SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Incorporated in California 86-0198983
IRS Employer
Identification No.
1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant's telephone number, including area code: (310) 772-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes x No
--- ---
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON May 14,
1998 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
March 31, 1998 and September 30, 1997 3 - 4
Consolidated Income Statement (Unaudited) -
Three Months and Six Months Ended March 31, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended March 31, 1998 and 1997 6 - 7
Note to Consolidated Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 23
Part II - Other Information 24
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, September 30,
1998 1997
--------------- ---------------
ASSETS
Investments:
Cash and short-term investments $ 174,489,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
March 1998, $2,053,672,000;
September 1997, $1,942,485,000) 2,094,033,000 1,986,194,000
Mortgage loans 302,157,000 339,530,000
Common stocks available for sale,
at fair value (cost: March 1998,
$115,000; September 1997, $271,000) 157,000 1,275,000
Real estate 24,000,000 24,000,000
Other invested assets 39,927,000 143,722,000
--------------- ---------------
Total investments 2,634,763,000 2,608,301,000
Variable annuity assets 11,172,416,000 9,343,200,000
Accrued investment income 24,183,000 21,759,000
Deferred acquisition costs 601,594,000 536,155,000
Other assets 73,816,000 61,524,000
--------------- ---------------
TOTAL ASSETS $14,506,772,000 $12,570,939,000
=============== ==============
See accompanying note
3
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
March 31, September 30,
1998 1997
--------------- ---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 2,100,772,000 $ 2,098,803,000
Reserves for guaranteed investment
contracts 301,540,000 295,175,000
Payable to brokers for purchases of
securities 21,364,000 263,000
Income taxes currently payable 57,261,000 32,265,000
Other liabilities 105,047,000 122,728,000
--------------- ---------------
Total reserves, payables
and accrued liabilities 2,585,984,000 2,549,234,000
--------------- ---------------
Variable annuity liabilities 11,172,416,000 9,343,200,000
--------------- ---------------
Subordinated notes payable to Parent 33,380,000 36,240,000
--------------- ---------------
Deferred income taxes 66,878,000 67,047,000
--------------- ---------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 308,674,000 308,674,000
Retained earnings 319,287,000 244,628,000
Net unrealized gains on debt and
equity securities available for sale 16,642,000 18,405,000
--------------- ---------------
Total shareholder's equity 648,114,000 575,218,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $14,506,772,000 $12,570,939,000
=============== ==============
See accompanying note
4
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Three Months Six Months
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
Investment income $54,502,000 $50,719,000 $114,357,000 $97,431,000
----------- ----------- ------------ -----------
Interest expense on:
Fixed annuity contracts (26,859,000) (27,155,000) (54,680,000) (52,346,000)
Guaranteed investment contracts (4,492,000) (5,948,000) (9,042,000) (11,986,000)
Senior indebtedness (152,000) (557,000) (345,000) (738,000)
Subordinated notes payable
to Parent (764,000) (766,000) (1,573,000) (1,524,000)
----------- ----------- ------------ -----------
Total interest expense (32,267,000) (34,426,000) (65,640,000) (66,594,000)
----------- ----------- ------------ -----------
NET INVESTMENT INCOME 22,235,000 16,293,000 48,717,000 30,837,000
----------- ----------- ------------ -----------
NET REALIZED INVESTMENT GAINS
(LOSSES) 2,297,000 (1,174,000) 23,232,000 (20,290,000)
----------- ----------- ------------ -----------
Fee income:
Variable annuity fees 47,298,000 32,333,000 91,662,000 62,939,000
Net retained commissions 12,238,000 9,777,000 22,699,000 17,573,000
Surrender charges 1,866,000 1,105,000 3,155,000 2,455,000
Asset management fees 7,143,000 6,305,000 14,046,000 12,723,000
Other fees 662,000 752,000 1,629,000 1,745,000
----------- ----------- ------------ -----------
TOTAL FEE INCOME 69,207,000 50,272,000 133,191,000 97,435,000
----------- ----------- ------------ -----------
GENERAL AND ADMINISTRATIVE
EXPENSES (24,451,000) (24,801,000) (47,470,000) (47,196,000)
----------- ----------- ------------ -----------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (18,377,000) (13,441,000) (35,579,000) (27,258,000)
----------- ----------- ------------ -----------
ANNUAL COMMISSIONS (4,148,000) (2,001,000) (7,674,000) (3,434,000)
----------- ----------- ------------ -----------
PRETAX INCOME 46,763,000 25,148,000 114,417,000 30,094,000
Income tax expense (16,452,000) (8,903,000) (39,758,000) (10,503,000)
----------- ----------- ------------ -----------
NET INCOME $30,311,000 $16,245,000 $ 74,659,000 $19,591,000
=========== =========== ============ ===========
See accompanying note
5
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
---------------------------------
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,659,000 $ 19,591,000
Adjustments to reconcile net income to
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 54,680,000 52,346,000
Guaranteed investment contracts 9,042,000 11,986,000
Net realized investment losses (gains) (23,232,000) 20,291,000
Amortization (accretion) of net
premiums/discounts on investments 1,174,000 (4,927,000)
Amortization of goodwill 597,000 583,000
Provision for deferred income taxes 779,000 (4,404,000)
Change in:
Accrued investment income (2,424,000) (3,535,000)
Deferred acquisition costs (63,839,000) (63,451,000)
Other assets (12,889,000) (7,976,000)
Income taxes currently payable 24,996,000 3,533,000
Other liabilities (15,189,000) 5,053,000
Other, net 129,000 117,000
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,483,000 29,207,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (1,031,150,000) (1,822,206,000)
Mortgage loans (577,000) (96,504,000)
Other investments, excluding short-term
investments --- (4,889,000)
Sales of:
Bonds, notes and redeemable preferred
stocks 624,733,000 1,444,348,000
Other investments, excluding short-term
investments 42,636,000 942,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 330,775,000 215,577,000
Mortgage loans 38,770,000 ---
Other investments, excluding short-term
investments 68,110,000 17,634,000
-------------- --------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 73,297,000 (245,098,000)
-------------- --------------
See accompanying note
6
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended March 31,
-------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $629,875,000 $688,942,000
Guaranteed investment contracts 5,619,000 55,000,000
Net exchanges from the fixed
accounts of variable annuity contracts (564,599,000) (227,868,000)
Withdrawal payments on:
Fixed annuity contracts (101,424,000) (124,474,000)
Guaranteed investment contracts (8,296,000) (62,122,000)
Claims and annuity payments on fixed
annuity contracts (16,694,000) (16,941,000)
Net receipts from (repayments of)
other short-term financings (5,352,000) 6,113,000
Capital contributions received --- 28,411,000
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (60,871,000) 347,061,000
------------ ------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 60,909,000 131,170,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 113,580,000 122,058,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $174,489,000 $253,228,000
============ ============
Supplemental cash flow information:
Interest paid on indebtedness $ 1,290,000 $ 1,608,000
============ ============
Net income taxes paid $ 13,987,000 $ 11,378,000
============ ============
See accompanying note
7
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
Anchor National Life Insurance Company (the "Company") is an indirect wholly
owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the
Company, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the Company's consolidated financial position as of March 31,
1998 and September 30, 1997, the results of its consolidated operations for the
three months and six months ended March 31, 1998 and 1997 and its consolidated
cash flows for the six months ended March 31, 1998 and 1997. The results of
operations for the three months and six months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the fiscal
year ended September 30, 1997, contained in the Company's Annual Report on Form
10-K.
8
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - 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 months and six months ended March 31, 1998 and March 31, 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 upon 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 $30.3 million in the second quarter of 1998, compared
with $16.2 million in the second quarter of 1997. For the six months, net
income amounted to $74.7 million in 1998, compared with $19.6 million in 1997.
PRETAX INCOME totaled $46.8 million in the second quarter of 1998 and
$25.1 million in the second quarter of 1997. For the six months, pretax income
totaled $114.4 million in 1998, compared with $30.1 million in 1997. The
significant improvements in the current periods over the prior periods
primarily resulted from increased net realized investment gains, fee income and
net investment income.
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 $22.2 million in the second quarter
of 1998 from $16.3 million in the second quarter of 1997. These amounts equal
3.52% on average invested assets (computed on a daily basis) of $2.53 billion
9
in the second quarter of 1998 and 2.41% on average invested assets of $2.70
billion in the second quarter of 1997. For the six months, net investment
income increased to $48.7 million in 1998 from $30.8 million in 1997, equalling
3.86% on average invested assets of $2.52 billion in 1998 and 2.37% on average
invested assets of $2.60 billion in 1997.
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 $108.1 million in the second quarter of 1998, $147.7 million
in the second quarter of 1997, $96.4 million in the six months of 1998 and
$149.0 million in the six months of 1997. The difference between the Company's
yield on average invested assets and the rate paid on average interest-bearing
liabilities (the "Spread Difference") was 3.29% in the second quarter of 1998,
2.11% in the second quarter of 1997, 3.65% in the six months of 1998 and 2.06%
in the six months of 1997.
Investment income (and the related yields on average invested assets)
totaled $54.5 million (8.62%) in the second quarter of 1998, $50.7 million
(7.50%) in the second quarter of 1997, $114.4 million (9.06%) in the six months
of 1998, and $97.4 million (7.48%) in the six months of 1997. Investment
income and the related yields in the 1998 periods primarily reflect the higher
returns realized on the Company's investments in limited partnerships.
Partnership income increased to $7.0 million (a yield of 195.58% on
related average assets of $14.3 million) in the second quarter of 1998,
compared with $1.4 million (a yield of 13.19% on related average assets of
$42.8 million) in the second quarter of 1997. For the six months, partnership
income amounted to $22.1 million (a yield of 301.18% on related average assets
of $14.7 million) in 1998, compared with $2.2 million (a yield of 9.88% on
related average assets of $43.7 million) in 1997. 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 $32.3 million in the second quarter of
1998 and $34.4 million in the second quarter of 1997. For the six months,
interest expense aggregated $65.6 million in 1998, compared with $66.6 million
in 1997. The average rate paid on all interest-bearing liabilities was 5.33%
in the second quarter of 1998, compared with 5.39% in the second quarter of
1997. For the six months, the average rate paid on all interest-bearing
liabilities was 5.41% in 1998, compared with 5.42% in 1997. Interest-bearing
liabilities averaged $2.42 billion during the second quarter of 1998, $2.56
billion during the second quarter of 1997, $2.43 billion during the six months
of 1998 and $2.46 billion during the six months of 1997.
The modest decline in average invested assets in the 1998 periods
reflects the modest decline in average interest-bearing liabilities and is
primarily due to a decline in sales of the Company's fixed-rate products. Since
March 31, 1997, fixed annuity premiums have aggregated $1.04 billion. Fixed
annuity premiums (comprised primarily of premiums for the fixed accounts of
variable annuities) totaled $367.9 million in the second quarter of 1998,
$326.1 million in the second quarter of 1997, $629.9 million in the six months
of 1998 and $688.9 million in the six months of 1997. The changes in premiums
for the fixed accounts of variable annuities in the 1998 periods principally
reflect differing promotional activities in each of those periods.
10
There were no guaranteed investment contract ("GIC") premiums during the
second quarter of 1998 and $50.0 million of GIC premiums in the second quarter
of 1997. For the six months, GIC premiums totaled $5.6 million in 1998 and
$55.0 million in 1997. The Company does not actively market GICs;
consequently, premiums may vary substantially from period to period. The GICs
issued by the Company generally guarantee the payment of principal and interest
at fixed or variable rates for a term of three to five years. 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 the terms of the underlying indenture or
agreement. GICs purchased by asset management firms for their short-term
portfolios either prohibit withdrawals or permit withdrawals with notice
ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow
information and prices accordingly so that it is compensated for possible
withdrawals prior to maturity.
NET REALIZED INVESTMENT GAINS totaled $2.3 million in the second quarter
of 1998, compared with net realized investment losses of $1.2 million in the
second quarter of 1997. Net realized investment gains include impairment
writedowns of $1.5 million in the second quarter of 1998. Therefore, net gains
from sales and redemptions of investments totaled $3.8 million in the second
quarter of 1998. There were no impairment writedowns in the second quarter of
1997. For the six months, net realized investment gains totaled $23.2 million
in 1998, compared with net realized investment losses of $20.3 million in 1997,
and include impairment writedowns of $1.5 million and $16.1 million,
respectively. Therefore, for the six months, net gains from sales and
redemptions of investments totaled $24.7 million in 1998, compared with net
losses of $4.2 million in 1997.
The Company sold or redeemed invested assets, principally bonds and
notes, aggregating $485.9 million in the second quarter of 1998, $768.3 million
in the second quarter of 1997, $1.08 billion in the six months of 1998 and
$1.58 billion in the six months of 1997, respectively. Sales of investments
result from the active management of the Company's investment portfolio.
Because redemptions of investments are generally involuntary and sales of
investments are made in both rising and falling interest rate environments, net
gains and losses from sales and redemptions of investments fluctuate from
period to period, and represent 0.60%, 0.17%, 1.96% and 0.32% of average
invested assets on an annualized basis for the second quarter of 1998, the
second quarter of 1997, the six months of 1998 and the six months of 1997,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Company's active portfolio management is to maximize total
returns on the investment portfolio, taking into account credit and interest-
rate risk.
Impairment writedowns in the six months of 1997 reflect $15.7 million of
provisions applied to non-income producing land owned in Arizona. The statutory
carrying value of this land had been guaranteed by the Company's ultimate
Parent, SunAmerica Inc. ("SunAmerica"). SunAmerica made a capital contribution
of $28.4 million on December 31, 1996 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 termination of the guaranty. Impairment
writedowns, on an annualized basis, represent 0.24% and 0.12% for the second
11
quarter and six months of 1998, respectively, and 1.24% for the six months of
1997. For the 18 fiscal quarters beginning October 1, 1993, impairment
writedowns as a percentage of average invested assets have ranged up to 3.64%
and have averaged 0.84%. 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 $47.3
million in the second quarter of 1998 and $32.3 million in the second quarter
of 1997. For the six months, variable annuity fees totaled $91.7 million in
1998, compared with $62.9 million in 1997. These increased fees reflect growth
in average variable annuity assets, principally due to increased market values,
the receipt of variable annuity premiums and net exchanges into the separate
accounts from the fixed accounts of variable annuity contracts, partially
offset by surrenders. Variable annuity assets averaged $10.24 billion during
the second quarter of 1998 and $7.10 billion during the second quarter of 1997.
For the six months, variable annuity assets averaged $9.82 billion in 1998,
compared with $6.85 billion in 1997. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, have
aggregated $1.57 billion since March 31, 1997. Variable annuity premiums
increased to $412.6 million in the second quarter of 1998 from $304.1 million
in the second quarter of 1997. For the six months, variable annuity premiums
increased to $834.8 million in 1998, compared with $531.0 million in 1997.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $780.4 million,
$630.2 million, $1.46 billion and $1.22 billion in the second quarters of 1998
and 1997 and the six months of 1998 and 1997, respectively. Increases in
Variable Annuity Product Sales in the 1998 periods 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. Also, recent administrative budget proposals include
the proposed taxation of exchanges involving variable annuity contracts and
reallocation within variable annuity contracts and certain other proposals
relating to annuities (see "Regulations").
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
$12.2 million in the second quarter of 1998 and $9.8 million in the second
quarter of 1997. For the six months, net retained commissions totaled $22.7
million in 1998 and $17.6 million in 1997. Broker-dealer sales (mainly sales
of general securities, mutual funds and annuities) totaled $4.30 billion in the
second quarter of 1998 and $2.67 billion in the second quarter of 1997. For
the six months, such sales totaled $8.13 billion in 1998 and $4.70 billion in
1997. The increases in sales and net retained commissions in the 1998 periods
reflect a greater number of registered representatives, 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 $1.9 million
in the second quarter of 1998 and $1.1 million in the second quarter of 1997.
12
For the six months, surrender charges on fixed and variable annuities totaled
$3.2 million in 1998, compared with $2.5 million in 1997. 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 $300.5 million in the second
quarter of 1998, compared with $277.8 million in the second quarter of 1997.
These payments, annualized, represent 9.8% and 12.3%, respectively, of average
fixed and variable annuity reserves. For the six months, withdrawal payments
totaled $569.0 million in 1998 and $515.9 million in 1997 and, annualized,
represent 9.6% and 11.8%, respectively, of average fixed and variable annuity
reserves. Withdrawals include variable annuity withdrawals from the separate
accounts totaling $248.5 million (9.8% of average variable annuity reserves),
$215.4 million (12.2% of average variable annuity reserves), $467.6 million
(9.6% of average variable annuity reserves) and $391.4 million (11.5% of
average variable annuity reserves) in the second quarters of 1998 and 1997 and
the six months of 1998 and 1997, respectively. 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 $7.1 million on
average assets managed of $2.79 billion in the second quarter of 1998 and $6.3
million on average assets managed of $2.31 billion in the second quarter of
1997. For the six months, asset management fees totaled $14.0 million on
average assets managed of $2.74 billion in 1998, compared with $12.7 million
on average assets managed of $2.26 billion in 1997. 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,
have aggregated $632.2 million since March 31, 1997. Mutual fund sales totaled
$193.9 million in the second quarter of 1998, up 62% from $119.9 million in the
second quarter of 1997. For the six months, such sales totaled $359.7 million
in 1998, up from $182.3 million in 1997. The significant increases in sales
during the 1998 periods principally resulted from the introduction in November
1996 of the Company's "Style Select Series" product. Sales of this product
totaled $134.5 million, $70.6 million, $244.7 million and $85.0 million for the
second quarters of 1998 and 1997 and the six months of 1998 and 1997,
respectively, reflecting the addition of four new Style Select funds, which
doubled the number of Style Select funds to eight, and generally favorable
market conditions. Redemptions of mutual funds, excluding redemptions of money
market accounts, amounted to $108.9 million in the second quarter of 1998 and
$110.4 million in the second quarter of 1997. For the six months, such
redemptions amounted to $200.9 million in 1998 and $214.1 million in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $24.5 million in the second
quarter of 1998 and $24.8 million in the second quarter of 1997. For the six
months, general and administrative expenses totaled $47.5 million in 1998,
compared with $47.2 million in 1997. 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 $18.4 million in the
second quarter of 1998, compared with $13.4 million in the second quarter of
1997. For the six months, such amortization totaled $35.6 million in 1998,
compared with $27.3 million in 1997. The increase in amortization was
primarily due to additional fixed and variable annuity and mutual fund sales
and the subsequent amortization of related deferred commissions and other
direct selling costs.
13
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 $4.1
million in the second quarter of 1998, $2.0 million in the second quarter of
1997, $7.7 million in the six months of 1998 and $3.4 million in the six months
of 1997. The increase in annual commissions reflects increased sales of
annuities that offer this commission option. The Company estimates that
approximately 50% 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 $16.5 million in the second quarter of 1998,
compared with $8.9 million in the second quarter of 1997 and $39.8 million in
the six months of 1998, compared with $10.5 million in the six months of 1997,
representing effective tax rates of 35% in both the 1998 and 1997 periods.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 12.7% to $648.1 million at March 31, 1998
from $575.2 million at September 30, 1997, primarily due to $74.7 million of
net income recorded in the six months of 1998.
INVESTED ASSETS at March 31, 1998 totaled $2.63 billion, compared with
$2.61 billion at September 30, 1997. 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 constitutes 79% of the Company's total
investment portfolio (at amortized cost), had an aggregate fair value that
exceeded its amortized cost by $40.4 million at March 31, 1998, compared with
an excess of $43.7 million at September 30, 1997.
At March 31, 1998, the Bond Portfolio (at amortized cost, excluding $6.1
million of redeemable preferred stocks) included $1.99 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 $63.7 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At March 31, 1998, approximately
$1.87 billion of the Bond Portfolio was investment grade, including $710.4
million of U.S. government/agency securities and mortgage-backed securities
("MBSs").
At March 31, 1998, the Bond Portfolio included $172.9 million (at
amortized cost with a fair value of $180.4 million) of bonds that were not
investment grade. Based on their March 31, 1998 amortized cost, these non-
investment-grade bonds accounted for 1.2% of the Company's total assets and
6.7% of its invested assets.
14
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 March 31, 1998.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1998 (dollars in thousands):
15
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-} $ 1,062,041 $ 1,079,556 1 $ 158,298 $ 166,470 $ 1,220,339 47.04% $ 1,246,026
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 540,515 544,282 2 113,771 116,664 654,286 25.22 660,946
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 9,512 10,762 3 8,198 8,680 17,710 0.68 19,442
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 136,282 142,128 4 17,329 17,906 153,611 5.92 160,034
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} --- --- 5 1,500 802 1,500 0.06 802
C1 to D
[DD]
{D} --- --- 6 101 102 101 0.00 102
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RATED ISSUES $ 1,748,350 $ 1,776,728 $ 299,197 $ 310,624 $ 2,047,547 $ 2,087,352
=========== =========== =========== =========== =========== ===========
Footnotes appear on the following page.
16
Footnotes to the table of rated bonds by rating classification
--------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moody's
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debt's relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. DCR rates
debt securities in rating categories ranging from AAA (the highest) to DD
(in payment default). A plus (+) or minus (-) indicates the debt's
relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on
the highest of the S&P, Moody's, DCR or 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 $63.7 million (at amortized cost) of
assets that were rated by the Company pursuant to applicable NAIC rating
guidelines.
(3) At amortized cost.
17
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $304.0 million at March 31, 1998. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At March 31, 1998, Secured Loans consisted of $171.9 million of
publicly traded securities and $132.1 million of privately traded securities.
These Secured Loans are composed of loans to 81 borrowers spanning 25
industries, with 22% 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 the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these
Secured Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of
loss upon default for these Secured Loans is mitigated by such financial
covenants and the collateral values underlying the Secured Loans. The
Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by
the Company, pursuant to comparable statutory rating guidelines established by
the NAIC.
MORTGAGE LOANS aggregated $302.2 million at March 31, 1998 and consisted
of 60 commercial first mortgage loans with an average loan balance of
approximately $5.0 million, collateralized by properties located in 20 states.
Approximately 23% of this portfolio was multifamily residential, 16% was
manufactured housing, 15% was office, 15% was hotel, 12% was industrial and 19%
was other types. At March 31, 1998, approximately 12% and 11% of this
portfolio was secured by properties located in California and New York,
respectively, and no more than 10% of this portfolio was secured by properties
located in any other single state. At March 31, 1998, there were four mortgage
loans with outstanding balances of $10 million or more, which loans
collectively aggregated approximately 18% of this portfolio. At March 31,
1998, approximately 19% of the mortgage loan portfolio consisted of loans with
balloon payments due before April 1, 2001. During the second quarters and six
months of 1998 and 1997, loans delinquent by more than 90 days, foreclosed
loans and restructured loans have not been significant in relation to the total
mortgage loan portfolio.
At March 31, 1998, 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 its emphasis on multi-family 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 $39.9 million at March 31, 1998,
including $14.0 million of investments in limited partnerships and an aggregate
of $25.9 million of miscellaneous investments, including policy loans,
18
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 76% of
the Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at March 31, 1998.
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 March 31, 1998, these assets had
an aggregate fair value of $2.52 billion with a duration of 3.9. The Company's
fixed-rate liabilities include fixed annuities and GICs. At March 31,1998,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $2.39 billion
with a duration of 1.1. The Company's potential exposure due to a 10% increase
in prevailing interest rates from their March 31, 1998 levels is a loss of
$40.7 million in fair value of its fixed-rate assets that is not offset by a
decrease 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
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.
19
As a component of its asset and liability management strategy, the
Company utilizes interest rate swap agreements ("Swap Agreements") to match
assets more closely to liabilities. Swap Agreements are agreements to exchange
with a counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company typically utilizes Swap Agreements to create a hedge
that effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At March 31, 1998, the Company had one outstanding Swap Agreement
with a notional principal amount of $21.5 million. This agreement matures in
December 2024.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-
collateralized. MBSs are generally investment-grade securities collateralized
by large pools of mortgage loans. MBSs generally pay principal and interest
monthly. The amount of principal and interest payments may fluctuate as a
result of prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions
is minimal. 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 value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of 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.
20
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 $2.4 million at March 31, 1998
(at amortized cost, with a fair value of $2.4 million), including $1.5 million
of bonds and notes and $0.9 million of mortgage loans. At March 31, 1998,
defaulted investments constituted less than 0.1% of total invested assets. At
September 30, 1997, defaulted investments totaled $1.4 million, including $0.5
million of bonds and notes and $0.9 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 March 31, 1998, approximately $1.67 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $49.2 million, while
approximately $385.5 million of the Bond Portfolio had an aggregate unrealized
loss of $8.8 million. In addition, the Company's investment portfolio
currently provides approximately $22.8 million of monthly cash flow from
scheduled principal and interest payments. Historically, cash flow 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,
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.
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems and applications are not presently
year 2000 compliant. The Company's business, financial condition and results
of operations could be materially and adversely affected by the failure of the
Company's systems and applications (and those operated by third parties
interfacing with the Company's systems and applications) to properly operate
or manage dates beyond the year 1999. The Company has a coordinated plan to
repair or replace these noncompliant systems and to obtain similar assurances
21
from third parties interfacing with the Company's systems and applications and
expects to significantly complete its plan by the end of calendar year 1998.
In Fiscal year 1997, the Company recorded a $6.2 million provision for
estimated programming costs to make necessary repairs of certain specific
noncompliant systems. Management believes that this provision is adequate and
does not anticipate any material future expenses associated with the repair
phase of this project. Management also expects to make an additional $15.0
million expenditure to replace certain other specific noncompliant systems,
which expenditure will be capitalized as software costs and amortized over
future periods.
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
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 and regulations relating to product design, actuarial standards, certain
separate account products 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 Corp., a subsidiary of the Company, is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940. The mutual funds that it markets are subject to regulation under
the Investment Company Act of 1940. SunAmerica Asset Management Corp. and the
mutual funds are subject to regulation and examination by the SEC. In
addition, variable annuities and the related separate accounts of the Company
are subject to regulation by the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940.
22
The Company's broker-dealer subsidiary, Royal Alliance Associates, Inc.,
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 SEC and the NASD have broad administrative and
supervisory powers relative to all aspects of business and may examine the
subsidiary's business and accounts at any time.
From time to time, Federal initiatives are proposed that could affect the
Company's businesses. Such initiatives include employee benefit plan
regulations and tax law changes affecting the taxation of insurance companies
and the tax treatment of insurance products. Recent administration budget
proposals include the proposed taxation of exchanges involving variable annuity
contracts and reallocations within variable annuity contracts and certain other
proposals relating to annuities. The Company believes these proposals have a
small likelihood of being enacted, because they would discourage retirement
savings and there is strong popular and industry opposition to them. Other
proposals made in recent years to limit the tax deferral of annuities have not
been enacted. The Company believes that certain of the proposals, if
implemented, would have an adverse effect on the Company's ability to sell
variable annuities, and, consequently, on its results of operations. However,
the Company would not expect this to materially impact earnings in the near
term because the Company believes that adoption of the administration
proposals, however unlikely, would reduce annuity surrenders on the existing
block of variable annuity contracts and the ongoing earnings potential arising
from that block would offset the near-term economic impact of the potential
decrease in sales.
23
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
EXHIBITS
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
No Current Report on Form 8-K was filed during the three months ended March 31,
1998.
24
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
Date: May 14, 1998 By:/s/ SCOTT L. ROBINSON
- ----------------------- ------------------------
Scott L. Robinson
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/ SCOTT L. ROBINSON Senior Vice President and May 15, 1998
- ------------------------ Director (Principal Financial ------------
Scott L. Robinson Officer)
/s/ N. SCOTT GILLIS Senior Vice President and May 15, 1998
- ------------------------ Controller (Principal ------------
N. Scott Gillis Accounting Officer)
25
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule