SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------------------------------
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, 49,440,475 shares outstanding
Nontransferable Class B Stock, par value $1.00 per share, 10,239,656
shares outstanding
SUNAMERICA INC.
INDEX
Page
Number(s)
---------
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
March 31, 1996 and September 30, 1995 3-4
Consolidated Income Statement (Unaudited) -
Three Months and Six Months Ended March 31, 1996 and 1995 5
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended March 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-28
Part II - Other Information 29-31
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
March 31, September 30,
1996 1995
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 876,779 $ 855,350
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value
(amortized cost: March 31, 1996,
$11,533,773; September 30, 1995,
$6,615,620) 11,461,252 6,584,488
Held for investment, at amortized cost
(fair value: September 30, 1995
$736,835) -- 718,283
Mortgage loans 1,626,048 1,543,285
Common stocks, at fair value
(cost: March 31, 1996 $17,378;
September 30, 1995, $21,403) 33,803 39,906
Partnerships 892,002 774,417
Real estate 110,721 105,637
Other invested assets 181,794 187,593
------------ -------------
Total investments 15,182,399 10,808,959
Variable annuity assets 5,779,699 5,263,006
Accrued investment income 165,135 95,038
Deferred acquisition costs 714,740 526,415
Other assets 166,992 150,749
------------ -------------
TOTAL ASSETS $ 22,008,965 $ 16,844,167
============ =============
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
March 31, September 30,
1996 1995
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 8,730,750 $ 4,862,250
Reserves for guaranteed investment contracts 3,865,895 3,607,192
Trust deposits 456,778 426,595
Payable to brokers for purchases of securities 336,189 473,728
Income taxes currently payable 61,285 2,465
Other liabilities 302,407 271,540
------------ -------------
Total reserves, payables
and accrued liabilities 13,753,304 9,643,770
------------ -------------
Variable annuity liabilities 5,779,699 5,263,006
------------ -------------
Senior indebtedness:
Long-term notes and debentures 573,335 524,835
Reverse repurchase agreements 63,359 --
------------ -------------
Total senior indebtedness 636,694 524,835
------------ -------------
Deferred income taxes 74,761 146,847
------------ -------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary grantor
trusts whose sole assets are junior
subordinated debentures of the Company 237,631 52,631
------------ -------------
Shareholders' equity:
Preferred stock 384,549 321,642
Nontransferable Class B Stock 10,240 10,240
Common Stock 49,440 44,175
Additional paid-in capital 357,295 185,211
Retained earnings 757,525 656,509
Net unrealized losses on debt and
equity securities available for sale (32,173) (4,699)
------------ -------------
Total shareholders' equity 1,526,876 1,213,078
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,008,965 $ 16,844,167
============ =============
<PAGE>
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and six months ended March 31, 1996 and 1995
(In thousands, except per-share amounts - unaudited)
<CAPTION>
Three months Six months
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 287,538 $ 215,457 $ 541,528 $ 417,624
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (89,588) (62,466) (157,684) (122,344)
Guaranteed investment contracts (59,918) (50,306) (121,342) (97,561)
Trust deposits (2,552) (2,606) (5,123) (5,276)
Senior indebtedness (18,014) (13,363) (33,066) (27,618)
--------- --------- --------- ---------
Total interest expense (170,072) (128,741) (317,215) (252,799)
--------- --------- --------- ---------
Dividends paid on preferred
securities of grantor trusts (5,172) -- (9,893) --
--------- --------- --------- ---------
NET INVESTMENT INCOME 112,294 86,716 214,420 164,825
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (3,589) (8,344) (2,185) (15,575)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 25,337 19,768 49,753 40,221
Net retained commissions 13,066 7,383 21,931 14,003
Asset management fees 6,361 6,662 12,864 13,687
Loan servicing fees 6,203 6,055 11,773 8,033
Trust fees 4,126 3,942 8,321 7,692
--------- --------- --------- ---------
TOTAL FEE INCOME 55,093 43,810 104,642 83,636
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 5,025 3,412 7,613 6,156
General and administrative expenses (50,242) (41,116) (94,340) (74,224)
Amortization of deferred acquisition costs (21,514) (18,740) (40,516) (37,414)
Other, net 374 1,016 393 2,884
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (66,357) (55,428) (126,850) (102,598)
--------- --------- --------- ---------
PRETAX INCOME 97,441 66,754 190,027 130,288
Income tax expense (29,200) (19,400) (57,000) (37,800)
--------- --------- --------- ---------
NET INCOME $ 68,241 $ 47,354 $ 133,027 $ 92,488
========= ========= ========= =========
EARNINGS PER SHARE $ 0.96 $ 0.68 $ 1.90 $ 1.34
========= ========= ========= =========
NET EARNINGS APPLICABLE TO COMMON STOCK
(used in the computation of earnings
per share) $ 65,358 $ 43,180 $ 127,261 $ 84,175
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 67,964 63,101 66,855 62,938
========= ========= ========= =========
</TABLE>
<PAGE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended March 31, 1996 and 1995
(In thousands - unaudited)
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 133,027 $ 92,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 157,684 122,344
Guaranteed investment contracts 121,342 97,561
Trust deposits 5,123 5,276
Net realized investment losses 2,185 15,575
Accretion of net discounts on investments (12,355) (14,209)
Provision for deferred income taxes (41,005) 5,117
Change in:
Deferred acquisition costs (28,677) (13,578)
Other assets (6,455) (15,224)
Income taxes currently payable 51,350 (6,420)
Other liabilities (6,551) 15,728
Other, net (2,524) 10,501
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 373,144 315,159
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (5,649,246) (1,756,731)
Bonds, notes and redeemable preferred
stocks held for investment (7,172) (39,777)
Mortgage loans (150,319) (146,464)
Partnerships (320,969) (188,909)
Other investments, excluding short-term
investments (64,683) (88,871)
Net assets of CalFarm Life Insurance Company (50,946) --
Net assets of Advantage Capital Corporation (2,072) --
Net assets of Ford Life Insurance Company 6,677 --
Net assets of Imperial Premium Finance, Inc. -- (442,804)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 4,092,761 1,513,052
Partnerships 97,657 19,173
Other investments, excluding short-term
investments 41,155 54,287
Traditional life insurance business of
CalFarm Life Insurance Company (117,719) --
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 1,160,484 568,331
Bonds, notes and redeemable preferred
stocks held for investment 23,817 246,372
Mortgage loans 60,706 40,045
Partnerships 114,294 44,199
Other investments, excluding short-term
investments 21,706 22,837
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (743,869) (155,260)
------------ ------------
<PAGE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended March 31, 1996 and 1995
(In thousands - unaudited)
1996 1995
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (32,011) $ (25,700)
Premium receipts on:
Fixed annuity contracts 518,375 559,286
Guaranteed investment contracts 514,916 716,775
Net exchanges to (from) the fixed accounts
of variable annuity contracts (104,628) 51,572
Receipts of trust deposits 250,573 262,210
Withdrawal payments on:
Fixed annuity contracts (310,279) (360,703)
Guaranteed investment contracts (376,833) (648,226)
Trust deposits (225,425) (261,632)
Claims and annuity payments on fixed
annuity contracts (97,755) (92,472)
Net proceeds from issuances of long-term notes 47,478 --
Repayments of collateralized mortgage
obligations -- (28,662)
Net increase in other senior indebtedness 63,359 --
Net repayments of other short-term financings (275,704) (158,685)
Net proceeds from issuance of preferred
securities of a subsidiary grantor trust 179,532 --
Net proceeds from issuance of Series E
Preferred Stock 240,556 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 392,154 13,763
------------ ------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 21,429 173,662
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 855,350 569,382
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 876,779 $ 743,044
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 30,855 $ 27,485
============ ============
Income taxes paid, net of refunds received $ 46,655 $ 39,103
============ ============
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of March 31, 1996 and September 30, 1995, the
results of its consolidated operations for the three months and six months
ended March 31, 1996 and 1995 and its consolidated cash flows for the six
months ended March 31, 1996 and 1995. The results of operations for the
three months and six months ended March 31, 1996 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, 1995, contained in the Company's 1995
Annual Report to Shareholders.
2. Acquisitions
------------
On February 29, 1996, the Company completed the acquisition of all of the
outstanding stock of Ford Life Insurance Company ("Ford Life") for a cash
purchase price of $172,500,000. This acquisition has been accounted for
by using the purchase method of accounting. The Company acquired assets
having an aggregate fair value of $3,146,072,000, composed primarily of
invested assets totaling $3,097,152,000. Liabilities assumed in this
acquisition totaled $3,098,396,000, including $3,059,255,000 of fixed
annuity reserves. An amount equal to excess of the purchase price over
the fair value of the liabilities assumed, amounting to $123,204,000 at
March 31, 1996, is included in Deferred Acquisition Costs in the
accompanying consolidated balance sheet, and is being amortized, with
interest, over the estimated lives of the assumed annuity contracts in
proportion to the present value of estimated future profits.
On December 29, 1995, the Company completed the acquisition of all of the
outstanding stock of CalFarm Life Insurance Company ("CalFarm") for a cash
purchase price of $120,000,000. This acquisition has been accounted for
by using the purchase method of accounting. The Company acquired assets
having an aggregate fair value of $737,028,000, composed primarily of
invested assets totaling $722,461,000. Liabilities assumed in this
acquisition totaled $650,652,000, including $645,814,000 of fixed annuity
reserves. An amount equal to excess of the purchase price over the fair
value of the liabilities assumed, amounting to $32,784,000 at March 31,
1996, is included in Deferred Acquisition Costs in the accompanying
consolidated balance sheet, and is being amortized, with interest, over
the estimated lives of the assumed annuity contracts in proportion to the
present value of estimated future profits.
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
2. Acquisitions
------------
(Continued)
The accompanying consolidated income statement includes the results of
Ford Life's operations for only the period from March 1, 1996 to March 31,
1996 and CalFarm's operations for only the period from January 1, 1996 to
March 31, 1996. On a pro forma (unaudited) basis, assuming these
acquisitions occurred on October 1, 1994, the beginning of the earliest
period presented, revenues (investment income, net realized investment
gains/losses and fee income) would have been $373,397,000 and
$307,459,000, for the three months ended March 31, 1996 and 1995,
respectively, and $731,987,000 and $581,571,000, for the six months ended
March 31, 1996 and 1995, respectively. On a pro forma (unaudited) basis,
these acquisitions would not have materially affected reported net income
of these prior periods.
3. Adoption of Accounting Pronouncement
------------------------------------
During the second quarter, the Company prospectively adopted the
provisions of Emerging Issues Task Force Consensus No. 94-1, "Accounting
for Tax Benefits Resulting from Investments in Affordable Housing
Projects" ("EITF 94-1"), for investments made after May 1995, the date of
the consensus. See "Management's Discussion and Analysis of Financial
Position and Results of Operations - Sources of Liquidity" on pages 26 and
27 for further discussion.
4. Reclassification of Securities Held for Investment
--------------------------------------------------
On December 1, 1995, the Company reassessed the appropriateness of
classifying a portion of its portfolio of bonds, notes and redeemable
preferred stock as held for investment (the "Held for Investment
Portfolio"). This reassessment was made pursuant to the provisions of
"Special Report: A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," issued by the
Financial Accounting Standards Board in November 1995. As a result of its
reassessment, the Company reclassified all of its Held for Investment
Portfolio as available for sale. At December 1, 1995, the amortized cost
of the Held for Investment Portfolio aggregated $701,512,000 and its fair
value was $723,423,000. Upon reclassification, the resulting net
unrealized gain of $21,911,000 was credited to Net Unrealized Gains
(Losses) on Debt and Equity Securities Available for Sale in the
shareholders' equity section of the balance sheet.
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
5. Preferred Securities of Subsidiary Grantor Trusts
-------------------------------------------------
Preferred securities of subsidiary grantor trusts comprise $52,630,875
liquidation amount of 9.95% Trust Originated Preferred Securities issued
by SunAmerica Capital Trust I on June 13, 1995 and $185,000,000
liquidation amount of 8.35% Trust Originated Preferred Securities issued
by SunAmerica Capital Trust II on October 11, 1995.
In connection with the issuance of the 9.95% Trust Originated 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. These
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.
In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by the Company of the grantor trust's
common securities, the Company issued to the grantor trust $191,224,250
principal amount of 8.35% junior subordinated debentures, due 2044. These
debentures are redeemable at the option of the Company on or after
September 30, 2000 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.
6. 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 D and E Depositary Shares issued in March 1993 and
November 1995, respectively. Common stock equivalents are included in the
computation only if their effect is dilutive. Net Earnings Applicable To
Common Stock are reduced by preferred stock dividend requirements, which
amounted to $2,883,000 and $4,174,000 for the three months ended March 31,
1996 and 1995, respectively, and $5,766,000 and $8,313,000 for the six
months ended March 31, 1996 and 1995, respectively. These preferred stock
dividend requirements do not include dividends paid on the convertible
issues, which amounted to $4,336,000 and $3,477,000 in the three months
ended March 31, 1996 and 1995, respectively, and $9,328,000 and $6,953,000
in the six months ended March 31, 1996 and 1995, respectively.
<PAGE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
7. Ratios of Earnings to Fixed Charges
-----------------------------------
The ratios of earnings to fixed charges for the three months and six
months ended March 31, 1996 and 1995 are as follows:
Three months Six months
--------------- ---------------
1996 1995 1996 1995
----- ----- ----- -----
Ratio of earnings to fixed
charges (excluding interest
incurred on fixed annuities,
guaranteed investment contracts
and trust deposits) 5.2x 6.0x 5.4x 5.7x
===== ===== ===== =====
Ratio of earnings to fixed
charges (including interest
incurred on fixed annuities,
guaranteed investment contracts
and trust deposits) 1.6x 1.5x 1.6x 1.5x
===== ===== ===== =====
Ratio of earnings to combined
fixed charges and preferred stock
dividends (excluding interest
incurred on fixed annuities,
guaranteed investment contracts
and trust deposits) 3.6x 3.3x 3.6x 3.2x
==== ==== ==== ====
Ratio of earnings to combined
fixed charges and preferred stock
dividends (including interest
incurred on fixed annuities,
guaranteed investment contracts
and trust deposits) 1.5x 1.4x 1.5x 1.4x
==== ==== ==== ====
<PAGE>
SUNAMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial
condition and results of operations of SunAmerica Inc. (the "Company") for the
three months and six months ended March 31, 1996 and 1995.
RESULTS OF OPERATIONS
NET INCOME totaled $68.2 million or $0.96 per share in the second quarter
of 1996, compared with $47.4 million or $0.68 per share in the second quarter
of 1995. For the six months, net income amounted to $133.0 million or $1.90
per share in 1996, compared with $92.5 million or $1.34 per share in 1995.
Results of operations in fiscal 1996 include the effects of the recently
completed acquisitions (the "Acquisitions") of CalFarm Life Insurance Company
("CalFarm") and Ford Life Insurance Company ("Ford Life"). The acquisition of
CalFarm was completed on December 29, 1995 and the acquisition of Ford Life was
completed on February 29, 1996.
PRETAX INCOME totaled $97.4 million in the second quarter of 1996, up
from $66.8 million in the second quarter of 1995. For the six months, pretax
income totaled $190.0 million in 1996, compared with $130.3 million in 1995.
These improvements primarily resulted from increased net investment income,
increased fee income and reduced net realized investment losses, partially
offset by increased general and administrative expenses.
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 $112.3 million in the second quarter
of 1996 from $86.7 million in the second quarter of 1995. These amounts
represent net investment spreads of 3.40% on average invested assets (computed
on a daily basis) of $13.23 billion in the second quarter of 1996 and 3.63% on
average invested assets of $9.56 billion in the second quarter of 1995. For
the six months, net investment income increased to $214.4 million in 1996 from
$164.8 million in 1995, representing net investment spreads of 3.54% and 3.48%,
respectively, on average invested assets of $12.12 billion and $9.48 billion,
respectively. As a result of the Acquisitions, net investment spreads in 1996
declined by 29 basis points in the second quarter and 16 basis points in the
six months.
Net investment spreads also include the effect of income earned on the
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $1.08 billion in the second quarter of 1996, $729.5
million in the second quarter of 1995, $1.04 billion in the six months of 1996
and $714.5 million in the six months of 1995. The difference between the
Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities was 2.92% in the second quarter of 1996, 3.18% in
the second quarter of 1995, 3.03% in the six months of 1996 and 3.04% in the
six months of 1995. As a result of the Acquisitions, the differences between
the Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities in 1996 declined by 17 basis points in the second
quarter and by 9 basis points in the six months.
Investment income totaled $287.5 million in the second quarter of 1996,
compared with $215.5 million in the second quarter of 1995. For the six months,
investment income amounted to $541.5 million in 1996, up $123.9 million from
the $417.6 million recorded in 1995. These amounts represent yields on average
invested assets of 8.69% and 9.01% in the second quarters of 1996 and 1995,
respectively, and 8.94% and 8.81% in the six months of 1996 and 1995,
respectively. Over the last ten fiscal quarters, the Company's quarterly
investment yields on average invested assets have ranged from 8.32% to 9.54%;
however, there can be no assurance that the Company will achieve similar yields
in future periods.
Investment income recorded in 1996 and the yields it represents reflect
the effects of the Acquisitions. The invested assets of Ford Life and CalFarm
are primarily high-grade corporate, government and government/agency bonds,
which are generally lower yielding than the Company's existing portfolio. In
1996, the investment income of Ford Life and CalFarm aggregated $30.0 million
in the second quarter and six months, reducing the overall investment yield of
the Company by 27 basis points in the second quarter and 15 basis points in the
six months.
In addition to the effects of the Acquisitions, investment income rose
during 1996 as a result of higher levels of average invested assets and
additional partnership income. Partnership income amounted to $29.8 million
(representing a yield of 13.80% on related average assets of $863.5 million)
in the second quarter of 1996, compared with $22.8 million (representing a
yield of 12.35% on related average assets of $737.2 million) in the second
quarter of 1995. For the six months, partnership income amounted to $66.0
million (representing a yield of 15.84% on related average assets of $833.9
million) in 1996, compared with $46.4 million (representing a yield of 13.35%
on related average assets of $695.0 million).
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 of $14.3 million on the Total Return Agreements during the
second quarter of 1996, compared with $5.7 million in the second quarter of
1995. For the six months, income on the Total Return Agreements totaled $19.2
million in 1996, compared with $4.2 million in 1995. The improved results in
1996 reflect increases in the fair value of the underlying assets, resulting
primarily from improved overall performance of non-investment-grade bonds in
1996 relative to 1995. Although the Company continues to use Dollar Rolls,
they did not have a significant impact on investment income in 1996 or 1995.
(See "Asset-Liability Matching" for additional discussion of Total Return
Agreements and Dollar Rolls).
Total interest and dividend expense aggregated $175.2 million in the
second quarter of 1996 and $128.7 million in the second quarter of 1995. For
the six months, interest expense aggregated $327.1 million in 1996, compared
with $252.8 million in 1995. The average rate paid on all interest-bearing
liabilities decreased to 5.77% (5.44% on fixed annuity contracts and 6.34% on
guaranteed investment contracts ("GICs")) in the second quarter of 1996, from
5.83% (5.38% on fixed annuity contracts and 6.68% on GICs) in the second
quarter of 1995. For the six months, the average rate paid on all interest-
bearing liabilities increased to 5.91% (5.51% on fixed annuity contracts and
6.52% on GICs) in 1996 from 5.77% (5.35% on fixed annuity contracts and 6.61%
on GICs) in 1995. Interest-bearing liabilities averaged $12.15 billion during
the second quarter of 1996, compared with $8.83 billion during the second
quarter of 1995. For the six months, interest-bearing liabilities averaged
$11.08 billion in 1996, compared with $8.76 billion in 1995.
The average rates paid on all interest-bearing liabilities in 1996 also
reflect the impact of the Acquisitions. The interest-bearing liabilities of
Ford Life and CalFarm are primarily single premium deferred annuities that
carry a lower average crediting rate than the average crediting rate paid on
the Company's other annuity liabilities. Assumption of these additional annuity
liabilities reduced the average rate paid on all interest-bearing liabilities
by 10 basis points (7 basis points on fixed annuity contracts) in the second
quarter of 1996 and by 6 basis points (5 basis points on fixed annuity
contracts) in the six months of 1996. Notwithstanding the favorable effects
of the Acquisitions, the average rate paid on all interest-bearing liabilities
increased in the six months of 1996 primarily due to the dividends paid on the
preferred securities of subsidiary grantor trusts. The average dividend rate
on those preferred securities was 8.72% in the six months of 1996. The
preferred securities were issued in June 1995 and October 1995, and, therefore,
there were no such dividends paid in the six months of 1995.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 reflects the impact of the
Acquisitions. Average assets in 1996 include the invested assets of CalFarm
for the entire second quarter and those of Ford Life for only the month of
March. In the aggregate, in 1996 the Acquisitions contributed $1.79 billion
and $893.8 million to the Company's average invested assets in the second
quarter and six months, respectively. Average invested assets also increased
as a result of sales of the Company's fixed-rate products, consisting of both
fixed annuities (including the fixed accounts of variable annuity products) and
GICs, and $519.2 million of aggregate net proceeds from the issuances of
Preferred Stock of the Company, preferred securities of subsidiary grantor
trusts and long-term notes. Since March 31, 1995, fixed annuity premiums have
aggregated $903.8 million and GIC premiums have totaled $1.56 billion. Fixed
annuity premiums totaled $371.0 million in the second quarter of 1996, down
from the $416.0 million recorded in the second quarter of 1995, and $518.4
million in the six months of 1996, down from $559.3 million in the six months
of 1995. These premiums include premiums for the fixed accounts of variable
annuities totaling $329.9 million, $86.6 million, $394.1 million and $146.5
million, respectively. The significant increase in premiums for the fixed
accounts of variable annuities in 1996 resulted primarily from increased
inflows into the one-year fixed account of the Company's Polaris product. GIC
premiums increased significantly to $283.4 million in the second quarter of
1996 from $152.5 million in the second quarter of 1995. This $130.9 million
increase principally resulted from additional sales to pension plans, largely
due to the success of the Company's recently introduced "AAA"-rated GIC product
and an expanded customer base. For the six months, GIC premiums totaled $514.9
million in 1996, compared with $716.8 million in 1995. This $201.9 million
reduction in GIC premiums primarily resulted from the cyclical demand for GICs
by municipalities, largely due to the interdependency of the demand for GICs
and the funding of new municipal bond offerings.
The GICs issued by the Company generally 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 Company imposes surrender penalties in the event of other
withdrawals prior to maturity. Contracts purchased by banks or state and local
governmental authorities may also permit scheduled book value withdrawals
subject to the terms of the underlying indenture or agreement. Contracts
purchased by asset management firms either prohibit withdrawals or permit
withdrawals with notice ranging from seven to 270 days. In pricing GICs, the
Company analyzes cash flow information and prices accordingly so that it is
compensated for possible withdrawals prior to maturity.
NET REALIZED INVESTMENT LOSSES totaled $3.6 million in the second quarter
of 1996 and $8.3 million in the second quarter of 1995. These amounts
represent 0.11% and 0.35%, respectively, of average invested assets. Net
realized investment losses include impairment writedowns of $8.5 million in the
second quarter of 1996 and $17.0 million in the second quarter of 1995.
Therefore, net gains from sales of investments totaled $4.9 million in the
second quarter of 1996, compared with $8.7 million in the second quarter of
1995. For the six months, net realized investment losses totaled $2.2 million
in 1996, compared with $15.6 million in 1995 and represent 0.04% and 0.33%,
respectively, of average invested assets. Net realized investment losses
include impairment writedowns of $15.4 million in 1996 and $21.7 million in
1995. Therefore, for the six months, net gains from sales of investments
totaled $13.2 million in 1996 and $6.1 million in 1995.
Net gains from sales of investments in 1996 include $11.8 million of net
gains ($5.3 million in the second quarter) realized on sales of other invested
assets, principally leveraged leases, and $3.3 million of net gains ($2.0
million in the second quarter) realized on sales of common stocks. These sales
were made primarily to maximize total return.
Net gains from sales of investments in 1995 include $10.8 million of net
gains ($7.8 million in the second quarter) realized on sales of common stocks
made primarily to maximize total return and $8.0 million of net losses ($0.4
million in the second quarter) realized on sales of various bonds that were
also primarily made to maximize total return. In addition, the Company
realized $2.3 million of net gains ($1.5 million in the second quarter) on
sales of real estate.
Impairment writedowns include additional provisions applied to defaulted
bonds amounting to $10.7 million in 1996 ($5.0 million in the second quarter)
and $18.1 million in 1995 ($13.8 million in the second quarter).
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees increased to $25.3
million in the second quarter of 1996 from $19.8 million in the second quarter
of 1995. For the six months, variable annuity fees totaled $49.8 million in
1996, compared with $40.2 million in 1995. These increases reflect growth in
average variable annuity assets, principally due to increased market values and
the receipt of variable annuity premiums, partially offset by surrenders.
Variable annuity assets averaged $5.63 billion during the second quarter of
1996 and $4.43 billion during the second quarter of 1995. For the six months,
variable annuity assets averaged $5.48 billion in 1996, compared with $4.43
billion in 1995. Variable annuity premiums, which exclude premiums allocated
to the fixed accounts of variable annuity products, have aggregated $799.6
million since March 31, 1995. Variable annuity premiums totaled $224.5 million
in the second quarter of 1996, up significantly from $106.9 million in the
second quarter of 1995. For the six months, variable annuity premiums totaled
$434.5 million in 1996, compared with $206.2 million in 1995. These increases
in premiums may be attributed, in part, to a heightened demand for equity
investments, principally as a result of generally improved market performance
in the 1996 periods. The Company has encountered increased competition in the
variable annuity marketplace during recent years and anticipates that the
market will remain highly competitive for the foreseeable future.
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
$13.1 million in the second quarter of 1996 and $7.4 million in the second
quarter of 1995. For the six months, net retained commissions totaled $21.9
million in 1996, compared with $14.0 million in 1995. Broker-dealer sales
(mainly sales of general securities, mutual funds and annuities) totaled $3.73
billion in the second quarter of 1996 and $1.81 billion in the second quarter
of 1995. For the six months, such sales totaled $5.99 billion in 1996 and $3.17
billion in 1995. The significant increases in sales and net retained
commissions during the 1996 periods reflect a greater number of registered
representatives and higher average production. In addition, sales in the
second quarter of 1996 include those of Advantage Capital Corporation, a
Houston-based broker-dealer acquired on January 3, 1996. Sales in 1996 also
reflect generally favorable market conditions. Increases in net retained
commissions are not proportionate to increases in sales primarily due to
differences in sales mix.
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. ("SunAmerica
Asset Management"). Such fees totaled $6.4 million on average assets managed
of $2.15 billion in the second quarter of 1996 and $6.7 million on average
assets managed of $2.03 billion in the second quarter of 1995. For the six
months, asset management fees totaled $12.9 million on average assets managed
of $2.15 billion in 1996, compared with $13.7 million on average assets managed
of $2.07 billion in 1995. Asset management fees are not proportionate to
average assets managed primarily due to changes in product mix. Sales of
mutual funds, excluding sales of money market accounts, have aggregated $179.7
million since March 31, 1995. Mutual fund sales totaled $63.6 million in the
second quarter of 1996, compared with $30.9 million in the second quarter of
1995. For the six months, such sales totaled $99.9 million in 1996, compared
with $60.5 million in 1995. Higher mutual fund sales in the 1996 periods
reflect the combined effects of additional advertising, the favorable
performance records of certain of the Company's mutual funds and heightened
demand for equity investments, principally as a result of improved market
performance. Redemptions of mutual funds, excluding redemptions of money
market accounts, amounted to $102.1 million in the second quarter of 1996,
compared with $109.9 million in the second quarter of 1995. For the six
months, such redemptions amounted to $199.6 million in 1996 and $250.4 million
in 1995.
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 these sold loans.
Such fee income totaled $6.2 million on average loans serviced of $455.7
million in the second quarter of 1996, compared with $6.1 million on average
loans serviced of $430.1 million in the second quarter of 1995. For the six
months, loan servicing fees totaled $11.8 million on average loans serviced of
$448.2 million in 1996, compared with $8.0 million on average loans serviced
of $286.8 million in 1995. Imperial's net assets were acquired on November 30,
1994, and, therefore, the six months of 1995 includes only four months of loan
servicing fee income.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts, as well as for other qualified pension plans. Trust fees increased
to $4.1 million in the second quarter of 1996 (on an average of 201,000 trust
accounts) from $3.9 million in the second quarter of 1995 (on an average of
198,000 trust accounts). For the six months, trust fees increased to $8.3
million (on an average of 200,000 trust accounts), compared with $7.7 million
(on an average of 193,000 trust accounts.
SURRENDER CHARGES on fixed and variable annuities totaled $5.0 million
in the second quarter of 1996 and $3.4 million in the second quarter of 1995.
For the six months, surrender charges totaled $7.6 million in 1996 and $6.2
million in 1995. Surrender charges generally are assessed on annuity
withdrawals at declining rates during the first seven years of the contract.
Withdrawal payments, which include surrenders and lump-sum annuity benefits,
totaled $332.5 million in the second quarter of 1996 and $344.9 million in the
second quarter of 1995. Annualized, these payments represent 11.5% and 16.1%,
respectively, of average fixed and variable annuity reserves. For the six
months, withdrawal payments totaled $617.0 million in 1996 and $657.8 million
in 1995, and, annualized, represent 11.6% and 15.5%, respectively, of average
fixed and variable annuity reserves. Withdrawals include variable annuity
payments from the separate accounts totaling $152.2 million in the second
quarter of 1996, $164.7 million in the second quarter of 1995, $307.6 million
in the six months of 1996 and $309.2 million in the six months of 1995. Despite
the addition to fixed annuity withdrawals resulting from the Acquisitions,
total annuity withdrawals declined slightly in the second quarter of 1996,
primarily resulting from a decline in variable annuity withdrawals. Variable
annuity withdrawals decreased principally due to the success of the Company's
retention efforts. In the six months, total withdrawals declined primarily as
a result of a decline in fixed annuity withdrawals. These withdrawals were
unusually high in the first quarter of 1995, principally as a result of certain
blocks of policies coming off surrender charge restrictions and a greater
volume of surrenders on a closed block of business. 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 $50.2 million in the second
quarter of 1996, compared with $41.1 million in the second quarter of 1995.
For the six months, general and administrative expenses totaled $94.3 million
in 1996, compared with $74.2 million in 1995. General and administrative
expenses in 1996 reflect the impact of the Acquisitions, including Advantage
Capital Corporation, and include the expenses of recently acquired Imperial for
the full six months, compared with only four months of such expenses recorded
in 1995. In addition, 1996 includes expenses related to a national advertising
campaign to further 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 totaled $21.5 million in the
second quarter of 1996 and $18.7 million in the second quarter of 1995. For
the six months, such amortization totaled $40.5 million in 1996, compared with
$37.4 million in 1995. This increase was primarily due to amortization of
deferred acquisition costs resulting from the Acquisitions and to additional
fixed and variable annuity and mutual fund sales and the subsequent
amortization of related deferred commissions and other acquisition costs.
INCOME TAX EXPENSE totaled $29.2 million in the second quarter of 1996,
$19.4 million in the second quarter of 1995, $57.0 million in the six months
of 1996 and $37.8 million in the six months of 1995, and represented effective
tax rates of 30% in 1996 and 29% in 1995. These tax rates reflect the
favorable impact of certain affordable housing tax credits.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY decreased by $39.1 million to $1.53 billion at March
31, 1996 from $1.57 billion at December 31, 1995, primarily as a result of a
$91.2 million increase in net unrealized losses on debt and equity securities
available for sale charged directly to shareholders' equity and $16.1 million
of dividends paid to shareholders. These decreases were partially offset by
the recording of $68.2 million of net income in the second quarter of 1996.
BOOK VALUE PER SHARE amounted to $21.16 at March 31, 1996, compared with
$21.76 at December 31, 1995. Excluding net unrealized gains and losses on debt
and equity securities available for sale, book value per share amounted to
$21.65 at March 31, 1996 and $20.86 at December 31, 1995.
TOTAL ASSETS increased by $4.16 billion to $22.01 billion at March 31,
1996 from $17.84 billion at December 31, 1995, principally due to a $3.59
billion increase in invested assets and a $325.6 million increase in the
separate accounts for variable annuities.
INVESTED ASSETS at March 31, 1996 totaled $15.18 billion, compared with
$11.59 billion at December 31, 1995. This $3.59 billion increase primarily
resulted from the acquisition of Ford Life (whose invested assets totaled $3.10
billion at the date of acquisition) for a cash purchase price of $172.5
million, an additional $316.1 million increase in amounts payable to brokers
for purchases of securities and increases in reserves of fixed annuity
contracts and guaranteed investment contracts. These favorable factors were
partially offset by a $157.4 million increase in net unrealized losses on debt
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. Effective,
December 1, 1995, pursuant to guidelines issued by the Financial Accounting
Standards Board, the Company determined that all of its portfolio of bonds,
notes and redeemable preferred stocks (the "Bond Portfolio") is available to
be sold in response to changes in market interest rates, changes in prepayment
risk, the Company's need for liquidity and other similar factors. Accordingly,
the Company no longer classifies a portion of its Bond Portfolio as held for
investment.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair
value by $72.5 million at March 31, 1996. At December 31, 1995, the fair value
of the Bond Portfolio was $84.9 million above its amortized cost. The net
unrealized losses on the Bond Portfolio since December 31, 1995 principally
reflect the higher relative prevailing interest rates at March 31, 1996 and
their corresponding effect on the fair value of the Bond Portfolio.
Approximately $11.48 billion or 99.6% of the Bond Portfolio (at amortized
cost) at March 31, 1996 was rated by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P"),
Fitch Investor Service, Inc. ("Fitch") or under comparable statutory rating
guidelines established by the National Association of Insurance Commissioners
("NAIC") and implemented by either the NAIC or the Company. At March 31, 1996,
approximately $10.32 billion (at amortized cost) was rated investment grade by
one or more of these agencies or under the NAIC guidelines, including
$5.61 billion of U.S. government/agency securities and mortgage-backed
securities ("MBSs").
At March 31, 1996, the Bond Portfolio included $1.16 billion (fair value,
$1.16 billion) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch
or the NAIC. Based on their March 31, 1996 amortized cost, these non-
investment-grade bonds accounted for 5.3% of the Company's total assets and
7.6% 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 $316.0 million at
March 31, 1996 (see "Asset-Liability Matching").
Non-investment-grade securities generally provide higher yields and
involve greater risks than investment-grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment-grade issuers. In addition, the trading market for
these securities is usually more limited than for investment-grade securities.
The Company intends that its holdings of such securities not exceed current
levels, but its policies may change from time to time, including in connection
with any possible acquisition. The Company had no material concentrations of
non-investment-grade securities at March 31, 1996.
<PAGE>
<TABLE>
The following table summarizes the Company's rated bonds by rating classification as of March 31, 1996 (dollars in
thousands):
<CAPTION>
Issues not rated by S&P/Moody's/
Issues Rated by S&P/Moody's/D&P/Fitch D&P/Fitch, By NAIC Category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[D&P]/{Fitch} 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)
[AAA to A-]
{AAA to A-} $6,848,749 $6,796,499 1 $1,425,122 $1,408,597 $ 8,273,871 54.30% $ 8,205,096
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 1,537,149 1,522,427 2 505,686 511,463 2,042,835 13.41 2,033,890
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 145,871 147,762 3 104,868 105,613 250,739 1.65 253,375
B+ to B- (B1 to B3)
[B+ to B-]
{B+ to B-} 632,821 645,907 4 212,322 205,471 845,143 5.55 851,378
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 33,288 29,655 5 11,390 9,001 44,678 0.29 38,656
CI to D
[DD]
{D} -- -- 6 24,904 22,596 24,904 0.16 22,596
---------- ---------- ---------- ---------- ----------- -----------
TOTAL RATED ISSUES $9,197,878 $9,142,250 $2,284,292 $2,262,741 $11,482,170 $11,404,991
========== ========== ========== ========== =========== ===========
Footnotes appear on the following page.
<PAGE>
Footnotes to the table of rated bonds by rating classification
---------------------------------------------------------------
(1) S&P rates debt securities in rating categories ranging 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 rating categories ranging from Aaa (the highest) to
C (extremely poor prospects of ever attaining any 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. D&P rates debt securities in rating categories ranging from AAA (the highest) to DD
(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. Fitch rates debt securities in rating categories
ranging from AAA (the highest) to D (in payment default). A plus (+) or a minus (-) indicates the debt's relative
standing within the rating category. A security rated BBB- or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, D&P and Fitch ratings if rated by multiple 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/D&P/Fitch 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>
<PAGE>
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $1.14 billion at March 31, 1996. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At March 31, 1996, Secured Loans consisted of loans to 275
borrowers spanning 27 industries, with 17% of these assets (at amortized cost)
concentrated in the leisure industry and with no other industry concentration
constituting more than 12% of these assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation
in these transactions has enabled the Company to improve its investment yield.
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. The Company's Secured Loans are rated by S&P, Moody's, D&P, Fitch
or under comparable statutory rating guidelines established by the NAIC and
implemented by either the NAIC or the Company.
MORTGAGE LOANS aggregated $1.63 billion at March 31, 1996 and consisted
of 667 first mortgage loans with an average loan balance of approximately $2.4
million, collateralized by properties located in 33 states. Approximately 45%
of the portfolio was multifamily residential, 22% was retail, 6% was
industrial, 5% was office and 22% was other types. At March 31, 1996,
approximately 26% of the portfolio was secured by properties located in
California and no more than 11% of the portfolio was secured by properties in
any other single state. At March 31, 1996, there were 33 loans with
outstanding balances of $10 million or more, which loans collectively
aggregated approximately 29% of the portfolio. At the time of their origination
or purchase by the Company, virtually all mortgage loans had loan-to-value
ratios of 75% or less. At March 31, 1996, approximately 21% of the mortgage
loan portfolio consisted of loans with balloon payments due before April 1,
1999. At March 31, 1996, loans delinquent by more than 90 days totaled $21.5
million (1.3% of total mortgages). Loans foreclosed upon and carried in real
estate in the balance sheet totaled $27.9 million (1.7% of total mortgages) at
March 31, 1996. Of this amount, $10.9 million was transferred to real estate
during fiscal 1996 and the remainder was transferred to real estate during
fiscal 1995. At March 31, 1996, mortgage loans having an aggregate carrying
value of $59.5 million had been restructured. Of this amount, $1.7 million was
restructured during fiscal 1996, $27.7 million was restructured during fiscal
1995 and $29.4 million was restructured during fiscal 1992.
Approximately 33% of the mortgage loans in the portfolio at March 31,
1996 were seasoned loans underwritten to the Company's standards and purchased
at or near par from the Resolution Trust Corporation or 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 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.
PARTNERSHIP investments totaled $892.0 million at March 31, 1996,
comprising investments in approximately 385 separate partnerships with an
average size of approximately $2.3 million. This portfolio includes: (i)
$378.5 million of partnerships managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including approximately 700 separate issuers; (ii) $398.1 million of
partnerships that make tax-advantaged investments in affordable housing,
currently involving approximately 325 multifamily projects in 38 states; and
(iii) $115.4 million of partnerships that invest in mortgage loans and income-
producing real estate. At March 31, 1996, $654.4 million of the Company's
partnerships was accounted for by using the cost method and $237.6 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. Approximately 84% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at March 31, 1996.
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. At March 31, 1996 the weighted
average life of the Company's investments was approximately 4.75 years and the
duration was approximately 3.25. Weighted average life is 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 option-
adjusted measure for the price sensitivity of a fixed-income portfolio to
changes in interest rates. It is the calculation of the relative percentage
change in market value resulting from small shifts in interest rates, and
recognizes the changes in portfolio cashflows resulting from embedded options
such as prepayments and bond calls.
As a component of its 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, variable-rate
payments exchanged for fixed-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 March 31,
1996, the Company had 37 outstanding Swap Agreements with an aggregate notional
principal amount of $1.70 billion. These agreements mature in various years
through 2001 and have an average remaining maturity of 31 months.
The Company also seeks to provide liquidity by using reverse repurchase
agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs. It also
seeks to enhance its spread income by using Reverse Repos, Dollar Rolls and
Total Return Agreements. 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 fair 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 provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risks associated with Total Return Agreements are the
credit risk on the underlying non-investment grade bonds, the risk of potential
loss due to the bond market fluctuation and the risk associated with
counterparty nonperformance. The primary risk associated with Dollar Rolls,
Reverse Repos and Swap Agreements is counterparty risk. The Company believes,
however, that the counterparties to its Total Return Agreements, Dollar Rolls,
Reverse Repos and Swap 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. In
addition to counterparty risk, 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 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. The valuation allowances on mortgage
loans are based on losses expected by management to be realized on transfers
of mortgage loans to real estate, on the disposition and settlement of mortgage
loans and on mortgage loans 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 $63.7
million at March 31, 1996, including $42.2 million (fair value, $31.5 million)
of bonds and notes, and $21.5 million of mortgage loans whose fair value was
equal to their amortized cost. At March 31, 1996, defaulted investments
constituted 0.4% of total invested assets at amortized cost. At December 31,
1995, defaulted investments totaled $56.9 million, which constituted 0.5% of
total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At March 31, 1996,
approximately $5.00 billion of the Company's Bond Portfolio had an aggregate
unrealized gain of $141.0 million, while approximately $6.53 billion of the
Bond Portfolio had an aggregate unrealized loss of $213.5 million. In addition,
the Company's investment portfolio also currently provides approximately $122.0
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 and GICs to maintain a generally competitive market
rate. Management would seek to place new funds in investments that were matched
in duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby
avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities and GICs. Should increased liquidity be required for withdrawals, the
Company believes that a significant portion of its investments could be sold
without adverse consequences in light of the general strengthening that would
be expected in the bond market.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"),
at March 31, 1996, had invested assets with a carrying value of $1.09 billion
and outstanding senior indebtedness of $573.3 million. Additionally, as of
March 31, 1996, the Parent had three GICs purchased by local government
authorities that aggregated $239.2 million.
During June and October 1995, the Parent purchased common securities of
SunAmerica Capital Trust I and SunAmerica Capital Trust II (the "Grantor
Trusts") and issued an aggregate of $245.5 million of junior subordinated
debentures (the "Debentures") to the Grantor Trusts in connection with the
public issuance of preferred securities of the Grantor Trusts (see Note 5 of
Notes to Consolidated Financial Statements).
The Parent's annual debt service with respect to its senior indebtedness,
GIC obligations and Debentures totals $48.7 million for the remainder of fiscal
1996, $98.7 million for fiscal 1997, $118.8 million for fiscal 1998, $227.3
million for fiscal 1999, $92.1 million for fiscal 2000 and $2.20 billion, in
the aggregate, thereafter.
The Parent received dividends from its regulated life insurance
subsidiaries of $94.3 million in March 1996. The Parent has also received
dividends of $5.5 million during fiscal 1996 from its other directly owned
subsidiaries.
The Company has transferred to third-party investors certain of its
interests in various partnerships that make tax-advantaged affordable housing
investments. As part of these transactions, the Parent has agreed to advance
monies to support the operations of the underlying housing projects, if
required, and has guaranteed that the transferred partnerships will provide,
as of the transfer date and under then current tax laws, a specified level of
associated tax credits and deductions to the third-party investors. In the
current quarter, the Company prospectively adopted the accounting provisions
of EITF Consensus No. 94-1 for affordable housing investments made after May
1995, the date of the consensus. Accordingly, syndication compensation is
recognized in income upon transfer of the partnerships and remaining income is
deferred and amortized over a 15-year period. Previously, a portion of the
income was deferred to absorb estimated payments under the guarantees with the
remainder recognized in income at the date of transfer. The adoption of the
consensus did not have a material effect on net income for the second quarter
of 1996, nor is it expected to materially affect future net income. Based on
an evaluation of the underlying housing projects, management does not
anticipate any material future cash payments with respect to the guarantees.
The Parent has guaranteed that its life insurance subsidiaries will
receive the statutory carrying value of certain invested assets, primarily debt
obligations and real estate, aggregating $123.9 million.
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 and the size of transactions that can be
consummated without first obtaining regulatory approval and other related
matters.
During the last decade, 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. In recent years, the NAIC has 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
changes 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On February 16, 1996, the Company held its annual meeting of
shareholders. The shareholders voted on the following matters: (1) the
election of ten directors, which comprise the entire Board of Directors;
(2) approval of an amendment to the Annual Performance Incentive
Compensation Plan ("PIC Plan Amendment"); (3) approval of a Share
Exchange Agreement, dated January 12, 1996, between the Company, Stanford
Ranch, Inc. and the shareholders of Stanford Ranch, Inc. (the "Share
Exchange Agreement"); and (4) approval of an amendment to the Company's
Charter to reduce the percentage threshold at which all outstanding
shares of Nontransferable Class B Stock automatically convert into Common
Stock from 10% to 5% of the total number of shares of Common Stock and
shares of Nontransferable Class B Stock outstanding (the "Charter
Amendment").
Each matter was approved. The votes cast for, against or withheld, as
well as the number of abstentions and broker non-votes as to each such
matter were as follows:
<TABLE>
<CAPTION)
ELECTION OF Votes Broker
DIRECTORS: Votes For Against Abstentions Non-Votes
----------- ----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Eli Broad 139,308,565 82,232
Ronald J. Arnault 139,312,717 78,080
Karen Hastie-Williams 139,298,139 92,658
David O. Maxwell 139,309,759 81,038
Barry Munitz 139,315,364 75,433
Lester Pollack 139,307,686 83,111
Carl E. Reichardt 139,303,075 87,722
Richard D. Rohr 138,914,422 476,375
Sanford C. Sigoloff 139,312,587 78,210
Harold M. Williams 138,674,367 716,430
PIC PLAN AMENDMENT 138,250,596 970,246 169,955
SHARE EXCHANGE
AGREEMENT 132,155,761 1,286,390 194,497 5,754,149
CHARTER AMENDMENT 131,340,920 2,089,335 206,393 5,754,149
</TABLE>
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBITS
10.1 Stock Purchase Agreement, dated November 10, 1995, between The American
Road Insurance Company and the Company, is incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed December 12, 1995 and amended December 14, 1995 and May 7, 1996.
10.2 Share Exchange Agreement, dated January 12, 1996, among the Company,
Stanford Ranch, Inc. and the Stockholders of Stanford Ranch, Inc., is
incorporated herein by reference to the Company's Notice of 1996 Annual
Meeting and Proxy Statement, filed January 15, 1996.
10.3 Amended and Restated Employment Agreement, dated March 21, 1996, between
the Company and Gary W. Krat, amending the Employment Agreement dated
July 30, 1992.
11 Statement re computation of per-share earnings.
23 The consent of Price Waterhouse LLP, independent accountants, filed as
an exhibit to the Company's 1995 Annual Report on Form 10-K, is
incorporated by reference herein.
27 Financial Data Schedule.
REPORTS ON FORM 8-K
On December 12, 1995, the Company filed a current report on Form 8-K, as
amended on December 14, 1995 and May 7, 1996, concerning its proposed
acquisition of Ford Life Insurance Company.
On January 29, 1996, the Company filed a current report on Form 8-K
announcing its first quarter 1996 earnings and its financial position at
December 31, 1995.
On March 15, 1996, the Company filed a current report on Form 8-K, as
amended May 7, 1996, concerning the completion of its acquisition of Ford
Life Insurance Company.
On April 24, 1996, the Company filed a current report on Form 8-K
announcing its second quarter 1996 earnings.
On April 27, 1996, the Company filed a current report on Form 8-K
announcing its financial position at March 31, 1996.
<PAGE>
SUNAMERICA INC.
PART II - OTHER INFORMATION
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNAMERICA INC.
-----------------------------------
Registrant
Dated May 13, 1996 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Vice Chairman
Dated May 13, 1996 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
<PAGE>
SUNAMERICA INC.
LISTS OF EXHIBITS FILED
- -----------------------
10.3 Amended and Restated Employment Agreement, dated March 21, 1996, between
the Company and Gary W. Krat, amending the Employment Agreement dated
July 30, 1992.
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 SIX MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 11,416,252
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 33,803
<MORTGAGE> 1,626,048
<REAL-ESTATE> 110,721
<TOTAL-INVEST> 15,182,399
<CASH> 876,779
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 714,740
<TOTAL-ASSETS> 22,008,965
<POLICY-LOSSES> 12,596,645
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 636,694
<COMMON> 59,680
0
384,549
<OTHER-SE> 1,082,647
<TOTAL-LIABILITY-AND-EQUITY> 22,008,965
0
<INVESTMENT-INCOME> 493,446
<INVESTMENT-GAINS> (2,185)
<OTHER-INCOME> 104,642
<BENEFITS> 279,026
<UNDERWRITING-AMORTIZATION> 40,516
<UNDERWRITING-OTHER> (8,006)
<INCOME-PRETAX> 190,027
<INCOME-TAX> 57,000
<INCOME-CONTINUING> 133,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,027
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE>
EXHIBIT 11
SUNAMERICA INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the three months and six months ended March 31, 1996 and 1995
(In thousands, except per-share amounts)
<CAPTION>
Three months Six months
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<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 54,540 54,230 54,415 53,705
Average number of common shares issued
upon exercise of employee stock options
or under other employee stock plans 12 16 108 438
Average number of common stock equivalent
shares arising from outstanding employee
stock options 2,299 1,350 2,219 1,290
Average number of common shares issuable
upon conversion of convertible preferred
stock:
Series D Mandatory Conversion
Premium Dividend Preferred Stock 55 7,505 2,584 7,505
Series E Mandatory Conversion
Premium Dividend Preferred Stock 6,000 -- 5,000 --
Average number of shares issued upon
redemption of Series D Depositary
Shares on January 2, 1996 5,058 -- 2,529 --
-------- -------- -------- --------
Average number of common and common stock
equivalent shares outstanding during
the period 67,964 63,101 66,855 62,938
======== ======== ======== ========
Earnings applicable to common stock:
Net income $ 68,241 $ 47,354 $133,027 $ 92,488
Less preferred dividend requirements other
than those related to convertible issues:
9-1/4% Preferred Stock, Series B (2,031) (3,249) (4,062) (6,498)
SunAmerica Adjustable Rate Cumulative
Preferred Stock, Series C (852) (925) (1,704) (1,815)
-------- -------- -------- --------
Net earnings applicable to common stock $ 65,358 $ 43,180 $127,261 $ 84,175
======== ======== ======== ========
Net earnings per common and common
equivalent share: $ 0.96 $ 0.68 $ 1.90 $ 1.34
======== ======== ======== ========
</TABLE>
CONFIDENTIAL
March 21, 1996
Gary W. Krat
167 E. 61st Street, #28E
New York, New York 10021
Dear Gary:
This letter (the "Agreement") amends and restates your employment letter
agreement dated January 23, 1995 (the "Prior Letter Agreement"), which
amended your letter agreement dated July 30, 1992. we are pleased to
confirm the terms of your continuing employment with SunAmerica Inc. or any
of its subsidiaries or affiliates (collectively, the "Company"), effective
October 1, 1995 as follows:
1. Your annual base salary shall be $250,000, payable semi-monthly,
subject to normal deductions and withholding. Your base salary shall be
reviewed bi-annually, commencing in December 1997. Your position shall be
that of Senior Vice President, SunAmerica Inc. and Chairman of the Company's
Broker-Dealers.
2. For each fiscal year this agreement is in effect, you shall also be
eligible to receive incentive compensation in an amount equal to .07% of
that portion of annual Proprietary Sales raised by the Company's Broker-
Dealers, as defined in the next sentence, in excess of $500 million.
"Proprietary Sales" shall mean (a) sales of annuity products issued by the
Company's life insurance companies, but specifically excluding guaranteed
investment contracts; and (b) sales of mutual funds by SunAmerica Asset
Management Corp., but specifically excluding sales of money market mutual
funds.
3. You shall also be eligible to receive additional incentive
compensation in an amount equal to three percent (3%) of the aggregate
pretax income of the Company's Broker-Dealers. In determining the pre-tax
income of the Company's Broker-Dealers, your incentive compensation based
upon Broker-Dealer pre-tax income shall be excluded from the calculation.
Additionally, for fiscal year 1996, operating losses from Advantage Capital
Corporation shall be excluded from the calculation to determine the pre-tax
income of the Company's Broker-Dealers.
4. You shall be eligible to receive and/or participate in employee
benefits commensurate with your position with the Company, including the
Company's executive medical plan, all subject to the terms and conditions
of such plans.
5. Incentive payments are made on or about December 15 each year for
the fiscal year ended on the prior September 30, and are contingent upon
employment through the date of payment; provided, however, payment of your
incentive compensation for fiscal 1997 is contingent upon your continued
employment through September 30, 1997.
6. This Agreement shall be terminated upon the first to occur of any
of the following: (a) mutual agreement of the parties; (b) your death or
physical disability; (c) written notice by either party; or (d) September
30, 1997. Should the Company terminate this Agreement with Cause (as
defined below) prior to September 30, 1997, your employment shall cease and
you shall receive for twelve months commencing on the date of notice of
termination your then current base salary. Payment of such severance shall
be in lieu of any other severance arrangement or plan of the Company. No
severance shall be paid in the event of any other termination of this
Agreement. "Cause" shall include, but is in no way limited to: (1) willful
misconduct, gross negligence, insubordination, violation of any fiduciary
duty, refusal or unwillingness to perform your duties, theft, fraud, sexual
harassment or other illegal conduct or a breach of any term of this
Agreement, which items are not subject to a right of cure; and (2) conduct
which reflects adversely upon, or the making of any remarks disparaging of,
the Company, or any Company's Board members, officers, directors, advisors
or employees, any willful act that is likely to and which does in fact have
the effect of injuring the reputation, business or a business relationship
of the Company and violation of any duty of loyalty, any of which items you
shall have the opportunity to cure within three days of your receipt of the
Company's notice to you that you will be terminated for Cause and
identifying the action or actions giving rise to the termination. Failure
to cure within three days shall be grounds for immediate termination for
Cause. Additionally, you shall have the right to cure only the first
incident which gives rise to a termination for Cause identified in (2)
above, after which you will no longer have the right of cure.
7. Should this Agreement and your employment terminate by the
occurrence of any event other than a termination by the Company without
Cause, 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
or plans with respect to the profit sharing plan, your group insurance
coverage, employee stock options and restricted shares.
8. While you are employed by the Company, in the performance of your
duties on behalf of the Company, you shall have access to, receive and be
entrusted with confidential information, including, but in no way limited
to development, marketing, organization, financial, management,
administrative, production, distribution, and sales information, data,
specifications and processes presently owned or at any time in the future
in the course of its business that is not otherwise part of the public
domain (collectively, the "Confidential Material"). All such Confidential
Material is considered secret and will be available to you in confidence.
Except in the performance of your duties on behalf of the Company, you shall
not, directly or indirectly for any reason whatsoever, disclose or use any
such Confidential Material, unless such Confidential Material ceases
(through no fault of yours) to be confidential because it has become a part
of the public domain. All records, files, drawings, documents, equipment
and other tangible items, wherever located, relating in any way to the
Confidential Material or otherwise to the Company's business, which you
prepare, use or encounter, shall be and remain the Company's sole and
exclusive property and shall be included in the term Confidential Material.
Upon termination of this Agreement by any means, or whenever requested by
the Company, you shall promptly deliver to the Company any and all of the
Confidential Material, not previously delivered to the Company, that may be
or at any previous time has been in your possession or under your control.
You hereby acknowledge that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material, except as
permitted hereby, by any means whatsoever and at any time before, during or
after your employment with the Company, shall be defined for purposes of
this Agreement as Unfair Competition.
You agree that you shall not engage in Unfair Competition either
during the time you are employed by the Company or at any time thereafter.
During the time you are employed by the Company, you shall not seek
or negotiate for employment other than with the Company; provided, however,
that during the 180 days prior to September 30, 1997, you may seek
employment by another entity if you advise the Chairman or any Vice Chairman
of the Company in advance, disclose with whom you are seeking employment and
do not disclose to any other employee of the Company that you are seeking
employment elsewhere. The Company will not contact any company with whom
you are seeking employment, nor will the Company make any comments about you
to them, without your advance approval.
9. In the event of the termination of your employment for any reason,
you (and any corporation or entity of which you are a director, officer,
employee or greater than 5% shareholder) shall not:
(a) for a period of one year thereafter, employ or engage or
seek to employ or engage any employee or independent contractor of the
Company; or
(b) make any public statement concerning the Company or your
employment, unless previously approved by the Company, except as may be
required by law; or
(c) induce, attempt to induce or knowingly encourage any
customer of the Company to divert any business or income from the Company.
The term "Customer" shall mean any individual or business firm that was or
is a customer or client, or one that was or is a party to a Selling
Agreement, or whose business was actively solicited by such company at any
time regardless of whether such customer was generated, in whole or in part,
by your efforts, including customers brought with you when your employment
began; or
(d) induce, attempt to induce or knowingly encourage any other
person or entity to induce cancellation, surrender, lapse or non-renewal or
sale of any insurance or annuity policy, mutual fund shares or trust
services offered by the Company by any contractholder, shareholder, or
client, as the case may be.
10. Notwithstanding any provisions contained in this Agreement that
could be construed to be contrary, nothing in this letter is intended to
create a contractual obligation on the part of the Company to employ you for
any specified period of time. That is, you will serve as an "employee at
will" of the Company.
11. Any controversy or claim arising out of or relating to this
Agreement, its enforcement or interpretation or because of an alleged
breach, default, or misrepresentation in connection with any of its
provisions, or arising out of or relating in any way to your employment or
termination of the same, shall be submitted to final and binding
arbitration, to be held in Los Angeles County, California, in accordance
with the California Employment Dispute Resolution Rules of the American
Arbitration Association, before a single arbitrator. In the event either
of us initiates arbitration under this Agreement, the party prevailing shall
be entitled, in addition to all other relief, to reasonable attorneys' fees
relating to the arbitration. The non-prevailing party shall be responsible
for all costs of the arbitration, including but not limited to the
arbitration fees and court reporter fees. Nothing in this paragraph
however, shall affect the Company's ability to seek from a court injunctive
or other equitable relief, including but not limited to relief for Unfair
Competition or sale of unauthorized use or disclosure of Confidential
Material.
12. This Agreement amends and restates the Prior Letter Agreement in
its entirety and constitutes the entire agreement between you and the
Company with respect to its subject matter (that is, your employment
compensation or receipt of any other benefits or amounts by any member of
the Company), other than existing stock option agreements for previously
granted stock options and restricted stock agreements for previously awarded
restricted stock, which agreements are not impacted hereby. It is intended
(with the documents referred to in this Agreement) as a complete and
exclusive statement of the terms of this Agreement among the parties with
respect thereto and cannot be changed or terminated orally.
13. If any provision of this Agreement is held to be enforceable for
any reason, it shall not affect the enforceability of any other provisions
of this Agreement. The parties agree that there is separate consideration
for each provision of this Agreement and that all of the provisions of this
Agreement are severable.
Gary, if the above is acceptable to you, please execute the
enclosed copy of this Agreement and return it to me. The original should
be kept with your records.
Very truly yours,
/s/ JOSEPH M. TUMBLER
______________________________
Joseph M. Tumbler
Agreed to as of this date, 1996
/s/ GARY W. KRAT
_____________________________
Gary W. Krat
