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, 1995
--------------------------------------
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, 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, 29,342,271 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 (Unaudited) -
March 31, 1995 and September 30, 1994 3-4
Consolidated Income Statement (Unaudited) -
Three Months and Six Months Ended March 31, 1995 and 1994 5
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended March 31, 1995 and 1994 6-7
Notes to Consolidated Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-22
Part II - Other Information 23
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
March 31, September 30,
1995 1994
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 743,044 $ 569,382
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value
(amortized cost: March 31, 1995,
$5,816,160; September 30, 1994,
$5,599,780) 5,569,968 5,270,738
Held for investment, at amortized cost
(fair value: March 31, 1995,
$869,565; September 30, 1994,
$1,072,222) 858,888 1,064,132
Mortgage loans 1,519,782 1,426,924
Common stocks, at fair value
(cost: March 31, 1995, $30,322;
September 30, 1994, $49,336) 44,189 61,660
Partnerships 719,784 593,854
Real estate 107,007 107,053
Other invested assets 235,719 186,647
------------ -------------
Total investments 9,798,381 9,280,390
Variable annuity assets 4,535,622 4,513,093
Accrued investment income 108,024 105,686
Deferred acquisition costs 573,152 581,874
Other assets 215,097 175,182
------------ -------------
TOTAL ASSETS $ 15,230,276 $ 14,656,225
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
March 31, September 30,
1995 1994
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 4,798,893 $ 4,519,623
Reserves for guaranteed investment contracts 2,949,632 2,783,522
Trust deposits 448,174 442,320
Payable to brokers for purchases of securities 573,536 643,734
Income taxes currently payable 1,594 4,600
Other liabilities 266,991 212,429
------------ -------------
Total reserves, payables
and accrued liabilities 9,038,820 8,606,228
------------ -------------
Variable annuity liabilities 4,535,622 4,513,093
------------ -------------
Senior indebtedness:
Long-term notes and debentures 472,835 472,835
Collateralized mortgage obligations -- 28,662
------------ -------------
Total senior indebtedness 472,835 501,497
------------ -------------
Deferred income taxes 101,169 74,319
------------ -------------
Shareholders' equity:
Preferred stock 374,273 374,273
Nontransferable Class B Stock 6,826 6,826
Common Stock 29,342 28,977
Additional paid-in capital 201,896 188,667
Retained earnings 579,359 512,571
Net unrealized losses on debt and
equity securities available for
sale (109,866) (150,226)
------------ -------------
Total shareholders' equity 1,081,830 961,088
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,230,276 $ 14,656,225
============ =============
<PAGE>
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and six months ended March 31, 1995 and 1994
(In thousands, except per share amounts - unaudited)
<CAPTION>
Three months Six months
--------------------- ---------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 215,457 $ 183,402 $ 417,624 $ 373,933
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (62,466) (64,000) (122,344) (133,920)
Guaranteed investment contracts (50,306) (34,531) (97,561) (71,376)
Trust deposits (2,606) (2,032) (5,276) (3,972)
Senior indebtedness (13,363) (12,103) (27,618) (23,215)
--------- --------- --------- ---------
Total interest expense (128,741) (112,666) (252,799) (232,483)
--------- --------- --------- ---------
NET INVESTMENT INCOME 86,716 70,736 164,825 141,450
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (8,344) (5,887) (15,575) (11,254)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 19,768 19,724 40,221 39,311
Asset management fees 6,662 8,127 13,687 16,476
Net retained commissions 7,383 7,070 14,003 13,707
Trust fees 3,942 2,916 7,692 5,970
Loan servicing fees 6,055 -- 8,033 --
--------- --------- --------- ---------
TOTAL FEE INCOME 43,810 37,837 83,636 75,464
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 3,412 2,637 6,156 5,151
General and administrative expenses (41,116) (32,500) (74,224) (65,957)
Amortization of deferred acquisition costs (18,740) (16,090) (37,414) (31,333)
Other, net 1,016 1,074 2,884 1,550
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (55,428) (44,879) (102,598) (90,589)
--------- --------- --------- ---------
PRETAX INCOME 66,754 57,807 130,288 115,071
Income tax expense (19,400) (17,800) (37,800) (35,500)
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 47,354 40,007 92,488 79,571
Cumulative effect of change in accounting
for income taxes -- -- -- (33,500)
--------- --------- --------- ---------
NET INCOME $ 47,354 $ 40,007 $ 92,488 $ 46,071
========= ========= ========= =========
EARNINGS PER SHARE:
Income before cumulative effect of change
in accounting for income taxes $ 1.03 $ .86 $ 2.01 $ 1.71
Cumulative effect of change in accounting
for income taxes -- -- -- (.80)
--------- --------- --------- ---------
Net income $ 1.03 $ .86 $ 2.01 $ .91
========= ========= ========= =========
NET EARNINGS APPLICABLE TO COMMON STOCK
(used in the computation of earnings
per share) $ 43,180 $ 35,906 $ 84,175 $ 37,869
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 42,067 41,604 41,959 41,622
========= ========= ========= =========
</TABLE>
<PAGE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended March 31, 1995 and 1994
(In thousands - unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 92,488 $ 46,071
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 122,344 133,920
Guaranteed investment contracts 97,561 71,376
Trust deposits 5,276 3,972
Net realized investment losses 15,575 11,254
Amortization (accretion) of net
premiums (discounts) on investments (14,209) 3,213
Provision for deferred income taxes 5,117 30,597
Cumulative effect of change in
accounting for income taxes -- 33,500
Change in:
Deferred acquisition costs (13,578) (16,210)
Other assets (15,224) (1,383)
Income taxes currently payable (6,420) (32,490)
Other liabilities 15,728 (6,460)
Other, net 10,501 6,788
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 315,159 284,148
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (1,756,731) (3,788,156)
Bonds, notes and redeemable preferred
stocks held for investment (39,777) (26,274)
Mortgage loans (146,464) (120,098)
Partnerships (188,909) (189,332)
Other investments, excluding short-term
investments (88,871) (52,433)
Net assets of Imperial Premium Finance, Inc. (442,804) --
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 1,513,052 2,948,436
Bonds, notes and redeemable preferred stock
held for investment -- 7,640
Kaufman and Broad Home Corporation
warrants -- 28,618
Other investments, excluding short-term
investments 73,460 63,025
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 568,331 169,380
Bonds, notes and redeemable preferred
stocks held for investment 246,372 194,691
Mortgage loans 40,045 84,971
Other investments, excluding short-term
investments 67,036 119,674
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (155,260) (559,858)
------------ ------------
<PAGE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended March 31, 1995 and 1994
(In thousands - unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (25,700) $ (24,986)
Premium receipts on:
Fixed annuity contracts 559,286 57,136
Guaranteed investment contracts 716,775 376,464
Net exchanges to (from) the fixed accounts
of variable annuity contracts 51,572 (38,090)
Receipts of trust deposits 262,210 142,738
Withdrawal payments on:
Fixed annuity contracts (360,703) (328,232)
Guaranteed investment contracts (648,226) (430,508)
Trust deposits (261,632) (102,610)
Claims and annuity payments on fixed
annuity contracts (92,472) (90,000)
Net proceeds from issuances of long-term notes -- 92,275
Repayments of collateralized mortgage
obligations (28,662) (49,810)
Net decrease in other senior indebtedness -- (15,119)
Net receipts from (repayments of) other
short-term financings (158,685) 156,271
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,763 (254,471)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 173,662 (530,181)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 569,382 1,797,796
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 743,044 $ 1,267,615
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 27,485 $ 26,636
============ ============
Income taxes paid, net of refunds received $ 39,103 $ 37,387
============ ============
<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, 1995 and September 30, 1994, the results
of its consolidated operations for the three months and six months ended
March 31, 1995 and 1994 and its consolidated cash flows for the six months
ended March 31, 1995 and 1994. The results of operations for the three
months and six months ended March 31, 1995 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, 1994, contained in the Company's 1994 Annual Report to
Shareholders. Certain items have been reclassified to conform to the
current periods' presentation.
2. Earnings per Share
------------------
The calculation of earnings per share is made by dividing applicable
earnings by the weighted average number of shares of Common Stock and
Nontransferable Class B Stock (collectively referred to as "Common Stock")
outstanding during each period, adjusted for the incremental shares
attributed to common stock equivalents. Common stock equivalents include
outstanding employee stock options and convertible preferred stock, which
includes the Series A and D Depositary Shares issued in October 1991 and
March 1993, respectively. Earnings Applicable To Common Stock are reduced
by preferred stock dividend requirements, which amounted to $4,174,000 and
$4,101,000 for the three months ended March 31, 1995 and 1994,
respectively, and $8,313,000 and $8,202,000 for the six months ended March
31, 1995 and 1994, respectively, and do not include dividends paid on the
convertible issues amounting to $3,477,000 in each of the three-month
periods ended March 31, 1995 and 1994 and $6,953,000 in each of the six-
month periods ended March 31, 1995 and 1994.
3. Ratios of Earnings to Fixed Charges
-----------------------------------
The ratios of earnings to fixed charges for the three months and six months
ended March 31, 1995 and 1994 are as follows:
Three Months Six Months
--------------- ---------------
1995 1994 1995 1994
----- ----- ----- -----
Ratio of earnings to fixed
charges (excluding interest on
fixed annuities, guaranteed
investment contracts and
trust deposits) 6.0x 5.8x 5.7x 6.0x
===== ===== ===== =====
Ratio of earnings to fixed
charges (including interest on
fixed annuities, guaranteed
investment contracts and
trust deposits) 1.5x 1.5x 1.5x 1.5x
===== ===== ===== =====
<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 of SunAmerica Inc. (the "Company") for the
three months and six months ended March 31, 1995 and 1994.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $47.4 million or $1.03 per share in the second quarter of 1995,
compared with $40.0 million or $0.86 per share in the second quarter of 1994.
For the six months, such income amounted to $92.5 million or $2.01 per share
in 1995, compared with $79.6 million or $1.71 per share in 1994. 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 non-cash charge of
$33.5 million or $0.80 per share in the first quarter of fiscal 1994.
Accordingly, net income amounted to $46.1 million or $0.91 per share for the
six months of 1994.
PRETAX INCOME totaled $66.8 million in the second quarter of 1995 and
$57.8 million in the second quarter of 1994. For the six months, pretax income
totaled $130.3 million in 1995, compared with $115.1 million in 1994. These
improvements primarily resulted from increased net investment income and fee
income, which were partially offset by increased general and administrative
expenses, additional amortization of deferred acquisition costs and higher net
realized investment losses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $86.7 million in the second quarter
of 1995 from $70.7 million in second quarter of 1994. These amounts represent
net investment spreads of 3.63% on average invested assets (computed on a daily
basis) of $9.56 billion in the second quarter of 1995 and 3.21% on average
invested assets of $8.81 billion in the second quarter of 1994. For the six
months, net investment income increased to $164.8 million in 1995 from $141.5
million in 1994, representing net investment spreads of 3.48% and 3.19%,
respectively, on average invested assets of $9.48 billion and $8.86 billion,
respectively.
Investment income totaled $215.5 million in second quarter of 1995, up
$32.1 million from the $183.4 million recorded in the second quarter of 1994.
For the six months, investment income amounted to $417.6 million in 1995, up
$43.7 million from the $373.9 million recorded in 1994. Investment income
increased in 1995 because of increased yields on a higher level of averaged
invested assets. The yield on average invested assets rose to 9.01% in the
second quarter of 1995 from 8.32% in the second quarter of 1994. For the six
months, the yield on average invested assets rose to 8.81% in 1995 from 8.44%
in 1994. These yields are computed without subtracting net realized investment
losses. If net realized investment losses were included in the computation, the
yields would be 8.66% in the second quarter of 1995, 8.06% in the second
quarter of 1994, 8.48% in the six months of 1995 and 8.19% in the six months
of 1994. Over the last six fiscal quarters, the Company's yields (before
considering net realized investment losses) on average invested assets have
ranged from 8.32% to 9.01%; however, there can be no assurance that the Company
will achieve similar yields in future periods.
Increased investment yields primarily resulted from increased
contributions from the Company's partnership investments. Investment income
includes $22.8 million of partnership income in the second quarter of 1995,
compared with $11.4 million in the second quarter of 1994. This income
represents a yield of 13.12% on related average invested assets of $694.8
million in the second quarter of 1995, versus 8.58% on average partnership
assets of $533.2 million in the second quarter of 1994. For the six months,
partnership income totaled $46.4 million in 1995 (representing a yield of
14.23%) and $25.6 million in 1994 (representing a yield of 9.53%).
The Company has also historically enhanced investment yield through its
use of both dollar roll transactions ("Dollar Rolls") and total return
corporate bond swap agreements ("Total Return Agreements"). Although the
Company continues to use these programs, their use did not have a significant
impact on investment income in fiscal 1995. (See "Asset-Liability Matching" for
additional discussion of Dollar Rolls and Total Return Agreements).
Total interest expense aggregated $128.7 million in the second quarter
of 1995 and $112.7 million in the second quarter of 1994. For the six months,
interest expense aggregated $252.8 million in 1995, compared with $232.5
million in 1994. The average rate paid on all interest-bearing liabilities
increased to 5.83% in the second quarter of 1995 from 5.52% in the second
quarter of 1994. For the six months, the average rate paid on all interest-
bearing liabilities increased to 5.77% in 1995 from 5.66% in 1994.
Interest-bearing liabilities averaged $8.83 billion during the second quarter
of 1995, compared with $8.16 billion during the second quarter of 1994. For
the six months, interest-bearing liabilities averaged $8.76 billion in 1995,
compared with $8.22 billion in 1994.
The increases in the average rate paid on all interest-bearing
liabilities primarily resulted from increased average crediting rates on the
Company's guaranteed investment contracts ("GICs"). Average GIC crediting
rates were 6.68% in the second quarter of 1995, 6.05% in the second quarter of
1994, 6.61% for the six months of 1995 and 6.11% for the six months of 1994.
Approximately 30% of the Company's GIC portfolio is variable-rate obligations
that reprice periodically based upon certain defined indices. In addition, in
fiscal 1995 the Company increased its average crediting rate on new GIC fixed-
rate obligations relative to those issued in the comparable 1994 periods to
maintain a generally competitive market rate as prevailing interest rates
increased. The increases in the average crediting rates on the Company's GIC
obligations were partially offset by modest declines in the average crediting
rates on the Company's fixed annuity contracts. Average fixed annuity crediting
rates were 5.38% in the second quarter of 1995, 5.42% in the second quarter of
1994, 5.35% in the six months of 1995 and 5.59% in the six months of 1994.
These declines in annuity rates were primarily due to a decline in prevailing
interest rates that began during the latter half of fiscal 1992 and continued
into the first half of the 1994 fiscal year. This decline was reflected in a
corresponding decrease in the average crediting rate on fixed annuity
contracts, the majority of which reprice annually as interest rate guarantees
are renewed.
GROWTH IN AVERAGE INVESTED ASSETS since 1994 primarily reflects sales of
the Company's fixed-rate products, consisting of fixed annuities (including the
fixed accounts of variable annuity products) and GICs. Fixed annuity premiums
aggregated $416.0 million in the second quarter of 1995, up significantly from
$33.3 million in the second quarter of 1994. For the six months, premiums from
fixed annuities totaled $559.3 million in 1995, up from $57.1 million in 1994.
These premiums include premiums for the fixed accounts of variable annuities
totaling $86.6 million, $23.6 million, $146.5 million and $36.1 million,
respectively. Total fixed annuity premiums have increased primarily due to
rising demand for fixed-rate investment options as prevailing interest rates
increased during the latter half of the 1994 fiscal year and into fiscal 1995.
GIC premiums increased to $152.5 million in the second quarter of 1995 from
$117.3 million in the second quarter of 1994. For the six months, GIC premiums
totaled $716.8 million in 1995, compared with $376.5 million in 1994. These
increases in GIC sales reflect the variable demand for such products from state
and local governmental authorities, pension plans, banks and asset management
firms. In addition, the increase in GIC sales reflects the success of the
Company's efforts to increase its GIC client base, particularly among asset
management firms.
The GICs issued by the Company and Sun Life Insurance Company of America
("Sun Life of America") typically guarantee the payment of principal and
interest at a fixed rate for a fixed term of three to five years. 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 of America imposes surrender penalties in the event of other withdrawals
prior to maturity. Contracts purchased by banks or state and local governmental
authorities may also permit scheduled book value withdrawals subject to the
terms of the underlying indenture or agreement. Contracts purchased by asset
management firms either prohibit withdrawals or permit withdrawals with notice
ranging from seven 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 $8.3 million in the second quarter
of 1995 and $5.9 million in the second quarter of 1994 and include impairment
writedowns of $17.0 million and $8.7 million, respectively. Therefore, net
gains from sales of investments totaled $8.7 million in the second quarter of
1995 and $2.8 million in the second quarter of 1994. For the six months, net
realized investment losses totaled $15.6 in 1995, compared with $11.3 million
in 1994 and include impairment writedowns of $21.7 million and $14.7 million,
respectively. Therefore, for the six months, net gains from sales of
investments totaled $6.1 million in 1995 and $3.4 million in 1994.
Net gains in 1995 include $10.8 million of net gains ($7.8 million in
the second quarter) on sales of common stocks made primarily to maximize total
return and $8.0 million of net losses ($0.4 million in the second quarter) on
sales of various bonds that were also primarily made to maximize total return.
In addition, the Company realized $2.3 million of net gains ($1.5 million in
the second quarter) on sales of real estate.
Net gains in 1994 include $15.9 million of net gains ($8.7 million in the
second quarter) on sales of common stocks made primarily to maximize total
return. Net gains in 1994 also include $11.9 million of net losses ($5.8
million in the second quarter) 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 mortgage-backed securities ("MBSs") ($409.0 million in the
second quarter) made primarily to acquire other MBSs that were then used in
Dollar Rolls. In addition, bond sales include sales of high-yield investments
and sales of certain collateralized mortgage obligations asset-backed
securities that were made primarily to maximize total return.
Impairment writedowns include additional provisions applied to defaulted
bonds amounting to $18.1 million in 1995 ($13.8 million in the second quarter)
and $7.2 million in 1994 ($1.2 million in the second quarter). In addition,
the Company wrote down certain mortgage loans by $3.5 million during the second
quarter of 1994 for estimated losses resulting from the January 17, 1994 Los
Angeles earthquake.
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 second quarter of 1995 and $19.7 million in the second quarter
of 1994. For the six months, variable annuity fees totaled $40.2 million in
1995, compared with $39.3 million in 1994. Variable annuity assets averaged
$4.43 billion during the second quarter of 1995 and $4.50 billion during the
second quarter of 1994. For the six months, variable annuity assets averaged
$4.43 billion in 1995, compared with $4.40 billion in 1994. Variable annuity
premiums, which exclude premiums allocated to the fixed accounts of variable
annuity products, have aggregated $489.0 million since March 31, 1994.
Variable annuity premiums declined to $106.9 million in the second quarter of
1995 from $246.4 million in the second quarter of 1994. For the six months,
variable annuity premiums declined to $206.2 million in 1995 from $476.5
million in 1994. These declines in premiums can be attributed, in part, to a
rising demand for fixed-rate investment options, including the fixed accounts
of variable annuities, as prevailing interest rates increased during the latter
half of the 1994 fiscal year and during fiscal 1995. The Company has
encountered increased competition in the variable annuity marketplace in fiscal
1994 and 1995 and anticipates that the market will remain highly competitive
for the foreseeable future.
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 $6.7 million on average assets managed of $2.03 billion in the second
quarter of 1995 and $8.1 million on average assets managed of $2.46 billion in
the second quarter of 1994. For the six months, asset management fees totaled
$13.7 million on average assets managed of $2.07 billion in 1995, compared with
$16.5 million on average assets managed of $2.50 billion in 1994. Asset
management fees decreased primarily due to a decline in the market value of
assets managed and redemptions since March 31, 1994, both a reflection of
adverse market conditions for fixed-income and equity securities which can be
attributed, in part, to rising interest rates during the latter half of the
1994 fiscal year and into fiscal 1995. Mutual fund sales in 1995 were also
affected by these adverse market conditions. Sales of mutual funds, excluding
sales of money market funds, totaled $30.9 million in the second quarter of
1995, compared with $124.0 million in the second quarter 1994. For the six
months, such sales totaled $60.5 million in 1995, compared with $236.3 million
in 1994.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiaries, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$7.4 million in the second quarter of 1995 and $7.1 million in the second
quarter of 1994. For the six months, net retained commissions totaled $14.0
million in 1995, compared with $13.7 million in 1994. Sales of nonproprietary
products (mainly mutual funds and general securities) totaled $1.67 billion in
the second quarter of 1995 and $1.68 billion in the second quarter of 1994.
For the six months, sales of nonproprietary products totaled $2.93 billion in
1995, compared with $3.21 billion in 1994. Net retained commissions are not
proportionate to sales primarily due to differences in sales mix.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts ("IRAs"), as well as for other qualified pension plans. Trust fees
increased to $3.9 million in the second quarter of 1995 from $2.9 million in
the second quarter of 1994. For the six months, trust fees totaled $7.7
million in 1995, compared with $6.0 million in 1994. Trust fees increased
primarily due to an increase in the average number of trust accounts,
principally resulting from the October 1, 1994 acquisition of the right to
service certain IRAs from New England Mutual Life Insurance Company.
LOAN SERVICING FEES are earned by the Company's recently formed
subsidiary, Imperial Premium Finance, Inc. ("Imperial"). Imperial provides
short-term installment loans for businesses to fund their commercial property
and casualty insurance premiums. These loans are secured by the unearned
premium associated with the underlying insurance policies. Currently, Imperial
sells most of the short-term loans it originates and earns fee income by
servicing the sold loans. Such fee income totaled $6.1 million for the second
quarter and $8.0 million for the six months of 1995. Imperial's net assets
were acquired on November 30, 1994, and, therefore, no such fee income was
earned in the comparable periods of 1994.
SURRENDER CHARGES on fixed and variable annuities totaled $3.4 million
in the second quarter of 1995, compared with $2.6 million in the second quarter
of 1994. For the six months, surrender charges totaled $6.2 million in 1995
and $5.2 million in 1994. Surrender charges generally are assessed on annuity
withdrawals at declining rates during the first five to seven years of the
contract. Withdrawal payments, which include surrenders and lump-sum annuity
benefits, totaled $344.9 million in the second quarter of 1995 and $307.1
million in the second quarter of 1994. These payments represent 16.1% and
14.1%, respectively, of average fixed and variable annuity reserves. For the
six months, withdrawal payments totaled $657.8 million in 1995 and $544.8
million in 1994, and represent 15.5% and 12.5%, respectively, of average fixed
and variable annuity reserves. Withdrawals include variable annuity payments
from the separate accounts totaling $164.7 million in the second quarter of
1995, $134.1 million in the second quarter of 1994, $309.2 million in the six
months of 1995 and $222.8 million in the six months of 1994. Variable annuity
surrenders have increased primarily due to surrenders on a closed block of
business, policies coming off surrender charge restrictions and increased
competition in the marketplace. In addition, fixed annuity surrenders have
increased largely due to policies coming off surrender charge restrictions.
Management anticipates that withdrawal rates will remain relatively stable for
the foreseeable future and the Company's investment portfolio has been
structured to provide sufficient liquidity for anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $41.1 million in the second
quarter of 1995, compared with $32.5 million in the second quarter of 1994. For
the six months, general and administrative expenses totaled $74.2 million in
1995, compared with $66.0 million in 1994, and represent 1.0% of average total
assets for 1995 and 0.9% for 1994. General and administrative expenses in
fiscal 1995 include the expenses of recently acquired Imperial. In addition,
the second quarter of 1995 includes $2.5 million of expense for the initial
stages of a recently initiated national advertising campaign. General and
administrative expenses remain closely controlled through a company-wide cost
containment program to increase the Company's brand name awareness.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded
during 1994 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
$18.7 million in the second quarter of 1995 and $16.1 million in the second
quarter of 1994. For the six months, such amortization totaled $37.4 million
in 1995 and $31.3 million in 1994.
INCOME TAX EXPENSE totaled $19.4 million in the second quarter of 1995
and $17.8 million in the second quarter of 1994, representing effective tax
rates of 29% and 31%, respectively. For the six months, income tax expense
totaled $37.8 million in 1995, compared with $35.5 million in 1994, also
representing effective tax rates of 29% and 31%, respectively. These tax rates
reflect the favorable impact of certain affordable housing tax credits.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY increased by $119.9 million to $1.08 billion at
March 31, 1995 from $961.9 million at December 31, 1994. This increase
primarily reflects an $85.2 million reduction in net unrealized losses on debt
and equity securities available for sale charged directly to shareholders'
equity and $47.4 million of net income recorded in the second quarter of 1995.
These favorable factors were partially offset by $13.0 million of dividends
paid by the Company to its shareholders. Book value per share amounted to
$21.66 at March 31, 1995, compared with $18.76 at December 31, 1994. Excluding
net unrealized losses on debt and equity securities available for sale, book
value per share amounted to $24.33 at March 31, 1995 and $23.49 at December 31,
1994.
TOTAL ASSETS increased by $451.7 million to $15.23 billion at March 31,
1995 from $14.78 billion at December 31, 1994, principally due to a $305.3
million increase in invested assets and a $176.3 million increase in the
separate account for variable annuities.
INVESTED ASSETS at March 31, 1995 totaled $9.80 billion, compared with
$9.49 billion at December 31, 1994. This $305.3 million increase primarily
resulted from an increase in reserves for fixed annuity contracts and a
decrease in net unrealized losses on debt and equity securities available for
sale.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. The Company carries
the portion of its portfolio of bonds, notes and redeemable preferred stocks
that is available for sale (the "Available for Sale Portfolio") at estimated
fair value. The remaining portion of its portfolio of bonds, notes and
redeemable preferred stocks is held for investment and is carried at amortized
cost.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for
investment and the Available for Sale Portfolio (the "Bond Portfolio"), at
March 31, 1995, had an aggregate amortized cost that exceeded its fair value
by $235.5 million (including net unrealized losses of $246.2 million on the
Available for Sale Portfolio). The aggregate amortized cost of the Bond
Portfolio was $430.1 million above its fair value at December 31, 1994
(including net unrealized losses of $421.7 million on the Available for Sale
Portfolio). The decrease in net unrealized losses on the Bond Portfolio since
December 31, 1994 principally resulted from a decrease in prevailing long-term
interest rates and the corresponding effect on the Bond Portfolio.
Approximately $6.66 billion or 99.6% of the Bond Portfolio (at amortized
cost) at March 31, 1995 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, 1995,
approximately $5.68 billion (at amortized cost) was rated investment grade by
one or both of these agencies or under the NAIC guidelines, including
$4.17 billion of U.S. government/agency securities and MBSs.
At March 31, 1995, the Bond Portfolio included $980.5 million (fair
value, $938.1 million) of bonds not rated investment grade by S&P, Moody's or
the NAIC. Based on their March 31, 1995 amortized cost, these bonds accounted
for 6.4% of the Company's total assets and 9.8% 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
$213.8 million at March 31, 1995 (see "Asset-Liability Matching").
Non-investment grade securities generally provide higher yields and
involve greater risks than investment grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade securities.
The Company intends that its holdings of such securities not exceed current
levels, but its policies may change from time to time, including in connection
with any possible acquisition. The Company had no material concentrations of
non-investment grade securities at March 31, 1995.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1995.
<TABLE>
Rated Bonds By Rating Classification
(Dollars in thousands)
<CAPTION>
Issues not rated by S&P/Moody's
Issues Rated by S&P/Moody's By NAIC Category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
Estimated NAIC Estimated Percent of Estimated
S&P (Moody's) Amortized fair category Amortized fair Amortized invested fair
category(1) cost value (2) cost value cost assets(3) value
- --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3) $2,934,180 $2,813,406 1 $1,456,030 $1,416,400 $4,390,210 43.77% $4,229,806
BBB+ to BBB-
(Baa1 to Baa3) 457,965 433,408 2 831,075 809,649 1,289,040 12.85 1,243,057
BB+ to BB-
(Ba1 to Ba3) 84,479 79,575 3 152,331 150,285 236,810 2.36 229,860
B+ to B- (B1 to B3) 434,698 418,799 4 193,750 187,255 628,448 6.27 606,054
CCC+ to C-
(Caa to C) 24,547 21,103 5 56,029 49,281 80,576 0.80 70,384
D -- -- 6 34,682 31,802 34,682 0.35 31,802
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $3,935,869 $3,766,291 $2,723,897 $2,644,672 $6,659,766 $6,410,963
========== ========== ========== ========== ========== ==========
(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.
(3) At amortized cost.
</TABLE>
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $689.2 million at March 31, 1995. 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
March 31, 1995, Secured Loans consisted of loans to 109 borrowers spanning 33
industries, with no industry concentration constituting more than 12% of these
assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation
in these transactions has enabled the Company to improve its investment yield.
The majority of the Company's Secured Loans are not rated by S&P or Moody's.
However, 88% 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 technical 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 financial
covenants and senior secured positions.
MORTGAGE LOANS aggregated $1.52 billion at March 31, 1995 and consisted
of 651 first mortgage loans with an average loan balance of approximately $2.3
million, collateralized by properties located in 26 states. Approximately 50%
of the portfolio was multifamily residential, 23% was retail, 7% was office,
7% was industrial and 13% was other types. At March 31, 1995, approximately 29%
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 March 31, 1995, there were no construction, takeout, farm or land loans and
there were 27 loans with outstanding balances of $10 million or more, which
loans collectively aggregated approximately 29% 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 March 31, 1995, approximately 21%
of the mortgage loan portfolio consisted of loans with balloon payments due
before April 1, 1998. At March 31, 1995, loans delinquent by more than 90 days
totaled $20.4 million and constituted 1.3% of total mortgages. Loans foreclosed
upon and transferred to real estate in the balance sheet during fiscal 1995
totaled $13.3 million (0.9% of total mortgages).
Approximately 39% of the mortgage loans in the portfolio at March 31,
1995 were seasoned loans underwritten to the Company's standards and purchased
at or near par from the Resolution Trust Corporation 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 properties such as offices, hotels and shopping centers
generally represent a higher level of risk for the industry than do mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans, and the effects of general
economic conditions on these commercial properties. However, due to the
seasoned nature of the Company's mortgage loans, its emphasis on multifamily
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 March 31, 1995, mortgage loans having an aggregate carrying value of
$78.0 million had been restructured. Of this amount, $10.6 million was
restructured during fiscal 1995, and $0.6 million, $24.2 million and $42.6
million were restructured during fiscal years 1994, 1993 and 1992,
respectively.
PARTNERSHIP investments totaled $719.8 million at March 31, 1995,
constituting investments in 247 separate partnerships with an average size of
$2.9 million. The portfolio includes: (i) $324.9 million of partnerships
managed by independent money managers that invest in a broad selection of
equity and fixed-income securities, currently including approximately 500
separate issuers; (ii) $231.0 million of partnerships that make tax-advantaged
investments in affordable housing, currently involving 191 multifamily projects
in 31 states; and (iii) $163.9 million of partnerships that invest in mortgage
loans and income-producing real estate. At March 31, 1995, $433.4 million of
the Company's partnerships were accounted for by using the cost method and
$286.4 million by using the equity method. The risks generally associated with
partnerships include those related to their underlying investments (i.e.
equity securities, debt securities and real estate), plus a level of
illiquidity, which is mitigated for the affordable housing partnerships by the
marketability of the tax credits they generate. The Company believes that
these risks are acceptable in light of anticipated partnership returns and the
contractual termination provisions contained in the partnership agreements.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed maturities that generate predictable rates of return. The Company does
not have a specific target rate of return. Instead, its rates of return vary
over time depending on the current interest rate environment, the slope of the
yield curve, the spread at which fixed maturities are priced over the yield
curve and general competitive conditions within the industry. Its portfolio
strategy is designed to achieve adequate risk-adjusted returns consistent with
its investment objectives of effective asset-liability matching, liquidity and
safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and GIC obligations. The Company seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed maturities. The
Company's fixed-rate products incorporate surrender charges, two-tiered
interest rate structures or other limitations on when contracts can be
surrendered for cash to encourage persistency and discourage withdrawals.
Approximately 76% of the Company's fixed annuity and GIC reserves had surrender
penalties or other restrictions at March 31, 1995.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. The cash flow obtained from MBSs
helps to maintain the anticipated spread, while providing desired liquidity.
At March 31, 1995 the weighted average life of the Company's investments was
approximately 4.1 years and the portfolio had a duration of approximately 3.6
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.
As a component of investment strategy, the Company utilizes Interest Rate
Swap Agreements ("Swap Agreements") to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a counterparty
interest rate payments of differing character (for example, fixed-rate payments
exchanged for variable-rate payments) based on an underlying principal balance
(notional principal) to hedge against interest rate changes. The Company
generally utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets into fixed-rate assets. At March 31, 1995, the Company
had 25 outstanding Swap Agreements with an aggregate notional principal amount
of $1.23 billion. These agreements mature in various years through 1998 and
have an average remaining maturity of 21 months.
The Company also seeks to provide liquidity, while enhancing its spread
income, by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls
and Total Return Agreements and by investing in MBSs. Reverse Repos involve
a sale of securities and an agreement to repurchase the same securities at a
later date at an agreed upon price and are generally over-collateralized.
Dollar Rolls are similar to Reverse Repos except that the repurchase involves
securities that are only substantially the same as the securities sold and the
arrangement is not collateralized, nor is it governed by a repurchase
agreement. 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.
There are risks associated with some of the techniques the Company uses
to enhance its spread income and match its assets and liabilities. The primary
risk associated with Dollar Rolls, Reverse Repos and Swap Agreements is the
risk associated with counterparty nonperformance. In addition, Swap Agreements
also have interest rate risk. However, the Company's Swap Agreements hedge
variable-rate assets, and interest rate fluctuations that adversely affect the
net cash received or paid under the terms of the Swap Agreement would be offset
by increased interest income earned on the variable-rate assets. The primary
risks associated with Total Return Agreements are the risk of potential loss
due to bond market fluctuation and counterparty risk. 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. Counterparty
risk associated with Dollar Rolls is further mitigated by the Company's
participation in an MBS trading clearinghouse. The sell and buy transactions
that are submitted to this clearinghouse are marked to market on a daily basis
and each participant is required to over-collateralize its net loss position
by 30% with either cash, letters of credit or government securities. The
primary risk associated with MBSs is that a changing interest rate environment
might cause prepayment of the underlying obligations at speeds slower or faster
than anticipated at the time of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of collateral (if any),
compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans, management
generally considers information concerning the mortgaged property and, among
other things, factors impacting the current and expected payment status of the
loan and, if available, the current fair value of the underlying collateral.
The carrying values of bonds that are determined to have declines in
value that are other than temporary are reduced to net realizable value and no
further accruals of interest are made. Mortgage loan writedowns are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost)
that are in default as to the payment of principal or interest, totaled $56.6
million at March 31, 1995, including $36.2 million (fair value, $28.7 million)
of unsecured loans and $20.4 million (fair value, $20.4 million) of mortgage
loans. At March 31, 1995, defaulted investments constituted 0.6% of total
invested assets at amortized cost. At December 31, 1994, defaulted investments
totaled $57.9 million, including $33.6 million (fair value, $28.5 million) of
mortgage loans and $24.3 million (fair value, $24.3 million) of unsecured
loans. At December 31, 1994, defaulted investments constituted 0.6% of total
invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At March 31, 1995,
approximately $2.85 billion of the Company's Bond Portfolio had an aggregate
unrealized gain of $80.6 million, while approximately $3.82 billion had an
aggregate unrealized loss of $316.1 million. In addition, the Company's
investment portfolio also currently provides approximately $104.9 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 that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby
avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities and GICs. Should increased liquidity be required for withdrawals, the
Company believes that a significant portion of its investments could be sold
without adverse consequences in light of the general strengthening that would
be expected in the bond market.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"),
at March 31, 1995, had invested assets with an amortized cost of $857.1 million
(fair value, $842.5 million) and outstanding indebtedness of $472.8 million,
comprising all of the Company's consolidated senior indebtedness.
Additionally, as of March 31, 1995, the Parent had three GICs purchased by
local government authorities that aggregated $250.4 million. The Parent's
annual debt service with respect to these debt and GIC obligations totals $29.8
million for the remainder of fiscal 1995, $70.3 million for fiscal 1996, $70.3
million for fiscal 1997, $89.9 million for fiscal 1998, $198.9 million for
fiscal 1999 and $908.9 million, in the aggregate, thereafter.
The Parent received dividends from its regulated life insurance
subsidiaries of $69.2 million in March 1995, $43.0 million in December 1993,
$30.0 million in December 1992 and $25.0 million in December 1991. The Parent
also received dividends of $1.5 million in fiscal 1995, $2.4 million in fiscal
1994, $4.7 million in fiscal 1993, $17.1 million in fiscal 1992 and $43.2
million in fiscal 1991 from its other directly-owned subsidiaries.
The Parent, Sun Life of America, SunAmerica Financial, Inc., and
SunAmerica Asset Management Corp. have sold certain of their interests in
various partnerships that make tax-advantaged affordable housing investments.
As part of the sales transactions, the Parent has guaranteed a minimum defined
yield and funding of certain defined operating deficits in return for a fee.
A portion of the fees received has been deferred to absorb any required
payments with respect to these guarantees. Based on an evaluation of the
underlying housing projects, it is management's belief that such deferrals are
ample for this purpose. Accordingly, management does not anticipate any
material future losses with respect to these guarantees.
Anchor has undertaken to dispose of $57.3 million (its statutory carrying
value) of certain of its real estate located in the Phoenix, Arizona
metropolitan area during the next one to two years, either to affiliated or
nonaffiliated parties, and the Parent has guaranteed that Anchor will receive
its statutory carrying value of these assets. The Parent has pledged certain
marketable securities having an amortized cost of $14.2 million at March 31,
1995 to secure this guarantee. This real estate has a consolidated carrying
value of approximately $28.6 million at March 31, 1995.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are authorized to transact business.
State insurance laws 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.
In recent years, 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 that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies. The NAIC has 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. The
NAIC is also currently developing model laws to govern insurance company
investments. Current proposals are still being debated and 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 that 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 subsidiaries 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 State Banking
Board 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.
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
On January 27, 1995 the Company held its annual meeting of shareholders. The
shareholders voted upon the following matters: (1) the election of nine
directors, which comprise the entire Board of Directors; (2) approval of the
Annual Performance Incentive Compensation Plan (the "PIC Plan"); and (3)
approval of the 1995 Performance Stock Plan (the "Stock Plan").
Each matter was approved. The votes cast for, against or withheld, as well as
the number of abstentions and broker non-votes as to each such matter were as
follows:
Votes
Votes Against or Broker
For Withheld Abstentions Non-Votes
---------- ---------- ----------- ---------
ELECTION OF DIRECTORS:
Eli Broad 77,163,545 126,432
Ronald J. Arnault 77,176,661 113,316
David O. Maxwell 77,172,324 117,653
Barry Munitz 77,175,597 114,380
Lester Pollack 77,170,821 119,156
Richard D. Rohr 77,172,849 117,128
Sanford C. Sigoloff 77,171,232 118,745
Karen Hastie Williams 76,178,174 1,111,803
Harold M. Williams 77,166,423 123,554
PIC PLAN 75,597,382 1,268,525 430,595 227,910
STOCK PLAN 72,888,877 4,130,790 290,957 213,788
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBITS
11 Statement re computation of per share earnings.
23 The consent of Price Waterhouse, independent accountants, filed as an
exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated
by reference herein.
27 Financial Data Schedule.
REPORTS ON FORM 8-K
On January 24, 1995, the Company filed a current report on Form 8-K that
announced its first quarter 1995 earnings.
On April 25, 1995, the Company filed a current report on Form 8-K that
announced its second quarter 1995 earnings.
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, 1995 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Vice Chairman
Dated May 12, 1995 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 5,569,968
<DEBT-CARRYING-VALUE> 858,888
<DEBT-MARKET-VALUE> 869,565
<EQUITIES> 44,189
<MORTGAGE> 1,519,782
<REAL-ESTATE> 107,007
<TOTAL-INVEST> 9,798,381
<CASH> 743,044
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 573,152
<TOTAL-ASSETS> 15,230,276
<POLICY-LOSSES> 7,748,525
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 472,835
<COMMON> 36,168
0
374,273
<OTHER-SE> 671,389
<TOTAL-LIABILITY-AND-EQUITY> 15,230,276
0
<INVESTMENT-INCOME> 384,730
<INVESTMENT-GAINS> (15,575)
<OTHER-INCOME> 83,636
<BENEFITS> 219,905
<UNDERWRITING-AMORTIZATION> 37,414
<UNDERWRITING-OTHER> 65,184
<INCOME-PRETAX> 130,288
<INCOME-TAX> 37,800
<INCOME-CONTINUING> 92,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,488
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE>
EXHIBIT 11
SUNAMERICA INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the three months and six months ended March 31, 1995 and 1994
(In thousands, except per share amounts)
<CAPTION>
Three months Six months
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average number of common and common stock
equivalent shares outstanding during
the period:
Common Stock issued and outstanding at
beginning of period 36,153 33,233 35,803 33,163
Average number of common shares issued
(canceled) upon exercise of employee
stock options or under other employee
stock plans 11 (35) 293 37
Average number of common stock equivalent
shares arising from outstanding employee
stock options 900 927 860 943
Average number of shares issuable upon
conversion of convertible preferred stock:
Series A Mandatory Conversion
Premium Dividend Preferred Stock -- 2,476 -- 2,476
Series D Mandatory Conversion
Premium Dividend Preferred Stock 5,003 5,003 5,003 5,003
-------- -------- -------- --------
Average number of common and common stock
equivalent shares outstanding during
the period 42,067 41,604 41,959 41,622
======== ======== ======== ========
Earnings applicable to common stock:
Income before cumulative effect of change
in accounting for income taxes $ 47,354 $ 40,007 $ 92,488 $ 79,571
Less preferred dividend requirements other
than those related to convertible issues:
9-1/4% Preferred Stock, Series B (3,249) (3,249) (6,498) (6,498)
SunAmerica Adjusted Rate Cumulative
Preferred Stock, Series C (925) (852) (1,815) (1,704)
-------- -------- -------- --------
Income before cumulative effect of change
in accounting for income taxes
applicable to common stock 43,180 35,906 84,175 71,369
Cumulative effect of change in accounting
for income taxes -- -- -- (33,500)
-------- -------- -------- --------
Net income applicable to common stock $ 43,180 $ 35,906 $ 84,175 $ 37,869
======== ======== ======== ========
Earnings per common and common equivalent
share:
Income before cumulative effect of
change in accounting for income taxes $ 1.03 $ 0.86 $ 2.01 $ 1.71
Cumulative effect of change in accounting
for income taxes -- -- -- (.80)
-------- -------- -------- --------
Net income $ 1.03 $ 0.86 $ 2.01 $ 0.91
======== ======== ======== ========
</TABLE>
