these premiums transferred into the variable funds.
12
GIC premiums totaled $55.0 million in 1997, $135.0 million in 1996 and
$275.0 million in 1995. GIC surrenders and maturities totaled $198.1 million
in 1997, $16.5 million in 1996 and $1.6 million in 1995. The Company does not
actively market GICs, so premiums may vary substantially from period to period.
The large increase in surrenders and maturities in 1997 was primarily due to
contracts maturing in 1997. 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. Contracts that are purchased by banks for their long-term
portfolios, or state and local governmental entities either prohibit
withdrawals or permit scheduled book value withdrawals subject to 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 $17.4 million in 1997, $13.4
million in 1996 and $4.4 million in 1995. Net realized investment losses
include impairment writedowns of $20.4 million in 1997, $16.0 million in 1996
and $4.8 million in 1995. Therefore, net gains from sales of investments
totaled $3.0 million in 1997, $2.6 million in 1996 and $0.4 million in 1995.
The Company sold invested assets, principally bonds and notes,
aggregating $2.19 billion, $1.28 billion and $1.15 billion in 1997, 1996 and
1995, respectively. Sales of investments result from the active management of
the Company's investment portfolio. Because sales of investments are made in
both rising and falling interest rate environments, net gains from sales of
investments fluctuate from period to period, and represent 0.11%, 0.12% and
0.02% of average invested assets for 1997, 1996 and 1995, 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 interest-rate risk.
Impairment writedowns reflect $15.7 million and $15.2 million of
provisions applied to non-income producing land owned in Arizona in 1997 and
1996, respectively. The statutory carrying value of this land had been
guaranteed by the Company's ultimate Parent, SunAmerica Inc. ("SunAmerica").
SunAmerica made capital contributions of $28.4 million and $27.4 million on
December 31, 1996 and 1995, respectively, to the Company through the Company's
direct 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 in 1995 include $3.8 million of additional provisions
applied to defaulted bonds. Impairment writedowns represent 0.77%, 0.73% and
0.28% of average invested assets for 1997, 1996 and 1995, respectively. For
the five years ended September 30, 1997, impairment writedowns as a percentage
of average invested assets have ranged from 0.28% to 2.20% and have averaged
1.16%. 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 $139.5
million in 1997, $104.0 million in 1996 and $84.2 million in 1995. These
13
increased fees reflect growth in average variable annuity assets, principally
due to the receipt of variable annuity premiums, increased market values and
net exchanges into the separate accounts from the fixed accounts of variable
annuity contracts, partially offset by surrenders. Variable annuity assets
averaged $7.55 billion during 1997, $5.70 billion during 1996 and $4.65 billion
during 1995. Variable annuity premiums, which exclude premiums allocated to
the fixed accounts of variable annuity products, totaled $1.27 billion in 1997,
$919.8 million in 1996 and $577.2 million in 1995. Sales of variable annuity
products (which include premiums allocated to the fixed accounts) ("Variable
Annuity Product Sales") amounted to $2.37 billion, $1.66 billion and $861.0
million in 1997, 1996 and 1995, respectively. Increases in Variable Annuity
Product Sales are due, in part, to market share gains through 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. 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.
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
$39.1 million in 1997, $31.5 million in 1996 and $24.1 million in 1995.
Broker-dealer sales (mainly sales of general securities, mutual funds and
annuities) totaled $11.56 billion in 1997, $8.75 billion in 1996 and $5.67
billion in 1995. The increases in sales and net retained commissions reflect
a greater number of registered representatives, due to the Company's ongoing
recruitment of representatives and to the transfer of representatives from an
affiliated broker-dealer, higher average production per representative and
generally favorable market conditions. Increases in net retained commissions
may not be proportionate to increases in sales primarily due to differences in
sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $5.5 million
in 1997, compared with $5.2 million in 1996 and $5.9 million in 1995.
Surrender charges generally are assessed on annuity withdrawals at declining
rates during the first seven years of an annuity contract. Withdrawal
payments, which include surrenders and lump-sum annuity benefits, totaled $1.06
billion in 1997, compared with $898.0 million in 1996 and $908.9 million in
1995. These payments represent 11.22%, 12.44% and 15.06%, respectively, of
average fixed and variable annuity reserves. Withdrawals include variable
annuity withdrawals from the separate accounts totaling $822.0 million in
1997, $634.1 million in 1996 and $632.1 million in 1995. Management
anticipates that withdrawal rates will remain relatively stable 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 by SunAmerica Asset Management Corp. Such fees totaled $25.8 million on
average assets managed of $2.34 billion in 1997, $25.4 million on average
assets managed of $2.14 billion in 1996 and $26.9 million on average assets
managed of $2.07 billion in 1995. Asset management fees are not proportionate
to average assets managed, principally due to changes in product mix. Sales
of mutual funds, excluding sales of money market accounts, amounted to $454.8
million in 1997, compared with $223.4 million in 1996 and $140.2 million in
14
1995. Redemptions of mutual funds, excluding redemptions of money market
accounts, amounted to $412.8 million in 1997, $379.9 million in 1996 and $426.5
million in 1995. The significant increases in sales during 1997 principally
resulted from the introduction in November 1996 of the Company's "Style Select
Series" product. Higher mutual fund sales and lower redemptions in 1996 both
reflect enhanced marketing efforts and the favorable performance records of
certain of the Company's mutual funds, and heightened consumer demand for
equity investments generally.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $98.8 million in 1997,
compared with $81.6 million in 1996 and $65.3 million in 1995. General and
administrative expenses in 1997 include a $5.0 million provision for estimated
programming costs associated with the year 2000. Management believes that this
provision is adequate and does not anticipate any material future expenses
associated with this project. 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 $66.9 million in
1997, compared with $57.5 million in 1996 and $58.7 million in 1995. The
increase in amortization during 1997 was primarily due to additional fixed and
variable annuity sales and the subsequent amortization of related deferred
commissions and other direct selling costs. The decline in amortization for
1996 is due to lower redemptions of mutual funds from the rate experienced in
1995, partially offset by additional fixed and variable annuity and mutual fund
sales in recent years and the subsequent amortization of related deferred
commissions and other acquisition 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 $9.0
million in 1997, $4.6 million in 1996 and $2.7 million in 1995. The increase
in annual commissions since 1995 reflects increased sales of annuities that
offer this commission option. The Company estimates that approximately 45% of
the average balances of its variable annuity products is currently subject to
such annual commissions. Based on current sales, this percentage is expected
to increase in future periods.
INCOME TAX EXPENSE totaled $31.2 million in 1997, compared with $24.3
million in 1996 and $25.7 million in 1995, representing effective tax rates of
33% in 1997, 35% in 1996 and 40% in 1995. The higher effective tax rate in
1995 was due to a prior year tax settlement. Without such payment, the
effective tax rate would have been 33%.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 18.5% to $575.2 million at September 30,
1997 from $485.3 million at September 30, 1996, primarily due to $63.1 million
of net income recorded in 1997 and $18.4 million of net unrealized gains on
debt and equity securities available for sale (credited directly to
shareholder's equity), versus $5.5 million of net unrealized losses on such
securities recorded at September 30, 1996. In addition, the Company received
a contribution of capital of $28.4 million in December 1996 and paid a dividend
of $25.5 million in April 1997.
15
INVESTED ASSETS at year end totaled $2.61 billion in 1997, compared with
$2.33 billion at year-end 1996. This 12.0% increase primarily resulted from
sales of fixed annuities and the $44.7 million net unrealized gain recorded
on debt and equity securities available for sale at September 30, 1997, versus
the $12.7 million net unrealized loss recorded on such securities at September
30, 1996.
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 comprises 76% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $43.7 million at September 30, 1997. At September 30, 1996,
the amortized cost exceeded the fair value of the Bond Portfolio by $13.8
million. The net unrealized gains on the Bond Portfolio since September 30,
1996 principally reflect the lower prevailing interest rates at September 30,
1997 and the corresponding effect on the fair value of the Bond Portfolio.
At September 30, 1997, the Bond Portfolio (at amortized cost, excluding
$6.1 million of redeemable preferred stocks) included $1.82 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 $124.4 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At September 30, 1997, approximately
$1.72 billion of the Bond Portfolio was investment grade, including $650.3
million of U.S. government/agency securities and mortgage-backed securities
("MBSs").
At September 30, 1997, the Bond Portfolio included $216.9 million (at
amortized cost with a fair value of $227.2 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these non-
investment-grade bonds accounted for 1.7% of the Company's total assets and
8.5% 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 September 30, 1997. The following table summarizes the Company's rated
bonds by rating classification as of September 30, 1997.
16
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 Percent of Estimated
[DCR]/{Fitch} 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)
[AAA to A-]
{AAA to A-} $ 935,866 $ 953,440 1 $ 142,548 $ 143,940 $ 1,078,414 42.07% $ 1,097,380
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 494,521 504,442 2 146,548 150,521 641,069 25.01 654,963
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 13,080 14,597 3 13,811 13,917 26,891 1.05 28,514
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 163,603 170,960 4 25,777 27,089 189,380 7.39 198,049
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 0 0 5 0 0 0 0.00 0
C1 to D
[DD]
{D} 0 0 6 606 606 606 0.02 606
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RATED ISSUES $ 1,607,070 $ 1,643,439 $ 329,290 $ 336,073 $ 1,936,360 $ 1,979,512
=========== =========== =========== =========== =========== ===========
Footnotes appear on the following page.
17
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, D&P 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 $124.4
million (at amortized cost) of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
18
Senior secured loans ("Secured Loans") are included in the Bond
Portfolio and their amortized cost aggregated $329.3 million at September 30,
1997. Secured Loans are senior to subordinated debt and equity, and are
secured by assets of the issuer. At September 30, 1997, Secured Loans
consisted of loans to 80 borrowers spanning 28 industries, with 17% of these
assets (at amortized cost) concentrated in financial institutions. No other
industry concentration constituted more than 10% 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.
As a result of restrictive financial covenants, 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 its 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 $339.5 million at September 30, 1997 and
consisted of 73 commercial first mortgage loans with an average loan balance
of approximately $4.7 million, collateralized by properties located in
21 states. Approximately 23% of this portfolio was multifamily residential,
18% was office, 14% was manufactured housing, 13% was hotels, 11% was retail,
11% was industrial and 10% was other types. At September 30, 1997,
approximately 13% and 12% of this portfolio was secured by properties located
in New York and California, respectively, and no more than 10% of this
portfolio was secured by properties located in any other single state. At
September 30, 1997, there were four mortgage loans with outstanding balances
of $10 million or more, which loans collectively aggregated approximately 17%
of this portfolio. At the time of their origination or purchase by the
Company, virtually all mortgage loans had loan-to-value ratios of 75% or less.
At September 30, 1997, approximately 23% of the mortgage loan portfolio
consisted of loans with balloon payments due before October 1, 2000. During
1997, 1996 and 1995, 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 September 30, 1997, approximately 18% 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 seasoned nature of the Company's mortgage loan
portfolio, its emphasis on multifamily loans and its strict underwriting
standards, the Company believes that it has prudently managed the risk
attributable to its mortgage loan portfolio while maintaining attractive
yields.
OTHER INVESTED ASSETS aggregated $143.7 million at September 30, 1997,
including $46.9 million of investments in limited partnerships, $70.9 million
of separate account investments and an aggregate of $25.9 million of
19
miscellaneous investments, including policy loans, residuals and leveraged
leases. The Company's limited partnership interests, accounted for by using
the cost method of accounting, are invested primarily in a combination of debt
and 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-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, 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 77% of
the Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at September 30, 1997.
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 September 30, 1997, these assets
had an aggregate fair value of $2.48 billion with a duration of 3.4. The
Company's fixed-rate liabilities include fixed annuities and GICs. At
September 30, 1997, these liabilities had an aggregate fair value (determined
by discounting future contractual cash flows by related market rates of
interest) of $2.32 billion with a duration of 1.3. The Company's potential
exposure due to a relative 10% increase in interest rates prevalent at
September 30, 1997 is a loss of approximately $31.2 million in fair value of
its fixed-rate assets that is not offset by an increase in the fair value of
its fixed-rate liabilities. 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.
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 and GIC products, allocating its available cash flow amongst its
various investment portfolio sectors and maintaining sufficient levels of
20
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 and liabilities more closely. 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 currently utilizes Swap Agreements to create a hedge
that effectively converts fixed-rate liabilities into floating-rate
instruments. At September 30, 1997, the Company had one outstanding Swap
Agreement with a notional principal amount of $15.9 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. 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
security with the intent to maximize total return.
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 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
21
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.
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. The valuation allowances 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 $1.4 million at September 30,
1997 (at amortized cost after impairment writedowns, with a fair value of
$1.4 million), including $0.5 million of bonds and notes and $0.9 million of
mortgage loans. At September 30, 1997, defaulted investments constituted 0.1%
of total invested assets. At September 30, 1996, defaulted investments totaled
$3.1 million, including $1.6 million of bonds and notes and $1.5 million of
mortgage loans, and constituted 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 September 30, 1997, approximately $1.80 billion of the Company's
Bond Portfolio had an aggregate unrealized gain of $46.5 million, while
approximately $139.8 million of the Bond Portfolio had an aggregate unrealized
loss of $2.7 million. In addition, the Company's investment portfolio
currently provides approximately $22.5 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.
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-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,
22
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.
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.
23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of Anchor National Life Insurance
Company (the "Company") as of December 23, 1997 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(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ------------------ -------
Eli Broad* 64 Chairman 1986 Cofounded SAI
Chief Executive 1994 in 1957
Officer and
President of
the Company
Chairman, Chief 1976
Executive Officer
and President of 1986
SunAmerica Inc.
("SAI")
Joseph M. Tumbler* 48 Executive Vice 1996 President and Chief 1989-1995
President Executive Officer,
of the Company Providian
Vice Chairman 1995 Capital Management
of SAI
Jay S. Wintrob* 40 Executive Vice 1991 Senior Vice President 1989-1991
President of the (Joined SAI in 1987)
Company
Vice Chairman of 1995
SAI
James R. Belardi* 40 Senior Vice 1992 Vice President and 1989-1992
President of the Treasurer (Joined SAI
Company in 1986)
Executive Vice 1995
President of SAI
Jana Waring Greer* 45 Senior Vice 1991 (Joined SAI in 1974)
President of the
Company and SAI
Peter McMillan, III* 40 Executive Vice 1994 Senior Vice President, 1989-1994
President and SunAmerica Investments,
Chief Investment Inc.
Officer of
SunAmerica
Investments, Inc.
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
24
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ----------------- -------
Scott L. Robinson* 51 Senior Vice 1991 (Joined SAI in 1978)
President of the
Company
Senior Vice
President and
Controller of SAI
Lorin M. Fife* 44 Senior Vice 1994 Vice President and 1994-1995
President, General Counsel-
General Counsel Regulatory Affairs
and Assistant of SAI
Secretary of Vice President and 1989-1994
the Company Associate General
Senior Vice 1995 Counsel of SAI
President and (Joined SAI in 1989)
General Counsel-
Regulatory Affairs
of SAI
Susan L. Harris* 40 Senior Vice 1994 Vice President, 1994-1995
President and General Counsel-
Secretary of the Corporate Affairs and
Company Secretary of SAI
Senior Vice 1995 Vice President, 1989-1994
President, Associate General
General Counsel- Counsel and Secretary
Corporate Affairs of SAI (Joined SAI
and Secretary of in 1985)
SAI
James Rowan* 35 Senior Vice 1996 Vice President 1993-1995
President of the Assistant to the 1992
Company Chairman
Senior Vice 1995 Senior Vice President, 1990-1992
President of SAI Security Pacific Corp.
N. Scott Gillis 44 Senior Vice 1994 Vice President and 1989-1994
President and Controller, SunAmerica
Controller of the Life Companies ("SLC")
Company (Joined SAI in 1985)
Vice President of 1997
SAI
Edwin R. Reoliquio 40 Senior Vice 1995 Vice President and 1990-1995
President and Actuary, SLC
Chief Actuary
of the Company
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
25
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ----------------- -------
Victor E. Akin 33 Senior Vice 1996 Vice President, 1995-1996
President of SLC
the Company Director, Product
Development, SLC 1994-1995
Manager, Business
Development, SLC 1993-1994
Actuary, Milliman
and Robertson 1992-1993
Consultant, Chalke
Inc. 1991-1992
Scott H. Richland 35 Vice President 1994 Vice President 1994-1995
and Treasurer of 1995 and Asst. Treasurer
the Company Vice President 1995-1997
Senior Vice 1997 and Treasurer
President and of SAI
Treasurer of SAI Vice President 1994-1995
and Asst.
Treasurer of SAI
Asst. Treasurer 1993-1994
of SAI
Director, SunAmerica 1990-1993
Investments, Inc.
(Joined SAI in 1990)
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
26
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 and to
all executive officers of the Company as a group for services rendered in all
capacities to the Company during 1997:
Name of Individual or Capacities In Allocated Cash
Number in Group Which Served Compensation
--------------------- ------------------------- --------------
Eli Broad Chairman, Chief Executive $ 1,438,587
Officer and President
Joseph M. Tumbler Executive Vice President 835,680
Jay S. Wintrob Executive Vice President 837,376
James R. Belardi Senior Vice President 357,144
Jana Waring Greer Senior Vice President 630,854
All Executive Officers
as a Group (14) $5,769,122
===========
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
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly owned subsidiary of SunAmerica Inc. Except
for Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned
by any director does not exceed one percent of the class outstanding. At
December 15, 1997, Mr. Broad was the beneficial owner of 10,706,006 shares of
Common Stock (5.68% of the class outstanding) and 13,740,441 shares of Class
B Common Stock (84.40% of the class outstanding). Of the Common Stock,
1,063,773 shares represent restricted shares granted under the Company's
employee stock plans as to which Mr. Broad has no investment power; and
6,949,512 shares represent employee stock options held by Mr. Broad which are
or will become exercisable on or before February 15, 1998 and as to which he
has no voting or investment power. Of the Class B Stock, 12,684,210 shares are
held directly by Mr. Broad; and 1,056,231 shares are registered in the name of
a corporation as to which Mr. Broad exercises sole voting and dispositive
powers. At December 15, 1997, all directors and officers as a group
beneficially owned 14,338,041 shares of Common Stock (7.64% of the class
outstanding) and 13,740,441 shares of Class B Common Stock (84.40% of the class
outstanding). All share numbers reflect a 3-for-2 stock split paid in the form
of a stock dividend on August 29, 1997 to holders of record on August 20, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
27
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
- ------- -----------
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 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 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 SunAmerica Inc.
("SAI"), extending the maturity date to September 30, 1999, of a
Subordinated Loan Agreement for Equity Capital, dated as of
September 30, 1992, which defined SAI's rights of 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
December 14, 1994, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 9% notes due January 13,
1998 is incorporated herein by reference to Exhibit 10(g) to the
Company's Form 10-K, filed December 19, 1996.
10(c) Subordinated Loan Agreement for Equity Capital, dated as of
April 20, 1995, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 9% notes due May 27, 1998
is incorporated herein by reference to Exhibit 10(h) to the
Company's Form 10-K, filed December 19, 1996.
10(d) Subordinated Loan Agreement for Equity Capital, dated as of May 30,
1996, between the Company's subsidiary, SACS, and SAI, defining
SAI's rights with respect to the 9% notes due June 29, 1998 is
incorporated herein by reference to Exhibit 10(i) to the Company's
Form 10-K, filed December 19, 1996.
10(e) 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.
28
Exhibit
No. Description
- ------- -----------
10(f) Amendment to the Subordinated Loan Agreement for Equity Capital,
dated as of September 3, 1996, between the Company's subsidiary,
SunAmerica Asset Management Corporation, and SAI, extending the
maturity date to September 13, 1999 of a Subordinated Loan
Agreement for Equity Capital, dated as of September 3, 1993, which
defined SAI's rights of 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(g) 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 March 14,
2000, is incorporated herein by reference to Exhibit 10(a) to
Company's quarterly report on Form 10-Q for quarter ended March 31,
1997, filed May 15, 1997.
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 September
30, 1997.
29
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/ SCOTT L. ROBINSON
--------------------------------------
Scott L. Robinson
December 23, 1997 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 December 23, 1997
- ------------------------------ Officer and President -----------------
Eli Broad (Principal Executive Officer)
/s/ SCOTT L. ROBINSON Senior Vice President and December 23, 1997
- ----------------------------- Director (Principal -----------------
Scott L. Robinson Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and December 23, 1997
- ------------------------------ Controller (Principal -----------------
N. Scott Gillis Accounting Officer)
/s/ JAY S. WINTROB Executive Vice President December 23, 1997
- ------------------------------ and Director -----------------
Jay S. Wintrob
/s/ JAMES R. BELARDI Senior Vice President, December 23, 1997
- ------------------------------ Treasurer and Director -----------------
James R. Belardi
/s/ LORIN M. FIFE Senior Vice President, December 23, 1997
- ------------------------------ General Counsel, Assistant -----------------
Lorin M. Fife Secretary and Director
/s/ JANA W. GREER Senior Vice President December 23, 1997
- ------------------------------ and Director -----------------
Jana W. Greer
/s/ SUSAN L. HARRIS Senior Vice President, December 23, 1997
- ------------------------------ Secretary and Director -----------------
Susan L. Harris
Signature Title Date
--------- ----- ----
/s/ JAMES W. ROWAN Senior Vice President December 23, 1997
- ------------------------------ and Director -----------------
James W. Rowan
/s/ EDWIN R. REOLIQUIO Senior Vice President December 23, 1997
- ------------------------------ and Chief Actuary -----------------
Edwin R. Reoliquio.
/s/ PETER McMILLAN Director December 23, 1997
- ------------------------------ -----------------
Peter McMillan
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Accountants F-2
Consolidated Balance Sheet as of September 30, 1997 and 1996 F-3 through
F-4
Consolidated Income Statement for the years ended
September 30, 1997, 1996 and 1995 F-5
Consolidated Statement of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 F-6 through
F-7
Notes to Consolidated Financial Statements F-8 through
F-25
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 income statement and statement of cash flows present fairly, in
all material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries at September 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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.
Price Waterhouse LLP
Los Angeles, California
November 7, 1997
F-2
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
September 30,
------------------------------
1997 1996
--------------- --------------
ASSETS
Investments:
Cash and short-term investments $ 113,580,000 $ 122,058,000
Bonds, notes and redeemable
preferred stocks:
Available for sale, at fair value
(amortized cost: 1997, $1,942,485,000;
1996, $2,001,024,000) 1,986,194,000 1,987,271,000
Mortgage loans 339,530,000 98,284,000
Common stocks, at fair value (cost:
1997, $271,000; 1996, $2,911,000) 1,275,000 3,970,000
Real estate 24,000,000 39,724,000
Other invested assets 143,722,000 77,925,000
--------------- --------------
Total investments 2,608,301,000 2,329,232,000
Variable annuity assets 9,343,200,000 6,311,557,000
Receivable from brokers for sales
of securities --- 52,348,000
Accrued investment income 21,759,000 19,675,000
Deferred acquisition costs 536,155,000 443,610,000
Other assets 61,524,000 48,113,000
--------------- --------------
TOTAL ASSETS $12,570,939,000 $9,204,535,000
=============== ==============
See accompanying notes
F-3
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
September 30,
------------------------------
1997 1996
--------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 2,098,803,000 $1,789,962,000
Reserves for guaranteed investment
contracts 295,175,000 415,544,000
Payable to brokers for purchases of
securities 263,000 ---
Income taxes currently payable 32,265,000 21,486,000
Other liabilities 122,728,000 74,710,000
--------------- --------------
Total reserves, payables
and accrued liabilities 2,549,234,000 2,301,702,000
--------------- --------------
Variable annuity liabilities 9,343,200,000 6,311,557,000
--------------- --------------
Subordinated notes payable to Parent 36,240,000 35,832,000
--------------- --------------
Deferred income taxes 67,047,000 70,189,000
--------------- --------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 308,674,000 280,263,000
Retained earnings 244,628,000 207,002,000
Net unrealized gains (losses) on debt and
equity securities available for sale 18,405,000 (5,521,000)
--------------- --------------
Total shareholder's equity 575,218,000 485,255,000
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $12,570,939,000 $9,204,535,000
=============== ==============
See accompanying notes
F-4
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
Years ended September 30,
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------
Investment income $ 210,759,000 $ 164,631,000 $ 129,466,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (109,217,000) (82,690,000) (72,975,000)
Guaranteed investment contracts (22,650,000) (19,974,000) (3,733,000)
Senior indebtedness (2,549,000) (2,568,000) (227,000)
Subordinated notes payable
to Parent (3,142,000) (2,556,000) (2,448,000)
------------- ------------ -------------
Total interest expense (137,558,000) (107,788,000) (79,383,000)
------------- ------------ -------------
NET INVESTMENT INCOME 73,201,000 56,843,000 50,083,000
------------- ------------ -------------
NET REALIZED INVESTMENT LOSSES (17,394,000) (13,355,000) (4,363,000)
------------- ------------ -------------
Fee income:
Variable annuity fees 139,492,000 103,970,000 84,171,000
Net retained commissions 39,143,000 31,548,000 24,108,000
Surrender charges 5,529,000 5,184,000 5,889,000
Asset management fees 25,764,000 25,413,000 26,935,000
Other fees 3,218,000 3,390,000 4,002,000
------------- ------------ -------------
TOTAL FEE INCOME 213,146,000 169,505,000 145,105,000
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES (98,802,000) (81,552,000) (64,457,000)
------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (66,879,000) (57,520,000) (58,713,000)
------------- ------------- -------------
ANNUAL COMMISSIONS (8,977,000) (4,613,000) (2,658,000)
------------- ------------- -------------
PRETAX INCOME 94,295,000 69,308,000 64,997,000
Income tax expense (31,169,000) (24,252,000) (25,739,000)
------------- ------------- -------------
NET INCOME $ 63,126,000 $ 45,056,000 $ 39,258,000
============= ============= =============
See accompanying notes
F-5
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30,
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,126,000 $ 45,056,000 $ 39,258,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 109,217,000 82,690,000 72,975,000
Guaranteed investment
contracts 22,650,000 19,974,000 3,733,000
Net realized investment losses 17,394,000 13,355,000 4,363,000
Accretion of net discounts
on investments (18,576,000) (8,976,000) (6,865,000)
Amortization of goodwill 1,187,000 1,169,000 1,168,000
Provision for deferred
income taxes (16,024,000) (3,351,000) (1,489,000)
Change in:
Accrued investment income (2,084,000) (5,483,000) 3,373,000
Deferred acquisition costs (113,145,000) (60,941,000) (7,180,000)
Other assets (14,598,000) (8,000,000) 7,047,000
Income taxes currently payable 10,779,000 5,766,000 3,389,000
Other liabilities 14,187,000 5,474,000 4,063,000
Other, net 418,000 (129,000) 7,000
------------- ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 74,531,000 86,604,000 123,842,000
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts 1,097,937,000 651,649,000 245,320,000
Guaranteed investment contracts 55,000,000 134,967,000 275,000,000
Net exchanges to (from) the fixed
accounts of variable annuity
contracts (620,367,000) (236,705,000) 10,475,000
Withdrawal payments on:
Fixed annuity contracts (242,589,000) (173,489,000) (237,977,000)
Guaranteed investment contracts (198,062,000) (16,492,000) (1,638,000)
Claims and annuity payments on
fixed annuity contracts (35,731,000) (31,107,000) (31,237,000)
Net receipts from (repayments of)
other short-term financings 34,239,000 (119,712,000) 3,202,000
Capital contribution received 28,411,000 27,387,000 ---
Dividends paid (25,500,000) (29,400,000) ---
------------- ------------ -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 93,338,000 207,098,000 263,145,000
------------- ------------ -------------
F-6
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Years ended September 30,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks $(2,566,211,000) $(1,937,890,000) $(1,556,586,000)
Mortgage loans (266,771,000) (15,000,000) ---
Other investments, excluding
short-term investments (75,556,000) (36,770,000) (13,028,000)
Sales of:
Bonds, notes and redeemable
preferred stocks 2,299,063,000 1,241,928,000 1,026,078,000
Real estate --- 900,000 36,813,000
Other investments, excluding
short-term investments 6,421,000 4,937,000 5,130,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks 376,847,000 288,969,000 178,688,000
Mortgage loans 25,920,000 11,324,000 14,403,000
Other investments, excluding
short-term investments 23,940,000 20,749,000 13,286,000
-------------- -------------- --------------
NET CASH USED BY INVESTING
ACTIVITIES (176,347,000) (420,853,000) (295,216,000)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS (8,478,000) (127,151,000) 91,771,000
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 122,058,000 249,209,000 157,438,000
-------------- -------------- --------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 113,580,000 $ 122,058,000 $ 249,209,000
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 7,032,000 $ 5,982,000 $ 3,235,000
============== ============== ==============
Net income taxes paid $ 36,420,000 $ 22,031,000 $ 23,656,000
============== ============== ==============
See accompanying notes
F-7
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica, Inc. (the "Parent"). The Company is
an Arizona-domiciled life insurance company and conducts its business
through three segments: annuity operations, asset management and broker-
dealer operations. Annuity operations include the sale and
administration of fixed and variable annuities and guaranteed investment
contracts. Asset management, which includes the sale and management of
mutual funds, is 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 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; 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 prior period
amounts have been reclassified to conform with the 1997 presentation.
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.
F-8
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVESTMENTS: 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. Real estate is carried at the lower of
cost or fair value. Other invested assets include investments in limited
partnerships, which are accounted for by using the cost method of
accounting; separate account investments; leveraged leases; policy loans,
which are carried at unpaid balances; and collateralized mortgage
obligation residuals.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are
amortized to investment income 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
Interest Expense in the income statement. All outstanding Swap
Agreements are designated as hedges and, therefore, are not marked to
market. However, in the event that a hedged asset/liability were to be
sold or repaid before the related Swap Agreement matures, the Swap
Agreement would be marked to market and any gain/loss classified with any
gain/loss realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement would be marked to market and the
resulting change in fair value would be included in Investment Income in
the income statement. In the event that a Swap Agreement that is
designated as a hedge were to be terminated before its contractual
maturity, any resulting gain/loss would be credited/charged to the
carrying value of the asset/liability that it hedged.
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
F-9
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
investment gains and losses, variable annuity 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 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 deferred acquisition costs 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 net unrealized gains or losses
on debt and equity securities available for sale that is credited or
charged directly to shareholder's equity. Deferred Acquisition Costs
have been decreased by $16,400,000 at September 30, 1997 and increased
by $4,200,000 at September 30, 1996 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 $18,311,000 at September 30, 1997, 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 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).
FEE INCOME: Variable annuity fees, asset management 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 is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under
the provisions of the Internal Revenue Code of 1986. Income taxes have
been calculated as if the Company filed a separate return. Deferred
F-10
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
3. 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 SEPTEMBER 30, 1997:
Securities of the United States
Government $ 18,496,000 $ 18,962,000
Mortgage-backed securities 636,018,000 649,196,000
Securities of public utilities 22,792,000 22,893,000
Corporate bonds and notes 984,573,000 1,012,559,000
Redeemable preferred stocks 6,125,000 6,681,000
Other debt securities 274,481,000 275,903,000
-------------- --------------
Total available for sale $1,942,485,000 $1,986,194,000
============== ==============
AT SEPTEMBER 30, 1996:
Securities of the United States
Government $ 311,458,000 $ 304,538,000
Mortgage-backed securities 747,653,000 741,876,000
Securities of public utilities 3,684,000 3,672,000
Corporate bonds and notes 590,071,000 591,148,000
Redeemable preferred stocks 9,064,000 8,664,000
Other debt securities 339,094,000 337,373,000
-------------- --------------
Total available for sale $2,001,024,000 $1,987,271,000
============== ==============
F-11
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale by contractual maturity,
as of September 30, 1997, follow:
Estimated
Amortized fair
cost value
-------------- --------------
Due in one year or less $ 19,067,000 $ 20,575,000
Due after one year through
five years 277,350,000 281,296,000
Due after five years through
ten years 631,083,000 650,242,000
Due after ten years 378,967,000 384,885,000
Mortgage-backed securities 636,018,000 649,196,000
-------------- --------------
Total available for sale $1,942,485,000 $1,986,194,000
============== ==============
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
F-12
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. 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 SEPTEMBER 30, 1997:
Securities of the United States
Government $ 498,000 $ (32,000)
Mortgage-backed securities 14,998,000 (1,820,000)
Securities of public utilities 141,000 (40,000)
Corporate bonds and notes 28,691,000 (705,000)
Redeemable preferred stocks 556,000 ---
Other debt securities 1,569,000 (147,000)
------------- -------------
Total available for sale $ 46,453,000 $ (2,744,000)
============= =============
AT SEPTEMBER 30, 1996:
Securities of the United States
Government $ 284,000 $ (7,204,000)
Mortgage-backed securities 7,734,000 (13,511,000)
Securities of public utilities 1,000 (13,000)
Corporate bonds and notes 11,709,000 (10,632,000)
Redeemable preferred stocks 16,000 (416,000)
Other debt securities 431,000 (2,152,000)
------------- -------------
Total available for sale $ 20,175,000 $ (33,928,000)
============= =============
At September 30, 1997, gross unrealized gains on equity securities
available for sale aggregated $1,004,000 and there were no unrealized
losses. At September 30, 1996, gross unrealized gains on equity
securities available for sale aggregated $1,368,000 and gross unrealized
losses aggregated $309,000.
F-13
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
Gross realized investment gains and losses on sales of investments are as follows:
Years ended September 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Available for sale:
Realized gains $ 22,179,000 $ 14,532,000 $ 15,983,000
Realized losses (25,310,000) (10,432,000) (21,842,000)
Held for investment:
Realized gains --- --- 2,413,000
Realized losses --- --- (586,000)
COMMON STOCKS:
Realized gains 4,002,000 511,000 994,000
Realized losses (312,000) (3,151,000) (114,000)
OTHER INVESTMENTS:
Realized gains 2,450,000 1,135,000 3,561,000
Realized losses --- --- (12,000)
IMPAIRMENT WRITEDOWNS (20,403,000) (15,950,000) (4,760,000)
------------ ------------ ------------
Total net realized
investment losses $(17,394,000) $(13,355,000) $ (4,363,000)
============ ============ ============
F-14
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The sources and related amounts of investment income are as follows:
Years ended September 30,
------------------------------------------
1997 1996 1995
-------------- ------------- -------------
Short-term investments $ 11,780,000 $ 10,647,000 $ 8,308,000
Bonds, notes and
redeemable preferred stocks 163,038,000 140,387,000 107,643,000
Mortgage loans 17,632,000 8,701,000 7,419,000
Common stocks 16,000 8,000 3,000
Real estate (296,000) (196,000) (51,000)
Limited partnerships 6,725,000 4,073,000 5,128,000
Other invested assets 11,864,000 1,011,000 1,016,000
-------------- ------------- -------------
Total investment income $210,759,000 $164,631,000 $129,466,000
============== ============= =============
Expenses incurred to manage the investment portfolio amounted to $2,050,000 for
the year ended September 30, 1997, $1,737,000 for the year ended September 30,
1996, and $1,983,000 for the year ended September 30, 1995 and are included in
General and Administrative Expenses in the income statement.
At September 30, 1997, no investment exceeded 10% of the Company's consolidated
shareholder's equity.
At September 30, 1997, mortgage loans were collateralized by properties located
in 21 states, with loans totaling approximately 13% of the aggregate carrying
value of the portfolio secured by properties located in New York and approximately
12% by properties located in California. No more than 10% of the portfolio was
secured by properties in any other single state.
At September 30, 1997, bonds, notes and redeemable preferred stocks included
$216,877,000 (fair value of $227,169,000) of bonds and notes not rated investment
grade. The Company had no material concentrations of non-investment-grade assets
at September 30, 1997.
At September 30, 1997, the amortized cost of investments in default as to the
payment of principal or interest was $1,378,000, consisting of $500,000 of non-
investment-grade bonds and $878,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $1,378,000.
F-15
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
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 September 30, 1997, the Company had
one outstanding Swap Agreement with a notional principal amount of $15.9 million,
which matures in December, 2024. The net interest paid amounted to $0.1 million
for the year ended September 30, 1997, and is included in Interest Expense on
Guaranteed Investment Contracts in the income statement.
At September 30, 1997, $5,276,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to 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.
COMMON STOCKS: Fair value is based principally on independent pricing services,
broker quotes and other independent information.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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: Variable annuity assets are carried at the market value
of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which the
carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life 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 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 hedging Swap Agreements, determined from independent broker quotes.
VARIABLE ANNUITY LIABILITIES: 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 PARENT: Fair value is estimated based on the quoted
market prices for similar issues.
F-16
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at September 30,
1997 and 1996, compared with their respective carrying values, are as follows:
Carrying Fair
value value
-------------- --------------
1997:
ASSETS:
Cash and short-term investments $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks 1,986,194,000 1,986,194,000
Mortgage loans 339,530,000 354,495,000
Common stocks 1,275,000 1,275,000
Cost-method partnerships 46,880,000 84,186,000
Variable annuity assets 9,343,200,000 9,343,200,000
LIABILITIES:
Reserves for fixed annuity contracts 2,098,803,000 2,026,258,000
Reserves for guaranteed investment
contracts 295,175,000 295,175,000
Payable to brokers for purchases
of securities 263,000 263,000
Variable annuity liabilities 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent 36,240,000 37,393,000
============== ==============
1996:
ASSETS:
Cash and short-term investments $ 122,058,000 $ 122,058,000
Bonds, notes and redeemable
preferred stocks 1,987,271,000 1,987,271,000
Mortgage loans 98,284,000 102,112,000
Common stocks 3,970,000 3,970,000
Cost-method partnerships 45,070,000 70,553,000
Receivable from brokers for sales
of securities 52,348,000 52,348,000
Variable annuity assets 6,311,557,000 6,311,557,000
LIABILITIES:
Reserves for fixed annuity contracts 1,789,962,000 1,738,784,000
Reserves for guaranteed investment
contracts 415,544,000 416,695,000
Variable annuity liabilities 6,311,557,000 6,117,508,000
Subordinated notes payable to Parent 35,832,000 37,339,000
============== ==============
F-18
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent equalled $36,240,000 at an interest rate of
9% at September 30, 1997 and require principal payments of $7,500,000 in 1998,
$23,060,000 in 1999 and $5,400,000 in 2000.
6. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided liquidity
support for certain short-term securities of three municipalities 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 $242,600,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities.
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 or results of
operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value Common
Stock. At September 30, 1997 and 1996, 3,511 shares were outstanding.
Changes in shareholder's equity are as follows:
Years ended September 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance $ 280,263,000 $ 252,876,000 $ 252,876,000
Capital contributions received 28,411,000 27,387,000 ---
------------- ------------- -------------
Ending balance $ 308,674,000 $ 280,263,000 $ 252,876,000
============= ============= =============
RETAINED EARNINGS:
Beginning balance 207,002,000 191,346,000 152,088,000
Net income 63,126,000 45,056,000 39,258,000
Dividend paid (25,500,000) (29,400,000) ---
------------- ------------- -------------
Ending balance $ 244,628,000 $ 207,002,000 $ 191,346,000
============= ============= =============
F-19
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. SHAREHOLDER'S EQUITY (continued)
Years ended September 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
NET UNREALIZED GAINS/LOSSES ON
DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance $ (5,521,000) $ (5,673,000) $ (24,953,000)
Change in net unrealized
gains/losses on debt
securities available
for sale 57,463,000 (2,904,000) 71,302,000
Change in net unrealized
gains/losses on equity
securities available for sale (55,000) 3,538,000 (1,240,000)
Change in adjustment to
deferred acquisition costs (20,600,000) (400,000) (40,400,000)
Tax effects of net changes (12,882,000) (82,000) (10,382,000)
------------- ------------- -------------
Ending balance $ 18,405,000 $ (5,521,000) $ (5,673,000)
============= ============= =============
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.
Dividends in the amounts of $25,500,000 and $29,400,000 were paid on April 1, 1997
and March 18, 1996, respectively. No dividends were paid in fiscal year 1995.
Under statutory accounting principles utilized in filings with insurance regulatory
authorities, the Company's net income for the nine months ended September 30, 1997
was $45,743,000. The statutory net income for the year ended December 31, 1996 was
$27,928,000 and for the year ended December 31, 1995 was $30,673,000. The Company's
statutory capital and surplus was $325,712,000 at September 30, 1997, $311,176,000
at December 31, 1996 and $294,767,000 at December 31, 1995.
F-20
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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
------------- ------------ ------------
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 $ (5,893,000) $ 37,062,000 $ 31,169,000
============= ============ ============
1996:
Currently payable $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred (10,347,000) 6,996,000 (3,351,000)
------------- ------------ ------------
Total income tax expense $ (4,593,000) $ 28,845,000 $ 24,252,000
============= ============ ============
1995:
Currently payable $ 4,248,000 $ 22,980,000 $ 27,228,000
Deferred (6,113,000) 4,624,000 (1,489,000)
------------- ------------ ------------
Total income tax expense $ (1,865,000) $ 27,604,000 $ 25,739,000
============= ============ ============
F-21
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES (continued)
Income taxes computed at the United States federal income tax rate of 35% and income
taxes provided differ as follows:
Years ended September 30,
------------------------------------------
1997 1996 1995
------------ ----------- ------------
Amount computed at
statutory rate $ 33,003,000 $ 24,258,000 $ 22,749,000
Increases (decreases)
resulting from:
Amortization of differences
between book and tax
bases of net assets
acquired 666,000 464,000 3,049,000
State income taxes, net of
federal tax benefit 1,950,000 2,070,000 437,000
Dividends-received deduction (4,270,000) (2,357,000) ---
Tax credits (318,000) (257,000) (168,000)
Other, net 138,000 74,000 (328,000)
------------ ------------ ------------
Total income tax expense $ 31,169,000 $ 24,252,000 $ 25,739,000
============ ============ ============
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 September 30,
1997. The Company does not anticipate any transactions which would cause any part
of this surplus to be taxable.
F-22
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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:
September 30,
----------------------------
1997 1996
------------- -------------
DEFERRED TAX LIABILITIES:
Investments $ 13,160,000 $ 15,036,000
Deferred acquisition costs 154,949,000 136,747,000
State income taxes 1,777,000 1,466,000
Net unrealized gains on debt
and equity securities
available for sale 9,910,000 ---
------------- -------------
Total deferred tax liabilities 179,796,000 153,249,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (108,090,000) (77,522,000)
Guaranty fund assessments (2,707,000) (1,031,000)
Other assets (1,952,000) (1,534,000)
Net unrealized losses on debt
and equity securities
available for sale --- (2,973,000)
------------- -------------
Total deferred tax assets (112,749,000) (83,060,000)
------------- -------------
Deferred income taxes $ 67,047,000 $ 70,189,000
============= =============
F-23
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica Securities,
Inc. and Advantage Capital Corp. Commissions paid to these broker-dealers totaled
$25,492,000 in 1997, $16,906,000 in 1996, and $9,435,000 in 1995. 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 36.1%,
38.3%, and 40.6% of premiums in 1997, 1996, and 1995, respectively. The Company
also sells its products through unaffiliated broker-dealers, the largest two of
which represented approximately 19.2% and 10.1% of premiums in 1997, 19.7% and 10.2%
in 1996, and 18.8% and 4.3% in 1995, respectively.
The Company purchases administrative, investment management, accounting, marketing
and data processing services from SunAmerica Financial, Inc., whose purpose is to
provide services to the SunAmerica companies. Amounts paid for such services
totaled $86,116,000 for the year ended September 30, 1997, $65,351,000 for the year
ended September 30, 1996 and $42,083,000 for the year ended September 30, 1995.
Such amounts are included in General and Administrative Expenses in the income
statement.
The Parent made capital contributions of $28,411,000 in December 1996 and
$27,387,000 in December 1995 to the Company, through the Company's direct parent,
in exchange for the termination of its guaranty with respect to certain real estate
owned in Arizona. Accordingly, the Company reduced the carrying value of this real
estate to estimated fair value to reflect the termination of the guaranty.
During the year ended September 30, 1995, the Company sold to the Parent real estate
for cash equal to its carrying value of $29,761,000.
During the year ended September 30, 1997, the Company sold various invested assets
to SunAmerica Life Insurance Company and to CalAmerica Life Insurance Company for
cash equal to their current market values of $15,776,000 and $15,000, respectively.
The Company recorded net gains aggregating $276,000 on such transactions.
During the year ended September 30, 1997, the Company also purchased certain
invested assets from SunAmerica Life Insurance Company and from CalAmerica Life
Insurance Company for cash equal to their current market values of $8,717,000 and
$284,000, respectively.
During the year ended September 30, 1996, the Company sold various invested assets
to the Parent and to SunAmerica Life Insurance Company for cash equal to their
current market values of $274,000 and $47,321,000, respectively. The Company
recorded net losses aggregating $3,000 on such transactions.
During the year ended September 30, 1996, the Company also purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal to their
current market values, which aggregated $28,379,000.
F-24
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
Total
depreciation
and
Total amortization Pretax Total
revenues expense income assets
------------- ------------ ------------ ---------------
1997:
Annuity operations $ 332,845,000 $ 55,675,000 $ 74,792,000 $12,438,021,000
Broker-dealer operations 38,005,000 689,000 16,705,000 51,400,000
Asset management 35,661,000 16,357,000 2,798,000 81,518,000
------------- ------------ ------------ ---------------
Total $ 406,511,000 $ 72,721,000 $ 94,295,000 $12,570,939,000
============= ============ ============ ===============
1996:
Annuity operations $ 256,681,000 $ 43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer operations 31,053,000 449,000 13,033,000 37,355,000
Asset management 33,047,000 18,295,000 2,448,000 74,410,000
------------- ------------ ------------ ---------------
Total $ 320,781,000 $ 62,718,000 $ 69,308,000 $ 9,204,535,000
============= ============ ============ ===============
1995:
Annuity operations $ 211,587,000 $ 38,350,000 $ 55,462,000 $ 7,667,946,000
Broker-dealer operations 24,194,000 411,000 9,025,000 29,241,000
Asset management 34,427,000 24,069,000 510,000 86,510,000
------------- ------------ ------------ ---------------
Total $ 270,208,000 $ 62,830,000 $ 64,997,000 $ 7,783,697,000
============= ============ ============ ===============
F-25
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
21 Subsidiaries of the Company.
27 Financial Data Schedule.