AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2005.
FILE NO. 333-67689
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT
NO. 13 ON FORM S-1 TO FORM S-3
UNDER THE SECURITIES ACT OF 1933
--------------------------------
AIG SUNAMERICA LIFE ASSURANCE COMPANY
("AIG SunAmerica Life")
(Exact Name of Registrant as specified in its Charter)
California 6311 86-0198983
(State or other (Primary Standard I.R.S. Employer
jurisdiction of incorporation or Industrial Classification Identification No.
organization) Number)
1 SUNAMERICA CENTER
LOS ANGELES, CALIFORNIA 90067-6022
(800) 871-2000
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
CHRISTINE A. NIXON, ESQ.
AIG SUNAMERICA LIFE ASSURANCE COMPANY
1 SUNAMERICA CENTER
LOS ANGELES, CALIFORNIA 90067-6022
(800) 871-2000
(Name, address, including zip code, and telephone number,
including area code of agent for service)
--------------------------------
Approximate date of commencement of proposed sale to the public: As soon
after the effective date of this Registration Statement as is practicable.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
AIG SUNAMERICA LIFE ASSURANCE COMPANY
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT FIVE
SUPPLEMENT TO THE
SEASONS SELECT VARIABLE ANNUITY
PROSPECTUS DATED AUGUST 2, 2004
- --------------------------------------------------------------------------------
THIS SUPPLEMENT REPLACES ALL PREVIOUS SUPPLEMENTS.
THE DATE OF THE PROSPECTUS HAS BEEN CHANGED TO APRIL 29, 2005.
ALL REFERENCES IN THE PROSPECTUS TO THE DATE OF THE STATEMENT OF ADDITIONAL
INFORMATION ARE HEREBY CHANGED TO APRIL 29, 2005.
THE FOLLOWING REPLACES THE SECTION ENTITLED "TRANSFERS DURING THE ACCUMULATION
PHASE" ON PAGE 15 OF THE PROSPECTUS:
TRANSFERS DURING THE ACCUMULATION PHASE
Subject to our rules, restrictions and policies, during the Accumulation Phase
you may transfer funds between the Variable Portfolios and/or any available
Fixed Account options by telephone or through the Company's website
(http://www.aigsunamerica.com) or in writing by mail or facsimile. All transfer
instructions submitted via facsimile must be sent to (818) 615-1543, otherwise
they will not be considered received by us. We may accept transfers by telephone
or the Internet unless you tell us not to on your contract application. When
receiving instructions over the telephone or the Internet, we follow procedures
we have adopted to provide reasonable assurance that the transactions executed
are genuine. Thus, we are not responsible for any claim, loss or expense from
any error resulting from instructions received over the telephone or the
Internet. If we fail to follow our procedures, we may be liable for any losses
due to unauthorized or fraudulent instructions.
Any transfer request will be priced as of the day it is confirmed in good order
by us if the request is processed before Market Close. If the transfer request
is processed after Market Close, the request will be priced as of the next
business day.
Funds already in your contract cannot be transferred into the DCA Fixed
Accounts. You must transfer at least $500 per transfer. If less than $500
remains in any Variable Portfolio after a transfer, that amount must be
transferred as well.
TRANSFER POLICIES
We do not want to issue this variable annuity contract to contract owners
engaged in trading strategies that seek to benefit from short-term price
fluctuations or price inefficiencies in the Variable Portfolios of this product
("Short-Term Trading") and we discourage Short-Term Trading as more fully
described below. However, we cannot always anticipate if a potential contract
owner intends to engage in Short-Term Trading. Short-Term Trading may create
risks that may result in adverse effects on investment return of an Underlying
Fund. Such risks may include, but are not limited to: (1) interference with the
management and planned investment strategies of an Underlying Fund and/or (2)
increased brokerage and administrative costs due to forced and unplanned fund
turnover; both of which may dilute the value of the shares in the Underlying
Fund and reduce value for all investors in the Variable Portfolio. In addition
to negatively impacting the contract owner, a reduction in contract value may
also be harmful to annuitants and/or beneficiaries.
We have adopted the following administrative procedures to discourage Short-Term
Trading.
We charge for transfers in excess of 15 in any contract year. Currently, the fee
is $25 for each transfer exceeding this limit. Transfers resulting from your
participation in the DCA or Asset Rebalancing programs are not counted towards
the number of free transfers per contract year.
In addition to charging a fee when you exceed 15 transfers as described in the
preceding paragraph, all transfer request in excess of 15 transfers per contract
year must be submitted in writing by United States Postal Service first-class
mail ("U.S. Mail") until your next contract anniversary ("Standard U. S. Mail
Policy"). We will not accept transfer requests sent by any other medium except
U.S. Mail until your next contract anniversary. Transfer requests required to be
submitted by U.S. Mail can only be cancelled by a written request sent by U.S.
Mail with the appropriate paperwork received prior to the execution of the
transfer. All transfers made on the same day prior to Market Close are
considered one transfer request. Transfers resulting from your participation in
the DCA or Asset Rebalancing programs are not included for the purposes of
determining the number of transfers before applying the Standard U.S. Mail
Policy. We apply the Standard U.S. Mail Policy uniformly and consistently to all
contract owners except for omnibus group contracts and contracts utilizing third
party asset allocation services as described below.
We believe that the Standard U. S. Mail Policy is a sufficient deterrent to
Short-Term Trading and we do not conduct any additional routine monitoring.
However, we may become aware of transfer patterns among the Variable Portfolios
and/or available Fixed Accounts which reflect what we consider to be Short-Term
Trading or otherwise detrimental to the Variable Portfolios but have not
triggered the limitations of the Standard U.S. Mail Policy described above. If
such transfer activity cannot be controlled by the Standard U.S. Mail Policy, we
may require you to adhere to our Standard U.S. Mail Policy prior to reaching the
specified number of transfers ("Accelerated U.S. Mail Policy"). To the extent we
become aware of Short-Term Trading activities which cannot be reasonably
controlled by the Standard U.S. Mail Policy or the Accelerated U.S. Mail Policy,
we also reserve the right to evaluate, in our sole discretion, whether to impose
further limits on the number and frequency of transfers you can make, impose
minimum holding periods and/or reject any transfer request or terminate your
transfer privileges. We will notify you in writing if your transfer privileges
are terminated. In addition, we reserve the right to not accept transfers from a
third party acting for you and not to accept preauthorized transfer forms. Some
of the factors we may consider when determining whether to accelerate the
Standard U.S. Mail Policy, reject or impose other conditions on transfer
privileges include:
(1) the number of transfers made in a defined period;
(2) the dollar amount of the transfer;
(3) the total assets of the Variable Portfolio involved in the transfer
and/or transfer requests that represent a significant portion of the
total assets of the Variable Portfolio;
(4) the investment objectives and/or asset classes of the particular Variable
Portfolio involved in your transfers;
(5) whether the transfer appears to be part of a pattern of transfers to take
advantage of short-term market fluctuations or market inefficiencies;
and/or
(6) other activity, as determined by us, that creates an appearance, real or
perceived, of Short-Term Trading.
Notwithstanding the administrative procedures above, there are limitations on
the effectiveness of these procedures. Our ability to detect and/or deter
Short-Term Trading is limited by operational systems and technological
limitations. We cannot guarantee that we will detect and/or deter all Short-Term
Trading. To the extent that we are unable to detect and/or deter Short-Term
Trading, the Variable Portfolios may be negatively impacted as described above.
Additionally, the Variable Portfolios may be harmed by transfer activity related
to other insurance companies and/or retirement plans or other investors that
invest in shares of the Underlying Fund. You should be aware that the design of
our administrative procedures involves inherently subjective decisions, which we
attempt to make in a fair and reasonable manner consistent with the interests of
all owners of this contract. We do not enter into agreements with contract
owners whereby we permit or intentionally disregard Short-Term Trading.
The Standard and Accelerated U.S. Mail Policies are applied uniformly and
consistently to contract owners utilizing third party trading services
performing asset allocation services for a number of contract owners at the same
time except for purposes of calculating the number of transfers for the Standard
U.S. Mail Policy. A calendar year will be used (instead of a contract year) for
these contracts. You should be aware that such third party trading services may
engage in transfer activities that can also be detrimental to the Variable
Portfolios. These transfer activities may not be intended to take advantage of
short-term price fluctuations or price inefficiencies. However, such activities
can create the same or similar risks to Short-Term Trading and negatively impact
the Variable Portfolios as described above.
Omnibus group contracts may invest in the same Underlying Funds available in
your contract but on an aggregate, not individual basis. Thus, we have limited
ability to detect Short-Term Trading in omnibus group contracts and the Standard
U.S. Mail Policy does not apply to these contracts. Our inability to detect
Short-Term Trading may negatively impact the Variable Portfolios as described
above.
WE RESERVE THE RIGHT TO MODIFY THE POLICIES AND PROCEDURES DESCRIBED IN THIS
SECTION AT ANY TIME. To the extent that we exercise this reservation of rights,
we will do so uniformly and consistently unless we disclose otherwise.
For information regarding transfers during the Income Phase, SEE INCOME OPTIONS
BELOW.
THE FOLLOWING REPLACES THE SECTION ENTITLED "PAYMENTS IN CONNECTION WITH
DISTRIBUTION OF THE CONTRACT" ON PAGE 31 OF THE PROSPECTUS:
Payments in Connection with Distribution of the Contract
Registered representatives of broker-dealers sell the contract. We pay
commissions to the broker-dealers for the sale of your contract ("Contract
Commissions"). There are different structures by which a broker-dealer can
choose to have their Contract Commissions paid. For example, as one option, we
may pay upfront Contract Commission only, that may be up to a maximum 8% of each
Purchase Payment you invest (which may include promotional amounts). Another
option may be a lower upfront Contract Commission on each Purchase Payment, with
a trail commission of up to a maximum 1.50% of contract value annually.
Generally, the higher the upfront commissions, the lower the trail and vice
versa. We pay Contract Commissions directly to the broker-dealer with whom your
registered representative is affiliated. Registered representatives may receive
a portion of these amounts we pay in accordance with any agreement in place
between the registered representative and his/her broker-dealer firm.
We may pay broker-dealers support fees in the form of additional cash or
non-cash compensation. These payments may be intended to reimburse for specific
expenses incurred or may be based on sales, certain assets under management,
longevity of assets invested with us or a flat fee. These payments may be
consideration for, among other things, product placement/preference, greater
access to train and educate the firm's registered representatives about our
products, our participation in sales conferences and educational seminars and
allowing broker-dealers to perform due diligence on our products. The amount of
these fees may be tied to the anticipated level of our access in that firm. We
enter into such arrangements in our discretion and we may negotiate customized
arrangements with firms, including affiliated and non-affiliated broker-dealers
based on various factors. We do not deduct these amounts directly from your
Purchase Payments. We anticipate recovering these amounts from the fees and
charges collected under the contract.
Contract commissions and other support fees may influence the way that a
broker-dealer and its registered representatives market the contracts and
service customers who purchase the contracts and may influence the broker-
dealer and its registered representatives to present this contract over others
available in the market place. You should discuss with your broker-dealer and/or
registered representative how they are compensated for sales of a contract
and/or any resulting real or perceived conflicts of interest.
AIG SunAmerica Capital Services, Inc., Harborside Financial Center, 3200 Plaza
5, Jersey City, NJ 07311-4992, distributes the contracts. AIG SunAmerica Capital
Services, an affiliate of AIG SunAmerica Life, is a registered broker-dealer
under the Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. No underwriting fees are paid in connection with the
distribution of the contracts.
PAYMENTS WE RECEIVE
In addition to amounts received pursuant to established 12b-1 Plans from the
Underlying Funds, we receive compensation from the Trust's investment advisor
related to the availability of the Underlying Funds in the contract. Such
amounts received from our affiliate, AIG SAAMCo, are paid pursuant to a profit
sharing agreement and are not expected to exceed 0.50% annually based on assets
under management. Furthermore, AIG SAAMCo and/or certain subadvisers may help
offset the costs we incur for training to support sales of the Underlying Funds
in the contract.
THE FOLLOWING REPLACES THE SECTION ENTITLED "THE GENERAL ACCOUNT" ON PAGE 31 OF
THE PROSPECTUS:
The General Account
Money allocated to any Fixed Account options goes into the Company's general
account. The general account consists of all of the company's assets other than
assets attributable to a Separate Account. All of the assets in the general
account are chargeable with the claims of any of the Company's contract holders
as well as all of its creditors. The general account funds are invested as
permitted under state insurance laws.
The Company has a support agreement in effect between the Company and its
ultimate parent company, American International Group, Inc. ("AIG"), and the
Company's insurance policy obligations are guaranteed by American Home Assurance
Company, a subsidiary of AIG. See the Statement of Additional Information for
more information regarding these arrangements.
THE FOLLOWING REPLACES THE SECTION ENTITLED "LEGAL PROCEEDINGS" ON PAGE 32 OF
THE PROSPECTUS:
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Separate Account. The
Company and its subsidiaries are parties to various kinds of litigation
incidental to their respective business operations. In management's opinion,
these matters are not material in relation to the financial position of the
Company with the exception of the matter disclosed below.
A purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta
Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed
on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair
County, Illinois. The action has been transferred to and is currently pending in
the United States District Court for the District of Maryland, Case No.
04-md-15863, as part of a Multi-District Litigation proceeding. The lawsuit
alleges certain improprieties in conjunction with alleged market timing
activities. The probability of any particular outcome cannot be reasonably
estimated at this time.
AIG has announced that it has delayed filing its Annual Report on Form 10-K for
the year ended December 31, 2004 to allow AIG's Board of Directors and new
management adequate time to complete an extensive review of AIG's books and
records. The review includes issues arising from pending investigations into
non-traditional insurance products and certain assumed reinsurance transactions
by the Office of the Attorney General for the State of New York and the
Securities and Exchange Commission and from AIG's decision to review the
accounting treatment of certain additional items. Circumstances affecting AIG
can have an impact on the Company. For example, the recent downgrades and
ratings actions taken by the major rating agencies with respect to AIG resulted
in corresponding downgrades and ratings actions being taken with respect to the
Company's ratings. Accordingly, we can give no assurance that any further
changes in circumstances for AIG will not impact us.
Date: April 29, 2005
Please keep this Supplement with your Prospectus.
[SEASONS SELECT LOGO]
PROSPECTUS
August 2, 2004
ALLOCATED FIXED AND VARIABLE GROUP ANNUITY
issued by
VARIABLE ANNUITY ACCOUNT FIVE
and
AIG SUNAMERICA LIFE ASSURANCE COMPANY
The annuity contract has several investment choices -- fixed investment options
which offer interest rates guaranteed by AIG SunAmerica Life for different
periods of time, and Variable Portfolios:
<Table>
SELECT PORTFOLIOS FOCUSED PORTFOLIO SEASONS STRATEGIES
LARGE CAP GROWTH FOCUS GROWTH GROWTH
LARGE CAP COMPOSITE MODERATE GROWTH
LARGE CAP VALUE BALANCED GROWTH
MID CAP GROWTH CONSERVATIVE GROWTH
MID CAP VALUE
SMALL CAP
INTERNATIONAL EQUITY
DIVERSIFIED FIXED INCOME
CASH MANAGEMENT
</Table>
all of which invest in the underlying portfolios of
SEASONS SERIES TRUST
which is managed by:
<Table>
SELECT PORTFOLIOS FOCUSED PORTFOLIOS SEASONS STRATEGIES
AIG GLOBAL INVESTMENT CORP. FRED ALGER MANAGEMENT INC. JANUS CAPITAL MANAGEMENT LLC.
AIG SUNAMERICA ASSET MANAGEMENT CORP. MARSICO CAPITAL MANAGEMENT, LLC. AIG SUNAMERICA ASSET MANAGEMENT CORP.
GOLDMAN SACHS ASSET MANAGEMENT, L.P. SALOMON BROTHERS ASSET MANAGEMENT INC PUTNAM INVESTMENT MANAGEMENT, L.L.C.
GOLDMAN SACHS MANAGEMENT INTERNATIONAL T. ROWE PRICE ASSOCIATES, INC.
JANUS CAPITAL MANAGEMENT LLC WELLINGTON MANAGEMENT COMPANY, LLP
LORD, ABBETT & CO. LLC.
T. ROWE PRICE ASSOCIATES, INC.
WELLINGTON MANAGEMENT COMPANY, LLP
</Table>
You can put your money into any one or all of the Variable Portfolios and/or
available fixed investment options.
Please read this prospectus carefully before investing and keep it for your
future reference. It contains important information you should know about the
Seasons Select Variable Annuity.
To learn more about the annuity offered by this prospectus, you can obtain a
copy of the Statement of Additional Information ("SAI") dated August 2, 2004.
The SAI has been filed with the Securities and Exchange Commission ("SEC") and
can be considered part of this prospectus.
The table of contents of the SAI appears below in this prospectus. For a free
copy of the SAI, call us at 800/445-SUN2 or write Our Annuity Service Center at,
P.O. Box 54299, Los Angeles, California 90054-0299.
A registration statement has been filed with the SEC under the Securities Act of
1933 relating to the contract. This prospectus does not contain all the
information in the registration statement as permitted by SEC regulations. The
omitted information can be obtained from the SEC's principal office in
Washington, D.C., upon payment of a prescribed fee.
In addition, the SEC maintains a website (http://www.sec.gov) that contains the
SAI, materials incorporated by reference and other information filed
electronically with the SEC.
ANNUITIES INVOLVE RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, AND ARE NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<Table>
GLOSSARY.................................................... 3
HIGHLIGHTS.................................................. 4
FEE TABLES.................................................. 5
Maximum Owner Transaction Expenses...................... 5
Transfer Fee............................................ 5
Contract Maintenance Fee................................ 5
Separate Account Annual Expenses........................ 5
Optional Income Protector Fee........................... 5
Portfolio Expenses...................................... 5
EXAMPLES.................................................... 6
THE SEASONS SELECT VARIABLE ANNUITY......................... 7
PURCHASING A SEASONS SELECT VARIABLE ANNUITY................ 8
Allocation of Purchase Payments......................... 8
Accumulation Units...................................... 9
Free Look............................................... 9
Exchange Offers......................................... 9
INVESTMENT OPTIONS.......................................... 9
Variable Portfolios..................................... 10
Select and Focused Portfolios......................... 10
Portfolio Operation................................... 10
Seasons Strategies.................................... 11
Seasons Strategy Rebalancing Program.................. 11
Fixed Investment Options................................ 13
Dollar Cost Averaging Fixed Accounts.................... 13
Transfers During the Accumulation Phase................. 14
Dollar Cost Averaging Program........................... 15
Return Plus Program..................................... 16
Voting Rights........................................... 16
Substitution............................................ 16
ACCESS TO YOUR MONEY........................................ 16
Free Withdrawal Provision............................... 17
Systematic Withdrawal Program........................... 18
Minimum Contract Value.................................. 18
Qualified Contract Owners............................... 18
DEATH BENEFIT............................................... 18
Death of the Annuitant.................................. 19
Extended Legacy Program and Beneficiary Continuation
Option................................................. 19
EXPENSES.................................................... 20
Separate Account Charges................................ 20
Withdrawal Charges...................................... 20
Investment Charges...................................... 21
Contract Maintenance Fee................................ 21
Transfer Fee............................................ 21
Optional Income Protector Fee........................... 21
Premium Tax............................................. 21
Income Taxes............................................ 21
Reduction or Elimination of Charges and Expenses, and
Additional Amounts Credited............................ 21
INCOME OPTIONS.............................................. 22
Annuity Date............................................ 22
Income Options.......................................... 22
Allocation of Annuity Payments.......................... 23
Transfers During the Income Phase....................... 24
Deferment of Payments................................... 24
The Optional Income Protector Program................... 24
TAXES....................................................... 26
Annuity Contracts in General............................ 26
Tax Treatment of Distributions--Non-Qualified
Contracts.............................................. 27
Tax Treatment of Distributions--Qualified Contracts..... 27
Minimum Distributions................................... 27
Tax Treatment of Death Benefits......................... 28
Contracts Owned by a Trust or Corporation............... 28
Gifts, Pledges and/or Assignments of a Non-Qualified
Contract............................................... 29
Diversification and Investor Control.................... 29
PERFORMANCE................................................. 29
OTHER INFORMATION........................................... 30
The Separate Account.................................... 30
The General Account..................................... 30
Payments in Connection with Distribution of the
Contract............................................... 30
Administration.......................................... 31
Legal Proceedings....................................... 31
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.... F-56
APPENDIX A--CONDENSED FINANCIAL INFORMATION................. A-1
APPENDIX B--MARKET VALUE ADJUSTMENT......................... B-1
</Table>
2
GLOSSARY
We have capitalized some of the technical terms used in this prospectus. To help
you understand these terms, we define them in this glossary.
ACCUMULATION PHASE--The period during which you invest money in your contract.
ACCUMULATION UNITS--A measurement we use to calculate the value of the variable
portion of your contract during the Accumulation Phase.
ANNUITANT(S)--The person(s) on whose life (lives) we base annuity payments.
ANNUITY DATE--The date on which annuity payments are to begin, as selected by
you.
ANNUITY UNITS--A measurement we use to calculate the amount of annuity payments
you receive from the variable portion of your contract during the Income Phase.
BENEFICIARY(IES)--The person(s) designated to receive any benefits under the
contract if you or the Annuitant dies.
COMPANY--AIG SunAmerica Life Assurance Company ("AIG SunAmerica Life"), we, us,
the issuer of this annuity contract. Only "AIG SunAmerica Life" is a capitalized
term in the prospectus.
INCOME PHASE--The period during which we make annuity payments to you.
IRS--The Internal Revenue Service.
LATEST ANNUITY DATE--Your 90(th) birthday or 10(th) anniversary, whichever is
later.
NON-QUALIFIED (CONTRACT)--A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account ("IRA").
PURCHASE PAYMENTS--The money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it.
QUALIFIED (CONTRACT)--A contract purchased with pretax dollars. These contracts
are generally purchased under a pension plan, specially sponsored program or
individual retirement account ("IRA").
VARIABLE PORTFOLIO(S)--Refers collectively to the Select Portfolios, Focused
Portfolios and/or Seasons Strategies. The underlying investment portfolios may
be referred to as Underlying Funds.
3
AIG SUNAMERICA LIFE OFFERS SEVERAL DIFFERENT VARIABLE ANNUITY PRODUCTS TO MEET
THE DIVERSE NEEDS OF OUR INVESTORS. EACH PRODUCT MAY PROVIDE DIFFERENT FEATURES
AND BENEFITS AND CORRESPONDINGLY DIFFERENT FEES, CHARGES AND EXPENSES. WHEN
WORKING WITH YOUR FINANCIAL ADVISOR TO DETERMINE THE BEST PRODUCT TO MEET YOUR
NEEDS YOU SHOULD CONSIDER, AMONG OTHER THINGS, WHETHER THE FEATURES OF THIS
CONTRACT AND THE RELATED FEES PROVIDE THE MOST APPROPRIATE PACKAGE TO HELP MEET
YOUR LONG-TERM RETIREMENT SAVINGS GOALS.
HIGHLIGHTS
- --------------------------------------------------------------------------------
The Seasons Select Variable Annuity is a contract between you and AIG SunAmerica
Life Assurance Company ("AIG SunAmerica Life"). It is designed to help you
invest on a tax-deferred basis and meet long-term financial goals. There are
minimum Purchase Payment amounts required to purchase a contract. Purchase
payments may be invested in the Select Portfolios, Focused Portfolios and/or
pre-allocated Seasons Strategies ("Variable Portfolios") and available fixed
account options. Like all deferred annuities, the contract has an Accumulation
Phase and an Income Phase. During the Accumulation Phase, you invest money in
your contract. The Income Phase begins when you start receiving income payments
from your annuity to provide for your retirement.
FREE LOOK: If you cancel your contract within 10 days after receiving it (or
whatever period is required in your state), we will cancel the contract without
charging a withdrawal charge. You will receive whatever your contract is worth
on the day that we receive your request. This amount may be more or less than
your original Purchase Payment. We will return your original Purchase Payment if
required by law. Please see PURCHASING A SEASONS SELECT VARIABLE ANNUITY in the
prospectus.
EXPENSES: There are fees and charges associated with the contract. Each year, we
deduct a $35 contract maintenance fee from your contract, which is currently
waived for contracts of $50,000 or more. We also deduct separate account
charges, which equal 1.40% (1.52% if you are age 81 or older at the time of
contract issue) annually of the average daily value of your contract allocated
to the Variable Portfolios. There are investment charges on amounts invested in
the Variable Portfolios. If you elect optional features under the contract we
may charge additional fees for these features. A separate withdrawal charge
schedule applies to each Purchase Payment. The amount of the withdrawal charge
declines over time. After a Purchase Payment has been in the contract for nine
complete years, withdrawal charges no longer apply to that portion of the
Purchase Payment. Please see the FEE TABLE, PURCHASING A SEASONS SELECT VARIABLE
ANNUITY and EXPENSES in the prospectus.
ACCESS TO YOUR MONEY: You may withdraw money from your contract during the
Accumulation Phase. If you do so, earnings are deemed to be withdrawn first. You
will pay income taxes on earnings and untaxed contributions when you withdraw
them. Payments received during the Income Phase are considered partly a return
of your original investment. A federal tax penalty may apply if you make
withdrawals before age 59 1/2. As noted above, a withdrawal charge may apply.
Please see ACCESS TO YOUR MONEY and TAXES in the prospectus.
DEATH BENEFIT: A death benefit feature is available under the contract to
protect your Beneficiaries in the event of your death during the Accumulation
Phase. Please see DEATH BENEFITS in the prospectus.
INCOME OPTIONS: When you are ready to begin taking income, you can choose to
receive income payments on a variable basis, fixed basis or a combination of
both. You may also chose from five different income options, including an option
for income that you cannot outlive. Please see INCOME OPTIONS in the prospectus.
INQUIRIES: If you have questions about your contract call your financial
representative or contact us at AIG SunAmerica Life Assurance Company Annuity
Service Center P.O. Box 54299 Los Angeles, California 90054-0299. Telephone
Number: (800) 445-SUN2.
PLEASE READ THE PROSPECTUS CAREFULLY FOR MORE DETAILED INFORMATION REGARDING
THESE AND OTHER FEATURES AND BENEFITS OF THE CONTRACT, AS WELL AS THE RISKS OF
INVESTING.
4
FEE TABLES
- --------------------------------------------------------------------------------
THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT
YOU TRANSFER CASH VALUE BETWEEN INVESTMENT OPTIONS OR SURRENDER THE CONTRACT. IF
APPLICABLE, YOU MAY ALSO BE SUBJECT TO STATE PREMIUM TAXES.
MAXIMUM OWNER TRANSACTION EXPENSES
<Table>
Maximum Withdrawal Charges
(as a percentage of each Purchase Payment)(1)... 9%
</Table>
TRANSFER FEE
No charge for the first 15 transfers each contract year; thereafter, the fee is
$25 ($10 in Pennsylvania and Texas) per transfer.
THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY PERIODICALLY
DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING UNDERLYING PORTFOLIO
FEES AND EXPENSES, WHICH ARE OUTLINED IN THE NEXT SECTION.
CONTRACT MAINTENANCE FEE
$35 ($30 in North Dakota) which is currently waived if contract value $50,000 or
more.
SEPARATE ACCOUNT ANNUAL EXPENSES
(deducted daily as a percentage of your average daily net asset value)
<Table>
If age 81 or older at contract issue:
Mortality and Expense Risk Fees.............. 1.37%
Distribution Expense Charge.................. 0.15%
-----
Total Separate Account Annual Expenses....... 1.52%
If age 80 or younger at contract issue:
Mortality and Expense Risk Fees.............. 1.25%
Distribution Expense Charge.................. 0.15%
-----
Total Separate Account Annual Expenses....... 1.40%
</Table>
- ---------------
<Table>
FOOTNOTES TO THE FEE TABLES:
(1) Withdrawal Charge Schedule
(as a percentage of each Purchase Payment) declines over 9 years
Years:.............. 1 2 3 4 5 6 7 8 9 10+
9% 8% 7% 6% 6% 5% 4% 3% 2% 0%
</Table>
OPTIONAL INCOME PROTECTOR FEE
<Table>
Annual Fee as a % of your Income Benefit
Base......................................... 0.10%
</Table>
The Income Protector is optional and if elected, the fee is deducted annually
from your contract value. The Income Benefit Base which is described more fully
in the prospectus is generally calculated by using your contract value on the
date of your effective enrollment in the program and then each subsequent
contract anniversary, adding Purchase Payments made since the prior contract
anniversary, less proportional withdrawals, and fees and charges applicable to
those withdrawals.
THE FOLLOWING SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED BY
THE UNDERLYING PORTFOLIO OF THE TRUST BEFORE ANY WAIVER OR REIMBURSEMENTS THAT
YOU MAY PAY PERIODICALLY DURING THE TIME YOU OWN THE CONTRACT. MORE DETAIL
CONCERNING THE TRUST'S FEES AND EXPENSES IS CONTAINED IN THE ATTACHED TRUST
PROSPECTUS. PLEASE READ IT CAREFULLY BEFORE INVESTING.
PORTFOLIO EXPENSES
<Table>
<Caption>
TOTAL ANNUAL TRUST OPERATING EXPENSES MINIMUM MAXIMUM
- ------------------------------------- ------- -------
(expenses that are deducted from
underlying portfolios of the Trust,
including management fees, other
expenses and 12b-1 fees, if
applicable)....................... 0.77% 1.60%
</Table>
5
MAXIMUM AND MINIMUM EXPENSE EXAMPLES
- --------------------------------------------------------------------------------
These Examples are intended to help you compare the cost of investing in the
contract with the cost of investing in other variable annuity contracts. These
costs include owner transaction expenses, contract maintenance fees, separate
account annual expense, fees for optional features and expenses for the
underlying portfolios of the Trust.
The Examples assume that you invest $10,000 in the contract for the time periods
indicated; that your investment has a 5% return each year; and that the maximum
and minimum fees and expenses of the underlying portfolios of the Trust are
reflected. Although your actual costs may be higher or lower, based on these
assumptions, your costs at the end of the stated period would be:
MAXIMUM EXPENSE EXAMPLES
(assuming maximum separate account annual expenses of 1.52%, and investment in
an underlying portfolio with total expenses of 1.60%)
(1) If you surrender your contract at the end of the applicable time period and
you elect the optional Income Protector feature with the following charge
(0.10%):
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$1,230 $1,707 $2,307 $3,567
</Table>
(2) If you annuitize your contract at the end of the applicable time period:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$315 $963 $1,635 $3,430
</Table>
(3) If you do not surrender your contract and you elect the optional Income
Protector feature with the following charge (0.10%):
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$330 $1,007 $1,707 $3,567
</Table>
MINIMUM EXPENSE EXAMPLES
(assuming minimum separate account annual expenses of 1.40% and investment in an
underlying portfolio with total expenses of 0.77%)
(1) If you surrender your contract at the end of the applicable time period and
you do not elect the optional Income Protector feature:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$1,125 $1,394 $1,790 $2,554
</Table>
(2) If you annuitize your contract at the end of the applicable time period:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$220 $679 $1,164 $2,503
</Table>
(3) If you do not surrender your contract and you do not elect the optional
Income Protector feature:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$225 $694 $1,190 $2,554
</Table>
EXPLANATION OF FEE TABLES AND EXAMPLES
1. The purpose of the Fee Tables is to show you the various expenses you will
incur directly and indirectly by investing in the contract. We converted the
contract administration fee to a percentage (0.05%). The actual impact of the
administration charge may differ from this percentage and is currently waived
for contract values over $50,000. Additional information on the portfolio
company fees can be found in the Trust prospectus located behind this
prospectus.
2. In addition to the stated assumptions, the Examples assume separate account
expenses as indicated and that no transfer fees were imposed. Although
premium taxes may apply in certain states, they are not reflected in the
Examples.
3. Examples reflecting application of the optional feature use the highest fees
and charges being offered for this feature.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Condensed financials appear in Appendix A of this prospectus.
6
THE SEASONS SELECT VARIABLE ANNUITY
- --------------------------------------------------------------------------------
An annuity is a contract between you and an insurance company. You are the owner
of the contract. The contract provides three main benefits:
- Tax Deferral: This means that you do not pay taxes on your earnings from
the annuity until you withdraw them.
- Death Benefit: If you die during the Accumulation Phase, the insurance
company pays a death benefit to your Beneficiary.
- Guaranteed Income: If elected, you receive a stream of income for your
lifetime, or another available period you select.
Tax-qualified retirement plans (e.g., IRAs, 401(k) or 403(b) plans) defer
payment of taxes on earnings until withdrawal. If you are considering funding a
tax-qualified retirement plan with an annuity, you should know that an annuity
does not provide any additional tax deferral treatment of earnings beyond the
treatment provided by the tax-qualified retirement plan itself. However,
annuities do provide other features and benefits which may be valuable to you.
You should fully discuss this decision with your financial representative.
This annuity was developed to help you contribute to your retirement savings.
This annuity works in two stages, the Accumulation Phase and the Income Phase.
Your contract is in the Accumulation Phase during the period when you make
payments into the contract. The Income Phase begins when you request Us to start
making payments to you out of the money accumulated in your contract.
The Contract is called a "variable" annuity because it allows you to invest in
variable investment portfolios. The Variable Portfolios have specific investment
objectives and their performance varies. You can gain or lose money if you
invest in these Variable Portfolios. The amount of money you accumulate in your
contract depends on the performance of the Variable Portfolios in which you
invest.
The Contract may also offer several fixed account options for varying time
periods. Fixed account options earn interest at a rate set and guaranteed by AIG
SunAmerica Life. If available and you allocate money to the fixed account
options, the amount of money that accumulates in your Contract depends on the
total interest credited to the particular fixed account option(s) in which you
are invested.
For more information on Variable Portfolios and fixed account options available
under this contract, SEE INVESTMENT OPTIONS BELOW.
AIG SunAmerica Life issues the Seasons Select Variable Annuity. When you
purchase a Seasons Select Variable Annuity, a contract exists between you and
AIG SunAmerica Life. The Company is a stock life insurance company organized
under the laws of the state of Arizona. Its principal place of business is 1
SunAmerica Center, Los Angeles, California 90067. The Company conducts life
insurance and annuity business in the District of Columbia and all states except
New York. AIG SunAmerica Life is an indirect, wholly owned subsidiary of
American International Group, Inc., a Delaware corporation. Seasons Select may
not currently be available in all states. Please check with your financial
representative regarding availability in your state.
This annuity is designed for investors whose personal circumstances allow for a
long-term investment time horizon, to assist in contributing to retirement
savings. As a function of the federal tax code you may be assessed a 10% federal
tax penalty on any withdrawal made prior to your reaching age 59 1/2.
Additionally, this contract provides that you will be charged a withdrawal
charge on each Purchase Payment withdrawn if that Purchase Payment has not been
invested in this contract for at least 9 years. Because of these potential
penalties, you should fully discuss all of the benefits and risks of this
contract with your financial representative prior to purchase.
7
PURCHASING A SEASONS SELECT VARIABLE ANNUITY
- --------------------------------------------------------------------------------
An initial Purchase Payment is the money you give us to buy a contract. Any
additional money you give us to invest in the contract after purchase is a
subsequent Purchase Payment.
This chart shows the minimum initial and subsequent Purchase Payments permitted
under your contract. These amounts depend upon whether a contract is Qualified
or Non-Qualified for tax purposes.
<Table>
<Caption>
MINIMUM MINIMUM SUBSEQUENT
MINIMUM INITIAL SUBSEQUENT PURCHASE PAYMENT--
PURCHASE PAYMENT PURCHASE PAYMENT AUTOMATIC PAYMENT PLAN
---------------- ---------------- ----------------------
Qualified $2,000 $500 $50
Non-Qualified $5,000 $500 $50
</Table>
We reserve the right to require Company approval prior to accepting Purchase
Payments greater than $1,000,000. Subsequent Purchase Payments that would cause
total Purchase Payments in all contracts issued by the Company and First
SunAmerica Life Insurance Company, an affiliate of the Company, to the same
owner to exceed these limits may also be subject to company pre-approval. For
any contracts subject to these dollar amount reservations, we further reserve
the right to limit the death benefit amount payable in excess of contract value
at the time we receive all required paperwork and satisfactory proof of death.
Any limit on the maximum death benefit payable would be mutually agreed upon by
you and the Company prior to purchasing the contract. We reserve the right to
change the amount at which pre-approval is required, at anytime.
Once you have contributed at least the minimum initial Purchase Payment, you can
establish an optional automatic payment plan that allows you to make subsequent
Purchase Payments of as little as $50.
In addition, we may not issue a contract to anyone age 91 or older. In general,
we will not issue a Qualified contract to anyone who is age 70 1/2 or older,
unless they certify to us that the minimum distribution required by the federal
tax code is being made.
We allow spouses to jointly own this contract. However the age of the older
spouse is used to determine the availability of any age driven benefits. The
addition of a joint owner after the contract has been issued is contingent upon
prior review and approval by the Company. If we learn a misstatement of age, we
reserve the right to fully pursue our remedies including termination of the
contract and/or revocation of any age-driven benefit.
You may assign this contract before beginning the Income Phase by sending us a
written request for an assignment. Your rights and those of any other person
with rights under this contract will be subject to the assignment. WE RESERVE
THE RIGHT TO NOT RECOGNIZE ASSIGNMENTS IF IT CHANGES THE RISK PROFILE OF THE
OWNER OF THE CONTRACT, AS DETERMINED IN OUR SOLE DISCRETION. Please see the
Statements of Additional Information for details on the tax consequences of an
assignment.
This contract is no longer available for purchase by new policyowners.
ALLOCATION OF PURCHASE PAYMENTS
We invest your Purchase Payments in the available fixed accounts and Variable
Portfolios according to your instructions. If we receive a Purchase Payment
without allocation instructions, we will invest the money according to your last
allocation instructions. Purchase Payments are applied to your contract based
upon the value of the variable investment option next determined after receipt
of your money. SEE INVESTMENT OPTIONS BELOW.
In order to issue your contract, We must receive your completed application,
Purchase Payment allocation instructions and any other required paper work at
our Annuity Service Center. We allocate your initial purchase payment within two
days of receiving it. If we do not have complete information necessary to issue
your contract, we will contact you or your financial advisor. If we do not have
the information necessary to issue your contract within 5 business days we will:
- Send your money back to you; or
- Ask your permission to keep your money until we get the information
necessary to issue the contract.
8
ACCUMULATION UNITS
The value of the variable portion of your contract will go up or down depending
upon the investment performance of the Variable Portfolios you select. In order
to keep track of the value of your contract, we use a unit of measure called an
Accumulation Unit. During the Income Phase, we call them Annuity Units.
An Accumulation Unit value is determined each day that the New York Stock
Exchange ("NYSE") is open. We calculate an Accumulation Unit for each Variable
Portfolio after the NYSE closes each day. We base the number of units you
receive on the unit value of the variable investment option as of the date we
receive your money, if we receive it before 1:00 p.m. Pacific Time ("PT") and on
the next day's unit value if we receive your money after 1:00 p.m. PT. We do
this by:
1. determining the total value of money invested in a particular Variable
Portfolio;
2. subtracting from that amount any asset-based charges and any other
charges such as taxes we have deducted; and
3. dividing this amount by the number of outstanding Accumulation Units.
EXAMPLE:
We receive a $25,000 Purchase Payment from you on Wednesday. You allocate the
money to the Focus Growth Portfolio. We determine that the value of an
Accumulation Unit for the Focus Growth Portfolio is $11.10 when the NYSE closes
on Wednesday. We then divide $25,000 by $11.10 and credit your contract on
Wednesday night with 2,252.2523 Accumulation Units for the Focus Growth
Portfolio.
FREE LOOK
You may cancel your contract within ten days after receiving it (or longer if
required by state law). We call this a "free look." To cancel, you must mail the
contract along with your free look request to Our Annuity Service Center at P.O.
Box 54299, Los Angeles, California 90054-0299. Unless otherwise required by
state law, you will receive back the value of the money allocated to the
Variable Portfolios on the day we receive your request plus any Purchase Payment
in the fixed investment options. This value may be more or less than the money
you initially invested. Thus, the investment risk is borne by you during the
free look period.
Certain states require us to return your Purchase Payments upon a free look
request. Additionally, all contracts issued as an IRA require the full return of
Purchase Payments upon a free look. With respect to those contracts, we reserve
the right to put your money in the 1-year fixed investment option during the
free look period. If you cancel your contract during the free look period, we
return the greater of (1) your Purchase Payments, or (2) the value of your
contract. At the end of the free look period, we reallocate your money according
to your instructions.
EXCHANGE OFFERS
From time to time, we may offer to allow you to exchange an older variable
annuity issued by AIG SunAmerica Life or one of its affiliates, for a newer
product with more current features and benefits, also issued by AIG SunAmerica
Life or one of its affiliates. Such and exchange offer will be made in
accordance with the applicable state and federal securities and insurance rules
and regulations. We will explain the specific terms and conditions of any such
exchange offer at the time the offer is made.
INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
The contract offers Variable Portfolios, and fixed investment options. We
designed the contract to meet your varying investment needs over time. You can
achieve this by using the Variable Portfolios alone or in concert with the fixed
investment options. The Variable Portfolios are only available through the
purchase of certain insurance contracts. A mixture of your investment in the
Variable Portfolios and fixed account options may lower the risk associated with
investing only in a variable investment option.
9
VARIABLE PORTFOLIOS
Each of the variable investment options of the contract invests in underlying
portfolios of Seasons Series Trust. AIG SunAmerica Asset Management Corp. ("AIG
SAAMCo"), an affiliate of AIG SunAmerica Life, manages Seasons Series Trust. AIG
SAAMCo has engaged sub-advisers to provide investment advice for certain of the
underlying investment portfolios.
YOU SHOULD READ THE PROSPECTUS FOR THE SEASONS SERIES TRUST CAREFULLY BEFORE
INVESTING. THE TRUST PROSPECTUS WHICH IS ATTACHED HERETO CONTAINS DETAILED
INFORMATION ABOUT THE UNDERLYING INVESTMENT PORTFOLIOS INCLUDING INVESTMENT
OBJECTIVE AND RISK FACTORS.
SELECT AND FOCUSED PORTFOLIOS
The contract offers Select Portfolios, each with a distinct investment
objective, utilizing a disciplined investing style to achieve its objective.
Each Select Portfolio invests in an underlying investment portfolio of the
Seasons Series Trust. Except for the Cash Management portfolio, each underlying
portfolio is multi-managed by a team of three money managers, one component of
the underlying portfolios is an unmanaged component that tracks a particular
target index or subset of an index. The other two components are actively
managed. The unmanaged component of each underlying portfolio is intended to
balance some of the risks associated with an actively traded portfolio.
The contract also currently offers one Focused Portfolio. Each multi-managed
Focused Portfolio offers you at least three different professional managers, and
each of which advises a separate portion of the Focused Portfolio. Each manager
actively selects a limited number of stocks that represent their best ideas.
This approach to investing results in a more concentrated portfolio, which will
be less diversified than the Select Portfolios, and may be subject to greater
market risks.
Each underlying Select and Focused Portfolio and the respective managers are:
<Table>
<Caption>
SELECT PORTFOLIOS FOCUSED PORTFOLIOS
LARGE CAP GROWTH MID CAP GROWTH INTERNATIONAL EQUITY FOCUS GROWTH
AIG Global Investment Corp. AIG Global Investment Corp. AIG Global Investment Corp. Fred Alger
Goldman Sachs Asset Management T. Rowe Price Associates, Inc. Goldman Sachs Asset Management Management Inc.
L.P. Wellington Management Company, International Marsico Capital
Janus Capital Management LLC LLP Lord, Abbett & Co. Management, LLC
Solomon Brothers
LARGE CAP COMPOSITE MID CAP VALUE DIVERSIFIED FIXED INCOME Asset Management
AIG Global Investment Corp. AIG Global Investment Corp. AIG Global Investment Corp. Inc
AIG SAAMCo Goldman Sachs Asset Management AIG SAAMCo
T. Rowe Price Associates, Inc. L.P. Wellington Management Company,
Lord, Abbett & Co. LLC. LLP
LARGE CAP VALUE
AIG Global Investment Corp. SMALL CAP CASH MANAGEMENT
T. Rowe Price Associates, Inc. AIG Global Investment Corp. AIG SAAMCo
Wellington Management Company, AIG SAAMCo
LLP Lord Abbett & Co. LLC.
</Table>
PORTFOLIO OPERATION
Each Select and Focused Portfolio is designed to meet a distinct investment
objective facilitated by the management philosophy of three different money
managers (except for the Cash Management portfolio). Generally, an equal portion
of the Purchase Payments received for allocation to each PORTFOLIO will be
allocated among the three managers for that PORTFOLIO. Each quarter AIG SAAMCo
will evaluate the asset allocation between the three managers of each PORTFOLIO.
If AIG SAAMCo determines that the assets have become significantly unequal in
allocation among the managers, then the in-coming cash flows may be redirected
in an attempt to stabilize the allocations. Generally, existing PORTFOLIO assets
will not be rebalanced. However, We reserve the right to do so in the event that
it is deemed necessary and not adverse to the interests of contract
10
owners invested in the PORTFOLIO. Transfers made as a result of rebalancing a
PORTFOLIO are not considered a transfer under your contract.
SEASONS STRATEGIES
The contract offers multi-manager variable investment Seasons Strategies, each
with a different investment objective. We designed the Seasons Strategies
utilizing an asset allocation approach to meet your investment needs over time,
considering factors such as your age, goals and risk tolerance. However, each
Seasons Strategy is designed to achieve different levels of growth over time.
Each Seasons Strategy invests in three underlying investment portfolios of the
Seasons Series Trust. The allocation of money among these investment portfolios
varies depending on the objective of the Seasons Strategy.
The underlying investment portfolios of Seasons Series Trust in which the
Seasons Strategies invest include the Asset Allocation: Diversified Growth
Portfolio, the Stock Portfolio and the Multi-Managed Growth, Multi-Managed
Moderate Growth, Multi-Managed Income/Equity and Multi-Managed Income Portfolios
(the "Multi-Managed Portfolios").
The Asset Allocation: Diversified Growth Portfolio is managed by Putnam
Investment Management, Inc. The Stock Portfolio is managed by T. Rowe Price
Associates, Inc. All of the Multi-Managed Portfolios include the same three
basic investment components: a growth component managed by Janus Capital
Management LLC., a balanced component managed by AIG SunAmerica Asset Management
Corp. and a fixed income component managed by Wellington Management Company,
LLP. The Growth Seasons Strategy and the Moderate Growth Seasons Strategy also
have an aggressive growth component which AIG SunAmerica Asset Management Corp.
manages. The percentage that any one of these components represents in each
Multi-Managed Portfolio varies in accordance with the investment objective.
Each Seasons Strategy uses an investment approach based on asset allocation.
This approach is achieved by each Seasons Strategy investing in distinct
percentages in three specific underlying funds of the Seasons Series Trust. In
turn, the underlying funds invest in a combination of domestic and international
stocks, bonds and cash. Based on the percentage allocation to each specific
underlying fund and each underlying fund's investment approach, each Seasons
Strategy initially has a neutral asset allocation mix of stocks, bonds and cash.
SEASONS STRATEGY REBALANCING PROGRAM
Each Seasons Strategy is designed to meet its investment objective by allocating
a portion of your money to three different investment portfolios. At the
beginning of each quarter a rebalancing occurs among the underlying funds to
realign each Seasons Strategy with its distinct percentage investment in the
three underlying funds. This rebalancing is designed to help maintain the
neutral asset allocation mix for each Seasons Strategy. The pie charts on the
following pages demonstrate:
- the neutral asset allocation mix for each Seasons Strategy; and
- the percentage allocation in which each Seasons Strategy invests.
On the first business day of each quarter (or as close to such date as is
administratively practicable) your money will be allocated among the various
investment portfolios according to the percentages set forth on the following
pages. Additionally, within each Multi-Managed Portfolio, your money will be
rebalanced among the various components. We also reserve the right to rebalance
any Seasons Strategy more frequently if rebalancing is, deemed necessary and not
adverse to the interests of contract owners invested in such Seasons Strategy.
Rebalancing a Seasons Strategy may involve shifting a portion of assets out of
underlying investment portfolios with higher returns into underlying investment
portfolios with relatively lower returns.
11
<Table>
GROWTH STRATEGY MODERATE GROWTH STRATEGY
GOAL: Long-term growth of capital, allocating its GOAL: Growth of capital through investments in equities,
assets primarily to stocks. This Strategy may be best with a secondary objective of conservation of principal by
suited for those with longer periods to invest. allocating more of its assets to bonds than the Growth
Strategy. This Strategy may be best suited for those nearing
Target Asset Allocation: retirement years but still earning income.
Stocks 80% Bonds 15% Cash Target Asset Allocation:
5%
Stocks 70% Bonds 25% Cash
[GROWTH CHART] 5%
[BALANCED GROWTH CHART]
</Table>
<Table>
BALANCED GROWTH STRATEGY CONSERVATIVE GROWTH STRATEGY
GOAL: Focuses on conservation of principal by GOAL: Capital preservation while maintaining some
investing in a more balanced weighting of stocks and potential for growth over the long term. This Strategy may
bonds, with a secondary objective of seeking a high total be best suited for those with lower investment risk
return. This Strategy may be best suited for those tolerance.
approaching retirement and with less tolerance for
investment risk. Target Asset Allocation:
Target Asset Allocation: Stocks 42% Bonds 53% Cash
5%
Stocks 55% Bonds 40% Cash
5% [CONSERVATIVE GROWTH CHART]
Bonds 53% Cash 5% Stocks 42%
[MODERATE GROWTH CHART]
Bonds 25% Cash 5% Stocks 70%
</Table>
12
FIXED INVESTMENT OPTIONS
Your contract may offer Fixed Account Guarantee Periods ("FAGP") to which you
may allocate certain Purchase Payments or contract value. Available guarantee
periods may be for different lengths of time (such as 1, 3 or 5 years) and may
have different guaranteed interest rates, as noted below. We guarantee the
interest rate credited to amounts allocated to any available FAGP and that the
rate will never be less than the minimum guaranteed interest rate as specified
in your contract. Once established, the rates for specified payments do not
change during the guarantee period. We determine the FAGPs offered at any time
in our sole discretion and we reserve the right to change the FAGPs that we make
available at any time, unless state law requires us to do otherwise. Please
check with your financial representative to learn if any FAGPs are currently
offered.
There are three interest rate scenarios for money allocated to the FAGPs. Each
of these rates may differ from one another. Once declared, the applicable rate
is guaranteed until the corresponding guarantee period expires. Under each
scenario your money may be credited a different rate of interest as follows:
- INITIAL RATE: The rate credited to any portion of the initial Purchase
Payment allocated to a FAGP.
- CURRENT RATE: The rate credited to any portion of the subsequent Purchase
Payments allocated to a FAGP.
- RENEWAL RATE: The rate credited to money transferred from a FAGP or a
Variable Portfolio into a FAGP and to money remaining in a FAGP after
expiration of a guarantee period.
When a FAGP ends, you may leave your money in the same FAGP or you may
reallocate your money to another FAGP or to the Variable Portfolios. If you want
to reallocate your money, you must contact us within 30 days after the end of
the current interest guarantee period and instruct us as to where you would like
the money invested. WE DO NOT CONTACT YOU. IF WE DO NOT HEAR FROM YOU, YOUR
MONEY WILL REMAIN IN THE SAME FAGP WHERE IT WILL EARN INTEREST AT THE RENEWAL
RATE THEN IN EFFECT FOR THAT FAGP.
If you purchased your contract prior to August 2, 2004 and you take money out of
any available multi-year FAGP before the end of the guarantee period, we make an
adjustment to your contract. We refer to the adjustment as a market value
adjustment ("MVA"). The MVA reflects any difference in the interest rate
environment between the time you place your money in the FAGP and the time when
you withdraw or transfer that money. This adjustment can increase or decrease
your contract value. Generally, if interest rates drop between the time you put
your money into a FAGP and the time you take it out, we credit a positive
adjustment to your contract. Conversely, if interest rates increase during the
same period, we post a negative adjustment to your contract. You have 30 days
after the end of each guarantee period to reallocate your funds without
incurring any MVA. APPENDIX B SHOWS HOW WE CALCULATE AND APPLY THE MVA.
If available, you may systematically transfer interest earned in available FAGPs
into any of the Variable Portfolios on certain periodic schedules offered by us.
If available, these systematic transfers will not count toward the 15 free
transfers per contract year and are not subject to a market value adjustment.
You may change or terminate these systematic transfers by contacting Our Annuity
Service Center. Check with your financial representative regarding the current
availability of this service.
All FAGPs may not be available in all states. We reserve the right to refuse any
Purchase Payment to available FAGPs if we are crediting a rate equal to the
minimum guaranteed interest rate specified in your contract. We may also offer
the specific Dollar Cost Averaging Fixed Accounts ("DCAFA"). The rules,
restrictions and operation of the DCAFAs may differ from the standard FAGPs
described above, please see DOLLAR COST AVERAGING PROGRAM below for more
details.
DOLLAR COST AVERAGING FIXED ACCOUNTS
You may invest initial and/or subsequent Purchase Payments in the DCAFAs, if
available. The minimum Purchase Payment that you must invest for the 6-month
DCAFA is $600 and $1,200 for the 12-month DCAFA, if such accounts are available.
Purchase Payments less than these minimum amounts will automatically be
allocated to the Variable Portfolios ("target account(s)") according to your
instructions to us or your current allocation on file. DCAFAs also credit a
fixed rate of interest but are specifically designed to facilitate a dollar cost
averaging program. Interest is credited to amounts allocated to the DCAFAs while
your investment is transferred to the
13
Variable Portfolios over certain specified time frames. The interest rates
applicable to the DCAFA may differ from those applicable to any available FAGPs
but will never be less than the minimum annual guaranteed interest rate as
specified in your contract. However, when using a DCAFA the annual interest rate
is paid on a declining balance as you systematically transfer your investment to
the Variable Portfolios. Therefore, the actual effective yield will be less than
the annual crediting rate. We determine the DCAFAs offered at any time in Our
sole discretion and We reserve the right to change to DCAFAs that We make
available at any time, unless state law requires us to do otherwise. See DOLLAR
COST AVERAGING PROGRAM below for more information.
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase you may transfer funds between the Variable
Portfolios and/or any available fixed account options. Funds already in your
contract cannot be transferred into the DCA fixed accounts. You must transfer at
least $500 per transfer. If less than $500 remains in any Variable Portfolio
after a transfer, that amount must be transferred as well. We will process any
transfer request as of the day we receive it in good order if the request is
received before the New York Stock Exchange ("NYSE") closes, generally at 1:00
p.m. Pacific Time. If the transfer request is received after the NYSE closes,
the request will be processed on the next business day.
This product is not designed for professional organizations or individuals
engaged in trading strategies that seek to benefit from short term price
fluctuations or price irregularities by making programmed transfers, frequent
transfers or transfers that are large in relation to the total assets of the
underlying portfolio in which the Variable Portfolios invest. These types of
trading strategies can be disruptive to the underlying portfolios in which the
Variable Portfolios invest and thereby potentially harmful to investors.
In connection with our efforts to control harmful trading, we may monitor your
trading activity. If we determine, in our sole discretion, that your transfer
patterns among the Variable Portfolios and/or available fixed accounts reflect a
potentially harmful trading strategy, we reserve the right to take action to
protect other investors. Such action may include, but may not be limited to,
restricting the way you can request transfers among the Variable Portfolios,
imposing penalty fees on such trading activity, and/or otherwise restricting
transfer capability in accordance with state and federal rules and regulations.
We will notify you, in writing, if we determine in our sole discretion that we
must terminate your transfer privileges. Some of the factors we may consider
when determining our transfer policies and/or other transfer restrictions may
include, but are not limited to:
- the number of transfers made in a defined period;
- the dollar amount of the transfer;
- the total assets of the Variable Portfolio involved in the transfer;
- the investment objectives of the particular Variable Portfolios involved
in your transfers; and/or
- whether the transfer appears to be part of a pattern of transfers to take
advantage of short-term market fluctuations or market inefficiencies.
Subject to our rules, restrictions and policies, you may request transfers of
your account value between the Variable Portfolios and/or the available fixed
account options by telephone or through AIG SunAmerica's website
(http://www.aigsunamerica.com) or in writing by mail or facsimile.
We allow 15 free transfers per contract per year. We charge $25 ($10 IN
PENNSYLVANIA AND TEXAS) for each additional transfer in any contract year.
Transfers resulting from your participation in the DCA or Asset Rebalancing
programs do not count against your 15 free transfers per contract year.
All transfer request in excess of 15 transfers per contract year must be
submitted in writing by United States Postal Service first-class mail ("U.S.
Mail") until your next contract anniversary. Transfer requests sent by same day
mail, overnight mail or courier services will not be accepted. Transfer requests
required to be submitted by U.S. Mail can only be cancelled by a written request
sent by U.S. Mail. Transfers resulting from your participation in the DCA or
Asset Rebalancing programs are not included for the purposes of determining the
number of transfers for the U.S. Mail requirement.
14
We may accept transfers by telephone or the Internet unless you tell us not to
on your contract application. When receiving instructions over the telephone or
the Internet, we follow appropriate procedures to provide reasonable assurance
that the transactions executed are genuine. Thus, we are not responsible for any
claim, loss or expense from any error resulting from instructions received over
the telephone or the Internet. If we fail to follow our procedures, we may be
liable for any losses due to unauthorized or fraudulent instructions.
For information regarding transfers during the Income Phase, SEE INCOME OPTIONS
BELOW.
WE RESERVE THE RIGHT TO MODIFY, SUSPEND, WAIVE OR TERMINATE THESE TRANSFER
PROVISIONS AT ANY TIME.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging ("DCA") program allows you to invest gradually in the
variable investment options. Under the program you systematically transfer a set
dollar amount or percentage from any Variable Portfolio (source accounts) to any
other Variable Portfolio. Transfers may occur on such periodic schedules such as
monthly or weekly. You may change the frequency to other available options at
any time by notifying us in writing. Fixed account options are not available as
target accounts for the DCA program. The minimum transfer amount under the DCA
program is $100 per transfer.
We may also offer DCAFAs for a specified time period exclusively to facilitate
this program. The DCAFAs only accept new Purchase Payments. You cannot transfer
money already in your contract into these options. If you allocate a Purchase
Payment into DCAFAs, we transfer all your money allocated to that account into
the Variable Portfolios you select over the selected time period at an offered
frequency of your choosing. The minimum Purchase Payment that you must invest
for the 6-month DCAFA is $600 and $1,200 for the 12-month DCAFA, if such
accounts are available. Purchase Payments less than these minimum amounts will
automatically be allocated to the target account(s) according to your
instructions to us or your current allocation instructions on file.
You may terminate your DCA program at any time. If money remains in the DCAFA,
we transfer the remaining money according to your instructions or to your
current allocation on file. Transfers resulting from a termination of this
program do not count towards your 15 free transfers.
The DCA program is designed to lessen the impact of market fluctuations on your
investment. However, we cannot ensure that you will make a profit. When you
elect the DCA program, you are continuously investing in securities regardless
of fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
We reserve the right to modify, suspend or terminate this program at any time.
There is no fee for participating in the DCA program.
EXAMPLE:
Assume that you want to gradually move $750 each month from the Cash
Management Portfolio to the Mid-Cap Value Select Portfolio over six months.
You set up dollar cost averaging and purchase Accumulation Units at the
following values:
<Table>
<Caption>
MONTH ACCUMULATION UNIT UNITS PURCHASED
- ----- ----------------- ---------------
1 $ 7.50 100
2 $ 5.00 150
3 $10.00 75
4 $ 7.50 100
5 $ 5.00 150
6 $ 7.50 100
</Table>
You paid an average price of only $6.67 per Accumulation Unit over six
months, while the average market price actually was $7.08. By investing an
equal amount of money each month, you automatically buy more Accumulation
Units when the market price is low and fewer Accumulation Units when the
market price is high. This example is for illustrative purposes only.
15
RETURN PLUS PROGRAM
The Return Plus Program available if we are offering multi-year FAGPs, allows
you to invest in one or more of the Variable Portfolios without putting your
principal at direct risk. The program accomplishes this by allocating your
investment strategically between the fixed investment options (other than the
DCA fixed accounts) and the Variable Portfolios you select. You decide how much
you want to invest and approximately when you want a return of principal. We
calculate how much of your Purchase Payment needs to be allocated to the
particular fixed investment option to ensure that it grows to an amount equal to
your total principal invested under this program.
We reserve the right to modify, suspend or terminate this program at any time.
EXAMPLE:
Assume that you want to allocate a portion of your initial Purchase Payment
of $100,000 to the fixed investment option. You want the amount allocated
to the fixed investment option to grow to $100,000 in 7 years. If the
7-year fixed investment option is offering a 5% interest rate, We will
allocate $71,069 to the 7-year fixed investment option to ensure that this
amount will grow to $100,000 at the end of the 7-year period. The remaining
$28,931 may be allocated among the Variable Portfolios, as determined by
you, to provide opportunity for greater growth.
VOTING RIGHTS
AIG SunAmerica Life is the legal owner of the Seasons Series Trust shares.
However, when an underlying portfolio solicits proxies in conjunction with a
vote of shareholders, We must obtain your instructions on how to vote those
shares. We vote all of the shares We own in proportion to your instructions.
This includes any shares We own on our own behalf. Should We determine that We
are no longer required to comply with these rules, We will vote the shares in
Our own right.
SUBSTITUTION
We may amend your contract due to changes to the investment variable portfolios
offered under your contract. For example, we may offer new portfolios, delete
portfolios, or stop accepting allocations and/or investments in a particular
portfolio. We may move assets and re-direct future premium allocations from one
portfolio to another if we receive investor approval through a proxy vote or SEC
approval for a fund substitution. This would occur if a portfolio is no longer
an appropriate investment for the contract, for reasons such as continuing
substandard performance, or for changes to the portfolio manager, investment
objectives, risks and strategies, or federal or state laws. The new investment
variable Portfolio offered may have different fees and expenses. You will be
notified of any upcoming proxies or substitutions that affect your portfolio
choices.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
You can access money in your contract by making a partial or total withdrawal,
and/or; by receiving income payments during the Income Phase. SEE INCOME
OPTIONS, BELOW.
Generally, we deduct a withdrawal charge applicable to any partial or total
withdrawal and a market value adjustment if a withdrawal comes from the multi
year fixed investment options prior to the end of a guarantee period. If you
withdraw your entire contract value, we also deduct any applicable premium taxes
and a contract maintenance fee. SEE EXPENSES, BELOW. We calculate charges due on
a total withdrawal on the day after we receive your request and other required
paper work. we return your contract value less any applicable fees and charges.
The minimum partial withdrawal amount is $1,000. We require that the value left
in the contract be at least $500 after the withdrawal. You must send a written
withdrawal request to our Annuity Service Center. Unless you provide us with
different instructions, partial withdrawals will be made in equal amounts from
each Variable Portfolio and the fixed investment option in which your contract
is invested. Withdrawals from available fixed investment options prior to the
end of the guarantee period may result in a market value adjustment.
16
We may be required to suspend or postpone the payment of a withdrawal for any
period of time when: (1) the NYSE is closed (other than a customary weekend and
holiday closings); (2) trading with the NYSE is restricted; (3) an emergency
exists such that disposal of or determination of the value of shares of the
Portfolios is not reasonably practicable; (4) the SEC, by order, so permits for
the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from a
fixed investment option. Such deferrals are limited to no longer than six
months.
FREE WITHDRAWAL PROVISION
Your contract provides for a free withdrawal amount each year. A free withdrawal
amount is the portion of your account that we allow you to take out each year
without being charged a surrender penalty. However, upon a future full surrender
of your contract any previous free withdrawals would be subject to a surrender
charge, if any is applicable at the time of the full surrender (except in the
state of Washington).
To determine your free withdrawal amount, and withdrawal charge, we refer to two
special terms. These are penalty-free earnings and the Total Invested Amount.
The penalty-free earnings portion of your contract is your account value less
your Total Invested Amount. The Total Invested Amount is the total of all
Purchase Payments you have made into the contract less portions of some prior
withdrawals you made. The portions of prior withdrawals that reduce your Total
Invested Amount are as follows:
1. Any free withdrawals in any year that were in excess of your penalty
free earnings and were based on the part of the Total Investment Amount
that was no longer subject to surrender charges at the time of the
withdrawal.
2. Any prior withdrawals of the Total Investment Amount on which you
already paid a surrender penalty, plus any surrender charge paid on such
a withdrawal.
When you make a withdrawal, we assume that it is taken from penalty-free
earnings first, then from the Total Invested Amount on a first-in, first-out
basis. This means that you can also access your Purchase Payments which are no
longer subject to a surrender charge before those Purchase Payments which are
still subject to the withdrawal charge.
During the first year after we issue your contract your free withdrawal amount
is the greater of:
1. Your penalty-free earnings, or;
2. If you are participating in the Systematic Withdrawal program, a total
of 10% of your Total Invested Amount less any withdrawals taken during
the contract year.
After the first contract year, your free withdrawal amount is the greater of the
following amounts each year:
1. Your penalty free earnings and any portion of your Total Invested Amount
no longer subject to withdrawal charges, or;
2. 10% of the portion of your Total Invested Amount that has been in your
contract for at least one year less any withdrawals taken during the
contract year.
Purchase payments withdrawn, above and beyond the amount of your free withdrawal
amount, that are invested for less than 9 years will result in your paying a
penalty in the form of a withdrawal charge. The amount of the charge and how it
applies are discussed more fully below. You should consider, before purchasing
this contract, the effect this charge will have on your investment if you need
to withdraw more money than the free withdrawal amount. You should fully discuss
this decision with your financial representative.
The withdrawal charge percentage applicable is determined by the age of the
Purchase Payment being withdrawn. For purposes of calculating the surrender
charge in the event of a full surrender, the charge is calculated based on the
remaining Total Invested Amount still subject to surrender charge.
For example, you make an initial Purchase Payment of $100,000. For purposes of
this example we will assume a 0% growth rate over the life of the contract no
election of any optional features and no subsequent Purchase
17
Payments. In contract year 2 and year 3, you take out your maximum free
withdrawal of $10,000 for each year. After that free withdrawal your contract
value is $80,000. In contract year 5 you request a full surrender of your
contract. We will apply the following calculation,
A - (B X C) = D, where:
A = Your contract value at the time of your request for surrender ($80,000)
B = The amount of your Purchase Payments still subject to withdrawal charge
($100,000)
C = The withdrawal charge percentage applicable to the age of each Purchase
Payment (6%)
[B X C = $6,000]
D = Your full surrender value ($74,000)
SYSTEMATIC WITHDRAWAL PROGRAM
If you elect, we use money in your contract to pay you monthly, quarterly,
semi-annual or annual payments during the Accumulation Phase. Electronic
transfer of these funds to your bank account is also available. The minimum
amount of each withdrawal is $250. There must be at least $500 remaining in your
contract at all times. Withdrawals may be taxable and a 10% IRS tax penalty may
apply if you are under age 59 1/2. Any withdrawals you make using this program
count against your free withdrawal amount as described above. Withdrawals in
excess of that amount may incur a withdrawal charge. There is no additional
charge for participating in this program.
The program is not available to everyone. Please check with our Annuity Service
Center, which can provide the necessary enrollment forms. We reserve the right
to modify, suspend or terminate this program at any time.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if both of the
following occur: (1) your contract is $500 or less as a result of withdrawals;
and (2) you have not made any Purchase Payments during the past three years. We
will provide you with sixty days written notice. At the end of the notice
period, we will distribute the contract's remaining value to you less any
applicable charges.
QUALIFIED CONTRACT OWNERS
Certain qualified plans restrict and/or prohibit your ability to withdraw money
from your contract. SEE TAXES, BELOW for a more detailed explanation.
DEATH BENEFIT
- --------------------------------------------------------------------------------
If you die during the Accumulation Phase of your contract, we pay a death
benefit to your Beneficiary.
If at the time we issued your contract, you were 80 years old or younger, the
death benefit is the greatest of:
1. the value of your contract on the date we receive all required paperwork
and satisfactory proof of death; or
2. total Purchase Payments less withdrawals (and any fees or charges
applicable to such withdrawals) in an amount proportionate to the amount
by which such withdrawals decreased contract values, compounded at a 4%
annual growth rate until the date of death (3% annual growth rate if 70
or older at the time of contract issue); or
3. the value of your contract on the seventh contract anniversary, plus any
Purchase Payments and less withdrawals (and any fees or charges
applicable to such withdrawals) in an amount proportionate to the amount
by which such withdrawals decreased contract values, since the seventh
contract anniversary, all compounded at a 4% annual growth rate until
the date of death (3% annual growth rate if age 70 or older at the time
of contract issue); or
4. the maximum anniversary value on any contract anniversary prior to your
81st birthday. The anniversary value equals the value of your contract
on a contract anniversary plus any Purchase Payments and less any
18
withdrawals (and any fees or charges applicable to such withdrawals) in
an amount proportionate to the amount by which such withdrawals
decreased contract values, since that contract anniversary.
If at the time we issue your contract, you were 81 years old or older, the death
benefit is the greater of:
1. the value of your contract on the date we receive all required paperwork
and satisfactory proof of death; or
2. total Purchase Payments less withdrawals (and any fees or charges
applicable to such withdrawals) in an amount proportionate to the amount
by which such withdrawals decreased contract values, compounded at a 3%
annual growth rate until the date of death.
We do not pay the death benefit if you die after you switch to the Income Phase.
However, if you die during the Income Phase, your Beneficiary will receive any
remaining guaranteed income payments in accordance with the income option you
choose. SEE INCOME OPTIONS, BELOW.
You name your Beneficiary. You may change the Beneficiary at any time, unless
you previously made an irrevocable Beneficiary designation. A new Beneficiary
designation is not effective until we record the change.
We calculate and pay the death benefit when we receive all required paperwork
and satisfactory proof of death. We consider the following satisfactory proof of
death: (1) a certified copy of a death certificate; (2) a certified copy of a
decree of court of competent jurisdiction as to the finding of death; (3) a
written statement by a medical doctor who attended the deceased at the time of
death; or (4) any other proof satisfactory to us.
DEATH OF THE ANNUITANT
If the Annuitant dies before annuity payments begin, you can name a new
Annuitant. If no Annuitant is named within 30 days, you will become the
Annuitant. However, if the owner is a non-natural person (for example, a
corporation), then the death of the Annuitant will be treated as the death of
the owner, no new Annuitant may be named and the death benefit will be paid.
The death benefit may be paid immediately in the form of a lump sum payment or
paid under one of the available Income Options. Please see INCOME OPTIONS below.
A Beneficiary may also elect to continue the contract and take the death benefit
amount in a series of payments based upon the Beneficiary's life expectancy
under the Extended Legacy program described below, subject to the applicable
Internal Revenue Code distribution requirements. Payments must begin under the
selected Income Option or the Extended Legacy program no later than the first
anniversary of your death for non-qualified contracts or December 31st of the
year following the year of your death for IRAs. Your Beneficiary cannot
participate in the Extended Legacy program if your Beneficiary has already
elected another settlement option. Beneficiaries who do not begin taking
payments within these specified time periods will not be eligible to elect an
Income Option or participate in the Extended Legacy program.
EXTENDED LEGACY PROGRAM AND BENEFICIARY CONTINUATION OPTIONS
Extended Legacy program can allow a Beneficiary to take the death benefit amount
in the form of income payments over a longer period of time with the flexibility
to withdraw more than the IRS required minimum distribution if they wish. The
contract continues in the original owner's name for the benefit of the
Beneficiary. Generally, IRS required minimum distributions must be made at least
annually over a period not to exceed the Beneficiary's life expectancy as
determined in the calendar year after your death. Under the Extended Legacy
program, a Beneficiary may withdraw all or a portion of the contract value at
any time, name their own beneficiary to receive any remaining unpaid interest in
the contract in the event of their death and make transfers among investment
options. If the contract value is less than the death benefit amount as of the
date we receive satisfactory proof of death and all required paperwork, we will
increase the contract value by the amount which the death benefit exceeds
contract value. Participation in the program may impact certain features of the
contract as detailed in the Death Claim Form. Please see your financial
representative for additional information.
Alternatively to the Extended Legacy program, the Beneficiary may also elect to
receive the death benefit under a 5-year option. The Beneficiary may take
withdrawals as desired, but the entire contract value must be distributed
19
by the fifth anniversary of your death for Non-qualified contracts or by
December 31st of the year containing the fifth anniversary of your death for
IRAs. For IRAs, the five-year option is not available if the date of death is
after the required beginning date for distributions (April 1 of the year
following the year the owner reaches the age of 70 1/2).
For information regarding how these payments are treated for tax purposes,
consult your tax advisor regarding tax implications and your particular
circumstances.
EXPENSES
- --------------------------------------------------------------------------------
There are charges and expenses associated with your contract. These charges and
expenses reduce your investment return. We will not increase the contract
maintenance fee or withdrawal charges under your contract. However the
investment charges under your contract may increase or decrease. Some states may
require that we charge less than the amounts described below.
SEPARATE ACCOUNT CHARGES
If you are age 80 or younger when your contract is issued, the Company deducts a
mortality and expense risk charge in the amount of 1.40% annually of the value
of your contract invested in the Variable Portfolios. If you are age 81 or older
when your contract is issued, the Company deducts a mortality and expense risk
charge in the amount of 1.52% annually of the value of your contract invested in
the Variable Portfolios. We deduct the charge daily. This charge compensates the
Company for the mortality and expense risk and the costs of contract
distribution assumed by the Company.
Generally, the mortality risks assumed by the Company arise from its contractual
obligations to make income payments after the Annuity Date and to provide a
death benefit. The expense risk assumed by the Company is that the costs of
administering the contracts and the Separate Account will exceed the amount
received from the administrative fees and charges assessed under the contract.
If these charges do not cover all of our expenses, we will pay the difference.
Likewise, if these charges exceed our expenses, we will keep the difference. The
Separate Account Charge is expected to result in a profit. Profit may be used
for any legitimate cost/expense including distribution, depending upon market
conditions.
WITHDRAWAL CHARGES
During the Accumulation Phase you may make withdrawals from your contract.
However, a withdrawal charge may apply. We apply a withdrawal charge upon an
early withdrawal against each Purchase Payment you put into the contract. The
withdrawal charge equals a percentage of the Purchase Payment you take out of
the contract. The withdrawal charge percentage declines each year a Purchase
Payment is in the contract, as follows:
<Table>
<Caption>
YEAR 1 2 3 4 5 6 7 8 9 10+
- ----------------- --- --- --- --- --- --- --- --- --- ---
Withdrawal Charge 9% 8% 7% 6% 6% 5% 4% 3% 2% 0%
</Table>
After a Purchase Payment has been in the contract for nine complete years, the
withdrawal charge no longer applies to that payment.
When calculating the withdrawal charge, we treat withdrawals as coming first
from the Purchase Payments that have been in your contract the longest. However,
for tax purposes, your withdrawals are considered earnings first, then Purchase
Payments.
Whenever possible, we deduct the withdrawal charge from the money remaining in
your contract from each of your investment options on a pro-rata basis. If you
withdraw all of your contract value, we deduct any applicable withdrawal charges
from the amount withdrawn.
The contract provides a free withdrawal amount every year. SEE ACCESS TO YOUR
MONEY ABOVE.
We will not assess a withdrawal charge for money withdrawn to pay a death
benefit. We do not currently assess a withdrawal charge upon election to receive
income payments from your contract.
20
Withdrawals made prior to age 59 1/2 may result in tax penalties. SEE TAXES
BELOW.
INVESTMENT CHARGES
Charges are deducted from the assets of the investment portfolios underlying the
Variable Portfolios for the advisory and other expenses of the portfolios. THE
FEE TABLE ABOVE ILLUSTRATES THESE CHARGES AND EXPENSES. FOR MORE DETAILED
INFORMATION ON THESE INVESTMENT CHARGES, REFER TO THE PROSPECTUS FOR THE SEASONS
SERIES TRUST, ATTACHED.
CONTRACT MAINTENANCE FEE
During the Accumulation Phase, we subtract a contract maintenance fee from your
account once per year. This charge compensates us for the cost of contract
administration. If your contract value is $50,000 or more on your contract
anniversary date, we are currently waiving this charge. This waiver is subject
to change without notice. We will deduct the $35 ($30 in North Dakota) contract
maintenance fee on a pro-rata basis from your account value on your contract
anniversary. In the states of Oregon, Pennsylvania, Texas and Washington a
contract maintenance fee will be deducted pro-rata from the Variable Portfolios
in which you are invested, only. If you withdraw your entire contract value, we
deduct the fee from that withdrawal.
TRANSFER FEE
We currently permit 15 free transfers between investment options, every contract
year. We charge you $25 for each transfer over 15 in any one year ($10 in
Pennsylvania and Texas). We deduct the transfer fee from the Variable Portfolios
and/or fixed investment options from which you request the transfer. SEE
INVESTMENT OPTIONS, ABOVE.
OPTIONAL INCOME PROTECTOR FEE
Please SEE THE OPTIONAL INCOME PROTECTOR PROGRAM BELOW for additional
information regarding the Income Protector Fee.
PREMIUM TAX
Certain states charge the Company a tax on the premiums you pay into the
contract ranging from 0.0% to 3.5%. We deduct these premium tax charges from
your contract when applicable. Currently we deduct the charge for premium taxes
when you take a full withdrawal or annuitize the contract. In the future, we may
assess this deduction at the time you put Purchase Payment(s) into the contract
or upon payment of a death benefit.
INCOME TAXES
We do not currently deduct income taxes from your contract. We reserve the right
to do so in the future.
REDUCTION OR ELIMINATION OF CHARGES AND EXPENSES, AND ADDITIONAL AMOUNTS
CREDITED
Sometimes sales of the contracts to groups of similarly situated individuals may
lower our administrative and/or sales expenses. We reserve the right to reduce
or waive certain charges and expenses when this type of sale occurs. In
addition, we may also credit additional interest to policies sold to such
groups. We determine which groups are eligible for such treatment. Some of the
criteria we evaluate to make a determination are: size of the group; amount of
expected Purchase Payments; relationship existing between us and prospective
purchaser; nature of the purchase; length of time a group of contracts is
expected to remain active; purpose of the purchase and whether that purpose
increases the likelihood that our expenses will be reduced; and/or any other
factors that we believe indicate that administrative and/or sales expenses may
be reduced.
AIG SunAmerica Life may make such a determination regarding sales to its
employees, it affiliates' employees and employees of currently contracted
broker-dealers; its registered representatives and immediate family members of
all of those described.
21
We reserve the right to change or modify any such determination or the treatment
applied to a particular group, at any time.
INCOME OPTIONS
- --------------------------------------------------------------------------------
ANNUITY DATE
During the Income Phase, the money in your Contract is used to make regular
income payments to you. You may switch to the Income Phase any time after your
second contract anniversary. You select the month and year in which you want
income payments to begin. The first day of that month is the Annuity Date. You
may change your Annuity Date, so long as you do so at least seven days before
the income payments are scheduled to begin. Once you begin receiving income
payments, you cannot change your Income Option. Except as discussed under Option
5, once you begin receiving income payments, you cannot otherwise access your
money through a withdrawal or surrender.
Income payments must begin on or before your 90th birthday or on your tenth
contract anniversary, whichever occurs later. If you do not choose an Annuity
Date, your income payments will automatically begin on this date. Certain states
may require your income payments to start earlier.
If the Annuity Date is past your 85th birthday, your contract could lose its
status as an annuity under Federal tax laws. This may cause you to incur adverse
tax consequences. In addition, certain Qualified contracts require you to take
minimum distributions after you reach age 70 1/2. SEE TAXES, BELOW.
INCOME OPTIONS
Currently, this Contract offers five standard Income Options. Other payout
options may be available. Contact the Annuity Service Center for more
information. If you elect to receive income payments but do not select an
option, your income payments will be made in accordance with Option 4 for a
period of 10 years. For income payments selected for joint lives, We pay
according to Option 3.
We base our calculation of income payments on the life of the Annuitant and the
annuity rates set forth in your contract. As the contract owner, you may change
the Annuitant at any time prior to the Annuity Date. You must notify us if the
Annuitant dies before the Annuity Date and then designate a new Annuitant.
OPTION 1 - LIFE INCOME ANNUITY
This option provides income payments for the life of the Annuitant. Income
payments stop when the Annuitant dies.
OPTION 2 - JOINT AND SURVIVOR LIFE ANNUITY
This option provides income payments for the life of the Annuitant and for the
life of another designated person. Upon the death of either person, we will
continue to make income payments during the lifetime of the survivor. Income
payments stop whenever the survivor dies.
OPTION 3 - JOINT AND 100% SURVIVOR LIFE ANNUITY WITH 10 OR 20 YEAR PERIOD
CERTAIN
This option is similar to Option 2 above, with an additional guarantee of
payments for at least 10 or 20 years. If the Annuitant and the Survivor die
before all of the payments have been made, the remaining payments are made to
the Beneficiary under your Contract.
OPTION 4 - LIFE ANNUITY WITH 10 OR 20 YEAR PERIOD CERTAIN
This option is similar to Option 1 above. In addition, this option provides a
guarantee that income payments will be made for at least 10 or 20 years. You
select the number of years. If the Annuitant dies before all guaranteed income
payments are made, the remaining income payments go to the Beneficiary under
your Contract.
22
OPTION 5 - INCOME FOR A SPECIFIED PERIOD
This option provides income payments for a guaranteed period ranging from 5 to
30 years. If the Annuitant dies before all the guaranteed income payments are
made, the remaining income payments are made to the Beneficiary under your
contract. Additionally, if variable income payments are elected under this
option, you (or the Beneficiary under the contract if the Annuitant dies prior
to all guaranteed payments being made) may redeem the contract value (in full or
in part) after the Annuity Date. The amount available upon such redemption would
be the discounted present value of any remaining guaranteed payments.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. Since Option 5 does not contain
an element of mortality risk, no benefit is derived from this charge.
ALLOCATION OF ANNUITY PAYMENTS
You can choose income payments that are fixed, variable or both. If payments are
fixed, AIG SunAmerica Life guarantees the amounts of each payment. If the
payments are variable, the amounts are not guaranteed. They will go up and/or
down based upon the performance of the Variable Portfolios in which you invest.
FIXED OR VARIABLE INCOME PAYMENTS
You can choose income payments that are fixed, variable or both. If at the date
when income payments begin you are invested in the Variable Portfolios only,
your income payments will be variable. If your money is only in fixed accounts
at that time, your income payments will be fixed in amount. If you are invested
in both fixed and variable options at the time you begin the Income Phase, a
portion of your income payments will be fixed and a portion will be variable.
INCOME PAYMENTS
We make income payments on a monthly, quarterly, semi-annual or annual basis.
You instruct us to send you a check or to have the payments direct deposited
into your bank account. If state law allows, we distribute annuities with a
contract value of $5,000 or less in a lump sum. Also, if the selected income
option results in annuity payments of less than $50 per payment, we may decrease
the frequency of the payments, state law allowing.
Your income payments will vary if you are invested in the Variable Portfolios
after the Annuity Date depending on four factors:
- for life options, your age when payments begin, and in most states, if a
Non-qualified contract, your gender and;
- the value of your contract in the Variable Portfolios on the Annuity
Date, and;
- the 3.5% assumed investment rate for variable income payments used in the
annuity table for the contract, and;
- the performance of the Variable Portfolios in which you are invested
during the time you receive income payments.
If you are invested in both the fixed account options and the Variable
Portfolios after the Annuity Date, the allocation of funds between the fixed
accounts and Variable Portfolios also impacts the amount of your annuity
payments.
The value of variable income payments, if elected, is based on an assumed
interest rate ("AIR") of 3.5% compounded annually. Variable income payments
generally increase or decrease from one income payment date to the next based
upon the performance of the applicable Variable Portfolios. If the performance
of the Variable Portfolios selected is equal to the AIR, the income payments
will remain constant. If performance of Variable Portfolios is greater than the
AIR, the income payments will increase and if it is less than the AIR, the
income payments will decline.
23
TRANSFERS DURING THE INCOME PHASE
During the Income Phase, one (1) transfer per month is permitted between the
Variable Portfolios. No other transfers are allowed during the income phase.
DEFERMENT OF PAYMENTS
We may defer making fixed payments for up to six months, or less if required by
law. Interest is credited to you during the deferral period. See also Access to
Your Money above for a discussion of when payments from a Variable Portfolio may
be suspended or postponed.
Please read the Statement of Additional Information for a more detailed
discussion of the income options.
THE OPTIONAL INCOME PROTECTOR PROGRAM
If you purchase your contract after July 5, 2000, you may elect to enroll in the
Income Protector Program. The Income Protector Program provides a future "safety
net" which offers you the ability to receive a guaranteed fixed minimum
retirement income when you choose to begin receiving income payments. With the
Income Protector you can know the level of minimum income that will be available
to you upon annuitization, regardless of fluctuating market conditions. In order
to utilize the program, you must follow the provisions discussed below.
You are not required to use the Income Protector to receive income payments. The
general provisions of your contract provide other income options. However, We
will not refund fees paid for the Income Protector if you begin taking income
payments under the general provisions of your contract. YOU MAY NEVER NEED TO
RELY UPON INCOME PROTECTOR IF YOUR CONTRACT PERFORMS WITHIN A HISTORICALLY
ANTICIPATED RANGE. HOWEVER, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Certain federal tax code restrictions on the income options available to
qualified retirement investors may have an impact on your ability to benefit
from this feature. Qualified investors should read NOTE TO QUALIFIED CONTRACT
HOLDERS, below.
HOW DO WE DETERMINE THE AMOUNT OF YOUR MINIMUM GUARANTEED INCOME?
If you elect the Income Protector Program, we base the amount of minimum
retirement income available to you upon a calculation we call the Income Benefit
Base. At the time your enrollment in the Income Protector program becomes
effective, your Initial Income Benefit Base is equal to your contract value. If
elected, your participation becomes effective on either the date of issue of the
contract (if the feature is elected at the time of application) or on the
contract anniversary following your enrollment in the program.
The Income Benefit Base is only a calculation. It does not represent a contract
value, nor does it guarantee performance of the Variable Portfolios in which you
invest.
Your Income Benefit Base increases if you make subsequent Purchase Payments and
decreases if you withdraw money from your contract. The exact Income Benefit
Base calculation is equal to (a) plus (b) minus (c) where:
(a) is equal to, for the first year of calculation, your contract value on
the date your participation became effective, and for each subsequent
year of calculation, the Income Benefit Base of your prior contract
anniversary, and;
(b) is equal to the sum of all subsequent Purchase Payments made into the
contract since the prior contract anniversary, and;
(c) is equal to all withdrawals and applicable fees, charges and any
negative MVA (but excluding administration fees, mortality and expense
charges and fee for enrollment into the program) since the prior
contract anniversary, including premium taxes in an amount
proportionate to the amount by which such withdrawals decreased your
contract value. Your Income Benefit Base may accumulate at the elected
growth rate, if available, from the date your election becomes
effective through your Income Benefit Date.
24
ENROLLING IN THE PROGRAM
If you decide that you want the protection offered by the Income Protector
program, you must elect the option of your choice by completing the Income
Protector Election Form. You can not terminate your enrollment once elected.
ELECTING TO RECEIVE INCOME
In order to exercise the Income Protector feature, you may not begin the income
phase for at least nine years following the date your enrollment in the program
became effective. Further, you may begin taking income payments using the Income
Protector feature only within 30 days after the ninth or later contract
anniversary following the effective date of your enrollment in the Income
Protector program.
The contract anniversary prior to your election to begin receiving income
payments is your Income Benefit Date. We calculate your Income Benefit Base as
of that date to use in determining your guaranteed minimum fixed retirement
income. To determine the minimum guaranteed retirement income available to you,
we apply your final Income Benefit Base to the annuity rates stated in your
Income Protector endorsement for the income option you select. You then choose
if you would like to receive the income annually, semi-annually, quarterly or
monthly for the time guaranteed under your selected income option. Your final
Income Benefit Base is equal to (a) minus (b) where:
(a) is your Income Benefit Base as of your Income Benefit Date, and;
(b) is any partial withdrawals of contract value and any charges applicable
to those withdrawals (including any negative MVA) and any withdrawal
charges otherwise applicable, calculated as if you fully surrender your
contract as of the Income Benefit Date, and any applicable premium
taxes.
The income options available when using the Income Protector feature to receive
your retirement income are:
- Life Annuity with 10 years guaranteed, or
- Joint and 100% Survivor Life Annuity with 20 years guaranteed
At the time you elect to begin receiving income payments, we will calculate your
income payments using both your income benefit base and your contract value. We
will use the same income option for each calculation; however, the annuity
factors used to calculate your income under the Income Protector feature will be
different. You will receive whichever provides a greater stream of income. If
you elect to receive income payments using the Income Protector feature your
income payments will be fixed in amount.
NOTE TO QUALIFIED CONTRACT HOLDERS
Qualified contracts generally require that you select an income option that does
not exceed your life expectancy. That restriction, if it applies to you, may
limit the benefit of the Income Protector program. To utilize the Income
Protector feature, you must take income payments under one of the two income
options described above. If those income options exceed your life expectancy,
you may be prohibited from receiving your guaranteed fixed income under the
program. If you own a qualified contract to which this restriction applies and
you elect the Income Protector program, you may pay for this minimum guarantee
and not be able to realize the benefit.
You may wish to consult your tax advisor for information concerning your
particular circumstances.
FEES ASSOCIATED WITH THE INCOME PROTECTOR PROGRAM
If you elect to participate in the Income Protector program we deduct a fee
equal to 0.10% of your Income Benefit Base from your contract value on each
contract anniversary beginning with the contract anniversary following the
anniversary on which your enrollment in the program becomes effective. We will
deduct this charge from your contract value on every contract anniversary up to
and including your Income Benefit Date. Additionally, if you fully surrender
your contract prior to your contract anniversary, we will deduct the fee at the
time of surrender based on your Income Benefit Base as of the surrender date.
Once elected, the Income Protector Program and its corresponding charges may not
be terminated until full surrender or annuitization of the contract occurs.
25
HYPOTHETICAL EXAMPLE OF THE OPERATION OF THE INCOME PROTECTOR PROGRAM:
This table assumes a $100,000 initial investment in a Non-qualified contract and
the election of the optional Income Protector program at contract issue with no
further premiums, no withdrawals or premium taxes.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
ANNUAL INCOME IF YOU ANNUITIZE ON THE FOLLOWING CONTRACT ANNIVERSARIES:
IF AT ISSUE YOU ARE . . . 1-8 9 10 15 20
- ----------------------------------------------------------------------------------------------------------------------------
Male (M), Age 60* N/A 6,480 6,672 7,716 8,832
- ----------------------------------------------------------------------------------------------------------------------------
Female (F), Age 60* N/A 5,700 5,880 6,900 8,112
- ----------------------------------------------------------------------------------------------------------------------------
M and F, Age 60** N/A 4,920 5,028 5,544 5,928
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
* Life Annuity with 10 Year Period Certain
** Joint and 100% Survivor Annuity with 20 Year Period Certain
The Income Protector program may not be available in all states. Check with your
financial adviser for availability in your state.
We reserve the right to modify, suspend or terminate the program at any time.
Please read the Statement of Additional Information, available upon request, for
a more detailed discussion of the income options.
TAXES
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NOTE: THE BASIC SUMMARY BELOW ADDRESSES BROAD FEDERAL TAXATION MATTERS, AND
GENERALLY DOES NOT ADDRESS STATE TAXATION ISSUES OR QUESTIONS. IT IS NOT TAX
ADVICE. WE CAUTION YOU TO SEEK COMPETENT TAX ADVICE ABOUT YOUR OWN
CIRCUMSTANCES. WE DO NOT GUARANTEE THE TAX STATUS OF YOUR ANNUITY. TAX LAWS
CONSTANTLY CHANGE; THEREFORE, WE CANNOT GUARANTEE THAT THE INFORMATION CONTAINED
HEREIN IS COMPLETE AND/OR ACCURATE. WE HAVE INCLUDED AN ADDITIONAL DISCUSSION
REGARDING TAXES IN THE SAI.
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the tax
treatment of annuity contracts. Generally, taxes on the earnings in your annuity
contract are deferred until you take the money out. Qualified retirement
investments that satisfy specific tax and ERISA requirements automatically
provide tax deferral regardless of whether the underlying contract is an
annuity, a trust, or a custodial account. Different rules apply depending on how
you take the money out and whether your contract is Qualified or Non-Qualified.
If you do not purchase your contract under a pension plan, a specially sponsored
employer program or an individual retirement account, your contract is referred
to as a Non-Qualified contract. A Non-Qualified contract receives different tax
treatment than a Qualified contract. In general, your cost in a Non-Qualified
contract is equal to the Purchase Payments you put into the contract. You have
already been taxed on the cost basis in your contract.
If you purchase your contract under a pension plan, a specially sponsored
employer program or as an individual retirement account, your contract is
referred to as a Qualified contract. Examples of qualified plans or arrangements
are: Individual Retirement Accounts ("IRAs"), Roth IRAs, Tax-Sheltered Annuities
(referred to as 403(b) contracts), plans of self-employed individuals (often
referred to as H.R.10 Plans or Keogh Plans) and pension and profit sharing
plans, including 401(k) plans. Typically, for employer plans and tax-deductible
IRA contributions, you have not paid any tax on the Purchase Payments used to
buy your contract and therefore, you have no cost basis in your contract.
However, you normally will have cost basis in a Roth IRA, and you may have cost
basis in a traditional IRA or in another Qualified Contract.
26
TAX TREATMENT OF DISTRIBUTIONS--NON-QUALIFIED CONTRACTS
If you make a partial or total withdrawal from a Non-Qualified contract, the IRC
treats such a withdrawal as first coming from the earnings and then as coming
from your Purchase Payments. Purchase payments made prior to August 14, 1982,
however, are an important exception to this general rule, and for tax purposes
are treated as being distributed before the earnings on those contributions. If
you annuitize your contract, a portion of each income payment will be
considered, for tax purposes, to be a return of a portion of your Purchase
Payment(s). Any portion of each income payment that is considered a return of
your Purchase Payment will not be taxed. Withdrawn earnings are treated as
income to you and are taxable. The IRC provides for a 10% penalty tax on any
earnings that are withdrawn other than in conjunction with the following
circumstances: (1) after reaching age 59 1/2; (2) when paid to your Beneficiary
after you die; (3) after you become disabled (as defined in the IRC); (4) when
paid in a series of substantially equal installments made for your life or for
the joint lives of you and your Beneficiary; (5) under an immediate annuity; or
(6) which are attributable to Purchase Payments made prior to August 14, 1982.
TAX TREATMENT OF DISTRIBUTIONS--QUALIFIED CONTRACTS (INCLUDING GOVERNMENTAL
457(b) ELIGIBLE DEFERRED COMPENSATION PLANS)
Generally, you have not paid any taxes on the Purchase Payments used to buy a
Qualified contract. As a result, with certain limited exceptions, any amount of
money you take out as a withdrawal or as income payments is taxable income. In
the case of certain Qualified contracts, the IRC further provides for a 10%
penalty tax on any taxable withdrawal or income payment paid to you other than
in conjunction with the following circumstances: (1) after reaching age 59 1/2;
(2) when paid to your Beneficiary after you die; (3) after you become disabled
(as defined in the IRC); (4) in a series of substantially equal installments,
made for your life or for the joint lives of you and your Beneficiary, that
begins after separation from service with the employer sponsoring the plan; (5)
to the extent such withdrawals do not exceed limitations set by the IRC for
deductible amounts paid during the taxable year for medical care; (6) to fund
higher education expenses (as defined in the IRC; only from an IRA); (7) to fund
certain first-time home purchase expenses (only from an IRA); (8) when you
separate from service after attaining age 55 (does not apply to an IRA); (9)
when paid for health insurance, if you are unemployed and meet certain
requirements; and (10) when paid to an alternate payee pursuant to a qualified
domestic relations order. This 10% penalty tax does not apply to withdrawals or
income payments from governmental 457(b) eligible deferred compensation plans,
except to the extent that such withdrawals or income payments are attributable
to a prior rollover to the plan (or earnings thereon) from another plan or
arrangement that was subject to the 10% penalty tax.
The IRC limits the withdrawal of an employee's voluntary Purchase Payments from
a Tax-Sheltered Annuity (TSA). Withdrawals can only be made when an owner: (1)
reaches age 59 1/2; (2) severs employment with the employer; (3) dies; (4)
becomes disabled (as defined in the IRC); or (5) experiences a financial
hardship (as defined in the IRC). In the case of hardship, the owner can only
withdraw Purchase Payments. Additional plan limitations may also apply. Amounts
held in a TSA annuity contract as of December 31, 1988 are not subject to these
restrictions. Qualifying transfers of amounts from one TSA contract to another
TSA contract under section 403(b) or to a custodial account under section
403(b)(7), and qualifying transfers to a state defined benefit plan to purchase
service credits, are not considered distributions, and thus are not subject to
these withdrawal limitations. If amounts are transferred from a custodial
account described in Code section 403(b)(7) to this contract the transferred
amount will retain the custodial account withdrawal restrictions.
Withdrawals from other Qualified Contracts are often limited by the IRC and by
the employer's plan.
MINIMUM DISTRIBUTIONS
Generally, the IRC requires that you begin taking annual distributions from
qualified annuity contracts by April 1 of the calendar year following the later
of (1) the calendar year in which you attain age 70 1/2 or (2) the calendar year
in which you separate from service from the employer sponsoring the plan. If you
own an IRA, you must begin taking distributions when you attain age 70 1/2
regardless of when you separate from service from the employer sponsoring the
plan. If you own more than one TSA, you may be permitted to take your annual
distributions in
27
any combination from your TSAs. A similar rule applies if you own more than one
IRA. However, you cannot satisfy this distribution requirement for your TSA
contract by taking a distribution from an IRA, and you cannot satisfy the
requirement for your IRA by taking a distribution from a TSA.
You may be subject to a surrender charge on withdrawals taken to meet minimum
distribution requirements, if the withdrawals exceed the contract's maximum
penalty free amount.
Failure to satisfy the minimum distribution requirements may result in a tax
penalty. You should consult your tax advisor for more information.
You may elect to have the required minimum distribution amount on your contract
calculated and withdrawn each year under the automatic withdrawal option. You
may select monthly, quarterly, semiannual, or annual withdrawals for this
purpose. This service is provided as a courtesy and we do not guarantee the
accuracy of our calculations. Accordingly, we recommend you consult your tax
advisor concerning your required minimum distribution. You may terminate your
election for automated minimum distribution at any time by sending a written
request to our Annuity Service Center. We reserve the right to change or
discontinue this service at any time.
The IRS issued new regulations, effective January 1, 2003, regarding required
minimum distributions from qualified annuity contracts. One of the regulations
requires that the annuity contract value used to determine required minimum
distributions include the actuarial value of other benefits under the contract,
such as optional death benefits. This regulation does not apply to required
minimum distributions made under an irrevocable annuity income option. We are
currently awaiting further clarification from the IRS on this regulation,
including how the value of such benefits is determined. You should discuss the
effect of these new regulations with your tax advisor.
TAX TREATMENT OF DEATH BENEFITS
Any death benefits paid under the contract are taxable to the Beneficiary. The
rules governing the taxation of payments from an annuity contract, as discussed
above, generally apply whether the death benefits are paid as lump sum or
annuity payments. Estate taxes may also apply.
Certain enhanced death benefits may be purchased under your contract. Although
these types of benefits are used as investment protection and should not give
rise to any adverse tax effects, the IRS could take the position that some or
all of the charges for these death benefits should be treated as a partial
withdrawal from the contract. In that case, the amount of the partial withdrawal
may be includible in taxable income and subject to the 10% penalty if the owner
is under 59 1/2.
If you own a Qualified contract and purchase these enhanced death benefits, the
IRS may consider these benefits "incidental death benefits." The IRC imposes
limits on the amount of the incidental death benefits allowable for Qualified
contracts. If the death benefit(s) selected by you are considered to exceed
these limits, the benefit(s) could result in taxable income to the owner of the
Qualified contract. Furthermore, the IRC provides that the assets of an IRA
(including a Roth IRA) may not be invested in life insurance, but may provide,
in the case of death during the Accumulation Phase, for a death benefit payment
equal to the greater of Purchase Payments or Contract Value. This contract
offers death benefits, which may exceed the greater of Purchase Payments or
Contract Value. If the IRS determines that these benefits are providing life
insurance, the contract may not qualify as an IRA (including Roth IRAs). You
should consult your tax advisor regarding these features and benefits prior to
purchasing a contract.
CONTRACTS OWNED BY A TRUST OR CORPORATION
A Trust or Corporation ("Non-Natural Owner") that is considering purchasing this
contract should consult a tax advisor. Generally, the IRC does not treat a
Non-Qualified contract owned by a non-natural owner as an annuity contract for
Federal income tax purposes. The non-natural owner pays tax currently on the
contract's value in excess of the owner's cost basis. However, this treatment is
not applied to a contract held by a trust or other entity as an agent for a
natural person nor to contracts held by Qualified Plans. See the SAI for a more
detailed discussion of the potential adverse tax consequences associated with
non-natural ownership of a non-qualified annuity contract.
28
GIFTS, PLEDGES AND/OR ASSIGNMENTS OF A CONTRACT
If you transfer ownership of your Non-Qualified contract to a person other than
your spouse (or former spouse incident to divorce) as a gift you will pay
federal income tax on the contract's cash value to the extent it exceeds your
cost basis. The recipient's cost basis will be increased by the amount on which
you will pay federal taxes. In addition, the IRC treats any assignment or pledge
(or agreement to assign or pledge) of any portion of a Non-Qualified contract as
a withdrawal. See the SAI for a more detailed discussion regarding potential tax
consequences of gifting, assigning, or pledging a Non-Qualified contract.
The IRC prohibits Qualified annuity contracts including IRAs from being
transferred, assigned or pledged as security for a loan. This prohibition,
however, generally does not apply to loans under an employer-sponsored plan
(including loans from the annuity contract) that satisfy certain requirements,
provided that: (a) the plan is not an unfunded deferred compensation plan; and
(b) the plan funding vehicle is not an IRA.
DIVERSIFICATION AND INVESTOR CONTROL
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity. We believe that the management of the
Underlying Funds monitors the Funds so as to comply with these requirements. To
be treated as a variable annuity for tax purposes, the underlying investments
must meet these requirements.
The diversification regulations do not provide guidance as to the circumstances
under which you, and not the Company, would be considered the owner of the
shares of the Variable Portfolios under your Non-Qualified Contract, because of
the degree of control you exercise over the underlying investments. This
diversification requirement is sometimes referred to as "investor control." It
is unknown to what extent owners are permitted to select investments, to make
transfers among Variable Portfolios or the number and type of Variable
Portfolios owners may select from. If any guidance is provided which is
considered a new position, then the guidance should generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the owner of the
Non-qualified Contract, could be treated as the owner of the underlying Variable
Portfolios. Due to the uncertainty in this area, we reserve the right to modify
the contract in an attempt to maintain favorable tax treatment.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time We will advertise the performance of the Variable Portfolios.
Any such performance results are based on historical earnings and are not
intended to indicate future performance.
We advertise the Cash Management Portfolio's yield and effective yield. In
addition, the other Variable Portfolios advertise total return, gross yield and
yield-to-maturity. These figures represent past performance of the Variable
Portfolios. These performance numbers do not indicate future results.
We may show performance of each Variable Portfolios in comparison to various
appropriate indexes and the performance of other similar variable annuity
products with similar objectives as reported by such independent reporting
services as Morningstar, Inc., Lipper Analytical Services, Inc. and the Variable
Annuity Research Data Service ("VARDS").
Please see the Statement of Additional Information for additional information
regarding the methods used to calculate performance data.
AIG SunAmerica Life may also advertise the rating and other information assigned
to it by independent industry ratings organizations. Some of those organizations
are A.M. Best Company ("A.M. Best"), Moody's Investor's Service ("Moody's"),
Standard & Poor's Insurance Rating Services ("S&P"), and Fitch Ratings. A.M.
Best's and Moody's ratings reflect their current opinion of Our financial
strength and performance in comparison to others in the life and health
insurance industry. S&P's and Fitch Ratings measure the ability of an insurance
company to meet its obligations under insurance policies it issues. These two
ratings do not measure the insurer's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Variable Portfolios.
29
OTHER INFORMATION
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
AIG SunAmerica Life originally established a separate account, Variable Annuity
Account Five (the "Separate Account"), under Arizona law on July 8, 1996. The
Separate Account is registered with the SEC as a unit investment trust under the
Investment Company Act of 1940, as amended.
AIG SunAmerica Life owns the assets in the Separate Account. However, the assets
in the Separate Account are not chargeable with liabilities arising out of any
other business conducted by AIG SunAmerica Life. Income gains and losses
(realized and unrealized) resulting from assets in the Separate Account are
credited to or charged against the Separate Account without regard to other
income, gains or losses of AIG SunAmerica Life. Assets in the Separate Account
are not guaranteed by AIG SunAmerica Life.
THE GENERAL ACCOUNT
Money allocated to the fixed account options goes into AIG SunAmerica Life's
general account. The general account consists of all of AIG SunAmerica Life's
assets other than assets attributable to a separate account. All of the assets
in the general account are chargeable with the claims of any AIG SunAmerica Life
contract holders as well as all of its creditors. The general account funds are
invested as permitted under state insurance laws.
PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT
PAYMENTS TO BROKER-DEALERS
Registered representatives of broker-dealers sell the contract. We pay
commissions to the broker-dealers for the sale of your contract ("Contract
Commissions"). There are different structures by which a broker-dealer can
choose to have their Contract Commissions paid. For example, as one option, we
may pay upfront Contract Commission, only, that may be up to a maximum 8% of
each Purchase Payment you invest (which may include promotional amounts).
Another option may be a lower upfront Contract Commission on each Purchase
Payment, with a trail commission of up to a maximum 1.50% of contract value,
annually. We pay Contract Commissions directly to the broker-dealer with whom
your registered representative is affiliated. Registered representatives may
receive a portion of these amounts we pay in accordance with any agreement in
place between the registered representative and his/her broker-dealer firm.
We (or our affiliates) may pay broker-dealers or permitted third parties cash or
non-cash compensation, including reimbursement of expenses incurred in
connection with the sale of these contracts. These payments may be intended to
reimburse for specific expenses incurred or may be based on sales, certain
assets under management or longevity of assets invested with us. For example, we
may pay additional amounts in connection with contracts that remain invested
with us for a particular period of time. We enter into such arrangements in our
discretion and we may negotiate customized arrangements with firms, including
affiliated and non-affiliated broker-dealers based on various factors.
Promotional incentives may change at any time.
We do not deduct these amounts directly from your Purchase Payments. We
anticipate recovering these amounts from the fees and charges collected under
the contract. Certain compensation payments may increase our cost of doing
business in a particular firm and may result in higher contractual fees and
charges if you purchase your contract through such a firm. SEE EXPENSES ABOVE.
AIG SunAmerica Capital Services, Inc., Harborside Financial Center, 3200 Plaza
5, Jersey City, NJ 07311-4992, distributes the contracts. AIG SunAmerica Capital
Services, an affiliate of AIG SunAmerica Life, is a registered broker-dealer
under the Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. No underwriting fees are paid in connection with the
distribution of the contracts.
PAYMENTS WE RECEIVE
In addition to amounts received pursuant to established 12b-1 Plans, we may
receive compensation of up to 0.60% from the investment advisers, subadvisers or
their affiliates of certain of the underlying Trusts and/or portfolios for
30
services related to the availability of the underlying portfolios in the
contract. Furthermore, certain advisers and/or subadvisers may offset the costs
we incur for training to support sales of the underlying funds in the contract.
ADMINISTRATION
We are responsible for the administrative servicing of your contract. During the
Accumulation Phase, you will receive confirmation of transactions within your
contract. Transactions made pursuant to contractual or systematic agreements,
such as deduction of the annual maintenance fee and dollar cost averaging, may
be confirmed quarterly. Purchase payments received through the Automatic Payment
Plan or a salary reduction arrangement, may also be confirmed quarterly. For
other transactions, we send confirmations immediately.
During the Accumulation and Income Phases, you will receive a statement of your
transactions over the past quarter and a summary of your account values. Please
contact our Annuity Service Center at 1-800-445-SUN2, if you have any comment,
question or service request.
We send out transaction confirmations and quarterly statements. It is your
responsibility to review these documents carefully and notify us of any
inaccuracies immediately. We investigate all inquiries. To the extent that we
believe we made an error, we retroactively adjust your contract, provided you
notify us within 30 days of receiving the transaction confirmation or quarterly
statement. Any other adjustments we deem warranted are made as of the time we
receive notice of the error.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Separate Account. AIG
SunAmerica Life engages in various kinds of routine litigation. In management's
opinion, these matters are not material in relation to the financial position of
the Company. A purported class action captioned NIKITA Mehta, as Trustee of the
N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199,
was filed on April 5, 2004 in the Circuit Court, Twentieth Judicial District in
St. Clair County, Illinois. The lawsuit alleges certain improprieties in
conjunction with alleged market timing activities. The probability of any
particular outcome cannot be reasonably estimated at this time.
31
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AIG SUNAMERICA LIFE ASSURANCE COMPANY
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AIG SunAmerica Life Assurance Company (the "Company") was incorporated as
Anchor National Life Insurance Company under the laws of the State of Arizona on
April 12, 1965 while the Company changed its name to AIG SunAmerica Life
Assurance Company on January 24, 2002. The Company continued to do business as
Anchor National Life Insurance Company until February 28, 2003, after which time
it began doing business under its new name, AIG SunAmerica Life Assurance
Company.
The Company is a direct wholly owned subsidiary of SunAmerica Life
Insurance Company (the "Parent"), which is a wholly owned subsidiary of AIG
Retirement Services, Inc. ("AIGRS") (formerly AIG SunAmerica Inc.), a wholly
owned subsidiary of American International Group, Inc. ("AIG"). AIG is a holding
company, which through its subsidiaries is engaged in a broad range of insurance
and insurance-related activities, financial services and retirement services and
asset management.
The Company has no employees; however, employees of AIGRS and other
affiliates of the Company perform various services for the Company. AIGRS had
approximately 1,900 employees at December 31, 2004, approximately 1,100 of whom
perform services for the Company as well as for certain of its affiliates.
The Company's primary activities are retirement services, herein discussed
as annuity operations and asset management operations. The annuity operations
consist of the sale and administration of deposit-type insurance contracts, such
as variable and fixed annuity contracts, universal life insurance contracts and
guaranteed investment contracts ("GICs"). The asset management operations are
conducted by the Company's registered investment advisor subsidiary, AIG
SunAmerica Asset Management Corp ("SAAMCo"), and its wholly owned distributor,
AIG SunAmerica Capital Services, Inc. ("SACS"), and its wholly owned servicing
administrator, AIG SunAmerica Fund Services, Inc. ("SFS"). See Note 13 of Notes
to the Consolidated Financial Statements for operating results by segment.
The Company ranks among the largest U.S. issuers of variable annuity
contracts. The Company distributes its products and services through an
extensive network of independent broker-dealers, full-service securities firms
and financial institutions. In prior years, GICs were marketed directly to
banks, municipalities, asset management firms and direct plan sponsors and
through intermediaries, such as managers or consultants servicing these groups.
In addition to distributing its variable annuity products through its nine
affiliated broker-dealers, the Company distributes its products through a vast
network of independent broker-dealers, full-service securities firms and
financial institutions. In total, more than 84,000 independent sales
representatives are appointed to sell the Company's annuity products. The
Company's nine affiliated broker-dealers are among the largest networks of
registered representatives in the nation. Sales through affiliated
broker-dealers accounted for approximately a quarter of the Company's total
annuity sales in 2004.
The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of 45 to 64 grew
from 51 million to 69 million from 1994 to 2003, making this age group the
fastest-growing segment of the U.S. population. Between 1994 and 2003, annual
industry premiums from fixed and variable annuities increased from $155 billion
to $267 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 operations on
the sale of variable annuity contracts. In recent years, the Company has
enhanced its marketing efforts and expanded its offerings of fee-based variable
annuity contracts. Variable accounts within the Company's variable annuity
business entail no portfolio credit risk and requires significantly less capital
support than the fixed accounts of variable annuity contracts ("Fixed Options"),
which generate net investment income.
F-1
The following table shows the Company's investment income, net realized
investment losses and fee income for the year ended December 31, 2004 by primary
product line or service:
NET INVESTMENT AND FEE INCOME
<Table>
<Caption>
AMOUNT PERCENT PRIMARY PRODUCT OR SERVICE
--------- -------- -----------------------------------------
(IN THOUSANDS, EXCEPT
FOR PERCENTAGES)
Fee income:
Variable annuity policy fees, net of reinsurance.......... $369,141 42.2% Variable annuity contracts
Asset management fees..................................... 89,569 10.2 Asset management
Universal life policy fees, net of reinsurance............ 33,899 3.9 Universal life products
Surrender charges......................................... 26,219 3.0 Fixed and variable annuity contracts
Other fees................................................ 15,753 1.8 Asset management
-------- -----
Total fee income.......................................... 534,581 61.1
Investment income........................................... 363,594 41.6 Fixed annuity contracts and Fixed Options
Net realized investment losses.............................. (23,807) (2.7) Fixed annuity contracts and Fixed Options
-------- -----
Total net investment and fee income......................... $874,368 100.0%
======== =====
</Table>
ANNUITY OPERATIONS - SEPARATE ACCOUNT
The annuity operations principally engaged in the business of issuing
variable annuity contracts directed to the market for tax-deferred, long-term
savings products. It also administers closed blocks of fixed annuity contracts,
universal life insurance contracts and GICs directed to the institutional
marketplace.
The Company's variable annuity products offer investors a broad spectrum of
fund alternatives, with a choice of investment managers, as well as Fixed
Options. The Company earns fees on the amounts earned in variable account
options of its variable annuity products held in separate accounts and net
investment income on the Fixed Options held in the general account. Variable
annuity contracts offer retirement planning features similar to those offered by
fixed annuity contracts, but differ in that the contract holder's rate of return
is generally dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the contract
holder. Because the investment risk is generally borne by the customer in all
but the Fixed Options, these products require significantly less capital support
than fixed annuity contracts.
At December 31, 2004, variable product liabilities were $26.04 billion, of
which $22.61 billion were held in separate accounts and $3.43 billion were the
liabilities of the Fixed Options, held in the Company's general account. The
Company's variable annuity products incorporate incentives, surrender charges
and/or other restrictions to encourage persistency. At December 31, 2004, 71% of
the Company's variable annuity liabilities held in separate accounts were
subject to surrender penalties or other restrictions. 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 2004 was
approximately $74,000.
ANNUITY OPERATIONS - GENERAL ACCOUNT
The Company's general account obligations are fixed-rate products,
principally Fixed Options, but also including fixed annuity contracts, GICs and
universal life insurance contracts ("Fixed-Rate Products") issued in prior
years. The Fixed Options provide interest rate guarantees of certain periods
ranging up to ten years. Although the Company's annuity contracts remain in
force an average of seven to ten years, approximately 77% of the reserves for
fixed annuity contracts and Fixed Options, as well as the universal life
insurance contracts, reprice annually at discretionary rates determined by the
Company subject to a minimum rate guarantee ranging from 1.5% to 4.0%, depending
on the contract. In repricing, the Company takes into account yield
characteristics of its investment portfolio, surrender assumptions and
competitive industry pricing, among other factors.
In prior years, the Company augmented its retail annuity business with the
sale of institutional products. At December 31, 2004, the Company had $211.4
million of fixed-maturity, variable-rate GIC obligations that reprice
periodically based upon certain defined indices and $3.9 million of
fixed-maturity, fixed-rate GICs.
The Company designs its Fixed-Rate Products and conducts its investment
operations in order to closely match the duration and cash flows of the assets
in its investment portfolio to its fixed-rate 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 incentives, surrender charges and
other restrictions in order to encourage
F-2
persistency. Approximately 77% of the Company's reserves for Fixed-Rate Products
had incentives, surrender penalties and/or other restrictions at December 31,
2004.
INVESTMENT OPERATIONS
The Company believes a portfolio principally composed of fixed-rate
investments that generate predictable rates of return should back its
liabilities for Fixed-Rate Products. The Company does not have a specific target
rate of return. Instead, its rates of return vary over time depending on the
current interest rate environment, the slope of the yield curve, the spread at
which fixed-rate investments are priced over the yield curve, default rates and
general economic conditions. The majority of the Company's invested assets are
managed by an affiliate of AIG. 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.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity."
ASSET MANAGEMENT OPERATIONS
Effective January 1, 2004, the Parent contributed to the Company 100% of
the outstanding capital stock of its consolidated subsidiary, SAAMCo, which in
turn has two wholly owned subsidiaries: SACS and SFS. Pursuant to this
contribution, SAAMCo became a direct wholly owned subsidiary of the Company.
This contribution increased the Company's shareholder's equity by $150,653,000.
Assets, liabilities and shareholder's equity at December 31, 2003 were restated
to include $190,605,000, $39,952,000 and $150,653,000, respectively, of SAAMCo
balances. Similarly, the results of operations and cash flows have been restated
for the years ended December 31, 2003 and 2002 for the addition and subtraction
to pretax income of $16,345,000 and $4,464,000, respectively, to reflect the
SAAMCo activity.
The asset management operations are conducted by the Company's registered
investment advisor subsidiary, SAAMCo, and its wholly owned distributor, SACS,
and its wholly owned servicing administrator, SFS. These companies earn fee
income by managing, distributing and administering a diversified family of
mutual funds, serving as investment advisor to certain variable investment
portfolios offered within the Company's variable annuity products and providing
professional management of individual, corporate and pension plan portfolios.
REGULATION
The Company, in common with other insurers, is subject to regulation and
supervision by the states and jurisdictions in which it does business. Within
the United States, the method of such regulation varies but generally has its
source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to approval
of policy forms and rates, the standards of solvency that must be met and
maintained, including risk based capital measurements, the licensing of insurers
and their agents, the nature of and limitations on investments, restrictions on
the size of risks which may be insured under a single contract, deposits of
securities for the benefit of contract holders, methods of accounting, periodic
examinations of the affairs of insurance companies, the form and content of
reports of financial condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the
protection of contract holders rather than security holders.
Risk-based capital ("RBC") standards are designed to measure the adequacy
of an insurer's statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurer's RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the target
level of statutory surplus varies not only as a result of the insurer's size,
but also on the risk profile of the insurer's operations. The RBC Model Law
provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control. The statutory capital and
surplus of the Company exceeded its RBC requirements as of December 31, 2004.
The federal government does not directly regulate the business of
insurance, however, the Company, its subsidiaries and its products are governed
by federal agencies, including the Securities and Exchange Commission ("SEC"),
the Internal Revenue Service and the self-regulatory organization, National
Association of Securities Dealers, Inc. ("NASD"). Federal legislation and
administrative policies in several areas, including financial services
regulation, pension regulation and federal taxation, can significantly and
adversely affect the insurance industry. The federal government has from time to
time considered legislation relating to the deferral of taxation on the
accretion of value within certain annuities and life insurance products, changes
in the
F-3
Employee Retirement Income Security Act regulations, the alteration of the
federal income tax structure and the availability of Section 401(k) and
individual retirement accounts. Although the ultimate effect of any such
changes, if implemented, is uncertain, both the persistency of our existing
products and our ability to sell products may be materially impacted in the
future.
Recently there has been a significant increase in federal and state
regulatory activity relating to financial services companies, particularly
mutual fund companies and life insurers issuing variable annuity products. These
inquiries have focused on a number of issues including, among other items,
after-hours trading, short-term trading (sometimes referred to as market
timing), suitability, revenue sharing arrangements and greater transparency
regarding compensation arrangements. There are several rule proposals pending at
the SEC, the NASD and on a federal level, which, if passed, could have an impact
on the business of the Company and/or its subsidiaries.
COMPETITION
The businesses conducted by the Company are highly competitive. The Company
competes with other life insurers, and also competes 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. In 2003, net annuity premiums
written among the top 100 companies ranged from approximately $79 million to
approximately $20 billion annually. The Company together with its affiliates
ranked third largest of this group. The Company believes the primary competitive
factors among life insurance companies for investment-oriented insurance
products, such as annuities include product flexibility, net return after fees,
innovation in product design, the insurer financial strength 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.
AVAILABLE INFORMATION
AIG SunAmerica Life Assurance Company (the "Company") files annual,
quarterly, and current reports and other information with the Securities and
Exchange Commission (the "SEC"). The SEC maintains a website that contains
annual, quarterly, and current reports and other information that issuers
(including the Company) file electronically with the SEC. The SEC's website is
http://www.sec.gov. Additionally, any materials the Company files with the SEC
may be read and copied at the SEC's Public Reference Room at 450 Fifth Street,
NW, Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company does
not maintain a website.
The Company makes available free of charge, Annual Reports on Form 10-K,
Quarterly Reports of Form 10-Q and Current Reports of Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
materials are electronically filed with, or furnished to the SEC.
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
Indemnification for liabilities arising under the 1933 Act is provided to
the Company's officers, directors and controlling persons. The SEC has advised
that it believes such indemnification is against public policy under the
Securities Act and unenforceable. If a claim for indemnification against such
liabilities (other than for payment of expenses incurred or paid by its
directors, officers or controlling persons in the successful defense of any
legal action) is asserted by a director, officer or controlling person of the
Company in connection with the securities registered under this prospectus, the
Company will submit to a court with jurisdiction to determine whether the
indemnification is against public policy under the Act. The Company will be
governed by final judgment of the issue. However, if in the opinion of the
Company's counsel this issue has been determined by controlling precedent, the
Company will not submit the issue to a court for determination.
DESCRIPTION OF PROPERTY
The Company's executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company,
through an affiliate, also leases office space in Woodland Hills, California and
Jersey City, New Jersey.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.
F-4
SELECTED FINANCIAL DATA
The following selected financial data of the Company 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.
The following selected financial date of the Company for years prior to
December 31, 2004 have been restated as if the contribution of SAAMCo and its
related subsidiaries were effective as of the earliest period reported below.
The following amounts include only the subsidiaries of SAAMCo as of December 31,
2004.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
Results of Operations
Revenues:
Fee income, net of reinsurance.............................. $534,581 $427,091 $444,002 $481,945 $549,970
Investment income........................................... 363,594 402,923 387,355 370,198 398,168
Net realized investment losses.............................. (23,807) (30,354) (65,811) (59,784) (15,177)
-------- -------- -------- -------- --------
Total revenues............................................ 874,368 799,660 765,546 792,359 932,961
Benefits and Expenses:
Interest expense............................................ 222,749 240,213 238,129 244,614 264,493
Amortization of bonus interest.............................. 10,357 19,776 16,277 11,938 3,824
General and administrative expenses......................... 131,612 119,093 115,210 99,232 138,955
Amortization of deferred acquisition costs and other
deferred expenses......................................... 157,650 160,106 222,484 208,378 154,183
Annual commissions.......................................... 64,323 55,661 58,389 58,278 56,473
Claims on universal life contracts, net of reinsurance
recoveries................................................ 17,420 17,766 15,716 17,566 19,914
Guaranteed minimum death benefits, net of reinsurance
recoveries................................................ 58,756 63,268 67,492 17,839 614
-------- -------- -------- -------- --------
Total benefits & expenses................................. 662,867 675,883 733,697 657,845 638,456
-------- -------- -------- -------- --------
Pretax income before cumulative effect of accounting
change.................................................... 211,501 123,777 31,849 134,514 294,505
Income tax expense.......................................... 6,410 30,247 160 21,824 94,400
-------- -------- -------- -------- --------
Net income before cumulative effect of accounting change.... 205,091 93,530 31,689 112,690 200,105
-------- -------- -------- -------- --------
Cumulative effect of accounting change, net of tax.......... (62,589) -- -- (10,342) --
-------- -------- -------- -------- --------
Net Income.................................................. $142,502 $ 93,530 $ 31,689 $102,348 $200,105
======== ======== ======== ======== ========
</Table>
In 2004, the Company adopted AICPA Statement of Position 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts ("SOP 03-1"), which was recorded as a
cumulative effect of accounting change. (See Note 2 of Notes to Consolidated
Financial Statements).
F-5
In 2001, the Company adopted EITF 99-20 "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" and Statement of Financial Accounting Standard 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which
were recorded as a cumulative effect of accounting change.
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Financial Position
Investments and cash.................................. $ 7,125,986 $ 7,124,633 $ 7,248,324 $ 6,294,148 $ 5,249,827
Variable annuity assets held in separate accounts..... 22,612,451 19,178,796 14,758,642 18,526,413 20,393,820
Deferred acquisition costs and other deferred
expenses............................................ 1,606,870 1,505,328 1,436,802 1,419,498 1,286,456
Other assets.......................................... 150,708 162,970 309,221 258,446 177,468
----------- ----------- ----------- ----------- -----------
Total Assets.......................................... $31,496,015 $27,971,727 $23,752,989 $26,498,505 $27,107,571
=========== =========== =========== =========== ===========
Reserves for fixed annuity and fixed accounts of
variable annuity contracts.......................... $ 3,948,158 $ 4,274,329 $ 4,285,098 $ 3,498,917 $ 2,778,229
Reserves for universal life insurance contracts....... 1,535,905 1,609,233 1,676,073 1,738,493 1,832,667
Reserves for guaranteed investment contracts.......... 215,331 218,032 359,561 483,861 610,672
Variable annuity liabilities related to separate
accounts............................................ 22,612,451 19,178,796 14,758,642 18,526,413 20,393,820
Other payables and accrued liabilities................ 1,172,594 794,031 831,138 839,032 268,201
Subordinated notes payable to affiliates.............. -- 40,960 40,960 47,960 55,119
Deferred income taxes................................. 257,532 242,556 341,935 211,242 81,989
Shareholder's equity.................................. 1,754,044 1,613,790 1,459,582 1,152,587 1,086,874
----------- ----------- ----------- ----------- -----------
Total Liabilities and Shareholder's Equity............ $31,496,015 $27,971,727 $23,752,989 $26,498,505 $27,107,571
=========== =========== =========== =========== ===========
</Table>
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 AIG SunAmerica Life Assurance Company (the "Company") for the
years ended December 31, 2004 ("2004"), 2003 ("2003") and 2002 ("2002") follows.
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
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.
CRITICAL ACCOUNTING POLICIES
The Company considers its most critical accounting policies those policies
with respect to valuation of certain financial instruments, amortization of
deferred acquisition costs ("DAC") and other deferred expenses and the reserve
for guaranteed benefits. In the implementation of each of the aforementioned
policies, management is required to exercise its judgment on both a quantitative
and qualitative basis. Further explanation of how management exercises that
judgment follows.
F-6
Valuation of Certain Financial Instruments: Gross unrealized losses on debt
and equity securities available for sale amounted to $27.1 million at December
31, 2004. In determining if and when a decline in fair value below amortized
cost is other than temporary, the Company evaluates at each reporting period the
market conditions, offering prices, trends of earnings, price multiples, and
other key measures for investments in debt and equity securities. In particular,
for debt securities, the Company assesses the probability that all amounts due
are collectible according to the contractual terms of the obligation. When such
a decline in value is deemed to be other than temporary, the Company recognizes
an impairment loss in the current period operating results to the extent of the
decline (See also discussion within "Capital Resources and Liquidity" herein).
Securities in the Company's portfolio with a carrying value of
approximately $813.0 million at December 31, 2004 do not have readily
determinable market prices. For these securities, the Company estimates the fair
value with internally prepared valuations (including those based on estimates of
future profitability). Otherwise, the Company uses its most recent purchases and
sales of similar unquoted securities, independent broker quotes or comparison to
similar securities with quoted prices when possible to estimate the fair value
of those securities. All such securities are classified as available for sale.
The Company's ability to liquidate its positions in these securities will be
impacted to a significant degree by the lack of an actively traded market, and
the Company may not be able to dispose of these investments in a timely manner.
Although the Company believes its estimates reasonably reflect the fair value of
those securities, the key assumptions about the risk-free interest rates, risk
premiums, performance of underlying collateral, if any, and other factors may
not reflect those of an active market.
Amortization of Deferred Acquisition Costs and Other Deferred Expenses:
Policy acquisition costs include commissions and other costs that vary with, and
are primarily related to, the production or acquisition of new business. Such
costs are deferred and amortized over the estimated lives of the annuity
contracts. Approximately 81% of the amortization of DAC and other deferred
expenses was attributed to policy acquisition costs deferred by the annuity
operations and 19% was attributed to the distribution costs deferred by the
asset management operations. For the annuity operations, the Company amortizes
DAC and other deferred expenses based on a percentage of expected gross profits
("EGPs") over the life of the underlying policies. EGPs are computed based on
assumptions related to the underlying policies written, including their
anticipated duration, the growth rate of the separate account assets (with
respect to variable options of the variable annuity contracts) or general
account assets (with respect to fixed annuity contracts, Fixed Options and
universal life insurance contracts) supporting these obligations, costs of
providing contract guarantees and the level of expenses necessary to administer
the policies. The Company adjusts amortization of DAC and other deferred
expenses (a "DAC unlocking") when current or estimates of future gross profits
to be realized from its annuity contracts are revised as more fully described
below. Substantially all of the DAC balance attributed to annuity operations at
December 31, 2004 related to variable annuity contracts.
DAC amortization on annuities is impacted by surrender rates, claims costs,
and the actual and assumed future growth rate of the assets supporting the
Company's obligations under annuity policies. With respect to Fixed Options, the
growth rate depends on the yield on the general account assets supporting those
annuity contracts. With respect to the variable options of the variable annuity
contracts, the growth rate depends on the performance of the investment options
available under the annuity contract and the allocation of assets among these
various investment options.
The assumption the Company uses for the long-term annual net growth rate of
the separate account assets in the determination of DAC amortization with
respect to its variable annuity contracts is 10% (the "long-term growth rate
assumption"). The Company uses a "reversion to the mean" methodology that allows
it to maintain this 10% long-term growth rate assumption, while also giving
consideration to the effect of short-term swings in the equity markets. For
example, if performance was 15% during the first year following the introduction
of a product, the DAC model would assume that market returns for the following
five years (the "short-term growth rate assumption") would be approximately 9%,
resulting in an average annual growth rate of 10% during the life of the
product. Similarly, following periods of below 10% performance, the model will
assume a short-term growth rate higher than 10%. A DAC unlocking will occur if
management deems the short-term growth rate assumption (i.e., the growth rate
required to revert to the mean 10% growth rate over a five-year period) to be
unreasonable. The use of a reversion to the mean assumption is common within the
industry; however, the parameters used in the methodology are subject to
judgment and vary within the industry.
For the asset management operations, the Company defers distribution costs
that are directly related to the sale of mutual funds that have a 12b-1
distribution plan and/or a contingent deferred sales charge feature
(collectively, "Distribution Fee Revenue"). These costs are amortized on a
straight-line basis, adjusted for redemptions, over a period ranging from one
year to eight years depending on share class. The carrying value of the deferred
asset is subject to continuous review based on projected Distribution Fee
Revenue. Amortization of deferred distribution costs is increased if at any
reporting period the value of the deferred amount exceeds the projected
Distribution Fee Revenue. The projected Distribution Fee Revenue is impacted by
estimated future withdrawal rates and the rates of market return. Management
uses historical activity to estimate future withdrawal rates and average annual
performance of the equity markets to estimate the rates of market return.
F-7
Reserve for Guaranteed Benefits: Pursuant to the adoption of Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1")
which was adopted on January 1, 2004, the Company is required to recognize a
liability for guaranteed minimum death benefits and other guaranteed benefits.
In calculating the projected liability, five thousand stochastically generated
investment performance scenarios were developed using the Company's best
estimates. These assumptions included, among others, mean equity return and
volatility, mortality rates and lapse rates. The estimation of cash flow and the
determination of the assumptions used require judgment, which can, at times, be
subjective.
Several of the guaranteed benefits are sensitive to equity market
conditions. The Company uses the purchase of reinsurance and capital market
hedging strategies to mitigate the risk of paying benefits in excess of account
values as a result of significant downturns in equity markets. Risk mitigation
may or may not reduce the volatility of net income resulting from equity market
volatility. Reinsurance or hedges are secured when the cost is less than the
risk reduction. The Company expects to use either additional reinsurance or
capital market hedges for risk mitigation on an opportunistic basis. Despite the
purchase of reinsurance or hedges, the reinsurance or hedge secured may be
inadequate to completely offset the effects of changes in equity markets.
BUSINESS SEGMENTS
Effective January 1, 2004, SunAmerica Life Insurance Company (the
"Parent"), the parent of the Company, contributed to the Company 100% of the
outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset
Management Corp. ("SAAMCo"), which in turn has two wholly owned subsidiaries:
AIG SunAmerica Capital Services, Inc. ("SACS") and AIG SunAmerica Fund Services,
Inc. ("SFS"). This contribution increased the Company's shareholder's equity by
approximately $150.7 million (see Note 1 of Notes to Consolidated Financial
Statements). Effective January 1, 2004, the Company's earnings include the asset
management operations of SAAMCo, SACS and SFS. Prior year results have been
restated to account for this contribution as if it had occurred at the beginning
of the earliest period presented.
The Company has two business segments: annuity operations and asset
management operations. The annuity operations consist of the sale and
administration of deposit-type insurance contracts, such as variable and fixed
annuity contracts, universal life insurance contracts and guaranteed investment
contracts. The Company focuses primarily on the marketing of variable annuity
products. The variable annuity products offer investors a broad spectrum of fund
alternatives, with a choice of investment managers, as well as Fixed Options.
The Company earns fee income on amounts invested in the variable account options
and net investment spread on the Fixed Options.
The asset management operations are conducted by the Company's registered
investment advisor subsidiary, SAAMCo, and its wholly owned distributor, SACS,
and its wholly owned servicing administrator, SFS. These companies earn fee
income by managing, distributing and administering a diversified family of
mutual funds, servicing as investment advisor to certain variable investment
portfolios offered within the Company's variable annuity products and providing
professional management of individual, corporate and pension plan portfolios.
RESULTS OF OPERATIONS
NET INCOME totaled $142.5 million in 2004, compared with $93.5 million in
2003 and $31.7 million in 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of SOP 03-1 on January 1, 2004. The Company recorded a loss of $62.6 million,
net of tax, which is recognized in the consolidated statement of income and
comprehensive income as a cumulative effect of accounting change for the year
ended December 31, 2004.
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $211.5
million in 2004, compared with $123.8 million in 2003 and $31.8 million in 2002.
The increase in 2004 compared to 2003 was primarily due to higher variable
annuity policy fee and asset management fee income, partially offset by lower
investment income and higher general and administrative and other expenses. The
increase in 2003 compared to 2002 was primarily due to reductions in net
realized investment losses and amortization of DAC and other expenses.
INCOME TAX EXPENSE totaled $6.4 million in 2004, $30.2 million in 2003 and
$0.2 million in 2002 representing effective tax rates of 3%, 24% and 1%,
respectively. The tax expense in 2004 included the benefit of $39.7 million
resulting from the reduction of the prior year tax liability based on additional
information becoming available. Excluding this benefit the effective tax rate is
22% in 2004. The unusually low effective tax rate for 2002 is due primarily to
the lower relative pretax income without corresponding reductions in permanent
tax differences. See Note 11 of the Notes to Consolidated Financial Statements
for a reconciliation of income tax expense to the federal statutory rate.
F-8
ANNUITY OPERATIONS
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $176.9
million in 2004, compared with $98.7 million in 2003 and $27.7 million in 2002.
The increase in 2004 compared to 2003 was primarily due to higher variable
annuity policy fee income and lower amortization of deferred acquisition costs
and other deferred expenses partially offset by higher general and
administrative and other expenses. The increase in 2003 compared to 2002 was
primarily due to lower net realized investment losses and improved net
investment income as customers allocated more dollars to the fixed rate portion
of variable annuity contracts.
NET INVESTMENT SPREAD, a non-GAAP measure, represents investment income
less interest credited to Fixed-Rate Products is a key measurement used by the
Company in evaluating the profitability of its annuity business. Investment
income includes income earned on invested assets, as well as the mark-to-market
on both purchased derivatives and embedded derivatives inherent in certain
product guarantees. Accordingly, the Company presents an analysis of net
investment spread because the Company has determined this measure to be useful
and meaningful.
In evaluating its investment yield and net investment spread, the Company
calculates average invested assets using the amortized cost of bonds, notes and
redeemable preferred stocks. This basis does not include unrealized gains and
losses, which are reflected in the carrying value (i.e., fair value) of those
investments pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In the
calculation of average invested assets, the Company excludes collateral received
from a securities lending program, which is offset by a securities lending
payable in the same amount. The Company participates in a securities lending
program with an affiliated agent, pursuant to which it lends its securities and
primarily takes cash as collateral with respect to the securities lent.
Participation in securities lending agreements provides additional net
investment income for the Company, resulting from investment income earned on
the collateral, less interest paid on the securities lending agreements and the
related management fees paid to an affiliate to administer the program.
An analysis of net investment spread and a reconciliation to pretax income
before cumulative effect of accounting change is presented in the following
table:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
(IN THOUSANDS)
Investment income........................................... $ 362,631 $ 398,304 $ 377,556
Interest credited to fixed annuity contracts and Fixed
Options................................................... (140,889) (153,636) (142,973)
Interest credited to universal life insurance contracts..... (73,745) (76,415) (80,021)
Interest credited to guaranteed investment contracts........ (6,034) (7,534) (11,267)
--------- --------- ---------
Net investment spread....................................... 141,963 160,719 143,295
Net realized investment losses.............................. (24,100) (30,354) (65,811)
Fee income, net of reinsurance.............................. 429,259 344,908 358,983
Amortization of bonus interest.............................. (10,357) (19,776) (16,277)
General and administrative expenses......................... (93,188) (83,013) (79,287)
Amortization of DAC and other deferred expenses............. (126,142) (137,130) (171,583)
Annual commissions.......................................... (64,323) (55,661) (58,389)
Claims on UL contracts, net of reinsurance recoveries....... (17,420) (17,766) (15,716)
Guaranteed benefits, net of reinsurance recoveries.......... (58,756) (63,268) (67,492)
--------- --------- ---------
Pretax income before cumulative effect of accounting
change.................................................... $ 176,936 $ 98,659 $ 27,723
========= ========= =========
</Table>
Net investment spread totaled $142.0 million in 2004, compared to $160.7
million in 2003 and $143.3 million in 2002. These amounts equal 2.28% on average
invested assets (computed on a daily basis) of $6.22 billion in 2004, 2.37% on
average invested assets of $6.66 billion in 2003 and 2.41% on average invested
assets of $6.09 billion in 2002. The decrease in net investment spread in 2004
from 2003 reflected results from lower average invested assets as discussed
below and reinvesting in the historically low prevailing interest rate
environment that has persisted throughout 2003 and 2004. The increase in net
investment spread in 2003 from 2002 resulted from substantial growth in average
invested assets and effective management of interest crediting rates to offset
lower yields available on invested assets.
F-9
The components of net investment spread were as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net investment spread....................................... $ 141,963 $ 160,719 $ 143,295
Average invested assets..................................... 6,216,792 6,656,360 6,086,517
Average interest-bearing liabilities........................ (5,942,627) (6,407,102) (5,962,521)
Yield on average invested assets............................ 5.83% 5.98% 6.20%
Rate paid on average interest-bearing liabilities........... 3.71 3.71 3.93
----------- ----------- -----------
Difference between yield and interest rate paid............. 2.12% 2.27% 2.27%
=========== =========== ===========
Net investment spread as a percentage of average invested
assets.................................................... 2.28% 2.41% 2.35%
=========== =========== ===========
</Table>
The decline in average invested assets resulted primarily from net
exchanges from Fixed Options into the separate accounts of variable annuity
contracts, partially offset by new deposits of Fixed Options. Deposits of Fixed
Options and renewal deposits on its universal life insurance contracts totaled
$1.41 billion 2004, $1.58 billion in 2003 and $1.78 billion in 2002, and are
primarily deposits for the Fixed Options. Deposits of Fixed Options represent
24% in 2004, 27% in 2003 and 34% in 2002, of the related reserve balances at the
beginning of the respective periods.
Net investment spread includes the effect of income earned or interest paid
on the difference between average invested assets and average interest-bearing
liabilities. Average invested assets exceeded average interest-bearing
liabilities by $274.2 million in 2004, compared with $249.3 million in 2003 and
$124.0 million in 2002. The difference between the Company's yield on average
invested assets and the rate paid on average interest-bearing liabilities was
2.12% in 2004 and 2.27% in 2003 and 2.27% in 2002.
Investment income (and the related yields on average invested assets)
totaled $362.6 million (5.83%) in 2004, compared with $398.3 million (5.98%) in
2003 and $377.6 million (6.20%) in 2002. The decrease in the investment yield
primarily reflects the reinvesting in the historically low prevailing interest
rate environment that has persisted throughout 2002, 2003 and 2004, as well as a
$4.3 million reduction in income from the mark to market of the S&P 500 put
options and the guaranteed minimum account value and guaranteed minimum
withdrawal benefit embedded derivatives in 2004. Excluding the impact of the put
options and embedded derivatives, investment income would have been $361.6
million (5.82%) and $393.0 million (5.90%) in 2004 and 2003, respectively.
Expenses incurred to manage the investment portfolio amounted to $2.5 million in
2004, $2.3 million in 2003 and $2.4 million in 2002. These expenses are included
as a reduction of investment income in the consolidated statement of income and
comprehensive income.
Interest expense (and the related rate paid on average interest-bearing
liabilities) totaled $220.7 million (3.71%) in 2004, $237.6 million (3.71%) in
2003 and $234.3 million (3.93%) in 2002. Interest-bearing liabilities averaged
$5.94 billion during 2004, $6.41 billion during 2003 and $5.96 billion during
2002.
NET REALIZED INVESTMENT LOSSES totaled $24.1 million in 2004, $30.4 million
in 2003 and $65.8 million in 2002 and include impairment writedowns of $21.1
million, $54.1 million and $57.3 million, respectively. Thus, net realized
losses from sales and redemptions of investments totaled $3.0 million in 2004,
compared with net realized gains of $23.7 million in 2003 and net realized
losses of $8.5 million in 2002.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $1.97 billion in 2004, $2.21 billion in 2003 and $1.60 billion in
2002. 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 0.05%, 0.36% and
0.14% of average invested assets for 2004, 2003 and 2002, respectively. Active
portfolio management involves the ongoing evaluation of asset sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of the
Company's active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit, option, liquidity and
interest-rate risk.
Impairment writedowns include $21.1 million, $54.1 million and $57.3
million of provisions principally applied to bonds in 2004, 2003 and 2002,
respectively. Impairment writedowns represent 0.34%, 0.81% and 0.96% of average
invested assets in the respective periods. For the five years ended December 31,
2004, impairment writedowns as a percentage of average invested assets have
ranged from 0.34% to 1.27% and have averaged 0.75%. Such writedowns are based
upon estimates of the fair value of invested assets and recorded when declines
in the value of such assets are considered to be other than temporary. Actual
realization will be dependent upon future events.
F-10
VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are generally based on the
market value of assets in the separate accounts supporting variable annuity
contracts. Such fees totaled $369.1 million in 2004, $281.4 million in 2003 and
$286.9 million in 2002 and are net of reinsurance premiums of $28.6 million,
$30.8 million and $22.5 million, respectively. The increased fees in 2004
compared to 2003 primarily reflect the improved equity market conditions in 2004
and the latter part of 2003, and the resulting favorable impact on market values
of the assets in the separate accounts. The decreased fees in 2003 as compared
to 2002 reflected increased reinsurance premiums. Variable annuity policy fees
represent 1.8%, 1.7% and 1.7% of average variable annuity assets in 2004, 2003
and 2002, respectively. Variable annuity assets averaged $20.41 billion, $16.32
billion and $16.45 billion during the respective periods. Variable annuity
deposits, which exclude deposits allocated to the Fixed Options, totaled $2.65
billion in 2004, $1.73 billion in 2003 and $1.18 billion in 2002. These amounts
represent 14%, 12% and 6% of variable annuity reserves at the beginning of the
respective periods. The increase in variable annuity deposits in 2004 and 2003
reflected increased demand for variable annuity products due to the improved
equity market conditions in 2004 and the latter part of 2003. Transfers from the
Fixed Options to the separate accounts are not classified as variable annuity
deposits. Accordingly, changes in variable annuity deposits are not necessarily
indicative of the ultimate allocation by customers among fixed and variable
account options of the Company's variable annuity products.
Sales of variable annuity products (which include deposits allocated to the
Fixed Options) ("Variable Annuity Product Sales") amounted to $4.01 billion,
$3.27 billion and $2.92 billion in 2004, 2003 and 2002, respectively. Such sales
primarily reflect those of the Company's Polaris and Seasons families of
variable annuity products. The Company's variable annuity products are primarily
multi-manager variable annuities that offer investors a choice of several
variable funds as well as up to seven fixed funds, depending on the product. The
increase in Variable Annuity Product Sales in 2004 and 2003 reflects the
generally improved equity market conditions in 2004 and the latter part of 2003.
The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time, federal
initiatives are proposed that could affect the taxation of annuities (see
"Regulation").
With respect to all reinsurance agreements, the Company could become liable
for all obligations of the reinsured policies if the reinsurers were to become
unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. Due to the high credit ratings and periodic monitoring of these
ratings of the reinsurers, such risks are considered to be minimal.
UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $33.9
million in 2004, $35.8 million in 2003 and $36.3 million in 2002 and are net of
reinsurance premiums of $34.3 million, $33.7 million and $34.1 million,
respectively. Universal life insurance policy fees consist of mortality charges,
up-front fees earned on deposits received and administrative fees, net of
reinsurance premiums. The administrative fees are assessed based on the number
of policies in force as of the end of each month. The Company acquired its
universal life insurance contracts as part of the acquisition of business from
MBL Life Assurance Corporation on December 31, 1998 and does not actively market
such contracts. Such fees represent 2.20%, 2.23% and 2.17% of average reserves
for universal life insurance contracts in the respective periods.
SURRENDER CHARGES on variable annuity and universal life insurance
contracts totaled $26.2 million in 2004, $27.7 million in 2003 and $32.5 million
in 2002. Surrender charge periods range from zero to nine years from the date a
deposit is received. Surrender charges generally are assessed on withdrawals at
declining rates.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $93.2 million in 2004, $83.0
million in 2003 and $79.3 million in 2002. The increase in 2004 results from
higher information technology costs and payroll related expenses resulting from
the servicing of a larger block of annuity contracts. 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 AND OTHER DEFERRED EXPENSES
totaled $126.1 million in 2004, compared with $137.1 million in 2003 and $171.6
million in 2002. DAC amortization in 2003 reflected a declining market which led
to higher DAC amortization (i.e. impairments on specific products) during the
first nine months of 2003 and is partially offset by an $18.0 million DAC
unlocking. The higher amortization in 2002 was primarily related to lower
estimates of future gross profits on variable annuity contracts compared to the
prior years in light of the downturn in the equity markets in 2002, and
additional variable annuity product sales over the last twelve months and the
subsequent amortization of related deferred commissions and other direct selling
costs.
ANNUAL COMMISSIONS totaled $64.3 million in 2004, compared with $55.7
million in 2003 and $58.4 million in 2002. Annual commissions generally
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. The vast majority of the Company's average balances of its variable
annuity products are currently subject to such annual commissions.
F-11
CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled
$17.4 million in 2004, compared with $17.8 million in 2003 and $15.7 million in
2002 (net of reinsurance recoveries of $34.2 million in 2004, $34.0 million in
2003 and $29.2 million in 2002). The change in such claims resulted principally
from changes in mortality experience and the reinsurance recoveries there on.
GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity
contracts totaled $58.8 million in 2004, compared with $63.3 million in 2003 and
$67.5 million in 2002 and are net of reinsurance recoveries of $2.7 million,
$8.0 million and $8.4 million, respectively. These guaranteed benefits consist
primarily of guaranteed minimum death benefits as well as immaterial amounts of
earnings enhancement benefits and guaranteed minimum income benefits. These
guarantees are described in more detail in the following paragraphs. The
decrease during 2004 reflects the generally improved equity market conditions in
2004 and the latter part of 2003. Downturns in the equity markets could increase
these expenses.
Guaranteed minimum death benefits ("GMDB") are issued on a majority of the
Company's variable annuity products. GMDB provides that, upon the death of a
contract holder, the contract holder's beneficiary will receive the greater of
(1) the contract holder's account value, or (2) a guaranteed minimum death
benefit that varies by product and election by the contract holder. The Company
bears the risk that death claims following a decline in the debt and equity
markets may exceed contract holder account balances and that the fees collected
under the contract are insufficient to cover the costs of the benefit to be
provided. On January 1, 2004, the Company recorded a liability for guaranteed
benefits including GMDB (see Note 2 of Notes to Consolidated Financial
Statements) pursuant to adoption of a new accounting standard, SOP 03-1.
Earnings enhancement benefit ("EEB") is a feature the Company offers on
certain variable annuity products. For contract holders who elect the feature,
the EEB provides an additional death benefit amount equal to a fixed percentage
of earnings in the contract, subject to certain maximums. The Company bears the
risk that account values following favorable performance of the financial
markets will result in greater EEB death claims and that the fees collected
under the contract are insufficient to cover the costs of the benefit to be
provided.
Guaranteed minimum income benefit ("GMIB") is a feature the Company offers
on certain variable annuity products. This feature provides a minimum fixed
annuity payment guarantee for those contract holders who choose to receive fixed
lifetime annuity payments after a seven, nine, or ten-year waiting period in
their deferred annuity contracts. The Company bears the risk that the
performance of the financial markets will not be sufficient for accumulated
contract holder account balances to support GMIB benefits and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. As there is a waiting period to annuitize using the GMIB, there
are no policies eligible to receive this benefit at December 31, 2004. The
Company has eliminated offering a GMIB feature that guarantees a return in
excess of the amount to be annuitized in order to mitigate its exposure.
Guaranteed minimum account value ("GMAV") is a feature the Company offers
on certain variable annuity products in the third quarter of 2002. If available
and elected by the contract holder at the time of contract issuance, this
feature guarantees that the account value under the contract will at least equal
the amount of the deposits invested during the first ninety days of the
contract, adjusted for any subsequent withdrawals, at the end of a ten-year
waiting period. The Company bears the risk that protracted under-performance of
the financial markets could result in GMAV benefits being higher than the
underlying contract holder account balance and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. The
Company purchased put options on the S&P 500 index to partially offset this
risk. Changes in the market value of both the GMAV benefit and the put options
are recorded in investment income in the accompanying consolidated statement of
income and comprehensive income.
Guaranteed minimum withdrawal benefit ("GMWB") is a feature the Company
began offering on certain variable annuity products in May of 2004. If available
and elected by the contract holder at the time of contract issuance, this
feature provides a guaranteed annual withdrawal stream, regardless of market
performance, equal to deposits invested during the first ninety days adjusted
for any subsequent withdrawals ("Eligible Premium"). These guaranteed annual
withdrawals of up to 10% of Eligible Premium are available after either a
three-year or a five-year waiting period, as elected by the contract holder at
the time of contract issuance, without reducing the future amounts guaranteed.
If no withdrawals have been made during the waiting period of 3 or 5 years, the
contract holder will realize an additional 10% or 20%, respectively, of Eligible
Premium after all other amounts guaranteed under this benefit have been paid.
The Company bears the risk that protracted under-performance of the financial
markets could result in GMWB benefits being higher than the underlying contract
holder account balance and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. The Company
purchased put options on the S&P 500 index to partially offset this risk.
Changes in the market value of both the GMWB benefit and the put options are
recorded in investment income in the accompanying consolidated statement of
income and comprehensive income.
F-12
Management expects substantially all of the Company's near-term exposure to
guaranteed benefits will relate to GMDB and EEB. As sales of products with other
guaranteed benefits increase, the Company expects these other guarantees to have
an increasing impact on operating results, under current hedging strategies.
ASSET MANAGEMENT OPERATIONS
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $34.6
million in 2004, compared to $25.1 million in 2003 and $4.1 million in 2002. The
increases in 2004 from 2003 resulted from the impact of higher average asset
base and higher margin on account servicing fees, partially offset by increased
amortization of DAC and other deferred expenses. The increase in 2003 from 2002
resulted from decreased amortization of DAC and other deferred expenses.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed by SAAMCo in
its mutual funds and certain variable annuity portfolios. Such fees totaled
$89.6 million on average assets managed of $9.65 billion in 2004, $66.7 million
on average assets managed of $8.15 billion in 2003 and $66.4 million on average
assets managed of $7.64 billion in 2002. The increase in asset management fees
is primarily the result of a higher average asset base and higher margin on
account servicing fees. Mutual fund sales, excluding sales of money market
accounts and private accounts, totaled $2.14 billion in 2004, compared to $2.23
billion in 2003 and $1.67 billion in 2002. Redemptions of mutual funds,
excluding redemptions of money market accounts, amounted to $1.56 billion in
2004, $1.55 billion in 2003 and $1.55 billion in 2002, which represent 20%, 25%
and 25%, respectively, of average related mutual fund assets. The 4% decrease in
mutual fund sales in 2004 compared to 2003 primarily reflects generally
difficult equity market conditions in the second and third quarters of 2004. The
increase in sales in 2003 principally reflects increasing demand for equity
products, due to generally improved equity market conditions in the latter part
of 2003.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $38.4 million in 2004, $36.1
million in 2003 and $35.9 million in 2002. General and administrative expenses
increased in 2004 due primarily to higher employee-related costs.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES
includes amortization of distribution costs that totaled $31.5 million in 2004,
compared with $23.0 million in 2003 and $35.9 million in 2002. The increased
amortization in 2004 was primarily due to additional mutual fund sales and
amortization of the deferred commissions thereon. In 2002, amortization of
deferred acquisition costs and other deferred expenses included additional
amortization of $24.2 million, resulting from certain distribution costs whose
carrying value exceeded projected revenue.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $1.75 billion at December 31, 2004 from
$1.61 billion at December 31, 2003 due to $142.5 million of net income and $49.1
million of capital contribution from Parent partially offset by a $49.1 million
tax effect on a distribution of investment and a $2.5 million dividend to the
Parent.
F-13
INVESTMENTS AND CASH at December 31, 2004 totaled $7.13 billion, compared
with $7.14 billion at December 31, 2003. The Company's invested assets are
managed by an affiliate. The following table summarizes the Company's portfolio
of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") and other
investments and cash at December 31, 2004 and 2003:
<Table>
<Caption>
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- -----------------------
FAIR PERCENT OF FAIR PERCENT OF
VALUE PORTFOLIO VALUE PORTFOLIO
---------- ---------- ---------- ----------
BOND PORTFOLIO: (IN THOUSANDS, EXCEPT FOR PERCENTAGES)
U.S. government securities.................................. $ 30,300 0.4% $ 24,292 0.3%
Mortgage-backed securities.................................. 956,567 13.4 1,191,817 16.7
Securities of public utilities.............................. 332,038 4.7 365,150 5.1
Corporate bonds and notes................................... 2,902,829 40.8 2,697,142 37.9
Redeemable preferred stocks................................. 21,550 0.3 22,175 0.3
Other debt securities....................................... 917,743 12.9 1,205,224 16.9
---------- ----- ---------- -----
Total Bond Portfolio........................................ 5,161,027 72.5 5,505,800 77.2
Mortgage loans.............................................. 624,179 8.7 716,846 10.1
Common stocks............................................... 4,902 0.1 727 0.0
Cash and short-term investments............................. 201,117 2.8 133,105 1.9
Securities lending collateral............................... 883,792 12.4 514,145 7.2
Other invested assets....................................... 250,969 3.5 254,010 3.6
---------- ----- ---------- -----
Total investments and cash.................................. $7,125,986 100.0% $7,124,633 100.0%
========== ===== ========== =====
</Table>
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 the Bond Portfolio is available to be
sold in response to changes in market interest rates, changes in relative value
of asset sectors and individual securities, changes in prepayment risk, changes
in the credit quality outlook for certain securities, the Company's need for
liquidity and other similar factors.
THE BOND PORTFOLIO, which constituted 72% of the Company's total investment
portfolio at December 31, 2004, had an aggregate fair value that was $153.2
million greater than its amortized cost at December 31, 2004, compared with
$154.6 million at December 31, 2003.
At December 31, 2004, the Bond Portfolio had an aggregate fair value of
$5.16 billion and an aggregate amortized cost of $5.01 billion. At December 31,
2004, the Bond Portfolio (excluding $21.6 million of redeemable preferred
stocks) included $4.50 billion of bonds rated by Standard & Poor's ("S&P"),
Moody's Investors Service ("Moody's") or Fitch ("Fitch") and $638.1 million of
bonds rated by the National Association of Insurance Commissioners ("NAIC") or
the Company pursuant to statutory ratings guidelines established by the NAIC. At
December 31, 2004, approximately $4.75 billion of the Bond Portfolio was
investment grade, including $986.8 million of mortgage-backed securities ("MBS")
and U.S. government/agency securities.
At December 31, 2004, the Bond Portfolio included $386.4 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1% of the Company's total assets and approximately 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.
An economic downturn could produce higher than average issuer defaults on the
non-investment-grade securities, which could cause the Company's investment
returns and net income to decline. At December 31, 2004, the Company's
non-investment-grade bond portfolio consisted of 171 issues with no single
issuer representing more than 10% of the total non-investment-grade portfolio.
These non-investment-grade securities are comprised of bonds spanning 10
industries with 19%, 16%, 16% and 10% concentrated in telecommunications,
utilities, financial services and noncyclical consumer products industries,
respectively. No other industry concentration constituted more than 10% of these
assets.
F-14
The table below summarizes the Company's rated bonds by rating
classification as of December 31, 2004.
RATED BONDS BY RATING CLASSIFICATION
<Table>
<Caption>
ISSUES RATED BY ISSUES NOT RATED BY
S&P/MOODY'S/FITCH S&P/MOODY'S/FITCH, BY NAIC CATEGORY TOTAL
- ------------------------------------------ ------------------------------------- ------------------------------------------
S&P/MOODY'S/FITCH AMORTIZED ESTIMATED NAIC AMORTIZED ESTIMATED AMORTIZED ESTIMATED PERCENT OF TOTAL
CATEGORY(1) COST FAIR VALUE CATEGORY(2) COST FAIR VALUE COST FAIR VALUE INVESTED ASSETS
- ----------------- ---------- ---------- ------------ --------- ---------- ---------- ---------- ----------------
(DOLLARS IN THOUSANDS)
AAA+ to A-
(Aaa to A3)
[AAA to A-] $2,888,647 $2,964,803 1 $266,034 $270,334 $3,154,681 $3,235,137 45.40%
BBB+ to BBB-
(Baa to Baa3)
[BBB+ to BBB-] 1,203,109 1,233,692 2 276,973 284,221 1,480,082 1,517,913 21.30%
BB+ to BB-
(Bal to Ba3)
[BB+ to BB-] 133,070 138,091 3 36,371 36,462 169,441 174,553 2.45%
B+ to B-
(Bl to B3)
[B+ to B-] 129,347 140,699 4 11,600 11,524 140,947 152,223 2.14%
CCC+ to CCC-
(Caal to Caa3)
[CCC+ to CCC-] 18,954 19,353 5 7,305 6,695 26,259 26,048 0.37%
CC to D
(Ca to C)
[CC to D] 1,842 4,722 6 14,476 28,880 16,318 33,602 0.47%
---------- ---------- -------- -------- ---------- ----------
TOTAL RATED
ISSUES $4,374,969 $4,501,360 $612,759 $638,116 $4,987,728 $5,139,476
========== ========== ======== ======== ========== ==========
</Table>
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. Issues are categorized based on the highest of
the S&P, Moody's 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 non-defaulted bonds plus one category 6, for bonds in or near default.
These six categories correspond with the S&P/ Moody's/Fitch rating groups
listed above, with categories 1 and 2 considered investment grade. The NAIC
categories include $131.5 million of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines.
The valuation of invested assets involves obtaining a fair value for each
security. The source for the fair value is generally from market exchanges, with
the exception of non-traded securities.
Another aspect of valuation pertains to impairment. As a matter of policy,
the determination that a security has incurred an other-than-temporary decline
in value and the amount of any loss recognition requires the judgment of the
Company's management and a continual review of its investments. In general, a
security is considered a candidate for impairment if it meets any of the
following criteria:
- Trading at a significant discount to par, amortized cost (if lower) or
cost for an extended period of time;
- The occurrence of a discrete credit event resulting in: (i) the issuer
defaulting on a material outstanding obligation; (ii) the issuer
seeking protection from creditors under the bankruptcy laws or similar
laws intended for the court supervised reorganization of insolvent
enterprises; or (iii) the issuer proposing a voluntary reorganization
pursuant to which creditors are asked to exchange their claims for cash
or securities having a fair value substantially lower than the par
value of their claims; or
- In the opinion of the Company's management, it is unlikely the Company
will realize a full recovery on its investment, irrespective of the
occurrence of one of the foregoing events.
F-15
Once a security has been identified as potentially impaired, the amount of
such impairment is determined by reference to that security's contemporaneous
market price.
The Company has the ability to hold any security to its stated maturity.
Therefore, the decision to sell reflects the judgment of the Company's
management that the security sold is unlikely to provide, on a relative value
basis, as attractive a return in the future as alternative securities entailing
comparable risks. With respect to distressed securities, the sale decision
reflects management's judgment that the risk-discounted anticipated ultimate
recovery is less than the value achieved on sale.
As a result of these policies, the Company recorded pretax impairment
writedowns of $21.1 million, $54.1 million and $57.3 million in 2004, 2003 and
2002, respectively. No individual impairment loss, net of DAC and taxes, during
the year exceeded 10% of the Company's net income for the year ended December
31, 2004.
Excluding the impairments noted above, the changes in fair value for the
Company's Bond Portfolio, which constitutes the vast majority of the Company's
investments, were recorded as a component of other comprehensive income in
shareholder's equity as unrealized gains or losses.
At December 31, 2004, the fair value of the Company's Bond Portfolio
aggregated $5.16 billion. Of this aggregate fair value, approximately 0.03%
represented securities trading at or below 75% of amortized cost. The impact of
unrealized losses on net income will be further mitigated upon realization,
because realization will result in current decreases in the amortization of DAC
and decreases in income taxes.
At December 31, 2004, approximately $3.91 billion, at amortized cost, of
the Bond Portfolio had a fair value of $4.09 billion resulting in an aggregate
unrealized gain of $180.3 million. At December 31, 2004, approximately $1.10
billion, at amortized cost, of the Bond Portfolio had a fair value of $1.07
billion resulting in an aggregate unrealized loss of $27.1 million. No single
issuer accounted for more than 10% of unrealized losses. Approximately 36%, 15%
and 11% of unrealized losses were from the financial services, transportation
and noncyclical consumer products industries, respectively. No other industry
accounted for more than 10% of unrealized losses.
The amortized cost of the Bond Portfolio in an unrealized loss position at
December 31, 2004, by contractual maturity, is shown below.
<Table>
<Caption>
AMORTIZED COST
--------------
(IN THOUSANDS)
Due in one year or less..................................... $ 46,250
Due after one year through five years....................... 422,237
Due after five years through ten years...................... 389,073
Due after ten years......................................... 243,973
----------
Total....................................................... $1,101,533
==========
</Table>
F-16
The aging of the Bond Portfolio in an unrealized loss position at December
31, 2004 is shown below:
<Table>
<Caption>
LESS THAN OR EQUAL TO 20% GREATER THAN 20% TO 50% GREATER THAN 50%
OF AMORTIZED COST OF AMORTIZED COST OF AMORTIZED COST
------------------------------- ------------------------------ ------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED AMORTIZED UNREALIZED
MONTHS COST LOSS ITEMS COST LOSS ITEMS COST LOSS ITEMS
- ------ ---------- ---------- ----- --------- ---------- ----- --------- ---------- -----
(DOLLARS IN THOUSANDS)
Investment Grade
Bonds
0-6 $ 455,818 $ (4,128) 73 $ -- $ -- -- $ -- $ -- --
7-12 387,123 (6,808) 57 -- -- -- -- -- --
>12 171,695 (7,108) 22 17,477 (4,046) 3 -- -- --
---------- -------- --- ------- ------- ---- ---- ----- ----
Total $1,014,636 $(18,044) 152 $17,477 $(4,046) 3 $ -- $ -- --
========== ======== === ======= ======= ==== ==== ===== ====
Below Investment
Grade Bonds
0-6 $ 28,496 $ (1,806) 13 $ -- $ -- -- $452 $(292) 3
7-12 8,773 (489) 8 -- -- -- -- -- --
>12 31,699 (2,467) 11 -- -- -- -- -- --
---------- -------- --- ------- ------- ---- ---- ----- ----
Total $ 68,968 $ (4,762) 32 $ -- $ -- -- $452 $(292) 3
========== ======== === ======= ======= ==== ==== ===== ====
Total Bonds
0-6 $ 484,314 $ (5,934) 86 $ -- $ -- -- $452 $(292) 3
7-12 395,896 (7,297) 65 -- -- -- -- -- --
>12 203,394 (9,575) 33 17,477 (4,046) 3 -- -- --
---------- -------- --- ------- ------- ---- ---- ----- ----
Total $1,083,604 $(22,806) 184 $17,477 $(4,046) 3 $452 $(292) 3
========== ======== === ======= ======= ==== ==== ===== ====
<Caption>
TOTAL
-------------------------------
AMORTIZED UNREALIZED
MONTHS COST LOSS ITEMS
- ------ ---------- ---------- -----
(DOLLARS IN THOUSANDS)
Investment Grade
Bonds
0-6 $ 455,818 $ (4,128) 73
7-12 387,123 (6,808) 57
>12 189,172 (11,154) 25
---------- -------- ---
Total $1,032,113 $(22,090) 155
========== ======== ===
Below Investment
Grade Bonds
0-6 $ 28,948 $ (2,098) 16
7-12 8,773 (489) 8
>12 31,699 (2,467) 11
---------- -------- ---
Total $ 69,420 $ (5,054) 35
========== ======== ===
Total Bonds
0-6 $ 484,766 $ (6,226) 89
7-12 395,896 (7,297) 65
>12 220,871 (13,621) 36
---------- -------- ---
Total $1,101,533 $(27,144) 190
========== ======== ===
</Table>
In 2004, the pretax realized losses incurred with respect to the sale of
fixed-rate securities in the Bond Portfolio was $12.6 million. The aggregate
fair value of securities sold was $140.3 million, which was approximately 92% of
amortized cost. The average period of time that securities sold at a loss during
2004 were trading continuously at a price below amortized cost was approximately
21 months.
The valuation for the Company's Bond Portfolio comes from market exchanges
or dealer quotations, with the exception of non-traded securities. The Company
considers non-traded securities to mean certain fixed income investments and
certain structured securities. The aggregate fair value of these securities at
December 31, 2004 was approximately $813.0 million. The Company estimates the
fair value with internally prepared valuations (including those based on
estimates of future profitability). Otherwise, the Company uses its most recent
purchases and sales of similar unquoted securities, independent broker quotes or
comparison to similar securities with quoted prices when possible to estimate
the fair value of those securities. All such securities are classified as
available for sale.
For certain structured securities, the carrying value is based on an
estimate of the security's future cash flows pursuant to the requirements of
Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." The change in carrying value is recognized in income.
Each of these investment categories is regularly tested to determine if
impairment in value exists. Various valuation techniques are used with respect
to each category in this determination.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $277.2 million at December 31, 2004. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At
December 31, 2004, Secured Loans consisted of $190.1 million of privately traded
securities and $87.1 million of publicly traded securities. These Secured Loans
are composed of loans to 59 borrowers spanning 10 industries, with 26%, 18%,
15%, 12% and 11% from the utilities, telecommunications, transportation,
noncyclical consumer products and cyclical consumer products industries,
respectively. No other industry 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, 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.
F-17
MORTGAGE LOANS aggregated $624.2 million at December 31, 2004 and consisted
of 100 commercial first mortgage loans with an average loan balance of
approximately $6.2 million, collateralized by properties located in 30 states.
Approximately 32% of this portfolio was office, 17% was manufactured housing,
17% was multifamily residential, 11% was industrial, 11% was hotels, and 12% was
other types. At December 31, 2004, approximately 27%, 11% and 10% of this
portfolio were secured by properties located in California, Michigan and
Massachusetts, respectively. No more than 10% of this portfolio was secured by
properties located in any other single state. At December 31, 2004, 13 mortgage
loans have an outstanding balance of $10 million or more, which collectively
aggregated approximately 45% of this portfolio. At December 31, 2004,
approximately 42% of the mortgage loan portfolio consisted of loans with balloon
payments due before January 1, 2008. During 2004 and 2003, loans delinquent by
more than 90 days, foreclosed loans and structured loans have not been
significant in relation to the total mortgage loan portfolio.
Substantially all of the mortgage loan portfolio has been originated by the
Company under its 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 Company's underwriting standards,
the Company believes that it has prudently managed the risk attributable to its
mortgage loan portfolio while maintaining attractive yields.
SECURITIES LENDING COLLATERAL totaled $883.8 million at December 31, 2004,
compared to $514.1 million at December 31, 2003, and consisted of cash
collateral invested in highly rated short-term securities received in connection
with the Company's securities lending program. The increase in securities
lending collateral in 2004 results from increased demand for securities in the
Company's portfolio. Although the cash collateral is currently invested in
highly rated short-term securities, the applicable collateral agreements permit
the cash collateral to be invested in highly liquid short and long-term
investment portfolios. At least 75% of the portfolio's short-term investments
must have external issue ratings of A-1/P-1, one of the highest ratings for
short-term credit quality. Long-term investments include corporate notes with
maturities of five years or less and a credit rating by at least two nationally
recognized statistical rating organizations ("NRSRO"), with no less than a S&P
rating of A or equivalent by any other NRSRO.
ASSET-LIABILITY MATCHING is utilized by the Company in an effort to
minimize the risks of interest rate fluctuations and disintermediation (i.e. the
risk of being forced to sell investments during unfavorable market conditions).
The Company believes that its fixed-rate liabilities should be backed by a
portfolio principally composed of fixed-rate investments that generate
predictable rates of return. The Company does not have a specific target rate of
return. Instead, its rates of return vary over time depending on the current
interest rate environment, the slope of the yield curve, the spread at which
fixed-rate investments are priced over the yield curve, default rates and
general economic conditions. Its portfolio strategy is constructed with a view
to achieve adequate risk-adjusted returns consistent with its investment
objectives of effective asset-liability matching, liquidity and safety. The
Company's Fixed-Rate Products incorporate incentives, surrender charges and/or
other restrictions in order to encourage persistency. Approximately 77% of the
Company's reserves for Fixed-Rate Products had surrender penalties or other
restrictions at December 31, 2004.
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 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 and cash
flows of the fixed-rate assets to that of its fixed-rate liabilities. The
fixed-rate assets in the Company's asset-liability modeling include: cash and
short-term investments; bonds, notes and redeemable preferred stocks; mortgage
loans; policy loans; and investments in limited partnerships that invest
primarily in fixed-rate securities. At December 31, 2004, these assets had an
aggregate fair value of $6.17 billion with an option-adjusted duration of 3.2
years. The Company's fixed-rate liabilities include Fixed Options, as well as
universal life insurance, fixed annuity and GIC contracts. At December 31, 2004,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $5.54 billion
with an option-adjusted duration of 3.6 years. The Company's potential exposure
due to a relative 10% decrease in prevailing interest rates from its December
31, 2004 levels is a loss of approximately $0.3 million, representing an
increase in fair value of its fixed-rate liabilities that is not offset by an
increase in fair value of its fixed-rate assets. Because the Company actively
manages its assets and liabilities and has strategies in place to minimize its
exposure to loss as interest rate changes occur, it expects that actual losses
would be less than the estimated potential loss.
Option-adjusted duration is a common measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. For example, if interest
rates increase 1%, the fair value of an asset with a duration of 5.0 years is
expected to decrease in value by approximately 5%. The Company estimates the
option-adjusted duration of its assets and liabilities using a number of
F-18
different interest rate scenarios, assuming continuation of existing investment
and interest crediting strategies, including maintaining an appropriate level of
liquidity. Actual company and contract owner behaviors may be different than was
assumed in the estimate of option-adjusted duration and these differences may be
material.
A significant portion of the Company's fixed annuity contracts (including
the Fixed Options) has reached or is near the minimum contractual guaranteed
rate (generally 3%). Continual declines in interest rates could cause the spread
between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate.
The Company has had the ability, limited by minimum interest rate
guarantees, to respond to the generally declining interest rate environment in
the last five years by lowering crediting rates in response to lower investment
returns. See the earlier discussion under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional information on
the calculation of investment yield and net investment spread used by the
Company's management as a key component in evaluating the profitability of its
annuity business. The trends experienced during 2004, 2003 and 2002 in the
Company's yield on average invested assets and rate of interest credited on
average interest-bearing liabilities, compared to the market trend in long-term
interest rates as illustrated by the average ten-year U.S. Treasury bond rate,
are presented in the following table:
<Table>
<Caption>
2004 2003 2002
---- ---- ----
AVERAGE 10-YEAR U.S. TREASURY BOND RATE:.................... 4.26% 4.01% 4.61%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio........................... 5.66 5.75 6.23
Rate paid on average interest-bearing liabilities......... 3.71 3.71 3.93
</Table>
Since the Company's investing strategy is to hold fixed-rate assets for
long-term investment, the Company's average yield tends to trail movements in
the average U.S. treasury yield. For further discussion on average yield on the
bond portfolio and the rate paid on average interest-bearing liabilities, see
discussion on "Investment Spread."
As a component of its asset-liability management strategy, the Company may
utilize interest rate swap agreements ("Swap Agreements") to match assets more
closely to liabilities. Swap Agreements exchange interest rate payments of
differing character (for example, variable-rate payments exchanged for
fixed-rate payments) with a counterparty, based on an underlying principal
balance (notional principal) to hedge against interest rate changes.
The Company seeks to enhance its spread income with dollar roll repurchase
agreements ("Dollar Roll Repos"). Dollar Roll Repos involve a sale of MBS by the
Company and an agreement to repurchase substantially similar MBS at a later date
at an agreed upon price. No Dollar Roll Repos were outstanding at December 31,
2004. The Company also seeks to provide liquidity by investing in MBS. MBS are
generally investment-grade securities collateralized by large pools of mortgage
loans. MBS 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 Dollar Roll Repos
and Swap Agreements is counterparty risk. The Company believes, however, that
the counterparties to its Dollar Roll Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is
minimal. It is the Company's policy that these agreements are entered into with
counterparties who have a debt rating of A/A2 or better from both S&P and
Moody's. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Company's Swap Agreements are intended to hedge
variable-rate assets or liabilities. The primary risk associated with MBS 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 such a security, the
Company assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once such a security 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 is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In conducting 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
F-19
value of the underlying collateral. For investments in partnerships, management
reviews the financial statements and other information provided by the general
partners.
The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment on mortgage loans are based on losses expected by management to be
realized on transfers of mortgage loans to real estate, on the disposition and
settlement of mortgage loans and on mortgage loans that management believes may
not be collectible in full. Accrual of interest is suspended when principal and
interest payments on mortgage loans are past due more than 90 days. Impairment
losses on securitized assets are recognized if the fair value of the security is
less than its book value, and the net present value of expected future cash
flows is less than the net present value of expected future cash flows at the
most recent (prior) estimation date.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $40.1 million of bonds at December
31, 2004, and constituted approximately 0.6% of total invested assets. At
December 31, 2003, defaulted investments totaled $49.6 million of bonds, which
constituted approximately 0.7% 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
repurchase agreement capacity on invested assets and, if required, proceeds from
invested asset sales. The Company's liquidity is primarily derived from
operating cash flows from annuity operations. At December 31, 2004,
approximately $4.09 billion of the Bond Portfolio had an aggregate unrealized
gain of $180.3 million, while approximately $1.07 billion of the Bond Portfolio
had an aggregate unrealized loss of $27.1 million. In addition, the Company's
investment portfolio currently provides approximately $44.0 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 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 Fixed-Rate Products 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 Dollar Roll
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 interest rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its Fixed-Rate
Products. 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.
If a substantial portion of the Company's Bond Portfolio diminished
significantly in value and/or defaulted, the Company would need to liquidate
other portions of its investment portfolio and/or arrange financing. Such events
that may cause such a liquidity strain could be the result of economic collapse
or terrorist acts.
Management believes that the Company's liquid assets and its net cash
provided by operations will enable the Company to meet any foreseeable cash
requirements for at least the next twelve months.
GUARANTEES AND OTHER COMMITMENTS
The Company has six agreements outstanding in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at
December 31, 2004 is $195.4 million. These commitments have contractual maturity
dates in 2005. Related to each of these agreements are participation agreements
with the Parent, under which the Parent will share in $62.6 million of these
liabilities in exchange for a proportionate percentage of the fees received
under these agreements. The Internal Revenue Service examined the transactions
underlying these commitments, including the Company's role in the transactions.
The examination did not result in a material loss to the Company.
At December 31, 2004, the Company held reserves for GICs with maturity
dates as follows: $186.5 million in 2005 and $28.8 million in 2024.
F-20
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts."
(For further discussion see Note 2 of Notes to Consolidated Financial
Statements.)
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
DIRECTORS AND OFFICERS
Directors are elected for one year terms at the annual meeting of the
shareholder. They receive no additional compensation for serving as directors.
The board of directors elects executive officers to one year terms subject to
removal at the board's discretion. The directors and principal officers of AIG
SunAmerica Life Assurance Company (the "Company") as of March 31, 2005 are
listed below, together with information as to their ages, dates of election and
principal business occupations during the last five years (if other than their
present business occupations).
<Table>
<Caption>
YEAR
ASSUMED OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE
NAME AGE PRESENT POSITION POSITION WITHIN LAST FIVE YEARS FROM-TO
- ---- --- ---------------------- -------- --------------------------------------------- ---------
Jay S. Wintrob*.......... 48 Chairman and Chief 2001 Chief Executive Officer, AIGRS, SunAmerica 2001-
Executive Officer Life Insurance Company ("SALIC") and First 2001-
SunAmerica Life Insurance Company ("FSA")
President, FSA 2001-
President, AIGRS 2000-
Chief Operating Officer, AIGRS 1998-2000
Vice Chairman, AIGRS (Joined AIGRS in 1987) 1995-2000
James R. Belardi*........ 48 Senior Vice President 1994 President, SALIC 2002-
Executive Vice President, AIGRS (Joined AIGRS 1995-
in 1986)
Marc H. Gamsin*.......... 49 Senior Vice President 1999 Executive Vice President, AIGRS 2001-
Senior Vice President, SALIC and FSA 1999-
Executive Vice President SunAmerica 1998-
Investments, Inc.
N. Scott Gillis*......... 51 Senior Vice President 2003 Chief Financial Officer, AIGRS, SALIC and FSA 2003-
and Chief Financial Senior Vice President, AIGRS 2002-
Officer Controller, AIGRS 2000-
Vice President, AIGRS (Joined AIGRS in 1985) 1998-2002
Jana W. Greer*........... 53 President 2002 Executive Vice President, AIGRS 2001-
President, SunAmerica Retirement Markets, 1996-
Inc. 1994-
Senior Vice President, SALIC and FSA 1992-2000
Senior Vice President, AIGRS (Joined AIGRS in
1974)
Michael J. Akers......... 55 Senior Vice President 2003 Chief Actuary, AIGRS 2003-
Senior Vice President, SALIC and FSA 2003-
Senior Vice President, AIGRS 2002-
Senior Vice President and Chief Actuary, The 1999-2002
Variable Annuity Life Insurance Company
Christine A. Nixon....... 40 Senior Vice President, 2003 Senior Vice President, General Counsel and 2003-
General Counsel and Secretary, SALIC and FSA
Secretary Chief Compliance Officer, AIGRS 2003
Secretary and Deputy Chief Legal Counsel, 2002-
AIGRS 2000-
Vice President, AIGRS (Joined AIGRS in 1993) 1997-2000
Associate General Counsel, AIGRS
Gregory M. Outcalt....... 42 Senior Vice President 2000 Vice President, SunAmerica Investments, Inc. 2002-
Senior Vice President, SALIC and FSA (Joined 2000-
AIGRS in 1986)
<Caption>
DIRECTOR
NAME SINCE
- ---- --------
Jay S. Wintrob*.......... 1990
James R. Belardi*........ 1990
Marc H. Gamsin*.......... 2000
N. Scott Gillis*......... 2000
Jana W. Greer*........... 1993
Michael J. Akers......... --
Christine A. Nixon....... --
Gregory M. Outcalt....... --
</Table>
F-21
<Table>
<Caption>
YEAR
ASSUMED OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE
NAME AGE PRESENT POSITION POSITION WITHIN LAST FIVE YEARS FROM-TO
- ---- --- ---------------------- -------- --------------------------------------------- ---------
Stewart Polakov.......... 45 Senior Vice President 2003 Senior Vice President and Controller, FSA and 2003-
and Controller SALIC
Vice President, SALIC and FSA (Joined AIGRS 1997-2003
in 1991)
Edwin R. Raquel.......... 47 Senior Vice President 1995 Senior Vice President and Chief Actuary, 1995-
and Chief Actuary SALIC and FSA (Joined AIGRS in 1990)
Mallary L. Reznik........ 36 Vice President 2005 Vice President, FSA 2005-
Associate General Counsel, AIGRS 1998-
Stephen J. Stone......... 46 Vice President 2005 Vice President, FSA 2005-
Senior Portfolio Manager, Allstate Insurance 1989-2004
Company
Edward T. Texeria........ 40 Vice President 2003 Vice President, SALIC and FSA 2003-
Assistant Controller, AIGRS 2003-
Assistant Controller, SALIC and FSA 2000-2003
Senior Manager, Assurance and Advisory 1994-2000
Business Services, Ernst & Young LLP
<Caption>
DIRECTOR
NAME SINCE
- ---- --------
Stewart Polakov.......... --
Edwin R. Raquel.......... --
Mallary L. Reznik........ --
Stephen J. Stone......... --
Edward T. Texeria........ --
</Table>
- ---------------
* Also serves as a director
The Company does not have an audit committee and relies on the Audit
Committee of the Board of Directors of AIG.
EXECUTIVE COMPENSATION
The Company's executive officers provide services for the Company, its
subsidiaries and, for certain officers, its affiliates. Allocations have been
made to the Company and its subsidiaries based upon each individual's time
devoted to his or her duties for the Company and its subsidiaries. All
compensation information provided under this Item 11 is based on these
allocations.
The following table sets forth allocable compensation awarded to, earned by
or paid to the Company's chief executive officer and four other most highly
compensated executive officers for the years ended December 31, 2004, 2003 and
2002:
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------
---------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING LTIP ALL OTHER SICO LTIP
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS (#)(2) PAYOUTS(3) COMPENSATION(4) AWARDS(5)
- ------------------ ---- -------- -------- ------------ -------------- ---------- --------------- ---------
Jay S. Wintrob............ 2004 $ 84,500 $104,000 $21,580 6,500 $194,526 $ 5,068 $341,484
Chief Executive Officer 2003 86,125 71,500 18,330 10,400 183,365 3,041 --
2002 316,050 215,600 56,840 19,600 719,992 2,467,413 907,088
Jana W. Greer............. 2004 329,648 517,634 -- 6,762 417,973 18,109 695,051
President 2003 318,000 371,353 -- 10,560 327,366 17,208 --
2002 220,789 111,250 -- 4,005 363,902 2,014,889 556,054
Peter A. Harbeck.......... 2004 254,567 442,500 -- 7,500 364,920 14,475 531,927
President & Chief
Executive 2003 331,250 390,000 -- 13,000 389,782 18,950 --
Officer, Asset
Management 2002 223,269 160,000 50,000 6,500 444,581 1,512,950 590,070
N. Scott Gillis........... 2004 69,863 65,138 -- 1,782 36,437 5,360 170,217
Senior Vice President
and 2003 69,317 58,050 -- 3,240 24,726 6,448 --
Chief Financial Officer 2002 61,027 71,750 -- 2,460 49,230 169,465 104,361
Christine A. Nixon........ 2004 92,250 50,840 -- 2,009 20,997 7,558 64,619
Senior Vice President,
General 2003 89,038 39,600 -- 3,600 15,860 7,889 --
Counsel and Secretary 2002 46,142 27,900 -- 1,395 14,839 65,863 57,387
</Table>
- ---------------
(1) Amounts represent year-end and bonuses paid quarterly pursuant to a
quarterly bonus program sponsored by AIG and marketing incentives.
(2) Amounts represent the number of shares of common stock of AIG subject to
options granted during the year indicated.
(3) Amounts shown represent payments under the Company's 2000 and 2001 Five-Year
Deferred Bonus Plans. Awards were granted under these plans in 2000 and 2001
and additional grants are not anticipated. Each award pays out in 20%
installments over five years of continued employment. The last installment
is to be paid in 2006.
(4) Amounts shown primarily represent Company matching contributions under the
401(k) Plan and the Executive Savings Plan. Additionally, the 2002 amounts
shown for Mr. Wintrob, Ms. Greer, Mr. Harbeck, Mr. Gillis and Ms. Nixon
include allocated retention bonuses awarded in connection with the
acquisition of SunAmerica Inc. by AIG consummated on January 1, 1999.
F-22
(5) The SICO LTIP awards were granted by Starr International Company, Inc.
pursuant to its Deferred Compensation Profit Participation Plan (the "SICO
Plan").
The following table summarizes certain information with respect to the
allocable portion of grants of options to purchase AIG common stock which were
granted during 2004 to the individuals named in the Summary Compensation Table.
OPTION GRANTS IN 2004
<Table>
<Caption>
POTENTIAL REALIZABLE VALUE*
PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK APPRECIATION FOR
SECURITIES GRANTED TO AIG EXERCISE OPTION TERM
DATE OF UNDERLYING EMPLOYEES PRICE PER EXPIRATION ----------------------------
NAME GRANT OPTIONS(1) DURING 2004(2) SHARE DATE 5 PERCENT(3) 10 PERCENT(4)
- ---- ---------- ---------- -------------- --------- ---------- ------------ -------------
Jay S. Wintrob................. 12/16/2004 6,500 0.19% $64.47 12/16/14 $263,510 $667,875
Jana W. Greer.................. 12/16/2004 6,762 0.20% 64.47 12/16/14 274,131 694,795
Peter A. Harbeck............... 12/16/2004 7,500 0.22% 64.47 12/16/14 304,050 770,625
N. Scott Gillis................ 12/16/2004 1,782 0.05% 64.47 12/16/14 72,242 183,101
Christine A. Nixon............. 12/16/2004 2,009 0.06% 64.47 12/16/14 81,445 206,425
</Table>
- ---------------
* Options would have no realizable value if there were no appreciation or if
there were depreciation from the price at which options were granted.
(1) All options relate to shares of common stock of AIG and were granted
pursuant to AIG's Amended and Restated 1999 Stock Option Plan at an exercise
price equal to the fair market value of such stock at the date of grant. The
option grants in 2004 provide that 25 percent of the options granted on any
date become exercisable on each anniversary date in each of the successive
four years and expire ten years from the date of grant.
(2) It is impractical to determine the percent the grant represents of total
options granted to the Company's employees, since the Company has no
employees. The percentage is provided with regard to options granted to
employees of AIG and its subsidiaries.
(3) The appreciated price per share at 5 percent is $105.01 per share.
(4) The appreciated price per share at 10 percent is $167.22 per share.
The following table summarizes certain information with respect to the
allocable exercise of options to purchase AIG common stock during 2004 by the
individuals named in the Summary Compensation Table and the allocable
unexercised options to purchase AIG common stock held by such individuals at
December 31, 2004 based on the allocations described above.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2004
AND DECEMBER 31, 2004 OPTION VALUES
<Table>
<Caption>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2004 DECEMBER 31, 2004(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Jay S. Wintrob............................ 21,101 $1,368,055 95,143 21,288 $ 4,474,328 $98,683
Jana W. Greer............................. 53,023 3,315,702 259,354 61,642 11,565,498 87,719
Peter A. Harbeck.......................... 14,428 710,616 57,373 45,471 1,464,499 94,203
N. Scott Gillis........................... 1,144 50,969 12,170 8,937 275,270 30,452
Christine A. Nixon........................ 3,549 203,628 12,983 9,364 377,754 34,657
</Table>
- ---------------
(1) Aggregate market value on date of exercise (closing sale price as reported
in the New York Stock Exchange Composite Transactions Report) less aggregate
exercise price.
(2) Aggregate market value on December 31, 2004 (closing sale price as reported
in the New York Stock Exchange Composite Transactions Report) less aggregate
exercise price.
F-23
The following table summarizes certain information with respect to benefits
granted under the SICO Plan which were granted during 2002 (with respect to the
2003-2004 period) to the individuals named in the Summary Compensation Table.
SICO LONG-TERM INCENTIVE PLANS(1)
<Table>
<Caption>
NUMBER UNIT AWARD ESTIMATED
NAME OF UNITS PERIOD FUTURE PAYOUTS
- ---- -------- ---------- ----------------
Jay S. Wintrob.............................................. 325 Two years 5,200 shares
Jana W. Greer............................................... 882 Two years 10,584 shares
Peter A. Harbeck............................................ 675 Two years 8,100 shares
N. Scott Gillis............................................. 216 Two years 2,592 shares
Christine A. Nixon.......................................... 123 Two years 984 shares
</Table>
- ---------------
(1) Awards represent grants of units under the SICO Plan with respect to the
two-year period from January 1, 2003 through December 31, 2004. The SICO
Plan contains neither threshold amounts nor maximum payout limitations. The
number of shares of AIG common stock, if any, allocated to a unit for the
benefit of a participant in the SICO Plan is primarily dependent upon two
factors: the growth in future earnings of AIG during the unit award period
and the book value of AIG at the end of the award period. Prior to earning
the right to payout, the participant is not entitled to any equity interest
with respect to such shares, and the shares are subject to forfeiture under
certain conditions, including but not limited to the participant's voluntary
termination of employment with AIG or its subsidiaries prior to normal
retirement age other than by death or disability.
EMPLOYEE BENEFIT PLANS
The Company participates in several employee benefit plans sponsored by
AIG.
RETIREMENT PLANS: The American International Group, Inc. Retirement Plan
(the "AIG Plan") is a non-contributory, qualified, defined benefit plan. For
employees of AIGRS and its subsidiaries, the formula equals .925% times Average
Final Compensation (defined as the average annual compensation, which includes
base pay and sales commissions, subject to limitations for certain highly
compensated employees imposed by law, during the three consecutive years in the
last ten years of credited service affording the highest such average) up to
150% of the employee's "covered compensation" (the average of the Social
Security Wage Bases during the 35 years preceding the Social Security retirement
age), plus 1.425% times Average Final Compensation in excess of 150% of the
employee's "covered compensation" times years of credited service up to 35
years; plus 1.425% times Average Final Compensation times years of credited
service in excess of 35 years but limited to 44 years.
AIG also has in place the AIG Excess Retirement Income Plan ("AIG Excess
Plan") for employees participating in the AIG Plan whose benefits under the AIG
Plan are limited by applicable tax laws. The AIG Excess Plan provides benefits
in excess of the AIG Plan benefits determined as if the benefit under the AIG
Plan has been calculated without the limitations imposed by applicable tax laws.
The AIG Excess Plan is a nonqualified, unfunded plan.
AIG also has approved a Supplemental Executive Retirement Plan ("AIG SERP")
which provides annual benefits to certain employees of AIGRS and its
subsidiaries, not to exceed 60% of Average Final Compensation, that accrue at a
rate of 2.4% of Average Final Compensation for each year of service or fraction
thereof for each full month of active employment. The benefit payable under the
AIG SERP is reduced by payments from the AIG Plan, the AIG Excess Plan, Social
Security and any payments from a qualified pension plan of a prior employer.
F-24
Annual amounts of normal retirement pension commencing at normal retirement
age of 65 based upon Average Final Compensation and credited service under the
AIG Plan and the AIG Excess Plan are illustrated in the following table:
ESTIMATED ANNUAL PENSION AT AGE 65
<Table>
<Caption>
AVERAGE FINAL
COMPENSATION 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
- ------------- -------- -------- -------- -------- -------- -------- ----------
$ 125,000 $ 14,341 $ 21,512 $ 28,682 $ 35,853 $ 43,024 $ 50,194 $ 59,100
$ 150,000 17,904 26,856 35,807 44,759 53,711 62,663 73,350
$ 175,000 21,466 32,199 42,932 53,666 64,399 75,132 87,600
$ 200,000 25,029 37,543 50,057 62,572 75,086 87,600 101,850
$ 225,000 28,591 42,887 57,182 71,478 85,774 100,069 116,100
$ 250,000 32,154 48,231 64,307 80,384 96,461 112,538 130,350
$ 300,000 39,279 58,918 78,557 98,197 117,836 137,475 158,850
$ 375,000 49,966 74,949 99,932 124,916 149,899 174,882 201,600
$ 400,000 53,529 80,293 107,057 133,822 160,586 187,350 215,850
$ 500,000 67,779 101,668 135,557 169,447 203,336 237,225 272,850
$ 750,000 103,404 155,106 206,807 258,509 310,211 361,913 415,350
$1,000,000 139,029 208,543 278,057 347,572 417,086 486,600 557,850
$1,200,000 167,529 251,293 335,057 418,822 502,586 586,350 671,850
$1,400,000 196,029 294,043 392,057 490,072 588,086 686,100 785,850
$1,600,000 224,529 336,793 449,057 561,322 673,586 785,850 899,850
$1,800,000 253,029 379,543 506,057 632,572 759,086 885,600 1,013,850
$2,000,000 281,529 422,293 563,057 703,822 844,586 985,350 1,127,850
</Table>
Each of the individuals named in the Summary Compensation Table have 2.0
years of credited service (under both plans) through December 31, 2004.
Pensionable salary includes the regular salary paid by AIG and its subsidiaries
and does not include amounts attributable to supplementary bonuses or overtime
pay. For such named individuals, pensionable salary allocable to the Company
during 2004 was as follows: Mr. Wintrob - $84,500; Ms. Greer - $329,648; Mr.
Harbeck - $339,423; Mr. Gillis - $69,863; and Ms. Nixon - $92,250.
Employees of AIGRS and its subsidiaries participate in the American
International Group, Inc. Incentive Savings Plan (the "Incentive Savings Plan"),
a 401(k) plan established by AIG which includes salary reduction contributions
by employees and matching contributions. Matching contributions vary based on
the number of years the employee has been employed.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company does not have a Compensation
Committee. Compensation decisions regarding the Chief Executive Officer are made
by AIG. Compensation decisions regarding other executive officers are made by
the Chief Executive Officer.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is an indirect wholly owned subsidiary of American
International Group, Inc.
The number of shares of AIG common stock beneficially owned as of January
31, 2005, by directors, executive officers named in the Summary Compensation
Table (as set forth in Item 11) and directors and executive officers as a group
were as follows:
<Table>
<Caption>
AIG COMMON STOCK
--------------------
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
DIRECTOR OR EXECUTIVE OFFICER (1)(2)(3)(5)
- ----------------------------- --------------------
Jay S. Wintrob(4)........................................... 2,087,506
James R. Belardi............................................ 861,222
Marc H. Gamsin.............................................. 140,616
N. Scott Gillis............................................. 47,439
Jana W. Greer............................................... 304,877
Peter A. Harbeck............................................ 132,846
Christine A. Nixon.......................................... 33,003
All Directors and Executive Officers as a Group............. 3,607,509
</Table>
F-25
- ---------------
(1) The number of shares of AIG common stock owned by each individual and by all
directors and executive officers as a group represents less than 1% of the
outstanding shares of AIG common stock.
(2) The number of shares of AIG common stock shown includes shares with respect
to which the individual shares voting and investment power as follows: Mr.
Belardi - 237 shares with his spouse; Ms. Greer - 39,105 shares with
co-trustee.
(3) The number of shares of AIG common stock shown includes shares subject to
options which may be exercised within 60 days as follows: Mr.
Wintrob - 741,870; Mr. Belardi - 305,397; Ms. Greer - 265,772; Mr.
Gillis - 46,575; Mr. Gamsin - 140,216; Mr. Harbeck - 78,122; Ms.
Nixon - 32,790; and all directors and executive officers as a
group - 1,610,742.
(4) Mr. Wintrob holds equity securities of C.V. Starr & Co., Inc. of 750 shares
of Common Stock and 3,750 shares of various series of Preferred Stock.
(5) The number of shares of AIG common stock shown excludes the following shares
owned by members of the named individual's immediate family as to which such
individual has disclaimed beneficial ownership: Mr. Wintrob - 4,009 shares
held by various family members.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2004, the Company paid cash dividends to its shareholder aggregating
$2.5 million and received a capital contribution of 100% of the outstanding
capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management
Corp. ("SAAMCo") (formerly SunAmerica Asset Management Corp.) which in turn has
two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. ("SACS")
(formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services,
Inc. ("SFS") (formerly SunAmerica Fund Services, Inc.). This capital
contribution increased the Company's equity by $150,653,000.
Beginning in 2004, the Company and its subsidiaries are included in the
consolidated federal income tax return of its ultimate parent, AIG. The Company
is a party to a written agreement (the "Tax Sharing Agreement") with AIG setting
forth the manner in which the total consolidated U.S. Federal income tax is
allocated to each entity that joins in the consolidated return. The Tax Sharing
Agreement provides that AIG agrees not to charge us a greater portion of the
consolidated tax liability than would have been paid by us had the Company filed
a separate federal income tax return. Additionally, AIG agrees to reimburse the
Company for any tax benefits arising out of net losses or tax credits, if any,
within ninety days after the filing of the consolidated federal income tax
return for the year in which such losses or tax credits are utilized by AIG.
The Company paid commissions totaling $60,674,000 in 2004 to nine
affiliated broker-dealers: Royal Alliance Associates, Inc.; SunAmerica
Securities, Inc.; Advantage Capital Corporation; FSC Services Corporation;
Sentra Securities Corporation; Spelman & Co., Inc.; VALIC Financial Advisors;
American General Equity Securities Corporation and American General Securities
Inc. These affiliated broker-dealers distribute a significant portion of the
Company's variable annuity products amounting to approximately 23% of deposits
in 2004. Of the Company's mutual fund sales, approximately 25% were distributed
by these affiliated broker-dealers in 2004.
On February 1, 2004, SAAMCo entered into an administrative services
agreement with FSA whereby SAAMCo will pay to FSA a fee based on a percentage of
all assets invested through FSA's variable annuity products in exchange for
services performed. SAAMCo is the investment advisor for certain trusts that
serve as investment options for FSA's variable annuity products. Amounts
incurred by the Company under this agreement totaled $1,537,000 in 2004.
On October 1, 2001, SAAMCo entered into two administrative services
agreements with business trusts established by its affiliate, The Variable
Annuity Life Insurance Company ("VALIC"), whereby the trust pays to SAAMCo a fee
based on a percentage of average daily net assets invested through VALIC's
annuity products in exchange for services performed. Amounts earned by SAAMCo
under this agreement totaled $9,074,000 in 2004 and are net of certain
administrative costs incurred by VALIC of $2,593,000.
Pursuant to a cost allocation agreement, the Company purchases
administrative, investment management, accounting, legal, marketing and data
processing services from the Parent, AIGRS and AIG. The allocation of such costs
for investment management services is based on the level of assets under
management. The allocation of costs for other services is based on estimated
levels of usage, transactions or time incurred in providing the respective
services. Amounts paid for such services totaled $148,554,000 in 2004.
The majority of the Company's invested assets are managed by an affiliate
of the Company. The investment management fees incurred were $3,712,000 in 2004.
Additionally, the Company incurred $1,113,000 of management fees to an affiliate
of the Company to administer its securities lending program for 2004.
F-26
FINANCIAL STATEMENTS
The consolidated financial statements of AIG SunAmerica Life Assurance
Company which are included in this prospectus should be considered only as
bearing on the ability AIG SunAmerica Life to meet its obligations with respect
to amounts allocated to the fixed investment options and with respect to the
death and other living benefits and our assumption of the mortality and expense
risks and the risks that withdrawal charge will not be sufficient to cover the
cost of distributing the contracts. They should not be considered as bearing on
the investment performance of the variable Portfolios. The value of the variable
Portfolios is affected primarily by the performance of the underlying
investments.
F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
AIG SunAmerica Life Assurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income and of cash flows, in
all material respects, the financial position of AIG SunAmerica Life Assurance
Company (the "Company"), an indirect wholly owned subsidiary of American
International Group, Inc., at December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting and reporting for certain
nontraditional long-duration contracts in 2004.
PricewaterhouseCoopers LLP
Los Angeles, California
April 15, 2005
F-28
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
(IN THOUSANDS)
Assets
Investments and cash:
Cash and short-term investments........................... $ 201,117 $ 133,105
Bonds, notes and redeemable preferred stocks available for
sale, at fair value (amortized cost: December 31, 2004,
$5,007,868; December 31, 2003, $5,351,183).............. 5,161,027 5,505,800
Mortgage loans............................................ 624,179 716,846
Policy loans.............................................. 185,958 200,232
Mutual funds.............................................. 6,131 21,159
Common stocks available for sale, at fair value (cost:
December 31, 2004, $4,876; December 31, 2003, $635)..... 4,902 727
Real estate............................................... 20,091 22,166
Securities lending collateral............................. 883,792 514,145
Other invested assets..................................... 38,789 10,453
----------- -----------
Total investments and cash................................ 7,125,986 7,124,633
Variable annuity assets held in separate accounts........... 22,612,451 19,178,796
Accrued investment income................................... 73,769 74,647
Deferred acquisition costs.................................. 1,349,089 1,268,621
Other deferred expenses..................................... 257,781 236,707
Income taxes currently receivable from Parent............... 9,945 15,455
Receivable from brokers for sales of securities............. 161 --
Goodwill.................................................... 14,038 14,038
Other assets................................................ 52,795 58,830
----------- -----------
Total Assets................................................ $31,496,015 $27,971,727
=========== ===========
</Table>
See accompanying notes to consolidated financial statements.
F-29
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
(IN THOUSANDS)
Liabilities and Shareholder's Equity
Reserves, payables and accrued liabilities:
Reserves for fixed annuity and fixed accounts of variable
annuity contracts....................................... $ 3,948,158 $ 4,274,329
Reserves for universal life insurance contracts........... 1,535,905 1,609,233
Reserves for guaranteed investment contracts.............. 215,331 218,032
Reserves for guaranteed benefits.......................... 76,949 12,022
Securities lending payable................................ 883,792 514,145
Due to affiliates......................................... 21,655 19,289
Payable to brokers........................................ -- 1,140
Other liabilities......................................... 190,198 247,435
----------- -----------
Total reserves, payables and accrued liabilities.......... 6,871,988 6,895,625
Variable annuity liabilities related to separate accounts... 22,612,451 19,178,796
Subordinated notes payable to affiliates.................... -- 40,960
Deferred income taxes....................................... 257,532 242,556
----------- -----------
Total liabilities........................................... 29,741,971 26,357,937
----------- -----------
Shareholder's equity:
Common stock.............................................. 3,511 3,511
Additional paid-in capital................................ 758,346 709,246
Retained earnings......................................... 919,612 828,423
Accumulated other comprehensive income.................... 72,575 72,610
----------- -----------
Total shareholder's equity................................ 1,754,044 1,613,790
----------- -----------
Total Liabilities and Shareholder's Equity.................. $31,496,015 $27,971,727
=========== ===========
</Table>
See accompanying notes to consolidated financial statements.
F-30
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Revenues:
Fee income:
Variable annuity policy fees, net of reinsurance........ $369,141 $281,359 $286,919
Asset management fees................................... 89,569 66,663 66,423
Universal life insurance fees, net of reinsurance....... 33,899 35,816 36,253
Surrender charges....................................... 26,219 27,733 32,507
Other fees.............................................. 15,753 15,520 21,900
-------- -------- --------
Total fee income...................................... 534,581 427,091 444,002
Investment income........................................... 363,594 402,923 387,355
Net realized investment losses.............................. (23,807) (30,354) (65,811)
-------- -------- --------
Total revenues.............................................. 874,368 799,660 765,546
======== ======== ========
Benefits and Expenses:
Interest expense:
Fixed annuity and fixed accounts of variable annuity
contracts............................................... 140,889 153,636 142,973
Universal life insurance contracts........................ 73,745 76,415 80,021
Guaranteed investment contracts........................... 6,034 7,534 11,267
Subordinated notes payable to affiliates.................. 2,081 2,628 3,868
-------- -------- --------
Total interest expense...................................... 222,749 240,213 238,129
Amortization of bonus interest.............................. 10,357 19,776 16,277
General and administrative expenses......................... 131,612 119,093 115,210
Amortization of deferred acquisition costs and other
deferred expenses......................................... 157,650 160,106 222,484
Annual commissions.......................................... 64,323 55,661 58,389
Claims on universal life contracts, net of reinsurance
recoveries................................................ 17,420 17,766 15,716
Guaranteed minimum death benefits, net of reinsurance
recoveries................................................ 58,756 63,268 67,492
-------- -------- --------
Total benefits and expenses................................. 662,867 675,883 733,697
======== ======== ========
Pretax Income Before Cumulative Effect of Accounting
Change.................................................... 211,501 123,777 31,849
Income tax expense.......................................... 6,410 30,247 160
-------- -------- --------
Net Income Before Cumulative Effect of Accounting Change.... 205,091 93,530 31,689
Cumulative effect of accounting change, net of tax.......... (62,589) -- --
-------- -------- --------
Net Income.................................................. $142,502 $ 93,530 $ 31,689
======== ======== ========
Other Comprehensive Income (Loss),
Net of Tax:
Net unrealized gains (losses) on debt and equity
securities available for sale identified in the current
period less related amortization of deferred acquisition
costs and other deferred expenses....................... $(20,487) $ 67,125 $ 20,358
Less reclassification adjustment for net realized losses
included in net income.................................. 19,263 19,194 52,285
Net unrealized gains (losses) on foreign currency......... 1,170 -- --
Change related to cash flow hedges........................ -- -- (2,218)
Income tax (benefit) expense.............................. 19 (30,213) (24,649)
-------- -------- --------
Other Comprehensive Income (Loss)........................... (35) 56,106 45,776
-------- -------- --------
Comprehensive Income........................................ $142,467 $149,636 $ 77,465
======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-31
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
--------- ----------- -----------
(IN THOUSANDS)
Cash Flow from Operating Activities:
Net income.................................................. $ 142,502 $ 93,530 $ 31,689
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change, net of tax........ 62,589 -- --
Interest credited to:
Fixed annuity and fixed accounts of variable annuity
contracts.............................................. 140,889 153,636 142,973
Universal life insurance contracts...................... 73,745 76,415 80,021
Guaranteed investment contracts......................... 6,034 7,534 11,267
Net realized investment losses............................ 23,807 30,354 65,811
Accretion of net discounts on investments................. (1,277) (9,378) (2,412)
Loss on other invested assets............................. 572 2,859 3,932
Amortization of deferred acquisition costs and other
expenses................................................ 168,007 179,882 238,761
Acquisition costs deferred................................ (246,033) (212,251) (204,833)
Other expenses deferred................................... (62,906) (70,158) (77,602)
Depreciation of fixed assets.............................. 1,619 1,718 860
Provision for deferred income taxes....................... 49,337 (129,591) 106,044
Change in:
Accrued investment income............................... 878 679 13,907
Other assets............................................ 4,416 (12,349) 4,736
Income taxes currently payable to/receivable from
Parent................................................. 5,157 148,898 (43,629)
Due from/to affiliates.................................. 2,366 (36,841) (7,743)
Other liabilities....................................... 7,485 10,697 (7,143)
Other, net................................................ 2,284 14,885 10,877
--------- ----------- -----------
Net Cash Provided by Operating Activities................... 381,471 250,519 367,516
--------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of:
Bonds, notes and redeemable preferred stocks.............. (964,705) (2,078,310) (2,403,362)
Mortgage loans............................................ (31,502) (44,247) (128,764)
Other investments, excluding short-term investments....... (33,235) (20,266) (65,184)
Sales of:
Bonds, notes and redeemable preferred stocks.............. 383,695 1,190,299 849,022
Other investments, excluding short-term investments....... 22,283 12,835 825
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks.............. 898,682 994,014 615,798
Mortgage loans............................................ 125,475 67,506 82,825
Other investments, excluding short-term investments....... 10,915 72,970 114,347
--------- ----------- -----------
Net Cash Provided By (Used in) Investing Activities......... $ 411,608 $ 194,801 $ (934,493)
========= =========== ===========
</Table>
See accompanying notes to consolidated financial statements.
F-32
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
----------- ----------- ----------
(IN THOUSANDS)
Cash Flow from Financing Activities:
Deposits received on:
Fixed annuity and fixed accounts of variable annuity
contracts............................................... $ 1,360,319 $ 1,553,000 $1,731,597
Universal life insurance contracts........................ 45,183 45,657 49,402
Net exchanges from the fixed accounts of variable annuity
contracts................................................. (1,332,240) (1,108,030) (503,221)
Withdrawal payments on:
Fixed annuity and fixed accounts of variable annuity
contracts............................................... (458,052) (464,332) (529,466)
Universal life insurance contracts........................ (69,185) (61,039) (68,444)
Guaranteed investment contracts........................... (8,614) (148,719) (135,084)
Claims and annuity payments, net of reinsurance, on:
Fixed annuity and fixed accounts of variable annuity
contracts............................................... (108,691) (109,412) (98,570)
Universal life insurance contracts........................ (105,489) (111,380) (100,995)
Net receipt from (repayments of) other short-term
financings................................................ (41,060) 14,000 --
Net payment related to a modified coinsurance transaction... (4,738) (26,655) (30,282)
Capital contribution received from Parent................... -- -- 200,000
Dividends paid to Parent.................................... (2,500) (12,187) (10,000)
----------- ----------- ----------
Net Cash (Used in) Provided by Financing Activities......... (725,067) (429,097) 504,937
----------- ----------- ----------
Net Increase (Decrease) in Cash and Short-term
Investments............................................... 68,012 16,223 (62,040)
Cash and Short-term Investments at Beginning of Period...... 133,105 116,882 178,922
----------- ----------- ----------
Cash and Short-term Investments at End of Period............ $ 201,117 $ 133,105 $ 116,882
=========== =========== ==========
Supplemental Cash Flow Formation:
Interest paid on indebtedness............................... $ 2,081 $ 2,628 $ 3,868
=========== =========== ==========
Net income taxes (received) paid to Parent.................. $ (47,749) $ 10,989 $ 5,856
=========== =========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-33
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
AIG SunAmerica Life Assurance Company (formerly Anchor National Life
Insurance Company) (the "Company") is a direct wholly owned subsidiary of
SunAmerica Life Insurance Company (the "Parent"), which is a wholly owned
subsidiary of AIG Retirement Services, Inc. ("AIGRS") (formerly AIG
SunAmerica Inc.), a wholly owned subsidiary of American International Group,
Inc. ("AIG"). AIG is a holding company which through its subsidiaries is
engaged in a broad range of insurance and insurance-related activities,
financial services, retirement services and asset management. The Company is
an Arizona-domiciled life insurance company principally engaged in the
business of writing variable annuity contracts directed to the market for
tax-deferred, long-term savings products.
The Company changed its name to AIG SunAmerica Life Assurance Company on
January 24, 2002. The Company continued to do business as Anchor National
Life Insurance Company until February 28, 2003, at which time it began doing
business under its new name.
Effective January 1, 2004, the Parent contributed to the Company 100% of the
outstanding capital stock of its consolidated subsidiary, AIG SunAmerica
Asset Management Corp. ("SAAMCo") (formerly SunAmerica Asset Management
Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica
Capital Services, Inc. ("SACS") (formerly SunAmerica Capital Services, Inc.)
and AIG SunAmerica Fund Services, Inc. ("SFS") (formerly SunAmerica Fund
Services, Inc.). Pursuant to this contribution, SAAMCo became a direct
wholly owned subsidiary of the Company. Assets, liabilities and
shareholder's equity at December 31, 2003 were restated to include
$190,605,000, $39,952,000 and $150,653,000, respectively, of SAAMCo
balances. Similarly, the results of operations and cash flows for the years
ended December 31, 2003 and 2002 have been restated for the addition and
subtraction to pretax income of $16,345,000 and $4,464,000 to reflect the
SAAMCo activity. Prior to this capital contribution to the Company, SAAMCo
distributed certain investments with a tax effect of $49,100,000 which was
indemnified by its then parent, SALIC. See Note 10 of the Notes to
Consolidated Financial Statements.
SAAMCo and its wholly owned distributor, SACS, and its wholly owned
servicing administrator, SFS, are included in the Company's asset management
segment (see Note 13). These companies earn fee income by managing,
distributing and administering a diversified family of mutual funds,
managing certain subaccounts offered within the Company's variable annuity
products and providing professional management of individual, corporate and
pension plan portfolios.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The
level of sales of the Company's financial products is influenced by many
factors, including general market rates of interest, the strength, weakness
and volatility of equity markets, and terms and conditions of competing
financial products. The Company is exposed to the typical risks normally
associated with a portfolio of fixed-income securities, namely interest
rate, option, liquidity and credit risk. The Company controls its exposure
to these risks by, among other things, closely monitoring and matching the
duration of its assets and liabilities, monitoring and limiting prepayment
and extension risk in its portfolio, maintaining a large percentage of its
portfolio in highly liquid securities, and engaging in a disciplined process
of underwriting, reviewing and monitoring credit risk. The Company also is
exposed to market risk, as market volatility may result in reduced fee
income in the case of assets held in separate accounts.
Products for the annuity operations and asset management operations are
marketed through affiliated and independent broker-dealers, full-service
securities firms and financial institutions. One independent selling
organization in the annuity operations represented 24.8% of deposits in the
year ended December 31, 2004, 14.6% of deposits in the year ended December
31, 2003 and 11.9% of deposits in the year ended December 31, 2002. No other
independent selling organization was responsible for 10% or more of deposits
for any such period. One independent selling organization in the asset
management operations represented 16.0% of deposits in the year ended
December 31, 2004 and 10.8% of deposits in the year ended December 31, 2003.
No other independent selling organization was responsible for 10% or more of
deposits for any such period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements
in conformity with GAAP requires the use of estimates and assumptions that
affect the amounts reported in the financial
F-34
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
statements and the accompanying notes. Actual results could differ from
those estimates. Certain prior period items have been reclassified to
conform to the current period's presentation.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments 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 deferred acquisition costs, deferred other expenses and
income tax, are credited or charged directly to the accumulated other
comprehensive income or loss component of shareholder's equity. Bonds,
notes, redeemable preferred stocks and common stocks are reduced to
estimated net fair value when declines in such values are considered to be
other than temporary. Estimates of net fair value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Policy loans are carried at unpaid balances. Mutual
funds consist of seed money for mutual funds used as investment vehicles for
the Company's variable annuity separate accounts and is carried at market
value. Real estate is carried at the lower of cost or net realizable value.
Securities lending collateral consist of securities provided as collateral
with respect to the Company's securities lending program. The Company has
entered into a securities lending agreement with an affiliated lending
agent, which authorizes the agent to lend securities held in the Company's
portfolio to a list of authorized borrowers. The fair value of securities
pledged under the securities lending agreement were $862,481,000 and
$502,885,000 as of December 31, 2004 and 2003, respectively, and represents
securities included in bonds, notes and redeemable preferred stocks
available for sale caption in the consolidated balance sheet as of December
31, 2004 and 2003, respectively. The Company receives primarily cash
collateral in an amount in excess of the market value of the securities
loaned. The affiliated lending agent monitors the daily market value of
securities loaned with respect to the collateral value and obtains
additional collateral when necessary to ensure that collateral is maintained
at a minimum of 102% of the value of the loaned securities. Such collateral
is not available for the general use of the Company. Income earned on the
collateral, net of interest paid on the securities lending agreements and
the related management fees paid to administer the program, is recorded as
investment income in the consolidated statement of income and comprehensive
income.
Other invested assets consist principally of investments in limited
partnerships and put options on the S&P 500 index purchased to partially
offset the risk of Guaranteed Minimum Account Value ("GMAV") benefits and
Guaranteed Minimum Withdrawal ("GMWB") benefits (see Note 7). Limited
partnerships are carried at cost. The put options do not qualify for hedge
accounting and accordingly are marked to market and changes in market value
are recorded through investment income.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized
to investment income by using the interest method over the contractual lives
of the investments.
The Company regularly reviews its investments for possible impairment based
on criteria including economic conditions, market prices, past experience
and other issuer-specific developments among other factors. If there is a
decline in a security's net realizable value, a determination is made as to
whether that decline is temporary or "other than temporary". If it is
believed that a decline in the value of a particular investment is
temporary, the decline is recorded as an unrealized loss in accumulated
other comprehensive income. If it is believed that the decline is "other
than temporary", the Company writes down the carrying value of the
investment and records a realized loss in the consolidated statement of
income and comprehensive income. Impairments writedowns totaled $21,050,000,
$54,092,000 and $57,273,000 in the years ending December 31, 2004, 2003 and
2002.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments primarily
used by the Company include interest rate swap agreements and put options on
the S&P 500 index entered into to partially offset the risk of certain
guarantees of annuity contract values. The Company is neither a dealer nor a
trader in derivative financial instruments.
F-35
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes all derivatives in the consolidated balance sheet at
fair value. Hedge accounting requires a high correlation between changes in
fair values or cash flows of the derivative financial instrument and the
specific item being hedged, both at inception and throughout the life of the
hedge. For fair value hedges, gains and losses in the fair value of both the
derivative and the hedged item attributable to the risk being hedged are
recognized in earnings. For cash flow hedges, to the extent the hedge is
effective, gains and losses in the fair value of both the derivative and the
hedged item attributable to the risk being hedged are recognized as
component of accumulated other comprehensive income in shareholder's equity.
Any ineffective portion of cash flow hedges is reported in investment
income. On the date a derivative contract is entered into, the Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking
various hedge transactions. This process includes linking all derivatives
designated as fair value or cash flow hedges to specific assets and
liabilities on the balance sheet.
Interest rate swap agreements convert specific investment securities from a
floating-rate to a fixed-rate basis, or vice versa, and hedge against the
risk of declining rates on anticipated security purchases. Interest rate
swaps in which the Company agrees to pay a fixed rate and receive a floating
rate are accounted for as fair value hedges. Interest rate swaps in which
the Company agrees to pay a floating rate and receive a fixed rate are
accounted for as cash flow hedges. The difference between amounts paid and
received on swap agreements is recorded as an adjustment to investment
income or interest expense, as appropriate, on an accrual basis over the
periods covered by the agreements. The related amount payable to or
receivable from counterparties is included in other liabilities or other
assets.
The Company issues certain variable annuity products that offer an optional
GMAV and GMWB living benefit. If elected by the contract holder at the time
of contract issuance, the GMAV feature guarantees that the account value
under the contract will equal or exceed the amount of the initial principal
invested, adjusted for withdrawals, at the end of a ten-year waiting period.
If elected by the contract holder at the time of contract issuance, the GMWB
feature guarantees an annual withdrawal stream, regardless of market
performance, equal to deposits invested during the first ninety days,
adjusted for any subsequent withdrawals. There is a separate charge to the
contract holder for these features. The Company bears the risk that
protracted under-performance of the financial markets could result in GMAV
and GMWB benefits being higher than the underlying contract holder account
balance and that the fees collected under the contract are insufficient to
cover the costs of the benefit to be provided.
Under Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"("FAS 133"), the GMAV and GMWB benefits are considered embedded
derivatives that are bifurcated and marked to market and recorded in other
liabilities in the consolidated balance sheet. Changes in the market value
of the estimated GMAV and GMWB benefits are recorded through investment
income.
DEFERRED ACQUISITION COSTS ("DAC"): Policy acquisition costs are deferred
and amortized over the estimated lives of the annuity and universal life
insurance contracts. Policy acquisition costs include commissions and other
costs that vary with, and are primarily related to, the production or
acquisition of new business.
DAC is amortized based on a percentage of expected gross profits ("EGPs")
over the life of the underlying contracts. EGPs are computed based on
assumptions related to the underlying contracts, including their anticipated
duration, the growth rate of the separate account assets (with respect to
variable options of the variable annuity contracts) or general account
assets (with respect to fixed options of variable annuity contracts ("Fixed
Options") and universal life insurance contracts) supporting the annuity
obligations, costs of providing for contract guarantees and the level of
expenses necessary to maintain the contracts. The Company adjusts
amortization of DAC and other deferred expenses (a "DAC unlocking") when
estimates of future gross profits to be realized from its annuity contracts
are revised.
The assumption for the long-term annual net growth of the separate account
assets used by the Company in the determination of DAC amortization with
respect to its variable annuity contracts is 10% (the "long-term growth rate
assumption"). The Company uses a "reversion to the mean" methodology that
allows the Company to maintain this 10% long-term growth rate assumption,
while also giving consideration to the effect of short-term swings in the
equity markets. For example, if performance were 15% during the first year
following the introduction of a product, the DAC model would assume that
market returns for the following five years (the "short-term growth rate
assumption") would approximate 9%, resulting in an average annual growth
rate of 10% during the life of the product. Similarly, following periods of
below 10%
F-36
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
performance, the model will assume a short-term growth rate higher than 10%.
A DAC unlocking will occur if management deems the short-term growth rate
(i.e., the growth rate required to revert to the mean 10% growth rate over a
five-year period) to be unreasonable. The use of a reversion to the mean
assumption is common within the industry; however, the parameters used in
the methodology are subject to judgment and vary within the industry.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to DAC equal to the change in amortization
that would have been recorded if such securities had been sold at their
stated aggregate fair value and the proceeds reinvested at current yields.
The change in this adjustment, net of tax, is included with the change in
net unrealized gains or losses on debt and equity securities available for
sale which is a component of accumulated other comprehensive income (loss)
and is credited or charged directly to shareholder's equity.
The Company reviews the carrying value of DAC on at least an annual basis.
Management considers estimated future gross profit margins as well as
expected mortality, interest earned and credited rates, persistency and
expenses in determining whether the carrying amount is recoverable. Any
amounts deemed unrecoverable are charged to amortization expense on the
consolidated statement of income and comprehensive income.
OTHER DEFERRED EXPENSES: The annuity operations currently offers enhanced
crediting rates or bonus payments to contract holders on certain of its
products. Such amounts are deferred and amortized over the life of the
contract using the same methodology and assumptions used to amortize DAC.
The Company previously deferred these expenses as part of DAC and reported
the amortization of such amounts as part of DAC amortization. Upon
implementation of Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and
for Separate Accounts" ("SOP 03-1"), the Company reclassified $155,695,000
of these expenses from DAC to other deferred expenses, which is reported on
the consolidated balance sheet. The prior period consolidated balance sheet
and consolidated statements of income and comprehensive income presentation
has been reclassified to conform to the new presentation. See Recently
Issued Accounting Standards below.
The asset management operations defer distribution costs that are directly
related to the sale of mutual funds that have a 12b-1 distribution plan
and/or contingent deferred sales charge feature (collectively, "Distribution
Fee Revenue"). The Company amortizes these deferred distribution costs on a
straight-line basis, adjusted for redemptions, over a period ranging from
one year to eight years depending on share class. Amortization of these
deferred distribution costs is increased if at any reporting period the
value of the deferred amount exceeds the projected Distribution Fee Revenue.
The projected Distribution Fee Revenue is impacted by estimated future
withdrawal rates and the rates of market return. Management uses historical
activity to estimate future withdrawal rates and average annual performance
of the equity markets to estimate the rates of market return.
The Company reviews the carrying value of other deferred expenses on at
least an annual basis. Management considers estimated future gross profit
margins as well as expected mortality, interest earned, credited rates,
persistency, withdrawal rates, rates of market return and expenses in
determining whether the carrying amount is recoverable. Any amounts deemed
unrecoverable are charged to expense.
VARIABLE ANNUITY ASSETS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS: The
assets and liabilities resulting from the receipt of variable annuity
deposits 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 policy fees in the consolidated statement of income and
comprehensive income.
GOODWILL: Goodwill amounted to $14,038,000 (net of accumulated amortization
of $18,838,000) at December 31, 2004 and 2003. In accordance with Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), the Company assesses goodwill for impairment on an
annual basis, or more frequently if circumstances indicate that a possible
impairment has occurred. The assessment of impairment involves a two-step
process whereby an initial assessment for potential impairment is performed,
followed by a measurement of the amount of the impairment, if any. The
Company has evaluated goodwill for impairment as of December 31, 2004 and
2003, and has determined that no impairment provision is necessary.
RESERVES FOR FIXED ANNUITY CONTRACTS, FIXED ACCOUNTS OF VARIABLE ANNUITY
CONTRACTS, UNIVERSAL LIFE INSURANCE CONTRACTS AND GICS: Reserves for fixed
annuity, Fixed Options, universal life insurance and GIC contracts are
accounted for in accordance with Statement of Financial Accounting Standards
No. 97,
F-37
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
"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 (deposits received, plus accrued
interest, less withdrawals and assessed fees). Under GAAP, deposits
collected on non-traditional life and annuity insurance products, such as
those sold by the Company, are not reflected as revenues in the Company's
consolidated statement of income and comprehensive income, as they are
recorded directly to contract holders' liabilities upon receipt.
RESERVES FOR GUARANTEED BENEFITS: Reserves for guaranteed minimum death
benefits ("GMDB"), earnings enhancement benefit and guaranteed minimum
income benefits are accounted for in accordance with SOP 03-1. See Recently
Issued Accounting Standards below.
FEE INCOME: Fee income includes variable annuity policy fees, asset
management fees, universal life insurance fees, commissions and surrender
charges. Variable annuity policy fees are generally based on the market
value of assets in the separate accounts supporting the variable annuity
contracts. Asset management fees include investment advisory fees and 12b-1
distribution fees and are based on the market value of assets managed in
mutual funds and certain variable annuity portfolios by SAAMCo. Universal
life insurance policy fees consist of mortality charges, up-front fees
earned on deposits received and administrative fees, net of reinsurance
premiums. Surrender charges are assessed on withdrawals occurring during the
surrender charge period. All fee income is recorded as income when earned
with net retained commissions are recognized as income on a trade date
basis.
INCOME TAXES: Prior to the 2004, the Company was included in a consolidated
federal income tax return with its Parent. Also, prior to 2004, SAAMCO, SFS
and SACS were included in a separate consolidated federal income tax return
with their parent, Saamsun Holdings Corporation. Beginning in 2004, all of
these companies are included in the consolidated federal income tax return
of their ultimate parent, AIG. Income taxes have been calculated as if each
entity files a separate return. Deferred income tax assets and liabilities
are recognized based on the difference between financial statement carrying
amounts and income tax basis of assets and liabilities using enacted income
tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In July 2003, the American Institute
of Certified Public Accountants issued SOP 03-1. This statement was
effective as of January 1, 2004, and requires the Company to recognize a
liability for GMDB and certain living benefits related to its variable
annuity contracts, account for enhanced crediting rates or bonus payments to
contract holders and modifies certain disclosures and financial statement
presentations for these products. In addition, SOP 03-1 addresses the
presentation and reporting of separate accounts and the capitalization and
amortization of certain other expenses. The Company reported for the first
quarter of 2004 a one-time cumulative accounting charge upon adoption of
$62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related
impact of DAC and reinsurance as of January 1, 2004.
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by major category follow:
<Table>
<Caption>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
At December 31, 2004:
U.S. government securities.................................. $ 28,443 $ 30,300
Mortgage-backed securities.................................. 926,274 956,567
Securities of public utilities.............................. 321,381 332,038
Corporate bonds and notes................................... 2,797,943 2,902,829
Redeemable preferred stocks................................. 20,140 21,550
Other debt securities....................................... 913,687 917,743
---------- ----------
Total..................................................... $5,007,868 $5,161,027
========== ==========
</Table>
F-38
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
<Table>
<Caption>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
At December 31, 2003:
U.S. government securities.................................. $ 22,393 $ 24,292
Mortgage-backed securities.................................. 1,148,452 1,191,817
Securities of public utilities.............................. 352,998 365,150
Corporate bonds and notes................................... 2,590,254 2,697,142
Redeemable preferred stocks................................. 21,515 22,175
Other debt securities....................................... 1,215,571 1,205,224
---------- ----------
Total..................................................... $5,351,183 $5,505,800
========== ==========
</Table>
At December 31, 2004, bonds, notes and redeemable preferred stocks included
$386,426,000 that were not rated investment grade. These
non-investment-grade securities are comprised of bonds spanning 10
industries with 19%, 16%, 16% and 10% concentrated in telecommunications,
utilities, financial institutions and noncyclical consumer products
industries, respectively. No other industry concentration constituted more
than 10% of these assets.
At December 31, 2004, mortgage loans were collateralized by properties
located in 30 states, with loans totaling approximately 27%, 11% and 10% of
the aggregate carrying value of the portfolio secured by properties located
in California, Michigan and Massachusetts, respectively. No more than 10% of
the portfolio was secured by properties in any other single state.
At December 31, 2004, the carrying value, which approximates its estimated
fair value, of all investments in default as to the payment of principal or
interest totaled $40,051,000 of bonds.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements to match assets more closely to
liabilities. Interest rate swap agreements exchange interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) with a counterparty, based on an underlying principal
balance (notional principal) to hedge against interest rate changes.
The Company typically utilizes swap agreements to create a hedge that
effectively converts floating-rate assets and liabilities to fixed-rate
instruments.
At December 31, 2004, $10,505,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
At December 31, 2004, no investments in any one entity or its affiliates
exceeded 10% of the Company's shareholder's equity.
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by contractual maturity, as of December 31, 2004, follow:
<Table>
<Caption>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
Due in one year or less..................................... $ 278,939 $ 281,954
Due after one year through five years....................... 2,076,145 2,138,574
Due after five years through ten years...................... 1,299,345 1,339,499
Due after ten years......................................... 427,165 444,433
Mortgage-backed securities.................................. 926,274 956,567
---------- ----------
Total..................................................... $5,007,868 $5,161,027
========== ==========
</Table>
Actual maturities of bonds, notes and redeemable preferred stocks may differ
from those shown above due to prepayments and redemptions.
F-39
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks by major category follow:
<Table>
<Caption>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- ----------
(IN THOUSANDS)
At December 31, 2004:
U.S. government securities.................................. $ 1,857 $ --
Mortgage-backed securities.................................. 32,678 (2,385)
Securities of public utilities.............................. 11,418 (761)
Corporate bonds and notes................................... 118,069 (13,183)
Redeemable preferred stocks................................. 1,410 --
Other debt securities....................................... 14,871 (10,815)
-------- --------
Total..................................................... $180,303 $(27,144)
======== ========
</Table>
<Table>
<Caption>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- ----------
(IN THOUSANDS)
At December 31, 2003:
U.S. government securities.................................. $ 1,898 $ --
Mortgage-backed securities.................................. 46,346 (2,980)
Securities of public utilities.............................. 13,467 (1,315)
Corporate bonds and notes................................... 127,996 (21,108)
Redeemable preferred stocks................................. 660 --
Other debt securities....................................... 24,366 (34,713)
-------- --------
Total..................................................... $214,733 $(60,116)
======== ========
</Table>
Gross unrealized gains on equity securities aggregated $26,000 at December
31, 2004 and $112,000 at December 31, 2003. There were no unrealized losses
on equity securities at December 31, 2004 and gross unrealized losses on
equity securities aggregated $20,000 at December 31, 2003.
The following tables summarize the Company's gross unrealized losses and
estimated fair values on investments, aggregated by investment category and
length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2004 and 2003.
<Table>
<Caption>
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------------- ----------------------------- -------------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSS ITEMS VALUE LOSS ITEMS VALUE LOSS ITEMS
-------- ---------- ----- -------- ---------- ----- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
December 31, 2004
Mortgage-backed
securities............... $125,589 $ (1,282) 23 $ 40,275 $ (1,103) 9 $ 165,864 $ (2,385) 32
Securities of public
utilities................ 46,249 (761) 9 0 0 0 46,249 (761) 9
Corporate bonds and
notes.................... 487,923 (7,418) 86 87,194 (5,765) 15 575,117 (13,183) 101
Other debt securities...... 207,378 (4,062) 36 79,782 (6,753) 12 287,160 (10,815) 48
-------- -------- --- -------- -------- -- ---------- -------- ---
Total.................... $867,139 $(13,523) 154 $207,251 $(13,621) 36 $1,074,390 $(27,144) 190
======== ======== === ======== ======== == ========== ======== ===
</Table>
F-40
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
<Table>
<Caption>
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------------- ---------------------------- -----------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSS ITEMS VALUE LOSS ITEMS VALUE LOSS ITEMS
-------- ---------- ----- ------- ---------- ----- -------- ---------- -----
December 31, 2003
Mortgage-backed securities..... $180,559 $ (2,882) 49 $13,080 $ (98) 6 $193,639 $ (2,980) 55
Securities of public
utilities.................... 67,626 (1,315) 8 -- -- -- 67,626 (1,315) 8
Corporate bonds and notes...... 276,373 (17,086) 54 30,383 (4,022) 5 306,756 (21,108) 59
Other debt securities.......... 302,230 (33,951) 54 41,523 (762) 5 343,753 (34,713) 59
-------- -------- --- ------- ------- -- -------- -------- ---
Total........................ $826,788 $(55,234) 165 $84,986 $(4,882) 16 $911,774 $(60,116) 181
======== ======== === ======= ======= == ======== ======== ===
</Table>
Realized investment gains and losses on sales of investments are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Bonds, Notes and Redeemable Preferred Stocks:
Realized gains............................................ $ 12,240 $ 30,896 $ 25,013
Realized losses........................................... (12,623) (11,818) (32,865)
Common Stocks:
Realized gains............................................ 5 561 --
Realized losses........................................... (247) (117) (169)
</Table>
The sources and related amounts of investment income are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Short-term investments...................................... $ 2,483 $ 1,363 $ 5,447
Bonds, notes and redeemable preferred stocks................ 293,258 321,493 305,480
Mortgage loans.............................................. 50,825 53,951 55,417
Partnerships................................................ 417 (478) 12,344
Policy loans................................................ 17,130 15,925 18,796
Real estate................................................. (202) (331) (276)
Other invested assets....................................... 2,149 13,308 (7,496)
Less: investment expenses................................... (2,466) (2,308) (2,357)
-------- -------- --------
Total investment income................................... $363,594 $402,923 $387,355
======== ======== ========
</Table>
Investment income was attributable to the following products:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Fixed annuity contracts..................................... $ 34,135 $ 37,762 $ 41,856
Variable annuity contracts.................................. 222,660 239,863 201,766
Guaranteed investment contracts............................. 13,191 20,660 28,056
Universal life insurance contracts.......................... 92,645 100,019 105,878
Asset management............................................ 963 4,619 9,799
-------- -------- --------
Total..................................................... $363,594 $402,923 $387,355
======== ======== ========
</Table>
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 non-financial
F-41
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
assets (including its real estate investments and other invested assets
except for 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 INSTRUMENTS: 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. For securities that do not have readily
determinable market prices, the fair value is estimated with internally
prepared valuations (including those based on estimates of future
profitability). Otherwise, the most recent purchases and sales of similar
unquoted securities, independent broker quotes or comparison to similar
securities with quoted prices when possible is used to estimate the fair
value of those securities.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
POLICY LOANS: Carrying value is considered a reasonable estimate of fair
value.
MUTUAL FUNDS: Fair value is considered to be the market value of the
underlying securities.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
PARTNERSHIPS: Fair value of partnerships that invest in debt and equity
securities is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY AND FIXED ACCOUNTS OF VARIABLE ANNUITY
CONTRACTS: Deferred annuity contracts are assigned a fair value equal to
current net surrender value. Annuitized contracts are valued based on the
present value of future cash flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates.
SECURITIES LENDING COLLATERAL/PAYABLE: Carrying value is considered to be a
reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Variable annuity
liabilities are carried at the market value of the underlying securities of
the variable annuity assets held in separate accounts.
SUBORDINATED NOTES TO/FROM AFFILIATES: Fair value is estimated based on the
quoted market prices for similar issues.
F-42
AIG SUNAMERICA LIFE ASSURANCE 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 December
31, 2004 and 2003 compared with their respective carrying values, are as
follows:
<Table>
<Caption>
CARRYING FAIR
VALUE VALUE
----------- -----------
(IN THOUSANDS)
December 31, 2004:
Assets:
Cash and short-term investments........................... $ 201,117 $ 201,117
Bonds, notes and redeemable preferred stocks.............. 5,161,027 5,161,027
Mortgage loans............................................ 624,179 657,828
Policy loans.............................................. 185,958 185,958
Mutual funds.............................................. 6,131 6,131
Common stocks............................................. 4,902 4,902
Partnerships.............................................. 1,084 1,084
Securities lending collateral............................. 883,792 883,792
Put options hedging guaranteed benefits................... 37,705 37,705
Variable annuity assets held in separate accounts......... 22,612,451 22,612,451
Liabilities:
Reserves for fixed annuity and fixed accounts of variable
annuity contracts....................................... $ 3,948,158 $ 3,943,265
Reserves for guaranteed investment contracts.............. 215,331 219,230
Securities lending payable................................ 883,792 883,792
Variable annuity liabilities related to separate
accounts................................................ 22,612,451 22,612,451
</Table>
<Table>
<Caption>
CARRYING FAIR
VALUE VALUE
----------- -----------
(IN THOUSANDS)
December 31, 2003:
Assets:
Cash and short-term investments........................... $ 133,105 $ 133,105
Bonds, notes and redeemable preferred stocks.............. 5,505,800 5,505,800
Mortgage loans............................................ 716,846 774,758
Policy loans.............................................. 200,232 200,232
Mutual funds.............................................. 21,159 21,159
Common stocks............................................. 727 727
Partnerships.............................................. 1,312 1,685
Securities lending collateral............................. 514,145 514,145
Put options hedging guaranteed benefits................... 9,141 9,141
Variable annuity assets held in separate accounts......... 19,178,796 19,178,796
Liabilities:
Reserves for fixed annuity and fixed accounts of variable
annuity contracts....................................... $ 4,274,329 $ 4,225,329
Reserves for guaranteed investment contracts.............. 218,032 223,553
Securities lending payable................................ 514,145 514,145
Variable annuity liabilities related to separate
accounts................................................ 19,178,796 19,178,796
Subordinated note payable to affiliate.................... 40,960 40,960
</Table>
F-43
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DEFERRED ACQUISITION COSTS
The following table summarizes the activity in deferred acquisition costs:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
2004 2003
----------- -----------
(IN THOUSANDS)
Balance at beginning of year................................ $1,268,621 $1,224,101
Acquisition costs deferred.................................. 246,033 212,250
Effect of net unrealized gains (losses) on securities....... 267 (30,600)
Amortization charged to income.............................. (126,142) (137,130)
Cumulative effect of SOP 03-1............................... (39,690) --
---------- ----------
Balance at end of year...................................... $1,349,089 $1,268,621
========== ==========
</Table>
6. OTHER DEFERRED EXPENSES
The annuity operations defer enhanced crediting rates or bonus payments to
contract holders on certain of its products ("Bonus Payments"). The asset
management operations defer distribution costs that are directly related to
the sale of mutual funds that have a 12b-1 distribution plan and/or
contingent deferred sales charge feature. The following table summarizes the
activity in these deferred expenses:
<Table>
<Caption>
BONUS DISTRIBUTION
PAYMENTS COSTS TOTAL
-------- ------------ --------
(IN THOUSANDS)
Year Ended December 31, 2004
Balance at beginning of year................................ $155,695 $ 81,012 $236,707
Expenses deferred........................................... 36,732 26,174 62,906
Effect of net unrealized gains (losses) on securities....... 33 -- 33
Amortization charged in income.............................. (10,357) (31,508) (41,865)
-------- -------- --------
Balance at end of year...................................... $182,103 $ 75,678 $257,781
======== ======== ========
Year Ended December 31, 2003
Balance at beginning of year................................ $140,647 $ 72,054 $212,701
Expenses deferred........................................... 38,224 31,934 70,158
Effect of net unrealized gains (losses) on securities....... (3,400) -- (3,400)
Amortization charged in income.............................. (19,776) (22,976) (42,752)
-------- -------- --------
Balance at end of year...................................... $155,695 $ 81,012 $236,707
======== ======== ========
</Table>
7. GUARANTEED BENEFITS
The Company issues variable annuity contracts for which the investment risk
is generally borne by the contract holder, except with respect to amounts
invested in the Fixed Options. For many of the Company's variable annuity
contracts, the Company offers contractual guarantees in the event of death,
at specified dates during the accumulation period, upon certain withdrawals
or at annuitization. Such benefits are referred to as GMDB, GMAV, GMWB and
guaranteed minimum income benefits ("GMIB"), respectively. The Company also
issues certain variable annuity products that offer an optional earnings
enhancement benefit ("EEB") feature that provides an additional death
benefit amount equal to a fixed percentage of earnings in the contract,
subject to certain maximums.
The assets supporting the variable portion of variable annuity contracts are
carried at fair value and reported as summary total "variable annuity assets
held in separate accounts" with an equivalent summary total reported for
liabilities. Amounts assessed against the contract holders for mortality,
administrative, other services and certain features are included in variable
annuity policy fees, net of reinsurance, in the consolidated statement of
income and comprehensive income. Changes in liabilities for minimum
guarantees are included in guaranteed benefits, net of reinsurance, in the
consolidated statement of income and comprehensive income. Separate account
net investment income, net investment gains and losses and the related
liability charges are offset within the same line item in the consolidated
statement of income and comprehensive income.
F-44
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. GUARANTEED BENEFITS (Continued)
The Company offers GMDB options that guarantee for virtually all contract
holders, that upon death, the contract holder's beneficiary will receive the
greater of (1) the contract holder's account value, or (2) a guaranteed
minimum death benefit that varies by product and election by policy owner.
The GMDB liability is determined each period end by estimating the expected
value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and
adjusts the additional liability balance, with a related charge or credit to
guaranteed benefits, net of reinsurance recoveries, if actual experience or
other evidence suggests that earlier assumptions should be revised.
EEB is a feature the Company offers on certain variable annuity products.
For contract holders who elect the feature, the EEB provides an additional
death benefit amount equal to a fixed percentage of earnings in the
contract, subject to certain maximums. The Company bears the risk that
account values following favorable performance of the financial markets will
result in greater EEB death claims and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided.
If available and elected by the contract holder, GMIB provides a minimum
fixed annuity payment guarantee after a seven, nine or ten-year waiting
period. As there is a waiting period to annuitize using the GMIB, there are
no policies eligible to receive this benefit at December 31, 2004. The GMIB
liability is determined each period end by estimating the expected value of
the annuitization benefits in excess of the projected account balance at the
date of annuitization and recognizing the excess ratably over the
accumulation period based on total expected assessments. The Company
regularly evaluates estimates used and adjusts the additional liability
balance, with a related charge or credit to guaranteed benefits, net of
reinsurance recoveries, if actual experience or other evidence suggests that
earlier assumptions should be revised.
GMAV is a feature offered on certain variable annuity products. If available
and elected by the contract holder at the time of contract issuance, GMAV
guarantees that the account value under the contract will at least equal the
amount of deposits invested during the first ninety days, adjusted for any
subsequent withdrawals, at the end of a ten-year waiting period. The Company
purchases put options on the S&P 500 index to partially offset this risk.
GMAVs are considered to be derivatives under FAS 133, and are recognized at
fair value in the consolidated balance sheet and through investment income
in the consolidated statement of income and comprehensive income.
GMWB is a feature offered on certain variable annuity products. If available
and elected by the contract holder at the time of contract issuance, this
feature provides a guaranteed annual withdrawal stream, regardless of market
performance, equal to deposits invested during the first ninety days
adjusted for any subsequent withdrawals ("Eligible Premium"). These
guaranteed annual withdrawals of up to 10% of Eligible Premium are available
after either a three-year or a five-year waiting period as elected by the
contract holder at time of contract issuance, without reducing the future
amounts guaranteed. If no withdrawals have been made during the waiting
period of three or five years, the contract holder will realize an
additional 10% or 20%, respectively, of Eligible Premium after all other
amounts guaranteed under this benefit have been paid. GMWBs are considered
to be derivatives under FAS 133 and are recognized at fair value in the
consolidated balance sheet and through investment income in the consolidated
statement of income and comprehensive income.
F-45
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. GUARANTEED BENEFITS (Continued)
Details concerning the Company's guaranteed benefit exposures as of December
31, 2004 are as follows:
<Table>
<Caption>
HIGHEST SPECIFIED
RETURN OF NET ANNIVERSARY ACCOUNT
DEPOSITS PLUS A VALUE MINUS
MINIMUM WITHDRAWALS POST
RETURN ANNIVERSARY
--------------- -------------------
(DOLLARS IN MILLIONS)
In the event of death (GMDB and EEB):
Account value............................................. $ 12,883 $12,890
Net amount at risk(a)..................................... $ 933 $ 1,137
Average attained age of contract holders.................. 67 64
Range of guaranteed minimum return rates.................. 0%-5% 0%
At annuitization (GMIB):
Account value............................................. $ 6,942
Net amount at risk(b)..................................... $ 3
Weighted average period remaining until earliest 3.8 Years
annuitization...........................................
Range of guaranteed minimum return rates.................. 0%-6.5%
Accumulation at specified date (GMAV):
Account value............................................. $ 1,533
Net amount at risk(c)..................................... $ --
Weighted average period remaining until guaranteed 9.0 Years
payment.................................................
Annual withdrawals at specified date (GMWB):
Account value............................................. $ 294
Net amount at risk(d)..................................... $ --
Weighted average period remaining until expected payout... 13.9 Years
</Table>
-------------------
(a) Net amount at risk represents the guaranteed benefit exposure in excess
of the current account value, net of reinsurance, if all contract
holders died at the same balance sheet date. The net amount at risk does
not take into account the effect of caps and deductibles from the
various reinsurance treaties.
(b) Net amount at risk represents the present value of the expected
annuitization payments at the expected annuitization dates in excess of
the present value of the expected account value at the expected
annuitization dates, net of reinsurance.
(c) Net amount at risk represents the guaranteed benefit exposure in excess
of the current account value, if all contract holders reached the
specified date at the same balance sheet date.
(d) Net amount at risk represents the guaranteed benefit exposure in excess
of the current account value if all contract holders exercise the
maximum withdrawal benefits at the same balance sheet date. If no
withdrawals have been made during the waiting period of 3 or 5 years,
the contract holder will realize an additional 10% or 20% of Eligible
Premium, respectively, after all other amounts guaranteed under this
benefit have been paid. The additional 10% or 20% enhancement increases
the net amount at risk by $26.3 million and is payable no sooner than 13
or 15 years from contract issuance for the 3 or 5 year waiting periods,
respectively.
The following summarizes the reserve for guaranteed benefits, net of
reinsurance, on variable contracts reflected in the general account:
<Table>
<Caption>
(IN THOUSANDS)
Balance at January 1, 2004 before reinsurance(e)............ $ 92,873
Guaranteed benefits incurred................................ 61,472
Guaranteed benefits paid.................................... (49,947)
--------
Balance at December 31, 2004 before reinsurance............. 104,398
Less reinsurance.......................................... (27,449)
--------
Balance at December 31, 2004, net of reinsurance............ $ 76,949
========
</Table>
(e) Includes amounts from the one-time cumulative accounting change
resulting from the adoption of SOP 03-1.
F-46
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. GUARANTEED BENEFITS (Continued)
The following assumptions and methodology were used to determine the reserve
for guaranteed benefits at December 31, 2004:
- Data used was 5,000 stochastically generated investment performance
scenarios.
- Mean investment performance assumption was 10%.
- Volatility assumption was 16%.
- Mortality was assumed to be 64% of the 75-80 ALB table.
- Lapse rates vary by contract type and duration and range from 0% to
40%.
- The discount rate was approximately 8%.
8. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
contract holders. The Company could become liable for all obligations of the
reinsured policies if the reinsurers were to become unable to meet the
obligations assumed under the respective reinsurance agreements. The Company
monitors its credit exposure with respect to these agreements. However, due
to the high credit ratings of the reinsurers, such risks are considered to
be minimal. The Company has no reinsurance recoverable or related
concentration of credit risk greater than 10% of shareholder's equity.
Variable policy fees are net of reinsurance premiums of $28,604,000,
$30,795,000 and $22,500,000 in 2004, 2003 and 2002, respectively. Universal
life insurance fees are net of reinsurance premiums of $34,311,000,
$33,710,000 and $34,098,000 in 2004, 2003 and 2002, respectively.
The Company has a reinsurance treaty under which the Company retains no more
than $100,000 of risk on any one insured life in order to limit the exposure
to loss on any single insured. Reinsurance recoveries recognized as a
reduction of claims on universal life insurance contracts amounted to
$34,163,000, $34,036,000 and $29,171,000 in 2004, 2003 and 2002,
respectively. Guaranteed benefits were reduced by reinsurance recoveries of
$2,716,000, $8,042,000 and $8,362,000 in 2004, 2003 and 2002, respectively.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has six agreements outstanding in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the
event there is no other buyer in the short-term marketplace. In return the
Company receives a fee. In addition, the Company guarantees the payment of
these securities upon redemption. The maximum liability under these
guarantees at December 31, 2004 is $195,442,000. These commitments have
contractual maturity dates in 2005. Related to each of these agreements are
participation agreements with the Parent under which the Parent will share
in $62,590,000 of these liabilities in exchange for a proportionate
percentage of the fees received under these agreements. The Internal Revenue
Service has completed its examinations into the transactions underlying
these commitments, including the Company's role in the transactions. The
examination did not result in a material loss to the Company.
At December 31, 2004, the Company has commitments to purchase a total of
approximately $10,000,000 of asset- backed securities in the ordinary course
of business. The expiration dates of these commitments are as follows:
$2,000,000 in 2005 and $8,000,000 in 2007.
Various federal, state and other regulatory agencies are reviewing certain
transactions and practices of the Company and its subsidiaries in connection
with industry-wide and other inquiries. In the opinion of the Company's
management, based on the current status of these inquiries, it is not likely
that any of these inquiries will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash
flows of the Company.
Various lawsuits against the Company and its subsidiaries have arisen in the
ordinary course of business. Contingent liabilities arising from litigation,
income taxes and regulatory and other matters are not considered material in
relation to the consolidated financial position, results of operations or
cash flows of the Company.
F-47
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
On April 5, 2004, a purported class action captioned Nitika Mehta, as
Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance
Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial
District in St. Clair County, Illinois. The lawsuit alleges certain
improprieties in conjunction with alleged market timing activities. The
probability of any particular outcome cannot be reasonably estimated at this
time. The Company cannot estimate a range because the litigation has not
progressed beyond the preliminary stage.
10. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At December 31, 2004 and 2003, 3,511 shares were outstanding.
Changes in shareholder's equity are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Additional Paid-in Capital:
Beginning balances........................................ $709,246 $709,246 $509,246
Capital contributions by Parent........................... 49,100 -- 200,000
-------- -------- --------
Ending balances........................................... $758,346 $709,246 $709,246
======== ======== ========
Retained Earnings:
Beginning balances........................................ $828,423 $730,321 $669,103
Net income................................................ 142,502 93,530 31,689
Dividends paid to Parent.................................. (2,500) (12,187) (10,000)
Adjustment for tax benefit of distributed subsidiary...... 287 16,759 39,529
Tax effect on a distribution of investment................ (49,100) -- --
-------- -------- --------
Ending balances........................................... $919,612 $828,423 $730,321
======== ======== ========
Accumulated Other Comprehensive Income (Loss):
Beginning balances........................................ $ 72,610 $ 16,504 $(29,272)
Change in net unrealized gains (losses) on debt securities
available for sale...................................... (1,459) 118,725 98,718
Change in net unrealized gains (losses) on equity
securities available for sale........................... (65) 1,594 (1,075)
Change in net unrealized gains on foreign currency........ 1,170 -- --
Change in adjustment to deferred acquisition costs and
other deferred expenses................................. 300 (34,000) (25,000)
Net change related to cash flow hedges.................... -- -- (2,218)
Tax effects of net changes................................ 19 (30,213) (24,649)
-------- -------- --------
Ending balances........................................... $ 72,575 $ 72,610 $ 16,504
======== ======== ========
</Table>
Gross unrealized gains (losses) on fixed maturity and equity securities
included in accumulated other comprehensive income are as follows:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
(IN THOUSANDS)
Gross unrealized gains...................................... $180,329 $214,845
Gross unrealized losses..................................... (27,144) (60,136)
Unrealized gain on foreign currency......................... 1,170 --
Adjustment to DAC and other deferred expenses............... (42,700) (43,000)
Deferred income taxes....................................... (39,080) (39,099)
-------- --------
Accumulated other comprehensive income...................... $ 72,575 $ 72,610
======== ========
</Table>
On October 30, 2002, the Company received a capital contribution of
$200,000,000 in cash from the Parent.
F-48
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY (Continued)
Dividends that the Company may pay to its shareholder in any year without
prior approval of the Arizona Department of Insurance are limited by
statute. The maximum amount of dividends which can be paid to shareholders
of insurance companies domiciled in the state of Arizona without obtaining
the prior approval of the Insurance Commissioner is limited to the lesser of
either 10% of the preceding year's statutory surplus or the preceding year's
statutory net gain from operations if, after paying the dividend, the
Company's capital and surplus would be adequate in the opinion of the
Arizona Department of Insurance. Accordingly, the maximum amount of
dividends that can be paid to stockholder in the year 2005 without obtaining
prior approval is $83,649,000. Dividends of $2,500,000 were paid in 2004.
Prior to the capital contribution of SAAMCo to the Company, SAAMCo paid
dividends to its parent, SunAmerica Life Insurance Company, of $12,187,000
and $10,000,000 in 2003 and 2002, respectively.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income totaled $99,288,000 for the
year ended December 31, 2004, net income of $89,071,000 and net loss of
$180,737,000 for the years ended December 31, 2003 and 2002, respectively.
The Company's statutory capital and surplus totaled $840,001,000 at December
31, 2004 and $602,348,000 at December 31, 2003.
11. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
-------- -------- ---------
(IN THOUSANDS)
Current expense (benefit)................................... $(42,927) $127,655 $(105,369)
Deferred expense (benefit).................................. 49,337 (97,408) 105,529
-------- -------- ---------
Total income tax expense.................................... $ 6,410 $ 30,247 $ 160
======== ======== =========
</Table>
Income taxes computed at the United States federal income tax rate of 35%
and income tax expenses reflected in statement of income and comprehensive
income provided differ as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Amount computed at statutory rate........................... $ 74,025 $ 43,322 $ 11,147
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit............ 4,020 2,273 (567)
Dividends received deduction.............................. (19,058) (15,920) (10,117)
Tax credits............................................... (4,000) -- --
Adjustment to prior year tax liability(a)................. (39,730) -- --
Other, net................................................ (8,847) 572 (303)
-------- -------- --------
Total income tax expense.................................. $ 6,410 $ 30,247 $ 160
======== ======== ========
</Table>
------------------
(a) In 2004, the Company revised its estimate of tax contingency amount for
prior year based on additional information that became available.
Under prior federal income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable investment
income was not taxed, but was set aside in a special tax account designated
as "policyholders' surplus". At December 31, 2004, the Company had
approximately $14,300,000 of policyholders' surplus on which no deferred tax
liability has been recognized, as federal income taxes are not required
unless this amount is distributed as a dividend or recognized under other
specified conditions. The American Jobs Creation Act of 2004 modified
federal income tax law to allow life insurance companies to distribute
amounts from policyholders' surplus during 2005 and 2006 without incurring
federal income tax on the distributions. The Company eliminated its
policyholders' surplus balance in January 2005.
At December 31, 2004, the Company had net operating carryforwards, capital
loss carryforwards and tax credit carryforwards for Federal income tax
purposes of $15,515,000, $63,774,000 and $44,604,000, respectively, arising
from
F-49
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
affordable housing investments no longer owned by SAAMCo. Such carryforwards
expire in 2018, 2006 to 2008 and 2018, respectively.
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:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
(IN THOUSANDS)
Deferred Tax Liabilities:
Deferred acquisition costs and other deferred expenses...... $ 432,868 $ 473,387
State income taxes.......................................... 10,283 5,744
Other liabilities........................................... 15,629 350
Net unrealized gains on debt and equity securities available
for sale.................................................. 39,080 39,098
--------- ---------
Total deferred tax liabilities.............................. 497,860 518,579
--------- ---------
Deferred Tax Assets:
Investments................................................. (28,915) (25,213)
Contract holder reserves.................................... (122,691) (158,112)
Guaranty fund assessments................................... (3,402) (3,408)
Deferred income............................................. (5,604) (3,801)
Other assets................................................ (1,068) (7,446)
Net operating loss carryforward............................. (5,430) --
Capital loss carryforward................................... (22,321) (20,565)
Low income housing credit carryforward...................... (44,604) (36,600)
Partnership income/loss..................................... (6,293) (20,878)
--------- ---------
Total deferred tax assets................................... (240,328) (276,023)
--------- ---------
Deferred income taxes....................................... $ 257,532 $ 242,556
========= =========
</Table>
The Company has concluded that the deferred tax asset will be fully realized
and no valuation allowance is necessary.
12. RELATED-PARTY MATTERS
As of December 31, 2004, subordinated notes payable to affiliates were paid
off except for accrued interest totaling $460,000 which is included in other
liabilities on the consolidated balance sheet.
On February 15, 2004, the Company entered into a short-term financing
arrangement with the Parent whereby the Company has the right to borrow up
to $500,000,000 from the Parent and vice versa. Any advances made under this
arrangement must be repaid within 30 days. There were no balances
outstanding under this agreement at December 31, 2004.
On February 15, 2004, the Company entered into a short-term financing
arrangement with its affiliate, First SunAmerica Life Insurance Company
("FSA"), whereby the Company has the right to borrow up to $15,000,000 from
FSA and vice versa. Any advances made under this arrangement must be repaid
within 30 days. There were no balances outstanding under this agreement at
December 31, 2004.
On December 19, 2001, the Company entered into a short-term financing
arrangement with AIGRS whereby AIGRS has the right to borrow up to
$500,000,000. Any advances made under this arrangement must be repaid within
30 days. There were no balances outstanding under this agreement at December
31, 2004.
On December 19, 2001, the Company entered into a short-term financing
arrangement with SunAmerica Investments, Inc. ("SAII"), whereby SAII has the
right to borrow up to $500,000,000 from the Company. Any advances made under
this agreement must be repaid within 30 days. There were no balances
outstanding under this agreement at December 31, 2004.
F-50
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. RELATED-PARTY MATTERS (Continued)
On September 26, 2001, the Company entered into a short-term financing
arrangement with AIGRS. Under the terms of this agreement, the Company has
immediate access of up to $500,000,000. Any advances made under this
arrangement must be repaid within 30 days. There were no balances
outstanding under this agreement at December 31, 2004.
On September 26, 2001, the Company entered into a short-term financing
arrangement with SAII, whereby the Company has the right to borrow up to
$500,000,000. Any advances made under this agreement must be repaid within
30 days. At December 31, 2004 and 2003, the Company owed $0 and $14,000,000,
respectively, under this agreement, which was included in due to affiliates.
On October 31, 2003, the Company became a party to an existing credit
agreement under which the Company agreed to make loans to AIG in an
aggregate amount of up to $60,000,000. This commitment expires on October
28, 2005. There were no balances outstanding under this agreement at
December 31, 2004.
For the years ended December 31, 2004, 2003 and 2002, the Company paid
commissions totaling $60,674,000, $51,716,000 and $59,058,000, respectively,
to nine affiliated broker-dealers: Royal Alliance Associates, Inc.;
SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services
Corporation; Sentra Securities Corporation; Spelman & Co., Inc.; VALIC
Financial Advisors; American General Equity Securities Corporation and
American General Securities Inc. These affiliated broker-dealers distribute
a significant portion of the Company's variable annuity products amounting
to approximately 23%, 24% and 31% of deposits for each of the respective
years. Of the Company's mutual fund sales, approximately 25%, 23% and 28%
were distributed by these affiliated broker-dealers for the years ended
December 31, 2004, 2003 and 2002, respectively.
On February 1, 2004, SAAMCo entered into an administrative services
agreement with FSA whereby SAAMCo will pay to FSA a fee based on a
percentage of all assets invested through FSA's variable annuity products in
exchange for services performed. SAAMCo is the investment advisor for
certain trusts that serve as investment options for FSA's variable annuity
products. Amounts incurred by the Company under this agreement totaled
$1,537,000 in 2004 and are included in the Company's consolidated statement
of income and comprehensive income. A fee of $150,000, $1,620,000 and
$1,777,000 was paid under a different agreement in 2004, 2003 and 2002,
respectively.
On October 1, 2001, SAAMCo entered into two administrative services
agreements with business trusts established by its affiliate, The Variable
Annuity Life Insurance Company ("VALIC"), whereby the trust pays to SAAMCo a
fee based on a percentage of average daily net assets invested through
VALIC's annuity products in exchange for services performed. Amounts earned
by SAAMCo under this agreement totaled $9,074,000, $7,587,000 and $7,614,000
in 2004, 2003 and 2002, respectively, and are net of certain administrative
costs incurred by VALIC of $2,593,000, $2,168,000 and $2,175,000,
respectively. The net amounts earned by SAAMCo are included in other fees in
the consolidated statement of income and comprehensive income.
The Company has a support agreement in effect between the Company and AIG
(the "Support Agreement"), pursuant to which AIG has agreed that AIG will
cause the Company to maintain a policyholder's surplus of not less than
$1,000,000 or such greater amount as shall be sufficient to enable the
Company to perform its obligations under any policy issued by it. The
Support Agreement also provides that if the Company needs funds not
otherwise available to it to make timely payment of its obligations under
policies issued by it, AIG will provide such funds at the request of the
Company. The Support Agreement is not a direct or indirect guarantee by AIG
to any person of any obligations of the Company. AIG may terminate the
Support Agreement with respect to outstanding obligations of the Company
only under circumstances where the Company attains, without the benefit of
the Support Agreement, a financial strength rating equivalent to that held
by the Company with the benefit of the Support Agreement. Contract holders
have the right to cause the Company to enforce its rights against AIG and,
if the Company fails or refuses to take timely action to enforce the Support
Agreement or if the Company defaults in any claim or payment owed to such
contract holder when due, have the right to enforce the Support Agreement
directly against AIG.
The Company's insurance policy obligations are guaranteed by American Home
Assurance Company ("American Home"), a subsidiary of AIG, and a member of an
AIG intercompany pool. This guarantee is unconditional and irrevocable, and
the Company's contract holders have the right to enforce the guarantee
directly against American Home. While American Home does not publish
financial statements, it does file statutory annual and quarterly reports
with the New York State Insurance Department, where such reports are
available to the public. AIG is a reporting company under the Securities
Exchange Act of
F-51
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. RELATED-PARTY MATTERS (Continued)
1934, and publishes annual reports on Form 10-K and quarterly reports on
Form 10-Q, which are available from the Securities and Exchange Commission.
The Company's ultimate parent, AIG, has announced that it has delayed filing
its Annual Report on Form 10-K for the year ended December 31, 2004 to allow
AIG's Board of Directors and new management adequate time to complete an
extensive review of AIG's books and records. The review includes issues
arising from pending investigations into non-traditional insurance products
and certain assumed reinsurance transactions by the Office of the Attorney
General for the State of New York and the SEC and from AIG's decision to
review the accounting treatment of certain additional items. Circumstances
affecting AIG can have an impact on the Company. For example, the recent
downgrades and ratings actions taken by the major rating agencies with
respect to AIG, resulted in corresponding downgrades and ratings actions
being taken with respect to the Company's ratings. Accordingly, we can give
no assurance that any further changes in circumstances for AIG will not
impact us. While the outcome of this investigation is not determinable at
this time, management believes that the ultimate outcome will not have a
material adverse effect on Company operating results, cash flows or
financial position.
Pursuant to a cost allocation agreement, the Company purchases
administrative, investment management, accounting, legal, marketing and data
processing services from its Parent, AIGRS and AIG. The allocation of such
costs for investment management services is based on the level of assets
under management. The allocation of costs for other services is based on
estimated levels of usage, transactions or time incurred in providing the
respective services. Amounts paid for such services totaled $148,554,000 for
the year ended December 31, 2004, $126,531,000 for the year ended December
31, 2003 and $119,981,000 for the year ended December 31, 2002. The
component of such costs that relate to the production or acquisition of new
business during these periods amounted to $60,183,000, $48,733,000 and
$49,004,000 respectively, and is deferred and amortized as part of deferred
acquisition costs. The other components of such costs are included in
general and administrative expenses in the consolidated statement of income
and comprehensive income.
The majority of the Company's invested assets are managed by an affiliate of
the Company. The investment management fees incurred were $3,712,000,
$3,838,000 and $3,408,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
The Company incurred $1,113,000, $500,000 and $790,000 of management fees to
an affiliate of the Company to administer its securities lending program for
the years ended December 31, 2004, 2003 and 2002, respectively (see Note 2).
In December 2003, the Company purchased an affiliated bond with a carrying
value of $37,129,000. At December 31, 2004, the affiliated bond has a market
value of $34,630,000.
F-52
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. BUSINESS SEGMENTS
The Company conducts its business through two business segments, annuity
operations and asset management operations. Annuity operations consists of
the sale and administration of deposit-type insurance contracts, including
fixed and variable annuity contracts, universal life insurance contracts and
GICs. Asset management operations, which includes the managing, distributing
and administering a diversified family of mutual funds, managing certain
subaccounts offered within the Company's variable annuity products and
providing professional management of individual, corporate and pension plan
portfolios, is conducted by SAAMCo and its subsidiary and distributor, SACS,
and its subsidiary and servicing administrator, SFS. Following is selected
information pertaining to the Company's business segments.
<Table>
<Caption>
ASSET
ANNUITY MANAGEMENT
OPERATIONS OPERATIONS TOTAL
----------- ---------- -----------
(IN THOUSANDS)
Year Ended December 31, 2004:
Revenues:
Fee income:
Variable annuity policy fees, net of reinsurance.......... $ 369,141 $ -- $ 369,141
Asset management fees..................................... -- 89,569 89,569
Universal life insurance policy fees, net of
reinsurance............................................. 33,899 -- 33,899
Surrender charges......................................... 26,219 -- 26,219
Other fees................................................ -- 15,753 15,753
----------- -------- -----------
Total fee income............................................ 429,259 105,322 534,581
Investment income........................................... 362,631 963 363,594
Net realized investment gains (losses)...................... (24,100) 293 (23,807)
----------- -------- -----------
Total revenues.............................................. 767,790 106,578 874,368
----------- -------- -----------
Benefits and Expenses:
Interest expense............................................ 220,668 2,081 222,749
Amortization of bonus interest.............................. 10,357 -- 10,357
General and administrative expenses......................... 93,188 38,424 131,612
Amortization of deferred acquisition costs and other
deferred expenses......................................... 126,142 31,508 157,650
Annual commissions.......................................... 64,323 -- 64,323
Claims on universal life contracts, net of reinsurance
recoveries................................................ 17,420 -- 17,420
Guaranteed benefits, net of reinsurance recoveries.......... 58,756 -- 58,756
----------- -------- -----------
Total benefits and expenses................................. 590,854 72,013 662,867
----------- -------- -----------
Pretax income before cumulative effect of accounting
change.................................................... $ 176,936 $ 34,565 $ 211,501
=========== ======== ===========
Total assets................................................ $31,323,462 $217,155 $31,540,617
=========== ======== ===========
Expenditures for long-lived assets.......................... $ -- $ 132 $ 132
=========== ======== ===========
</Table>
F-53
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. BUSINESS SEGMENTS (Continued)
<Table>
<Caption>
ASSET
ANNUITY MANAGEMENT
OPERATIONS OPERATIONS TOTAL
----------- ---------- -----------
(IN THOUSANDS)
Year Ended December 31, 2003:
Revenues:
Fee income:
Variable annuity policy fees, net of reinsurance.......... $ 281,359 $ -- $ 281,359
Asset management fees..................................... -- 66,663 66,663
Universal life insurance policy fees, net of
reinsurance............................................. 35,816 -- 35,816
Surrender charges......................................... 27,733 -- 27,733
Other fees................................................ -- 15,520 15,520
----------- -------- -----------
Total fee income............................................ 344,908 82,183 427,091
Investment income........................................... 398,304 4,619 402,923
Net realized investment losses.............................. (30,354) -- (30,354)
----------- -------- -----------
Total revenues.............................................. 712,858 86,802 799,660
----------- -------- -----------
Benefits and Expenses:
Interest expense............................................ 237,585 2,628 240,213
Amortization of bonus interest.............................. 19,776 -- 19,776
General and administrative expenses......................... 83,013 36,080 119,093
Amortization of deferred acquisition costs and other
deferred expenses......................................... 137,130 22,976 160,106
Annual commissions.......................................... 55,661 -- 55,661
Claims on universal life contracts, net of reinsurance
recoveries................................................ 17,766 -- 17,766
Guaranteed benefits, net of reinsurance recoveries.......... 63,268 -- 63,268
----------- -------- -----------
Total benefits and expenses................................. 614,199 61,684 675,883
----------- -------- -----------
Pretax income before cumulative effect of accounting
change.................................................... $ 98,659 $ 25,118 $ 123,777
=========== ======== ===========
Total assets................................................ $27,781,457 $190,270 $27,971,727
=========== ======== ===========
Expenditures for long-lived assets.......................... $ -- $ 2,977 $ 2,977
=========== ======== ===========
</Table>
F-54
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. BUSINESS SEGMENTS (Continued)
<Table>
<Caption>
ASSET
ANNUITY MANAGEMENT
OPERATIONS OPERATIONS TOTAL
----------- ---------- -----------
(IN THOUSANDS)
Year Ended December 31, 2002:
Revenues:
Fee income:
Variable annuity policy fees, net of reinsurance.......... $ 286,919 $ -- $ 286,919
Asset management fees..................................... -- 66,423 66,423
Universal life insurance policy fees, net of
reinsurance............................................. 36,253 -- 36,253
Surrender charges......................................... 32,507 -- 32,507
Other fees................................................ 3,304 18,596 21,900
----------- -------- -----------
Total fee income............................................ 358,983 85,019 444,002
Investment income........................................... 377,556 9,799 387,355
Net realized investment losses.............................. (65,811) -- (65,811)
----------- -------- -----------
Total revenues.............................................. 670,728 94,818 765,546
----------- -------- -----------
Benefits and Expenses:
Interest expense............................................ 234,261 3,868 238,129
Amortization of bonus interest.............................. 16,277 -- 16,277
General and administrative expenses......................... 79,287 35,923 115,210
Amortization of deferred acquisition costs and other
deferred expenses......................................... 171,583 50,901 222,484
Annual commissions.......................................... 58,389 -- 58,389
Claims on universal life contracts, net of reinsurance
recoveries................................................ 15,716 -- 15,716
Guaranteed benefits, net of reinsurance recoveries.......... 67,492 -- 67,492
----------- -------- -----------
Total benefits and expenses................................. 643,005 90,692 733,697
----------- -------- -----------
Pretax income before cumulative effect of accounting
change.................................................... $ 27,723 $ 4,126 $ 31,849
=========== ======== ===========
Total assets................................................ $23,538,832 $214,157 $23,752,989
=========== ======== ===========
Expenditures for long-lived assets.......................... $ -- $ 7,297 $ 7,297
=========== ======== ===========
</Table>
F-55
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<Table>
Separate Account............................................ 3
General Account............................................. 4
Performance Data............................................ 4
Annuity Payments............................................ 8
Annuity Unit Values......................................... 8
Taxes....................................................... 11
Distribution of Contracts................................... 16
Financial Statements........................................ 16
</Table>
F-56
APPENDIX A - CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<Table>
<Caption>
FISCAL ONE MONTH FISCAL FISCAL FISCAL FISCAL
INCEPTION TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
STRATEGIES 3/31/99 3/31/00 4/30/00 4/30/01 4/30/02 4/30/03 4/30/04
- ----------------------- ------------ ---------- ---------- ---------- ---------- ---------- ----------
- --------------------------------------------------------------------------------------------------------------------
Growth
(Inception Date:
(a) 3/4/99 (b)
4/6/99)
Beginning AUV........ (a) $ 15.05 $ 15.89 $ 21.30 $ 20.24 $ 17.060 $ 14.397 $ 12.770
(b) $ 0 $ 16.27 $ 21.27 $ 20.22 $ 17.018 $ 14.344 $ 12.707
End AUV.............. (a) $ 15.89 $ 21.30 $ 20.24 $ 17.06 $ 14.397 $ 12.770 $ 14.964
(b) $ 0 $ 21.27 $ 20.22 $ 17.02 $ 14.344 $ 12.707 $ 14.870
Ending Number of
AUs................ (a) 31,169 1,653,495 1,871,300 4,391,169 3,845,259 2,885,924 2,660,440
(b) 0 126,216 132,445 278,263 243,444 203,459 180,815
- --------------------------------------------------------------------------------------------------------------------
Moderate Growth
(Inception Date:
(a) 3/3/99 (b)
4/26/99)
Beginning AUV........ (a) $ 14.25 $ 15.09 $ 19.48 $ 18.62 $ 16.298 $ 14.197 $ 12.885
(b) $ 0 $ 15.79 $ 19.46 $ 18.59 $ 16.259 $ 14.145 $ 12.823
End AUV.............. (a) $ 15.09 $ 19.48 $ 18.62 $ 16.30 $ 14.197 $ 12.885 $ 14.803
(b) $ 0 $ 19.46 $ 18.59 $ 16.26 $ 14.145 $ 12.823 $ 14.710
Ending Number of
AUs................ (a) 93,136 1,559,019 1,760,865 3,829,366 3,880,927 2,933,797 2,703,926
(b) 0 53,392 69,503 228,084 227,877 180,653 173,100
- --------------------------------------------------------------------------------------------------------------------
Balanced Growth
(Inception Date:
(a) 3/5/99 (b)
4/5/99)
Beginning AUV........ (a) $ 13.80 $ 14.05 $ 16.68 $ 16.11 $ 14.986 $ 13.731 $ 12.924
(b) $ 0 $ 14.26 $ 16.66 $ 16.09 $ 14.948 $ 13.681 $ 12.861
End AUV.............. (a) $ 14.05 $ 16.68 $ 16.11 $ 14.99 $ 13.731 $ 12.924 $ 14.471
(b) $ 0 $ 16.66 $ 16.09 $ 14.95 $ 13.681 $ 12.861 $ 14.380
Ending Number of
AUs................ (a) 85,553 991,695 1,061,795 2,286,317 2,273,698 1,998,503 1,744,175
(b) 0 113,160 109,857 305,108 227,027 168,763 162,774
- --------------------------------------------------------------------------------------------------------------------
Conservative Growth
(Inception Date:
(a) 3/5/99 (b)
3/19/99)
Beginning AUV........ (a) $ 13.03 $ 13.21 $ 14.89 $ 14.50 $ 14.137 $ 13.445 $ 13.071
(b) $ 13.25 $ 13.21 $ 14.87 $ 14.48 $ 14.101 $ 13.395 $ 13.007
End AUV.............. (a) $ 13.21 $ 14.89 $ 14.50 $ 14.14 $ 13.445 $ 13.071 $ 14.296
(b) $ 13.21 $ 14.87 $ 14.48 $ 14.10 $ 13.395 $ 13.007 $ 14.210
Ending Number of
AUs................ (a) 33,892 623,175 629,067 1,262,136 1,376,306 1,326,779 1,253,980
(b) 5,689 77,606 81,771 149,827 132,461 123,733 116,512
- --------------------------------------------------------------------------------------------------------------------
</Table>
AUV-Accumulation Unit Value
AU-Accumulation Units
(a) Reflects age 80 or younger
(b) Reflects age 81 or older
A-1
<Table>
<Caption>
FISCAL ONE MONTH FISCAL FISCAL FISCAL FISCAL
INCEPTION TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECT PORTFOLIOS 3/31/99 3/31/00 4/30/00 4/30/01 4/30/02 4/30/03 4/30/04
- ----------------------- ------------ ---------- ---------- ---------- ---------- ---------- ----------
- --------------------------------------------------------------------------------------------------------------------
Large Cap Growth
(Inception Date:
(a) 3/1/99 (b)
4/6/99)
Beginning AUV........ (a) $ 10.00 $ 10.68 $ 14.94 $ 13.99 $ 10.128 $ 7.948 $ 6.832
(b) $ 0 $ 10.00 $ 13.53 $ 12.67 $ 9.160 $ 7.180 $ 6.164
End AUV.............. (a) $ 10.68 $ 14.94 $ 13.99 $ 10.13 $ 7.948 $ 6.832 $ 8.143
(b) $ 0 $ 13.53 $ 12.67 $ 9.16 $ 7.180 $ 6.164 $ 7.340
Ending Number of
AUs................ (a) 85,647 1,058,317 1,158,071 2,665,362 2,259,645 1,778,572 1,685,980
(b) 0 59,510 77,385 228,987 221,014 176,478 146,171
- --------------------------------------------------------------------------------------------------------------------
Large Cap Composite
(Inception Date:
(a) 3/1/99 (b) 4/8/99)
Beginning AUV........ (a) $ 10.00 $ 10.41 $ 12.88 $ 12.30 $ 10.426 $ 8.876 $ 7.467
(b) $ 0 $ 10.00 $ 11.87 $ 11.34 $ 9.599 $ 8.162 $ 6.858
End AUV.............. (a) $ 10.41 $ 12.88 $ 12.30 $ 10.43 $ 8.876 $ 7.467 $ 8.857
(b) $ 0 $ 11.87 $ 11.34 $ 9.60 $ 8.162 $ 6.858 $ 8.130
Ending Number of
AUs................ (a) 33,347 316,855 361,941 715,674 670,641 583,952 540,273
(b) 0 17,244 18,966 35,031 23,619 20,743 13,893
- --------------------------------------------------------------------------------------------------------------------
Large Cap Value
(Inception Date:
(a) 3/1/99 (b)
4/6/99)
Beginning AUV........ (a) $ 10.00 $ 10.32 $ 10.75 $ 10.79 $ 12.363 $ 11.322 $ 9.468
(b) $ 0 $ 10.00 $ 10.32 $ 10.35 $ 11.848 $ 10.837 $ 9.052
End AUV.............. (a) $ 10.32 $ 10.75 $ 10.79 $ 12.36 $ 11.322 $ 9.468 $ 11.713
(b) $ 0 $ 10.32 $ 10.35 $ 11.85 $ 10.837 $ 9.052 $ 11.180
Ending Number of
AUs................ (a) 34,004 531,732 571,490 1,296,249 1,462,924 1,174,422 1,138,283
(b) 0 9,381 11,064 43,104 60,523 48,995 46,181
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Growth
(Inception Date:
(a) 3/1/99 (b)
4/8/99)
Beginning AUV........ (a) $ 10.00 $ 10.62 $ 18.41 $ 16.85 $ 13.703 $ 12.213 $ 10.280
(b) $ 0 $ 10.00 $ 16.95 $ 15.50 $ 12.595 $ 11.212 $ 9.426
End AUV.............. (a) $ 10.62 $ 18.41 $ 16.85 $ 13.70 $ 12.213 $ 10.280 $ 13.819
(b) $ 0 $ 16.95 $ 15.50 $ 12.59 $ 11.212 $ 9.426 $ 12.660
Ending Number of
AUs................ (a) 27,096 529,844 612,249 1,483,760 1,377,519 1,039,978 998,138
(b) 0 22,616 35,007 116,099 94,966 77,977 71,562
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Value
(Inception Date:
(a) 3/1/99 (b)
4/8/99)
Beginning AUV........ (a) $ 10.00 $ 10.10 $ 10.93 $ 11.14 $ 14.212 $ 15.662 $ 13.204
(b) $ 0 $ 10.00 $ 10.78 $ 10.98 $ 13.996 $ 15.405 $ 12.972
End AUV.............. (a) $ 10.10 $ 10.93 $ 11.14 $ 14.21 $ 15.662 $ 13.204 $ 17.347
(b) $ 0 $ 10.78 $ 10.98 $ 14.00 $ 15.405 $ 12.972 $ 17.020
Ending Number of
AUs................ (a) 11,278 297,306 318,151 796,922 1,019,911 797,665 750,965
(b) 0 18,247 33,708 115,825 82,010 36,957 33,208
- --------------------------------------------------------------------------------------------------------------------
</Table>
AUV-Accumulation Unit Value
AU-Accumulation Units
(a) Reflects age 80 or younger
(b) Reflects age 81 or older
A-2
<Table>
<Caption>
FISCAL ONE MONTH FISCAL FISCAL FISCAL FISCAL
INCEPTION TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECT PORTFOLIOS 3/31/99 3/31/00 4/30/00 4/30/01 4/30/02 4/30/03 4/30/04
- ------------------------ ------------ ---------- --------- ---------- ---------- ---------- ----------
- --------------------------------------------------------------------------------------------------------------------
Small Cap
(Inception Date:
(a) 3/1/99 (b) 4/8/99)
Beginning AUV......... (a) $ 10.00 $ 10.35 $ 15.00 $ 13.56 $ 11.209 $ 10.477 $ 8.120
(b) $ 0 $ 10.00 $ 14.46 $ 13.07 $ 10.786 $ 10.070 $ 7.795
End AUV............... (a) $ 10.35 $ 15.00 $ 13.56 $ 11.21 $ 10.477 $ 8.120 $ 10.440
(b) $ 0 $ 14.46 $ 13.07 $ 10.79 $ 10.070 $ 7.795 $ 10.010
Ending Number of AUs.. (a) 22,807 432,850 481,239 1,239,523 1,275,746 1,003,103 987,030
(b) 0 17,502 32,914 74,871 72,435 65,526 61,532
- --------------------------------------------------------------------------------------------------------------------
International Equity
(Inception Date:
(a) 3/1/99 (b) 4/6/99)
Beginning AUV......... (a) $ 10.00 $ 10.51 $ 13.61 $ 12.46 $ 9.609 $ 7.780 $ 5.855
(b) $ 0 $ 10.00 $ 12.71 $ 11.63 $ 8.962 $ 7.247 $ 5.447
End AUV............... (a) $ 10.51 $ 13.61 $ 12.46 $ 9.61 $ 7.780 $ 5.855 $ 7.863
(b) $ 0 $ 12.71 $ 11.63 $ 8.96 $ 7.247 $ 5.447 $ 7.310
Ending Number of AUs.. (a) 23,961 314,634 384,946 1,208,881 1,109,279 950,385 961,285
(b) 0 9,229 23,901 59,533 57,707 40,366 38,988
- --------------------------------------------------------------------------------------------------------------------
Diversified Fixed Income
(Inception Date:
(a) 3/10/99 (b) 4/8/99)
Beginning AUV......... (a) $ 10.00 $ 10.02 $ 10.00 $ 9.96 $ 10.576 $ 10.935 $ 11.774
(b) $ 0 $ 10.00 $ 9.87 $ 9.82 $ 10.422 $ 10.762 $ 11.574
End AUV............... (a) $ 10.02 $ 10.00 $ 9.96 $ 10.58 $ 10.935 $ 11.774 $ 11.739
(b) $ 0 $ 9.87 $ 9.82 $ 10.42 $ 10.762 $ 11.574 $ 11.530
Ending Number of AUs.. (a) 31,762 474,014 513,721 1,135,253 1,338,549 1,415,730 1,000,019
(b) 0 12,327 13,385 68,020 73,370 73,584 56,104
- --------------------------------------------------------------------------------------------------------------------
Cash Management
(Inception Date:
(a) 3/26/99 (b)
4/8/99)
Beginning AUV......... (a) $ 10.00 $ 10.00 $ 10.32 $ 10.35 $ 10.780 $ 10.857 $ 10.791
(b) $ 0 $ 10.00 $ 10.30 $ 10.33 $ 10.744 $ 10.808 $ 10.727
End AUV............... (a) $ 10.00 $ 10.32 $ 10.35 $ 10.78 $ 10.857 $ 10.791 $ 10.673
(b) $ 0 $ 10.30 $ 10.33 $ 10.74 $ 10.808 $ 10.727 $ 10.600
Ending Number of AUs.. (a) 970 380,169 235,608 583,476 487,732 513,839 297,445
(b) 0 19,302 26,880 34,844 43,620 33,488 5,776
- --------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FOCUSED PORTFOLIOS
- ------------------------
- ---------------------------------------------------------------------------------------------------------------------
Focus Growth
(Inception Date:
(a) 7/7/00 (b) 7/7/00)
Beginning AUV......... (a) 0 0 0 $ 10.00 $ 7.648 $ 6.585 $ 5.597
(b) 0 0 0 $ 10.00 $ 7.204 $ 6.195 $ 5.259
End AUV............... (a) 0 0 0 $ 7.65 $ 6.584 $ 5.597 $ 7.171
(b) 0 0 0 $ 7.20 $ 6.195 $ 5.259 $ 6.730
Ending Number of AUs.. (a) 0 0 0 1,140,438 1,102,958 1,038,908 1,050,831
(b) 0 0 0 70,478 70,526 61,088 50,226
- ---------------------------------------------------------------------------------------------------------------------
</Table>
AUV-Accumulation Unit Value
AU-Accumulation Units
(a) Reflects age 80 or younger
(b) Reflects age 81 or older
A-3
APPENDIX B - MARKET VALUE ADJUSTMENT
- --------------------------------------------------------------------------------
The information in this Appendix applies only if you take money out of a FAGP
(with a duration longer than 1 year) before the end of the guarantee period.
We calculate the MVA by doing a comparison between current rates and the rate
being credited to you in the FAGP. For the current rate We use a rate being
offered by Us for a guarantee period that is equal to the time remaining in the
FAGP from which you seek withdrawal. If we are not currently offering a
guarantee period for that period of time, We determine an applicable rate by
using a formula to arrive at a number between the interest rates currently
offered for the two closest periods available.
Where the MVA is negative, We first deduct the adjustment from any money
remaining in the FAGP. If there is not enough money in the FAGP to meet the
negative deduction, We deduct the remainder from your withdrawal. Where the MVA
is positive, We add the adjustment to your withdrawal amount. If a withdrawal
charge applies, it is deducted before the MVA calculation. The MVA is assessed
on the amount withdrawn less any withdrawal charges.
The MVA is computed by multiplying the amount withdrawn, transferred or taken
under an income option by the following factor:
[[(1+I/(1+J+L)] to the power of N/12] - 1
where:
I is the interest rate you are earning on the money invested in
the FAGP;
J is the interest rate then currently available for the period of
time equal to the number of years remaining in the term you initially agreed to
leave your money in the FAGP;
N is the number of full months remaining in the term you initially
agreed to leave your money in the FAGP; and
L is 0.005 (Some states require a different value. Please see your
contract.)
We do not assess an MVA against withdrawals under the following circumstances:
- If a withdrawal is made within 30 days after the end of a guarantee
period;
- If a withdrawal is made to pay contract fees and charges;
- To pay a death benefit; and
- Upon beginning an income option, if occurring on the Latest Annuity Date.
EXAMPLES OF THE MVA
The purpose of the examples below is to show how the MVA adjustments are
calculated and may not reflect the Guarantee periods available or Withdrawal
Charges applicable under your contract.
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to a
FAGP at a rate of 5%;
(2) You make a partial withdrawal of $4,000 when 1 1/2 years (18 months)
remain in the term you initially agreed to leave your money in the FAGP (N=18);
(3) You have not made any other transfers, additional Purchase Payments, or
withdrawals; and
(4) Your contract was issued in a state where L=0.005.
B-1
POSITIVE ADJUSTMENT, NO WITHDRAWAL CHARGE APPLIES
Assume that on the date of withdrawal, the interest rate in effect for a new
Purchase Payments in the 1-year FAGP is 3.5% and the 3-year FAGP is 4.5%. By
linear interpolation, the interest rate for the remaining 2 years (1 1/2 years
rounded up to the next full year) in the contract is calculated to be 4%. No
withdrawal charge is reflected in this example, assuming that the Purchase
Payment withdrawn falls within the free look amount.
The MVA factor is
= [[(1+I/(1+J+0.005)] to the power of N/12] - 1
= [[(1.05)/(1.04+0.005)]to the power of 18/12] - 1
= [(1.004785) to the power of 1.5] - 1
= 1.007186 - 1
= +0.007186
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 X (+0.007186) = +$28.74
$28.74 represents the positive MVA that would be added to the withdrawal.
NEGATIVE ADJUSTMENT, NO WITHDRAWAL CHARGE APPLIES
Assume that on the date of withdrawal, the interest rate in effect for new
Purchase Payments in the 1-year FAGP is 5.5% and the 3-year FAGP is 6.5%. By
linear interpolation, the interest rate for the remaining 2 years (1 1/2 years
rounded up to the next full year) in the contract is calculated to be 6%. No
withdrawal charge is reflected in this example, assuming that the Purchase
Payment withdrawn falls with the free withdrawal amount.
The MVA factor is
= [[(1+I)/(1+J+0.005)] to the power of N/12] - 1
= [[(1.05)/(1.06+0.005)] to the power of 18/12] - 1
= [(0.985915) to the power of 1.5] - 1
= 0.978948 - 1
= -0.021052
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 X (-0.021052) = -$84.21
$84.21 represents the negative MVA that will be deducted from the money
remaining in the 3-year FAGP.
POSITIVE ADJUSTMENT, WITHDRAWAL CHARGE APPLIES
Assume that on the date of withdrawal, the interest rate in effect for a new
Purchase Payments in the 1-year FAGP is 3.5% and the 3-year FAGP is 4.5%. By
linear interpolation, the interest rate for the remaining 2 years (1 1/2 years
rounded up to the next full year) in the contract is calculated to be 4%. A
withdrawal charge of 6% is reflected in this example, assuming that the Purchase
Payment withdrawn exceeds the free withdrawal amount.
B-2
The MVA factor is
= [[(1+I)/(I+J+0.005)] to the power of N/12] - 1
= [[(1.05)/(1.04+0.005)] to the power of 18/12] - 1
= [(1.004785) to the power of 1.5] - 1
= 1.007186 - 1
= +0.007186
The requested withdrawal amount, less the withdrawal charge ($4,000 - 6% =
$3,760) is multiplied by the MVA factor to determine the MVA:
$3,760 X (+0.007186) = +$27.02
$27.02 represents the positive MVA that would be added to the withdrawal.
NEGATIVE ADJUSTMENT, WITHDRAWAL CHARGE APPLIES
Assume that on the date of withdrawal, the interest rate in effect for new
Purchase Payments in the 1-year FAGP is 5.5% and the 3-year FAGP is 6.5%. By
linear interpolation, the interest rate for the remaining 2 years (1 1/2 years
rounded up to the next full year) in the contract is calculated to be 6%. A
withdrawal charge of 6% is reflected in this example, assuming that the Purchase
Payment withdrawn exceeds the free withdrawal amount.
The MVA factor is
= [[(1+I)/(I+J+0.005)] to the power of N/12] - 1
= [[(1.05)/(1.06+0.005)] to the power of 18/12] - 1
= [(0.985916) to the power of 1.5] - 1
= 0.978949 - 1
= -0.021051
The requested withdrawal amount, less the withdrawal charge ($4,000 - 6% =
$3,760) is multiplied by the MVA factor to determine the MVA:
$3,760 X (-0.021052) = -$79.16
$79.16 represents the negative MVA that would be deducted from the withdrawal.
B-3
Please forward a copy (without charge) of the Seasons Select Variable Annuity
Statement of Additional Information to:
(Please print or type and fill in all information.)
------------------------------------------------------------------
Name
------------------------------------------------------------------
Address
------------------------------------------------------------------
City/State/Zip
------------------------------------------------------------------
Date: ____________ Signed: ______________________________________
Return to: AIG SunAmerica Life Assurance Company, Annuity Service Center, P.O.
Box 52499, Los Angeles, California 90054-0299
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the SEC registration fee.
SEC registration fee .......................... $ 5,560
Printing and engraving ........................ $50,000
Legal fees and expenses ....................... $10,000
Rating agency fees ............................ $ 7,500
Miscellaneous ................................. $10,000
Total .................................... $83,060
Item 14. Indemnification of Directors and Officers.
Section 10-851 of the Arizona Corporations and Associations law permits
the indemnification of directors, officers, employees and agents of Arizona
corporations. Article Eight of the Company's Restated Articles of Incorporation,
as amended and restated (the "Articles") and Article Five of the Company's
By-Laws ("By-Laws") authorize the indemnification of directors and officers to
the full extent required or permitted by the Laws of the State of Arizona, now
or hereafter in force, whether such persons are serving the Company, or, at its
request, any other entity, which indemnification shall include the advance of
expenses under the procedures and to the full extent permitted by law. In
addition, the Company's officers and directors are covered by certain directors'
and officers' liability insurance policies maintained by the Company's parent.
Reference is made to section 10-851 of the Arizona Corporations and Associations
Law, Article Eight of the Articles, and Article Five of the By-Laws, which are
incorporated herein by reference.
Item 15. Recent Sales of Unregistered Securities.
None
Item 16. Exhibits and Financial Statements Schedules.
<Table>
<Caption>
Exhibit
No. Description
(1) Form of Underwriting Agreement.......................................... *
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.............................................................. Not Applicable
(3) (a) Amendment to Articles of Incorporation dated
September 30, 2002................................................ +
(b) Amended and Restated Articles of Incorporation+++
(c) Amended and Restated By-Laws...................................... ****
(4) (a) Seasons Select Allocated Fixed and Variable Group Annuity
Certificate....................................................... **
(b) Seasons Select Individual Fixed and Variable Annuity Contract..... **
(c) Seasons Select Participant Enrollment Form........................ **
(d) Seasons Select Deferred Annuity Application....................... **
(5) Opinion of Counsel re: Legality......................................... *
(including on Exhibit (23)(b))
(6) Opinion re Discount on Capital Shares................................... Not Applicable
(7) Opinion re Liquidation Preference....................................... Not Applicable
(8) Opinion re Tax Matters.................................................. Not Applicable
(9) Voting Trust Agreement.................................................. Not Applicable
(10) Material Contracts...................................................... Not Applicable
(11) Statement re Computation of Per Share Earnings.......................... Not Applicable
(12) Statement re Computation of Ratios...................................... Not Applicable
(14) Code of Ethics.......................................................... Not Applicable
(15) Letter re Unaudited Financial Information............................... Not Applicable
(16) Letter re Change in Certifying Accountant............................... Not Applicable
(23) (a) Consent of Independent Registered Public Accounting Firm.......... Filed Herewith
(b) Consent of Attorney............................................... *
(24) (a) Powers of Attorney................................................ ***
(24) (b) Power of Attorney Oct. 2003....................................... ++
(25) Statement of Eligibility of Trustee..................................... Not Applicable
(26) Invitation of Competitive Bids.......................................... Not Applicable
(99) Other Exhibits.......................................................... Not Applicable
</Table>
* Incorporated by reference to Pre Effective Amendment No. 1, File Nos.
333-08877, filed March 11, 1997, Accession No. 0000912057-97-008515.
** Incorporated by reference to Pre Effective Amendment No. 2, File Nos.
333-67689, filed February 1, 1999, Accession No. 0001047469-99-002911.
*** Incorporated by reference to Post Effective Amendment No. 4, File Nos.
333-67689, filed June 21, 2000, Accession No. 0000912057-00-029316.
**** Incorporated by reference to Post Effective Amendment No. 5, File Nos.
333-67689, filed April 9, 2001, Accession No. 0000950148-02-000994.
+ Incorporated by reference to Post Effective Amendment No. 9, File Nos.
333-67689, filed April 24, 2003, Accession No. 0000950148-03-000979.
++ Incorporated by reference to Post Effective Amendment No. 11, File No.
333-67689, filed April 9, 2004, Accession No. 0000950148-04-000742.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this post-effective amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California on this 27th day of
April 2005.
AIG SUNAMERICA LIFE ASSURANCE
COMPANY (Registrant)
By: /s/ JAY S. WINTROB
---------------------------------------
Jay S. Wintrob, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
JAY S. WINTROB* Chief Executive Officer, April 27, 2005
- --------------------------------- & Director
Jay S. Wintrob (Principal Executive Officer)
JAMES R. BELARDI* Director April 27, 2005
- ---------------------------------
James R. Belardi
MARC H. GAMSIN* Director April 27, 2005
- ---------------------------------
Marc H. Gamsin
N. SCOTT GILLIS* Senior Vice President, April 27, 2005
- --------------------------------- Chief Financial Officer &
N. Scott Gillis Director
(Principal Financial Officer)
JANA W. GREER* Director April 27, 2005
- ---------------------------------
Jana W. Greer
STEWART R. POLAKOV* Senior Vice President April 27, 2005
- --------------------------------- & Controller
Stewart R. Polakov (Principal Accounting Officer)
* By: /s/ MALLARY L. REZNIK April 27, 2005
----------------------------
Mallary L. Reznik
Attorney-In-Fact