SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
--------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to__________________
Commission file number 1-4618
SUNAMERICA INC.
---------------
(Exact name of registrant as specified in its charter)
Maryland 86-0176061
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1 SunAmerica Center, Century City, Los Angeles, California 90067-6022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 772-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
Common Stock, par value $1.00 per share, 26,404,732 shares outstanding
Nontransferable Class B Stock, par value $1.00 per share, 6,827,644
shares outstanding
SUNAMERICA INC.
INDEX
Page
Number(s)
---------
Part I - Financial Information
Consolidated Balance Sheet -
December 31, 1993 and September 30, 1993 3-4
Consolidated Income Statement -
Three Months Ended December 31, 1993 and 1992 5
Consolidated Statement of Cash Flows -
Three Months Ended December 31, 1993 and 1992 6-7
Notes to Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-26
Part II - Other Information 27-28
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
December 31, September 30,
1993 1993
------------ -------------
(unaudited)
ASSETS
Investments:
Cash and short-term investments $ 1,617,162 $ 1,797,796
Bonds, notes and redeemable preferred stocks:
Available for sale, at market value
(amortized cost: December 31, 1993,
$4,915,487; September 30, 1993,
$4,659,741) 4,984,627 4,751,665
Held for investment, at amortized cost
(market value: December 31, 1993
$1,695,784; September 30, 1993
$1,701,362) 1,613,200 1,626,109
Mortgage loans 1,279,570 1,286,436
Policy loans 42,862 41,752
Common stocks, at market value
(cost: December 31, 1993, $23,070;
September 30, 1993, $21,009) 60,271 57,610
Kaufman and Broad Home Corporation
warrants, at market value (cost: $1,188) - 26,538
Real estate 149,162 143,857
Other invested assets 640,907 633,189
------------ -------------
Total investments 10,387,761 10,364,952
Variable annuity assets 4,432,876 4,194,970
Accrued investment income 109,083 105,895
Deferred acquisition costs 483,092 475,917
Other assets 128,263 125,687
------------ -------------
TOTAL ASSETS $ 15,541,075 $ 15,267,421
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands)
December 31, September 30,
1993 1993
------------ -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 4,810,948 $ 4,934,871
Reserves for guaranteed investment contracts 2,378,606 2,216,104
Trust deposits 382,315 378,986
Payable to brokers for purchases of securities 1,430,968 1,586,923
Income taxes currently payable 20,718 9,280
Other liabilities 227,199 231,950
------------ -------------
Total reserves, payables
and accrued liabilities 9,250,754 9,358,114
------------ -------------
Variable annuity liabilities 4,432,876 4,194,970
------------ -------------
Senior indebtedness:
Long-term notes and debentures 404,835 380,560
Bank notes - 15,119
Collateralized mortgage obligations 86,220 112,032
Reverse repurchase agreements 155,163 -
------------ -------------
Total senior indebtedness 646,218 507,711
------------ -------------
Deferred income taxes 119,396 96,599
------------ -------------
Shareholders' equity:
Preferred stock 452,293 452,293
Nontransferable Class B Stock 6,828 6,828
Common Stock 26,405 26,335
Additional paid-in capital 112,136 110,100
Retained earnings 425,169 413,770
Net unrealized gains on bonds, notes
and redeemable preferred stocks
available for sale 44,940 59,980
Net unrealized gains on common stocks 24,060 23,990
Net unrealized gain on Kaufman and Broad
Home Corporation warrants - 16,731
------------ -------------
Total shareholders' equity 1,091,831 1,110,027
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,541,075 $ 15,267,421
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months ended December 31, 1993 and 1992
(In thousands, except per common share amounts - unaudited)
1993 1992
---------- ----------
Investment income $ 190,531 $ 179,441
---------- ----------
Interest expense on:
Fixed annuity contracts (69,920) (81,557)
Guaranteed investment contracts (36,845) (37,564)
Trust deposits (1,940) (2,322)
Senior indebtedness (11,112) (7,941)
---------- ----------
Total interest expense (119,817) (129,384)
---------- ----------
NET INVESTMENT INCOME 70,714 50,057
---------- ----------
NET REALIZED INVESTMENT LOSSES (5,367) (3,748)
---------- ----------
Fee income:
Variable annuity fees 19,587 16,134
Asset management fees 8,349 7,843
Net retained commissions 7,109 4,537
Trust fees 3,054 2,791
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TOTAL FEE INCOME 38,099 31,305
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Other income and expenses:
Surrender charges 2,514 2,608
General and administrative expenses (33,457) (29,754)
Amortization of deferred acquisition costs (15,243) (12,674)
Other, net 4 1,611
---------- ----------
TOTAL OTHER INCOME AND EXPENSES (46,182) (38,209)
---------- ----------
PRETAX INCOME 57,264 39,405
Income tax expense (17,700) (11,400)
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 39,564 28,005
Cumulative effect of change in accounting
for income taxes (33,500) -
---------- ----------
NET INCOME $ 6,064 $ 28,005
========== ==========
PER COMMON SHARE:
Income before cumulative effect of change
in accounting for income taxes $ .85 $ .63
Cumulative effect of change in accounting
for income taxes (.80) -
---------- ----------
Net income $ .05 $ .63
========== ==========
AVERAGE COMMON SHARES OUTSTANDING 41,911 37,873
========== ==========
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended December 31, 1993 and 1992
(In thousands - unaudited)
1993 1992
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,064 $ 28,005
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 69,920 81,557
Guaranteed investment contracts 36,845 37,564
Trust deposits 1,940 2,322
Net realized investment losses 5,367 3,748
Amortization (accretion) of net
premiums (discounts) on investments 6,248 (7,299)
Provision for income taxes 5,130 (3,796)
Cumulative effect of change in
accounting for deferred income taxes 33,500 -
Change in:
Accrued investment income (3,188) 15,099
Deferred acquisition costs (7,175) (6,748)
Other assets (2,324) 1,574
Income taxes currently payable 1,585 7,235
Other liabilities (4,751) 12,082
Other, net 2,357 13,002
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 151,518 184,345
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (2,707,419) (1,794,093)
Bonds, notes and redeemable preferred
stocks held for investment (26,144) (158,859)
Mortgage loans (49,371) (35,533)
Other investments, excluding short-term
investments (99,397) (87,830)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 1,830,739 1,645,747
Bonds, notes an redeemable preferred
stocks held for investment - 49,673
Kaufman and Broad Home Corporation
warrants 28,618 -
Other investments, excluding short-term
investments 41,318 85,879
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 77,923 109,220
Bonds, notes and redeemable preferred
stocks held for investment 38,845 174,671
Mortgage loans 44,101 16,093
Other investments, excluding short-term
investments 55,838 8,788
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (764,949) 13,756
------------ ------------
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended December 31, 1993 and 1992
(In thousands - unaudited)
1993 1992
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (12,495) $ (8,008)
Premium receipts on:
Fixed annuity contracts 30,233 59,727
Guaranteed investment contracts 259,120 11,750
Receipts of trust deposits 47,565 44,740
Withdrawal payments on:
Fixed annuity contracts (180,201) (112,714)
Guaranteed investment contracts (133,462) (132,914)
Trust deposits (46,177) (36,267)
Claims and annuity payments on fixed
annuity contracts (44,126) (44,074)
Net proceeds from issuances of long-term notes 24,275 -
Repayments of collateralized mortgage
obligations (25,812) (15,570)
Net increase in other senior indebtedness 140,044 170,601
Net receipts from other short-term financings 373,833 87,812
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 432,797 25,083
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (180,634) 223,184
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 1,797,796 1,511,366
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 1,617,162 $ 1,734,550
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 10,120,000 $ 4,695,000
============ ============
Income taxes paid, net of refunds received $ 10,985,000 $ 7,961,000
============ ============
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of December 31, 1993 and September 30, 1993 and the
results of its consolidated operations and its consolidated cash flows for
the three months ended December 31, 1993 and 1992. The results of
operations for the three months ended December 31, 1993 are not necessarily
indicative of the results to be expected for the full year. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the
fiscal year ended September 30, 1993, contained in the Company's 1993
Annual Report to Shareholders. Certain items have been reclassified to
conform to the current year's presentation.
2. Net Income per Common Share
---------------------------
The calculation of net income per common share is based upon the weighted
average number of shares of Common Stock and Nontransferable Class B Stock
(collectively referred to as "Common Stock") outstanding during each period
after deduction for preferred dividend requirements other than for those
paid on convertible issues. The calculation of the weighted average number
of shares of Common Stock outstanding includes the effect (8,709,000 shares
and 5,525,000 shares for the three months ended December 31, 1993 and 1992,
respectively) of common stock equivalents arising from the March 1993 and
October 1991 issuances of convertible preferred stock and the Company's
various employee stock option programs. Preferred dividend requirements
other than for those paid on convertible securities totaled $4,101,000 and
$4,135,000 for the three months ended December 31, 1993 and 1992,
respectively.
3. Sale of Kaufman and Broad Home Corporation Warrants
---------------------------------------------------
During December 1993, the Company sold warrants to purchase 2,377,000
shares of the special common stock of Kaufman and Broad Home Corporation
for cash proceeds of $28,618,000, and recorded a gain of $17,830,000, net
of a provision for income taxes of $9,600,000. In accordance with the
method used to account for the 1989 distribution of substantially all of
the common stock of Kaufman and Broad Home Corporation then owned by the
Company to holders of the Company's Common Stock, the Company credited this
net gain directly to Retained Earnings. Therefore, there was no impact on
fiscal 1994 net income as a result of this sale.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. Change in Accounting for Income Taxes
-------------------------------------
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 during the quarter ended December 31, 1993 to increase
the liability for Deferred Income Taxes by $33,500,000. Also in accordance
with the new pronouncement, the Company reclassified deferred tax
liabilities associated with unrealized gains on certain debt and equity
securities credited directly to shareholders' equity, which liabilities
previously had been netted against the carrying values of the related
securities, to the liability for Deferred Income Taxes in the accompanying
consolidated balance sheet for the fiscal year ended September 30, 1993.
Such reclassifications increased the liability for deferred income taxes
by $53,174,000. Also as part of this accounting change, the Company
reclassified certain deferred tax benefits to the liability for Deferred
Income Taxes that were previously netted against Reserves for Fixed Annuity
Contracts pursuant to Accounting Principles Board Opinion No. 16, "Business
Combinations." Such reclassification reduced the liability for Deferred
Income Taxes by $2,121,000 at September 30, 1993.
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 at
September 30, 1993 are as follows:
Bond discounts $ 19,015,000
Capital losses (38,332,000)
Leveraged leases 47,170,000
State income taxes 3,854,000
Deferred acquisition costs 149,598,000
Contractholder reserves (94,211,000)
Guaranty fund assessments (7,700,000)
Deferred compensation (3,736,000)
Deferred income (5,169,000)
Net unrealized gains on certain debt and equity
securities 53,174,000
Other, net 6,436,000
------------
130,099,000
Cumulative effect of change in accounting for
income taxes recorded in the first quarter 1994 (33,500,000)
------------
Balance of liability for Deferred Income Taxes
at September 30, 1993, as reclassified $ 96,599,000
============
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. Change in Accounting for Income Taxes (continued)
-------------------------------------
The components of income tax expense for the three months ended December
31, 1993 and 1992 are as follows:
1993 1992
------------ ------------
Current $ 12,570,000 $ 15,196,000
Deferred 5,130,000 (3,796,000)
------------ ------------
Total income tax expense $ 17,700,000 $ 11,400,000
============ ============
In addition, the deferred tax liabilities associated with unrealized
gains on certain debt and equity securities credited directly to
shareholders' equity declined by $15,833,000 during the first quarter
1994 to $37,341,000 at December 31, 1993 as a result of declines in the
related gains.
<PAGE>
SUNAMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial
condition and results of operations for the three months ended December 31,
1993 ("Fiscal 1994") and December 31, 1992 ("Fiscal 1993").
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $39.6 million or $.85 per common share in Fiscal 1994, compared with
$28.0 million or $.63 per common share in Fiscal 1993. The cumulative effect
of the change in accounting for income taxes resulting from the implementation
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," amounted to a nonrecurring charge of $33.5 million or $.80 per common
share in Fiscal 1994. Therefore, net income amounted to $6.1 million or $.05
per common share in Fiscal 1994, compared to $28.0 million or $.63 per common
share in Fiscal 1993.
PRETAX INCOME totaled $57.3 million in Fiscal 1994, compared to $39.4
million in Fiscal 1993. The $17.9 million improvement primarily resulted from
increased net investment and fee income.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $70.7 million in Fiscal 1994 from
$50.1 million in Fiscal 1993. These amounts represent net investment spreads
of 3.18% on average invested assets (computed on a daily basis) of $8.90
billion in Fiscal 1994 and 2.44% on average invested assets of $8.22 billion
in Fiscal 1993. The $20.6 million improvement in net investment income
primarily resulted from an increase in average invested assets and from
reductions in interest rates paid on all interest-bearing liabilities, both of
which were partially offset by declines in yield on average invested assets.
In addition, net investment spread on average invested assets has increased as
a result of an increase in the excess of average invested assets over average
interest-bearing liabilities. The excess of average invested assets over
average interest-bearing liabilities increased to $626.7 million in Fiscal 1994
from $289.5 million in Fiscal 1993.
The average rate paid on all interest-bearing liabilities fell to 5.79%
(5.75% on fixed annuities) in Fiscal 1994 from 6.52% (6.37% on fixed annuities)
in Fiscal 1993. Interest-bearing liabilities averaged $8.28 billion during
Fiscal 1994, compared to $7.93 billion during Fiscal 1993. The lower interest
rates paid in Fiscal 1994 were primarily attributable to the repricing of
annuity contracts downward in a lower interest rate environment.
Investment income totaled $190.5 million in Fiscal 1994, compared to
$179.4 million in Fiscal 1993. This $11.1 million improvement in Fiscal 1994
resulted primarily from the effects of a higher level of average invested
assets, which were partially offset by declines in yield thereon. The yield
on average invested assets declined to 8.56% in Fiscal 1994 from 8.73% in
Fiscal 1993. These yields are computed without subtracting net realized
investment losses. If net realized investment losses were included in the
computation, the yields would be 8.32% in Fiscal 1994 and 8.55% in Fiscal 1993.
These declines in yield were primarily due to lower prevailing interest rates.
The Company has enhanced investment yield during Fiscal 1994 and Fiscal
1993 through dollar roll transactions ("Dollar Rolls") whereby the proceeds
from sales of mortgage-backed securities ("MBSs") are invested in short-term
securities pending the repurchase of substantially the same securities at
discounted prices in the forward market. Throughout Fiscal 1994 and the 1993
fiscal year, the market demand for MBSs for formation of collateralized
mortgage obligations ("CMOs") has been high, permitting the Company to engage
in Dollar Rolls. The Company recorded $7.0 million of enhanced yield on a
weighted average volume of $1.62 billion of such transactions during Fiscal
1994, compared to $1.7 million of enhanced yield on a weighted average volume
of $401.1 million during Fiscal 1993.
In addition, the Company enhances investment yield through the use of
interest rate swap agreements ("Swap Agreements"), which effectively convert
variable-rate senior secured loans, as well as variable-rate mortgage loans,
into fixed-rate instruments at the higher prevailing rates in effect when the
Swap Agreements were arranged. At December 31, 1993, the Company had 22
outstanding Swap Agreements with an aggregate notional principal amount of
$1.09 billion. These agreements mature in various years through 1998 and have
an average remaining maturity of 30 months. The Company also enhances yield
through total return corporate bond swap agreements (the "Total Return
Agreements"). The Company recorded $6.7 million of income on these Total
Return Agreements during Fiscal 1994, compared to $0.6 million of loss during
Fiscal 1993. (See "Asset-Liability Matching.")
GROWTH IN AVERAGE INVESTED ASSETS to $8.90 billion during Fiscal 1994
from $8.22 billion during Fiscal 1993 primarily reflected $179.0 million of net
proceeds from the issuances of the Company's Series D Depositary Shares during
March 1993 and $177.7 million of aggregate net proceeds from the Company's
issuances of long-term notes and debentures since December 31, 1992. In
addition, growth in average invested assets reflects sales of the Company's
fixed-rate products including its guaranteed investment contracts ("GICs").
Premiums from fixed annuities have aggregated $194.3 million and GIC premiums
have aggregated $939.0 million since December 31, 1992. Premiums from fixed
annuities (including the fixed accounts of variable annuities) totaled $30.2
million in Fiscal 1994 and $59.7 million in Fiscal 1993. GIC premiums totaled
$259.1 million in Fiscal 1994 and $11.7 million in Fiscal 1993. The decline in
Fiscal 1994 premiums received on fixed annuities reflects management's decision
to deemphasize the marketing of fixed annuity products in the existing interest
rate environment. The increase in GIC sales during Fiscal 1994 primarily
reflects the variable demand for GICs from state and local governmental
authorities.
The GICs issued by the Company and Sun Life Insurance Company of America
("Sun Life") typically guarantee the payment of principal and interest at a
fixed rate for a fixed term of one to ten years. GIC sales include sales to
pension plans, state and local governmental authorities and money market funds.
In the case of GICs sold to pension plans, certain withdrawals may be made at
book value in the event of circumstances specified in the plan document, such
as employee retirement, death, disability, hardship withdrawal or employee
termination. Sun Life imposes surrender penalties in the event of other
withdrawals prior to maturity. Contracts purchased by state and local
governmental authorities may also permit scheduled book value withdrawals.
Contracts purchased by money market funds permit withdrawals at any time with
seven days of notice. In pricing GICs, the Company analyzes cash flow
information and prices accordingly so that it is compensated for possible
withdrawals prior to maturity. (See "Financial Condition and Liquidity.")
NET REALIZED INVESTMENT LOSSES totaled $5.4 million in Fiscal 1994 and
$3.7 million in Fiscal 1993, and include impairment writedowns of $6.0 million
in Fiscal 1994 and $13.5 million in Fiscal 1993. Therefore, net gains from
sales of investments totaled $0.6 million in Fiscal 1994 and $9.8 million in
Fiscal 1993.
Net gains in Fiscal 1994 include $7.2 million of net gains realized on
$5.0 million of sales of common stocks made primarily to maximize total return.
Net gains in Fiscal 1994 also include $6.4 million of net losses realized on
$1.20 billion of sales of bonds. These bond sales include approximately $652.4
million of sales of MBSs made primarily to acquire other MBSs which were then
used in Dollar Rolls. In addition, bond sales include $219.6 million of sales
of high-yield investments and $162.7 million of sales of certain CMOs and
asset-backed securities which were primarily made to maximize total return.
Net gains in Fiscal 1993 include $5.3 million of gains realized on $5.8
million of sales of common stocks made primarily to maximize total return. Net
gains in 1993 also include $4.7 million of gains realized on $1.32 billion of
sales of bonds. These bond sales include approximately $528.7 million of sales
of MBSs made primarily to acquire other MBSs for use in Dollar Rolls and $338.5
million of sales of securitized residential whole loans made primarily to
maximize total return. In addition, bond sales include $260.6 million of sales
of high-yield investments and $125.8 of sales of senior secured loans ("Secured
Loans") made primarily to improve the overall credit quality of the portfolio.
Impairment writedowns in Fiscal 1994 are composed of $6.0 million of
additional provisions applied to defaulted bonds. Impairment writedowns in
Fiscal 1993 include $11.1 million of provisions applied to the Company's
investment in a real estate related separate account of Anchor National Life
Insurance Company ("Anchor"), which separate account was liquidated through
sales of underlying assets to affiliated and nonaffiliated parties in Fiscal
1993.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $19.6
million in Fiscal 1994 and $16.1 million in Fiscal 1993. The increases in
variable annuity fees resulted primarily from asset growth from the receipt of
variable annuity premiums and increased market values. Variable annuity
premiums totaled $230.4 million in Fiscal 1994 and $148.5 million in Fiscal
1993. Variable annuity assets averaged $4.30 billion during Fiscal 1994 and
$3.36 billion during Fiscal 1993.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds and private accounts by SunAmerica Asset Management Corp. Such fees
totaled $8.3 million on average assets managed of $2.54 billion in Fiscal 1994
and $7.8 million on average assets managed of $2.36 billion in Fiscal 1993.
Sales of mutual funds, excluding sales of money market funds, totaled $112.2
million during Fiscal 1994, compared to $130.4 million in Fiscal 1993. The
decline in Fiscal 1994 mutual fund sales from those recorded in Fiscal 1993
resulted primarily from the Company's strategic decision to diversify its
mutual fund product sales and to reduce the percentage of sales derived from
capital intensive back-end loaded products.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiaries, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$7.1 million in Fiscal 1994 and $4.5 million in Fiscal 1993. Sales of
nonproprietary products (mainly mutual funds and general securities) totaled
$1.51 billion in Fiscal 1994 and $1.29 billion in Fiscal 1993.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts, as well as for qualified pension plans. Trust fees totaled $3.1
million in Fiscal 1994 and $2.8 million in Fiscal 1993.
SURRENDER CHARGES on fixed and variable annuities totaled $2.5 million
in Fiscal 1994, compared to $2.6 million in Fiscal 1993. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first seven years of the contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $251.2 million in Fiscal 1994
and $195.5 million in Fiscal 1993. These represent 11.6% and 9.8%,
respectively, of average fixed and variable annuity reserves. Withdrawals
include variable annuity payments made from the separate accounts totaling
$95.3 million in Fiscal 1994 and $84.3 million in Fiscal 1993. Management
anticipates that withdrawal rates will remain relatively stable for the
foreseeable future, and the Company's investment portfolio has been structured
to provide sufficient liquidity for anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $33.5 million in Fiscal 1994,
compared to $29.8 million in Fiscal 1993. General and administrative expenses
continue to be controlled through a company-wide cost containment program and
represent 0.9% of average total assets for Fiscal 1994 and Fiscal 1993.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded
during Fiscal 1993 primarily due to additional fixed and variable annuity and
mutual fund sales and the subsequent amortization of related deferred
commissions and other acquisition costs. Amortization of all deferred
acquisition costs totaled $15.2 million in Fiscal 1994 and $12.7 million in
Fiscal 1993.
INCOME TAX EXPENSE totaled $17.7 million in Fiscal 1994, compared to
$11.4 million in Fiscal 1993, representing an effective tax rate of 31% in
Fiscal 1994 and 29% in Fiscal 1993. The higher tax rate in Fiscal 1994
primarily reflects an increase in the annual effective tax rate made as a
result of a change in tax law.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY decreased by $18.2 million to $1.09 billion at
December 31, 1993 from $1.11 billion at September 30, 1993 primarily as a
result of a $15.0 million decline in net unrealized gains on bonds, notes and
redeemable preferred stocks available for sale and $12.5 million of dividends
paid to shareholders. These reductions in shareholders' equity were partially
offset by net income of $6.1 million realized during Fiscal 1994.
Shareholders' equity was also impacted by $17.8 million of net gain
realized from the sale of the Kaufman and Broad Home Corporation warrants (the
"KBH Warrants"). As discussed in Note 3 of Notes to Consolidated Financial
Statements, this gain was credited directly to retained earnings. However, the
impact of this net gain was nearly offset by a $16.7 million reduction in net
unrealized gains on the KBH Warrants as a result of this sale.
Book value per common share amounted to $22.12 at December 31, 1993.
TOTAL ASSETS increased by $273.7 million to $15.54 billion at
December 31, 1993 from $15.27 billion at September 30, 1993. This increase was
centered in the separate account for variable annuities which increased by
$237.9 million during Fiscal 1994 and in the invested assets portfolio, which
increased by $22.8 million during Fiscal 1994.
INVESTED ASSETS at December 31, 1993 totaled $10.39 billion, compared to
$10.36 billion at September 30, 1993. The Company managed nearly all of these
investments internally.
The Company's general investment philosophy is to hold fixed maturity
assets for long-term investment. Thus, it does not have a trading portfolio.
Effective September 30, 1993, the Company adopted SFAS 115, and, accordingly,
began to carry its portfolio of debt securities available for sale at estimated
market value. The Company carries its portfolio of bonds, notes and redeemable
preferred stocks held for investment at amortized cost.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those available
for sale (the "Bond Portfolio"), at December 31, 1993, had an aggregate market
value which exceeded its amortized cost by $151.7 million (including net
unrealized gains of $69.1 million on bonds, notes and redeemable preferred
stocks available for sale). At September 30, 1993, the Bond Portfolio had an
aggregate market value which exceeded its amortized cost by $167.2 million
(including net unrealized gains of $91.9 million on bonds, notes and redeemable
preferred stock available for sale). These declines in the excess of market
value over amortized cost principally resulted from increases in prevailing
interest rates since September 30, 1993 and the corresponding effect on the
Bond Portfolio.
Approximately $6.54 billion or 99.7% of the Bond Portfolio (at amortized
cost, before deduction of $31.2 million of unallocated general credit reserves)
at December 31, 1993 was rated by Standard and Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's") or under comparable statutory rating
guidelines established by the National Association of Insurance Commissioners
("NAIC") and implemented by either the NAIC or the Company. At December 31,
1993, approximately $5.75 billion (at amortized cost) was rated investment
grade by one or both of these agencies or under the NAIC guidelines, including
$4.09 billion of U.S. government/agency and MBSs.
At December 31, 1993, the Company's Bond Portfolio included $787.4
million (market value, $815.4 million) of bonds not rated investment grade by
S&P, Moody's or the NAIC. Based on their December 31, 1993 amortized cost,
these bonds accounted for 5.1% of the Company's total assets and 7.7% of
invested assets. In addition to its direct investment in non-investment grade
bonds, the Company has entered into Total Return Agreements with an aggregate
notional principal amount of $199.3 million at December 31, 1993.
Non-investment grade securities generally provide higher yields and
involve greater risks than investment grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade securities.
The Company intends that its holdings of such securities not exceed current
levels, but its policies may change from time to time, including in connection
with any possible acquisition. The Company had no material concentrations of
non-investment grade securities at December 31, 1993.
<PAGE>
<TABLE>
The following table summarizes the Company's rated bonds by rating classification as of December 31, 1993
(dollars in thousands):
Rated Bonds By Rating Classification
<CAPTION>
Issues Rated by S&P/Moody's By NAIC Category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
Estimated NAIC Estimated Percent of Estimated
S&P (Moody's) Carrying market category Carrying market Carrying invested market
category(1) value value (2) value value value assets value
- --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3) $3,311,132 $3,336,997 1 $1,173,148 $1,191,941 $4,484,280 43.62% $4,528,938
BBB+ to BBB-
(Baa1 to Baa3) 293,550 299,311 2 975,589 1,010,265 1,269,139 12.34 1,309,576
BB+ to BB-
(Ba1 to Ba3) 110,376 111,374 3 233,458 250,659 343,834 3.34 362,033
B+ to B- (B1 to B3) 146,689 151,352 4 192,432 198,531 339,121 3.30 349,883
CCC+ to C-
(Caa to C) 25,139 25,869 5 45,011 45,206 70,150 0.68 71,075
D - - 6 34,266 32,409 34,266 0.33 32,409
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $3,886,886 $3,924,903 $2,653,904 $2,729,011 $6,540,790 $6,653,914
========== ========== ========== ========== ========== ==========
(1) S&P rates debt securities in eleven rating categories, from AAA (the highest) to D (in payment default). A plus (+)
or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is
considered investment grade. Moody's rates debt securities in nine rating categories, from Aaa (the highest) to C
(extremely poor prospects of attaining real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the
lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is
considered investment grade. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both
agencies.
(2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging
from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six
categories correspond with the S&P/Moody's rating groups listed above, with categories 1 and 2 considered investment
grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its
implementation of NAIC rating guidelines.
/TABLE
<PAGE>
SENIOR SECURED LOANS are included in the Bond Portfolio and their
amortized cost aggregated $587.3 million at December 31, 1993. Secured Loans
are primarily originated by money center banks or investment banks or are
originated directly by the Company and include loans that were issued in
connection with leveraged buyouts and corporate reorganizations. Secured Loans
are senior to subordinated debt and equity, and virtually all are secured by
assets of the corporate borrowers. At December 31, 1993, Secured Loans
consisted of loans to 33 borrowers spanning 18 industries, with no industry
constituting more than 13% of the outstanding Secured Loans.
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.
With few exceptions, the Company's Secured Loans are not rated by S&P or
Moody's. However, most of the Secured Loans are rated in NAIC categories 1 and
2. Although, as a result of restrictive financial covenants, Secured Loans
involve greater risk of default than do publicly traded investment grade
securities, management believes that generally the risk of loss upon default
for its Secured Loans is mitigated by their three-year average lives, financial
covenants and senior secured position.
MORTGAGE LOANS aggregated $1.28 billion at December 31, 1993 and
consisted of 687 seasoned first mortgage loans with an average loan balance of
approximately $1.9 million, collateralized by properties located in 25 states.
Approximately 53% of the portfolio was multifamily residential, 19% was retail,
9% was office, 8% was industrial and 11% was other types. At December 31, 1993,
approximately 38% of the portfolio was secured by properties located in
California and no more than 11% of the portfolio was secured by properties in
any other single state. Of the portfolio collateralized by properties in
California, 48% was multifamily residential, 30% was retail, 8% was industrial,
5% was office and 9% was other types. At December 31, 1993, there were no
construction, takeout, farm or land loans and there were only 21 loans with
outstanding balances of $10 million or more, which loans collectively
aggregated approximately 27% of the portfolio. At the time of their origination
or purchase by the Company, all mortgage loans had loan-to-value ratios of 75%
or less. At December 31, 1993, approximately 23% of the mortgage loan portfolio
consisted of loans with balloon payments due before January 1, 1997. At
December 31, 1993, loans delinquent by more than 90 days totaled $38.0 million
and constituted 3.0% of total mortgages. Loans foreclosed upon and transferred
to real estate in the balance sheet during Fiscal 1994 totaled $11.0 million
(0.9% of total mortgages).
Approximately 60% of the mortgage loans in the portfolio at December 31,
1993 were seasoned loans underwritten to the Company's standards and purchased
at or near par from the Resolution Trust Corporation ("RTC") and other
financial institutions, many of which were downsizing their portfolios. Such
loans generally have higher average interest rates than loans that could be
originated today. The volume of problem mortgage loans has increased
industry-wide due to adverse real estate market conditions as well as
restrictive lending practices among banks and other financial institutions
which make refinancing existing loans more difficult. In addition, commercial
mortgage loans on such properties as offices, hotels and shopping centers have
recently represented a higher level of risk for the industry than have mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans, and the effects of general
economic conditions on these commercial properties. However, due to the
seasoned nature of the Company's mortgage loans and its strict underwriting
standards, the Company believes that it has reduced the risk attributable to
its mortgage loan portfolio while maintaining attractive yields.
OTHER INVESTED ASSETS aggregated $640.9 million at December 31, 1993,
including $478.2 million of investments in limited partnerships and an
aggregate of $162.7 million of miscellaneous investments, including leveraged
leases and CMO residuals. The Company's limited partnership interests primarily
include (i) partnerships which have purchased mortgage loans or other assets
(with an aggregate carrying value in the partnerships at December 31, 1993 of
$154.9 million) from the RTC or other financial institutions; (ii) partnerships
which invest largely in equity securities; and (iii) partnerships which make
tax-advantaged investments in low-income housing.
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 which generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope
of the yield curve, the spread at which fixed maturities are priced over the
yield curve and general competitive conditions within the industry. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
The Company designs its fixed-rate products and conducts its investment
operations so that at any time the duration of the assets in its investment
portfolio and its annuity and GIC obligations will be closely matched. Based
upon its then prevailing assumptions as to future interest rates, persistency
and expenses, the Company seeks to achieve a predictable spread between what
it earns on its assets and what it pays on its liabilities by investing
principally in fixed maturities. The Company's fixed-rate products incorporate
surrender charges, two-tiered interest rate structures or limitations on when
contracts can be surrendered for cash to encourage persistency and discourage
withdrawals. Approximately 91% of the Company's fixed annuity and GIC reserves
had surrender penalties or restrictions at December 31, 1993. The Company
believes that its disciplined product pricing and asset-liability matching have
proven effective. In fiscal years 1993, 1992 and 1991, during which time the
yield on five-year treasury bonds ranged from approximately 4.62% to 8.51%, the
Company achieved net investment spreads on average invested assets amounting
to 3.15%, 2.81% and 2.17%, respectively.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations which 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. In addition, the Company has designed
its portfolio to limit the market discount from book value on the aggregate
portfolio which might result from a sharp rise in interest rates. The cash flow
obtained from MBSs and from a variety of floating-rate instruments helps to
maintain the anticipated spread, while providing desired liquidity. At
December 31, 1993, the weighted average life of the Company's investments was
approximately five years and the portfolio had a duration of approximately
three and one-half years. Weighted average life is defined as the average time
to receipt of all principal, incorporating the effects of scheduled
amortization and expected prepayments, weighted by book value. Duration is a
common measure for the price sensitivity of a fixed-income security or
portfolio to changes in interest rates. It is the weighted average time to
receipt of all expected cash flows, both principal and interest, including the
effects of scheduled amortization and expected prepayments, in which the weight
attached to each year of receipt is the proportion of the present value of cash
to be received during that year to the total present value of the portfolio.
The Company also seeks to enhance its spread income, while providing
desired liquidity by using reverse repurchase agreements ("Reverse Repos"),
Dollar Rolls, Swap Agreements and Total Return Agreements and by investing in
MBSs. Reverse Repos involve a sale of securities (generally MBSs) and an
agreement to repurchase the same securities at a later date at an agreed upon
price and are generally collateralized by government securities. Dollar Rolls
are similar to Reverse Repos except that the repurchase involves securities
that are substantially the same as the securities sold and the arrangement is
not collateralized. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
fixed-rate payments exchanged for variable-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate volatility. The Company utilizes Swap Agreements generally to create a
hedge which effectively converts floating-rate assets into fixed-rate assets.
This helps to maintain the Company's spread and to match the Company's assets
more closely to its liabilities. Total Return Agreements effectively exchange
a fixed rate of interest on the notional amount for the coupon income plus or
minus the increase or decrease in the market value of specified non-investment
grade corporate bonds. 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.
Prepayments increase during periods of declining interest rates resulting in
reduced yields and increased liquidity.
The primary risk associated with Dollar Rolls, Reverse Repos, Swap
Agreements and Total Return Agreements is the risk associated with counterparty
nonperformance. In the case of Dollar Rolls and Reverse Repos, if the
counterparty goes bankrupt or becomes insolvent, the Company would become a
creditor of the counterparty, possibly delaying or preventing the Company from
repurchasing its securities. In the case of Swap Agreements, if the
counterparty defaults on its obligation to pay interest to the Company, the
Company would be exposed to the interest rate volatility risk it sought to
hedge. The Company believes, however, that the counterparties to its Dollar
Rolls, Reverse Repos, Swap Agreements and Total Return Agreements are
financially responsible and that the counterparty risk associated with those
transactions is minimal. In addition to the risk of counterparty
nonperformance, Swap Agreements also have interest rate risk, which is the risk
that increases in interest rates will adversely affect the net cash received
or paid (the "Swap Income") under the terms of the Swap Agreements. However,
the Company's Swap Agreements hedge variable-rate assets and interest rate
fluctuations that adversely affect the Swap Income would be offset by increased
interest income earned on the variable-rate assets. In addition to the risk of
counterparty nonperformance, Total Return Agreements also have the risk of
potential loss due to bond market fluctuation. 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. In addition, MBSs are subject to the credit risk of
delinquency or default on the underlying obligations. The Company does not
believe that any credit risk associated with its MBS portfolio is material.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments which 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 and Secured Loans, management principally considers the adequacy of
collateral (if any), compliance with contractual covenants, the borrower's
recent financial performance, news reports and other externally generated
information concerning the creditor's affairs. In the case of publicly traded
bonds, management also considers market value quotations, if available. For
mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value
of the underlying collateral.
The carrying values of bonds and Secured Loans which 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 which 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.
Included in the Bond Portfolio at December 31, 1993 are 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
which give the holder the right to receive only the interest payments on a pool
of underlying loans. As would be anticipated in a declining interest rate
environment, the net realizable values of these IOs have been impaired as a
result of increased prepayments of the underlying loans. At December 31, 1993,
the amortized cost of these IOs was $49.1 million (net of impairment writedowns
of $9.7 million) and the market value was $18.5 million.
In addition to specifically allocated impairment writedowns, the Company
has provided additional unallocated general credit reserves which totaled $31.2
million at December 31, 1993.
At December 31, 1993, mortgage loans having an aggregate carrying value
of $100.6 million have been restructured. Of these loans, loans having an
aggregate carrying value of $27.3 million were restructured during the 1993
fiscal year. No mortgage loans were restructured in Fiscal 1994.
In the short time since the January 17, 1994 Los Angeles earthquake, the
Company has made an evaluation of mortgage-backed securities, collateralized
mortgage obligations and mortgage loans secured by properties in the affected
areas. Although the Company has not completed its evaluation, management
believes that losses, if any, resulting from the earthquake are not
significant.
At December 31, 1993, there were no material amounts of other
non-restructured performing Secured Loans or mortgage loans that are considered
potential problem loans.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost)
which are in default as to the payment of principal or interest, totaled $59.4
million at December 31, 1993 including $21.4 million (net of impairment
writedowns of $37.5 million) of unsecured corporate bonds and $38.0 million of
mortgage loans (net of impairment writedowns of $5.5 million). At such date,
the amortized cost of these nonperforming investments, net of specifically
allocated impairment writedowns, constituted 0.6% of total invested assets at
amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At December 31,
1993, approximately $4.72 billion of the Company's Bond Portfolio had an
aggregate unrealized gain of $181.7 million, while approximately $1.81 billion
had an aggregate unrealized loss of $30.0 million. In addition, the Company's
investment portfolio also currently provides approximately $102.1 million of
monthly cash flow from scheduled principal and interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments which 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 which would
be expected in the bond market.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"),
at December 31, 1993, had invested assets with an amortized cost of $1.26
billion (market value, $1.27 billion) and outstanding indebtedness of $404.8
million. Such indebtedness was composed of $125.0 million of 9% notes, $100.0
million of 9.95% debentures, $100.0 million of 8-1/8% debentures and $79.8
million of Medium Term Notes. Additionally, as of December 31, 1993, the Parent
had three GICs purchased by local government authorities (which aggregated
$284.8 million, are primarily due serially through 2003 and pay interest
semiannually at rates ranging from 8-3/8% to 8-1/2%) and four GICs purchased
by money market funds (which aggregated $150.0 million, are due in 1994 and pay
interest quarterly at a floating-rate equal to a defined three-month LIBOR rate
plus 25 basis points). These GIC agreements provided liquidity to the Company
at a lower cost than other sources of liquidity with similar maturities. The
Parent's annual debt service with respect to these debt and GIC obligations
totals $216.7 million for the remainder of the 1994 fiscal year, $70.8 million
for fiscal 1995, $65.9 million for fiscal 1996, $65.8 million for fiscal 1997,
$86.0 million for fiscal 1998 and $1.02 billion in the aggregate thereafter.
The Parent; Sun Life; SunAmerica Financial, Inc.; and SunAmerica Asset
Management Corp. have sold certain of their interests in various limited
partnerships which make tax-advantaged low-income housing investments. As part
of the sales transactions, the Parent has guaranteed a minimum defined yield
and funding of certain defined operating deficits in return for a fee. A
portion of the fees received has been deferred to absorb any required payments
with respect to these guarantees. Based on an evaluation of the underlying
housing projects, it is management's belief that such deferrals are ample for
this purpose. Accordingly, management does not anticipate any material future
losses with respect to these guarantees.
Anchor has undertaken to dispose of $84.9 million of certain of its real
estate located in the Phoenix, Arizona metropolitan area during the next one
to three years, either to affiliated or nonaffiliated parties, and the Parent
has guaranteed that Anchor will receive its current carrying value of these
assets. The Parent has pledged certain marketable securities having an
amortized cost of $45.2 million at December 31, 1993 to secure this guarantee.
Terms of divestitures of these assets to affiliates may not necessarily be on
an arm's-length basis; however, any gain or loss on sales to affiliates made
at amounts other than book value would be eliminated in consolidation.
Supplementing the Parent's liquidity at December 31, 1993 was $57.4
million of invested assets at amortized cost (market value, $60.9 million),
held by a nonregulated holding company subsidiary, which assets are available
for distribution to the Company, and approximately $56.3 million of dividends
available from its regulated life insurance subsidiaries. The Parent received
dividends of $4.7 million in fiscal 1993, $17.1 million in fiscal 1992 and
$43.2 million in fiscal 1991 from its nonregulated subsidiary. The Company also
received dividends in the amount of $43.0 million in December 1993, $30.0
million in December 1992 and $25.0 million in December 1991 from Sun Life and
a $9.9 million dividend from Anchor in December 1988. These are the only
dividends the Parent has received from any of its life insurance subsidiaries
since 1984.
REGULATION
The laws of the various states establish insurance regulatory agencies
with broad administrative and supervisory powers relative to granting and
revoking licenses to transact business, regulating trade practices,
establishing guaranty associations, licensing agents, approving policy forms,
filing certain premium rates, setting reserve requirements, determining the
form and content of required financial statements, determining the
reasonableness and adequacy of capital and surplus, prescribing the type and
amount of investments permitted and other related matters. Recently, increased
scrutiny has been placed upon the insurance regulatory framework, and a number
of state legislatures have considered or enacted legislative proposals that
alter, and in many cases increase, state authority to regulate insurance
companies. In addition, legislation has been introduced periodically in
Congress which could result in the federal government assuming some role in the
regulation of the insurance industry. In light of these legislative
developments, the NAIC and insurance regulators are also involved in a process
of reexamining existing laws and their application to insurance companies. In
particular, this reexamination has focused on insurance company investment and
solvency issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of
nonstatutory guidelines. Principal among these are risk-based capital
requirements, mandatory asset adequacy testing, the development of a new model
investment law and increased limitations on dividends. These developments may
impact the structure of insurance company investment portfolios and the
earnings thereon. It is not possible to predict the future impact of changing
state and federal regulation on the operations of the Company and its insurance
subsidiaries.
Most states have enacted legislation which regulates insurance holding
company systems. The Company and its insurance subsidiaries have registered as
a holding company system pursuant to such legislation in California, Maryland
and New York, and routinely report to other jurisdictions.
As part of their routine regulatory oversight process insurance
departments conduct periodic detailed examinations of the books, records and
accounts of insurance companies domiciled in their states. Such examinations
are generally conducted in cooperation with the departments of two or three
other states under guidelines promulgated by the NAIC. Examinations of Sun Life
and Anchor were recently concluded for the periods ended 1991 and 1992. The
conclusions reached in those recent examinations had no material effect on
either company's capital and surplus, business or operations.
The ability of the Company to receive dividends from its life insurance
subsidiaries is governed by the insurance laws of the subsidiaries' states of
domicile. Sun Life is the parent company of both Anchor and First SunAmerica,
and the restrictions on Sun Life are most relevant to determining the Company's
ability to receive dividends from its insurance subsidiaries. As a result of
recently adopted legislation, Maryland, Sun Life's state of domicile, currently
defines extraordinary dividends (those that require prior regulatory approval)
as dividends and distributions during any twelve month period exceeding 10% of
surplus. In addition, the new law requires prior notice of any dividend and
grants to the Maryland Insurance Commissioner authority to order that a
dividend not be paid if the Commissioner finds that the surplus of the
insurance company following the payment of the dividend would be inadequate or
could leave the insurance company in a hazardous financial condition. Sun Life
is presently considering redomestication to Arizona, where extraordinary
dividends are defined as dividends and distributions during any twelve month
period exceeding the lesser of net gain from operations or 10% of capital and
surplus. Since 1984, the Company's life insurance subsidiaries have not paid
a dividend that would have exceeded the new Maryland standard or the Arizona
standard.
Under the NAIC's risk-based capital initiative, insurance companies must
calculate and report information under a risk-based capital formula, beginning
with their year-end 1993 statutory financial statements. This information is
intended to permit insurance regulators to identify and require remedial action
for inadequately capitalized insurance companies, but is not designed to rank
adequately capitalized companies. The NAIC initiative provides for four levels
of potential involvement by state regulators in connection with inadequately
capitalized insurance companies, ranging from regulatory control of the
insurance company to a requirement for the insurance company to submit a plan
to improve its capitalization. Implementation of the substantive regulatory
authority contemplated by this NAIC initiative depends on adoption by the
states of the NAIC model act on risk-based capital requirements. The NAIC has
determined to deny good standing to state insurance regulatory authorities in
states failing to adopt this risk-based capital model act by January 1, 1996.
Based on the Company's calculations, using December 31, 1993 statutory
financial statements and the Company's interpretation of the NAIC's current
risk-based capital formula, Sun Life, Anchor and First SunAmerica are well
above required capital levels.
Insurance departments in the states where the Company's life insurance
subsidiaries are domiciled or do business require insurance companies to make
annual and quarterly filings. These statutory filings require classifications
of investments and the establishment of mandatory reserves designed to
stabilize a company's statutory surplus against fluctuations in the market
value of stocks and bonds, according to regulations prescribed by the NAIC.
These reserves are the interest maintenance reserve ("IMR") and the asset
valuation reserve ("AVR"). They are generally required by state insurance
regulatory authorities to be established as a liability on a life insurer's
statutory financial statements, but do not affect financial statements of the
Company prepared in accordance with generally accepted accounting principles.
The new reserves involve expanded reserve requirements to include all invested
assets and, for investments having a fixed maturity date, to distinguish
between gains and losses resulting from changes in interest rates and gains and
losses resulting from changes in creditworthiness. The IMR captures all
investment gains and losses on debt instruments (bonds, bank loans,
mortgage-backed securities and mortgage loans) resulting from changes in
interest rates and provides for subsequent amortization of such amounts into
statutory net income on a basis reflecting the remaining life of the assets
sold, thus limiting the ability of an insurer to enhance statutory surplus by
taking gains on fixed income securities. The AVR captures investment gains and
losses related to changes in creditworthiness and is adjusted each year based
on a formula related to the quality and loss experience of the Company's
investment portfolio. Such reserves will affect the ability of the Company's
life insurance subsidiaries to fully reflect future investment gains and losses
in current period statutory earnings and surplus. Any reduction in statutory
surplus could have a negative effect on the ability of Sun Life, Anchor and
First SunAmerica to pay dividends, but the Company does not expect them to have
any material negative impact.
SunAmerica Asset Management is registered with the Securities and
Exchange Commission (the "Commission") as a registered investment adviser under
the Investment Advisers Act of 1940. The mutual funds which it markets are
subject to regulation under the Investment Company Act of 1940. SunAmerica
Asset Management and the mutual funds are subject to regulation and examination
by the Commission. In addition, variable annuities and the related separate
accounts of the Company's life insurance companies are subject to regulation
by the Commission under the Securities Act of 1933 and the Investment Company
Act of 1940.
Resources Trust is subject to regulation by the Colorado Banking
Commission and the Federal Deposit Insurance Corporation.
The Company's broker-dealer subsidiaries are subject to regulation and
supervision by the states in which they transact business, as well as by the
National Association of Securities Dealers, Inc. (the "NASD"). The NASD has
broad administrative and supervisory powers relative to all aspects of business
and may examine the subsidiaries' business and accounts at any time.
<PAGE>
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
On January 28, 1994 the Company held its annual meeting of shareholders. The
shareholders voted upon the following matters: (1) the election of nine (9)
directors, which comprise the entire Board of Directors; and (2) approval of
the Long-Term Performance-Based Incentive Plan for the Chief Executive Officer
(the "Compensation Plan").
Each matter was approved. The votes cast for, against or withheld, as well as
the number of abstentions and broker non-votes as to each such matter were as
follows:
Votes
Votes Against or Broker
For Withheld Abstentions Non-Votes
---------- ---------- ----------- ---------
ELECTION OF DIRECTORS:
Eli Broad 90,539,532 64,627
Ronald J. Arnault 90,540,422 63,737
David O. Maxwell 90,541,512 62,647
Lester Pollack 90,475,915 128,244
Richard D. Rohr 90,538,402 65,757
Sanford C. Sigoloff 90,537,079 67,080
William E. Simon 90,535,930 68,229
Harold M. Williams 90,494,461 109,698
Karen Hastie Williams 90,489,121 115,038
COMPENSATION PLAN 85,336,355 2,417,904 397,998 2,451,902
Approval of the Compensation Plan required, in addition to the affirmative vote
of a majority of votes present or represented and entitled to vote, the
affirmative vote of the majority of the votes cast, other than the votes
represented by shares as to which Mr. Broad, President and Chief Executive
Officer of the Company, has or shares the power to vote. Without considering
the shares as to which Mr.Broad has or shares the power to vote, the votes were
cast as follows:
Votes
Votes Against or Broker
For Withheld Abstentions Non-Votes
---------- --------- ----------- ---------
COMPENSATION PLAN 27,741,325 2,417,904 397,998 2,451,902
SUNAMERICA INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K .
- -----------------------------------------
EXHIBITS
24 The consent of Price Waterhouse, independent accountants, filed as an
exhibit to the Company's 1993 Annual Report on Form 10-K, is incorporated
by reference herein.
REPORTS ON FORM 8-K
On November 10, 1993, the Company filed a current report on Form 8-K which
announced its fourth quarter 1993 earnings.
On January 24, 1994, the Company filed a current report on From 8-K which
announced its first quarter 1994 earnings.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNAMERICA INC.
-----------------------------------
Registrant
Dated February 10, 1994 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Executive Vice President
Dated February 10, 1994 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
