[TEXT]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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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.
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(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, 26,344,303 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 -
March 31, 1994 and September 30, 1993 3-4
Consolidated Income Statement -
Three Months and Six Months Ended March 31, 1994 and 1993 5
Consolidated Statement of Cash Flows -
Six Months Ended March 31, 1994 and 1993 6-7
Notes to Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-28
Part II - Other Information 29
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
March 31, September 30,
1994 1993
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 1,267,615 $ 1,797,796
Bonds, notes and redeemable preferred stocks:
Available for sale, at market value
(amortized cost: March 31, 1994,
$4,801,442; September 30, 1993,
$4,659,741) 4,706,533 4,751,665
Held for investment, at amortized cost
(market value: March 31, 1994
$1,417,467; September 30, 1993
$1,701,362) 1,372,974 1,626,109
Mortgage loans 1,307,212 1,286,436
Policy loans 41,473 41,752
Common stocks, at market value
(cost: March 31, 1994, $23,487;
September 30, 1993, $21,009) 50,531 57,610
Kaufman and Broad Home Corporation
warrants, at market value (cost: $1,188) - 26,538
Real estate 147,808 143,857
Other invested assets 710,139 633,189
------------ -------------
Total investments 9,604,285 10,364,952
Variable annuity assets 4,377,269 4,194,970
Accrued investment income 100,840 105,895
Deferred acquisition costs 507,217 475,917
Other assets 146,679 125,687
------------ -------------
TOTAL ASSETS $ 14,736,290 $ 15,267,421
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
March 31, September 30,
1994 1993
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 4,670,430 $ 4,934,871
Reserves for guaranteed investment contracts 2,233,436 2,216,104
Trust deposits 423,087 378,986
Payable to brokers for purchases of securities 1,161,629 1,586,923
Income taxes currently payable 5,999 9,280
Other liabilities 225,490 231,950
------------ -------------
Total reserves, payables
and accrued liabilities 8,720,071 9,358,114
------------ -------------
Variable annuity liabilities 4,377,269 4,194,970
------------ -------------
Senior indebtedness:
Long-term notes and debentures 472,835 380,560
Bank notes - 15,119
Collateralized mortgage obligations 62,222 112,032
------------ -------------
Total senior indebtedness 535,057 507,711
------------ -------------
Deferred income taxes 89,051 96,599
------------ -------------
Shareholders' equity:
Preferred stock 452,273 452,273
Nontransferable Class B Stock 6,828 6,828
Common Stock 26,344 26,335
Additional paid-in capital 111,023 110,120
Retained earnings 452,685 413,770
Net unrealized gains (losses) on debt and
equity securities available for sale (34,311) 100,701
------------ -------------
Total shareholders' equity 1,014,842 1,110,027
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,736,290 $ 15,267,421
============ =============
<PAGE>
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and six months ended March 31, 1994 and 1993
(In thousands, except per common share amounts - unaudited)
<CAPTION>
Three months Six months
--------------------- ---------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 183,402 $ 179,374 $ 373,933 $ 358,815
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (64,000) (77,814) (133,920) (159,371)
Guaranteed investment contracts (34,531) (32,014) (71,376) (69,578)
Trust deposits (2,032) (2,097) (3,972) (4,419)
Senior indebtedness (12,103) (7,814) (23,215) (15,755)
--------- --------- --------- ---------
Total interest expense (112,666) (119,739) (232,483) (249,123)
--------- --------- --------- ---------
NET INVESTMENT INCOME 70,736 59,635 141,450 109,692
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (5,887) (5,325) (11,254) (9,073)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 19,724 15,831 39,311 31,965
Asset management fees 8,127 8,000 16,476 15,843
Net retained commissions 8,129 5,966 15,238 10,503
Trust fees 2,916 2,741 5,970 5,532
--------- --------- --------- ---------
TOTAL FEE INCOME 38,896 32,538 76,995 63,843
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 2,637 2,359 5,151 4,967
General and administrative expenses (32,500) (34,690) (65,957) (64,444)
Amortization of deferred acquisition costs (16,090) (12,861) (31,333) (25,535)
Other, net 15 53 19 1,664
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (45,938) (45,139) (92,120) (83,348)
--------- --------- --------- ---------
PRETAX INCOME 57,807 41,709 115,071 81,114
Income tax expense (17,800) (12,100) (35,500) (23,500)
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 40,007 29,609 79,571 57,614
Cumulative effect of change in accounting
for income taxes - - (33,500) -
--------- --------- --------- ---------
NET INCOME $ 40,007 $ 29,609 $ 46,071 $ 57,614
========= ========= ========= =========
PER COMMON SHARE:
Income before cumulative effect of change
in accounting for income taxes $ .86 $ .66 $ 1.70 $ 1.29
Cumulative effect of change in accounting
for income taxes - - (.80) -
--------- --------- --------- ---------
Net income $ .86 $ .66 $ .90 $ 1.29
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 41,931 38,542 41,921 38,207
========= ========= ========= =========
</TABLE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended March 31, 1994 and 1993
(In thousands - unaudited)
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,071 $ 57,614
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 133,920 159,371
Guaranteed investment contracts 71,376 69,578
Trust deposits 3,972 4,419
Net realized investment losses 11,254 9,073
Amortization (accretion) of net
premiums (discounts) on investments 3,213 (13,728)
Provision for deferred income taxes 30,597 (12,550)
Cumulative effect of change in
accounting for income taxes 33,500 -
Change in:
Accrued investment income 5,055 (971)
Deferred acquisition costs (16,210) (16,096)
Other assets (1,383) 5,396
Income taxes currently payable (32,490) 13,834
Other liabilities (6,460) (4,421)
Other, net 1,733 13,980
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 284,148 285,499
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (3,788,156) (3,570,256)
Bonds, notes and redeemable preferred
stocks held for investment (26,274) (265,755)
Mortgage loans (120,098) (41,158)
Other investments, excluding short-term
investments (214,597) (147,782)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 2,948,436 2,575,083
Bonds, notes an redeemable preferred
stocks held for investment 7,640 79,809
Kaufman and Broad Home Corporation
warrants 28,618 -
Other investments, excluding short-term
investments 61,259 111,726
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 169,380 131,283
Bonds, notes and redeemable preferred
stocks held for investment 194,691 313,979
Mortgage loans 93,636 79,282
Other investments, excluding short-term
investments 85,607 18,457
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (559,858) (715,332)
------------ ------------
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended March 31, 1994 and 1993
(In thousands - unaudited)
1994 1993
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (24,986) $ (16,092)
Premium receipts on:
Fixed annuity contracts 73,514 126,444
Guaranteed investment contracts 376,464 132,448
Receipts of trust deposits 142,738 98,806
Withdrawal payments on:
Fixed annuity contracts (382,700) (247,375)
Guaranteed investment contracts (430,508) (427,762)
Trust deposits (102,610) (98,305)
Claims and annuity payments on fixed
annuity contracts (90,000) (87,743)
Net proceeds from issuances of long-term notes 92,275 -
Repayments of collateralized mortgage
obligations (49,810) (36,148)
Net increase (decrease) in other senior
indebtedness (15,119) 24,720
Net proceeds from issuance of preferred stock - 179,040
Net receipts from other short-term financings 156,271 819,743
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (254,471) 467,776
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (530,181) 37,943
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 1,797,796 1,511,366
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 1,267,615 $ 1,549,309
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 26,636 $ 20,701
============ ============
Income taxes paid, net of refunds received $ 37,387 $ 22,216
============ ============
<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 March 31, 1994 and September 30, 1993, the results
of its consolidated operations for the three months and six months ended
March 31, 1994 and 1993 and its consolidated cash flows for the six months
ended March 31, 1994 and 1993. The results of operations for the three
months and six months ended March 31, 1994 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 (8,733,000 shares
and 5,538,000 shares for the three months ended March 31, 1994 and 1993,
respectively, and 8,721,000 and 5,632,000 shares for the six months ended
March 31, 1994 and 1993, 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 $4,138,000 for the three months ended March 31, 1994
and 1993, respectively, and totaled $8,202,000 and $8,273,000 for the six
months ended March 31, 1994 and 1993, 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
1994 net income as a result of this sale.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 (in thousands):
Bond discounts $ 19,015
Capital losses (38,332)
Leveraged leases 47,170
State income taxes 3,854
Deferred acquisition costs 149,598
Contractholder reserves (94,211)
Guaranty fund assessments (7,700)
Deferred compensation (3,736)
Deferred income (5,169)
Net unrealized gains on certain debt and equity
securities 53,174
Other, net 6,436
--------
130,099
Cumulative effect of change in accounting for
income taxes recorded in the first quarter 1994 (33,500)
--------
Balance of liability for Deferred Income Taxes
at September 30, 1993, as reclassified $ 96,599
========
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Change in Accounting for Income Taxes (continued)
-------------------------------------
The components of income tax expense for the three months and six months
ended March 31, 1994 and 1993 are as follows (in thousands):
Three Months Six Months
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
Current $ (7,667) $ 20,854 $ 4,903 $ 36,050
Deferred 25,467 (8,754) 30,597 (12,550)
-------- -------- -------- --------
Total income tax
expense $ 17,800 $ 12,100 $ 35,500 $ 23,500
======== ======== ======== ========
In addition, the deferred tax asset associated with net unrealized losses
on certain debt and equity securities charged directly to shareholders'
equity increased by $71,645,000 during the fiscal year 1994 to reflect
a deferred tax benefit of $18,471,000 at March 31, 1994 as a result of
increases in the related unrealized losses.
<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 and six months ended
March 31, 1994 and 1993.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $40.0 million or $.86 per common share in the second quarter of 1994,
compared with $29.6 million or $.66 per common share in the second quarter of
1993. For the six months, such income amounted to $79.6 million or $1.70 per
common share in 1994, compared with $57.6 million or $1.29 per common share in
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 the first quarter of 1994.
Accordingly, net income amounted to $46.1 million or $.90 per common share for
the six months of 1994.
PRETAX INCOME totaled $57.8 million in the second quarter of 1994,
compared to $41.7 million in the second quarter of 1993. For the six months,
pretax income totaled $115.1 million in 1994, compared with $81.1 million in
1993. The improvements in 1994 over 1993 primarily resulted from increased net
investment income 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 the second quarter
of 1994 from $59.6 million in the second quarter of 1993. These amounts
represent net investment spreads of 3.21% on average invested assets (computed
on a daily basis) of $8.81 billion in the second quarter of 1994 and 2.96% on
average invested assets of $8.07 billion in the second quarter of 1993. For
the six months, net investment income increased to $141.5 million in 1994 from
$109.7 million in 1993, representing net investment spreads of 3.19% and 2.70%,
respectively, on average invested assets of $8.86 billion and $8.13 billion,
respectively. The improvements in net investment income in 1994 over 1993
primarily resulted from an increase in average invested assets and from
reductions in interest rates paid on all interest-bearing liabilities, the
effects of which were partially offset by declines in investment yield. In
addition, net investment spreads on average invested assets in 1994 have
increased over 1993 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
$653.0 million in the second quarter of 1994 from $382.9 million in the second
quarter of 1993. For the six months, the excess of average invested assets over
average interest-bearing liabilities increased by $303.5 million to $639.7
million during 1994 from $336.2 million during 1993.
Total interest expense aggregated $112.7 million in the second quarter
of 1994, down from $119.7 million in the second quarter of 1993. For the six
months, total interest expense aggregated $232.5 million in 1994, compared to
$249.1 million in 1993. The average rate paid on all interest-bearing
liabilities fell to 5.52% (5.42% on fixed annuities) in the second quarter of
1994 from 6.23% (6.11% on fixed annuities) in the second quarter of 1993. For
the six months, the average rate paid on all interest-bearing liabilities
declined to 5.66% (5.59% on fixed annuities) in 1994 from 6.40% (6.24% on fixed
annuities) in 1993. Interest-bearing liabilities averaged $8.16 billion during
the second quarter of 1994, compared to $7.68 billion during the second quarter
of 1993. For the six months, interest-bearing liabilities averaged $8.22
billion in 1994, compared to $7.79 billion in 1993. These declines in rates
paid in 1994 compared to 1993 were primarily due to a lower interest-rate
environment and the corresponding downward repricings of annuity contracts.
Investment income totaled $183.4 million in the second quarter of 1994,
up $4.0 million from the $179.4 million recorded in the second quarter of 1993.
For the six months, investment income totaled $373.9 million in 1994, up $15.1
million from the $358.8 million recorded in 1993. The improvements in
investment income in 1994 resulted primarily from the effects of a higher level
of average invested assets. However, the yield on average invested assets
decreased to 8.32% in the second quarter of 1994 from 8.90% in the second
quarter of 1993. For the six months, the yield on average invested assets
decreased to 8.44% in 1994 from 8.83% in 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 8.06% in the
second quarter of 1994, 8.63% in the second quarter of 1993, 8.19% for the six
months of 1994 and 8.61% for the six months of 1993. These declines in yield
in 1994 compared to 1993 were primarily due to lower prevailing interest rates.
The Company has enhanced investment yield during 1994 and 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. Although declining during the second quarter of
1994, the market demand for MBSs for formation of collateralized mortgage
obligations ("CMOs") has been high throughout 1993 and 1994, permitting the
Company to engage in Dollar Rolls. The Company recorded $4.6 million of
enhanced yield on a weighted average volume of $1.02 billion of such
transactions during the second quarter of 1994, compared to $4.5 million of
enhanced yield on a weighted average volume of $825.3 million during the second
quarter of 1993. For the six months, the Company recorded $11.6 million of
enhanced yield on a weighted average volume of $1.32 billion of such
transactions in 1994, compared to $6.2 million of enhanced yield on a weighted
average volume of $613.2 million of such transactions in 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 March 31, 1994, 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 27 months. The Company also enhances yield
through total return corporate bond swap agreements (the "Total Return
Agreements"). The Company recorded a loss of $2.9 million during the second
quarter of 1994, compared to income of $6.0 million during the second quarter
of 1993 on these Total Return Agreements. For the six months, the Company
recorded income of $3.8 million on the Total Return Agreements during 1994,
compared to $5.3 million during 1993. The loss recorded in the Total Return
Agreements during the second quarter of 1994 primarily resulted from declines
in the market value of the agreements as a result of an increase in interest
rates. (See "Asset-Liability Matching.")
GROWTH IN AVERAGE INVESTED ASSETS since 1993 primarily reflects $245.7
million of aggregate net proceeds from the Company's issuances of long-term
notes and debentures since March 31, 1993. 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 $170.9 million and GIC premiums have aggregated $935.7 million
since March 31, 1993. Premiums from fixed annuities (including the fixed
accounts of variable annuities) totaled $43.3 million in the second quarter of
1994, compared to $66.7 million in the second quarter of 1993. For the six
months, premiums from fixed annuities totaled $73.5 million in 1994, down from
$126.4 million in 1993. GIC premiums totaled $117.3 million in the second
quarter of 1994 and $120.7 million in the second quarter of 1993. For the six
months, GIC premiums totaled $376.5 million in 1994, compared with $132.4
million in 1993. The decline in premiums received on fixed annuities during
fiscal 1994 reflects management's decision to deemphasize the marketing of
fixed annuity products in the existing low-interest rate environment. The $3.4
million decrease in GIC sales during the second quarter of 1994 and the $244.1
million increase in GIC sales during the six months of 1994 primarily reflect
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 $5.9 million in the second quarter
of 1994 and $5.3 million in the second quarter of 1993, and include impairment
writedowns of $8.7 million and $28.8 million, respectively. Therefore, net
gains from sales of investments totaled $2.8 million in the second quarter of
1994 and $23.5 million in the second quarter of 1993. For the six months, net
realized investment losses totaled $11.3 million in 1994, compared to $9.1
million in 1993, and include impairment writedowns of $14.7 million and $42.3
million, respectively. Therefore, for the six months, net gains from sales of
investments totaled $3.5 million in 1994 and $33.2 million in 1993.
Net gains in 1994 include $15.9 million of net gains ($8.7 million in the
second quarter) realized on $7.7 million of sales of common stocks ($2.7
million in the second quarter) made to maximize total return. Net gains in the
six months of 1994 also include $7.2 million of net losses ($5.5 million in the
second quarter) realized on $2.01 billion of sales of bonds ($812.0 million in
the second quarter). These bond sales include approximately $1.06 billion of
sales of MBSs ($409.0 million in the second quarter) made primarily to acquire
other MBSs which were then used in Dollar Rolls. In addition, bond sales
include $313.5 million of sales of high-yield investments ($93.9 million in the
second quarter) and $437.1 million of sales of certain CMOs and asset-backed
securities ($274.4 million in the second quarter) which were primarily made to
maximize total return.
Net gains in 1993 include $28.6 million of net gains ($24.9 million in
the second quarter) realized on $2.06 billion of sales of bonds ($766.9 million
in the second quarter). These bond sales include approximately $995.3 million
of sales of MBSs ($466.6 million in the second quarter) made primarily to
acquire other MBSs for use in Dollar Rolls, and $338.5 million of sales of
securitized residential whole loans made to maximize total return. In addition,
bond sales include $374.1 million of sales of high-yield investments ($113.5
in the second quarter) and $165.9 million of sales of senior secured loans
($40.1 million in the second quarter) made primarily to improve the overall
credit quality of the portfolio.
Impairment writedowns in 1994 include $7.2 million of additional
provisions applied to defaulted bonds ($1.2 million in the second quarter). In
addition, the Company provided $3.5 million of reserves during the second
quarter for estimated losses on mortgage loans resulting from the January 17,
1994 Los Angeles earthquake. Impairment writedowns in 1993 include $31.2
million of additional provisions applied to bonds ($28.8 million in the second
quarter) in response to additional defaults and the effects of declines in
interest rates on interest-rate sensitive securities. In addition, 1993
includes $11.1 million of provisions made in the first quarter and 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 during the first quarter of 1993.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $19.7
million in the second quarter of 1994 and $15.8 million in the second quarter
of 1993. For the six months, variable annuity fees totaled $39.3 million in
1994, compared to $32.0 million in 1993. The increases in variable annuity
fees resulted primarily from asset growth from the receipt of variable annuity
premiums, which aggregated $944.0 million since March 31, 1993. Variable
annuity premiums totaled $250.6 million in the second quarter of 1994 and
$185.4 million in the second quarter of 1993. For the six months, variable
annuity premiums totaled $481.1 million in 1994, up from $334.0 million in
1993. Variable annuity assets averaged $4.50 billion during the second quarter
of 1994 and $3.52 billion during the second quarter of 1993. For the six
months, variable annuity assets averaged $4.40 billion in 1994, compared to
$3.44 billion in 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 $8.1 million on average assets managed of $2.46 billion in the second
quarter of 1994 and $8.0 million on average assets managed of $2.44 billion in
the second quarter of 1993. For the six months, asset management fees totaled
$16.5 million on average assets managed of $2.50 billion in 1994, compared to
$15.8 million on average assets managed of $2.40 billion in 1993. Sales of
mutual funds, excluding sales of money market funds, aggregated $494.0 million
for the twelve months ended March 31, 1994. In the second quarter, such sales
totaled $124.0 million in 1994, compared to $144.2 million in 1993. For the
six months, such sales totaled $236.3 million in 1994, compared to $274.7
million in 1993. The declines in 1994 mutual fund sales from those recorded
in 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 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
$8.1 million in the second quarter of 1994 and $6.0 million in the second
quarter of 1993. For the six months, net retained commissions totaled $15.2
million in 1994, compared to $10.5 million in 1993. Sales of nonproprietary
products (mainly mutual funds and general securities) totaled $1.68 billion in
the second quarter of 1994 and $1.71 billion in the second quarter of 1993.
For the six months, sales of nonproprietary products totaled $3.19 billion in
1994, compared to $3.00 billion in 1993. The increases in net retained
commissions during 1994 from the comparable periods in 1993 are not
proportionate to the related changes in sales, primarily due to changes in
sales mix.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts, as well as for other qualified retirement plans. Trust fees totaled
$2.9 million in the second quarter of 1994 and $2.7 million in the second
quarter of 1993. For the six months, trust fees totaled $6.0 million in 1994,
compared with $5.5 million in 1993.
SURRENDER CHARGES on fixed and variable annuities totaled $2.6 million
in the second quarter of 1994, compared to $2.4 million in the second quarter
of 1993. For the six months, surrender charges totaled $5.2 million in 1994 and
$5.0 million in 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 $321.2 million in the second quarter of 1994 and $195.8 million in the
second quarter of 1993, and represented 14.7% and 9.7%, respectively, of
average fixed and variable annuity reserves. For the six months, withdrawal
payments totaled $565.7 million in 1994 and $391.3 million in 1993, and
represented 13.0% and 9.7%, respectively, of average fixed and variable annuity
reserves. Withdrawals included variable annuity payments made from the
separate accounts totaling $134.1 million in the second quarter of 1994, $68.7
million in the second quarter of 1993, $222.8 million in the six months of 1994
and $153.0 million in the six months of 1993. The increase in surrenders
during 1994 primarily reflects disintermediation in the fixed annuity products
and the Company's decision to deemphasize the marketing of such products in the
existing low-interest rate environment. In addition, variable annuity
surrenders have increased as a result of changing market conditions and
surrenders on a closed block of business. Management anticipates that
withdrawal rates will be reasonably 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 $32.5 million in the second
quarter of 1994, compared to $34.7 million in the second quarter of 1993. For
the six months, general and administrative expenses totaled $66.0 million in
1994, compared to $64.4 million in 1993. General and administrative expenses
in 1993 include a $1.0 million provision for future guaranty fund assessments.
General and administrative expenses continue to be controlled through a
company-wide cost containment program and represent 0.9% of average total
assets for the second quarter and six months of 1994 compared to 1.0% for the
second quarter and six months of 1993.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded
during 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
$16.1 million in the second quarter of 1994 and $12.9 million in the second
quarter of 1993. For the six months, such amortization totaled $31.3 million
in 1994 and $25.5 million in 1993.
INCOME TAX EXPENSE totaled $17.8 million in the second quarter of 1994,
compared to $12.1 million in the second quarter of 1993, representing
effective tax rates of 31% and 29%, respectively. For the six months, income
tax expense totaled $35.5 million in 1994, compared to $23.5 million in 1993,
representing effective tax rates of 31% in 1994 and 29% in 1993. The higher
tax rate in 1994 primarily reflects a change in tax law.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY decreased by $77.0 million to $1.01 billion at March
31, 1994 from $1.09 billion at December 31, 1993, primarily as a result of a
$103.3 million decline in Net Unrealized Gains (Losses) on Debt and Equity
Securities Available for Sale during the second quarter. In addition, the
Company paid $12.5 million of dividends to shareholders during the second
quarter. These reductions in shareholders' equity were partially offset by net
income of $40.0 million realized during the second quarter. Book value per
common share amounted to $19.99 at March 31, 1994.
TOTAL ASSETS decreased by $804.8 million to $14.74 billion at March 31,
1994 from $15.54 billion at December 31, 1993, due to a decrease in the
invested assets portfolio. In addition, the separate account for variable
annuities declined by $55.6 million during the second quarter of 1994,
primarily as a result of declines in market values.
INVESTED ASSETS at March 31, 1994 totaled $9.60 billion, compared to
$10.39 billion at December 31, 1993. The Company managed nearly all of these
investments internally. Invested assets declined by $783.5 million during the
second quarter, primarily as a result of declines in amounts payable to brokers
for purchases of securities, and reserves for GICs and fixed annuity contracts.
Amounts payable to brokers for purchases of securities decreased by $269.3
million during the second quarter, primarily as a result of a reduction in
dollar-roll positions. The decline in GIC reserves principally reflects
scheduled withdrawals in accordance with the terms of the GIC contracts. Fixed
annuity reserves declined as a result of an excess of surrenders over fixed
annuity sales, reflecting management's decision to deemphasize the marketing
of fixed annuity products in the existing low-interest rate environment.
Invested assets also declined as a consequence of a $164.0 million decline in
unrealized gains on bonds, notes and redeemable preferred stocks available for
sale (which are carried at market value). At March 31, 1994, the available for
sale portfolio had a $94.9 million unrealized loss, compared to an unrealized
gain of $69.1 million at December 31, 1993.
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 Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities," and, accordingly, began to carry its portfolio of bonds,
notes and redeemable preferred stocks 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 and held for investment, at March 31, 1994, had an aggregate amortized
cost which exceeded its market value by $50.4 million (including net unrealized
losses of $94.9 million on bonds, notes and redeemable preferred stocks
available for sale). At December 31, 1993, the Bond Portfolio 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
stock available for sale). The unrealized losses on the Bond Portfolio at
March 31, 1994 principally resulted from increases in prevailing interest rates
since December 31, 1993.
Approximately $6.18 billion or 99.6% of the Bond Portfolio (at amortized
cost, before deduction of $24.8 million of unallocated general credit reserves)
at March 31, 1994 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 March 31, 1994, approximately
$5.30 billion (at amortized cost) was rated investment grade by one or both of
these agencies or under the NAIC guidelines, including $3.81 billion of U.S.
government/agency MBSs.
At March 31, 1994, the Bond Portfolio included $878.6 million (market
value, $877.0 million) of bonds not rated investment grade by S&P, Moody's or
the NAIC. Based on their March 31, 1994 amortized cost, these bonds accounted
for 5.9% of the Company's total assets and 9.1% 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
$151.1 million at March 31, 1994.
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 approximate 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 March 31, 1994.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1994.<PAGE>
<TABLE>
Rated Bonds By Rating Classification
(Dollars in thousands)
<CAPTION>
Issues Rated by S&P/Moody's By NAIC Category Total
- - ---------------------------------------------- ----------------------------------- ----------------------------------
Estimated NAIC Estimated Percent of Estimated
S&P (Moody's) Amortized market category Amortized market Amortized invested market
category(1) cost value (2) cost value cost assets value
- - --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3) $2,950,723 $2,889,075 1 $1,113,285 $1,086,253 $4,064,008 42.02% $3,975,328
BBB+ to BBB-
(Baa1 to Baa3) 433,951 432,775 2 798,529 807,058 1,232,480 12.74 1,239,833
BB+ to BB-
(Ba1 to Ba3) 129,754 125,588 3 231,070 239,425 360,824 3.73 365,013
B+ to B- (B1 to B3) 247,992 242,655 4 177,401 178,167 425,393 4.40 420,822
CCC+ to C-
(Caa to C) 18,928 17,182 5 39,305 42,186 58,233 0.60 59,368
D - - 6 34,179 31,817 34,179 0.35 31,817
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $3,781,348 $3,707,275 $2,393,769 $2,384,906 $6,175,117 $6,092,181
========== ========== ========== ========== ========== ==========
(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 ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $571.1 million at March 31, 1994. Secured
Loans are primarily originated by money center 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 March 31, 1994, Secured Loans consisted
of loans to 34 borrowers spanning 19 industries, with no industry constituting
more than 14% 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 $1.31 billion at March 31, 1994 and consisted
of approximately 680 first mortgage loans with an average loan balance of
approximately $1.9 million, collateralized by properties located in 25 states.
Approximately 52% of the portfolio was multifamily residential, 20% was retail,
8% was office, 8% was industrial and 12% was other types. At March 31, 1994,
approximately 37% 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, 47% was multifamily residential, 31% was retail, 8% was industrial,
5% was office and 9% was other types. At March 31, 1994, there were no
construction, takeout, farm or land loans and there were only 20 loans with
outstanding balances of $10 million or more, which loans collectively
aggregated approximately 25% 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 March 31, 1994, approximately 25% of the mortgage loan portfolio
consisted of loans with balloon payments due before April 1, 1997. At March 31,
1994, loans delinquent by more than 90 days totaled $45.4 million and
constituted 3.5% of total mortgages. Loans foreclosed upon and transferred to
real estate in the balance sheet during fiscal 1994 totaled $8.9 million (0.7%
of total mortgages).
Approximately 52% of the mortgage loans in the portfolio at March 31,
1994 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 $710.1 million at March 31, 1994,
including $565.0 million of investments in limited partnerships and an
aggregate of $145.1 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 March 31, 1994 of
$152.9 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 90% of the Company's fixed annuity and GIC reserves
had surrender penalties or restrictions at March 31, 1994. 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 of 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 March
31, 1994, the weighted average life of the Company's investments was approxi-
mately 4-1/2 years and the portfolio had a duration of approximately 3-3/4
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 only substantially the same as the securities sold and the arrangement
is not collateralized, nor is it governed by a contract. 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 and Swap
Agreements is the risk associated with counterparty nonperformance. The primary
risks associated with Total Return Agreements are the risk of potential loss
due to bond market fluctuation and counterparty risk. 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. 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 March 31, 1994 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 lower interest rate
environment, the net realizable values of these IOs have been impaired as a
result of increased prepayments of the underlying loans. At March 31, 1994,
the amortized cost of these IOs was $47.9 million and the market value was
$26.0 million.
In addition to specifically allocated impairment writedowns, the Company
has provided unallocated general credit reserves which totaled $24.8 million
at March 31, 1994. Such reserves totaled $31.2 million at December 31, 1993.
During the second quarter of 1994, the Company used $6.8 million of such
reserves to absorb the write-off of accrued interest on certain defaulted
investments and to offset realized losses incurred on the sale of certain
investments, including $4.4 million of realized losses on $8.1 million of sales
of IOs.
At March 31, 1994, mortgage loans having an aggregate carrying value of
$95.0 million have been restructured. Of these loans, loans having an aggregate
carrying value of $24.2 million were restructured during the 1993 fiscal year.
No mortgage loans were restructured during the 1994 fiscal year.
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 and
has made a provision of $3.5 million for estimated losses thereon.
At March 31, 1994, 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 $71.7
million at March 31, 1994, including $26.3 million (net of impairment
writedowns of $17.3 million) of unsecured corporate bonds and $45.4 million of
mortgage loans (net of impairment writedowns of $5.6 million). At such date,
the amortized cost of these nonperforming investments, net of specifically
allocated impairment writedowns, constituted 0.7% 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 March 31, 1994,
approximately $2.54 billion of the Company's Bond Portfolio had an aggregate
unrealized gain of $93.4 million, while approximately $3.64 billion had an
aggregate unrealized loss of $143.8 million. In addition, the Company's
investment portfolio also currently provides approximately $99.1 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 March 31, 1994, had invested assets with an amortized cost and market value
of $1.20 billion and outstanding indebtedness of $472.8 million. Such
indebtedness is composed of $125.0 million of 9% notes, $100.0 million of 9.95%
debentures, $100.0 million of 8-1/8% debentures and $147.8 million of Medium
Term Notes. Additionally, as of March 31, 1994, the Parent had three GICs
purchased by local government authorities (which aggregated $265.3 million, are
primarily due serially through 2003 and pay interest semiannually at rates
ranging from 8-3/8% to 8-1/2%). 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 $31.1 million for the remainder of the 1994 fiscal year,
$75.2 million for fiscal 1995, $70.3 million for fiscal 1996, $70.2 million for
fiscal 1997, $89.8 million for fiscal 1998 and $1.11 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 more than
sufficient for this purpose. Accordingly, management does not anticipate any
material future losses with respect to these guarantees.
Anchor has undertaken to dispose of $84.6 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 $41.9 million at March 31, 1994 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 March 31, 1994 was $79.7 million
of invested assets, at amortized cost (market value, $84.8 million), held by
a nonregulated holding company subsidiary, which assets are available for
distribution to the Company, and approximately $57.9 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 subsidiaries. The Company
also received dividends of $43.0 million in December 1993, $30.0 million in
December 1992 and $25.0 million in December 1991 from Sun Life.
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 marketing and other 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 marketing,
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. Several states have also recently
initiated requirements for reporting on certain market conduct issues. 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 calendar years 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 ("RBC") guidelines and applicable
statutes, insurance companies have been required to calculate and report
information under an RBC 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's RBC framework 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 RBC framework depends on adoption by the states of the
NAIC model act on RBC requirements. The NAIC has determined to deny good
standing to state insurance regulatory authorities in states failing to adopt
this RBC model act by January 1, 1996. Based on the Company's calculations,
using March 31, 1994 statutory financial statements, 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.
Recent press accounts have indicated that the Administration is
considering a proposal to revise the Internal Revenue Code to impose certain
limits on the tax deferral that now applies to annuities. While the details
of any such proposal remain unclear at this time, other proposals made in
recent years to limit the tax deferral for annuities have not been enacted.
In the absence of a definitive proposal, the Company is unable to determine
what, if any, effect such a proposal might have on the Company's financial
position or results of operations.
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 (CONTINUED)
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- - -------------------------------------------------------------
Reference is made to Part II - Other Information, Item 4 - Submission of
Matters to Vote of Security-Holders in the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1993.
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 January 24, 1994, the Company filed a current report on Form 8-K which
announced its first quarter 1994 earnings.
On April 26, 1994, the Company filed a current report on Form 8-K which
announced its second 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 May 12, 1994 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Executive Vice President
Dated May 12, 1994 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
