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, 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, 29,398,010 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) -
June 30, 1995 and September 30, 1994 3-4
Consolidated Income Statement (Unaudited) -
Three Months and Nine Months Ended June 30, 1995 and 1994 5
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended June 30, 1995 and 1994 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-25
Part II - Other Information 26
<PAGE>
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
June 30, September 30,
1995 1994
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 766,926 $ 569,382
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value
(amortized cost: June 30, 1995,
$6,271,857; September 30, 1994,
$5,599,780) 6,236,728 5,270,738
Held for investment, at amortized cost
(fair value: June 30, 1995,
$831,416; September 30, 1994,
$1,072,222) 809,731 1,064,132
Mortgage loans 1,534,936 1,426,924
Common stocks, at fair value
(cost: June 30, 1995, $25,699;
September 30, 1994, $49,336) 38,834 61,660
Partnerships 784,523 593,854
Real estate 102,898 107,053
Other invested assets 198,179 186,647
------------ -------------
Total investments 10,472,755 9,280,390
Variable annuity assets 4,893,894 4,513,093
Accrued investment income 105,897 105,686
Deferred acquisition costs 523,620 581,874
Other assets 199,382 175,182
------------ -------------
TOTAL ASSETS $ 16,195,548 $ 14,656,225
============ =============
<PAGE>
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
June 30, September 30,
1995 1994
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 4,887,635 $ 4,519,623
Reserves for guaranteed investment contracts 3,276,686 2,783,522
Trust deposits 430,868 442,320
Payable to brokers for purchases of securities 552,723 643,734
Income taxes currently payable 10,567 4,600
Other liabilities 316,147 212,429
------------ -------------
Total reserves, payables
and accrued liabilities 9,474,626 8,606,228
------------ -------------
Variable annuity liabilities 4,893,894 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 136,585 74,319
------------ -------------
Company-obligated preferred securities of
grantor trust whose sole asset is $54,259
principal amount of 9.95% junior
subordinated debentures, due 2044, of
the Company 52,631 --
------------ -------------
Shareholders' equity:
Preferred stock 321,642 374,273
Nontransferable Class B Stock 6,826 6,826
Common Stock 29,398 28,977
Additional paid-in capital 201,277 188,667
Retained earnings 614,800 512,571
Net unrealized losses on debt and
equity securities available for
sale (8,966) (150,226)
------------ -------------
Total shareholders' equity 1,164,977 961,088
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,195,548 $ 14,656,225
============ =============
<PAGE>
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and nine months ended June 30, 1995 and 1994
(In thousands, except per share amounts - unaudited)
<CAPTION>
Three months Nine months
--------------------- ---------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 233,261 $ 187,019 $ 650,885 $ 560,952
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (67,940) (60,863) (190,284) (194,783)
Guaranteed investment contracts (54,215) (36,835) (151,776) (108,211)
Trust deposits (2,625) (2,251) (7,901) (6,223)
Senior indebtedness (13,413) (12,829) (41,031) (36,044)
--------- --------- --------- ---------
Total interest expense (138,193) (112,778) (390,992) (345,261)
--------- --------- --------- ---------
Dividends paid on preferred
securities of grantor trust (364) -- (364) --
--------- --------- --------- ---------
NET INVESTMENT INCOME 94,704 74,241 259,529 215,691
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (8,975) (5,312) (24,550) (16,566)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 21,246 19,837 61,467 59,148
Asset management fees 6,712 7,541 20,399 24,017
Net retained commissions 8,670 7,181 22,673 20,888
Loan servicing fees 5,874 -- 13,907 --
Trust fees 3,892 3,081 11,584 9,051
--------- --------- --------- ---------
TOTAL FEE INCOME 46,394 37,640 130,030 113,104
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 3,013 2,883 9,169 8,034
General and administrative expenses (44,358) (32,198) (118,582) (98,155)
Amortization of deferred acquisition costs (21,783) (17,241) (59,197) (48,574)
Other, net 370 1,150 3,254 2,700
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (62,758) (45,406) (165,356) (135,995)
--------- --------- --------- ---------
PRETAX INCOME 69,365 61,163 199,653 176,234
Income tax expense (21,100) (19,100) (58,900) (54,600)
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 48,265 42,063 140,753 121,634
Cumulative effect of change in accounting
for income taxes -- -- -- (33,500)
--------- --------- --------- ---------
NET INCOME $ 48,265 $ 42,063 $ 140,753 $ 88,134
========= ========= ========= =========
EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES $ 1.05 $ .91 $ 3.06 $ 2.63
Cumulative effect of change in accounting
for income taxes -- -- -- (.81)
--------- --------- --------- ---------
NET INCOME $ 1.05 $ .91 $ 3.06 $ 1.82
========= ========= ========= =========
NET EARNINGS APPLICABLE TO COMMON STOCK
(used in the computation of earnings
per share) $ 44,478 $ 37,958 $ 128,653 $ 75,827
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 42,288 41,546 42,069 41,596
========= ========= ========= =========
</TABLE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1995 and 1994
(In thousands - unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 140,753 $ 88,134
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 190,284 194,783
Guaranteed investment contracts 151,776 108,211
Trust deposits 7,901 6,223
Net realized investment losses 24,550 16,566
Amortization (accretion) of net
premiums (discounts) on investments (21,438) 391
Provision for deferred income taxes (13,798) 62,738
Cumulative effect of change in
accounting for income taxes -- 33,500
Change in:
Deferred acquisition costs (19,146) (19,726)
Other assets (8,839) (5,163)
Income taxes currently payable 11,883 (56,130)
Other liabilities 64,884 6,558
Other, net 10,882 4,199
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 539,692 440,284
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (3,890,673) (4,475,927)
Bonds, notes and redeemable preferred
stocks held for investment (55,641) (36,035)
Mortgage loans (194,043) (213,674)
Partnerships (335,035) (236,821)
Other investments, excluding short-term
investments (83,844) (46,263)
Net assets of Imperial Premium Finance, Inc. (442,804) --
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 2,825,190 3,455,845
Bonds, notes and redeemable preferred stocks
held for investment 2,052 13,349
Kaufman and Broad Home Corporation
warrants -- 28,618
Partnerships 109,591 25,775
Other investments, excluding short-term
investments 78,461 46,324
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 1,061,049 318,525
Bonds, notes and redeemable preferred
stocks held for investment 309,969 298,590
Mortgage loans 67,460 114,509
Other investments, excluding short-term
investments 76,202 123,964
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (472,066) (583,221)
------------ ------------
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended June 30, 1995 and 1994
(In thousands - unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (38,524) $ (37,489)
Premium receipts on:
Fixed annuity contracts 812,980 127,192
Guaranteed investment contracts 1,104,699 675,416
Net exchanges to (from) the fixed accounts
of variable annuity contracts 41,114 (36,275)
Receipts of trust deposits 346,335 236,619
Withdrawal payments on:
Fixed annuity contracts (537,798) (528,636)
Guaranteed investment contracts (763,311) (518,621)
Trust deposits (365,684) (180,074)
Claims and annuity payments on fixed
annuity contracts (136,632) (133,079)
Net proceeds from issuances of long-term notes -- 92,275
Repayments of collateralized mortgage
obligations (28,662) (66,556)
Net decrease in other senior indebtedness -- (15,119)
Net repayments of other short-term financings (304,599) (379,207)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 129,918 (763,554)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 197,544 (906,491)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 569,382 1,797,796
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 766,926 $ 891,305
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 39,282 $ 40,355
============ ============
Income taxes paid, net of refunds received $ 60,816 $ 47,992
============ ============
NON-CASH FINANCING ACTIVITY:
Exchange of 2,105,235 shares of
9-1/4% Series B Preferred Stock for
preferred securities of grantor trust $ 52,631 $ --
============ ============
<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, 1995 and September 30, 1994, the results
of its consolidated operations for the three months and nine months ended
June 30, 1995 and 1994 and its consolidated cash flows for the nine months
ended June 30, 1995 and 1994. The results of operations for the three
months and nine months ended June 30, 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. Preferred Securities of Grantor Trust
-------------------------------------
On June 13, 1995, pursuant to an exchange offer, SunAmerica Capital Trust
I (the "Grantor Trust"), a consolidated wholly owned subsidiary of the
Company, issued $52,630,875 liquidation amount of its 9.95% Trust
Originated Preferred Securities (the "Preferred Securities") to holders of
2,105,235 shares of the Company's 9-1/4% Series B Preferred Stock, also
having a liquidation preference of $52,630,875.
In connection with the issuance of the Preferred Securities and the related
purchase by the Company of the Grantor Trust's Common Securities, the
Company issued to the Grantor Trust $54,258,650 principal amount of 9.95%
Junior Subordinated Debentures, due 2044 (the "Debentures"). The interest
and other payment dates on the Debentures correspond to the distribution
and other payment dates on the Preferred and Common Securities. Under
certain circumstances involving a change in law or legal interpretation,
the Debentures may be distributed to holders of the Preferred and Common
Securities in liquidation of the Grantor Trust. The Debentures are
redeemable at the option of the Company on or after June 15, 1997 at a
redemption price of $25 per Debenture plus accrued and unpaid interest.
The Preferred and Common Securities will be redeemed on a pro rata basis,
to the same extent as the Debentures are repaid, at $25 per security plus
accumulated and unpaid distributions. The Company believes that its
obligations under the Debentures and related agreements, taken together,
are equivalent to a full and unconditional guarantee of payments due on the
Preferred Securities. The Debentures and the Common Securities are
eliminated in the accompanying consolidated balance sheet.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. 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 $3,787,000 and
$4,105,000 for the three months ended June 30, 1995 and 1994, respectively,
and $12,100,000 and $12,307,000 for the nine months ended June 30, 1995 and
1994, respectively. These preferred stock dividend requirements do not
include dividends paid on the convertible issues, which amounted to
$3,477,000 and $5,142,000 in the three months ended June 30, 1995 and 1994,
respectively, and $10,430,000 and $15,425,000 for the nine months ended
June 30, 1995 and 1994, respectively.
4. Ratios of Earnings to Fixed Charges
-----------------------------------
The ratios of earnings to fixed charges for the three months and nine
months ended June 30, 1995 and 1994 are as follows:
Three Months Nine 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 5.8x 5.9x
===== ===== ===== =====
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 nine months ended June 30, 1995 and 1994.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $48.3 million or $1.05 per share in the third quarter of 1995 and
$140.8 million or $3.06 per share in the nine months of 1995, compared with
$42.1 million or $0.91 per share in the third quarter of 1994 and $121.6
million or $2.63 per share in the nine months of 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 $0.81
per share in the first quarter of fiscal 1994. Accordingly, net income
amounted to $88.1 million or $1.82 per share in the nine months of 1994.
PRETAX INCOME totaled $69.4 million in the third quarter of 1995 and
$61.2 million in the third quarter of 1994. For the nine months, pretax income
totaled $199.7 million in 1995, compared with $176.2 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 or dividends paid on fixed annuities and other
interest-bearing liabilities, increased to $94.7 million in the third quarter
of 1995 from $74.2 million in third quarter of 1994. These amounts represent
net investment spreads of 3.81% on average invested assets (computed on a daily
basis) of $9.93 billion in the third quarter of 1995 and 3.37% on average
invested assets of $8.81 billion in the third quarter of 1994. For the nine
months, net investment income increased to $259.5 million in 1995 from $215.7
million in 1994, representing net investment spreads of 3.59% and 3.25%,
respectively, on average invested assets of $9.63 billion and $8.84 billion,
respectively.
Investment income totaled $233.3 million in third quarter of 1995, up
$46.3 million from the $187.0 million recorded in the third quarter of 1994.
For the nine months, investment income amounted to $650.9 million in 1995, up
$89.9 million from the $561.0 million recorded in 1994. Investment income
increased in 1995 as a result of increased yields on higher levels of average
invested assets. The yield on average invested assets rose to 9.39% in the
third quarter of 1995 from 8.49% in the third quarter of 1994. For the nine
months, the yield on average invested assets rose to 9.01% in 1995 from 8.46%
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 9.03% in the third quarter of 1995, 8.25% in the third quarter
of 1994, 8.67% in the nine months of 1995 and 8.21% in the nine months of 1994.
Over the last seven fiscal quarters, the Company's yields (before considering
net realized investment losses) on average invested assets have ranged from
8.32% to 9.39%; however, there can be no assurance that the Company will
achieve similar yields in future periods.
Increased investment yields in 1995 reflect higher average prevailing
interest rates relative to the comparable 1994 periods. In addition, investment
income in 1995 includes increased contributions from the Company's investments
in partnerships and other similar entities. Income from such investments in
1995 totaled $77.3 million ($30.9 million in the third quarter), compared with
$44.4 million in 1994 ($18.7 million in the third quarter). This income
represents a yield of 14.33% on related average assets of $719.0 million in
1995 (16.11% on related average assets of $766.9 million in the third quarter
of 1995), compared with 10.75% on related average assets of $550.3 million in
1994 (13.36% on related average assets of $558.7 million in the third quarter
of 1994).
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"). The Company
recorded income on the Total Return Agreements of $9.7 million ($5.5 million
in the third quarter) in 1995, compared with $4.1 million ($0.3 million in the
third quarter) in 1994. Although the Company continues to use Dollar Rolls,
they 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 and dividend expense aggregated $138.6 million in the
third quarter of 1995 and $112.8 million in the third quarter of 1994. For the
nine months, interest and dividend expense aggregated $391.4 million in 1995,
compared with $345.3 million in 1994. The average rate paid on all
interest-bearing liabilities increased to 6.03% in the third quarter of 1995
from 5.52% in the third quarter of 1994. For the nine months, the average rate
paid on all interest-bearing liabilities increased to 5.86% in 1995 from 5.61%
in 1994. Interest-bearing liabilities averaged $9.19 billion during the third
quarter of 1995, compared with $8.16 billion during the third quarter of 1994.
For the nine months, interest-bearing liabilities averaged $8.90 billion in
1995, compared with $8.20 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 6.84% in the third quarter of 1995, 6.24% in the third quarter of
1994, 6.69% in the nine months of 1995 and 6.15% in the nine months of 1994.
Approximately 30% of the Company's GIC portfolio are 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 fixed-rate
GIC obligations relative to those issued in the comparable 1994 periods to
maintain a generally competitive market rate. For the nine months, the increase
in the average GIC crediting rate was partially offset by a modest decline in
the average crediting rate on the Company's fixed annuity contracts. Average
fixed annuity crediting rates were 5.60% in the third quarter of 1995, 5.28%
in the third quarter of 1994, 5.43% in the nine months of 1995 and 5.49% in the
nine months of 1994.
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
have aggregated $915.8 million since June 30, 1994. GIC premiums have
aggregated $1.47 billion since June 30, 1994. Third quarter fixed annuity
premiums totaled $253.7 million in 1995, up significantly from $70.1 million
in 1994, while nine-month premiums from fixed annuities aggregated $813.0
million in 1995, up from $127.2 million in 1994. These premiums include
premiums for the fixed accounts of variable annuities totaling $70.9 million,
$48.0 million, $217.4 million and $84.1 million, respectively. These increases
in fixed annuity premiums during 1995 reflect generally heightened demand for
fixed-rate products in 1995 relative to the comparable 1994 periods. This
heightened demand may be attributed, in part, to the increase in prevailing
long-term interest rates that began during the latter half of fiscal 1994 and
continued into the first quarter of fiscal 1995. GIC premiums increased to
$387.9 million in the third quarter of 1995 from $299.0 million in the third
quarter of 1994. For the nine months, GIC premiums totaled $1.10 billion in
1995, compared with $675.4 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 its life insurance subsidiaries
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. The life
insurance subsidiaries impose 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 $9.0 million in the third quarter
of 1995 and $5.3 million in the third quarter of 1994 and include impairment
writedowns of $6.3 million and $5.9 million, respectively. Therefore, net
losses realized from sales of investments totaled $2.7 million in the third
quarter of 1995, compared with net gains of $0.6 million realized in the third
quarter of 1994. For the nine months, net realized investment losses totaled
$24.6 million in 1995, compared with $16.6 million in 1994 and include
impairment writedowns of $28.0 million and $20.7 million, respectively.
Therefore, for the nine months, net gains realized from sales of investments
totaled $3.4 million in 1995 and $4.1 million in 1994.
Net gains in 1995 include $17.7 million of net gains ($6.9 million in
the third quarter) realized on sales of common stocks made primarily to
maximize total return and $16.9 million of net losses ($8.9 million in the
third quarter) realized on sales of various bonds that were also primarily made
to maximize total return. In addition, the Company realized $2.2 million of net
gains ($0.1 million of net losses in the third quarter) on sales of real
estate.
Net gains in 1994 include $22.2 million of net gains ($6.3 million in the
third quarter) realized on sales of common stocks made primarily to maximize
total return. Net gains in 1994 also include $18.9 million of net losses
($11.7 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 mortgage-backed securities ("MBSs")
($201.2 million in the third 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
and asset-backed securities that were made primarily to maximize total return.
Impairment writedowns include additional provisions applied to defaulted
bonds, amounting to $18.3 million in 1995 ($0.2 million in the third quarter),
and $4.9 million of provisions applied to mortgage loans ($4.1 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). In addition, the Company wrote down certain mortgage loans by $2.5
million during the third 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 $21.2
million in the third quarter of 1995 and $19.8 million in the third quarter of
1994. For the nine months, variable annuity fees totaled $61.5 million in 1995,
compared with $59.1 million in 1994. Variable annuity assets averaged $4.72
billion during the third quarter of 1995 and $4.41 billion during the third
quarter of 1994. For the nine months, variable annuity assets averaged $4.53
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, aggregated $472.0 million since June 30, 1994. Variable
annuity premiums declined to $150.1 million in the third quarter of 1995 from
$167.2 million in the third quarter of 1994. For the nine months, variable
annuity premiums declined to $356.4 million in 1995 from $643.7 million in
1994. These declines in premiums can be attributed, in part, to a heightened
demand for fixed-rate investment options, including the fixed accounts of
variable annuities (see "Growth in Average Invested Assets"). 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 $2.06 billion in the third
quarter of 1995, compared with $7.5 million on average assets managed of $2.31
billion in the third quarter of 1994. For the nine months, asset management
fees totaled $20.4 million on average assets managed of $2.07 billion in 1995,
compared with $24.0 million on average assets managed of $2.44 billion in 1994.
Asset management fees decreased due to a decline in assets managed, principally
resulting from $468.2 million of redemptions, excluding redemptions of money
market funds, since June 30, 1994. Sales of mutual funds, excluding sales of
money market funds, totaled $39.5 million in the third quarter of 1995,
compared with $65.9 million in the third quarter 1994. For the nine months,
such sales totaled $100.0 million in 1995, compared with $302.2 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
$8.7 million in the third quarter of 1995 and $7.2 million in the third quarter
of 1994. For the nine months, net retained commissions totaled $22.7 million
in 1995, compared with $20.9 million in 1994. Broker-dealer sales (mainly
mutual funds and general securities) totaled $2.05 billion in the third quarter
of 1995 and $1.86 billion in the third quarter of 1994. For the nine months,
broker-dealer sales totaled $5.23 billion in 1995, compared with $5.38 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 third quarter of 1995 on an average of 199,200
trust accounts from $3.1 million in the third quarter of 1994 on an average of
150,700 trust accounts. For the nine months, trust fees totaled $11.6 million
in 1995 on an average of 197,700 trust accounts, compared with $9.1 million in
1994 on an average of 147,900 trust accounts. The increases in trust fees and
the average number of trust accounts in 1995 principally resulted 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 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 $5.9 million on average loans serviced of $438.3 million in
the third quarter and $13.9 million on average loans serviced of $437.2 million
in the nine 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 $3.0 million
in the third quarter of 1995, compared with $2.9 million in the third quarter
of 1994. For the nine months, surrender charges totaled $9.2 million in 1995
and $8.0 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 $333.6 million in the third quarter of 1995 and $308.3
million in the third quarter of 1994. These payments represent 14.7% and 14.5%,
respectively, of average fixed and variable annuity reserves. For the nine
months, withdrawal payments totaled $991.4 million in 1995 and $853.1 million
in 1994, and represent 15.2% and 13.2%, respectively, of average fixed and
variable annuity reserves. Withdrawals include variable annuity payments from
the separate accounts totaling $160.2 million in the third quarter of 1995,
$113.6 million in the third quarter of 1994, $469.4 million in the nine months
of 1995 and $336.4 million in the nine 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 in the nine months of 1995 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 $44.4 million in the third
quarter of 1995, compared with $32.2 million in the third quarter of 1994. For
the nine months, general and administrative expenses totaled $118.6 million in
1995, compared with $98.2 million in 1994. General and administrative expenses
in fiscal 1995 include the expenses of recently acquired Imperial. In
addition, fiscal 1995 includes expenses related to a national advertising
campaign to increase the Company's brand name awareness. General and
administrative expenses remain closely controlled through a company-wide cost
containment program and represent approximately 1% of average total assets.
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
$21.8 million in the third quarter of 1995 and $17.2 million in the third
quarter of 1994. For the nine months, such amortization totaled $59.2 million
in 1995 and $48.6 million in 1994.
INCOME TAX EXPENSE totaled $21.1 million in the third quarter of 1995 and
$19.1 million in the third quarter of 1994, representing effective tax rates
of 30% and 31%, respectively. For the nine months, income tax expense totaled
$58.9 million in 1995, compared with $54.6 million in 1994, also representing
effective tax rates of 30% and 31%, respectively. These tax rates reflect the
favorable impact of certain affordable housing tax credits.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY increased by $83.1 million to $1.16 billion at June
30, 1995 from $1.08 billion at March 31, 1995. This increase primarily
reflects a $100.9 million reduction in net unrealized losses on debt and equity
securities available for sale charged directly to shareholders' equity and
$48.3 million of net income recorded in the third quarter of 1995. These
favorable factors were partially offset by a reduction of outstanding preferred
stock resulting from an exchange of $52.6 million of 9-1/4% Series B Preferred
Stock for $52.6 million of preferred securities of SunAmerica Capital Trust I,
a grantor trust and a wholly owned subsidiary of the Company (see Note 2 of
Notes to Consolidated Financial Statements). Book value per share amounted to
$24.94 at June 30, 1995, compared with $21.66 at March 31, 1995. Excluding net
unrealized losses on debt and equity securities available for sale, book value
per share amounted to $25.15 at June 30, 1995 and $24.33 at March 31, 1995.
TOTAL ASSETS increased by $965.3 million to $16.20 billion at June 30,
1995 from $15.23 billion at March 31, 1995, principally due to a $674.4 million
increase in invested assets and a $358.3 million increase in the separate
account for variable annuities.
INVESTED ASSETS at June 30, 1995 totaled $10.47 billion, compared with
$9.80 billion at March 31, 1995. This $674.4 million increase primarily
resulted from sales of guaranteed investment contracts and fixed annuity
contracts and a $100.9 million 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 June
30, 1995, had an aggregate amortized cost that exceeded its fair value by $13.4
million (including net unrealized losses of $35.1 million on the Available for
Sale Portfolio). The aggregate amortized cost of the Bond Portfolio was $235.5
million above its fair value at March 31, 1995 (including net unrealized losses
of $246.2 million on the Available for Sale Portfolio). The decrease in net
unrealized losses on the Bond Portfolio since March 31, 1995 principally
resulted from a decrease in prevailing long-term interest rates and the
corresponding effect on the fair value of the Bond Portfolio.
Approximately $7.06 billion or 99.5% of the Bond Portfolio (at amortized
cost) at June 30, 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 June 30, 1995,
approximately $6.12 billion (at amortized cost) was rated investment grade by
one or both of these agencies or under the NAIC guidelines, including
$4.62 billion of U.S. government/agency securities and MBSs.
At June 30, 1995, the Bond Portfolio included $934.5 million (fair value,
$918.2 million) of bonds not rated investment grade by S&P, Moody's or the
NAIC. Based on their June 30, 1995 amortized cost, these bonds accounted for
5.8% of the Company's total assets and 8.9% 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
$212.4 million at June 30, 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 June 30, 1995.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 1995.
<PAGE>
<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) $4,059,123 $4,033,047 1 $1,138,401 $1,146,425 $5,197,524 49.52% $5,179,472
BBB+ to BBB-
(Baa1 to Baa3) 175,613 175,595 2 749,188 749,106 924,801 8.81 924,701
BB+ to BB-
(Ba1 to Ba3) 56,645 55,060 3 162,789 169,193 219,434 2.09 224,253
B+ to B- (B1 to B3) 415,363 414,128 4 216,125 214,600 631,488 6.02 628,728
CCC+ to C-
(Caa to C) 16,510 14,931 5 33,264 22,692 49,774 0.47 37,623
D -- -- 6 33,783 27,555 33,783 0.32 27,555
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $4,723,254 $4,692,761 $2,333,550 $2,329,571 $7,056,804 $7,022,332
========== ========== ========== ========== ========== ==========
(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 $716.7 million at June 30, 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 June
30, 1995, Secured Loans consisted of loans to 117 borrowers spanning 35
industries, with no industry concentration constituting more than 11% 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, 92% 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 the risk of loss upon
default for its Secured Loans is mitigated by their financial covenants and
senior secured positions.
MORTGAGE LOANS aggregated $1.53 billion at June 30, 1995 and consisted
of 649 first mortgage loans with an average loan balance of approximately $2.4
million, collateralized by properties located in 26 states. Approximately 49%
of the portfolio was multifamily residential, 23% was retail, 6% was
industrial, 5% was office and 17% was other types. At June 30, 1995,
approximately 30% 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, 1995, 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 June 30, 1995, approximately 21% of the mortgage loan
portfolio consisted of loans with balloon payments due before July 1, 1998. At
June 30, 1995, loans delinquent by more than 90 days totaled $37.8 million and
constituted 2.5% of total mortgages. Loans foreclosed upon and transferred to
real estate in the balance sheet totaled $12.6 million (0.8% of total
mortgages) at June 30, 1995.
Approximately 37% of the mortgage loans in the portfolio at June 30, 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 June 30, 1995, mortgage loans having an aggregate carrying value of
$56.8 million have been restructured. Of this amount, $10.6 million was
restructured during fiscal 1995, $8.3 million was restructured during fiscal
1993 and $37.4 million was restructured during fiscal 1992.
PARTNERSHIP investments totaled $784.5 million at June 30, 1995,
constituting investments in approximately 300 separate partnerships with an
average size of $2.6 million. The portfolio includes: (i) $369.1 million of
partnerships managed by independent money managers that invest in a broad
selection of equity and fixed-income securities, currently including over 800
separate issuers; (ii) $266.2 million of partnerships that make tax-advantaged
investments in affordable housing, currently involving approximately 240
multifamily projects in 34 states; and (iii) $149.2 million of partnerships
that invest in mortgage loans and income-producing real estate. At June 30,
1995, $508.7 million of the Company's partnerships were accounted for by using
the cost method and $275.8 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 June 30, 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 June 30, 1995 the weighted average life of the Company's investments was
approximately 3.8 years and the portfolio had a duration of approximately 3.2
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.
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
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities into fixed-rate instruments. At June 30,
1995, the Company had 22 outstanding Swap Agreements with an aggregate notional
principal amount of $871.6 million. These agreements mature in various years
through 1998 and have an average remaining maturity of 36 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 or liabilities, 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 or reduced interest expense paid on the variable rate
liabilities. 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 $62.2
million at June 30, 1995, including $24.4 million (fair value, $18.4 million)
of unsecured loans and $37.8 million (fair value, $37.8 million) of mortgage
loans. At June 30, 1995, defaulted investments constituted 0.6% of total
invested assets at amortized cost. At March 31, 1995, defaulted investments
totaled $56.6 million, including $36.2 million (fair value, $28.7 million) of
mortgage 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.
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, 1995,
approximately $4.45 billion of the Company's Bond Portfolio had an aggregate
unrealized gain of $161.4 million, while approximately $2.63 billion had an
aggregate unrealized loss of $174.8 million. In addition, the Company's
investment portfolio also currently provides approximately $102.4 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 June 30, 1995, had invested assets with an amortized cost of $759.2 million
(fair value, $759.6 million) and outstanding senior indebtedness of $472.8
million, comprising all of the Company's consolidated senior indebtedness.
Additionally, as of June 30, 1995, the Parent had three GICs purchased by local
government authorities that aggregated $255.4 million.
In connection with the issuance of the Preferred Securities, and the
related purchase by the Parent of the Common Securities, of SunAmerica Capital
Trust I (the "Grantor Trust"), the Parent issued $54.3 million of 9.95% junior
subordinated debentures, due 2044 (the "Debentures"), to the Grantor Trust.
The Parent's annual debt service with respect to its senior indebtedness,
GIC obligations and Debentures totals $22.4 million for the remainder of fiscal
1995, $75.7 million for fiscal 1996, $75.7 million for fiscal 1997, $95.3
million for fiscal 1998, $204.3 million for fiscal 1999 and $1.21 billion, 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, SunAmerica Life Insurance Company, 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 National Life Insurance Company has undertaken to dispose of $55.8
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
$14.0 million at June 30, 1995 to secure this guarantee. This real estate has
a consolidated carrying value of approximately $28.5 million at June 30, 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.
The Company's premium finance subsidiaries are subject to regulation and
supervision by substantially all of the states in which they are authorized to
transact business. State premium finance laws establish supervisory agencies
with broad administrative and supervisory powers related to granting and
revoking licenses to transact business, approving finance agreement forms,
regulating certain finance charge rates, regulating marketing and other trade
practices (including the procedures to cancel financed insurance policies for
non-payment), prescribing the form and content of required financial statements
and reports, performing financial and other examinations and other related
matters.
<PAGE>
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
EXHIBITS
10(a) Employment Agreement, dated April 17, 1995, between the Company and
Joseph M. Tumbler.
10(b) Employment Agreement, dated April 27, 1995, between the Company and
Jay S. Wintrob.
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 April 24, 1995, the Company filed a current report on Form 8-K
announcing its second quarter 1995 earnings.
On May 26, 1995, the Company filed a current report on Form 8-K related to
the offer by SunAmerica Capital Trust I, a grantor trust established by
the Company, to exchange its 9.95% Trust Originated Preferred Securities
for up to 5,500,000 shares of the Company's outstanding 9-1/4% Preferred
Stock, Series B.
On July 14, 1995, the Company filed a current report on Form 8-K
announcing that the name of its subsidiary, Sun Life Insurance Company of
America, had been changed to "SunAmerica Life Insurance Company."
On July 28, 1995, the Company filed a current report on Form 8-K
announcing its third quarter 1995 earnings.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNAMERICA INC.
-----------------------------------
Registrant
Dated August 14, 1995 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Vice Chairman
Dated August 14, 1995 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
<PAGE>
SUNAMERICA INC.
LISTS OF EXHIBITS FILED
-----------------------
10(a) Employment Agreement, dated April 17, 1995, between the Company and
Joseph M. Tumbler.
10(b) Employment Agreement, dated April 27, 1995, between the Company and Jay
S. Wintrob.
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
<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 JUNE 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 6,236,728
<DEBT-CARRYING-VALUE> 809,731
<DEBT-MARKET-VALUE> 831,416
<EQUITIES> 38,834
<MORTGAGE> 1,534,936
<REAL-ESTATE> 102,898
<TOTAL-INVEST> 10,472,755
<CASH> 766,926
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 523,620
<TOTAL-ASSETS> 16,195,548
<POLICY-LOSSES> 8,164,321
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 472,835
<COMMON> 36,224
0
321,642
<OTHER-SE> 807,111
<TOTAL-LIABILITY-AND-EQUITY> 16,195,548
0
<INVESTMENT-INCOME> 601,589
<INVESTMENT-GAINS> (24,550)
<OTHER-INCOME> 130,030
<BENEFITS> 324,060
<UNDERWRITING-AMORTIZATION> 59,197
<UNDERWRITING-OTHER> 106,159
<INCOME-PRETAX> 199,653
<INCOME-TAX> 58,900
<INCOME-CONTINUING> 140,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,753
<EPS-PRIMARY> 3.06
<EPS-DILUTED> 3.06
<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 nine months ended June 30, 1995 and 1994
(In thousands, except per share amounts)
<CAPTION>
Three months Nine 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 36,168 33,172 35,803 33,163
Average number of common shares issued
upon exercise of employee stock options
or under other employee stock plans 29 89 327 57
Average number of common stock equivalent
shares arising from outstanding employee
stock options 1,090 806 937 897
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 5,001 5,003 5,002 5,003
-------- -------- -------- --------
Average number of common and common stock
equivalent shares outstanding during
the period 42,288 41,546 42,069 41,596
======== ======== ======== ========
Earnings applicable to common stock:
Income before cumulative effect of change
in accounting for income taxes $ 48,265 $ 42,063 $140,753 $121,634
Less preferred dividend requirements other
than those related to convertible issues:
9-1/4% Preferred Stock, Series B (2,911) (3,249) (9,409) (9,747)
SunAmerica Adjusted Rate Cumulative
Preferred Stock, Series C (876) (856) (2,691) (2,560)
-------- -------- -------- --------
Income before cumulative effect of change
in accounting for income taxes
applicable to common stock 44,478 37,958 128,653 109,327
Cumulative effect of change in accounting
for income taxes -- -- -- (33,500)
-------- -------- -------- --------
Net income applicable to common stock $ 44,478 $ 37,958 $128,653 $ 75,827
======== ======== ======== ========
Earnings per common and common equivalent
share:
Income before cumulative effect of
change in accounting for income taxes $ 1.05 $ 0.91 $ 3.06 $ 2.63
Cumulative effect of change in accounting
for income taxes -- -- -- (.81)
-------- -------- -------- --------
Net income $ 1.05 $ 0.91 $ 3.06 $ 1.82
======== ======== ======== ========
</TABLE>
April 13, 1995
PERSONAL AND CONFIDENTIAL
Mr. Joseph M. Tumbler REVISED
25 Poplar Hill Road
Louisville, Kentucky 40207
Dear Joe:
We are pleased to make you the following offer of employment to join
SunAmerica Inc. (the "Company") on or about May 15, 1995 or earlier.
1. Your position with the Company will be one of two Vice Chairmen.
Your initial responsibilities will include marketing and sales, treasury and
planning, service center operations and systems.
2. Your annual salary will be $375,000 payable semi-monthly, subject to
normal deductions and withholding. Your salary will be reviewed annually.
3. Incentive Compensation: Together with other senior officers, you
shall be eligible to participate in the SunAmerica Inc. annual formula-based
incentive compensation plan, commencing with the fiscal year beginning
October 1, 1994 (your actual award would be prorated for your length of
service within the fiscal year). Such incentive plan entitles participants
employed through the end of the fiscal year to cash equal to a percentage
share of a compensation pool to be paid in December following the fiscal year
end. You shall be eligible to receive a seven percent (7.0%) share of the
pool for the fiscal year ending September 30, 1995. During your employment
you shall be eligible for future annual SunAmerica Inc. incentive plans. The
1995 incentive compensation pool (for the fiscal year 10/1/94 - 9/30/95) is
currently estimated at $12.5 million, which would yield an award of $875,000,
before proration and subject to normal deductions and withholding. Your
actual award could be higher or lower, corresponding to increased or
decreased business performance for the year. I would be glad to meet with
you to discuss in more detail the prospects for the Company's financial
performance in 1995 and beyond, and the impact of such performance on the
incentive plan.
4. The above notwithstanding, for the employment period ending March 31,
1997 the Company will provide you with an annual cash compensation guarantee
of $1,200,000 (to be prorated for your length of service during each fiscal
year).
5. I will recommend to the Personnel, Compensation and Stock Option
Committee of SunAmerica Inc. that you be granted options to purchase 50,000
shares of SunAmerica Inc. common stock pursuant to the 1988 SunAmerica Inc.
Employee Stock Plan. The exercise price for the options will be the fair
market value of SunAmerica Inc. common stock at the date of grant. The
options will have a ten year term and be exercisable on a cumulative basis in
20% installments commencing with the first anniversary of the option grant.
6. I will recommend to the Personnel, Compensation and Stock Option
Committee that you be granted 75,000 restricted shares of SunAmerica Inc.
common stock under the SunAmerica 1995 Performance Stock Plan which entitles
you, upon achievement of super performance levels as described in the Plan,
to 112,500 shares. This grant is subject to certain restrictions which will
lapse over a five-year performance period ending September 30, 1999 upon the
achievement of specified performance objectives which will be fully set forth
in a stock restriction agreement and which are summarized herein. Dates for
the five-year performance period may be subject to change contingent upon
legal and tax constraints.
Performance shall be related to the achievement of overall corporate success,
as measured by EPS and TRS (total return to shareholders) over the 5-year
performance period:
50% of Award Determined by Cumulative EPS:
Fixed $ Cumulative EPS Restrictions Lapse
Threshold $24.04 (1) 18,750 (25% x 75,000)
Target $27.77 (2) 37,500 (50% x 75,000)
"Super" Target $34.28 (3) 56,250 (75% x 75,000)
PLUS
50% of Award Determined by Cumulative TRS:
TRS vs. S&P 500 Restrictions Lapse
Threshold March S&P 500 18,750 (25% x 75,000)
Target Beat S&P 500 by 15% 37,500 (50% x 75,000)
"Super" Beat S&P 500 by 30% 56,250 (75% x 75,000)
and TOTAL Earned under Plan at 1999 will be:
Threshold = 37,500
Target = 75,000
Super = 112,500
Dividends are payable on the 75,000 restricted shares over the five-year
performance period. I will be glad to discuss the outlook for the Company's
financial performance over the plan period and the resultant impact on this
plan.
7. Upon your first day of employment you will be entitled to a $500,000
cash payment.
8. The Company will coordinate and pay all reasonable costs related to
the move of your household goods from Louisville to Los Angeles. Upon your
family establishing a residence in Los Angeles, you shall be entitled to
receive a one-time cash payment of $100,000 to cover relocation-related
expenses. In addition, we will pay for your housing until you have a binding
unconditional agreement of sale on your Louisville residence or up to one
year, whichever occurs earlier.
9. You will be eligible to receive and/or participate in employee
benefits commensurate with your position with the Company and consistent with
benefits afforded other senior officers, all subject to the terms and
conditions of the various benefit plans, including:
401(k) Plan: Assuming that your first day of employment is May 1,
you would become eligible to participate in the Company's 401(k) Plan on
August 1, 1995. Participants in this plan may defer up to 10% of salary
earnings each pay period, of which the first 4% currently is matched by the
company (subject to the IRS annual deferral limit). Company matching
contributions are subject to a five-year vesting schedule, with 25% vesting
earned upon two years of service.
Supplemental Deferral Plan: On January 1, 1996, you would be
eligible to participate in the supplemental Deferral Plan, a non-qualified
deferred compensation plan which supplements the 401(k) plan by allowing
participants to defer compensation in excess of the IRS annual limit, up to
10% of their eligible compensation. Assuming an annual salary of $375,000,
if you were to participate in both the 401(k) and the Supplemental Plan, you
would be able to defer up to a total of $37,500 and receive $15,000 in
matching funds in 1996. You would also be able to make additional unmatched
deferrals of incentive compensation awards.
Executive Medical: Assuming an employment date of May 1, your
coverage would begin July 1. Upon satisfaction of deductibles and through
monthly contributions, this plan would provide 100% reimbursement for all
covered medical and prescriptions charges (certain limits apply to mental
health charges).
(1) Based on actual FY94 EPS ($3.58) compounded 10% annually.
(2) Based on actual FY94 EPS ($3.58) compounded 15% annually.
(3) Based on actual FY94 EPS ($3.58) compounded 22.5% annually.
Auto: You would receive a monthly auto allowance of $225 plus a
gasoline credit card for use for your primary business vehicle. In addition
you would be eligible for reimbursement of up to $1,000 per year for
automobile insurance.
Life Insurance and Disability:Upon your first day of employment,
you will be eligible for a Company-paid life insurance benefit of two times
your annual salary earnings, up to a maximum benefit of $500,000. You will
also be eligible for Company-paid short and long-term disability coverage,
beginning six months from your date of hire.
Financial and Tax Planning: For the first year you would be
eligible for reimbursement of up to $5,500 for tax and estate planning
services; annually you would also be eligible for reimbursement of up to
$1,250 for tax preparation as well as $1,000 for work related to any audit.
10. Should this agreement and your employment be terminated by the
Company without Cause, you shall receive severance as follows: $375,000 to
be payable immediately and $31,250 per month for up to 24 months will be
paid. It is understood that during such severance period you would use your
best efforts to secure employment and that severance payments would cease at
the commencement of other employment. Should this agreement and your
employment terminate with Cause or be terminated by you, then all salary,
benefits and rights under this agreement shall cease upon such termination.
Nothing contained in this agreement shall prevent your receipt of the
benefits described in the Company's published policies, plans or agreements
with respect to the profit sharing plan, your group insurance coverage,
employee stock options and restricted shares.
For purposes of this agreement, "Cause" shall mean (i) the conviction
of the executive of a felony or other crime involving fraud, dishonesty,
moral turpitude or sexual harassment, (ii) fraud with respect to the business
of the Company, or (iii) failure to perform your duties with the Company
(other than as a result of incapacity due to physical or mental illness),
which is willful and deliberate or the result of Executive's gross neglect of
duties, and which is not remedied in a reasonable period of time after
receipt of written notice from the Board of Directors of the Company
specifying such breach.
11. During the performance of your duties on behalf of the Company, you
shall receive and be entrusted with certain confidential and/or secret
information of a proprietary nature. You shall not disclose or use, during
the term of this agreement or any time thereafter, any such information which
is not otherwise publicly available.
12. You agree that during your employment you will not engage as
director, officer, owner, part-owner (five or more percent shareholder),
joint venture or otherwise, in any business competitive with the Company or
any of its affiliates or subsidiaries. It is assumed that passive
investments are permitted by this paragraph.
13. In the event of the termination of your employment for any reason,
you directly or indirectly, shall not for a period of one year:
(i) employ or seek to employ any person or engage any employee
of the company or any of its affiliates or subsidiaries nor any person who is
an independent contractor involved in sales or manufacture of such products
sold or manufactured by the Company or any of its affiliates or subsidiaries;
or
(ii) make any public statement concerning the Company, any of its
affiliates or subsidiaries, or your employment unless previously approved by
the Company, except as may be required by law; or
(iii) induce, attempt to induce or knowingly encourage any customer
of the Company or its affiliates or subsidiaries to divert any business or
income from such company or to stop or alter the manner in which they are
then doing business with the Company or its affiliates or subsidiaries. The
term "Customer" shall mean any individual or business firm that is a customer
or client, or one that is a party in a selling agreement, provided, however,
"Customer" shall not include any business firm that is not among the
Company's top ten sources of product distribution (based on sales levels
during the prior 18 months) nor any individual associated with such business
firm; or
(iv) induce, attempt to induce or knowingly encourage, directly
or through an intermediary such as a registered representative, insurance
agent or a broker-dealer firm, any contractholder, shareholder or client, as
the case may be, to cancel, surrender, lapse or not renew any insurance or
annuity policy, mutual fund shares or trust services offered by a subsidiary
of the Company.
14. Nothing contained in this letter that could be construed to the
contrary is intended to create a contractual obligation on your part to serve
the Company for any specified period of time. Your relationship to the
Company is intended to be that of an "at will" employee. You are free to
terminate your employment at any time, with or without notice and with; or
without cause. Likewise, the Company is free to terminate your employment at
any time, with or without notice or with or without cause, subject to the
terms of this agreement.
Joe, if the above is acceptable to you, please execute the enclosed copy of
this agreement and return it to me.
Sincerely,
ELI BROAD
EB/shc
Agreed to this _________day of April, 1995.
JOSEPH M. TUMBLER 4/17/95
Joseph M. Tumbler Date
EMPLOYMENT AGREEMENT
____________________
AGREEMENT by and between SunAmerica Inc., a Maryland
corporation (the "Company"), and Jay S. Wintrob (the "Executive"), dated as
of the 27th day of April, 1995.
In view of Executive's long-term service with and
continuing contribution to the Company, the Company's Board of Directors
(the "Board") believes it is in the best interests of the Company and its
shareholders to secure Executive's continued services by reducing the
personal uncertainties and risks associated with the possibility or
occurrence of a Change of Control (as defined in Exhibit A). The Board
has, therefor, caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Effective Date.
(a) The "Effective Date" shall mean the first date
following the eighth anniversary of Executive's employment with the Company
and prior to April 27, 2000 on which a Change of Control occurs; provided
that no Change of Control shall be deemed to have occurred so long as Eli
Broad continues to serve as the Chief Executive Officer of the Company or
continues to beneficially own more than 35% of the Outstanding Company
Voting Securities (as such terms are defined in Exhibit A).
Notwithstanding anything in this Agreement to the contrary, if a Change of
Control occurs within one year after termination of Executive's employment
with the Company, and if it is reasonably demonstrated by the Executive
that such termination of employment (i) was at the request of a third party
who had taken steps reasonably calculated to effect the Change of Control
or (ii) otherwise arose in connection with or anticipation of the Change of
Control, then the "Effective Date" shall mean the date immediately prior to
the date of such termination of employment.
(b) The Executive and the Company acknowledge that,
prior to the Effective Date, the employment of the Executive by the Company
is "at will" and may be terminated by either the Executive or the Company
at any time. Moreover, if prior to the Effective Date, the Executive's
employment with the Company terminates, then the Executive shall have no
further rights under this Agreement.
2. Employment Period. The Company hereby agrees to continue
the Executive in its employ, and the Executive hereby agrees to remain in
the employ of the Company, in accordance with the terms and provisions of
this Agreement, for the period commencing on the Effective Date and ending
on the fifth anniversary of such date (the "Employment Period").
3. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's
position (including titles and reporting requirements), authority and
duties shall be at least commensurate in all material respects with those
held, exercised and assigned during the 180-day period immediately
preceding the Effective Date and (B) the Executive's services shall be
performed at the location where he was employed immediately preceding the
Effective Date or any office which is the headquarters of the Company and
is less than 50 miles from such location.
(ii) During the Employment Period, the Executive agrees
to devote his full business time and attention to the business and affairs
of the Company and to use his reasonable best efforts to perform faithfully
and efficiently the responsibilities assigned to him in accordance with
this Agreement. During the Employment Period it shall not be a violation
of this Agreement for the Executive to (A) serve on civic or charitable
boards or committees, (B) fulfill speaking engagements and (C) manage
personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
(b) Compensation.
(i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary at least equal to his annual
base salary in effect immediately prior to the Effective Date.
(ii) Compensation Plans. During the Employment Period,
the Executive shall be entitled to participate in all bonus and incentive
compensation plans, practices, policies and programs ("Compensation Plans")
available generally to other peer executives of the Company and its
affiliated companies. Such Compensation Plans shall provide the Executive
with the opportunity under reasonable expectations of Company performance
to earn an amount of bonus and incentive compensation at least equal, in
the aggregate, to the average annual bonus and incentive compensation
received by Executive with respect to the Company's two full fiscal years
immediately preceding the Effective Date or, if greater, an amount
consistent with the bonus and incentive compensation paid to other peer
executives of the Company and its affiliated companies.
(iii)Additional Benefits and Policies. During the
Employment Period, the Executive shall be entitled to (A) life and
executive medical insurance and other welfare benefits and fringe benefits,
(B) prompt reimbursement for all reasonable employment expenses incurred by
the Executive, (C) paid vacation, and (D) an office and secretarial and
other assistants, in each case in accordance with the policies, practices
and procedures of the Company in effect generally with respect to other
peer executives of the Company and its affiliated companies.
(iv) Affiliated Companies. For purposes of this
Agreement, the term "affiliated companies" will not includeany
corporation or other entity not controlled by theCompany but
deemed to be an affiliate because of theownership or control of
Eli Broad.
4. Termination of Employment.
(a) Certain Definitions. The terms "Cause,"
"Disability," "Good Reason" and "Notice of Termination," as used in this
Agreement, are defined in Exhibit A, which is incorporated in and made a
part of this Agreement.
(b) Termination of Employment. The Executive's
employment shall terminate automatically upon the Executive's death during
the Employment Period. The Company may terminate the Executive's
employment during the Employment Period for Cause or due to the Executive's
Disability. The Executive may terminate his employment during the
Employment Period for Good Reason.
(c) Notice of Termination. Any termination by the
Company for Cause or Disability, or by the Executive for Good Reason, shall
be communicated by Notice of Termination to the other party hereto given in
accordance with Section 9(b). The failure by the Executive or the Company
to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason, Cause or Disability shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
5. Obligations of the Company upon Termination.
(a) Payments Upon Termination. If, during the
Employment Period, the Company shall terminate the Executive's employment
other than for Cause or Disability, or the Executive shall terminate his
employment for Good Reason, the Company shall pay to the Executive as
severance an amount in cash equal to (i) Executive's average annual cash
compensation (base salary plus any bonus or incentive compensation) earned
during the Company's three full fiscal years immediately preceding the
fiscal year in which the Date of Termination occurs (the "Average Cash
Compensation"), multiplied by (ii) a fraction, the numerator of which is
the number of days remaining, after the Date of Termination (as defined in
Exhibit A), in the Employment Period, and the denominator of which is 365;
provided, however, that in no event will the amount of such payment be less
than one or more than two times the Average Cash Compensation (the
"Severance Amount"). One half of such Severance Amount shall be paid to
Executive in a lump sum within 10 days after the Date of Termination, with
the remaining one half payable in equal installments on the last day of
each of the twelve calendar months immediately following the Date of
Termination. In addition to any amounts that may be due to Executive
pursuant to the previous two sentences or any other provision of this
Agreement, upon termination of the Executive's employment with the Company
during the Employment Period for any reason whatsoever, the Company (i)
will pay to executive, within 10 days after the Date of Termination, any
amount of base salary accrued but unpaid through the Date of Termination,
any compensation previously deferred by the Executive and accrued vacation
pay, and (ii) will timely pay or provide to the Executive and/or his family
any other amounts or benefits required to be paid or provided, or which the
Executive and/or his family is eligible to receive, pursuant to this
Agreement or under any plan, program, policy or practice, contract or
agreement of the Company applicable to the Executive or generally
applicable to other peer executives of the Company and its affiliated
companies (except for severance payments under the severance plan in effect
for all Company employees, the benefits under which are replaced during the
Employment Period by the provisions of this Section 5(a)).
(b) Effect of Termination on Restricted Stock and
Stock Options. Notwithstanding any other provision of this Agreement, of
any Company plan or any agreement between Executive and the Company, if
Executive's employment with the Company is terminated during the Employment
Period (i) by the Company other than for Cause or Disability, or by
Executive for Good Reason, then (x) all options to purchase securities of
the Company theretofore granted to Executive and not fully exercisable
shall become exercisable in full and may be exercised by Executive at any
time prior to the one-year anniversary of the Date of Termination, and (y)
all restrictions on any shares of restricted stock granted by the Company
to and then held by Executive (other than "Super Shares," as defined in the
Company's 1995 Performance Stock Plan) shall lapse, and (z) the Company
shall issue to Executive the number of Super Shares subject to Executive's
outstanding awards and as to which the applicable Super Performance
Objectives (as defined in the Company's 1995 Performance Stock Plan) have
been achieved on or prior to the Date of Termination, or, if such
objectives have not been achieved by such date, as to which the Company's
Board determines, in the reasonable exercise of its business judgement and
based on the Company's actual and reasonably anticipated financial results
through the end of the applicable Performance Period (as defined in the
Company's 1995 Performance Stock Plan), that the applicable Super
Performance Objectives are reasonably certain to be achieved by the end of
such Performance Period, or (ii) by reason of the Executive's death or
Disability, then (x) all restrictions will lapse on that number of shares
of restricted stock then held by Executive as to which such restrictions
would have lapsed on or prior to the Date of Termination had each agreement
between the Company and Executive regarding grants of restricted stock
provided for restrictions to lapse on 1-2/3% of the number of shares (other
than "Super Shares") included in such grant at the end of each month
following the date of such grant, and (y) the Company shall issue to
Executive a number of Super Shares equal to the number that would have been
issued pursuant to Section 5(b)(i)(z) above had Executive's employment been
terminated by the Company other than for Cause or Disability, multiplied by
a fraction, the numerator of which is the number of shares of restricted
stock as to which restrictions will lapse in accordance with Section
5(b)(ii)(x) above and the denominator of which is the number of shares of
restricted stock held by Executive as of the Date of Termination.
Certificates representing the number of shares of Company common stock as
to which restrictions shall have lapsed and to be issued to Executive under
awards of Super Shares pursuant to the previous sentence shall be delivered
to Executive (or his estate or legal representatives) by the Company, free
of any restrictive legends or conditions, within 10 days after the Date of
Termination. This Section 5(b) shall be deemed an amendment to any
agreements between the Company and the Executive with respect to
outstanding stock options, shares of restricted stock or Super Shares.
6. Non-exclusivity of Rights; Option to Waive Benefits.
Nothing in this Agreement shall prevent or limit the Executive's continuing
or future participation in any plan, program, policy or practice provided
by the Company or any of its affiliated companies and for which the
Executive may qualify (except for the severance plan in effect for all
Company employees, the benefits under which are replaced during the
Employment Period by the provisions of Section 5(a) hereof), nor shall
anything herein reduce such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies
at or subsequent to the Date of Termination shall be payable in accordance
with such plan, policy, practice or program or contract or agreement except
as explicitly modified by this Agreement. In no event shall the Executive
be obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether
or not the Executive obtains other employment. Executive shall be entitled
to refuse or defer all or any portion of any payments or benefits under
this Agreement, by delivering written notice of such refusal or deferral to
the Company in writing, if he determines that the receipt of such payment
or benefit may result in adverse tax consequences to him; provided that
such refusal or deferral shall not extend or modify the period during which
options may be exercised or restrictions may lapse on restricted shares or
Super Shares or as to which performance is measured under any Company
benefit or stock plan.
7. Successors. This Agreement is personal to the Executive
and shall not be assignable by the Executive otherwise than by will or the
laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal representatives.
This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor
to its business and/or assets that becomes subject to this Agreement by
operation of law or otherwise.
8. Confidentiality and Solicitation. During the performance of
Executive's duties on behalf of the Company, Executive will receive and be
entrusted with certain confidential and/or secret information of a
proprietary nature. Executive shall not disclose or use, during his
employment or any time thereafter, any such information which is not
otherwise publicly available, except as may be required by law. Executive
agrees that during his employment he will not engage as a director,
officer, owner, part-owner (five or more percent shareholder), joint
venturer or otherwise, in any business competitive with the Company or any
of its affiliated companies; provided that passive investments are
permitted by this sentence. In the event of termination of Executive's
employment for any reason, for a period of one year thereafter, Executive
will not (a) employ or seek to employ or engage any employee of the Company
or any of its affiliated companies, or (b) make any public statement
concerning the Company, any of its affiliates or affiliated companies, or
his employment unless previously approved by the Company, except as may be
required by law.
9. Miscellaneous.
(a) This Agreement shall be governed by and construed
in accordance with the laws of the State of California. The captions of
this Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive: Jay S. Wintrob
2465 La Condesa Drive
Los Angeles, CA 90049
If to the Company: SunAmerica Inc.
1 SunAmerica Center
Century City
Los Angeles, CA 90071-6022
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable
under this Agreement such Federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) If any legal action shall be brought for the
enforcement of this Agreement, or because of any alleged dispute, breach or
default hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in such action
in addition to any other relief to which it or he may be entitled.
(f) The Executive's or the Company's failure to insist
upon strict compliance with any provision of this Agreement or the failure
to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason, shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Agreement.
IN WITNESS WHEREOF, the Executive has executed this Agreement and,
pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of
the day and year first above written.
JAY S. WINTROB
Jay S. Wintrob
SUNAMERICA INC.
By: ELI BROAD<PAGE>
EXHIBIT A
Certain Definitions
I. "Cause." For purposes of this Agreement, "Cause" shall mean (i) the
conviction of the Executive of a felony or other crime involving fraud,
dishonesty or moral turpitude, (ii) fraud with respect to the business of
the Company, or (iii) a material breach by the Executive of the Executive's
obligations under Section 3(a) of this Agreement (other than as a result of
incapacity due to physical or mental illness), which is willful and
deliberate or the result of Executive's gross neglect of duties, and which
is not remedied in a reasonable period of time after receipt of written
notice from the Board of Directors of the Company specifying such breach.
II. "Change of Control." For purposes of this Agreement, a "Change of
Control" shall mean the occurrence of any of the following events:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more, or such greater percentage as shall be
required to make such individual, entity or group, immediately following
such acquisition, the largest holder, of the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company (excluding an acquisition by virtue of the exercise of a conversion
privilege), (ii) any acquisition by the Company, (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company, or (iv) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation,
the conditions described in clauses (A), (B) and (C) of subsection (c) of
this paragraph II are satisfied; or
(b) Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board; or
(c) Approval by the shareholders of the Company of
(i) a complete liquidation or dissolution of the Company, (ii) a
reorganization, consolidation or merger (a "Reorganization"), or (iii) the
sale or other disposition of all or substantially all of the assets of the
Company (a "Sale"), unless, following the consummation of any such
Reorganization or Sale, the following requirements are satisfied with
respect to the corporation resulting from such Reorganization, or the
corporation which has acquired all or substantially all of the assets of
the Company: (A) more than 60% of the then outstanding voting securities of
such corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners of the
Outstanding Company Voting Securities immediately prior to such
Reorganization or Sale, in substantially the same proportion as their
ownership, immediately prior to such Reorganization or Sale of the
Outstanding Company Voting Securities, (B) no Person (excluding the Company
and any employee benefit plan (or related trust) of the Company or such
corporation and any Person beneficially owning, immediately prior to such
reorganization, consolidation or merger, or such sale or other disposition,
directly or indirectly, 20% or more of the Outstanding Company Voting
Securities) beneficially owns, directly or indirectly, 20% or more of the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the
Board providing for such Reorganization or Sale.
If any of the foregoing events occurs and Eli Broad is
then the Chief Executive Officer of the Company or the beneficial owner of
more than 35% of the Outstanding Company Voting Securities, then,
notwithstanding the foregoing, such Change of Control shall be deemed to
have occurred on the first date on which Mr. Broad is no longer the Chief
Executive Officer of the Company or the beneficial owner of more than 35%
of the Outstanding Company Voting Securities.
III. "Date of Termination." For purposes of this Agreement, the "Date of
Termination" means (i) if the Executive's employment is terminated by the
Company for Cause or Disability, or by the Executive for Good Reason, the
date of receipt of the Notice of Termination or any later date specified
therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive
of such termination and (iii) if the Executive's employment is terminated
by reason of death, the Date of Termination shall be the date of
Executive's death.
IV. "Disability." For purposes of this Agreement, "Disability" shall mean
the absence of the Executive from his duties with the Company on a
full-time basis for 120 consecutive days as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by
a physician selected by the Company or its insurers and acceptable to the
Executive or his legal representative (such agreement as to acceptability
not to be withheld unreasonably).
V. "Good Reason." For purposes of this Agreement, "Good Reason" shall
mean:
(i) any action or failure to act by the Company which
results in Executive's position (including titles and reporting
requirements), authority or duties being reduced below the level
specified in Section 3(a)(i)(A) of this Agreement;
(ii) any failure by the Company to comply with the
provisions of Section 3(b) of this Agreement;
(iii)the Company's requiring the Executive to be based
at any office or location other than that described in
Section 3(a)(i)(B) of this Agreement; or
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by
this Agreement.
VI. "Notice of Termination." For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) to the extent applicable,
sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment (specifying
the provision of this Agreement relied upon) and (ii) if the Date of
Termination is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than 15 days after the
giving of such notice).
