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FILED PURSUANT TO RULE 497(c)
OF THE SECURITIES ACT OF 1933
FILE NO. 333-08859
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PROFILE
April 3, 1997
This Profile is a summary of some of the more important points you should know
before purchasing the Seasons Variable Annuity. The sections in this Profile
correspond to sections in the prospectus which discuss the topics in more
detail. Please read the prospectus carefully.
THE SEASONS VARIABLE ANNUITY
The Seasons Variable Annuity Contract is a contract between you and Anchor
National Life Insurance Company. It is designed to help you save on a
tax-deferred basis and diversify your investments among asset classes and
managers to meet long-term financial goals, such as retirement funding. Tax
deferral means all your money, including the amount you would otherwise pay in
current income taxes, remains in your contract to generate more earnings. Your
money could grow faster than it would in a comparable taxable investment.
The Seasons Variable Annuity helps you meet these goals by offering four
variable investment STRATEGIES which are managed by five different professional
investment managers. The value of any portion of your contract allocated to the
STRATEGIES will fluctuate up or down based on the performance of the STRATEGIES
you select and you may experience a loss. Five fixed investment options, each
for a different length of time and offering different interest rates that are
guaranteed by Anchor National and a one year DCA account offering a fixed
interest rate guaranteed by Anchor National are also available under the
contract.
The STRATEGIES and fixed investment options are designed to be used in concert
in order to achieve your desired investment goals. You may put money into any of
the STRATEGIES and/or fixed investment options. You may transfer between
STRATEGIES and/or the fixed investment options four times per year without
charge.
Like all annuities, the contract has an Accumulation Phase, and if you choose to
annuitize, an Income Phase. During the Accumulation Phase, you invest money in
your contract. Your earnings are based on the investment performance of the
STRATEGY or STRATEGIES to which your money is allocated and/or the interest rate
earned on the fixed investment option. You may withdraw money from your contract
during the Accumulation Phase. However, as with other tax-deferred investments,
you will pay taxes on earnings and untaxed contributions when you withdraw them.
An IRS tax penalty may apply if you make withdrawals before age 59 1/2. During
the Income Phase, you will receive payments from your annuity. Your payments may
be fixed in dollar amount, vary with investment performance or be a combination
of both, depending on the annuity option you select. Among other factors, the
amount of money you are able to accumulate in your contract during the
Accumulation Phase will determine the amount of your payments during the Income
Phase.
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ANNUITY PAYMENT OPTIONS
You can select from one of five annuity payment options:
(1) payments for your lifetime;
(2)payments for your lifetime and your survivor's lifetime;
(3) payments for your lifetime and your survivor's lifetime, but for not
less than 120 months;
(4) payments for your lifetime, but for not less than 120 or 240 months; and
(5) payments for a specified period of 5 to 30 years.
You will also need to decide if you want your payments to fluctuate with
investment performance or remain constant, and the date on which your payments
will begin. Once you begin receiving payments, you cannot change your annuity
option. If your contract is Non-qualified, payments during the Income Phase are
considered partly a return of your original investment. The "original
investment" part of each payment is not taxable as income. For Qualified
contracts, the entire payment is taxable as income.
PURCHASING A SEASONS VARIABLE ANNUITY
You can buy a contract through your financial representative, who can also help
you complete the proper forms. For Non-Qualified contracts the minimum initial
investment is $5000. For Qualified contracts the minimum initial investment is
$2000. You can add $500 or more to your contract at any time during the
Accumulation Phase.
INVESTMENT OPTIONS
You can put your money into any one or more of the four multi-manager variable
investment STRATEGIES and/or one or more of the six fixed investment options.
The fixed investment options offer fixed rates of interest for specified lengths
of time.
Each STRATEGY has a different investment objective and uses an asset allocation
investment approach, investing in a combination of underlying investment
portfolios which invest in a combination of stocks, bonds and cash in varying
degrees, in order to achieve its investment objective. The four investment
STRATEGIES are:
GROWTH
MODERATE GROWTH
BALANCED GROWTH
CONSERVATIVE GROWTH
Each STRATEGY invests in three underlying investment portfolios. The underlying
investment portfolios are managed by the following five investment managers:
PUTNAM INVESTMENT MANAGEMENT, INC.
T. ROWE PRICE ASSOCIATES, INC.
JANUS CAPITAL CORPORATION
SUNAMERICA ASSET MANAGEMENT CORP.
WELLINGTON MANAGEMENT COMPANY, LLP
EXPENSES
Each year we deduct a $35 ($30 in North Dakota and Washington) contract
administration fee on your contract anniversary. We currently waive this fee if
your contract value is at least $50,000.
We also deduct insurance charges which amount to 1.40% annually of the average
daily value of your contract allocated to the STRATEGIES. The insurance charges
include Mortality and Expense Risk, 1.25% and Distribution Expense, .15%.
There are also investment charges and other expenses if you put money into the
STRATEGIES, which may range from 1.12% to 1.25%. Investment charges may be more
or less than the percentages reflected here.
If you take your money out, we may assess a withdrawal charge which is a
percentage of the Purchase Payment you withdraw. The percentage declines with
each year the Purchase Payment is in the contract as follows:
<TABLE>
<S> <C> <C> <C>
Year 1......... 7% Year 5......... 4%
Year 2......... 6% Year 6......... 3%
Year 3......... 6% Year 7......... 2%
Year 4......... 5% Year 8......... 0%
</TABLE>
After a Purchase Payment has been in your contract for 7 full years, there is no
withdrawal charge when that Purchase Payment is withdrawn.
Additionally, if you take money out of a multi-year fixed investment option
before the term you initially agreed to ends, you may be assessed an adjustment
which could increase or decrease the value of your money.
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In some states you may also be assessed a state premium tax of up to 3.5%,
depending upon the state in which you reside.
If you transfer among the STRATEGIES and/or fixed investment options more than
four times per year, you will be charged a $25 dollar transfer fee per transfer
($10 in Pennsylvania and Texas).
The following chart is designed to help you understand the charges in your
contract. THE COLUMN "TOTAL ANNUAL CHARGES" SHOWS THE TOTAL OF THE $35 CONTRACT
ADMINISTRATION CHARGE, THE 1.40% INSURANCE CHARGES AND THE INVESTMENT CHARGES
FOR EACH STRATEGY. WE CONVERTED THE CONTRACT ADMINISTRATION CHARGE TO A
PERCENTAGE (.12%) USING AN ASSUMED CONTRACT SIZE OF $30,000. The actual impact
of this charge on your contract may differ from this percentage.
<TABLE>
<CAPTION>
EXAMPLES
Total Annual Total Annual Total Total
Insurance
Related
Charges Investment Expenses Expenses
Related Total at end of at end of
Charges Annual 1 YEAR 10 YEARS
STRATEGY Charges
<S> <C> <C> <C> <C> <C> <C>
Growth 1.52% (1.40% + .12%) 1.25% 2.77% $98 $309
Moderate Growth 1.52% (1.40% + .12%) 1.21% 2.73% $98 $306
Balanced Growth 1.52% (1.40% + .12%) 1.17% 2.69% $97 $301
Conservative Growth 1.52% (1.40% + .12%) 1.12% 2.64% $97 $296
</TABLE>
The examples assume that you invested $1,000 in a STRATEGY which earns 5%
annually and that you withdrew your money at the end of a 1 year period and at
the end of a 10 year period. For year 1, the total annual charges are assessed
as well as the withdrawal charge. For year 10, the example reflects the total
annual charges but there is no withdrawal charge. The annual investment-related
expenses reflect the waiver or reimbursement of expenses by the investment
adviser. No premium taxes are assumed. Please see the Fee Tables in the
prospectus for more detailed information regarding the fees and expenses
incurred under the contract.
TAXES
Unlike taxable investments where earnings are taxed in the year they are earned,
taxes on amounts earned in a Non-qualified Contract, one that is established
with after tax dollars, are deferred until they are withdrawn. In a Qualified
Contract, one that is established with before tax dollars, like an IRA, all
amounts are taxable when they are withdrawn. When you begin taking distributions
or withdrawals from your contract, earnings are considered to be taken out first
and will be taxed at your ordinary income tax rate. You may be subject to a 10%
federal tax penalty for distributions or withdrawals before age 59 1/2.
ACCESS TO YOUR MONEY
Withdrawals may be made from your contract in the amount of $1000 or more. You
can take out up to 10% of your total Purchase Payments each year without charge.
Withdrawals in excess of the 10% will be assessed a withdrawal charge as
described above. If you withdraw your entire contract value you will not receive
the benefit of any free withdrawal amount. After a Purchase Payment has been in
your contract for 7 full years, there is no withdrawal charge. Additionally,
withdrawal charges are not assessed when a death benefit is paid. Of course, you
may also have to pay income tax and a 10% IRS tax penalty may apply.
PERFORMANCE
The value of your annuity will fluctuate depending upon the investment
performance of the STRATEGY or STRATEGIES you select. From time to time we may
advertise a STRATEGY'S total return. The total return figures are based on
historical data and are not intended to indicate future performance.
As of the date of the prospectus, the sale of Seasons Variable Annuity had not
begun. Therefore, no performance data is presented here.
DEATH BENEFIT
If you, or, if there is a joint owner, the younger of the two, should die during
the Accumulation Phase, your Beneficiary will receive a death benefit.
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If you die before age 75, the death benefit will be the greater of: (1) the
money you put into the contract less any withdrawals, charges and market value
adjustments, accumulated at 3%; or (2) the current value of your contract.
If you die after age 75, the death benefit will be the greater of: (1) the money
you put into the contract less any withdrawals, charges and market value
adjustments, accumulated at 3% until your 75th birthday plus any subsequent
Purchase Payments and less any withdrawals; or (2) the current value of your
contract.
OTHER INFORMATION
OWNERSHIP: The contract is an allocated fixed and variable group annuity
contract. A group contract is issued to a contractholder, for the benefit of the
participants in the group. You, as an owner of a Seasons Variable Annuity, are a
participant in the group and will receive a certificate evidencing your
ownership. You, as the owner of a certificate, are entitled to all the rights
and privileges of ownership. As used in this Profile and the prospectus, the
term contract refers to your certificate. In some states an individual fixed and
variable annuity contract may be available instead, which is identical to the
group contract described in this Profile and the prospectus except that it is
issued directly to the individual owner.
FREE LOOK: You may cancel your contract within 10 days of receiving it (or
whatever period is required by your state) by mailing it to our Annuity Service
Center. Your contract will be treated as void on the date we receive it and we
will pay you an amount equal to the value of your contract (unless otherwise
required by state law). Its 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.
SYSTEMATIC WITHDRAWAL PROGRAM: If selected by you, this program allows you to
receive either monthly, quarterly, semi-annual or annual checks during the
Accumulation Phase. Systematic withdrawals may also be electronically wired to
your bank account. Of course, withdrawals during the Accumulation Phase may be
taxable and a 10% IRS tax penalty may apply if you are under age 59 1/2.
DOLLAR COST AVERAGING: If selected by you, this program allows you to invest
gradually into one or more of the STRATEGIES.
PRINCIPAL ADVANTAGE PROGRAM: If selected by you, this program allows you to put
money in a fixed investment option and one or more STRATEGIES and we will
guarantee that the portion allocated to the fixed investment option will grow to
equal your principal investment.
AUTOMATIC PAYMENT PLAN: You can add to your contract directly from your bank
account with as little as $50 per month.
CONFIRMATIONS AND QUARTERLY STATEMENTS: You will receive a confirmation of each
transaction within your contract. On a quarterly basis, you will receive a
complete statement of your transactions over the past quarter and a summary of
your account values.
INQUIRIES:
If you have questions about your contract or need to make changes, call your
financial representative or contact us at:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
800/445-SUN2
If money accompanies your correspondence, you should direct it to:
Anchor National Life Insurance Company
P.O. Box 100330
Pasadena, California 91189-0001
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ALLOCATED FIXED AND VARIABLE GROUP ANNUITY
issued by
VARIABLE ANNUITY ACCOUNT FIVE
and
ANCHOR NATIONAL LIFE INSURANCE COMPANY
The annuity contract has 10 investment choices - 6 fixed investment options
which offer interest rates guaranteed by Anchor National for different periods
of time and 4 variable investment STRATEGIES:
GROWTH
MODERATE GROWTH
BALANCED GROWTH
CONSERVATIVE GROWTH
which invest in the underlying portfolios of
SEASONS SERIES TRUST
which is managed by:
PUTNAM INVESTMENT MANAGEMENT, INC.
T. ROWE PRICE ASSOCIATES, INC.
JANUS CAPITAL CORPORATION
SUNAMERICA ASSET MANAGEMENT CORP.
WELLINGTON MANAGEMENT COMPANY, LLP
You can put your money into any one or all of the STRATEGIES and/or 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 Variable Annuity.
To learn more about the annuity offered by this prospectus, you can obtain a
copy of the Statement of Additional Information dated April 3, 1997. The
Statement of Additional has been filed with the Securities and Exchange
Commission and is incorporated by reference into this prospectus. The table of
contents of the Statement of Additional Information appears on page of this
prospectus.
For a free copy of the Statement of Additional Information, call us at
800/445-SUN2 or write us at our Annuity Service Center, P.O. Box 54299, Los
Angeles, California 90054-0299.
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.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Profile................................................................... 2
Glossary.................................................................. 3
Fee Tables................................................................ 4
Owner Transaction Expenses.......................................... 4
Annual Separate Account Expenses.................................... 4
Portfolio Expenses.................................................. 4
Examples.................................................................. 5
THE SEASONS VARIABLE ANNUITY.............................................. 6
ANNUITY INCOME OPTIONS.................................................... 6
Options............................................................. 7
Allocation of Annuity Payments...................................... 7
Transfers During the Income Phase................................... 7
Deferment of Payments............................................... 7
PURCHASING A SEASONS VARIABLE ANNUITY..................................... 8
Allocation of Purchase Payments..................................... 8
Accumulation Units.................................................. 8
Free Look Period.................................................... 8
INVESTMENT OPTIONS........................................................ 9
Variable Investment Options: The STRATEGIES......................... 9
Substitution........................................................ 12
Fixed Investment Options............................................ 12
Transfers During the Accumulation Phase............................. 12
EXPENSES.................................................................. 14
Insurance Charges................................................... 14
Investment Charges.................................................. 14
Contract Maintenance Charge......................................... 14
Withdrawal Charge................................................... 14
Transfer Fee........................................................ 15
Premium Taxes....................................................... 15
Income Taxes........................................................ 15
Reduction or Elimination of Certain Charges......................... 15
TAXES..................................................................... 16
Annuity Contracts in General........................................ 16
Tax Treatment of Distributions --Non-Qualified Contracts............ 16
Tax Treatment of Distributions --Qualified Contracts................ 16
Diversification..................................................... 16
ACCESS TO YOUR MONEY...................................................... 17
Suspension of Payments.............................................. 17
Minimum Contract Value.............................................. 17
PERFORMANCE............................................................... 18
DEATH BENEFIT............................................................. 18
Death of the Annuitant.............................................. 19
OTHER INFORMATION......................................................... 19
Anchor National..................................................... 19
The Separate Account................................................ 19
The General Account................................................. 20
Distribution........................................................ 20
Administration...................................................... 20
Other Information about Anchor National............................. 20
FINANCIALS................................................................ 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 25
INDEPENDENT ACCOUNTANTS................................................... 37
FINANCIAL STATEMENTS...................................................... 37
APPENDIX A................................................................ 53
APPENDIX B--PREMIUM TAXES................................................. 54
</TABLE>
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GLOSSARY OF TERMS
We have capitalized some of the technical terms used in this prospectus. To help
you understand these terms, we have defined them below:
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.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under the
contract if you or the Annuitant dies.
INCOME PHASE -- The period during which we make annuity payments to you.
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.
PURCHASE PAYMENTS -- The money you give us to buy a contract, as well as any
additional money you give us to invest after you own it.
QUALIFIED (CONTRACT) -- A contract purchased with pre-tax dollars. These
contracts are generally purchased under a pension plan, specially sponsored
program or individual retirement account.
STRATEGY(IES) -- A sub-account of Variable Annuity Account Five which provides
for the variable investment options available under the contract. Each STRATEGY
has its own investment objective and is invested in the underlying investment
portfolios of Seasons Series Trust.
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SEASONS VARIABLE ANNUITY FEE TABLES
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OWNER TRANSACTION EXPENSES
Withdrawal Charge as a percentage of Purchase Payments:
<TABLE>
<S> <C> <C> <C>
Year 1.............. 7% Year 5.............. 4%
Year 2.............. 6% Year 6.............. 3%
Year 3.............. 6% Year 7.............. 2%
Year 4.............. 5% Year 8.............. 0%
</TABLE>
<TABLE>
<S> <C>
Contract Maintenance Charge........ $35 each year ($30 in North Dakota and
Washington)
Transfer Fee....................... No charge for first 4 transfers each
year; thereafter, the fee is $25 per
transfer ($10 in
Pennsylvania and Texas)
</TABLE>
ANNUAL SEPARATE ACCOUNT EXPENSES
(as a percentage of daily net asset value)
<TABLE>
<S> <C>
Mortality Risk Charge........................ 0.90%
Expense Risk Charge.......................... 0.35%
Distribution Expense Charge.................. 0.15%
---
Total Separate Account Expenses........ 1.40%
</TABLE>
The Investment Portfolio Expenses table set forth below identifies the total
investment expenses charged by the underlying investment portfolios of Seasons
Series Trust. Each contractholder within a STRATEGY will incur a portion of
these total investment expenses in relation to the investment by such STRATEGY
in the respective portfolio. The table entitled "Investment Portfolio Expenses
by STRATEGY" which follows the table below identifies the total investment
portfolio expenses by STRATEGY based upon the allocation of contract values
within each STRATEGY to the underlying investment portfolios after the quarterly
rebalancing described on page 11. However, the actual investment portfolio
expenses incurred by contractholders within a STRATEGY will vary depending upon
the daily net asset value of each investment portfolio in which such STRATEGY is
invested.
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of daily net asset value of each investment portfolio after
reimbursement of expenses.)*
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
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Stock .85% .36% 1.21%
Asset Allocation: Diversified Growth .85% .36% 1.21%
Multi-Managed Growth .89% .40% 1.29%
Multi-Managed Moderate Growth .85% .36% 1.21%
Multi-Managed Income/Equity .81% .33% 1.14%
Multi-Managed Income .77% .29% 1.06%
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* The percentages set forth above are based on estimated amounts for the current fiscal year.
</TABLE>
THE ABOVE INVESTMENT PORTFOLIO EXPENSES WERE PROVIDED BY SEASONS SERIES TRUST.
WE HAVE NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.
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INVESTMENT PORTFOLIO EXPENSES BY STRATEGY*
(based on the total annual expenses of the underlying investment portfolios
reflected above, after reimbursement of expenses)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
STRATEGY
Growth .87% .38% 1.25%
Moderate Growth .85% .36% 1.21%
Balanced Growth .83% .34% 1.17%
Conservative Growth .80% .32% 1.12%
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*The percentages set forth above are based on estimates for the current fiscal year.
</TABLE>
EXAMPLES
You will pay the following expenses on a $1,000 investment in each STRATEGY,
assuming a 5% annual return on assets and:
(a) surrender of the contract at the end of the stated time period;
(b) if the contract is annuitized or not surrendered.
<TABLE>
<CAPTION>
TIME PERIODS
STRATEGY 1 YEAR 3 YEARS
<S> <C> <C>
Growth (a) $98 (a) $146
(b) $28 (b) $ 86
Moderate Growth (a) $98 (a) $145
(b) $28 (b) $ 85
Balanced Growth (a) $97 (a) $143
(b) $27 (b) $ 83
Conservative Growth (a) $97 (a) $142
(b) $27 (b) $ 82
</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. The
example reflects owner transaction expenses, separate account expenses
and investment portfolio expenses by STRATEGY.
2. For certain investment portfolios in which the STRATEGIES invest, the
adviser, SunAmerica Asset Management Corp., has voluntarily agreed to
waive fees or reimburse certain expenses, if necessary, to keep annual
operating expenses at or below the following percentages of each
investment portfolio's average net assets: Stock and Asset Allocation:
Diversified Growth Portfolios: 1.21%; Multi-Managed Growth: 1.29%;
Multi-Managed Moderate Growth: 1.21%; Multi-Managed Income/Equity: 1.14%,
Multi-Managed Income: 1.06%. The adviser also may voluntarily waive or
reimburse additional amounts to increase an investment portfolios'
investment return. All waivers and/or reimbursements may be terminated at
any time. Furthermore, the adviser may recoup any waivers or
reimbursements within the following two years, provided that the
investment portfolio is able to make such payment and remain in
compliance with the foregoing expense limitations.
3. The Examples assume that no transfer fees were imposed. Premium taxes are
not reflected but may be applicable.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
AS OF THE DATE OF THIS PROSPECTUS, THE SALE OF SEASONS HAD NOT BEGUN AND THE
STRATEGIES DID NOT HAVE ANY ASSETS. THEREFORE, NO CONDENSED FINANCIAL
INFORMATION IS PRESENTED HERE.
5
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THE SEASONS VARIABLE ANNUITY
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An annuity is a contract between you, the owner, and an insurance company. The
contract provides tax deferral for your earnings, as well as a death benefit and
guaranteed income in the form of annuity payments beginning on a date you
select. Until you decide to begin receiving annuity payments, your annuity is in
the Accumulation Phase. Once you begin receiving annuity payments, your contract
switches to the Income Phase. If you die during the Accumulation Phase, the
insurance company guarantees a death benefit to your Beneficiary. The Seasons
Variable Annuity is issued by Anchor National Life Insurance Company.
During the Accumulation Phase, the value of your annuity benefits from tax
deferral. This means your earnings accumulate on a tax-deferred basis until you
take money out of your contract. The Income Phase occurs when you begin to
receive annuity payments. You select the date on which annuity payments are to
begin.
The contract is called a variable annuity because you can choose among four
variable investment STRATEGIES, which invest in underlying investment portfolios
managed by five investment managers. Depending upon market conditions, you can
make or lose money in any of these STRATEGIES. If you allocate money to the
STRATEGIES, the amount of money you are able to accumulate in your contract
during the Accumulation Phase depends upon the investment performance of the
STRATEGIES you select. The amount of the annuity payments you receive during the
Income Phase from the variable portion of your contract also depends upon the
investment performance of the STRATEGIES you select for the Income Phase.
The contract also offers six fixed investment options. Your money will earn
interest at the rate guaranteed by us for the period of time you agree to leave
your money in the fixed investment option. We currently offer fixed investment
options for periods of one, three, five, seven and ten years and a special one
year DCA fixed account specifically for the Dollar Cost Averaging Program. The
multi-year fixed investment options are not available in Maryland or Washington.
If you allocate money to a fixed investment option, the amount of money you are
able to accumulate in your contract during the Accumulation Phase depends upon
the total interest credited to your contract. An adjustment to your contract
will apply to withdrawals or transfers from the multi-year fixed investment
options prior to the end of the selected guarantee period. The amount of annuity
payments you receive during the Income Phase from the fixed portion of your
contract will remain level for the entire Income Phase.
ANNUITY INCOME OPTIONS
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When you switch to the Income Phase, you will receive regular income payments
under the contract. You can choose to have your annuity payments sent to you by
check or electronically wired to your bank. The contract offers 5 annuity
options. Other annuity options may be available in the future.
You select the date on which annuity payments are to begin, which must be the
first day of a month at least two years after the date of your contract. We call
this the Annuity Date. You may change your Annuity Date at least seven days
prior to the date that your payments are to begin. However, annuity payments
must begin by the later of your 90th birthday or ten years after the date your
contract is issued. We call this the Latest Annuity Date. If no Annuity Date is
selected we will begin payments based on the Latest Annuity Date. Certain states
may require that you begin receiving annuity payments prior to this date. If the
Annuity Date is past your 85th birthday, it is possible that the contract would
not be treated as an annuity and you may incur adverse tax consequences.
Unless you are a non-natural owner, you may change the Annuitant at any time
prior to the Annuity Date. You may also designate a second person on whose life
annuity payments are based. If the Annuitant dies before the Annuity Date, you
must notify us and designate a new Annuitant.
If you do not choose an annuity option, annuity payments will be made in
accordance with option 4 (below) for 120 months. If the annuity payments are for
joint lives, then we will make payments in accordance with option 3. If
permitted by state law, we may pay the annuity in one lump sum if your contract
is less than $5,000. Likewise, if your annuity payments would be less than $50 a
month, we have the right to change the
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frequency of your payment to be quarterly, semi-annual or annual so that your
annuity payments are at least $50. Annuity payments will be made to you unless
you designate another person to receive them. In that case, you must notify us
in writing at least 30 days before the Annuity Date. You will remain fully
responsible for any taxes related to annuity payments.
OPTION 1 - LIFE INCOME
Under this option, we will make annuity payments as long as the Annuitant is
alive. Annuity payments stop when the Annuitant dies.
OPTION 2 - JOINT AND SURVIVOR ANNUITY
Under this option, we will make annuity payments as long as the Annuitant and a
designated second person are alive. Upon the death of either person, we will
continue to make annuity payments so long as the survivor is alive. You choose
the amount of the annuity payments to the survivor, which can be equal to 100%,
66.66% or 50% of the full amount. Annuity payments stop upon the death of the
survivor.
OPTION 3 - JOINT AND SURVIVOR LIFE ANNUITY - 120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2 above, with the additional guarantee that
payments will be made for at least 120 months. If the Annuitant and survivor die
before all guaranteed payments have been made, the rest will be made to the
Beneficiary.
OPTION 4 - LIFE ANNUITY WITH 120 OR 240 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 1 above, with the additional guarantee that
payments will be made for at least 120 or 240 months, as selected by you. Under
this option, if the Annuitant dies before all guaranteed payments have been
made, the rest will be made to the Beneficiary.
OPTION 5 - INCOME FOR A SPECIFIED PERIOD
Under this option, we will make annuity payments for any period of time from 5
to 30 years, as selected by you. However, the period must be for full 12 month
increments. Under this option, if the Annuitant dies before all guaranteed
payments have been made, the rest will be made to the beneficiary. This option
does not contain an element of mortality risk. Therefore, you will not get the
benefit of the mortality component of the mortality and expense risk charge if
this option is selected.
ALLOCATION OF ANNUITY PAYMENTS
On the Annuity Date, if your money is invested in a fixed investment option(s),
your annuity payments will be fixed in amount. If your money is invested in a
STRATEGY(IES), your annuity payments will vary depending on the investment
performance of the STRATEGY(IES) you select. If you have money in the fixed and
variable investment options, your annuity payments will be based on the
respective allocations. You may not convert between fixed and variable payments
once annuity payments begin.
VARIABLE ANNUITY PAYMENTS
If you choose to have any portion of your annuity payments come from the
STRATEGIES, the dollar amount of your payment will depend upon three things: (1)
the value of your contract in the STRATEGIES on the Annuity Date, (2) the 3.5%
assumed investment rate used in the annuity table for the contract and (3) the
performance of the STRATEGIES you selected. If the actual performance exceeds
the 3.5% assumed rate, your annuity payments will increase. Similarly, if the
actual rate is less than 3.5%, your annuity payments will decrease. The
Statement of Additional Information contains detailed information and sample
calculations.
TRANSFERS DURING THE INCOME PHASE
You may transfer money among the STRATEGIES during the Income Phase. Transfers
are subject to the same limitations as transfers during the Accumulation Phase.
However, you may not transfer money from the fixed account into the STRATEGIES
or from the STRATEGIES into the fixed accounts during the Income Phase.
DEFERMENT OF PAYMENTS
We may defer making fixed payments for up to six months, or less if required by
state law. Interest will be credited to you during the deferral period.
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PURCHASING A SEASONS VARIABLE ANNUITY
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A Purchase Payment is 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. You can
purchase a Non-Qualified contract with a minimum initial investment of $5,000
and a Qualified contract with a minimum initial investment of $2,000. The
maximum we accept is $1,000,000 without our prior approval. Payments in amounts
of $500 or more may be added to your contract at any time during the
Accumulation Phase. You can make scheduled subsequent Purchase Payments of $50
or more per month by enrolling in the Automatic Payment Plan.
We may refuse any Purchase Payment. In general, we will not issue a
Non-Qualified contract to anyone who is age 90 or older or a Qualified contract
to anyone who is age 70 1/2 or older.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, you will allocate your Purchase Payment to one or
more of the STRATEGIES and/or the fixed investment options. You should specify
your investment allocations on the contract application. If you make additional
Purchase Payments, we will allocate them the same way as your first Purchase
Payment unless you tell us otherwise.
Once we receive your Purchase Payment and a complete application at our
principal place of business, we will issue your contract and allocate your first
Purchase Payment within two business days. If we are unable to complete this
process within five business days, we will either send back your money or get
your permission to keep it until we get all the necessary information.
ACCUMULATION UNITS
The value of the variable portion of your contract will go up or down depending
upon the investment performance of the STRATEGY(IES) you select. In order to
keep track of the value of your contract, we use a unit of measure called an
Accumulation Unit which works like a share of a mutual fund. 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 STRATEGY
after the NYSE closes each day. We do this by:
(1) determining the total value of money invested in the particular
STRATEGY;
(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.
The value of an Accumulation Unit may go up or down from day to day. When you
make a Purchase Payment, we credit your contract with Accumulation Units. The
number of Accumulation Units credited is determined by dividing the amount of
the Purchase Payment allocated to a STRATEGY by the value of the Accumulation
Unit for that STRATEGY.
Example:
We receive a $25,000 Purchase Payment from you on Wednesday. You want your
money to be invested in the Moderate Growth STRATEGY. We determine that the
value of an Accumulation Unit for the Moderate Growth STRATEGY 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 2252.252 Accumulation Units for
the Moderate Growth STRATEGY.
FREE LOOK PERIOD
If you change your mind about owning the contract, you can cancel it within 10
days after receiving it (or longer if required by state law) by mailing it back
to our Annuity Service Center. Unless otherwise required by state law, you will
receive back whatever your contract is worth on the day we receive your request.
Its 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.
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INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
The contract offers variable investment options which we call STRATEGIES and
fixed investment options. The contract was designed to meet your varying
investment needs over time, which can be achieved by using the STRATEGIES alone
or in concert with the fixed investment options in order to lower the risk
associated with investing only in a variable investment option.
VARIABLE INVESTMENT OPTIONS:
THE STRATEGIES
The contract offers four multi-manager variable investment STRATEGIES, each with
a different investment objective. The STRATEGIES are designed to meet your
investment needs over time and considering factors such as your age, goals and
risk tolerance. However, each STRATEGY is designed to achieve different levels
of growth over time.
Each STRATEGY invests in three underlying investment portfolios of the Seasons
Series Trust. The allocation of money among these investment portfolios will
vary depending on the objective of the STRATEGY.
Seasons Series Trust is managed by SunAmerica Asset Management Corp.
("SAAMCo."), which is affiliated with Anchor National. SAAMCo. has engaged
sub-advisers to provide investment advice for certain investment portfolios.
The underlying investment portfolios of Seasons Series Trust 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
Corporation, a balanced component managed by SAAMCo. and a fixed income
component managed by Wellington Management Company, LLP. The Growth STRATEGY and
the Moderate Growth STRATEGY also have an aggressive growth component which is
managed by SAAMCo. The percentage that any one of these components represents in
the Multi-Managed Portfolios varies in accordance with each STRATEGY's
objective.
YOU SHOULD READ THE PROSPECTUS FOR SEASONS SERIES TRUST CAREFULLY BEFORE
INVESTING. THE PROSPECTUS CONTAINS DETAILED INFORMATION ABOUT THE INVESTMENT
PORTFOLIOS AND IS ATTACHED TO THIS PROSPECTUS.
Each STRATEGY uses an asset allocation investment approach to achieve its
objective and allocates your money into underlying investment portfolios which
invest in a combination of stocks, both domestic and international, bonds and
cash. Although the asset mix within each STRATEGY will vary over time, each
STRATEGY has a neutral asset allocation mix, including a cash component in order
to reflect the anticipated cash holdings required to rebalance each STRATEGY
quarterly, as reflected on the following pages. Additionally, after the
quarterly rebalancing described on page 10, the contract value within each
STRATEGY will be allocated to the various underlying investment portfolios in
the percentages identified on the following pages.
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GROWTH
GOAL: Long-term growth of capital, allocating its assets primarily to stocks.
This STRATEGY may be best suited for those with longer periods to invest.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 80%
Bonds 15%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO 25%
Managed by Putnam Investment Management, Inc.
STOCK PORTFOLIO 25%
Managed by T. Rowe Price Associates, Inc.
MULTI-MANAGED GROWTH PORTFOLIO 50%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
MODERATE GROWTH
GOAL: Growth of capital through investments in equities, with a secondary
objective of conservation of principal by allocating more of its assets to bonds
than the Growth STRATEGY. This STRATEGY may be best suited for those nearing
retirement years but still earning income.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 70%
Bonds 25%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO 25%
Managed by Putnam Investment Management, Inc.
STOCK PORTFOLIO 20%
Managed by T. Rowe Price Associates, Inc.
MULTI-MANAGED MODERATE GROWTH PORTFOLIO 55%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
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BALANCED GROWTH
Goal: Focuses on conservation of principal by investing in a more balanced
weighting of stocks and bonds, with a secondary objective of seeking a high
total return. This STRATEGY may be best suited for those approaching retirement
and with less tolerance for investment risk.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 55%
Bonds 40%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO 25%
Managed by Putnam Investment Management, Inc.
STOCK PORTFOLIO 20%
Managed by T. Rowe Price Associates, Inc.
MULTI-MANAGED INCOME/EQUITY PORTFOLIO 55%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
CONSERVATIVE GROWTH
Goal: Capital preservation while maintaining some potential for growth over the
long term. This STRATEGY may be best suited for those with lower investment risk
tolerance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 42%
Bonds 53%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO 25%
Managed by Putnam Investment Management, Inc.
STOCK PORTFOLIO 15%
Managed by T. Rowe Price Associates, Inc.
MULTI-MANAGED INCOME PORTFOLIO 60%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
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STRATEGY REBALANCING
Each STRATEGY is designed to meet its investment objective by allocating a
portion of your money to three different investment portfolios. In order to
maintain the mix of investment portfolios consistent with each STRATEGY's
objective, each STRATEGY within your contract will be rebalanced on the first
business day of each quarter so that it is allocated among the various
investment portfolios according to the percentages set forth on pages 9 and 10.
Additionally, within each Multi-Managed Portfolio, your money will be rebalanced
among the various components. Rebalancing your contract may involve shifting
assets out of better performing investments into an investment with relatively
lower returns.
SUBSTITUTION
If any of the underlying investment portfolios is no longer available, we may be
required to substitute shares of another investment portfolio. We will seek any
required prior approval of the SEC and give you notice before doing this.
FIXED INVESTMENT OPTIONS
The contract also offers six fixed investment options. Anchor National will
guarantee the interest rate earned on money you allocate to any of these fixed
investment options. We currently offer fixed investment options for periods of
one, three, five, seven and ten years, which we call Guarantee Periods. The
multi-year fixed investment options are not available in Maryland or Washington.
Additionally, we guarantee the interest rate for money allocated to the one year
DCA fixed account (the "DCA Account") which is available only in conjunction
with the Dollar Cost Averaging Program. Please see the section on the Dollar
Cost Averaging Program on the next page for additional information about,
including limitations on, the availability of the DCA Account.
Interest rates offered for the different Guarantee Periods and the DCA Account
will differ from time to time due to changes in market conditions but will not
be less than 3%. The interest rate offered for a particular Guarantee Period for
new Purchase Payments may differ from the interest rate offered for money
already invested in such account. An interest rate established for a Guarantee
Period or the DCA Account will not change during the term of that period.
You may reallocate money to a fixed investment option (other than the DCA
account) or to any of the STRATEGIES after the end of the Guarantee Period.
However, if you do not give us different instructions within 30 days after the
end of your Guarantee Period, we will keep your money in the fixed account for
the same Guarantee Period you previously selected. You will receive the interest
rate then in effect for that Guarantee Period.
MARKET VALUE ADJUSTMENT
THE FOLLOWING DISCUSSION APPLIES TO MONIES YOU PUT INTO THE THREE, FIVE, SEVEN
AND TEN YEAR FIXED INVESTMENT OPTIONS ONLY AND DOES NOT APPLY TO WITHDRAWALS TO
PAY A DEATH BENEFIT OR CONTRACT FEES AND CHARGES.
If you take your money out of a multi-year fixed investment option (whether by
withdrawal, transfer or annuitization) before the end of the Guarantee Period,
we will make an adjustment to the value of your contract. We call this a Market
Value Adjustment. The Market Value Adjustment reflects the differing interest
rate environments between the time you put your money into the fixed account and
the time you take your money out of the fixed account. The adjustment can
increase or decrease the value of your contract. You may withdraw your money
within 30 days followng the end of a Guarantee Period without incurring a Market
Value Adjustment.
We calculate the Market Value Adjustment by comparing the interest rate you
received on the money you put into the fixed account against the interest rate
we are currently offering to contract owners for the period of time remaining in
the Guarantee Period. If the amount of time remaining is not equal to an
available guarantee period for which we offer a fixed interest rate, the
interest rate will be determined by linear interpolation between interest rates
for the two nearest periods that are available.
Generally, if interest rates have dropped between the time you put your money
into the fixed account and the time you take it out, there will be a positive
adjustment to the value of your contract. Conversely, if interest rates have
increased between the time you put your money into the fixed account and the
time you take it out, there will be a negative adjustment to the value of your
contract.
If the Market Value Adjustment is negative, it will be assessed first against
any remaining money allocated to the fixed account out of which you took your
money and then against the amount of money you take out of the fixed account. If
the Market Value Adjustment is positive, it will be added to the amount you take
out of the fixed account.
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Appendix A provides more information about how we calculate the Market Value
Adjustment and gives some examples of the impact of the adjustment.
The one year fixed investment option and DCA Account do not impose a market
value adjustment and are not registered under the Securities Act of 1933 and are
not subject to the provisions of the Investment Company Act of 1940.
TRANSFERS DURING THE ACCUMULATION PHASE
Except as provided in the next sentence with respect to the DCA Account, you can
transfer money among the STRATEGIES and the fixed investment options by written
request or by telephone. Although you may transfer money out of the DCA Account,
you may not transfer money into the DCA Account from any STRATEGY or any fixed
investment option. You can make four transfers every year without incurring a
transfer charge. We measure a year from the anniversary of the day we issued
your contract. If you make more than four transfers in a year, there is a $25
transfer fee per transfer ($10 in Pennsylvania and Texas). Additionally,
transfers out of a multi-year fixed investment option may be subject to a market
value adjustment.
The minimum amount you can transfer is $500 or a lesser amount if you transfer
the entire balance from a STRATEGY or a fixed investment option. If any money
will remain in a STRATEGY or fixed investment option after making a transfer, it
must be at least $500. Your request for transfer must clearly state which
STRATEGY(IES) and/or fixed investment option(s) are involved and the amount you
want to transfer. Please see the section below on Dollar Cost Averaging for
specific rules regarding the DCA Account.
We will accept transfers by telephone unless you specify otherwise on your
contract application. We have in place procedures to provide reasonable
assurance that instructions given to us by telephone are genuine. Thus, we
disclaim all liability for any claim, loss or expense from any error. If we fail
to use such procedures, we may be liable for any losses due to unauthorized or
fraudulent instructions.
We reserve the right to modify, suspend or terminate the transfer privileges at
any time.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
percentage or amount from any STRATEGY or the one year fixed investment option
(we call these source accounts) to another STRATEGY. You can also select to
transfer the entire value in a STRATEGY or the one year fixed investment option
in a stated number of transfers. Transfers may be monthly or quarterly. You can
change the amount or frequency at any time by notifying us in writing.
When you make either your initial Purchase Payment or a subsequent Purchase
Payment and want to participate in the Dollar Cost Averaging Program with that
money, you may also use the DCA Account as a source account. You cannot transfer
money from a STRATEGY or other fixed investment option into the DCA Account.
When the DCA Account is used, all of your money in the account will be
transferred to the STRATEGY(IES) you select in either monthly or quarterly
transfers (as selected by you) by the end of the one year period for which the
interest rate is guaranteed. Once selected, you can not change the frequency of
transfers under the program. If you want to stop participation in the Dollar
Cost Averaging Program and you are using the DCA Account as your source account,
we will either transfer your money to the STRATEGY (IES) or fixed investment
option(s) you select, or, in the absence of express instructions, we will
transfer your money to the one year fixed investment option which will earn
interest at the rate then being offered for a period of one year.
By allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations. However, there is no assurance that you will earn a greater
profit. You are still subject to loss in a declining market. Dollar cost
averaging involves continuous investment in securities regardless of fluctuating
price levels. You should consider your financial ability to continue to invest
through periods of low prices.
Transfers under this program are not counted against your four free transfers
per year. We reserve the right to modify, suspend or terminate this program at
any time.
PRINCIPAL ADVANTAGE PROGRAM
The Principal Advantage Program allows you to allocate Purchase Payments to a
fixed investment option (other than the DCA Account) and one or more STRATEGIES
without any market risk to your principal. You decide how much you want to
invest and when you would like a return of your principal. We will calculate how
much of your Purchase Payment must be allocated to the fixed investment option
to
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ensure that this money will grow to equal the full amount of your purchase
payment by the end of the selected period. The remaining portion of the Purchase
Payment is then invested in a STRATEGY(IES), where it has the potential to
achieve greater growth.
We reserve the right to modify, suspend or terminate this program at any time.
EXPENSES
- --------------------------------------------------------------------------------
There are charges and other expenses associated with the contract that will
reduce your investment return. These charges and deductions are described below.
INSURANCE CHARGES
Each day, we make a deduction for our insurance charges from amounts allocated
to the STRATEGIES. This is done as part of our calculation of the values of the
Accumulation Units and Annuity Units during the Accumulation Phase and the
Income Phase, respectively. The asset based charges consist of the Mortality and
Expense Risk Charge and the Distribution Expense Charge. There are no asset
based charges deducted from the portion of your contract (if any) allocated to a
fixed investment option.
MORTALITY AND EXPENSE RISK CHARGE
This charge is equal, on an annual basis, to 1.25% of the daily value of the
contract invested in a STRATEGY. This charge is for our obligation to make
annuity payments, to provide a death benefit and for assuming the risk that the
current charges will be insufficient in the future to cover the cost of
administering the contract. Approximately .90% is for mortality risks and .35%
is for expense risks. If the charges under the contract are not sufficient, we
will bear the loss. We will not increase this charge. We may use any profits
from this charge to pay for the costs of distributing the contract.
DISTRIBUTION EXPENSE CHARGE
This charge is equal, on an annual basis, to .15% of the daily value of the
contract invested in a STRATEGY. This charge is for all expenses associated with
the distribution of the contract. These expenses include preparing the contract,
confirmations and statements, providing sales support, and maintaining contract
records. If this charge is not enough to cover the costs of distributing the
contract, we will bear the loss.
INVESTMENT CHARGES
If you have money allocated to the STRATEGIES, there are deductions from and
expenses paid out of the assets of the various underlying investment portfolios.
These investment charges are summarized in the Fee Tables on pages 3 and 4. For
more detailed information, you should refer to the prospectuses for the Seasons
Series Trust.
CONTRACT MAINTENANCE CHARGE
During the Accumulation Phase, every year on the anniversary of the date when
your contract was issued, we deduct $35 ($30 in North Dakota and Washington)
from the value of your contract as a contract maintenance charge. This charge is
for expenses incurred to establish and maintain your contract. This charge
cannot be increased. If you make a complete withdrawal from your contract, the
contract maintenance charge will be deducted prior to the withdrawal. We will
not deduct the contract maintenance charge if, when the deduction is to be made,
the value of your contract is $50,000 or more. We may discontinue this practice
at some point in the future.
WITHDRAWAL CHARGE
During the Accumulation Phase you may make withdrawals from your contract.
However, a withdrawal charge may apply. For purposes of calculating any
applicable withdrawal charge, amounts withdrawn from your contract will come
first from the Free Withdrawal Amount (as described below), then from Purchase
Payments no longer subject to a withdrawal charge which have not previously been
withdrawn, then from Purchase Payments subject to a withdrawal charge which have
not previously been withdrawn and last from earnings. However, for tax purposes,
earnings are considered withdrawn first. You will not receive the benefit of the
Free Withdrawal Amount if you make a complete surrender of your contract.
Each contract year you may withdraw up to 10% of your total Purchase Payments
which are subject to a withdrawal charge
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free of any withdrawal charge (the "Free Withdrawal Amount"). Any portion of a
withdrawal in excess of the Free Withdrawal Amount which is still subject to a
withdrawal charge will be assessed one as described below.
In order to determine the applicable withdrawal charge, we keep track of each
Purchase Payment and assess a charge based on the length of time a Purchase
Payment is in your contract before being withdrawn. After a Purchase Payment has
been in your contract for seven years, no withdrawal charge is assessed against
withdrawals of the Purchase Payment.
The withdrawal charge is assessed as a percentage of the Purchase Payment you
are withdrawing as follows:
<TABLE>
<S> <C> <C> <C>
Year 1......... 7% Year 5......... 4%
Year 2......... 6% Year 6......... 3%
Year 3......... 6% Year 7......... 2%
Year 4......... 5% Year 8......... 0%
</TABLE>
If the withdrawal is for only part of the contract, we will deduct the
withdrawal charge from the remaining value in your contract.
We will not assess any withdrawal charges for withdrawals to pay contract
charges, a death benefit or for annuity payments during the Income Phase.
The withdrawal charge is intended to cover the actual costs of distribution.
However, to the extent that such charge is insufficient, the Company may use any
of its corporate assets to make up any difference.
TRANSFER FEE
You can make four free transfers every year. We measure a year from the day we
issued your contract. If you make more than four transfers a year, we will
deduct a $25 transfer fee per transfer ($10 in Pennsylvania and Texas). The
transfer fee will be deducted from the STRATEGY or fixed investment option from
which the transfer is requested. If the transfer is part of the Dollar Cost
Averaging Program, it will not count against your four free transfers per year.
PREMIUM TAXES
We are responsible for the payment of premium taxes charged by a limited number
of states and will make a deduction from your contract for them. Premium taxes
range from .00075% to 3.5%. These taxes are due either when the contract is
issued or when annuity payments begin or when you make a full surrender of the
contract. It is our current practice not to charge you for these taxes until
annuity payments begin or when a full surrender is made. In the future, we may
discontinue this practice and assess the tax when it is due or upon the payment
of the death benefit.
Appendix B provides more information about the premium taxes assessed in each
state.
INCOME TAXES
Although we do not currently deduct any income taxes borne under your contract,
we reserve the right to do so in the future.
REDUCTION OR ELIMINATION OF CERTAIN CHARGES
We will reduce or eliminate the amount of certain insurance charges when the
contract is sold to groups of individuals under circumstances which reduce its
sales and administrations expenses. We will determine the eligibility of such
groups by considering the following factors: (1) the size of the group; (2) the
total amount of Purchase Payments we expect to receive from the group; (3) the
nature of the purchase and the persistency we expect in that group; (4) the
purpose of the purchase and whether that purpose makes it likely that expenses
will be reduced; and (5) any other circumstances which we believe to be relevant
in determining whether reduced sales expenses may be expected.
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TAXES
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NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU ARE CAUTIONED
TO SEEK COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE
THE TAX STATUS OF THE ANNUITY.
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the tax
treatment of annuity contracts. Generally, you will not be taxed on the earnings
on the money held in your annuity contract until you take the money out.
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, specially sponsored
program or an individual retirement account, your contract is referred to as a
Non-Qualified contract and receives different tax treatment than a Qualified
contract. In general, your cost basis 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, specially sponsored program
or as an individual retirement account, your contract is referred to as a
Qualified contract. Examples of Qualified plans are: Individual Retirement
Annuities, Tax-sheltered Annuities (referred to as 403(b) contracts), H.R. 10
Plans (referred to as Keogh Plans) and pension and profit sharing plans,
including 401(k) plans. Typically 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.
TAX TREATMENT OF DISTRIBUTIONS -- NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the IRC treats such a withdrawal as
first coming from the earnings and then as coming from your Purchase Payments.
For annuity payments, a portion of each payment is considered a return of your
Purchase Payment and will not be taxed. Withdrawn earnings are treated as income
to you and are taxable. The IRC further provides for a 10% tax penalty on any
earnings that are withdrawn other than in conjunction with the following
circumstances: (1) after you reach age 59 1/2; (2) after you die; (3) after you
become disabled (as described in the IRC); (4) in a series of substantially
equal installments made for the life of the taxpayer or for the joint lives of
the taxpayer and his or her Beneficiary; (5) under an immediate annuity; or (6)
which come from Purchase Payments made prior to August 14, 1982.
TAX TREATMENT OF DISTRIBUTIONS -- QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy a
Qualified contract or on any earnings and therefore any amount you take out as a
withdrawal or as annuity payments will be taxable income. The IRC further
provides for a 10% tax penalty on any withdrawal or annuitization other than in
conjunction with the following circumstances: (1) after reaching age 59 1/2; (2)
after you die; (3) after you become disabled (as defined in the IRC); (4) in a
series of substantially equal installments made for the life of the taxpayer or
for the joint lives of the taxpayer and his or her Beneficiary; and, except in
the case of an IRA as to the following (5) after you separate from service after
attaining age 55; (6) to the extent such withdrawals do not exceed limitations
set by the IRC for amounts paid during the taxable year for medical care; and
(7) paid to an alternate payee pursuant to a qualified domestic relations order.
The IRC limits the withdrawal of Purchase Payments made by owners from certain
Tax-sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his or her job; (3) dies; (4) becomes disabled (as
defined in the IRC); or (5) in the case of hardship. In the case of hardship,
the owner can only withdraw Purchase Payments and not any earnings.
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity in order to be treated as a variable annuity
for tax purposes. We believe that the underlying investment portfolios are being
managed so as to comply with these requirements.
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Neither the IRC nor any guidelines issued in conjunction with the IRC provide
guidance regarding when you, because of the degree of control you exercise over
the way your money is invested, and not Anchor National, would be considered the
owner of the shares of the underlying investment portfolios. It is unknown to
what extent the ability to select investments, make transfers among STRATEGIES
or choose from a wide selection of investment options will ultimately impact
this issue. If guidance is provided, generally it would be applied
prospectively. However, if such guidance is not considered a new position, it
may be applied retroactively. Due to the uncertainty is this area, we reserve
the right to modify the contract in an attempt to maintain favorable tax
treatment.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Under your contract, money can be accessed in the following ways: (1) by making
a withdrawal either for a part of the value of your contract or for the entire
value of your contract during the Accumulation Phase; (2) by receiving annuity
payments during the Income Phase; and (3) when a death benefit is paid to your
Beneficiary.
Generally, withdrawals are subject to a withdrawal charge, a market value
adjustment if the money withdrawn comes from a multi-year fixed investment
option and, if you withdraw your full contract value, premium taxes and a
contract maintenance charge. (See Section 5 - Expenses for more complete
information.)
If you make a complete withdrawal you will receive the value of your contract,
less any applicable fees, charges and market value adjustments, at the price
calculated following receipt of a complete request to make such a withdrawal at
our Annuity Service Center. Your contract must be submitted as well.
Under most circumstances, partial withdrawals must be for a minimum of $1,000.
We require that the value left in any STRATEGY or fixed investment option be at
least $500 after a withdrawal. Unless you provide us with different
instructions, partial withdrawals will be made pro rata from each STRATEGY and
fixed investment option in which your contract is invested. You must send a
written withdrawal request to us prior to any withdrawal being made.
SYSTEMATIC WITHDRAWAL PROGRAM
This program allows you to receive either monthly, quarterly, semi-annual or
annual checks during the Accumulation Phase. You can also choose to have
systematic withdrawals electronically wired to your bank account. Any
withdrawals you make using this program count against your Free Withdrawal
Amount as described in Section 5 - Expenses. Withdrawals in excess of the Free
Withdrawal Amount may be subject to a withdrawal charge. The minimum amount of
each withdrawal is $250. Withdrawals may be taxable and a 10% IRS tax penalty
may apply if you are under age 59 1/2. There is no charge for participating in
this program.
This program is not available to everyone, so 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.
SUSPENSION OF PAYMENTS
We may be required to suspend or postpone the payment of a withdrawal for any
period of time when: (1) the New York Stock Exchange is closed (other than a
customary weekend and holiday closings); (2) trading on the New York Stock
Exchange is restricted; (3) an emergency exists such that disposal of or
determination of the value of shares of the investment portfolios is not
reasonably practicable; (4) the Securities and Exchange Commission, by order, so
permits for the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from the
fixed account for the period permitted by law but not for more than six months.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if it is less than
$500 as a result of withdrawals and no Purchase Payments have been made during
the past three years. We will provide you with sixty days written notice and
distribute the contract's remaining value to you.
WITHDRAWAL CHARGES, MARKET VALUE ADJUSTMENTS, INCOME TAXES, TAX PENALTIES AND
CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL YOU MAKE.
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PERFORMANCE
- --------------------------------------------------------------------------------
From time to time we will advertise the performance of the STRATEGIES. Any such
performance results are based on historical earnings and are not intended to
indicate future performance.
For each STRATEGY we will show performance against a comparison index which is
made up of the S&P 500 Index, the Lehman Brothers Corporate/Government Index and
the Lipper Money Market Index. The comparison index will blend the referenced
indices in proportion to the neutral allocation of stocks, bonds and cash within
each STRATEGY as indicated on pages 9 and 10 of this prospectus.
Additionally, we may show performance of each STRATEGY 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 Variable
Annuity Reporting Data Service.
Please see the Statement of Additional Information for additional information
regarding the methods used to calculate performance data.
DEATH BENEFIT
- --------------------------------------------------------------------------------
If you should die before beginning the Income Phase of your contract, we will
pay a death benefit to your Beneficiary.
If you should die prior to reaching age 75 or, if there are joint owners, if an
owner should die prior to the youngest owner reaching age 75, the death benefit
will be equal to the greater of:
1. The value of your contract at the time we receive adequate proof of death
and the Beneficiary's election as to how the benefit should be paid; or
2. Total Purchase Payments less any withdrawals, applicable charges, market
value adjustments and taxes, accumulated at 3% from the date your contract
was issued until the date of death, plus any Purchase Payments received,
less any withdrawals, applicable charges, market value adjustments and taxes
made or charged, after the date of death.
If the contract was issued after your 75th birthday or if you should die after
you reach age 75, or, if there are joint owners, if the contract was issued
after both owners' 75th birthday or if an owner dies after the youngest owner
reaches age 75, the death benefit will be the greater of:
1. The value of your contract at the time we receive adequate proof of death
and the Beneficiary's election as to how the death benefit will be paid; or
2. Total Purchase Payments received by us before age 75 (in the case of joint
owners, before the younger owner reaches age 75) less any withdrawals,
applicable charges, market value adjustments and taxes, accumulated at 3%
from the date your contract was issued until your 75th birthday (or, if
there is a joint owner, the 75th birthday of the youngest owner), plus any
subsequent Purchase Payments received, less any withdrawals, applicable
charges, market value adjustments and taxes made or charged, after your 75th
birthday.
The entire death benefit must be paid within 5 years of the date of death unless
the Beneficiary elects to have it payable in the form of an annuity. If the
Beneficiary elects an annuity option, it must be paid over the Beneficiary's
lifetime or for a period not extending beyond the Beneficiary's life expectancy
and payments must begin within one year of your death. If the Beneficiary is the
spouse of the owner, he or she can elect to continue the contract at the then
current value.
The death benefit will be paid out when we receive adequate proof of death and
the Beneficiary's election as to how the death benefit will be paid. If the
Beneficiary does not make a specific election within 60 days of our receipt of
proof of death, the death benefit will be paid in a lump sum.
You may select a Beneficiary to receive the death benefit. You may change the
Beneficiary at anytime before the Income
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Phase begins, unless you previously made an irrevocable Beneficiary designation.
A new Beneficiary designation is not effective until we record the change.
A death benefit is not paid if you should die after beginning the Income Phase
of your contract. In that event, to the extent there are remaining guaranteed
annuity payments, they will be paid to your beneficiary.
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.
Your Beneficiary will receive the value of any annuity payments which we are
obligated to make under options 3, 4 and 5 as described in Section 3 - Annuity
Payment Options, if you die before the total annuity payments are made.
OTHER INFORMATION
- --------------------------------------------------------------------------------
ANCHOR NATIONAL
Anchor National is a stock life insurance company domiciled under the laws of
the state of Arizona. Its principal business address is 1 SunAmerica Center, Los
Angeles, California 90067-6022. Anchor National conducts business in the
District of Columbia and in all states except New York. Anchor National is an
indirect wholly owned subsidiary of SunAmerica Inc., a Maryland corporation.
Anchor National and its affiliates, SunAmerica Life Insurance Company, First
SunAmerica Life Insurance Company, CalFarm Life Insurance Company, SunAmerica
Asset Management Corp., Imperial Premium Finance, Inc., Resources Trust Company
and four broker-dealers, offer a full line of financial services, including
fixed and variable annuities, mutual funds, premium finance and trust
administration services.
THE SEPARATE ACCOUNT
Anchor National established a separate account, Variable Annuity Account Five
("Separate Account"), under Arizona law on July 3, 1996. The Separate Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940.
There are no pending legal proceedings affecting the Separate Account. Anchor
National and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, are not of material importance to their
respective total assets or material with respect to the Separate Account.
Anchor National 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 Anchor National may conduct. Income, gains and losses (realized
and unrealized) resulting from the assets in the Separate Account are credited
to or charged against the Separate Account.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, serves as the custodian of the assets of the Separate Account. We pay
State Street Bank for services based on a schedule of fees.
STATEMENT OF ADDITIONAL INFORMATION
Additional information concerning the operations of the Separate Account is
contained in a Statement of Additional Information, which is available without
charge upon written request to us at our Annuity Service Center at the address
provided in the Profile preceding this prospectus. The Separate Account has not
yet begun operations and, therefore, no financial statements are available.
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TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Separate Account........................ 3
General Account......................... 3
Performance Date........................ 4
Annuity Payments........................ 4
Annuity Unit Values..................... 5
Taxes................................... 6
Distribution of Contracts............... 9
Financial Statements.................... 10
</TABLE>
THE GENERAL ACCOUNT
If you put your money into a fixed investment option it goes into Anchor
National's general account ("General Account"). The General Account is made up
of all of Anchor National'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 Anchor National contract holder, as well as all creditors. The General
Account is invested in assets permitted by state insurance law.
DISTRIBUTION
The contract is sold through registered representatives of broker-dealers. We
pay commissions to registered representatives for the sale of contracts.
Commissions are not expected to exceed 7.25% of your Purchase Payment. Under
some circumstances we pay a persistency bonus in addition to standard
commissions. Usually the standard commission is lower when we pay a persistency
bonus, which is not anticipated to exceed 1.00% annually.
SunAmerica Capital Services, Inc., 733 Third Avenue, 4th Floor, New York, New
York, 10017, acts as the distributor of the contracts. SunAmerica Capital
Services, Inc. is an affiliate of Anchor National.
ADMINISTRATION
We are responsible for all the administrative servicing of your contract. Please
contact Anchor National's Annuity Service Center at the telephone number and
address provided in the Profile of this prospectus if you have any comment,
question or service request.
We will send out transaction confirmations and quarterly statements. Please
review these documents carefully and notify us of any questions immediately. We
will investigate all questions and, to the extent we have made an error, we will
retroactively adjust your contract provided you have notified us within 30 days
of receiving the transaction confirmation or quarterly statement, as applicable.
All other adjustments will be made as of the time we receive notice of the
error.
OTHER INFORMATION ABOUT ANCHOR NATIONAL
Anchor National is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Securities and Exchange Commission ("SEC"). Such
reports and other information filed by the Company can be inspected and copied;
and copies can be obtained at the public reference facilities of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the regional offices
in Chicago and New York. The addresses of these regional offices are as follows:
500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material also can be obtained by
mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington D.C. 20549, upon payment of the fees prescribed by the rules and
regulations of the SEC at prescribed rates.
Registration statements have been filed with the SEC, Washington, D.C., under
the Securities Act of 1933 as amended, with respect to the contracts offered by
this prospectus. This prospectus does not contain all the information set forth
in the registration statements and the exhibits filed as part of the
registration statements, to all of which reference is hereby made for further
information concerning the Separate Account, Anchor National and its general
account, the investment portfolios and the contract. Statements found in this
prospectus as to the terms of the contracts and other legal instruments are
summaries, and reference is made to such instruments as filed.
PROPERTIES
Anchor National's principal office is leased at 1 SunAmerica Center, Los
Angeles, California, 90067-6022. We also lease office space in Torrance,
California which is utilized for certain recordkeeping and data processing
functions. Anchor National's broker-dealer and asset management subsidiaries
lease office space in New York, New York.
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STATE REGULATION
Anchor National is subject to regulation and supervision by the states in which
it is authorized to transact business. State insurance laws establish
supervisory agencies with broad administrative and supervisory powers relating
to granting and revoking licenses to transact business, regulating marketing and
other trade practices, operating guaranty associations, licensing agents,
approving policy forms, regulating certain premium rates, regulating insurance
holding company systems, establishing reserve requirements, prescribing the form
and content of required financial statements and reports, performing financial
and other examinations, determining the reasonableness and adequacy of statutory
capital and surplus, regulating the type, valuation and amount of investments
permitted, limiting the amount of dividends that can be paid and the size of
transactions that can be consummated without first obtaining regulatory approval
and other related matters.
During the last decade, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the National
Association of Insurance Commissioners ("NAIC"). Various states have considered
or enacted legislation that changes, and in many cases increases, the states'
authority to regulate insurance companies. Legislation has been introduced from
time to time in Congress that could result in the federal government assuming
some role in the regulation of insurance companies. In recent years, the NAIC
has approved and recommended to the states for adoption and implementation
several regulatory initiatives designed to reduce the risk of insurance company
insolvencies and market conduct violations. These initiatives include investment
reserve requirements, risk-based capital standards and restrictions on an
insurance company's ability to pay dividends to its stockholders. The NAIC is
also currently developing model laws relating to product design and
illustrations for annuity products. Current proposals are still being debated
and we are monitoring developments in this area and the effects any changes
would have on the Company.
SunAmerica Asset Management Corp. is registered with the Securities and Exchange
Commission ("SEC") as a registered investment adviser under the Investment
Advisers Act of 1940. The mutual funds that is markets are subject to regulation
under the Investment Company Act of 1940. SunAmerica Asset Management Corp. and
the mutual funds are subject to regulation and examination by the SEC. In
addition, variable annuities and Anchor National's related separate accounts are
subject to regulation by the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940.
Anchor National's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the
National Association of Securities Dealers, Inc. ("NASD"). The NASD has broad
administrative and supervisory powers relative to all aspects of business and
may examine the subsidiary's business and accounts at any time.
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DIRECTORS AND EXECUTIVE OFFICERS
Anchor National's directors and executive officers as of January 1, 1997 are
listed below:
<TABLE>
<CAPTION>
YEAR ASSUMED
PRESENT OTHER POSITIONS AND OTHER BUSINESS
NAME AGE PRESENT POSITION POSITION EXPERIENCE WITHIN LAST FIVE YEARS** FROM-TO
- --------------------- --- -------------------------------------- ------------ ------------------------------------- ---------
<C> <C> <S> <C> <C> <C>
Eli Broad* 63 Chairman, CEO and President of Anchor 1994 Cofounded SunAmerica Inc. ("SAI") in
National; 1957
Chairman, CEO and President of SAI 1986
Joseph M. Tumbler* 48 EVP of Anchor National; 1996 President and Chief Executive 1989-1995
Vice Chairman of SAI 1995 Officer, Providian Capital Management
Jay S. Wintrob* 39 EVP of Anchor National; 1991 SVP 1989-1991
Vice Chairman of SAI 1995
Victor E. Akin 32 SVP of Anchor National 1996 VP, SunAmerica Life Companies 1995-1996
Director, SunAmerica Life Companies 1994-1995
Manager, SunAmerica Life Companies 1993-1994
Actuary, Milliman & Robertson 1992-1993
Consultant, Chalke Inc. 1991-1992
James R. Belardi* 39 SVP of Anchor National; 1992 VP and Treasurer 1989-1992
EVP of SAI 1995
Lorin M. Fife* 43 SVP, General Counsel and Asst. 1994 VP and General Counsel-Regulatory 1994-1995
Secretary of Anchor National; Affairs of SAI;
SVP, General Counsel-Regulatory 1995 VP and Associate General Counsel of 1989-1994
Affairs of SAI SAI
N. Scott Gillis 43 SVP and Controller of Anchor National 1994 VP and Controller, SunAmerica Life 1989-1994
Companies
Jana Waring Greer* 45 SVP of Anchor National and SAI; 1991 VP 1981-1991
President of SunAmerica Marketing 1995
Susan L. Harris* 39 SVP and Secretary of Anchor National; 1994 VP, General Counsel-Corporate Affairs 1994-1995
SVP, General Counsel-Corporate Affairs and Secretary of SAI;
and Secretary of SAI 1995 VP, Associate General Counsel and 1989-1994
Secretary of SAI
Peter McMillan, III* 39 EVP and Chief Investment Officer of 1994 SVP of SunAmerica Investments, Inc. 1989-1994
SunAmerica Investments, Inc.
Edwin R. Reoliquio 39 SVP and Chief Actuary of Anchor 1995 VP and Actuary, SunAmerica Life 1989-1994
National Companies
Scott L. Robinson* 50 SVP of Anchor National; 1991 VP and Controller 1986-1991
SVP and Controller of SAI
James W. Rowan* 33 SVP of Anchor National and SAI 1996 VP; 1993-1995
Asst. to the Chairman; 1992
SVP, Security Pacific Corp. 1990-1992
</TABLE>
* Also serves as a director CEO = Chief Executive Officer
** Unless otherwise noted, positions EVP = Executive Vice President
with SunAmerica Inc. SVP = Senior Vice President
VP = Vice President
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EXECUTIVE COMPENSATION
All of Anchor National's executive officers are also employees of
SunAmerica Inc. or its affiliates and do not receive direct compensation from
Anchor National. We allocated the time each executive officer spent devoted to
his or her duties as an executive officer of Anchor National to determine the
executive compensation set forth below for the Chief Executive Officer and the
other four highest compensated executive officers, as well as the executive
officers as a group, for services rendered during 1996.
<TABLE>
<CAPTION>
Name of Individual or Number Allocated Cash
in Group Capacities in Which Served Compensation
<S> <C> <C>
Eli Broad Chairman, Chief Executive Officer and
President $ 1,444,146
Joseph M. Tumbler Executive Vice President 834,708
Jay S. Wintrob Executive Vice President 836,327
James R. Belardi Senior Vice President 341,329
Jana Waring Greer Senior Vice President 420,171
All Executive Officers as a
Group (12) 5,056,560
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of Anchor National are owned by any executive officer or director.
Anchor National is an indirect wholly owned subsidiary of SunAmerica Inc. The
only officer or director that owns more than 1% of the shares of SunAmerica Inc.
is Mr. Eli Broad, Chairman, Chief Executive Officer and President. At February
28, 1997, Mr. Broad beneficially owned 6,655,176 shares of Common Stock
(approximately 5.8% of the class outstanding) and 9,160,294 shares of Class B
Common Stock (approximately 84.4% of the class outstanding). Of the Common
Stock, 715,872 shares represent restricted shares granted under the Company's
employee stock plans as to which Mr. Broad has no investment power; 75,846
shares are registered in the name of a corporation of which Mr. Broad is a
director and has sole voting and investment power; 4,150,932 shares represent
employee stock options which are or will become exercisable within the next 60
days and as to which he has no voting or investment power; 65,136 shares are
held by a foundation of which Mr. Broad is a director and as to which he has
shared voting and investment power. At February 28, 1997, all directors and
officers as a group beneficially owned 10,344,440 shares of Common Stock
(approximately 9% of the class outstanding) and 9,160,294 shares of Class B
Common Stock (approximately 84.4% of the class outstanding).
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FINANCIALS
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information of Anchor National
Life Insurance Company, insofar as it relates to each of the years 1992-1996,
has been derived from audited annual financial statements, including the
consolidated balance sheets at September 30, 1995 and 1996 and the related
consolidated statements of income and cash flow for each of the three years in
the period ended September 30, 1996 and the notes thereto appearing elsewhere
herein. The information for the three months ended December 31, 1995 and 1996
has been derived from unaudited financial information also appearing herein and
which, in the opinion of management, includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods.
This information 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 follow this
selected information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income................. $ 36,499 $ 48,912 $ 58,996 $ 50,083 $ 56,843 $ 14,617 $ 14,544
Net realized investment losses........ (22,749) (22,247) (33,713) (4,363) (13,355) (12,800) (19,116)
Fee income............................ 97,220 118,247 131,225 135,214 160,931 37,284 44,820
General and administrative expenses... (55,615) (55,142) (52,636) (61,629) (80,048) (16,997) (22,322)
Provision for future guaranty fund
assessments.......................... -- (4,800) -- -- -- -- --
Amortization of deferred acquisition
costs................................ (18,224) (30,825) (44,195) (58,713) (57,520) (13,658) (13,817)
Annual commissions.................... (215) (312) (1,158) (2,658) (4,613) (939) (1,433)
Other income and expenses............. 9,218 9,679 8,801 7,063 7,070 1,768 2,270
----------- ----------- ----------- ----------- ----------- ----------- -------------
PRETAX INCOME......................... 46,134 63,512 67,320 64,997 69,308 9,275 4,946
Income tax expense.................... (15,361) (21,794) (22,705) (25,739) (24,252) (3,449) (1,600)
----------- ----------- ----------- ----------- ----------- ----------- -------------
Income from continuing operations..... 30,773 41,718 44,615 39,258 45,056 5,826 3,346
Net income of subsidiaries sold to
affiliates........................... 1,312 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES................................ 32,085 41,718 44,615 39,258 45,056 5,826 3,346
Cumulative effect of change in
accounting for income taxes.......... -- -- (20,463) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -------------
NET INCOME............................ $ 32,085 $ 41,718 $ 24,152 $ 39,258 $ 45,056 $ 5,826 $ 3,346
----------- ----------- ----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- ----------- ----------- -------------
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
--------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments........................... $ 2,126,899 $ 2,093,100 $ 1,632,072 $ 2,114,908 $ 2,329,232 $ 1,964,418 $ 2,703,683
Variable annuity assets............... 3,284,507 4,170,275 4,486,703 5,230,246 6,311,557 5,418,534 6,784,374
Deferred acquisition costs............ 288,264 336,677 416,289 383,069 443,610 379,922 461,637
Other assets.......................... 91,588 71,337 67,062 55,474 120,136 81,466 76,014
----------- ----------- ----------- ----------- ----------- ----------- -------------
TOTAL ASSETS.......................... $ 5,791,258 $ 6,671,389 $ 6,602,126 $ 7,783,697 $ 9,204,535 $ 7,844,340 $ 10,025,708
----------- ----------- ----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- ----------- ----------- -------------
Reserves for fixed annuity
contracts............................ $ 1,735,565 $ 1,562,136 $ 1,437,488 $ 1,497,052 $ 1,789,962 $ 1,473,964 $ 2,024,873
Reserves for guaranteed investment
contracts............................ -- -- -- 277,095 415,544 277,167 420,871
Variable annuity liabilities.......... 3,284,507 4,170,275 4,486,703 5,230,246 6,311,557 5,418,534 6,784,374
Other reserves, payables and accrued
liabilities.......................... 398,045 495,308 195,134 227,953 96,196 79,466 157,622
Subordinated notes payable to
Parent............................... 15,500 34,432 34,712 35,832 35,832 35,832 35,903
Deferred income taxes................. 35,163 38,145 64,567 73,459 70,189 72,934 71,943
Shareholder's equity.................. 322,478 371,093 383,522 442,060 485,255 486,443 530,122
----------- ----------- ----------- ----------- ----------- ----------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY............................... $ 5,791,258 $ 6,671,389 $ 6,602,126 $ 7,783,697 $ 9,204,535 $ 7,844,340 $ 10,025,708
----------- ----------- ----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- ----------- ----------- -------------
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations of Anchor National Life Insurance Company (the "Company") for the
three years in the period ended September 30, 1996 follows. In connection with,
and because it desires to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in the following
discussion 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. In particular, 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 which represent the Company's beliefs concerning future or projected
levels of sales of the Company's products, investment spreads or yields, or the
earnings or profitability of the Company's activities.
Forward-looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results and
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 the forward-looking statements may depend
on numerous foreseeable and unforeseeable events or developments, some of which
may be national in scope, such as general economic conditions and changes in
interest rates, some of which may be related to the insurance industry
generally, such as pricing competition, regulatory developments and industry
consolidation, and others of which may relate to the Company specifically, such
as credit, volatility, and other risks associated with the Company's investment
portfolio, and other factors. Investors are also directed to consider other
risks and uncertainties discussed in documents filed by the Company with the
SEC. The Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1994, 1995 AND 1996
INCOME BEFORE CUMULATIVE EFFECTIVE OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $45.1 million in 1996, compared with $39.3 million in 1995 and $44.6
million in 1994. The cumulative effect of the change in accounting for income
taxes resulting from the 1994 implementation of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a
nonrecurring non-cash charge of $20.5 million. Accordingly, net income amounted
to $24.1 million in 1994.
PRETAX INCOME totaled $69.3 million in 1996, $65.0 million in 1995, and $67.3
million in 1994. The $4.3 million improvement in 1996 over 1995 primarily
resulted from increased net investment income and significantly increased fee
income partially offset by increased net realized investment losses and
additional general and administrative expenses. The $2.3 million decline in 1995
over 1994 primarily resulted from additional amortization of deferred
acquisition costs, increased general and administrative expenses and decreased
net investment income, partially offset by decreased net realized investment
losses.
NET INVESTMENT INCOME, which is the spread between the income earned on invested
assets and the interest paid on fixed annuities and other interest-bearing
liabilities, totaled $56.8 million in 1996, $50.1 million in 1995 and $59.0
million in 1994. These amounts represent 2.59% on average invested assets
(computed on a daily basis) of $2.19 billion in 1996, 2.95% on average invested
assets of $1.70 billion in 1995 and 3.78% on average invested assets of $1.56
billion in 1994.
Net investment income also includes the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $142.9 million in 1996, $108.4 million in 1995 and $49.5 million in
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1994. The difference between the Company's yield on average invested assets and
the rate paid on average interest-bearing liabilities was 2.25% in 1996, 2.63%
in 1995 and 3.64% in 1994.
Investment income and the related yields on average invested assets totaled
$164.6 million or 7.50% in 1996, compared with $129.5 million or 7.62% in 1995
and $127.8 million or 8.20% in 1994.
Investment income rose during 1996 as a result of higher levels of average
invested assets, partially offset by reduced investment yields. Investment
yields were lower in 1996 because of a generally declining interest rate
environment since early 1995 and lower contributions from the Company's
investments in partnerships. Partnership income totaled $4.1 million in 1996,
$5.1 million in 1995 and $9.5 million in 1994. This income represents a yield of
10.12% on average investments in partnerships of $40.2 million in 1996, compared
with 10.60% on average investments in partnerships of $48.4 million in 1995 and
23.78% on average investments in partnerships of $39.9 million in 1994.
Partnership income is based upon cash distributions received from limited
partnerships, the operations of which the Company does not significantly
influence. Consequently, such income is not predictable and there can be no
assurance that the Company will realize comparable levels of such income in the
future.
The decline in investment yield in 1995 compared with 1994 is primarily due to
lower contributions from the Company's investments in partnerships and a
significant decline from the $3.7 million of yield enhancement recorded in 1994
through the Company's use of dollar roll transactions ("Dollar Rolls"). Although
the Company continues to use Dollar Rolls, their use did not have a significant
impact on investment income in 1995 or 1996.
Total interest expense aggregated $107.8 million in 1996, $79.4 million in 1995
and $68.8 million in 1994. The average rate paid on all interest-bearing
liabilities increased to 5.25% (5.11% on fixed annuity contracts and 5.87% on
guaranteed investment contracts ("GICs")) in 1996, compared with 4.99% (4.90% on
fixed annuity contracts and 6.14% on GICs) in 1995 and 4.56% (4.50% on fixed
annuity contracts) in 1994. Interest-bearing liabilities averaged $2.05 billion
during 1996, compared with $1.59 billion during 1995 and $1.51 billion during
1994.
The increase in the average rates paid on all interest-bearing liabilities
during 1996 primarily resulted from the growth in average reserves for GICs,
which credit at higher rates of interest than fixed annuity contracts. Average
GIC reserves were $340.5 million in 1996 and $60.8 million in 1995. The increase
in average crediting rates in 1995 resulted from higher crediting rates on fixed
annuity contracts as interest rates rose from the low levels experienced in
1994.
The growth in average invested assets since 1994 primarily reflects sales of the
Company's fixed-rate products, consisting of both fixed accounts of variable
annuity products and GICs. Fixed annuity premiums totaled $741.8 million in
1996, compared with $284.4 million in 1995 and $140.7 million in 1994. These
increased premiums resulted from greater inflows into the one-year fixed account
of the Company's Polaris variable annuity product.
GIC premiums totaled $135.0 million in 1996 and $275.0 million in 1995. In 1995,
the Company began to issue GICs, which guarantee the payment of principal and
interest at fixed or variable rates for a term of one year. The Company's GICs
that are purchased by asset management firms either prohibit withdrawals or
permit withdrawals with notice ranging from 90 to 270 days. Contracts that are
purchased by banks or state and local governmental authorities either prohibit
withdrawals or permit scheduled book value withdrawals subject to terms of the
underlying indenture or agreement. In pricing GICs, the Company analyzes cash
flow information and prices accordingly so that it is compensated for possible
withdrawals prior to maturity.
NET REALIZED INVESTMENT LOSSES totaled $13.4 million in 1996, $4.4 million in
1995 and $33.7 million in 1994. Net realized investment losses include
impairment writedowns of $16.0 million in 1996, $4.8 million in 1995 and $14.2
million in 1994. Therefore, net gains from sales of investments totaled $2.6
million in 1996 and $0.4 million in 1995. In 1994, the Company incurred $19.5
million of net losses from sales of investments.
Net gains from sales of investments in 1996 include $4.1 million of net gains
realized on $1.27 billion of sales of bonds and $288.6 million of redemptions of
bonds. Net gains from sales of investments in 1995 include a $4.4 million gain
on sales of real estate, common stock and other invested assets offset by $4.0
million of net losses realized on $1.11 billion of sales of bonds. Net losses
from sales of investments in 1994 include $17.3 million of net losses realized
on $673.6 million of sales of bonds. These bond sales include approximately
$289.3 million of sales of MBSs made primarily to acquire other MBSs that were
then used in Dollar Rolls. Sales of investments are generally made to maximize
total return.
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Impairment writedowns in 1996 include $13.4 million of provisions applied to
certain real estate owned in Arizona on December 31, 1995. Prior to that date,
the statutory carrying value of this real estate had been guaranteed by the
Company's ultimate parent, SunAmerica Inc. ("SunAmerica"). On December 31, 1995,
SunAmerica made a $27.4 million capital contribution to the Company through the
Company's direct parent in exchange for the termination of its guaranty with
respect to this real estate. Accordingly, the Company reduced the carrying value
of this real estate to estimated fair value to reflect the termination of the
guaranty. (SunAmerica's guaranty of the statutory carrying value of the
Company's other real estate owned in Arizona was fully terminated on December
31, 1996).
Impairment writedowns in 1995 include $2.0 million of additional provisions
applied to defaulted bonds and $1.8 million of additional provisions applied to
certain interest-only strips ("IOs"). IOs, a type of MBS used as an
asset-liability matching tool to hedge against rising interest rates, are
investment grade securities that give the holder the right to receive only the
interest payments on a pool of underlying mortgage loans. At September 30, 1996,
the amortized cost of the IOs held by the Company was $2.6 million and their
fair value was $3.7 million. Impairment writedowns in 1994 of $14.2 million
reflect additional provisions applied to bonds, primarily made in response to
the adverse impact of declining interest rates on certain MBSs.
Impairment writedowns represent 0.73%, 0.28% and 0.91% of average invested
assets in 1996, 1995 and 1994, respectively. Such writedowns are based upon
estimates of the net realizable value of the applicable assets. Actual
realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $104.0
million in 1996, $84.2 million in 1995 and $79.1 million in 1994. Increases in
variable annuity fees in 1996 and 1995 reflect growth in average variable
annuity assets, principally due to increased market values and the receipt of
variable annuity premiums, partially offset by surrenders. Variable annuity
assets averaged $5.70 billion during 1996, $4.65 billion during 1995 and $4.40
billion during 1994. Variable annuity premiums, which exclude premiums allocated
to the fixed accounts of variable annuity products, totaled $919.8 million in
1996, $577.2 million in 1995 and $769.6 million in 1994. The increase in
premiums in 1996 may be attributed, in part, to a heightened demand for equity
investments, principally as a result of generally improved market performance.
The decline in premiums in 1995 may be attributed, in part, to a heightened
demand for fixed-rate investment options, including the fixed accounts of
variable annuities. The Company has encountered increased competition in the
variable annuity marketplace during recent years and anticipates that the market
will remain highly competitive for the foreseeable future.
NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of
nonproprietary investment products by the Company's broker-dealer subsidiary,
after deducting the substantial portion of such commissions that is passed on to
registered representatives. Net retained commissions totaled $31.5 million in
1996, $24.1 million in 1995 and $20.8 million in 1994. Broker-dealer sales
(mainly sales of general securities, mutual funds, and annuities) totaled $8.75
billion in 1996, $5.67 billion in 1995 and $5.21 billion in 1994. The
significant increases in sales and net retained commissions during 1996 reflect
a greater number of registered representatives and higher average production,
combined with generally favorable market conditions. Increases in net retained
commissions may not be proportionate to increases in sales primarily due to
differences in sales mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $25.4 million on
average assets managed of $2.14 billion in 1996, $26.9 million on average assets
managed of $2.07 billion in 1995 and $31.3 million on average assets managed of
$2.39 billion in 1994. Asset management fees decreased slightly in 1996, despite
a modest increase in average assets managed, principally due to changes in
product mix. The decrease in asset management fees during 1995 principally
resulted from the decline in average assets managed, primarily due to an excess
of redemptions over sales. Redemptions of mutual funds, excluding redemptions of
money market accounts, amounted to $379.9 million in 1996, compared with $426.5
million in 1995 and $561.0 million in 1994. Sales of mutual funds, excluding
sales of money market accounts, amounted to $223.4 million in 1996, compared
with $140.2 million in 1995 and $342.6 million in 1994. Higher mutual fund sales
and lower redemptions in 1996 both reflect the combined effects of additional
advertising, the favorable performance records of certain of the Company's
mutual funds and heightened demand for equity investments, principally as a
result of improved market performance.
SURRENDER CHARGES on fixed and variable annuities totaled $5.2 million in 1996,
$5.9 million in 1995 and $5.0
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million in 1994. Surrender charges generally are assessed on annuity withdrawals
at declining rates during the first five to seven years of the contract.
Withdrawal payments, which include surrenders and lump-sum annuity benefits,
totaled $898.0 million in 1996, $908.9 million in 1995 and $723.9 million in
1994. These payments represent 12.4%, 15.1% and 12.5%, respectively, of average
fixed and variable annuity reserves. Withdrawals include variable annuity
payments from the separate accounts totaling $634.1 million in 1996, $646.4
million in 1995 and $459.1 million in 1994. Such variable annuity surrenders
represent 11.2%, 14.0% and 10.5%, respectively, of average variable annuity
liabilities in 1996, 1995 and 1994. Variable annuity surrender rates increased
in 1995 primarily due to surrenders on a closed block of business, policies
coming off surrender charge restrictions and increased competition in the
marketplace. Fixed annuity surrenders have remained relatively constant,
totaling $263.8 million in 1996, $262.4 million in 1995 and $264.8 million in
1994. Management anticipates that withdrawal rates will remain relatively stable
for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $80.0 million in 1996, compared with
$61.6 million in 1995 and $52.6 million in 1994. Expenses in 1996 include
expenses related to a national advertising campaign, as well as additional
administrative expenses related to a growing block of business. Expenses remain
closely controlled through a company-wide cost containment program and represent
approximately 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $57.5 million in 1996, $58.7
million in 1995 and $44.2 million in 1994. The decline in amortization for 1996
is due to lower redemptions of mutual funds from the rate experienced in 1995,
partially offset by additional fixed and variable annuity and mutual fund sales
in recent years and the subsequent amortization of related deferred commissions
and other acquisition costs. The increase in amortization in 1995 was primarily
caused by the substantial reduction in net realized capital losses from the
level experienced in 1994.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears to
maintain the persistency of certain of the Company's variable annuity contracts.
Substantially all of the Company's currently available variable annuity products
allow for an annual commission payment option in return for a lower immediate
commission. Annual commissions totaled $4.6 million in 1996, $2.7 million in
1995 and $1.2 million in 1994. The increase in annual commissions since 1994
reflects increased sales of annuities that offer this commission option. The
Company estimates that during 1996 approximately 35% of the average balances of
its variable annuity products are currently subject to such annual commissions.
Based on current sales, this percentage is expected to increase in future
periods.
INCOME TAX EXPENSE totaled $24.3 million in 1996, $25.7 million in 1995 and
$22.7 million in 1994, representing effective tax rates of 35% in 1996, 40% in
1995 and 34% in 1994. The increase in the effective tax rate in 1995 was due to
a prior year tax settlement. Without such payment, the effective tax rate would
have been 33%.
FINANCIAL CONDITION AND LIQUIDITY AT SEPTEMBER 30, 1996
SHAREHOLDER'S EQUITY increased by $43.2 million to $485.3 million at September
30, 1996 from $442.1 million at September 30, 1995, primarily as a result of the
$45.1 million of net income recorded in 1996 and a $0.2 million reduction of net
unrealized losses on debt and equity securities available for sale charged
directly to shareholder's equity. In addition, the Company received a
contribution of capital of $27.4 million in December 1995 and paid a dividend of
$29.4 million in March 1996.
TOTAL ASSETS increased by $1.42 billion to $9.20 billion at September 30, 1996
from $7.78 billion at September 30, 1995, principally due to a $1.08 billion
increase in the separate accounts for variable annuities and a $214.3 million
increase in invested assets.
INVESTED ASSETS at year end totaled $2.33 billion in 1996, compared with $2.11
billion in 1995. This $214.3 million increase primarily resulted from a $208.2
million increase in amounts receivable from brokers for sales of securities.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. Effective December 1,
1995, pursuant to guidelines issued by the Financial Accounting Standards Board,
the Company determined that all of its portfolio of bonds, notes and redeemable
preferred stocks (the "Bond Portfolio") is available to be sold in response to
changes in market interest rates, changes in prepayment risk, the Company's need
for liquidity and other similar factors. Accordingly, the Company no longer
classifies a portion of its Bond Portfolio as held for investment.
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THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair value
by $13.8 million at September 30, 1996, compared with $3.7 million at September
30, 1995 (including net unrealized losses of $10.8 million on the portion of the
portfolio that was designated as available for sale at September 30, 1995). The
increase in net unrealized losses on the Bond Portfolio since September 30,
1995, principally reflects the higher prevailing interest rates at September 30,
1996 and their corresponding effect on the fair value of the Bond Portfolio.
All of the Bond Portfolio ($1.99 billion at amortized cost, excluding $9.1
million of redeemable preferred stocks) at September 30, 1996 was rated by
Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"),
Duff and Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P.
("Fitch") or under comparable statutory rating guidelines established by the
National Association of Insurance Commissioners ("NAIC") and implemented by
either the NAIC or the Company. At September 30, 1996, approximately $1.83
billion of the Bond Portfolio (at amortized cost) was rated investment grade by
one or more of these agencies or by the Company or the NAIC, pursuant to
applicable NAIC guidelines, including $1.05 billion of U.S. government/agency
securities and MBSs.
At September 30, 1996, the Bond Portfolio included $160.8 million (fair value,
$160.2 million) of bonds not rated investment grade by S&P, Moody's, DCR, Fitch
or the NAIC. Based on their September 30, 1996 amortized cost, these non-
investment-grade bonds accounted for 1.8% of the Company's total assets and 6.9%
of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company intends that the proportion of its portfolio in such securities not
exceed current levels, but its policies may change from time to time, including
in connection with any possible acquisition. The Company had no material
concentrations of non-investment-grade securities at September 30, 1996.
The table on the following page summarizes the Company's rated bonds by rating
classification as of September 30, 1996.
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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P/ MOODY'S/
ISSUES RATED BY S&P/MOODY'S/DCR/FITCH DCR/FITCH, BY NAIC CATEGORY TOTAL
- ------------------------------------------------------- ----------------------------------- -------------------------------------
S&P/(MOODY'S)/ NAIC PERCENT OF
[DCR]/{FITCH} AMORTIZED ESTIMATED CATEGORY AMORTIZED ESTIMATED AMORTIZED INVESTED ESTIMATED
CATEGORY (1) COST FAIR VALUE (2) COST FAIR VALUE COST ASSETS (3) FAIR VALUE
- ------------------------------ ----------- ----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-}................. $ 1,345,960 $ 1,333,515 1 $ 125,115 $ 125,046 $ 1,471,075 62.81% $ 1,458,561
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}.............. 226,312 226,191 2 133,773 133,698 360,085 15.38 359,889
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}................ 30,023 30,368 3 5,597 5,597 35,620 1.52 35,965
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}.................. 87,580 90,468 4 17,136 18,089 104,716 4.47 108,557
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}................ 19,847 15,018 5 -- -- 19,847 0.85 15,018
C1 to D
[DD]
{D}......................... -- -- 6 618 618 618 0.03 618
----------- ----------- ----------- ----------- ----------- -----------
Total rated issues $ 1,709,722 $ 1,695,560 $ 282,239 $ 283,048 $ 1,991,961 $ 1,978,608
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates
the debt's relative standing within the rating category. A security rated
BBB- or higher is considered investment grade. Moody's rates debt securities
in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2
or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative
standing within the rating category. A security rated Baa3 or higher is
considered investment grade. DCR rates debt securities in rating categories
ranging from AAA (the highest) to DD (in payment default). A plus (+) or
minus (-) indicates the debt's relative standing within the rating category.
A security rated BBB- or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, DCR and Fitch ratings
if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/ DCR/Fitch rating
groups listed above, with categories 1 and 2 considered investment grade. A
substantial portion of the assets in the NAIC categories were rated by the
Company pursuant to applicable of NAIC rating guidelines.
(3) At amortized cost.
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SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and
their amortized cost aggregated $200.8 million at September 30, 1996. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At September 30, 1996, Secured Loans consisted of loans to 52
borrowers spanning 20 industries, with 22% of these assets (at amortized cost)
concentrated in the leisure industry. No other industry concentration
constituted more than 9% of these assets.
While the trading market for Secured Loans is more limited than for publicly
traded corporate debt issues, management believes that participation in these
transactions has enabled the Company to improve its investment yield. Although,
as a result of restrictive financial covenants, Secured Loans involve greater
risk of technical default than do publicly traded investment-grade securities,
management believes that the risk of loss upon default for its Secured Loans is
mitigated by their financial covenants and senior secured positions. The
Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch or by the Company
or the NAIC, pursuant to comparable statutory rating guidelines established by
the NAIC.
MORTGAGE LOANS aggregated $98.3 million at September 30, 1996 and consisted of
17 first mortgage loans with an average loan balance of approximately $5.8
million, collateralized by properties located in 11 states. At September 30,
1996, the Company had no concentrations in any single state or in any single
type of property that amounted to more than 23% of the mortgage loan portfolio.
At September 30, 1996, there were four loans with outstanding balances of $10
million or more, the largest of which had a balance of approximately $21
million, which collectively aggregated approximately 61% of the portfolio. At
September 30, 1996, approximately 33% of the mortgage loan portfolio consisted
of loans with balloon payments due before October 1, 1999. At September 30,
1996, loans delinquent by more than 90 days totaled $1.5 million (1.6% of total
mortgages). There were no loans foreclosed upon and transferred to real estate
in the balance sheet during 1996. At September 30, 1996, mortgage loans having
an aggregate carrying value of $21.3 million had been previously restructured.
Of this amount, $16.5 million was restructured during 1995 and $4.8 million was
restructured during 1992. No mortgage loans were restructured during 1996.
Approximately 62% of the mortgage loans in the portfolio at September 30, 1996
were seasoned loans underwritten to the Company's standards and purchased at or
near par from another financial institution which was downsizing its portfolio.
Such loans generally have higher average interest rates than loans that could be
originated today. The balance of the mortgage loan portfolio has been originated
by the Company under strict underwriting standards. Commercial mortgage loans on
properties such as offices, hotels and shopping centers 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 effects of general economic conditions on these commercial
properties. However, due to the seasoned nature of the Company's mortgage loans
and its strict underwriting standards, the Company believes that it has reduced
the risk attributable to its mortgage loan portfolio while maintaining
attractive yields.
REAL ESTATE aggregated $39.7 million at September 30, 1996 and consisted of
non-income producing land in the Phoenix, Arizona metropolitan area. Of this
amount, the Company has undertaken to dispose of $28.4 million during the next
year, either to affiliated or nonaffiliated parties, and SunAmerica the ultimate
parent, has guaranteed that the Company will receive its statutory carrying
value of these assets. (This guaranty was terminated on December 31, 1996-See
"Results of Operations for the First Three Months of Fiscal 1997").
OTHER INVESTED ASSETS aggregated $77.9 million at September 30, 1996, including
$45.1 million of investments in limited partnerships and an aggregate of $32.8
million of miscellaneous investments, including policy loans, residuals,
separate account investments, and leveraged leases. The Company's limited
partnership interests, accounted for by using the cost method of accounting,
invest mainly in equity securities.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of
interest rate fluctuations and disintermediation. The Company believes that its
fixed-rate liabilities should be backed by a portfolio principally composed of
fixed maturities that generate predictable rates of return. The Company does not
have a specific target rate of return. Instead, its rates of return vary over
time depending on the current interest rate environment, the slope of the yield
curve, the spread at which fixed maturities are priced over the yield curve and
general competitive conditions within the industry. Its portfolio strategy is
designed to achieve adequate risk-adjusted returns consistent with its
investment objectives of effective asset-liability matching, liquidity and
safety.
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The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and GIC obligations. The Company seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. The
Company's fixed-rate products incorporate surrender charges or other limitations
on when contracts can be surrendered for cash to encourage persistency.
Approximately 63% of the Company's fixed annuity and GIC reserves had surrender
penalties or other restrictions at September 30, 1996.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. At September 30, 1996 the weighted
average life of the Company's investments was approximately five years and the
duration was approximately three. Weighted average life is the average time to
receipt of all principal, incorporating the effects of scheduled amortization
and expected prepayments, weighted by book value. Duration is a common option-
adjusted measure for the price sensitivity of a fixed-income portfolio to
changes in interest rates. It measures the approximate percentage change in
market value of a portfolio if interest rates change by 100 basis points,
recognizing the changes in portfolio cashflows resulting from embedded options
such as prepayments and bond calls.
As a component of its investment strategy, the Company utilizes interest rate
swap agreements ("Swap Agreements") to match assets more closely to liabilities.
Swap Agreements are agreements to exchange with a counterparty interest rate
payments of differing character (for example, variable-rate payments exchanged
for fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities into fixed-rate instruments.
The Company also seeks to provide liquidity from time to time by using reverse
repurchase agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs.
It also seeks to enhance its spread income by using Reverse Repos and Dollar
Rolls. Reverse Repos involve a sale of securities and an agreement to repurchase
the same securities at a later date at an agreed upon price and are generally
over-collateralized. Dollar Rolls are similar to Reverse Repos except that the
repurchase involves securities that are only substantially the same as the
securities sold and the arrangement is not collateralized, nor is it governed by
a repurchase agreement. MBSs are generally investment-grade securities
collateralized by large pools of mortgage loans. MBSs generally pay principal
and interest monthly. The amount of principal and interest payments may
fluctuate as a result of prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Dollar Rolls,
Reverse Repos and Swap Agreements is counterparty risk. The Company believes,
however, that the counterparties to its Dollar Rolls, Reverse Repos and Swap
Agreements are financially responsible and that the counterparty risk associated
with those transactions is minimal. Counterparty risk associated with Dollar
Rolls is further mitigated by the Company's participation in an MBS trading
clearinghouse. The sell and buy transactions that are submitted to this
clearinghouse are marked to market on a daily basis and each participant is
required to over-collateralize its net loss position by 30% with either cash,
letters of credit or government securities. In addition to counterparty risk,
Swap Agreements also have interest rate risk. However, the Company's Swap
Agreements typically hedge variable-rate assets or liabilities, and interest
rate fluctuations that adversely affect the net cash received or paid under the
terms of a Swap Agreement would be offset by increased interest income earned on
the variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of its
portfolio of debt securities. Management identifies monthly those investments
that require additional monitoring and carefully reviews the carrying value of
such investments at least quarterly to determine whether specific investments
should be placed on a nonaccrual basis and to determine declines in value that
may be other than temporary. In making these reviews for bonds, management
principally considers the adequacy of collateral (if any), compliance with
contractual covenants, the borrower's recent financial performance, news reports
and
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other externally generated information concerning the creditor's affairs. In the
case of publicly traded bonds, management also considers market value
quotations, if available. For mortgage loans, management generally considers
information concerning the mortgaged property and, among other things, factors
impacting the current and expected payment status of the loan and, if available,
the current fair value of the underlying collateral.
The carrying values of bonds that are determined to have declines in value that
are other than temporary are reduced to net realizable value and no further
accruals of interest are made. The valuation allowances on mortgage loans are
based on losses expected by management to be realized on transfers of mortgage
loans to real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $3.1 million at September 30, 1996 (at
amortized cost, with a fair value of $2.9 million) including $1.6 million of
bonds and notes and $1.5 million of mortgage loans. At September 30, 1996,
defaulted investments constituted 0.1% of total invested assets. At September
30, 1995, defaulted investments totaled $5.0 million which constituted 0.2% of
total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of the
Company's existing portfolio of cash and short-term investments, Reverse Repo
capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1996, approximately $936.8 million of the Company's Bond
Portfolio had an aggregate unrealized gain of $20.1 million, while approximately
$1.06 billion of the Bond Portfolio had an aggregate unrealized loss of $33.9
million. In addition, the Company's investment portfolio currently provides
approximately $21.6 million of monthly cash flow from scheduled principal and
interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease over
time, reflecting lower interest crediting rates on its fixed annuities and GICs.
Should increased liquidity be required for withdrawals, the Company believes
that a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS OF FISCAL 1997
NET INCOME totaled $3.3 million for the three months ended December 31, 1996
("Fiscal 1997"), compared with $5.8 million for the three months ended December
31, 1995 ("Fiscal 1996").
PRETAX INCOME totaled $4.9 million in Fiscal 1997 and $9.3 million in Fiscal
1996. This $4.4 million decline primarily resulted from increased net realized
investment losses and general and administrative expenses, partially offset by
an increase in fee income.
NET INVESTMENT INCOME totaled $14.5 million in Fiscal 1997 and $14.6 million in
Fiscal 1996. These amounts represent 2.32% on average invested assets (computed
on a daily basis) of $2.50 billion in Fiscal 1997 and 3.00% on average invested
assets of $1.95 billion in Fiscal 1996.
The excess of average invested assets over average interest-bearing liabilities
amounted to $150.5 million in Fiscal 1997 and $131.2 million in Fiscal 1996. The
difference between the Company's yield on average invested assets and the rate
paid on average interest-bearing liabilities was 1.99% in Fiscal 1997 and 2.65%
in Fiscal 1996.
Investment income and the related yields on average invested assets totaled
$46.7 million or 7.46% in Fiscal 1997, compared with $38.7 million or 7.95% in
Fiscal 1996.
Investment income rose during Fiscal 1997 as a result of higher levels of
average invested assets, partially offset by
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reduced investment yields. Investment yields were lower in Fiscal 1997 because
of a generally declining interest rate environment since early 1995 and lower
contributions from the Company's investments in partnerships. Partnership income
totaled $0.7 million in Fiscal 1997 and $1.4 million in Fiscal 1996. This income
represents a yield of 6.71% on related average assets of $44.6 million in Fiscal
1997, compared with 11.60% on related average assets of $48.7 million in Fiscal
1996. Partnership income is based upon cash distributions received from limited
partnerships, the operations of which the Company does not significantly
influence. Consequently, such income is not predictable and there can be no
assurance that the Company will realize comparable levels of such income in the
future.
Total interest expense aggregated $32.2 million in Fiscal 1997 and $24.0 million
in Fiscal 1996. The average rate paid on all interest-bearing liabilities was
5.47% (5.34% on fixed annuity contracts and 5.81% on GICs) in Fiscal 1997,
compared with 5.30% (5.10% on fixed annuity contracts and 6.19% on GICs) in
Fiscal 1996. Interest-bearing liabilities averaged $2.35 billion during Fiscal
1997, compared with $1.81 billion during Fiscal 1996.
The increase in the average rates paid on fixed annuity contracts during Fiscal
1997 primarily resulted from the impact of certain promotional one-year interest
rates offered on the Company's Polaris variable annuity product. The decline in
interest paid on GICs reflects the generally declining interest rate environment
and its effect on the variable-rate GIC portfolio.
The growth in average invested assets since 1995 primarily reflects sales of the
Company's fixed-rate products, consisting of both fixed accounts of variable
annuity products and GICs. Since December 31, 1995, fixed annuity premiums have
aggregated $1.04 billion and GIC premiums have totaled $140.0 million. Fixed
annuity premiums totaled $362.8 million in Fiscal 1997, compared with $62.5
million in Fiscal 1996. This increase in premiums resulted primarily from
greater inflows into the one-year fixed account of the Company's Polaris
variable annuity product. The Company has observed that many purchasers of its
variable annuity contracts allocate new premiums to the one-year fixed account
and concurrently sign up for the option to dollar costs average into the
variable fund. Accordingly, the Company anticipates that it will see a large
portion of these premiums transferred into the separate accounts.
GIC premiums totaled $5.0 million in Fiscal 1997. There were no GIC premiums in
Fiscal 1996.
NET REALIZED INVESTMENT LOSSES totaled $19.1 million in Fiscal 1997 and $12.8
million in Fiscal 1996. Net realized investment losses include impairment
writedowns of $16.1 million in Fiscal 1997 and $14.9 million in Fiscal 1996.
Therefore, net losses from sales of investments totaled $3.0 million in Fiscal
1997, compared with net gains of $2.1 million in Fiscal 1996.
Impairment writedowns reflect $15.7 million and $14.9 million of provisions
applied to non-income producing land in Arizona in Fiscal 1997 and Fiscal 1996,
respectively. The statutory carrying value of this land had been guaranteed by
the Company's ultimate Parent, SunAmerica. SunAmerica made capital contributions
of $28.4 million and $27.4 million on December 31, 1996 and 1995, respectively,
to the Company through the Company's direct parent in exchange for the
termination of its guaranty with respect to this land. Accordingly, the Company
reduced the carrying value of this land to estimated fair value to reflect the
termination of the guaranty. SunAmerica's guaranty has been fully terminated.
Impairment writedowns, on an annualized basis, represent 2.51% and 3.06% of
average invested assets in Fiscal 1997 and 1996, respectively. Such writedowns
are based upon estimates of the net realizable value of the applicable assets.
Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES increased to $30.6 million in Fiscal 1997 from $24.3
million in Fiscal 1996. The increase in variable annuity fees in Fiscal 1997
reflects growth in average variable annuity assets, principally due to increased
market values and the receipt of variable annuity premiums, partially offset by
surrenders. Variable annuity assets averaged $6.60 billion during Fiscal 1997
and $5.29 billion during Fiscal 1996. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, have
aggregated $937.1 million since December 31, 1995. Variable annuity premiums
increased to $226.8 million in Fiscal 1997 from $209.5 million in Fiscal 1996.
This increase may be attributed, in part, to a heightened demand for equity
investments, principally as a result of generally improved market performance.
NET RETAINED COMMISSIONS totaled $7.8 million in Fiscal 1997 and $6.5 million in
Fiscal 1996. Broker-dealer sales (mainly sales of general securities, mutual
funds and annuities) totaled $2.03 billion in Fiscal 1997 and $1.75 billion in
Fiscal 1996. The significant increases in sales and net
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retained commissions during Fiscal 1997 reflect a greater number of registered
representatives and higher average production, combined with generally favorable
market conditions.
ASSET MANAGEMENT FEES totaled $6.4 million on average assets managed of $2.21
billion in Fiscal 1997 and $6.5 million on average assets managed of $2.15
billion in Fiscal 1996. Asset management fees decreased slightly in Fiscal 1997,
despite a modest increase in average assets managed, principally due to changes
in product mix. Sales of mutual funds, excluding sales of money market accounts,
have aggregated $249.5 million since December 31, 1995. Mutual fund sales
totaled $62.3 million in Fiscal 1997 and $36.3 million in Fiscal 1996. Higher
mutual funds sales in Fiscal 1997 include $14.3 million of sales from the
Company's "Style Select Series," a product introduced in November 1996. Sales in
Fiscal 1997 also reflect the combined effects of additional advertising,
increased distribution, the favorable performance records of certain of the
Company's mutual funds, and heightened demand for equity investments,
principally as a result of improved market performance. Redemptions of mutual
funds, excluding redemptions of money market accounts, amounted to $103.7
million in Fiscal 1997 and $97.6 million in Fiscal 1996.
SURRENDER CHARGES on fixed and variable annuities totaled $1.4 million in Fiscal
1997 and $1.3 million in Fiscal 1996. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $238.1 million in Fiscal 1997
and $215.1 million in Fiscal 1996. These payments represent 11.4% and 12.9%,
respectively, of the aggregate of average fixed and variable annuity reserves.
Withdrawals include variable annuity payments from the separate accounts
totaling $176.0 million in Fiscal 1997 and $154.5 million in Fiscal 1996.
Approximately 67% of the Company's fixed annuity and GIC reserves had surrender
penalties or other restrictions at December 31, 1996. Although variable annuity
surrenders have increased, principally as a result of growth in the variable
annuity separate accounts, variable annuity withdrawal rates have declined.
Variable annuity surrenders represent 10.7% and 11.8%, respectively, of average
variable annuity liabilities in Fiscal 1997 and Fiscal 1996. Fixed annuity
surrenders have increased slightly to $62.1 million in Fiscal 1997 from $60.6
million in Fiscal 1996 as the fixed annuity reserves have grown. Management
anticipates that withdrawal rates will remain relatively stable for the
foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $22.3 million in Fiscal 1997,
compared with $17.0 million in Fiscal 1996. Expenses in Fiscal 1997 increased
primarily due to a growing block of business. Expenses remain closely controlled
through a company-wide cost containment program and continue to represent
approximately 1% of average total assets on an annualized basis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $13.8 million in Fiscal 1997
and $13.7 million in Fiscal 1996 and represent for each period, on an annualized
basis, approximately 14% of the balance of deferred acquisition costs at the
beginning of each period. The slight increase in Fiscal 1997 was primarily due
to additional fixed and variable annuity and mutual fund sales and the
subsequent amortization of related deferred commissions and other acquisition
costs.
ANNUAL COMMISSIONS totaled $1.4 million in Fiscal 1997 and $0.9 million in
Fiscal 1996. The increase in annual commissions reflects increased sales of
annuities that offer this commission option. The Company estimates that
approximately 43% of the average balances of its variable annuity products are
currently subject to such annual commissions. Based on current sales, this
percentage is expected to increase in future periods.
INCOME TAX EXPENSE totaled $1.6 million in Fiscal 1997 and $3.4 million in
Fiscal 1996, representing effective tax rates of 32% and 37%, respectively. The
lower rate in Fiscal 1997 is primarily due to the impact of state taxes in the
prior year.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1996
SHAREHOLDER'S EQUITY increased by $44.9 million to $530.1 million at December
31, 1996 from $485.3 million at September 30, 1996, primarily as a result of a
$28.4 million capital contribution and $3.3 million of net income recorded in
Fiscal 1997. Shareholder's equity at December 31, 1996 was also favorably
impacted by the recording of a $7.6 million net unrealized gain on debt and
equity securities available for sale, a $13.1 million improvement over the $5.5
million net unrealized loss recorded at September 30, 1996.
TOTAL ASSETS increased by $821.2 million to $10.03 billion at December 31, 1996
from $9.20 billion at September 30, 1996, principally due to a $472.8 million
increase in the separate accounts for variable annuities and a $374.5 million
increase in invested assets.
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INVESTED ASSETS at December 31, 1996 totaled $2.70 billion, compared with $2.33
billion at September 30, 1996. This $374.5 million increase primarily resulted
from the sales of fixed annuities and a net increase in the amount payable to
brokers for purchases of securities.
THE BOND PORTFOLIO had an aggregate fair value that exceeded its amortized cost
by $17.0 million at December 31, 1996. At September 30, 1996, the amortized cost
of the Bond Portfolio exceeded its fair value by $13.8 million. The net
unrealized gain on the Bond Portfolio since September 30, 1996 principally
reflects the lower relative prevailing interest rates at December 31, 1996 and
their corresponding effect on the fair value of the Bond Portfolio.
All of the Bond Portfolio ($2.26 billion at amortized cost, excluding $6.5
million of redeemable preferred stocks), at December 31, 1996 was rated by S&P,
Moody's, DCR, Fitch or under comparable statutory rating guidelines established
by the NAIC and implemented by either the NAIC or the Company. At December 31,
1996, approximately $2.06 billion of the Bond Portfolio (at amortized cost) was
rated investment grade by one or more of these agencies or by the Company or the
NAIC, pursuant to applicable NAIC guidelines, including $1.13 billion of U.S.
government/agency securities and MBSs.
At December 31, 1996, the Bond Portfolio included $198.9 million (fair value,
$202.8 million) of bonds not rated investment grade by S&P, Moody's, DCR, Fitch
or the NAIC. Based on their December 31, 1996 amortized cost, these non-
investment-grade bonds accounted for 2.0% of the Company's total assets and 7.4%
of invested assets. The Company had no material concentrations of
non-investment-grade securities at December 31, 1996.
SENIOR SECURED LOANS are included in the Bond Portfolio and their amortized cost
aggregated $201.4 million at December 31, 1996. At December 31, 1996, Secured
Loans consisted of loans to 65 borrowers spanning 22 industries, with 12.7% of
these assets (at amortized cost) concentrated in the air transport industry. No
other industry concentration constituted more than 11.7% of these assets.
MORTGAGE LOANS aggregated $120.7 million at December 31, 1996 and consisted of
22 first mortgage loans with an average loan balance of approximately $5.5
million, collateralized by properties located in 13 states. At December 31,
1996, the Company had no concentrations in any single state or in any single
type of property that amounted to more than 24% of the mortgage loan portfolio.
At December 31, 1996, there were four loans with outstanding balances of $10
million or more, the largest of which had a balance of approximately $20.5
million, which collectively aggregated approximately 49% of the portfolio. At
December 31, 1996, approximately 26% of the mortgage loan portfolio consisted of
loans with balloon payments due before January 1, 2000. During Fiscal 1997 and
Fiscal 1996, loans delinquent by more than 90 days, foreclosed loans and
restructured loans have not been significant in relation to the portfolio.
Approximately 49% of the mortgage loans in the portfolio at December 31, 1996
were seasoned loans underwritten to the Company's standards and purchased at or
near par from another financial institution which was downsizing its portfolio.
OTHER INVESTED ASSETS aggregated $77.5 million at December 31, 1996, including
$45.6 million of investments in limited partnerships and an aggregate of $31.9
million of miscellaneous investments, including policy loans, residuals,
separate account investments and leveraged leases. The Company's limited
partnership interests, accounted for by using the cost method of accounting,
invest mainly in equity securities.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $6.5 million at December 31, 1996 (at
amortized cost, with a fair value of $5.4 million) including $5.0 million of
bonds and notes and $1.5 million of mortgage loans. At December 31, 1996
defaulted investments constituted 0.2% of total invested assets. At September
30, 1996, defaulted investments totaled $3.1 million, which constituted 0.1% of
total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of the
Company's existing portfolio of cash and short-term investments, Reverse Repo
capacity on invested assets and, if required, proceeds from invested asset
sales. At December 31, 1996, approximately $1.22 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $38.4 million, while approximately
$1.04 billion of the Bond Portfolio had an aggregate unrealized loss of $21.4
million. In addition, the Company's investment portfolio currently provides
approximately $22.6 million of monthly cash flow from scheduled principal and
interest payments.
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INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Anchor National Life Insurance Company
as of September 30, 1996 and 1995 and for each of the three years in the period
ended September 30, 1996 included in this prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Anchor National have been included in
this prospectus. You should consider these financial statements only with
respect to Anchor National's ability to meet its obligations under the fixed
investment options to pay death benefits under the contracts, to assume the
mortality and expense risks under the Contract and any risk resulting from the
withdrawal charge not being adequate to cover the costs of distributing the
contracts. These financial statements provide no information as it relates to
Seasons Series Trust, its investment portfolios or the value of any money
allocated to the STRATEGIES.
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries at September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 8, 1996
38
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
--------------- --------------- DECEMBER 31,
1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Investments:
Cash and short-term investments........................... $ 249,209,000 $ 122,058,000 $ 196,142,000
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value (amortized cost:
September 1995, $1,500,062,000; September 1996,
$2,001,024,000; December 1996, $2,264,485,000)......... 1,489,213,000 1,987,271,000 2,281,527,000
Held for investment, at amortized cost (fair value:
September 1995, $165,004,000).......................... 157,901,000 -- --
Mortgage loans............................................ 94,260,000 98,284,000 120,680,000
Common stocks, at fair value (cost: September 1995,
$6,576,000; September 1996, $2,911,000; December 1996,
$2,510,000).............................................. 4,097,000 3,970,000 3,842,000
Real estate............................................... 55,798,000 39,724,000 24,000,000
Other invested assets..................................... 64,430,000 77,925,000 77,492,000
--------------- --------------- ---------------
Total investments..................................... 2,114,908,000 2,329,232,000 2,703,683,000
Variable annuity assets..................................... 5,230,246,000 6,311,557,000 6,784,374,000
Receivable from brokers for sales of securities............. -- 52,348,000 --
Accrued investment income................................... 14,192,000 19,675,000 20,404,000
Deferred acquisition costs.................................. 383,069,000 443,610,000 461,637,000
Other assets................................................ 41,282,000 48,113,000 55,610,000
--------------- --------------- ---------------
TOTAL ASSETS.......................................... $ 7,783,697,000 $ 9,204,535,000 $10,025,708,000
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts...................... $ 1,497,052,000 $ 1,789,962,000 $ 2,024,873,000
Reserves for guaranteed investment contracts.............. 277,095,000 415,544,000 420,871,000
Payable to brokers for purchases of securities............ 155,861,000 -- 49,991,000
Income taxes currently payable............................ 15,720,000 21,486,000 23,807,000
Other liabilities......................................... 56,372,000 74,710,000 83,824,000
--------------- --------------- ---------------
Total reserves, payables and accrued liabilities...... 2,002,100,000 2,301,702,000 2,603,366,000
--------------- --------------- ---------------
Variable annuity liabilities................................ 5,230,246,000 6,311,557,000 6,784,374,000
--------------- --------------- ---------------
Subordinated notes payable to Parent........................ 35,832,000 35,832,000 35,903,000
--------------- --------------- ---------------
Deferred income taxes....................................... 73,459,000 70,189,000 71,943,000
--------------- --------------- ---------------
Shareholder's equity:
Common Stock.............................................. 3,511,000 3,511,000 3,511,000
Additional paid-in capital................................ 252,876,000 280,263,000 308,674,000
Retained earnings......................................... 191,346,000 207,002,000 210,348,000
Net unrealized gains (losses) on debt and equity
securities available for sale............................ (5,673,000) (5,521,000) 7,589,000
--------------- --------------- ---------------
Total shareholder's equity............................ 442,060,000 485,255,000 530,122,000
--------------- --------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............ $ 7,783,697,000 $ 9,204,535,000 $10,025,708,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes
39
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------ ---------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment income................................. $127,758,000 $129,466,000 $164,631,000 $ 38,653,000 $ 46,712,000
------------ ------------ ------------ ------------ ------------
Interest expense on:
Fixed annuity contracts......................... (66,311,000) (72,975,000) (82,690,000) (18,936,000) (25,191,000)
Guaranteed investment contracts................. -- (3,733,000) (19,974,000) (4,272,000) (6,038,000)
Senior indebtedness............................. (71,000) (227,000) (2,568,000) (195,000) (181,000)
Subordinated notes payable to Parent............ (2,380,000) (2,448,000) (2,556,000) (633,000) (758,000)
------------ ------------ ------------ ------------ ------------
Total interest expense.......................... (68,762,000) (79,383,000) (107,788,000) (24,036,000) (32,168,000)
------------ ------------ ------------ ------------ ------------
NET INVESTMENT INCOME............................. 58,996,000 50,083,000 56,843,000 14,617,000 14,544,000
------------ ------------ ------------ ------------ ------------
NET REALIZED INVESTMENT LOSSES.................... (33,713,000) (4,363,000) (13,355,000) (12,800,000) (19,116,000)
------------ ------------ ------------ ------------ ------------
Fee income:
Variable annuity fees........................... 79,101,000 84,171,000 103,970,000 24,290,000 30,606,000
Net retained commissions........................ 20,822,000 24,108,000 31,548,000 6,491,000 7,796,000
Asset management fees........................... 31,302,000 26,935,000 25,413,000 6,503,000 6,418,000
------------ ------------ ------------ ------------ ------------
TOTAL FEE INCOME.................................. 131,225,000 135,214,000 160,931,000 37,284,000 44,820,000
------------ ------------ ------------ ------------ ------------
Other income and expenses:
Surrender charges............................... 5,034,000 5,889,000 5,184,000 1,261,000 1,350,000
General and administrative expenses............. (52,636,000) (61,629,000) (80,048,000) (16,997,000) (22,322,000)
Amortization of deferred acquisition costs...... (44,195,000) (58,713,000) (57,520,000) (13,658,000) (13,817,000)
Annual commissions.............................. (1,158,000) (2,658,000) (4,613,000) (939,000) (1,433,000)
Other, net...................................... 3,767,000 1,174,000 1,886,000 507,000 920,000
------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME AND EXPENSES................... (89,188,000) (115,937,000) (135,111,000) (29,826,000) (35,302,000)
------------ ------------ ------------ ------------ ------------
PRETAX INCOME..................................... 67,320,000 64,997,000 69,308,000 9,275,000 4,946,000
Income tax expense................................ (22,705,000) (25,739,000) (24,252,000) (3,449,000) (1,600,000)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES...................... 44,615,000 39,258,000 45,056,000 5,826,000 3,346,000
Cumulative effect of change in accounting for
income taxes..................................... (20,463,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME........................................ $ 24,152,000 $ 39,258,000 $ 45,056,000 $ 5,826,000 $ 3,346,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes
40
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 24,152,000 $ 39,258,000 $ 45,056,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts........................... 66,311,000 72,975,000 82,690,000
Guaranteed investment contracts................... -- 3,733,000 19,974,000
Net realized investment losses.................... 33,713,000 4,363,000 13,355,000
Accretion of net discounts on investments......... (2,050,000) (6,865,000) (8,976,000)
Amortization of goodwill.......................... 1,169,000 1,168,000 1,169,000
Provision for deferred income taxes............... 19,395,000 (1,489,000) (3,351,000)
Cumulative effect of change in accounting for
income taxes..................................... 20,463,000 -- --
Change in:
Accrued investment income........................... (1,310,000) 3,373,000 (5,483,000)
Deferred acquisition costs.......................... (34,612,000) (7,180,000) (60,941,000)
Other assets........................................ 5,133,000 7,047,000 (8,000,000)
Income taxes currently payable...................... 6,559,000 3,389,000 5,766,000
Other liabilities................................... 46,000 4,063,000 5,474,000
Other, net............................................ 360,000 7,000 (129,000)
---------------- ---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES:............ 139,329,000 123,842,000 86,604,000
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts........................... 138,526,000 245,320,000 651,649,000
Guaranteed investment contracts................... -- 275,000,000 134,967,000
Net exchanges to (from) the fixed accounts of
variable annuity contracts......................... (29,286,000) 10,475,000 (236,705,000)
Withdrawal payments on:
Fixed annuity contracts........................... (269,412,000) (237,977,000) (173,489,000)
Guaranteed investment contracts................... -- (1,638,000) (16,492,000)
Claims and annuity payments on fixed annuity
contracts.......................................... (31,146,000) (31,237,000) (31,107,000)
Net receipts from (repayments of) other short-term
financings......................................... (166,685,000) 3,202,000 (119,712,000)
Capital contributions received...................... -- -- 27,387,000
Dividend paid....................................... -- -- (29,400,000)
---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... (358,003,000) 263,145,000 207,098,000
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks...... (1,197,743,000) (1,556,586,000) (1,937,890,000)
Mortgage loans.................................... (10,666,000) -- (15,000,000)
Other investments, excluding short-term
investments...................................... (26,317,000) (13,028,000) (36,770,000)
Sales of:
Bonds, notes and reedeemable preferred stocks..... 877,068,000 1,026,078,000 1,241,928,000
Real estate....................................... 33,443,000 36,813,000 900,000
Other investments, excluding short-term
investments...................................... 2,353,000 5,130,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks...... 173,763,000 178,688,000 288,969,000
Mortgage loans.................................... 10,087,000 14,403,000 11,324,000
Other investments, excluding short-term
investments...................................... 13,500,000 13,286,000 20,749,000
---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES...... (124,512,000) (295,216,000) (420,853,000)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.......................................... (343,186,000) 91,771,000 (127,151,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD............................................... 500,624,000 157,438,000 249,209,000
---------------- ---------------- ----------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 157,438,000 $ 249,209,000 $ 122,058,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental cash flow information:
Interest paid on indebtedness....................... $ 1,175,000 $ 3,235,000 $ 5,982,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net income taxes paid (recovered)................... $ (3,328,000) $ 23,656,000 $ 22,031,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------------
1995 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 5,826,000 $ 3,346,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts........................... 18,936,000 25,191,000
Guaranteed investment contracts................... 4,272,000 6,038,000
Net realized investment losses.................... 12,800,000 19,116,000
Accretion of net discounts on investments......... (1,669,000) (2,615,000)
Amortization of goodwill.......................... 293,000 291,000
Provision for deferred income taxes............... (6,541,000) (5,305,000)
Cumulative effect of change in accounting for
income taxes..................................... -- --
Change in:
Accrued investment income........................... (3,683,000) (729,000)
Deferred acquisition costs.......................... (5,853,000) (28,927,000)
Other assets........................................ (6,902,000) (7,788,000)
Income taxes currently payable...................... 5,749,000 2,321,000
Other liabilities................................... 428,000 3,924,000
Other, net............................................ 85,000 (6,000)
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES:............ 23,741,000 14,857,000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts........................... 62,536,000 325,993,000
Guaranteed investment contracts................... -- 5,000,000
Net exchanges to (from) the fixed accounts of
variable annuity contracts......................... (36,865,000) (82,234,000)
Withdrawal payments on:
Fixed annuity contracts........................... (60,577,000) (25,292,000)
Guaranteed investment contracts................... (4,200,000) (5,711,000)
Claims and annuity payments on fixed annuity
contracts.......................................... (7,202,000) (8,741,000)
Net receipts from (repayments of) other short-term
financings......................................... (131,379,000) 10,308,000
Capital contributions received...................... 27,387,000 28,411,000
Dividend paid....................................... -- --
---------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... (150,300,000) 247,734,000
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks...... (230,071,000) (1,068,608,000)
Mortgage loans.................................... -- (25,124,000)
Other investments, excluding short-term
investments...................................... (2,698,000) (3,108,000)
Sales of:
Bonds, notes and reedeemable preferred stocks..... 186,979,000 833,249,000
Real estate....................................... -- --
Other investments, excluding short-term
investments...................................... 1,397,000 856,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks...... 44,943,000 67,201,000
Mortgage loans.................................... 1,428,000 2,806,000
Other investments, excluding short-term
investments...................................... 2,658,000 4,221,000
---------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES...... 4,636,000 (188,507,000)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.......................................... (121,923,000) 74,084,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD............................................... 249,209,000 122,058,000
---------------- ----------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 127,286,000 $ 196,142,000
---------------- ----------------
---------------- ----------------
Supplemental cash flow information:
Interest paid on indebtedness....................... $ 661,000 $ 288,000
---------------- ----------------
---------------- ----------------
Net income taxes paid (recovered)................... $ 4,247,000 $ 4,584,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes
41
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica, Inc. (the "Parent"). The Company is an
Arizona-domiciled life insurance company and, on a consolidated basis, conducts
its business through three segments: annuity operations, asset management
operations and broker-dealer operations. Annuity operations include the sale and
administration of fixed and variable annuities and guaranteed investment
contracts. Asset management operations, which include the sale and management of
mutual funds, is conducted by SunAmerica Asset Management Corp. Broker-dealer
operations include the sale of securities and financial services products, and
is conducted by Royal Alliance Associates, Inc.
The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government, and
policies of state and other regulatory authorities. The level of sales of the
Company's financial products is influenced by many factors, including general
market rates of interest; strength, weakness and volatility of equity markets;
and terms and conditions of competing financial products. The Company is exposed
to the typical risks normally associated with a portfolio of fixed-income
securities, namely interest rate, option, liquidity and credit risks. The
Company controls its exposure to these risks by, among other things, closely
monitoring and matching the duration of its assets and liabilities, monitoring
and limiting prepayment and extension risk in its portfolio, maintaining a large
percentage of its portfolio in highly liquid securities, and engaging in a
disciplined process of underwriting, reviewing and monitoring credit risk. The
Company also is exposed to market risk, as market volatility may result in
reduced fee income in the case of assets managed in mutual funds and held in
separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated in
consolidation. Certain 1995 and 1994 amounts have been reclassified to conform
with the 1996 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS: Effective October 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Accordingly, the cumulative effect of this change
in accounting for income taxes was recorded on October 1, 1993 to increase the
liability for Deferred Income Taxes by $20,463,000.
INVESTMENTS: Cash and short-term investments primarily include cash, commercial
paper, money market investments, repurchase agreements and short-term bank
participations. All such investments are carried at cost plus accrued interest,
which approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholder's equity.
Bonds, notes and redeemable preferred stocks held for investment (the "Held for
Investment Portfolio") are carried at amortized cost. On December 1, 1995, the
Company reassessed the appropriateness of classifying a portion of its portfolio
of bonds, notes and redeemable preferred stocks as held for investment. This
reassessment was made pursuant to the provisions of "Special Report: A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," issued by the Financial Accounting Standards Board in
November 1995. As a result of its reassessment, the Company reclassified all of
its Held for Investment Portfolio as available for sale. At December 1, 1995,
the amortized cost of the Held for Investment Portfolio aggregated $157,830,000
and its fair value was $166,215,000. Upon reclassification, the resulting net
unrealized gain of $8,385,000 was credited to Net Unrealized Losses on Debt and
Equity Securities Available for Sale in the shareholder's equity section of the
balance sheet.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
42
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in limited partnerships, which are
accounted for by using the cost method of accounting; separate account
investments; leveraged leases; policy loans, which are carried at unpaid
balances; and collateralized mortgage obligation residuals.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in relation
to the present value of estimated gross profits, which are composed of net
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses. Costs incurred to
sell mutual funds are also deferred and amortized over the estimated lives of
the funds obtained. Deferred acquisition costs consist of commissions and other
costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to deferred acquisition costs equal to the change
in amortization that would have been recorded if such securities had been sold
at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been increased by $4,200,000 at September 30, 1996, and
by $4,600,000 at September 30, 1995 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting
from the receipt of variable annuity premiums are segregated in separate
accounts. The Company receives administrative fees for managing the funds and
other fees for assuming mortality and certain expense risks. Such fees are
included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $19,478,000 at September 30, 1996, is
amortized by using the straight-line method over periods averaging 25 years and
is included in Other Assets in the balance sheet.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts
and guaranteed investment contracts are accounted for as investment-type
contracts in accordance with Statement of Financial Accounting Standards No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments," and
are recorded at accumulated value (premiums received, plus accrued interest,
less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees and asset management fees are recorded in
income as earned. Net retained commissions are recognized as income on a
trade-date basis.
INCOME TAXES: The Company is included in the consolidated federal income tax
return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income tax assets
and liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and liabilities using
enacted income tax rates and laws.
43
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale and held for investment by major category
follow:
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
--------------- ---------------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
Securities of the United States Government.................................... $ 311,458,000 $ 304,538,000
Mortgage-backed securities.................................................... 747,653,000 741,876,000
Securities of public utilities................................................ 3,684,000 3,672,000
Corporate bonds and notes .................................................... 590,071,000 591,148,000
Redeemable preferred stocks................................................... 9,064,000 8,664,000
Other debt securities......................................................... 339,094,000 337,373,000
--------------- ---------------
Total available for sale...................................................... $ 2,001,024,000 $ 1,987,271,000
--------------- ---------------
--------------- ---------------
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States Government.................................... $ 59,756,000 $ 60,258,000
Mortgage-backed securities.................................................... 1,121,064,000 1,110,676,000
Securities of public utilities................................................ 792,000 774,000
Corporate bonds and notes..................................................... 290,924,000 288,883,000
Redeemable preferred stocks................................................... 3,945,000 4,937,000
Other debt securities ........................................................ 23,581,000 23,685,000
--------------- ---------------
Total available for sale...................................................... $ 1,500,062,000 $ 1,489,213,000
--------------- ---------------
--------------- ---------------
HELD FOR INVESTMENT:
Securities of the United States Government.................................... $ 10,379,000 $ 10,797,000
Mortgage-backed securities.................................................... 8,378,000 8,378,000
Corporate bonds and notes..................................................... 105,980,000 112,665,000
Other debt securities......................................................... 33,164,000 33,164,000
--------------- ---------------
Total held for investment..................................................... $ 157,901,000 $ 165,004,000
--------------- ---------------
--------------- ---------------
</TABLE>
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1996, follow:
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
--------------- ---------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less....................................................... $ 18,792,000 $ 19,357,000
Due after one year through five years......................................... 505,564,000 499,163,000
Due after five years through ten years........................................ 378,249,000 378,250,000
Due after ten years........................................................... 350,766,000 348,625,000
Mortgage-backed securities.................................................... 747,653,000 741,876,000
--------------- ---------------
Total available for sale...................................................... $ 2,001,024,000 $ 1,987,271,000
--------------- ---------------
--------------- ---------------
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will differ
from those shown above due to prepayments and redemptions.
44
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale and held for investment by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
------------ -------------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
Securities of the United States Government......................................... $ 284,000 $ (7,204,000)
Mortgage-backed securities......................................................... 7,734,000 (13,511,000)
Securities of public utilities..................................................... 1,000 (13,000)
Corporate bonds and notes.......................................................... 11,709,000 (10,632,000)
Redeemable preferred stocks........................................................ 16,000 (416,000)
Other debt securities.............................................................. 431,000 (2,152,000)
------------ -------------
Total available for sale........................................................... $ 20,175,000 $ (33,928,000)
------------ -------------
------------ -------------
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States Government......................................... $ 553,000 $ (51,000)
Mortgage-backed securities......................................................... 12,013,000 (22,401,000)
Securities of public utilities..................................................... -- (18,000)
Corporate bonds and notes.......................................................... 5,344,000 (7,385,000)
Redeemable preferred stocks........................................................ 992,000 --
Other debt securities.............................................................. 104,000 --
------------ -------------
Total available for sale........................................................... $ 19,006,000 $ (29,855,000)
------------ -------------
------------ -------------
HELD FOR INVESTMENT:
Securities of the United States Government......................................... $ 432,000 $ (14,000)
Corporate bonds and notes.......................................................... 6,685,000 --
------------ -------------
Total held for investment.......................................................... $ 7,117,000 $ (14,000)
------------ -------------
------------ -------------
</TABLE>
At September 30, 1996, gross unrealized gains on equity securities aggregated
$1,368,000 and gross unrealized losses aggregated $309,000. At September 30,
1995, gross unrealized gains on equity securities aggregated $1,082,000 and
gross unrealized losses aggregated $3,561,000.
45
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Gross realized investment gains and losses on sales of all types of investments
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Available for sale:
Realized gains .................................................. $ 14,532,000 $ 15,983,000 $ 12,760,000
Realized losses.................................................. (10,432,000) (21,842,000) (31,066,000)
Held for investment:
Realized gains .................................................. -- 2,413,000 890,000
Realized losses ................................................. -- (586,000) (1,913,000)
EQUITIES:
Realized gains..................................................... 511,000 994,000 467,000
Realized losses.................................................... (3,151,000) (114,000) (303,000)
OTHER INVESTMENTS:
Realized gains .................................................... 1,135,000 3,561,000 --
Realized losses.................................................... (1,729,000) (12,000) (358,000)
IMPAIRMENT WRITEDOWNS................................................ (14,221,000) (4,760,000) (14,190,000)
------------- ------------- -------------
Total net realized investment losses................................. $ (13,355,000) $ (4,363,000) $ (33,713,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Short-term investments.............................................. $ 10,647,000 $ 8,308,000 $ 4,648,000
Bonds, notes and redeemable preferred stocks........................ 140,387,000 107,643,000 98,935,000
Mortgage loans...................................................... 8,701,000 7,419,000 12,133,000
Common stocks....................................................... 8,000 3,000 1,000
Real estate......................................................... (196,000) (51,000) 1,379,000
Limited partnerships................................................ 4,073,000 5,128,000 9,487,000
Other invested assets............................................... 1,011,000 1,016,000 1,175,000
------------- ------------- -------------
Total investment income....................................... $ 164,631,000 $ 129,466,000 $ 127,758,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $1,737,000 for
the year ended September 30, 1996, $1,983,000 for the year ended September 30,
1995, and $1,714,000 for the year ended September 30, 1994 and are included in
General and Administrative Expenses in the income statement.
At September 30, 1996, no investment exceeded 10% of the Company's consolidated
shareholder's equity.
At September 30, 1996, mortgage loans were collateralized by properties located
in 11 states, with loans totaling approximately 21% of the aggregate carrying
value of the portfolio secured by properties located in Colorado, approximately
17% by properties located in New Jersey and approximately 14% by properties
located in California. No more than 12% of the portfolio was secured by
properties in any other single state.
At September 30, 1996, bonds, notes and redeemable preferred stocks included
$160,801,000 (fair value, $160,158,000) of bond and notes not rated investment
grade by either Standard & Poor's Corporation, Moody's Investors Service, Duff
and Phelps Credit Rating Co., Fitch Investor Service, Inc. or under National
Association of Insurance Commissioners' guidelines. The Company had no material
concentrations of non-investment-grade assets at September 30, 1996.
46
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
At September 30, 1996, the amortized cost of investments in default as to the
payment of principal or interest was $3,115,000, consisting of $1,580,000 of
non-investment-grade bonds and $1,535,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $2,935,000.
At September 30, 1996, $6,486,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.
The Company has undertaken to dispose of certain real estate investments, having
an aggregate carrying value of $28,410,000, during the next year, to affiliated
or nonaffiliated parties, and the Parent has guaranteed that the Company will
receive its current carrying value for these assets. (This guaranty was
terminated on December 31, 1996. See Note 11--"Subsequent Event").
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its other invested assets, equity
investments and real estate investments) and liabilities or the value of
anticipated future business. The Company does not plan to sell most of its
assets or settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Selling expenses and potential taxes are not
included. The estimated fair value amounts were determined using available
market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally
on independent pricing services, broker quotes and other independent
information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future cash
flows to the present at current market rates, using expected prepayment rates.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which the
carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life contracts are assigned a fair value equal to current net surrender
value. Annuitized contracts are valued based on the present value of future cash
flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates.
VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation
phase are based on net surrender values. Fair values of contracts in the payout
phase are based on the present value of future cash flows at assumed investment
rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the
quoted market prices for similar issues.
47
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at September
30, 1996 and 1995, compared with their respective carrying values, are as
follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
--------------- ---------------
<S> <C> <C>
1996:
ASSETS:
Cash and short-term investments...................................... $ 122,058,000 $ 122,058,000
Bonds, notes and redeemable preferred stocks......................... 1,987,271,000 1,987,271,000
Mortgage loans....................................................... 98,284,000 102,112,000
Receivable from brokers for sales of securities...................... 52,348,000 52,348,000
Variable annuity assets.............................................. 6,311,557,000 6,311,557,000
LIABILITIES:
Reserves for fixed annuity contracts................................. 1,789,962,000 1,738,784,000
Reserves for guaranteed investment contracts......................... 415,544,000 416,695,000
Variable annuity liabilities......................................... 6,311,557,000 6,117,508,000
Subordinated notes payable to Parent................................. 35,832,000 37,339,000
--------------- ---------------
--------------- ---------------
1995:
ASSETS:
Cash and short-term investments...................................... $ 249,209,000 $ 249,209,000
Bonds, notes and redeemable preferred stocks......................... 1,647,114,000 1,654,217,000
Mortgage loans....................................................... 94,260,000 95,598,000
Variable annuity assets.............................................. 5,230,246,000 5,230,246,000
LIABILITIES:
Reserves for fixed annuity contracts................................. 1,497,052,000 1,473,757,000
Reserves for guaranteed investment contracts......................... 277,095,000 277,095,000
Payable to brokers for purchases of securities....................... 155,861,000 155,861,000
Variable annuity liabilities......................................... 5,230,246,000 5,077,257,000
Subordinated notes payable to Parent................................. 35,832,000 34,620,000
--------------- ---------------
--------------- ---------------
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent averaged $35,832,000 at a weighted average
interest rate of 8.71% (with rates ranging from 7% to 9%) at September 30, 1996
and require principal payments of $5,272,000 in 1997, $7,500,000 in 1998 and
$23,060,000 in 1999.
6. CONTINGENT LIABILITIES
The Company has entered into two agreements in which it has guaranteed the
liquidity of certain short-term securities of two municipalities by agreeing to
purchase such securities in the event there is no other buyer in the short-term
marketplace. In return the Company receives a fee. These guarantees total up to
$182,600,000. Management does not anticipate any material future losses with
respect to these guarantees.
The Company is involved in various kinds of litigation common to its businesses.
These cases are in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses are
adequate and any further liabilities and costs will not have a material adverse
impact upon the Company's financial position or results of operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value Common
Stock. At September 30, 1996, 1995 and 1994, 3,511 shares are outstanding.
48
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY (CONTINUED)
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance........................................ $ 252,876,000 $ 252,876,000 $ 252,876,000
Capital contributions received........................... 27,387,000 -- --
------------- ------------- -------------
Ending balance........................................... $ 280,263,000 $ 252,876,000 $ 252,876,000
------------- ------------- -------------
------------- ------------- -------------
RETAINED EARNINGS:
Beginning balance........................................ $ 191,346,000 $ 152,088,000 $ 127,936,000
Net income............................................... 45,056,000 39,258,000 24,152,000
Dividend paid............................................ (29,400,000) -- --
------------- ------------- -------------
Ending balance........................................... $ 207,002,000 $ 191,346,000 $ 152,088,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
NET UNREALIZED LOSSES ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance......................................... $ (5,673,000) $ (24,953,000) $ (13,230,000)
Change in net unrealized gains/losses on debt securities
available for sale....................................... (2,904,000) 71,302,000 (69,407,000)
Change in net unrealized gains/losses on equity securities
available for sale....................................... 3,538,000 (1,240,000) (753,000)
Change in adjustment to deferred acquisition costs........ (400,000) (40,400,000) 45,000,000
Tax effects of net changes................................ (82,000) (10,382,000) 13,437,000
------------- ------------- -------------
Ending balance............................................ $ (5,521,000) $ (5,673,000) $ (24,953,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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. A dividend in the amount of $29,400,000 was paid on March 18,
1996. No dividends were paid in fiscal years 1995 or 1994.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1996 was $21,898,000. The statutory net income for the year ended
December 31, 1995 was $30,673,000 and for the year ended December 31, 1994 was
$35,060,000. The Company's statutory capital and surplus was $282,275,000 at
September 30, 1996, $294,767,000 at December 31, 1995 and $219,577,000 at
December 31, 1994.
49
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS
(LOSSES) OPERATIONS TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
1996:
Currently payable............................................. $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred...................................................... (10,347,000) 6,996,000 (3,351,000)
------------- ------------ ------------
Total income tax expense...................................... $ (4,593,000) $ 28,845,000 $ 24,252,000
------------- ------------ ------------
------------- ------------ ------------
1995:
Currently payable............................................. $ 4,248,000 $ 22,980,000 $ 27,228,000
Deferred...................................................... (6,113,000) 4,624,000 (1,489,000)
------------- ------------ ------------
Total income tax expense...................................... $ (1,865,000) $ 27,604,000 $ 25,739,000
------------- ------------ ------------
------------- ------------ ------------
1994:
Currently payable............................................. $ (6,825,000) $ 10,135,000 $ 3,310,000
Deferred...................................................... (1,320,000) 20,715,000 19,395,000
------------- ------------ ------------
Total income tax expense...................................... $ (8,145,000) $ 30,850,000 $ 22,705,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
Income taxes computed at the United States federal income tax rate of 35% and
income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Amount computed at statutory rate.............................. $ 24,258,000 $ 22,749,000 $ 23,562,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases of net
assets acquired............................................. 464,000 3,049,000 465,000
State income taxes, net of federal tax benefit............... 2,070,000 437,000 (662,000)
Dividends-received deduction................................. (2,357,000) -- --
Tax credits.................................................. (257,000) (168,000) (612,000)
Other, net................................................... 74,000 (328,000) (48,000)
------------ ------------ ------------
Total income tax expense....................................... $ 24,252,000 $ 25,739,000 $ 22,705,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at September 30, 1996. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
50
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments....................................................... $ 15,036,000 $ 14,181,000
Deferred acquisition costs........................................ 136,747,000 118,544,000
State income taxes................................................ 1,466,000 1,847,000
------------- -------------
Total deferred tax liabilities.................................... 153,249,000 134,572,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves........................................... (77,522,000) (55,910,000)
Guaranty fund assessments......................................... (1,031,000) (1,123,000)
Other assets...................................................... (1,534,000) (1,025,000)
Net unrealized losses on certain debt and equity securities....... (2,973,000) (3,055,000)
------------- -------------
Total deferred tax assets......................................... (83,060,000) (61,113,000)
------------- -------------
Deferred income taxes............................................. $ 70,189,000 $ 73,459,000
------------- -------------
------------- -------------
</TABLE>
9. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica Securities,
Inc. and Advantage Capital Corp. These broker-dealers represent a significant
portion of the Company's business, amounting to approximately 15.6%, 14.1% and
14.5% of premiums in 1996, 1995 and 1994, respectively. Commissions paid to
these broker-dealers totaled $16,906,000 in 1996, $9,435,000 in 1995 and
$9,725,000 in 1994.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $65,351,000 for the year ended September 30, 1996,
$42,083,000 for the year ended September 30, 1995 and $36,934,000 for the year
ended September 30, 1994. Such amounts are included in General and
Administrative Expenses in the income statement.
On December 31, 1995, the Parent made a $27,387,000 capital contribution to the
Company, through the Company's direct parent, in exchange for the termination of
its guaranty with respect to certain real estate owned in Arizona. Accordingly,
the Company reduced the carrying value of this real estate to estimated fair
value to reflect the termination of the guaranty. On December 31, 1996, the
Parent made a similar capital contribution for $28,410,000 in exchange for the
termination of the remaining guaranty with respect to such real estate.
During the year ended September 30, 1995, the Company sold to the Parent real
estate for cash equal to its carrying value of $29,761,000.
During the year ended September 30, 1996, the Company sold various invested
assets to the Parent, SunAmerica Life Insurance Company and Ford Life Insurance
Company ("Ford") for cash equal to their current market values of $274,000,
$8,968,000 and $38,353,000, respectively. The Company recorded net losses of
$3,000 on such transactions.
During the year ended September 30, 1996, the Company also purchased certain
invested assets from SunAmerica Life Insurance Company and Ford for cash equal
to their current market values of $5,159,000 and $23,220,000, respectively.
51
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX
REVENUES EXPENSE INCOME TOTAL ASSETS
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
1996:
Annuity operations........................... $ 250,645,000 $ 43,974,000 $ 53,827,000 $ 9,092,770,000
Asset management............................. 29,711,000 18,295,000 2,448,000 74,410,000
Broker-dealer operations..................... 31,851,000 449,000 13,033,000 37,355,000
------------- ------------ ------------ ---------------
Total........................................ $ 312,207,000 $ 62,718,000 $ 69,308,000 $ 9,204,535,000
------------- ------------ ------------ ---------------
------------- ------------ ------------ ---------------
1995:
Annuity operations........................... $ 205,698,000 $ 38,350,000 $ 55,462,000 $ 7,667,946,000
Asset management............................. 30,253,000 24,069,000 510,000 86,510,000
Broker-dealer operations..................... 24,366,000 411,000 9,025,000 29,241,000
------------- ------------ ------------ ---------------
Total........................................ $ 260,317,000 $ 62,830,000 $ 64,997,000 $ 7,783,697,000
------------- ------------ ------------ ---------------
------------- ------------ ------------ ---------------
1994:
Annuity operations........................... $ 171,553,000 $ 26,501,000 $ 52,284,000 $ 6,473,065,000
Asset management............................. 32,803,000 19,330,000 7,916,000 102,192,000
Broker-dealer operations..................... 20,914,000 408,000 7,120,000 26,869,000
------------- ------------ ------------ ---------------
Total........................................ $ 225,270,000 $ 46,239,000 $ 67,320,000 $ 6,602,126,000
------------- ------------ ------------ ---------------
------------- ------------ ------------ ---------------
</TABLE>
11. SUBSEQUENT EVENT (UNAUDITED)
On December 31, 1996, the Parent made a capital contribution of $28,410,000 to
the Company through the Company's direct parent, in exchange for the termination
of its guaranty with respect to the remainder of the land owned in Arizona.
Accordingly, on December 31, 1996, the Company reduced the carrying value of
this land to estimated fair value to reflect the termination of the guaranty.
52
<PAGE>
APPENDIX A - MARKET VALUE ADJUSTMENT
- --------------------------------------------------------------------------------
The Market Value Adjustment reflects the impact that changing interest rates
have on the value of money invested at a fixed interest rate. The longer the
period of time remaining in the term you initially agreed to leave your money in
the fixed investment option, the greater the impact of the Market Value
Adjustment. The impact of the Market Value Adjustment can be either positive or
negative, and is computed by multiplying the amount withdrawn, transferred or
annuitized by the following factor:
N/12
[(1+I)/ (1+J+0.005*)] -1
where:
I is the Guarantee Rate you are earning on the money invested in
the fixed investment option;
J is the Guarantee 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 fixed investment option; and
N is the number of full months remaining in the term you
initially agreed to leave your money in the fixed investment option.
* if you live in the state of Pennsylvania this number will be zero.
EXAMPLES OF THE MARKET VALUE ADJUSTMENT
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to the
ten year fixed investment option at a Guarantee Rate of 7%;
(2) You make a partial withdrawal of $4,000 when 2 1/2 years (30 months)
remain in the ten year term you initially agreed to leave your money in the
fixed investment option (N=30);
(3) you have not made any other transfers, additional Purchase Payments, or
withdrawals.
No withdrawal charges are reflected in the examples because your Purchase
Payment has been in the contract for more than 7 full years.
NEGATIVE ADJUSTMENT:
Assume that on the date of withdrawal, the Guarantee Rate in effect for a new
investment in the three year (rounded up to the next full year) fixed investment
option is 8%:
The Market Value Adjustment factor is equal to:
N/12
[(1+I)/(1+J+.005)] -1
30/12
[(1.07)/(1.08+.005)] -1
2.5
(0.986175) -1
0.965795-1
- -0.034205
The requested withdrawal amount is multiplied by the Market Value Adjustment
factor to determine the Market Value Adjustment:
$4,000 X (-0.034205)= -$136.82
$136.82 represents the Market Value Adjustment that will be deducted from the
remaining money in the ten year fixed investment option.
POSITIVE ADJUSTMENT:
Assume that on the date of withdrawal, the Guarantee Rate in effect for a new
investment in the three year (rounded up to the next full year) fixed investment
option is 6%:
The Market Value Adjustment factor is equal to:
N/12
[(1+I)/(1+J+.005)] -1
30/12
[(1.07)/(1.06+.005)] -1
2.5
(1.004695) -1
1.011778-1
+0.011778
The requested withdrawal amount is multiplied by the Market Value Adjustment
factor to determine the Market Value Adjustment:
$4,000 X .011778= +47.11
$47.11 represents the Market Value Adjustment that would be added to your
withdrawal.
53
<PAGE>
APPENDIX B - PREMIUM TAXES
- --------------------------------------------------------------------------------
Premium taxes vary according to the state and are subject to change without
notice. In many states, there is no tax at all. Listed below are the tax rates
payable on premiums in effect in those states that assess a premium tax, as of
the date of this prospectus. For current information you should consult your tax
advisor. Additionally, please see Section 5 "Expenses" for additional
information on Premium Taxes.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
STATE CONTRACT CONTRACT
- ------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
California..................................................................... .50% 2.35%
District of Columbia........................................................... 2.25% 2.25%
Kansas......................................................................... 0% 2%
Kentucky....................................................................... 2% 2%
Maine.......................................................................... 0% 2%
Michigan....................................................................... .00075% .00075%
Nevada......................................................................... 0% 3.5%
South Dakota................................................................... 0% 1.25%
West Virginia.................................................................. 1% 1%
Wyoming........................................................................ 0% 1%
</TABLE>
54
<PAGE>
Please forward a copy (without charge) of the Statement of Additional
Information concerning SEASONS Variable Annuity Contracts to:
(Please print or type and fill in all information.)
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City/State/Zip
- --------------------------------------------------------------------------------
Date: ________________________________ Signed: ________________________________
Return to: Anchor National Life Insurance Company, Annuity Service Center, P.O.
Box 54299, Los Angeles, California 90054-0299.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FIXED AND VARIABLE GROUP DEFERRED
ANNUITY CONTRACTS ISSUED BY
VARIABLE ANNUITY ACCOUNT FIVE
DEPOSITOR: ANCHOR NATIONAL LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus; it should be
read with the prospectus relating to the annuity contracts described above, a
copy of which may be obtained without charge by calling 800/445-SUN2 or by
written request addressed to:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS
April 3, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Separate Account........................................................................................... 3
General Account............................................................................................ 3
Performance Data........................................................................................... 4
Annuity Payments........................................................................................... 4
Annuity Unit Values........................................................................................ 5
Taxes...................................................................................................... 6
Distribution of Contracts.................................................................................. 9
Financial Statements....................................................................................... 10
</TABLE>
2
<PAGE>
SEPARATE ACCOUNT
Variable Annuity Account Five was originally established by Anchor National Life
Insurance Company (the "Company") on July 3, 1996 pursuant to the provisions of
Arizona law, as a segregated asset account of the Company. The separate account
meets the definition of a "separate account" under the federal securities laws
and is registered with the SEC as a unit investment trust under the Investment
Company Act of 1940. This registration does not involve supervision of the
management of the separate account or the Company by the SEC.
The assets of the separate account are the property of the Company. However, the
assets of the separate account, equal to its reserves and other contract
liabilities, are not chargeable with liabilities arising out of any other
business the Company may conduct.
Income, gains, and losses, whether or not realized, from assets allocated to the
separate account are credited to or charged against the separate account without
regard to other income, gains, or losses of the Company.
The separate account is divided into STRATEGIES, with the assets of each
STRATEGY invested in the shares of one or more underlying investment portfolios.
The Company does not guarantee the investment performance of the separate
account, its STRATEGIES or the underlying investment portfolios. Values
allocated to the separate account and the amount of variable annuity payments
will vary with the values of shares of the underlying investment portfolios, and
are also reduced by insurance charges and fees.
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The contract is designed to
seek to accomplish this objective by providing that variable annuity payments
will reflect the investment performance of the separate account with respect to
amounts allocated to it both before and after the Annuity Date. Since the
separate account is always fully invested in shares of the underlying investment
portfolios, its investment performance reflects the investment performance of
those entities. The values of such shares held by the separate account fluctuate
and are subject to the risks of changing economic conditions as well as the risk
inherent in the ability of the underlying funds' managements to make necessary
changes in their STRATEGIES to anticipate changes in economic conditions.
Therefore, the owner bears the entire investment risk that the basic objectives
of the contract may not be realized, and that the adverse effects of inflation
may not be lessened. There can be no assurance that the aggregate amount of
variable annuity payments will equal or exceed the Purchase Payments made with
respect to a particular account for the reasons described above, or because of
the premature death of an Annuitant.
Another important feature of the contract related to its basic objective is the
Company's promise that the dollar amount of variable annuity payments made
during the lifetime of the Annuitant will not be adversely affected by the
actual mortality experience of the Company or the actual expenses incurred by
the Company in excess of expense deductions provided for in the contract
(although the Company does not guarantee the amounts of the variable annuity
payments).
GENERAL ACCOUNT
The General Account is made up of all of the general assets of the Company other
than those allocated to the separate account or any other segregated asset
account of the Company. A Purchase Payment may be allocated to the one, three,
five, seven or ten year fixed investment option available in connection with the
general account, as elected by the owner purchasing a contract. Assets
supporting amounts allocated to a fixed investment option become part of the
Company's general account assets and are available to fund the claims of all
classes of customers of the Company, as well as of its creditors. Accordingly,
all of the Company's assets held in the general account will be available to
fund the Company's obligations under the contracts as well as such other claims.
The Company will invest the assets of the general account in the manner chosen
by the Company and allowed by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
3
<PAGE>
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
PERFORMANCE DATA
The Separate Account may advertise "total return" data for its STRATEGIES. Total
return figures are based on historical data and are not intended to indicate
future performance. The "total return" for a STRATEGY is a computed rate of
return that, when compounded annually over a stated period of time and applied
to a hypothetical initial investment in a Contract funded by that STRATEGY made
at the beginning of the period, will produce the same contract value at the end
of the period that the hypothetical investment would have produced over the same
period (assuming a complete redemption of the contract at the end of the
period.) The effect of applicable Withdrawal Charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5, or 10 year period as of the end of the
period (or fractional portion thereof).
The total return figures reflect the effect of both non-recurring and recurring
charges. The applicable Withdrawal Charge (if any) is deducted as of the end of
the period, to reflect the effect of the assumed complete redemption. Total
return figures are derived from historical data and are not intended to be a
projection of future performance.
ANNUITY PAYMENTS
INITIAL ANNUITY PAYMENT
The initial annuity payment is determined by taking the contract value, less any
premium tax, less any Market Value Adjustment that may apply in the case of a
premature annuitization of CERTAIN Guarantee Amounts, and then applying it to
the annuity table specified in the contract. Those tables are based on a set
amount per $1,000 of proceeds applied. The appropriate rate must be determined
by the sex (except where, as in the case of certian Qualified contracts and
other employer-sponsored retirement plans, such classification is not permitted)
and age of the Annuitant and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by the
appropriate annuity factor appearing in the table to compute the amount of the
first monthly annuity payment. In the case of a variable annuity, that amount is
divided by the value of an Annuity Unit as of the Annuity Date to establish the
number of Annuity Units representing each variable annuity payment. The number
of Annuity Units determined for the first variable annuity payment remains
constant for the second and subsequent monthly variable annuity payments,
assuming that no reallocation of contract values is made.
SUBSEQUENT MONTHLY PAYMENTS
For a fixed annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
The amount of the second and each subsequent monthly variable annuity payment is
determined by multiplying the number of Annuity Units, as determined in
connection with the determination of the initial monthly payment, above, by the
Annuity Unit Value as of the day preceding the date on which each annuity
payment is due.
4
<PAGE>
ANNUITY UNIT VALUES
The value of an Annuity Unit is determined independently for each STRATEGY.
The annuity tables contained in the contract are based on a 3.5% per annum
assumed investment rate. If the actual net investment rate experienced by a
STRATEGY exceeds 3.5%, variable annuity payments derived from allocations to
that STRATEGY will increase over time. Conversely, if the actual rate is less
than 3.5%, variable annuity payments will decrease over time. If the net
investment rate equals 3.5%, the variable annuity payments will remain constant.
If a higher assumed investment rate had been used, the initial monthly payment
would be higher, but the actual net investment rate would also have to be higher
in order for annuity payments to increase (or not to decrease).
The payee receives the value of a fixed number of Annuity Units each month. The
value of a fixed number of Annuity Units will reflect the investment performance
of the STRATEGIES elected, and the amount of each annuity payment will vary
accordingly.
For each STRATEGY, the value of an Annuity Unit is determined by multiplying the
Annuity Unit value for the preceding month by the Net Investment Factor for the
month for which the Annuity Unit value is being calculated. The result is then
multiplied by a second factor which offsets the effect of the assumed net
investment rate of 3.5% per annum which is assumed in the annuity tables
contained in the contract.
NET INVESTMENT FACTOR
The Net Investment Factor ("NIF") is an index applied to measure the net
investment performance of a STRATEGY from one month to the next. The NIF may be
greater or less than or equal to one; therefore, the value of an Annuity Unit
may increase, decrease or remain the same.
The NIF for any STRATEGY for a certain month is determined by dividing (a) by
(b) where:
(a)is the Accumulation Unit value of the STRATEGY determined as of the end
of that month, and
(b)is the Accumulation Unit value of the STRATEGY determined as of the end
of the preceding month.
The NIF for a STRATEGY for a given month is a measure of the net investment
performance of the STRATEGY from the end of the prior month to the end of the
given month. A NIF of 1.000 results from no change; a NIF greater than 1.000
results from an increase; and a NIF less than 1.000 results from a decrease. The
NIF is increased (or decreased) in accordance with the increases (or decreases,
respectively) in the value of the shares of the underlying investment portfolios
in which the STRATEGY invests; it is also reduced by separate account asset
charges.
ILLUSTRATIVE EXAMPLE
Assume that one share of a given STRATEGY had an Accumulation Unit value of
$11.46 as of the close of the New York Stock Exchange ("NYSE") on the last
business day in September; that its Accumulation Unit value had been $11.44 at
the close of the NYSE on the last business day at the end of the previous month.
The NIF for the month of September is:
NIF= ($11.46/$11.44)
= 1.00174825
ILLUSTRATIVE EXAMPLE
The change in Annuity Unit value for a STRATEGY from one month to the next is
determined in part by multiplying the Annuity Unit value at the prior month end
by the NIF for that STRATEGY for the new month. In addition, however, the result
of that computation must also be multiplied by an additional factor that takes
into account, and neutralizes, the assumed investment rate of 3.5 percent per
annum upon which
5
<PAGE>
the annuity payment tables are based. For example, if the net investment rate
for a STRATEGY (reflected in the NIF) were equal to the assumed investment rate,
the variable annuity payments should remain constant (i.e., the Annuity Unit
value should not change). The monthly factor that neutralizes the assumed
investment rate of 3.5 percent per annum is:
1/[(1.035)^(1/12)] = 0.99713732
In the example given above, if the Annuity Unit value for the STRATEGY was
$10.103523 on the last business day in August, the Annuity Unit value on the
last business day in September would have been:
$10.103523 x 1.00174825 x 0.99713732 = $10.092213
VARIABLE ANNUITY PAYMENTS
ILLUSTRATIVE EXAMPLE
Assume that a male owner, P, owns a contract in connection with which P has
allocated all of his contract value to a single STRATEGY. P is also the sole
Annuitant and, at age 60, has elected to annuitize his contract as a life
annuity with 120 monthly payments guaranteed. As of the last valuation preceding
the Annuity Date, P's Account was credited with 7543.2456 Accumulation Units
each having a value of $15.432655, (i.e., P's Account Value is equal to
7543.2456 x $15.432655 = $116,412.31). Assume also that the Annuity Unit value
for the STRATEGY on that same date is $13.256932, and that the Annuity Unit
value on the day immediately prior to the second annuity payment date is
$13.327695.
P's first variable annuity payment is determined from the annuity rate tables in
P's contract, using the information assumed above. From the tables, which supply
monthly annuity payments for each $1,000 of applied contract value, P's first
variable annuity payment is determined by multiplying the monthly installment of
$5.42 (Option 4 tables, male Annuitant age 60 at the Annuity Date) by the result
of dividing P's account value by $1,000:
First Payment = $5.42 x ($116,412.31/$1,000) = $630.95
The number of P's Annuity Units (which will be fixed; i.e., it will not change
unless he transfers his Account to another Account) is also determined at this
time and is equal to the amount of the first variable annuity payment divided by
the value of an Annuity Unit on the day immediately prior to annuitization:
Annuity Units = $630.95/$13.256932 = 47.593968
P's second variable annuity payment is determined by multiplying the number of
Annuity Units by the Annuity Unit value as of the day immediately prior to the
second payment due date:
Second Payment = 47.593968 x $13.327695 = $634.32
The third and subsequent variable annuity payments are computed in a manner
similar to the second variable annuity payment.
Note that the amount of the first variable annuity payment depends on the
contract value in the relevant STRATEGY on the Annuity Date and thus reflects
the investment performance of the STRATEGY net of fees and charges during the
Accumulation Phase. The amount of that payment determines the number of Annuity
Units, which will remain constant during the Annuity Phase (assuming no
transfers from the STRATEGY). The net investment performance of the STRATEGY
during the Annuity Phase is reflected in continuing changes during this phase in
the Annuity Unit value, which determines the amounts of the second and
subsequent variable annuity payments.
TAXES
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A contract owner is not taxed on
increases in the value of a contract until distribution occurs, either in the
form of a non-annuity distribution or as annuity payments under the annuity
payment option elected. For a lump sum payment received as a total surrender
(total redemption), the recipient is
6
<PAGE>
taxed on the portion of the payment that exceeds the cost basis of the contract.
For a payment received as a withdrawal (partial redemption), federal tax
liability is determined on a last-in, first-out basis, meaning taxable income is
withdrawn before the cost basis of the contract is withdrawn. For contracts
issued in connection with Non-qualified plans, the cost basis is generally the
Purchase Payments, while for contracts issued in connection with Qualified plans
there may be no cost basis. The taxable portion of the lump sum payment is taxed
at ordinary income tax rates. Tax penalties may also apply.
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the contract bears to the total
value of annuity payments for the term of the annuity contract. The taxable
portion is taxed at ordinary income tax rates. Contract owners, Annuitants and
Beneficiaries under the contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
contracts are purchased.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the separate account is not a separate entity from the
Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of Qualified plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the owner. Withholding on other
types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated Beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the owner may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION -- SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to earnings allocable to the contract prior to the receipt of
payments under the contract. The Code contains a safe harbor provision which
provides that annuity contracts such as the contracts meet the diversification
requirements if, as of the close of each calendar quarter, the underlying assets
meet the diversification standards for a regulated investment company, and no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
The Treasury Department has issued regulations which establish diversification
requirements for the investment portfolios underlying annuity variable contracts
such as the contracts. The regulations amplify
7
<PAGE>
the diversification requirements for variable annuity contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations an investment portfolio will be deemed adequately
diversified if (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of determining whether or not the diversification
standards imposed on the underlying assets of variable contracts by Section
817(h) of the Code have been met, "each United States government agency or
instrumentality shall be treated as a separate issuer."
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the same
contract owner by one company or its affiliates are treated as one annuity
contract for purposes of determining the tax consequences of any distribution.
Such treatment may result in adverse tax consequences including more rapid
taxation of the distributed amounts from such multiple contracts. The Company
believes that Congress intended to affect the purchase of multiple deferred
annuity contracts which may have been purchased to avoid withdrawal income tax
treatment. Owners should consult a tax adviser prior to purchasing more than one
annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their contracts.
QUALIFIED PLANS
The contracts offered by this prospectus are designed to be suitable for use
under various types of Qualified plans. Taxation of owners in each Qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued pursuant to the
plan.
Following are general descriptions of the types of Qualified plans with which
the contracts may be used. Such descriptions are not exhaustive and are for
general information purposes only. The tax rules regarding Qualified plans are
very complex and will have differing applications depending on individual facts
and circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a contract issued under a Qualified plan.
Contracts issued pursuant to Qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this prospectus. Generally, contracts issued pursuant to Qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified contracts.
(A) H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish Qualified
plans for themselves and their employees, commonly referred to as "H.R. 10" or
"Keogh" Plans. Contributions made to the plan for the benefit of the employees
will not be included in the gross income of the employees until distributed from
the plan. The tax consequences to owners may vary depending upon the particular
plan design. However, the Code places limitations and restrictions on all plans
on such items as: amounts of allowable contributions; form, manner and timing of
distributions; vesting and nonforfeitability of interests; nondiscrimination in
8
<PAGE>
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. Purchasers of contracts for use with an H.R. 10 Plan
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
(B) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, education and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employee until the
employee receives distributions from the contract. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, non-discrimination and withdrawals. Any employee
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
(C) INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. Sales of contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an IRA.
Purchasers of contracts to be qualified as IRAs should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
(D) CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the contracts to provide benefits under the plan.
Contributions to the plan for the benefit of employees will not be includible in
the gross income of the employee until distributed from the plan. The tax
consequences to owners may vary depending upon the particular plan design.
However, the Code places limitations on all plans on such items as amount of
allowable contributions; form, manner and timing of distributions; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. Purchasers of contracts for use with corporate pension or profit
sharing plans should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
(E) DEFERRED COMPENSATION PLANS -- SECTION 457
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish, for the benefit of their employees, deferred
compensation plans which may invest in annuity contracts. The Code, as in the
case of Qualified plans, establishes limitations and restrictions on
eligibility, contributions and distributions. Under these plans, contributions
made for the benefit of the employees will not be includible in the employees'
gross income until distributed from the plan. However, under a 457 plan all the
plan assets shall remain solely the property of the employer, subject only to
the claims of the employer's general creditors until such time as made available
to an owner or a Beneficiary.
DISTRIBUTION OF CONTRACTS
The contracts are offered through SunAmerica Capital Services, Inc., located at
733 Third Avenue, 4th Floor, New York, New York 10017. SunAmerica Capital
Services, Inc. is registered as a broker-dealer under the Securities Exchange
Act of 1934, as amended, and is a member of the National Association of
Securities Dealers, Inc. The Company and SunAmerica Capital Services, Inc. are
each an indirect wholly owned subsidiary of SunAmerica Inc.
Contracts are offered on a continuous basis.
9
<PAGE>
FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company as of September 30,
1996 and 1995 and for each of the three years in the period ended September 30,
1996 are presented in the prospectus. The consolidated financial statements of
the Company should be considered only as bearing on the ability of the Company
to meet its obligation under the contracts.
Price Waterhouse LLP, 400 South Hope Street, Los Angeles, California 90071,
serves as the independent accountants for the Separate Account and the Company.
The financial statements of the Company as of September 30, 1996 and 1995 and
for each of the three years in the period ended September 30, 1996 have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated unaudited interim financial information of the Company for the
three months ended December 31, 1995 and 1996 are also presented in the
prospectus. This interim financial information should be considered only as
bearing on the ability of the Company to meet its obligation under the
Contracts.
As of the date of this Statement of Additional Information, the sale of
contracts had not commenced and the STRATEGIES had no assets. Therefore, no
financial statements with respect to the Separate Account are presented in this
Statement of Additional Information.
10
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)Financial Statements
The following financial statements are included in Part A of the Registration
Statement:
Consolidated financial statements of Anchor National Life Insurance
Company
The following financial statements are included in Part B of the Registration
Statement:
None
(B) EXHIBITS
<TABLE>
<S> <C> <C>
(1) Resolutions Establishing Separate Account.................... Filed Herewith
(2) Form of Custody Agreement.................................... Filed Herewith
(3) (a) Distribution Agreement................................... Filed Herewith
(b) Form of Selling Agreement................................ Filed Herewith
(4) (a) Allocated Fixed and Variable Group Annuity Certificate... Filed Herewith
(b) Individual Fixed and Variable Annuity Contract........... Filed Herewith
(5) (a) Participant Enrollment Form.............................. Filed Herewith
(b) Deferred Annuity Application............................. Filed Herewith
(6) Depositor -- Corporate Documents
(a) Certificate of Incorporation............................. Filed Herewith
(b) By-Laws.................................................. Filed Herewith
(7) Reinsurance Contract......................................... Not Applicable
(8) Fund Participation Agreement................................. Filed Herewith
(9) Opinion of Counsel........................................... Filed Herewith
Consent of Counsel........................................... Filed Herewith
(10) Consent of Independent Accountants........................... Filed Herewith
(11) Financial Statements Omitted from Item 23.................... None
(12) Initial Capitalization Agreement............................. Not Applicable
(13) Performance Computations..................................... Not Applicable
(14) Diagram and Listing of All Persons Directly or Indirectly
Controlled By or Under Common Control with Anchor National
Life Insurance Company, the Depositor of Registrant......... Filed Herewith
(15) Powers of Attorney........................................... Previously
Filed
(27) Financial Data Schedule...................................... Not Applicable
</TABLE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The officers and directors of Anchor National Life Insurance Company are
listed below. Their
principal business address is 1 SunAmerica Center, Los Angeles, California
90067-6022, unless
otherwise noted.
<TABLE>
<CAPTION>
NAME POSITION
- -------------------------- ---------------------------------------------------------------------------------
<S> <C>
Eli Broad Chairman, President and Chief Executive Officer
Jay S. Wintrob Director and Executive Vice President
Joseph M. Tumbler Director and Executive Vice President
Jana W. Greer Director and Senior Vice President
Peter McMillan Director
James R. Belardi Director and Senior Vice President
Lorin M. Fife Director, Senior Vice President, General Counsel and Assistant Secretary
Susan L. Harris Director, Senior Vice President and Secretary
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION
- -------------------------- ---------------------------------------------------------------------------------
<S> <C>
Scott L. Robinson Director and Senior Vice President
Victor E. Akin Senior Vice President
N. Scott Gillis Senior Vice President and Controller
Edwin R. Reoliquio Senior Vice President and Chief Actuary
James W. Rowan Senior Vice President
J. Franklin Grey Vice President
Keith B. Jones Vice President
Michael L. Lindquist Vice President
Edward P. Nolan* Vice President
Gregory M. Outcalt Vice President
Scott H. Richland Vice President and Treasurer
</TABLE>
- ------------------------
* 88 Bradley Road, P.O. Box 4005, Woodbridge, Connecticut 06525
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH DEPOSITOR OR
REGISTRANT
The Registrant is a separate account of Anchor National Life Insurance
Company (Depositor).
For a complete listing and diagram of all persons directly or indirectly
controlled by or under common
control with the Depositor or Registrant, see Exhibit 14 which is incorporated
herein by reference.
ITEM 27. NUMBER OF CONTRACT OWNERS
None.
ITEM 28. INDEMNIFICATION
None.
ITEM 29. PRINCIPAL UNDERWRITER
SunAmerica Capital Services, Inc. serves as distributor to the Registrant.
Its principal business address is 733 Third Avenue, 4th Floor, New York, New
York 10017. The following are the directors and officers of SunAmerica Capital
Services, Inc.
<TABLE>
<CAPTION>
NAME POSITION WITH DISTRIBUTOR
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Peter A. Harbeck President
Robert M. Zakem Executive Vice President, General
Counsel & Assistant Secretary
Enrique Lopez-Balboa Vice President
Steven Rothstein Treasurer
Susan L. Harris Secretary
Lorin M. Fife Assistant Secretary
</TABLE>
<TABLE>
<CAPTION>
NET DISTRIBUTION COMPENSATION ON
DISCOUNTS AND REDEMPTION OR BROKERAGE
NAME OF DISTRIBUTOR COMMISSIONS ANNUITIZATION COMMISSIONS COMMISSIONS*
- ------------------------------------------------- ----------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
SunAmerica Capital Services, Inc. None None None None
</TABLE>
- ------------------------
* Distribution fee is paid by Anchor National Life Insurance Company.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Anchor National Life Insurance Company, the Depositor for the Registrant, is
located at 1 SunAmerica Center, Los Angeles, California 90067-6022. SunAmerica
Capital Services, Inc., the distributor of the Contracts, is located at 733
Third Avenue, New York, New York 10017. Each maintains those accounts and
records required to be maintained by it pursuant to Section 31(a) of the
Investment Company Act and the rules promulgated thereunder.
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02100, maintains certain accounts and records pursuant to the instructions of
the Registrant.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to (1) file post-effective amendments to this
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the variable annuity Contracts may be
accepted; (2) include either (A) as part of any application to purchase a
Contract offered by the prospectus forming a part of the Registration Statement,
a space that an applicant can check to request a Statement of Additional
Information, or (B) a postcard or similar written communication affixed to or
included in the Prospectus that the Applicant can remove to send for a Statement
of Additional Information; and (3) deliver a Statement of Additional Information
and any financial statements required to be made available under this Form N-4
promptly upon written or oral request.
The Company hereby represents that the fees and charges deducted under the
contract, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the insurance
company.
ITEM 33. REPRESENTATION
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including
the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection
with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to
which the participant may elect to transfer his contract value.
