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 June 30, 1994
--------------------------------------
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
---------------------------------------------------------------------
(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, 26,464,008 shares outstanding
Nontransferable Class B Stock, par value $1.00 per share, 6,826,439
shares outstanding
SUNAMERICA INC.
INDEX
Page
Number(s)
---------
Part I - Financial Information
Consolidated Balance Sheet -
June 30, 1994 and September 30, 1993 3-4
Consolidated Income Statement -
Three Months and Nine Months Ended June 30, 1994 and 1993 5
Consolidated Statement of Cash Flows -
Nine Months Ended June 30, 1994 and 1993 6-7
Notes to Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-26
Part II - Other Information 27
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
June 30, September 30,
1994 1993
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 891,305 $ 1,797,796
Bonds, notes and redeemable preferred stocks:
Available for sale, at market value
(amortized cost: June 30, 1994,
$4,898,325; September 30, 1993,
$4,659,741) 4,668,140 4,751,665
Held for investment, at amortized cost
(market value: June 30, 1994
$1,296,456; September 30, 1993
$1,701,362) 1,280,929 1,626,109
Mortgage loans 1,372,660 1,286,436
Policy loans 41,545 41,752
Common stocks, at market value
(cost: June 30, 1994, $36,987;
September 30, 1993, $21,009) 55,131 57,610
Kaufman and Broad Home Corporation
warrants, at market value (cost: $1,188) - 26,538
Real estate 142,384 143,857
Other invested assets 735,351 633,189
------------ -------------
Total investments 9,187,445 10,364,952
Variable annuity assets 4,368,102 4,194,970
Accrued investment income 105,598 105,895
Deferred acquisition costs 506,978 475,917
Other assets 171,641 125,687
------------ -------------
TOTAL ASSETS $ 14,339,764 $ 15,267,421
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
June 30, September 30,
1994 1993
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 4,560,924 $ 4,934,871
Reserves for guaranteed investment contracts 2,481,110 2,216,104
Trust deposits 441,755 378,986
Payable to brokers for purchases of securities 709,062 1,586,923
Income taxes currently payable 3,399 9,280
Other liabilities 238,508 231,950
------------ -------------
Total reserves, payables
and accrued liabilities 8,434,758 9,358,114
------------ -------------
Variable annuity liabilities 4,368,102 4,194,970
------------ -------------
Senior indebtedness:
Long-term notes and debentures 472,835 380,560
Bank notes - 15,119
Collateralized mortgage obligations 45,476 112,032
------------ -------------
Total senior indebtedness 518,311 507,711
------------ -------------
Deferred income taxes 69,417 96,599
------------ -------------
Shareholders' equity:
Preferred stock 452,273 452,273
Nontransferable Class B Stock 6,826 6,828
Common Stock 26,464 26,335
Additional paid-in capital 111,826 110,120
Retained earnings 482,245 413,770
Net unrealized gains (losses) on debt and
equity securities available for sale (130,458) 100,701
------------ -------------
Total shareholders' equity 949,176 1,110,027
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,339,764 $ 15,267,421
============ =============
<PAGE>
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and nine months ended June 30, 1994 and 1993
(In thousands, except per common share amounts - unaudited)
<CAPTION>
Three months Nine months
--------------------- ---------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 187,019 $ 190,994 $ 560,952 $ 549,809
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (60,863) (76,091) (194,783) (235,462)
Guaranteed investment contracts (36,835) (33,339) (108,211) (102,917)
Trust deposits (2,251) (2,036) (6,223) (6,455)
Senior indebtedness (12,829) (9,829) (36,044) (25,584)
--------- --------- --------- ---------
Total interest expense (112,778) (121,295) (345,261) (370,418)
--------- --------- --------- ---------
NET INVESTMENT INCOME 74,241 69,699 215,691 179,391
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (5,312) (4,468) (16,566) (13,541)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 19,837 17,048 59,148 49,013
Asset management fees 7,541 8,438 24,017 24,281
Net retained commissions 8,287 6,234 23,525 16,737
Trust fees 3,081 2,756 9,051 8,288
--------- --------- --------- ---------
TOTAL FEE INCOME 38,746 34,476 115,741 98,319
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 2,883 2,325 8,034 7,292
General and administrative expenses (32,198) (37,576) (98,155) (102,020)
Amortization of deferred acquisition costs (17,241) (13,027) (48,574) (38,562)
Other, net 44 6 63 1,670
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (46,512) (48,272) (138,632) (131,620)
--------- --------- --------- ---------
PRETAX INCOME 61,163 51,435 176,234 132,549
Income tax expense (19,100) (17,600) (54,600) (41,100)
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 42,063 33,835 121,634 91,449
Cumulative effect of change in accounting
for income taxes - - (33,500) -
--------- --------- --------- ---------
NET INCOME $ 42,063 $ 33,835 $ 88,134 $ 91,449
========= ========= ========= =========
PER COMMON SHARE:
Income before cumulative effect of change
in accounting for income taxes $ .91 $ .70 $ 2.63 $ 2.00
Cumulative effect of change in accounting
for income taxes - - (.81) -
--------- --------- --------- ---------
Net income $ .91 $ .70 $ 1.82 $ 2.00
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 41,546 42,461 41,596 39,625
========= ========= ========= =========
</TABLE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1994 and 1993
(In thousands - unaudited)
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88,134 $ 91,449
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 194,783 235,462
Guaranteed investment contracts 108,211 102,917
Trust deposits 6,223 6,455
Net realized investment losses 16,566 13,541
Amortization (accretion) of net
premiums (discounts) on investments 391 (17,419)
Provision for deferred income taxes 62,738 (9,998)
Cumulative effect of change in
accounting for income taxes 33,500 -
Change in:
Accrued investment income 297 12,497
Deferred acquisition costs (19,726) (27,444)
Other assets (5,163) 10,774
Income taxes currently payable (56,130) 16,875
Other liabilities 6,558 32,935
Other, net 3,902 14,128
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 440,284 482,172
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (4,475,927) (4,688,909)
Bonds, notes and redeemable preferred
stocks held for investment (36,035) (347,835)
Mortgage loans (213,674) (90,582)
Other investments, excluding short-term
investments (293,767) (280,651)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 3,455,845 3,382,837
Bonds, notes and redeemable preferred
stocks held for investment 13,349 124,218
Kaufman and Broad Home Corporation
warrants 28,618 -
Other investments, excluding short-term
investments 74,032 214,004
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 318,525 243,494
Bonds, notes and redeemable preferred
stocks held for investment 298,590 298,415
Mortgage loans 123,257 97,158
Other investments, excluding short-term
investments 123,966 53,784
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (583,221) (994,067)
------------ ------------
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended June 30, 1994 and 1993
(In thousands - unaudited)
1994 1993
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (37,489) $ (27,250)
Premium receipts on:
Fixed annuity contracts 127,192 185,284
Guaranteed investment contracts 675,416 453,611
Receipts of trust deposits 236,619 142,956
Withdrawal payments on:
Fixed annuity contracts (564,911) (397,712)
Guaranteed investment contracts (518,621) (514,831)
Trust deposits (180,074) (146,875)
Claims and annuity payments on fixed
annuity contracts (133,079) (134,383)
Net proceeds from issuances of long-term notes 92,275 98,362
Repayments of collateralized mortgage
obligations (66,556) (49,771)
Net decrease in other senior indebtedness (15,119) (7,741)
Net proceeds from issuance of preferred stock - 178,983
Net receipts (payments) resulting from other
short-term financings (379,207) 454,389
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (763,554) 235,022
------------ ------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (906,491) (276,873)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 1,797,796 1,511,366
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 891,305 $ 1,234,493
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 40,355 $ 26,043
============ ============
Income taxes paid, net of refunds received $ 47,992 $ 34,223
============ ============
<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 June 30, 1994 and September 30, 1993, the results
of its consolidated operations for the three months and nine months ended
June 30, 1994 and 1993 and its consolidated cash flows for the nine months
ended June 30, 1994 and 1993. The results of operations for the three
months and nine months ended June 30, 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 (8,285,000 shares
and 9,446,000 shares for the three months ended June 30, 1994 and 1993,
respectively, and 8,376,000 and 6,903,000 shares for the nine months ended
June 30, 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 $4,105,000 and $4,101,000 for the three months ended June 30, 1994
and 1993, respectively, and $12,307,000 and $12,374,000 for the nine months
ended June 30, 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 (3,069)
Net unrealized gains on certain debt and equity
securities 53,174
Other, net 4,336
--------
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 (benefit) for the three months and
nine months ended June 30, 1994 and 1993 are as follows (in thousands):
Three Months Nine Months
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
Current $(13,041) $ 15,048 $ (8,138) $ 51,098
Deferred 32,141 2,552 62,738 (9,998)
-------- -------- -------- --------
Total income tax
expense $ 19,100 $ 17,600 $ 54,600 $ 41,100
======== ======== ======== ========
In addition, the deferred tax asset associated with net unrealized losses
on certain debt and equity securities charged directly to shareholders'
equity increased by $123,420,000 during the fiscal year 1994 to reflect
a deferred tax benefit of $70,246,000 at June 30, 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 nine months ended
June 30, 1994 and 1993.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $42.1 million or $.91 per common share in the third quarter of 1994,
compared with $33.8 million or $.70 per common share in the third quarter of
1993. For the nine months, such income amounted to $121.6 million or $2.63 per
common share in 1994, compared with $91.4 million or $2.00 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 $.81 per common share and occurred in the first
quarter of 1994. Accordingly, net income amounted to $88.1 million or $1.82 per
common share for the nine months of 1994.
PRETAX INCOME totaled $61.2 million in the third quarter of 1994,
compared with $51.4 million in the third quarter of 1993. For the nine months,
pretax income totaled $176.2 million in 1994, compared with $132.5 million in
1993. The improvements in 1994 over 1993 primarily resulted from increased net
investment income and fee income and decreased general and administrative
expenses.
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 $74.2 million in the third quarter
of 1994 from $69.7 million in the third quarter of 1993. These amounts
represent net investment spreads of 3.37% on average invested assets (computed
on a daily basis) of $8.81 billion in the third quarter of 1994 and 3.26% on
average invested assets of $8.56 billion in the third quarter of 1993. For the
nine months, net investment income increased to $215.7 million in 1994 from
$179.4 million in 1993, representing net investment spreads of 3.25% and 2.89%,
respectively, on average invested assets of $8.84 billion and $8.27 billion,
respectively. The improvements in net investment income in 1994 over 1993
primarily resulted from increases 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
$643.7 million in the third quarter of 1994 from $558.9 million in the third
quarter of 1993. For the nine months, the excess of average invested assets
over average interest-bearing liabilities increased by $229.2 million to $639.6
million during 1994 from $410.4 million during 1993.
Total interest expense aggregated $112.8 million in the third quarter of
1994, down from $121.3 million in the third quarter of 1993. For the nine
months, total interest expense aggregated $345.3 million in 1994, compared with
$370.4 million in 1993. The average rate paid on all interest-bearing
liabilities fell to 5.52% (5.28% on fixed annuities) in the third quarter of
1994 from 6.06% (6.02% on fixed annuities) in the third quarter of 1993. For
the nine months, the average rate paid on all interest-bearing liabilities
declined to 5.61% (5.49% on fixed annuities) in 1994 from 6.28% (6.17% on fixed
annuities) in 1993. Interest-bearing liabilities averaged $8.16 billion during
the third quarter of 1994, compared with $8.00 billion during the third quarter
of 1993. For the nine months, interest-bearing liabilities averaged $8.20
billion in 1994, compared with $7.86 billion in 1993. These declines in rates
paid in 1994 compared with 1993 were primarily due to a lower interest rate
environment and the corresponding downward repricings of annuity contracts.
Investment income totaled $187.0 million in the third quarter of 1994,
down $4.0 million from the $191.0 million recorded in the third quarter of
1993. For the nine months, investment income totaled $561.0 million in 1994,
up $11.2 million from the $549.8 million recorded in 1993. The $4.0 million
decrease in investment income in the quarter resulted primarily from a decline
in yield on average invested assets, partially offset by the effects of higher
levels of such assets. The $11.2 million improvement in investment income in
the year resulted primarily from the effects of a higher level of average
invested assets, partially offset by a decline in yield on such assets. The
yield on average invested assets decreased to 8.49% in the third quarter of
1994 from 8.92% in the third quarter of 1993. For the nine months, the yield
on average invested assets decreased to 8.46% in 1994 from 8.86% 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 8.25% in the third quarter of 1994, 8.72% in the third quarter of
1993, 8.21% for the nine months of 1994 and 8.65% for the nine months of 1993.
These declines in yield in 1994 compared with 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 and third
quarters 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 $2.3
million of enhanced yield on a weighted average volume of $1.03 billion of such
transactions during the third quarter of 1994, compared with $11.5 million of
enhanced yield on a weighted average volume of $1.44 billion during the third
quarter of 1993. For the nine months, the Company recorded $13.9 million of
enhanced yield on a weighted average volume of $1.22 billion of such
transactions in 1994, compared with $17.7 million of enhanced yield on a
weighted average volume of $889.4 million of such transactions in 1993. The
decline in enhanced yield during 1994 is primarily due to a narrowing of market
spreads on such transactions.
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 June 30, 1994, the Company had 18
outstanding Swap Agreements with an aggregate notional principal amount of
$880.3 million. These agreements mature in various years through 1998 and have
an average remaining maturity of 30 months (see "Asset-Liability Matching").
The Company also enhances yield through total return corporate bond swap
agreements (the "Total Return Agreements"). The Company recorded income of
$0.3 million during the third quarter of 1994, compared with income of $5.2
million during the third quarter of 1993 on these Total Return Agreements. For
the nine months, the Company recorded income of $4.1 million on the Total
Return Agreements during 1994, compared with $10.5 million during 1993. The
reduction in income recorded on the Total Return Agreements during 1994
resulted primarily from declines in the market value of the underlying assets
as a consequence of an increase in prevailing interest rates.
GROWTH IN AVERAGE INVESTED ASSETS since 1993 primarily reflects $147.4
million of aggregate net proceeds from the Company's issuances of long-term
notes. In addition, growth in average invested assets reflects sales of the
Company's fixed-rate products, consisting of fixed annuities (including fixed
accounts of variable annuity products) and guaranteed investment contracts
("GICs"). Fixed annuity premiums have aggregated $165.7 million since June 30,
1993. GIC premiums have aggregated $913.4 million since June 30, 1993. Fixed
annuity premiums totaled $70.1 million in the third quarter of 1994, $58.8
million in the third quarter of 1993, $127.2 million in the nine months of
1994, and $185.3 million in the nine months of 1993. These premiums include
premiums for the fixed accounts of variable annuities totaling $48.0 million,
$16.4 million, $84.1 million and $50.5 million, respectively. The increase in
total fixed annuity premiums in the third quarter of 1994 reflects increased
demand for fixed-rate investment options because of recent increases in
prevailing interest rates. The decline in total fixed annuity premiums in the
nine months of 1994 principally reflects the Company's de-emphasis of these
products during early fiscal 1994 given the then prevailing low-interest rate
environment. GIC premiums totaled $299.0 million in the third quarter of 1994
and $321.2 million in the third quarter of 1993. For the nine months, GIC
premiums totaled $675.4 million in 1994, compared with $453.6 million in 1993.
The $22.2 million decrease in GIC sales during the third quarter of 1994 and
the $221.8 million increase in GIC sales during the nine months of 1994
primarily reflect the variable demand for GICs from municipalities, pension
plans and money-market funds.
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 also permit scheduled book value withdrawals.
Contracts purchased by money management firms either prohibit withdrawals or
permit withdrawals with notice ranging from 7 to 270 days. In pricing GICs, the
Company analyzes cash flow information and prices accordingly so that it is
compensated for possible withdrawals prior to maturity. (See "Financial
Condition and Liquidity.")
NET REALIZED INVESTMENT LOSSES totaled $5.3 million in the third quarter
of 1994 and $4.5 million in the third quarter of 1993, and include impairment
writedowns of $5.9 million and $31.0 million, respectively. Therefore, net
gains from sales of investments totaled $0.6 million in the third quarter of
1994 and $26.5 million in the third quarter of 1993. For the nine months, net
realized investment losses totaled $16.6 million in 1994, compared with $13.5
million in 1993, and include impairment writedowns of $20.7 million and $73.3
million, respectively. Therefore, for the nine months, net gains from sales of
investments totaled $4.1 million in 1994 and $59.8 million in 1993.
Net gains in 1994 include $22.2 million of net gains ($6.3 million in the
third quarter) realized on $9.1 million of sales of common stocks ($1.4 million
in the third quarter) made primarily to maximize total return. Net gains in
1994 also include $22.6 million of net losses ($10.8 million in the third
quarter) realized on $2.50 billion of sales of bonds ($490.2 million in the
third quarter). These bond sales include approximately $1.26 billion of sales
of MBSs ($201.2 million in the third quarter) made primarily to acquire other
MBSs which were then used in Dollar Rolls. In addition, bond sales include
$514.8 million of sales of high-yield investments ($201.3 million in the third
quarter) and $506.4 million of sales of certain CMOs and asset-backed
securities ($69.2 million in the third quarter), which were primarily made to
maximize total return. The Company also realized $4.5 million of net gains
($4.6 million in the third quarter) on $612.6 million of redemptions and calls
of bonds ($243.9 million in the third quarter).
Net gains in 1993 include $49.1 million of net gains ($20.5 million in
the third quarter) realized on $3.10 billion of sales of bonds ($1.04 billion
in the third quarter). These bond sales include approximately $1.50 billion of
sales of MBSs ($500.6 million in the third quarter) made primarily to acquire
other MBSs for use in Dollar Rolls. In addition, bond sales in 1993 include
sales made to maximize total return, primarily $560.6 million of sales of high-
yield investments ($186.4 million in the third quarter) and $338.5 million of
sales of securitized residential whole loans made in the nine months. Bond
sales in 1993 also include $199.9 million of sales of senior secured loans
($34.0 million in the third quarter) made primarily to improve the overall
credit quality of the portfolio. In addition, net gains in 1993 include $7.1
million of net gains ($0.9 million in the third quarter) realized on $27.1
million of sales of common stock ($9.7 million in the third quarter).
Impairment writedowns in 1994 include $13.2 million of additional
provisions applied to defaulted bonds ($5.9 million in the third quarter).
Impairment writedowns in 1994 also include $2.5 million of reserves provided
during the second quarter for mortgage loan losses resulting from the January
17, 1994 Los Angeles earthquake. Impairment writedowns in 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 during the first quarter of 1993.
Impairment writedowns in 1993 also include $56.6 million of additional
provisions applied to bonds ($25.4 million in the third quarter) in response
to additional defaults and the effects of declines in interest rates on
interest-rate sensitive securities. These bond writedowns included $25.0
million applied to certain interest-only strips ("IOs") during the third
quarter of 1993. 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 June 30, 1994, the
amortized cost, which is net of impairment writedowns, of these IOs was $28.7
million and the market value was $24.2 million.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $19.8
million in the third quarter of 1994 and $17.0 million in the third quarter of
1993. For the nine months, variable annuity fees totaled $59.1 million in 1994,
compared with $49.0 million in 1993. The increases in variable annuity fees
resulted primarily from asset growth from the receipt of variable annuity
premiums. Variable annuity premiums, which exclude the premiums allocated to
the fixed accounts of variable annuity products, aggregated $870.6 million
since June 30, 1993. Variable annuity premiums totaled $167.2 million in the
third quarter of 1994 and $236.0 million in the third quarter of 1993. The
$68.8 million decline in variable annuity premiums during the third quarter
resulted primarily from recent adverse conditions in the financial markets.
For the nine months, variable annuity premiums totaled $643.7 million in 1994,
up from $570.0 million in 1993. Variable annuity assets averaged $4.41 billion
during the third quarter of 1994 and $3.72 billion during the third quarter of
1993. For the nine months, variable annuity assets averaged $4.40 billion in
1994, compared with $3.53 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 $7.5 million on average assets managed of $2.31 billion in the third
quarter of 1994 and $8.4 million on average assets managed of $2.49 billion in
the third quarter of 1993. For the nine months, asset management fees totaled
$24.0 million on average assets managed of $2.44 billion in 1994, compared with
$24.3 million on average assets managed of $2.43 billion in 1993. The decline
in asset management fees in the third quarter of 1994 resulted primarily from
a decline in market value of assets managed and increased redemptions, both
principally due to the effects of adverse market conditions. Sales of mutual
funds, excluding sales of money market funds, aggregated $442.1 million for the
twelve months ended June 30, 1994. In the third quarter, such sales totaled
$65.9 million in 1994, compared with $117.8 million in 1993. For the nine
months, such sales totaled $302.2 million in 1994, compared with $392.4 million
in 1993. The declines in 1994 mutual fund sales from those recorded in 1993
principally resulted from adverse market conditions.
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
$8.3 million in the third quarter of 1994 and $6.2 million in the third quarter
of 1993. For the nine months, net retained commissions totaled $23.5 million
in 1994, compared with $16.7 million in 1993. Sales of nonproprietary products
(mainly mutual funds and general securities) totaled $1.71 billion in the third
quarter of 1994 and $1.40 billion in the third quarter of 1993. For the nine
months, sales of nonproprietary products totaled $4.92 billion in 1994,
compared with $4.41 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
$3.1 million in the third quarter of 1994 and $2.8 million in the third quarter
of 1993. For the nine months, trust fees totaled $9.1 million in 1994,
compared with $8.3 million in 1993.
SURRENDER CHARGES on fixed and variable annuities totaled $2.9 million
in the third quarter of 1994, compared with $2.3 million in the third quarter
of 1993. For the nine months, surrender charges totaled $8.0 million in 1994
and $7.3 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 $308.3 million in the third quarter of 1994 and $213.9 million in the
third quarter of 1993, representing 14.5% and 10.4%, respectively, of average
fixed and variable annuity reserves. For the nine months, withdrawal payments
totaled $853.1 million in 1994 and $605.2 million in 1993, representing 13.2%
and 9.9%, respectively, of average fixed and variable annuity reserves.
Withdrawals include variable annuity payments made from the separate accounts
totaling $113.6 million in the third quarter of 1994, $76.0 million in the
third quarter of 1993, $336.4 million in the nine months of 1994 and $229.0
million in the nine months of 1993. The increase in surrenders during 1994
periods primarily reflects disintermediation in the fixed annuity products.
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 $32.2 million in the third
quarter of 1994, compared with $37.6 million in the third quarter of 1993. For
the nine months, general and administrative expenses totaled $98.2 million in
1994, compared with $102.0 million in 1993. General and administrative expenses
in 1993 include a $4.1 million provision ($3.1 million in the third quarter)
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 third quarter and nine months
of 1994, compared with 1.0% for the third quarter and nine 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
$17.2 million in the third quarter of 1994 and $13.0 million in the third
quarter of 1993. For the nine months, such amortization totaled $48.6 million
in 1994 and $38.6 million in 1993.
INCOME TAX EXPENSE totaled $19.1 million in the third quarter of 1994,
compared with $17.6 million in the third quarter of 1993, representing
effective tax rates of 31% and 34%, respectively. For the nine months, income
tax expense totaled $54.6 million in 1994, compared with $41.1 million in 1993,
representing effective tax rates of 31% in 1994 and in 1993. These tax rates
reflect the favorable impact of certain low-income housing tax credits.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY decreased by $65.7 million to $949.2 million at June
30, 1994 from $1.01 billion at March 31, 1994, primarily as a result of a $96.1
million increase in net unrealized losses on debt and equity securities
available for sale. In addition, the Company paid $12.5 million of dividends
to shareholders during the third quarter. These reductions in shareholders'
equity were partially offset by net income of $42.1 million realized during the
third quarter. Book value per common share amounted to $18.62 at June 30,
1994. If net unrealized losses on debt and equity securities available for
sale were excluded from the computation of book value per common share, such
value would be $21.82 at June 30, 1994.
TOTAL ASSETS decreased by $396.5 million to $14.34 billion at June 30,
1994 from $14.74 billion at March 31, 1994, principally due to a decrease in
the invested assets portfolio.
INVESTED ASSETS at June 30, 1994 totaled $9.19 billion, compared with
$9.60 billion at March 31, 1994. The Company managed nearly all of these
investments internally. Invested assets declined by $416.8 million during the
third quarter, primarily as a result of a decline in amounts payable to brokers
for purchases of securities. Amounts payable to brokers for purchases of
securities decreased by $452.6 million during the third quarter, principally
as a result of a reduction in dollar-roll positions. Invested assets also
declined as a consequence of the aforementioned increase in unrealized losses
on debt and equity securities.
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 (the "Bond Portfolio"), at June 30, 1994, had
an aggregate amortized cost of $6.18 billion which exceeded its market value
by $214.7 million (including net unrealized losses of $230.2 million on bonds,
notes and redeemable preferred stocks available for sale). At March 31, 1994,
the amortized cost of the Bond Portfolio exceeded its market value by $50.4
million (including net unrealized losses of $94.9 million on bonds, notes and
redeemable preferred stock available for sale). The increase in unrealized
losses on the Bond Portfolio at June 30, 1994 principally resulted from
increases in prevailing interest rates since March 31, 1994.
Approximately $6.16 billion or 99.6% of the Bond Portfolio (at amortized
cost, before deduction of $8.2 million of unallocated general credit reserves)
at June 30, 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 June 30, 1994, approximately
$5.28 billion (at amortized cost) was rated investment grade by one or both of
these agencies or under the NAIC guidelines, including $3.86 billion of U.S.
government/agency and MBSs.
At June 30, 1994, the Bond Portfolio included $887.7 million (market
value, $870.4 million) of bonds not rated investment grade by S&P, Moody's or
the NAIC. Based on their June 30, 1994 amortized cost, these bonds accounted
for 6.1% of the Company's total assets and 9.4% 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
$143.0 million at June 30, 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 June 30, 1994.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 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) $2,898,031 $2,761,095 1 $1,191,097 $1,141,628 $4,089,128 43.50% $3,902,723
BBB+ to BBB-
(Baa1 to Baa3) 411,788 390,501 2 774,680 770,291 1,186,468 12.62 1,160,792
BB+ to BB-
(Ba1 to Ba3) 103,693 99,411 3 253,088 258,098 356,781 3.80 357,509
B+ to B- (B1 to B3) 267,952 254,847 4 182,075 178,532 450,027 4.79 433,379
CCC+ to C-
(Caa to C) 8,434 8,327 5 49,395 48,242 57,829 0.62 56,569
D - - 6 23,037 22,961 23,037 0.25 22,961
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $3,689,898 $3,514,181 $2,473,372 $2,419,752 $6,163,270 $5,933,933
========== ========== ========== ========== ========== ==========
(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>
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $726.6 million at June 30, 1994. Secured
Loans are primarily originated by money center or investment banks or are
originated directly by the Company. Secured Loans are senior to subordinated
debt and equity, and virtually all are secured by assets of the issuer. At June
30, 1994, Secured Loans consisted of loans to 105 borrowers spanning 25
industries, with no industry constituting more than 9% of this portfolio.
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.
The majority of the Company's Secured Loans are not rated by S&P or Moody's.
However, 94% of the Secured Loans (at amortized cost) 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 positions.
MORTGAGE LOANS aggregated $1.37 billion at June 30, 1994 and consisted
of approximately 665 first mortgage loans with an average loan balance of
approximately $2.1 million, collateralized by properties located in 24 states.
Approximately 53% of the portfolio was multifamily residential, 19% was retail,
8% was office, 8% was industrial and 12% was other types. At June 30, 1994,
approximately 35% of the portfolio was secured by properties located in
California and no more than 12% of the portfolio was secured by properties in
any other single state. At June 30, 1994, there were no construction, takeout,
farm or land loans and there were 21 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,
virtually all mortgage loans had loan-to-value ratios of 75% or less. At June
30, 1994, approximately 24% of the mortgage loan portfolio consisted of loans
with balloon payments due before July 1, 1997. At June 30, 1994, loans
delinquent by more than 90 days totaled $49.3 million and constituted 3.6% of
total mortgages. Loans foreclosed upon and transferred to real estate in the
balance sheet during fiscal 1994 totaled $5.1 million (0.4% of total
mortgages).
Approximately 47% of the mortgage loans in the portfolio at June 30, 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 balance of the mortgage loan portfolio has been
originated by the Company under strict underwriting standards. 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, its emphasis on multi-family
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.
At June 30, 1994, mortgage loans having an aggregate carrying value of
$76.7 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.
OTHER INVESTED ASSETS aggregated $735.4 million at June 30, 1994,
including $589.1 million of investments in limited partnerships and an
aggregate of $146.3 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 June 30, 1994 of
$135.6 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 85% of the Company's fixed annuity and GIC reserves
had surrender penalties or restrictions at June 30, 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 June 30,
1994, the weighted average life of the Company's investments was approximately
4-1/4 years and the portfolio had a duration of approximately 3-1/2 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 generally utilizes Swap
Agreements 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.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost,
which is net of impairment writedowns) which are in default as to the payment
of principal or interest, totaled $59.7 million at June 30, 1994, constituting
0.6% of total invested assets at amortized cost. The market value of such
defaulted investments was $59.3 million at June 30, 1994.
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 June 30, 1994,
approximately $1.85 billion of the Company's Bond Portfolio had an aggregate
unrealized gain of $59.0 million, while approximately $4.33 billion had an
aggregate unrealized loss of $273.7 million. In addition, the Company's
investment portfolio also currently provides approximately $100.8 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 June 30, 1994, had invested assets with an amortized cost of $953.4 million
(market value of $943.0 million) 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 June 30, 1994, the Parent had
three GICs purchased by local government authorities (which aggregated $270.6
million, are primarily due serially through 2003 and pay interest semiannually
at rates ranging from 8-3/8% to 8-1/2%) and a $75.0 million GIC purchased by
a money market fund which is due in July 1994 and pays interest quarterly at
a defined short-term floating rate. 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 $97.4 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, $89.9 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 $84.5 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 June 30, 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.
At June 30, 1994 there was approximately $57.9 million of dividends
available from its regulated life insurance subsidiaries, supplementing the
Parent's liquidity. 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
Currently, the Company's insurance subsidiaries are subject to regulation
and supervision by the states in which they are admitted to transact business.
State insurance laws generally establish supervisory agencies with broad
administrative and supervisory powers related to granting and revoking licenses
to transact business, regulating marketing and other trade practices, operating
guaranty associations, licensing agents, approving policy forms, regulating
certain premium rates, regulating insurance holding company systems,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and surplus,
regulating the type and amount of investments permitted, limiting the amount
of dividends that can be paid without first obtaining regulatory approval and
other related matters.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation which changes, and in
many cases increases, the states' authority to regulate insurance companies.
Legislation is under consideration in Congress which could result in the
federal government assuming some role in the regulation of insurance companies.
The NAIC recently approved and recommended to the states for adoption and
implementation several regulatory initiatives designed to reduce the risk of
insurance company insolvencies. These initiatives include new investment
reserve requirements, risk-based capital standards and restrictions on an
insurance company's ability to pay dividends to its stockholders. A committee
of the NAIC is developing a model law to govern insurance company investments
scheduled for introduction by the end of 1994. While the specific provisions
of such a model law are not known at this time, and current proposals are still
being debated, the Company is monitoring developments in this area and the
effects any change would have on the Company.
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 6 - EXHIBITS AND REPORTS ON FORM 8-K .
- - -----------------------------------------
EXHIBITS
24 The consent of Price Waterhouse LLP, 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 April 26, 1994, the Company filed a current report on Form 8-K which
announced its second quarter 1994 earnings.
On July 20, 1994, the Company filed a current report on Form 8-K which
announced its third quarter 1994 earnings.
<PAGE>
SIGNATURES
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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 AUGUST 12, 1994 /s/ JAY S. WINTROB
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Jay S. Wintrob
Executive Vice President
Dated AUGUST 12, 1994 /s/ SCOTT L. ROBINSON
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Scott L. Robinson
Senior Vice President and Controller
