SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 31, 1997
SUNAMERICA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MARYLAND 1-4618 86-0176061
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
1 SUNAMERICA CENTER, CENTURY CITY
LOS ANGELES, CALIFORNIA 90067-6022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including
area code (310) 772-6000
Item 2. Acquisition or Disposition of Assets.
On November 29, 1996, SunAmerica Inc., through its subsidiary,
SunAmerica Life Insurance Company, entered into a definitive agreement
to acquire the annuity business of John Alden Financial Corporation for
$238,282,000 in cash (the "John Alden Transaction"). The transaction
included approximately $3,800,000,000 of annuity reserves acquired under
a 100% coinsurance agreement from John Alden Life Insurance Company and
the purchase of the outstanding common stock of John Alden Life
Insurance Company of New York, which had approximately $1,400,000,000 of
annuity reserves and approximately $65,000,000 of statutory capital and
surplus at December 31, 1996. The purchase price was agreed to by the
parties on an arms-length basis. The acquisition was completed through
SunAmerica Life Insurance Company on March 31, 1997. Funds for the
acquisition were provided from the working capital of SunAmerica Life
Insurance Company.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial statements of businesses acquired.
The financial statements of John Alden Life Insurance Company of
New York ("JANY") are filed herewith as Exhibit 99-1 and include
the following:
+ Independent auditors' report.
+ Audited balance sheets as of December 31, 1995 and 1996.
+ Unaudited balance sheet as of March 31, 1997.
+ Audited statements of income for the years ended December 31,
1994, 1995 and 1996.
+ Unaudited statement of income for the three months ended March
31, 1996 and 1997.
+ Audited statements of changes in stockholder's equity for the
years ended December 31, 1994, 1995 and 1996.
+ Unaudited statement of changes in stockholder's equity for the
three months ended March 31, 1996 and 1997.
+ Audited statements of cash flows for the years ended December
31, 1994, 1995 and 1996.
+ Unaudited statement of cash flows for the three months ended
March 31, 1996 and 1997.
+ Notes to financial statements.
-2-
Historical financial statements prepared pursuant to Rule 3-05 of
Regulation S-X concerning the coinsurance portion of the John
Alden Transaction have not been filed herewith. Under a 100%
coinsurance transaction, the coinsurer agrees to indemnify the
issuing insurer for all of its obligations under the relevant
annuity contracts. However, the issuing insurer remains the only
party obligated to the insured party. In consideration for its
indemnification, the coinsurer receives assets, usually composed
of cash and/or marketable securities, in an amount equal to the
annuity liabilities, computed on a statutory basis, less a
negotiated fee. Such assets are not specifically associated with
the annuity liabilities on an historical basis. The coinsurance
portion of the John Alden Transaction reflects the assumption of
certain annuity liabilities as to which the parties to the
transaction matched assets at a particular point in time.
Separate historical financial statements do not exist for these
assets and liabilities. Further, it is not possible to make
meaningful historical financial statements concerning this
portion of the transaction because the various assets acquired
may not be properly associated with the various liabilities
assumed at any historical point in time. Accordingly, historical
financial statements prepared pursuant to Rule 3-05 of Regulation
S-X concerning this transaction have not been filed. However, an
audited Statement of Assets Acquired and Liabilities Assumed in
the Coinsurance Portion of the John Alden Transaction, as of
March 31, 1997, the effective date of the transaction, is
included herewith as Exhibit 99-2. Such audited financial statement
includes related notes and a report of independent accountants.
(b) Pro Forma Financial Information.
As more fully described under Item 2 of this Current Report on Form
8-K/A, on March 31, 1997, the Registrant acquired all of the
outstanding capital stock of John Alden Life Insurance Company of New
York, and acquired certain assets and assumed certain liabilities of
John Alden Life Insurance Company in a 100% coinsurance transaction
(the "John Alden Transaction"). A pro forma condensed balance sheet
is not filed herewith because the entire transaction is fully
reflected in the Registrant's March 31, 1997 consolidated balance
sheet, which was filed on May 15, 1997 as part of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
The pro forma condensed income statement set forth in Exhibit 99-3
herein reflects the effects of the John Alden Transaction as if it had
been consummated on October 1, 1995, the beginning of the Registrant's
most recent fiscal year end. The pro forma effects of the John Alden
Transaction include a $0.21 increase in earnings per share for the 1996
fiscal year.
The pro forma condensed income statement set forth in Exhibit 99-4
herein reflects the effects of the John Alden Transaction as if it had
been consummated on October 1, 1996, the beginning of the Registrant's
most recent fiscal interim period. The pro forma effects of the John
Alden Transaction include a $0.12 increase in earnings per share for
the six months ended March 31, 1997.
-3-
(c) Exhibits.
Exhibit No. Description of Exhibit
----------- ----------------------
99-1 Audited Financial Statements of John Alden
Insurance Company of New York
99-2 Statement of Assets Acquired and Liabilities
Assumed in the Coinsurance Portion of the
John Alden Transaction
99-3 Pro Forma Condensed Income Statement for
the year ended September 30, 1996
99-4 Pro Forma Condensed Income Statement for
the six months ended March 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNAMERICA INC.
Date: June 16, 1997 By: /s/ Scott L. Robinson
-----------------------------
Scott L. Robinson
Senior Vice President
and Controller
-4-
John Alden Life Insurance Company of New York
Financial Statements
For the Year Ended December 31, 1996
<PAGE> 2
John Alden Life Insurance Company of New York
Financial Statements
For the Year Ended December 31, 1996
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants....................................... 1
Balance Sheets as of December 31, 1995 and 1996
and as of March 31, 1997............................................. 2
Statements of Income for the Years Ended December 31, 1994, 1995
and 1996 and for the Three Months Ended March 31, 1996 and 1997...... 3
Statements of Changes in Stockholder's Equity for the Years Ended
December 31, 1994, 1995 and 1996 and for the Three Months Ended
March 31, 1996 and 1997.............................................. 4
Statements of Cash Flows for the Years ended December 31, 1994, 1995
and 1996 and for the Three Months Ended March 31, 1996 and 1997...... 5
Notes to Financial Statements........................................... 6
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
John Alden Life Insurance Company of New York
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in stockholder's equity and of cash flows present fairly, in
all material respects, the financial position of John Alden Life Insurance
Company of New York at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, the Company was sold by John Alden Life Insurance
Company to SunAmerica Life Insurance Company on March 31, 1997. The accompanying
financial statements have been prepared reflecting the accounting principles and
estimates used as of December 31, 1996 and prior to the sale.
PRICE WATERHOUSE LLP
Miami, Florida
May 23, 1997
1
<PAGE> 4
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1997
-------------------------- ------------
ASSETS 1995 1996 (UNAUDITED)
----------- ----------- ------------
<S> <C> <C> <C>
Debt securities:
Held-to-maturity securities, at amortized cost (market and
$213,726, $222,897 and $211,948) ................................. $ 205,790 $ 220,070 $ 213,083
Available-for-sale securities, at market (cost $769,956, $878,836
and $861,306) ................................................... 812,939 895,580 858,832
Trading account securities, at market (cost $2,027, $1,018
and $1,017) ..................................................... 2,060 999 973
Mortgage loans ....................................................... 225,871 237,105 232,968
Policy loans and other notes receivable .............................. 8,448 8,937 8,702
Real estate owned .................................................... 1,037 1,760 -
----------- ----------- -----------
Total invested assets ........................................... 1,256,145 1,364,451 1,314,558
Cash and cash equivalents ............................................ 40,291 44,408 93,527
Accrued investment income ............................................ 14,761 16,072 15,745
Deferred policy acquisition costs .................................... 24,745 39,393 47,139
Goodwill ............................................................. 8,518 8,019 7,894
Reinsurance receivables .............................................. 13,943 12,636 12,188
Investment deposits recoverable ...................................... 28,831 25,520 25,065
Other assets ......................................................... 3,561 5,597 9,878
----------- ----------- -----------
Total assets .................................................. $ 1,390,795 $ 1,516,096 $ 1,525,994
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Contract holder liabilities:
Contract holder deposit funds .................................. $ 1,280,775 $ 1,399,752 $ 1,412,999
Other benefit, claim and unearned premium reserves ............. 19,798 22,630 23,152
Accounts payable and other liabilities ............................. 3,271 5,106 1,986
Funds payable under reinsurance treaties ........................... - - -
----------- ----------- -----------
Total liabilities ............................................ 1,303,844 1,427,488 1,438,137
----------- ----------- -----------
Stockholder's equity:
Common stock, $20 par value; 360,000 shares authorized, issued and
outstanding .................................................... 7,200 7,200 7,200
Paid-in capital .................................................. 40,420 40,420 45,420
Net unrealized gain (loss) on investments, net of income taxes ... 13,449 5,413 (1,683)
Retained earnings ................................................ 25,882 35,575 36,920
----------- ----------- -----------
Total stockholder's equity .................................. 86,951 88,608 87,857
----------- ----------- -----------
Total liabilities and stockholder's equity .................. $ 1,390,795 $ 1,516,096 $ 1,525,994
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
2
<PAGE> 5
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net insurance premiums and contract charges earned .. $ 4,520 $ 20,945 $ 20,423 $ 5,533 $ 4,826
Net investment income ............................... 68,621 88,591 99,813 24,113 25,579
Other income ........................................ 202 - - - -
Net realized investment (losses) gains .............. (3,828) 1,072 (654) (61) (849)
--------- --------- --------- --------- ---------
Total revenues .......................... 69,515 110,608 119,582 29,585 29,556
--------- --------- --------- --------- ---------
Benefits and expenses:
Interest credited to account balances ............... 54,451 73,691 73,598 17,398 19,179
Benefit claims incurred in excess of account balances - 2,071 2,396 1,124 371
Increase in life insurance reserves ................ 1,820 2,864 2,247 2,367 425
--------- --------- --------- --------- ---------
Total benefits ......................... 56,271 78,626 78,241 20,889 19,975
--------- --------- --------- --------- ---------
Commissions ........................................ 83 4,823 3,990 1,284 2,178
General expenses ................................... 5,064 10,706 14,243 3,006 2,858
Amortization of purchased intangibles .............. 1,105 929 850 93 202
Amortization of deferred policy acquisition costs .. 991 5,038 7,922 1,823 2,205
--------- --------- --------- --------- ---------
Total expenses ......................... 7,243 21,496 27,005 6,206 7,443
--------- --------- --------- --------- ---------
Total benefits and expenses ............ 63,514 100,122 105,246 27,095 27,418
--------- --------- --------- --------- ---------
Income before provision for income taxes ............... 6,001 10,486 14,336 2,490 2,138
Provision for income taxes ............................. 2,303 3,858 4,643 918 793
--------- --------- --------- --------- ---------
Net income ............................................. $ 3,698 $ 6,628 $ 9,693 $ 1,572 $ 1,345
========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 6
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
TWELVE MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------- ---------------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of shares outstanding ............................ 360,000 360,000 360,000 360,000 360,000
========= ========= ========= ========= =========
Common stock, beginning of period ....................... $ 7,200 $ 7,200 $ 7,200 $ 7,200 $ 7,200
--------- --------- --------- --------- ---------
Common stock, end of period ............................. $ 7,200 $ 7,200 $ 7,200 $ 7,200 $ 7,200
========= ========= ========= ========= =========
Paid-in capital, beginning of period .................... $ 32,920 $ 34,920 $ 40,420 $ 40,420 $ 40,420
Capital contributions ................................ 2,000 5,500 - -- 5,000
--------- --------- --------- --------- ---------
Paid-in capital, end of period .......................... $ 34,920 $ 40,420 $ 40,420 $ 40,420 $ 45,420
========= ========= ========= ========= =========
Net unrealized gain on investments, net of income taxes,
beginning of period .................................. $ 4,426 $ (3,620) $ 13,449 $ 13,449 $ 5,413
Change in net unrealized gain on investments, net
of income taxes .................................... (8,046) 17,069 (8,036) (9,350) (7,096)
--------- --------- --------- --------- ---------
Net unrealized (loss) gain on investments, net of
income taxes, end of period ........................ $ (3,620) $ 13,449 $ 5,413 $ 4,099 $ (1,683)
========= ========= ========= ========= =========
Retained earnings, beginning of period .................. $ 15,556 $ 19,254 $ 25,882 $ 25,882 35,575
Net income ........................................... 3,698 6,628 9,693 1,572 1,345
--------- --------- --------- --------- ---------
Retained earnings, end of period ........................ $ 19,254 $ 25,882 $ 35,575 $ 27,454 $ 36,920
========= ========= ========= ========= =========
Stockholder's equity, beginning of period ............... $ 60,102 $ 57,754 $ 86,951 $ 86,951 $ 88,608
Net income ........................................... 3,698 6,628 9,693 1,572 1,345
Capital contributions ................................ 2,000 5,500 - - 5,000
Change in net unrealized gain on investments,
net of income taxes ................................ (8,046) 17,069 (8,036) (9,350) (7,096)
--------- --------- --------- --------- ---------
Stockholder's equity, end of period ..................... $ 57,754 $ 86,951 $ 88,608 $ 79,173 $ 87,857
========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 7
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
TWELVE MONTHS ENDED MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 3,698 $ 6,628 $ 9,693 $ 1,572 $ 1,345
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment losses (gains) .............. 3,828 (1,072) 654 61 849
Depreciation and amortization ....................... (1,648) (3,003) (2,237) (709) (756)
Policy acquisition costs deferred, net of
amortization ...................................... (10,526) (7,130) (785) (755) 545
Amortization of purchased intangibles ............... 1,105 940 851 218 202
Cumulative effect of a change in accounting principle - - - - -
Net inflows from sales, maturities, calls and
purchases of trading account securities ........... 71,476 4,943 1,000 - -
Interest credited on universal life and investment
type contracts .................................... 54,451 73,691 73,598 17,398 19,179
Decrease in contract holder liabilities ............. (8,399) (12,621) (4,798) (2,237) (1,464)
Increase in accrued investment income ............... (440) (3,392) (1,311) (23) 327
Decrease (increase) reinsurance receivables and
investment deposits recoverable ................... 4,359 (4,134) 3,344 (81) 233
(Increase) decrease in other assets ................. (51) 1,281 (758) (45) 275
Increase in income taxes payable .................... (1,536) (925) 2,894 1,379 (907)
Increase (decrease) in accounts payable and
other liabilities ................................. (712) (3,033) 370 (419) (3,055)
Increase (decrease) in funds payable under
reinsurance treaties .............................. (11) (1,933) 1,275 1,944 669
--------- --------- --------- --------- ---------
Net cash provided by operating activities .............. 115,594 50,240 83,790 18,303 17,442
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from investments sold:
Available-for-sale securities ................. 30,262 36,597 25,752 1,515 -
Real estate owned ............................. 2,359 664 802 - 1,454
Maturities, calls and scheduled loan payments:
Held-to-maturity securities ................... 32,957 23,025 28,948 4,919 7,127
Available-for-sale securities ................. 3,068 47,286 24,011 7,847 18,077
Mortgage loans and other notes receivable ..... 21,459 20,394 36,026 8,419 8,118
Investments purchased:
Held-to-maturity securities ................... (169,701) (40,953) (42,648) (30,813) -
Available-for-sale securities ................. (91,027) (150,480) (156,069) (24,397) -
Mortgage loans and other notes receivable ..... (82,972) (97,701) (49,504) (19,097) (4,142)
Acquisition of insurance company ..................... - (7,404) - - -
Purchases of property, equipment and other ........... (40) (214) - - (11)
--------- --------- --------- --------- ---------
Net cash used in investing activities .................. (253,635) (168,786) (132,682) (51,607) 30,623
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Receipts from universal life and investment-type
contracts ......................................... 212,486 233,595 153,423 49,811 30,746
Payments on universal life and investment-type
contracts ......................................... (72,531) (90,404) (100,414) (23,077) (34,692)
Capital contribution from parent ..................... 2,000 5,500 - - 5,000
--------- --------- --------- --------- ---------
Net cash provided by financing activities .............. 141,955 148,691 53,009 26,734 1,054
--------- --------- --------- --------- ---------
Net increase in cash and cash equivalents ................. 3,914 30,145 4,117 (6,570) 49,119
Cash and cash equivalents, beginning of period ............ 6,232 10,146 40,291 40,291 44,408
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period .................. $ 10,146 $ 40,291 $ 44,408 $ 33,721 $ 93,527
========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 8
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
John Alden Life Insurance Company of New York ("JANY" or the "Company"),
is a stock life insurance company primarily engaged in selling annuities in the
State of New York, its state of domicile. Until March 31, 1997, the Company was
a wholly-owned subsidiary of John Alden Life Insurance Company ("JALIC"). JALIC
is a wholly-owned subsidiary of Houston National Life Insurance Company, which
is a wholly-owned subsidiary of John Alden Financial Corporation ("JAFCO"), an
insurance holding company and Delaware Corporation. On March 31, 1997, JALIC
sold all of the common stock of JANY to SunAmerica Life Insurance Company
("SunAmerica"). On that date, SunAmerica made a capital contribution to JANY for
$5.0 million.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") and pursuant to the rules
and regulations of the Securities and Exchange Commission. The financial
statements include management estimates and assumptions that affect the recorded
amounts. The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessarily for a fair statement of the results of
operations for the interim periods presented. Certain information and note
disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted with respect to the interim period. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
As described in Note 1, the Company was sold by JALIC to SunAmerica on
March 31, 1997. The description of the accounting policies below and the
disclosures in the following footnotes reflect those in effect at JANY while a
subsidiary of JALIC. Subsequent to its purchase of JANY, SunAmerica may include
different management estimates and assumptions, elect different applications of
certain accounting policies and/or change the operations of the Company. The
impact of any such potential change on the Company's financial position, results
of operations or cash flows can not be determined at this time.
Investments
Investments in debt securities are classified into one of three
categories: held-to-maturity, available-for-sale or trading. Investments in debt
securities which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and carried at amortized cost, with
premiums amortized to call dates and discounts amortized to maturity dates. In
certain limited circumstances, such as individual issuer credit deterioration or
requirements of insurance regulators, the Company may dispose of such
investments prior to their scheduled maturities. Investments in debt securities
which are held principally for the purpose of resale in the near term are
classified as trading securities and carried at market value with unrealized
gains and losses included in earnings. Investments in debt securities not
classified as held-to-maturity or trading are classified as available-for-sale
and carried at market value, with resulting unrealized gains and losses, net of
applicable income taxes and deferred policy acquisition costs, credited or
charged to stockholder's equity.
Policy loans are carried at the unpaid principal balance. Mortgage loans
are carried at the unpaid principal balance less unamortized discounts,
write-downs and a valuation reserve. The valuation reserve is determined by both
a historical analysis and specific loan analysis. Mortgage loan origination
incremental costs and fees are deferred and amortized over the life of the loan
using the interest method. Mortgage discounts are deferred and amortized to call
dates. The Company's policy of placing mortgage loans on non-accrual status
(i.e., no longer accruing investment income) is at the earlier of 90 days past
due or at the commencement of foreclosure. Real estate owned represents
foreclosed mortgage loan collateral and is held for sale and carried at cost
less allowances for selling costs and impairments in value. The investment
portfolio is continuously reviewed for investments that may have experienced a
decline in value considered to be other than temporary. Provisions for
impairments that are considered other than temporary are included in net
realized investment gains (losses).
6
<PAGE> 9
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Premium and Other Contract-Related Revenues, Contract Holder Liabilities and
Deferred Policy Acquisition Costs
Single Payment Deferred Annuities and Flexible Payment Annuities. Contract
charges earned for investment-type contracts consist of service charges and
surrender charges assessed against account balances. Expenses related to these
products include interest credited to account balances. Contract holder
liabilities are recorded at accumulated value without reduction for surrender
charges. Policy acquisition costs (principally excess first year commissions)
are deferred and amortized over an initial policy period, generally ten years,
in relation to expected profits. This amortization is reviewed annually and
adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from a group of products, including realized
and unrealized gains and losses from investments.
Universal Life Insurance. Contract charges earned consist of cost of
insurance assessments, service charges and surrender charges assessed against
account balances. Expenses consist of interest credited to account balances and
benefit claims incurred in excess of policyholder account balances. Contract
holder liabilities are recorded at accumulated value without reduction for
surrender charges.
Ordinary Life Insurance. Premiums are recorded as revenue when due. Policy
reserves generally are calculated using the same assumptions as to interest,
mortality, lapses and expenses used in pricing, plus additional margins for
adverse deviation. Policy acquisition costs (principally excess first year
commissions) are deferred and amortized over the premium paying period using the
same assumptions as to interest, mortality and lapses used in calculating
benefit reserves.
Individual Health Insurance. Premiums are recorded as revenue when due.
Policy and claim reserves are calculated based on tables prescribed by the New
York State Insurance Department, consisting of assumptions as to interest,
mortality and morbidity.
Goodwill
Goodwill is amortized on a straight-line basis over lives ranging from 15
to 25 years. At December 31, 1995 and 1996, the balances of such net goodwill
and accumulated amortization were approximately $8.5 million and $8.0 million
and $4.4 million and $4.9 million, respectively. The Company periodically
reviews the recoverability of goodwill from future cash flows, and adjusts the
carrying value as required. At December 31, 1995 and 1996, the Company
determined that goodwill, net of accumulated amortization, was not impaired.
Income Taxes
Tax expense is the amount of income taxes expected to be payable for the
current year plus (or minus) the change from the beginning of the year in
deferred tax liabilities or assets. Deferred income taxes are provided in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". The tax effect of future taxable temporary
differences (liabilities) and future deductible temporary differences (assets)
are separately calculated and recorded. A valuation allowance reducing the asset
recognized must be recorded if it is determined that it is more likely than not
that the asset will not be realized.
7
<PAGE> 10
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JAFCO has elected to file a Life/Non-Life consolidated federal income tax
return which includes all subsidiaries, including JANY. Federal income tax is
computed under an inter-company agreement which generally provides that federal
income taxes are allocated based on the amount due as if the Company files a
separate return. A tax refund to a loss company for utilization of its net
operating losses by a profitable company occurs to the extent the loss is
utilized in the consolidated tax return.
Changes in Accounting Principles
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", effective
January 1, 1996. SFAS No. 121 addresses the recognition and measurement of
impairments of long-lived assets, certain identifiable intangible assets and
goodwill related to those assets to be held as well as impairments of long-lived
assets and certain identifiable intangibles to be disposed of. There was no
effect on the Company's results of operations or financial position upon
adoption of this statement.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" effective January 1, 1995. SFAS No. 114
addresses the accounting by creditors for the measurement and recognition of
loan impairments. SFAS No. 118 amends certain provisions of SFAS No. 114. There
was no effect on the Company's results of operations or financial position upon
adoption of these statements. It is the Company's policy to discontinue accrual
of interest income on loans at the earlier of 90 days past due or at the
commencement of foreclosure. Cash receipts on such loans are recognized as
interest income, including recognition of amounts previously not accrued.
Receipts in excess of all past due interest are recognized as reductions of
principal. Loan impairments are generally considered to be other than temporary
declines in value and therefore are reported as realized investment losses. As
of December 31, 1995 and December 31, 1996, investments in impaired mortgage
loans totaled $2.0 million and $3.8 million, respectively. Impairment reserves
due to other than temporary declines in value of $0.4 million and $0.9 million
have been recognized as realized investment losses in relation to such loans
during 1995 and 1996, respectively.
NOTE 3 -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement addresses the accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a financial-components approach.
Adoption is generally required for transactions occurring after December 31,
1996, while the effective date for certain portions of the statement has been
deferred one year. The Company does not anticipate a material impact on its
financial position or results of operations upon adoption.
NOTE 4 -- ACQUISITION OF AMERICAN CROWN LIFE INSURANCE COMPANY
Effective January 1, 1995, the Company purchased all of the common stock
of American Crown Life Insurance Company ("ACL"), a life and accident and health
insurance company domiciled in the State of New York, for a purchase price of
$8.0 million. The Company acquired $38.1 million of invested assets and $3.5
million of other assets. JANY also assumed liabilities of $34.2 million,
including $32.5 million of contract holder liabilities. These balances, as well
as results of operations of ACL, are included in the Company's financial
statements from the acquisition date.
8
<PAGE> 11
NOTE 5 -- INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities". This
guidance permitted enterprises a one-time opportunity to reassess the
appropriateness of the classifications of all securities and to reclassify
held-to-maturity securities to the available-for-sale category without calling
into question their intent to hold other debt securities to maturity. On
December 18, 1995, the Company transferred securities from the held-to-maturity
portfolio with an aggregate amortized cost of approximately $409.0 million to
the available-for-sale portfolio at a market value of $417.5 million. As a
result, the Company recorded a net unrealized gain in stockholder's equity, net
of deferred policy acquisition costs and deferred income taxes (see Note 7), of
approximately $2.4 million.
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities as of December 31, 1995 and
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government corporations ............ $ 66,285 $ 2,584 $ (8) $ 68,861
and agencies
Obligations of state and local ......................... 1,989 110 -- 2,099
governments
Corporate securities ................................... 50,940 3,496 -- 54,436
Mortgage-backed securities ............................. 38,146 654 (167) 38,633
Asset-backed securities ................................ 48,430 1,311 (44) 49,697
-------- -------- -------- --------
Total ............................................. $205,790 $ 8,155 $ (219) $213,726
======== ======== ======== ========
AVAILABLE-FOR-SALE
U.S. Treasury securities and
obligations of U.S. government corporations and agencies $211,612 $ 10,987 $ (286) $222,313
Obligations of state and local governments ............. 2,205 -- (16) 2,189
Debt securities issued by foreign governments .......... 10,940 835 -- 11,775
Corporate securities ................................... 306,810 21,347 -- 327,387
Mortgage-backed securities ............................. 218,014 10,787 (770) 228,540
Asset-backed securities ................................ 20,375 360 (261) 20,735
-------- -------- -------- --------
Total ............................................. $769,956 $ 44,316 $ (1,333) $812,939
======== ======== ======== ========
</TABLE>
9
<PAGE> 12
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $ 57,041 $ 1,414 $ -- $ 58,455
Obligations of state and local governments... 1,990 64 -- 2,054
Corporate securities ........................ 67,715 1,780 (405) 69,090
Mortgage-backed securities .................. 41,608 462 (267) 41,803
Asset-backed securities ..................... 51,716 329 (550) 51,495
-------- -------- -------- --------
Total .................................. $220,070 $ 4,049 $ (1,222) $222,897
======== ======== ======== ========
AVAILABLE-FOR-SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $213,837 $ 4,777 $ (2,022) $216,592
Obligations of state and local governments .. 2,205 -- (63) 2,142
Debt securities issued by foreign governments 10,946 396 (8) 11,334
Corporate securities ........................ 313,424 10,529 (764) 323,189
Mortgage-backed securities .................. 239,418 5,466 (1,992) 242,892
Asset-backed securities ..................... 99,006 1,064 (639) 99,431
-------- -------- -------- --------
Total .................................. $878,836 $ 22,232 $ (5,488) $895,580
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities at December 31, 1996, by
contractual maturity, are shown below (dollars in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Securities which will be collected over multiple periods have been
allocated based upon the ultimate maturities of the securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less...... $ 11,622 $ 11,772 $ 16,033 $ 16,037
Due after one year through 63,914 65,044 77,117 79,468
five years...................
Due after five year through 81,220 82,832 335,430 345,700
ten years....................
Due after ten years.......... 63,314 63,249 450,256 454,375
--------- --------- -------- ---------
Total.................... $ 220,070 222,897 878,836 895,580
========== ========== ========= ==========
</TABLE>
At December 31, 1995 and 1996, the Company held no unrated or less than
investment grade (i.e., with a Standard & Poor's Corporation ("S&P") rating
below BBB) debt securities.
10
<PAGE> 13
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- INVESTMENTS (CONTINUED)
The Company's mortgage loan investments are diversified by property
type, location and loan size. Generally, loans do not exceed 75% of the
property's value at the time the loan is made. At December 31, 1996, mortgage
loan investments were concentrated in the following property types (dollars in
thousands):
<TABLE>
<CAPTION>
PROPERTY TYPE: PERCENTAGE
CARRYING OF TOTAL
VALUE MORTGAGES
----------- -----------
<S> <C> <C>
Residential.................................... $ 92,364 39.0%
Commercial:
Retail space............................... 80,871 34.1
Office buildings........................... 31,620 13.3
Multi-family apartments.................... 14,644 6.2
Warehouse.................................. 14,253 6.0
Other...................................... 3,353 1.4
--------- -----
Total.......................................... $ 237,105 100.0%
========= =====
</TABLE>
The following is a summary of activity relating to the mortgage loan
impairment reserves as of and for the years ended December 31, 1994, 1995 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year.............. $ 999 $ 480 $ 424
Additions to impairment reserves........ 87 252 1,071
Amounts charged off or transferred to
real estate owned....................... (606) (308) (608)
-------- ------- -------
Balance, end of year.................... $ 480 $ 424 $ 887
======== ======= =======
</TABLE>
As of December 31, 1995 and 1996, the Company held no investments in debt
securities which were non-income producing for the previous twelve months.
Non-income producing mortgage loans aggregating approximately $0.9 million were
held as of December 31, 1995. The Company held no investments in a single entity
(other than United States government agencies and authorities) which exceeded
10% of stockholder's equity as of December 31, 1996.
At December 31, 1996, securities with a carrying value of approximately
$0.3 million were on deposit with governmental agencies, as required by law in
various states in which the insurance subsidiaries of JAFCO conduct business.
This amount is included in total invested assets in the Company's accompanying
balance sheet.
See Note 12 for fair value of investment disclosures.
11
<PAGE> 14
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Major categories of investment income for the years ended December 31,
1994, 1995 and 1996 are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Debt securities..................... $ 58,685 $ 72,381 $ 79,885
Mortgage loans...................... 10,634 16,817 21,067
Policy loans and other notes
receivable........................ 534 988 636
--------- --------- ---------
Total gross investment income... 69,853 90,186 101,588
Less: investment expenses.......... (1,232) (1,595) (1,775)
--------- --------- ---------
Net investment income.......... $ 68,621 $ 88,591 $ 99,813
========== ========= =========
</TABLE>
Proceeds from sales and calls of investments in debt securities for the
years ended December 31, 1994, 1995 and 1996 were $129.3 million, $90.0 million
and $33.9 million, respectively. Proceeds from sales and calls of
available-for-sale securities for the years ended December 31, 1994, 1995 and
1996 were $30.3 million, $81.6 million and $32.9 million, respectively. Gross
unrealized investment gains (losses) related to available-for-sale securities
increased (decreased) stockholder's equity by $(20.2) million, $52.3 million and
$(26.2) million for the years ended December 31, 1994, 1995 and 1996,
respectively.
The components of net realized investment (losses) gains for the years
ended December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Realized gains (losses) from sales, call
and prepayment
Gross realized investment gains
from sales and calls ................. $ 1,907 $ 1,119 $ 535
Gross realized investment losses from
sales and calls ...................... (1,185) (458) (337)
Prepayments of mortgage loans and other (287) 147 108
------- ------- -------
Realized gains (losses) from sales,
calls and prepayments ............ 435 808 306
Impairments in value ....................... 117 (206) (908)
Change in net unrealized gains and losses on (4,380) 470 (52)
trading accounting securities
------- ------- -------
Net realized investment gains (losses) . $(3,828) $ 1,072 $ (654)
======= ======= =======
</TABLE>
12
<PAGE> 15
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, 1994, 1995 and 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year.................... $ 29,365 $ 43,588 $ 24,745
Capitalization of commissions, sales and issue
expenses.................................... 11,517 12,168 8,707
Amortization.................................. (991) (5,038) (7,922)
Effect of change in unrealized gains (losses)
on available-for-sale securities............ 3,697 (21,074) 13,863
Effect of implementation of subsequent SFAS No.
115 guidance (see Note 5).................... -- (4,899) --
-------- -------- --------
Balance, end of year.......................... $ 43,588 $ 24,745 $ 39,393
========= ========= ========
</TABLE>
NOTE 8 -- CONTRACT HOLDER LIABILITIES
The composition of contract holder liabilities at December 31, 1995 and
1996 and the more significant assumptions as to future investment yield,
mortality and withdrawals, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
DECEMBER 31, --------------------------------
---------------------- INTEREST MORTALITY/
1995 1996 RATES MORBIDITY
---------- ---------- --------- ---------------------
<S> <C> <C> <C> <C>
Contract holder deposit funds:
Deferred and immediate
annuities.................. $1,254,257 $1,374,045 3.5-10.0% 1971 IAM and 1983 IAM
Universal life insurance.... 26,518 25,707 4.5-6.0% 1980 CSO Tables
Other benefit reserves,
including individual life
insurance................... 9,976 12,673 3.5-6.0% 1958 CSO & 1980 CSO
Tables
Claim reserves................ 9,492 9,194
Unearned premium reserves..... 330 763
---------- ----------
Total contract holder
liabilities................. $1,300,573 $1,422,382
========== ==========
</TABLE>
Contract holder deposit funds for deferred annuities and universal life
contracts are recorded at their accumulated values using the retrospective
deposit approach. The average accumulated values per annuity contract were
approximately $27,600 and $25,600 as of December 31, 1996 and 1995,
respectively. Interest rates shown for these contracts are current credited
rates. Mortality rates are contractual guarantees for monthly term charges
(universal life insurance) or settlement rates (deferred annuities).
13
<PAGE> 16
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 9 -- LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for unpaid claims and claims adjustment expenses, on a
gross-of-reinsurance basis for the years ended December 31, 1994, 1995 and 1996
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance, at January 1 before acquisition of
insurance company ........................ $ 17 $ 11 $ 9,492
Balance at January 1 of acquired insurance
company .................................. -- 1,453 --
Less reinsurance recoverables ............ -- -- 8,464
------- ------- -------
Net balance at January 1 ................... 17 1,464 1,028
------- ------- -------
Incurred claims related to:
Current year ............................. (100) (26) 139
Prior year ............................... (7) -- (381)
------- ------- -------
Total incurred ............................. (107) (26) (242)
------- ------- -------
Paid claims related to:
Current year ............................. (111) 399 (1,125)
Prior year ............................... 10 11 931
------- ------- -------
Total paid ................................. (101) 410 (194)
------- ------- -------
Net balance at December 31 ................. 11 1,028 980
Plus reinsurance recoverables ........... -- 8,464 8,214
------- ------- -------
Balance at December 31 ..................... $ 11 $ 9,492 $ 9,194
======= ======= =======
</TABLE>
The total incurred claims above include claims adjustment expenses net of
reinsurance, which are included in general expenses in the accompanying
statements of income for the years ended December 31, 1994, 1995 and 1996.
NOTE 10 -- REINSURANCE
In the ordinary course of business, the Company assumes and cedes business
with other insurance companies. Ceding reinsurance is used by the Company to
limit its risk on new and unproven products, to meet certain regulatory, rating
agency or debt covenant leverage ratios or to limit its risk up to its retention
limits. The Company is not relieved of its primary obligation to the
policyholder as a result of these reinsurance transactions. The maximum amount
of life insurance retained on any one life is generally $50,000 or $500,000,
depending upon the plan of insurance. At December 31, 1996, life insurance in
force aggregated approximately $1.4 billion, after a reduction of approximately
$0.2 billion for reinsurance ceded.
The effects of reinsurance on long duration contracts for insurance
premiums and contract charges earned are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
--------- --------- -------
<S> <C> <C> <C>
INSURANCE PREMIUMS AND CONTRACT CHARGES
EARNED FROM LONG DURATION CONTRACTS
Direct business........................... $4,521 $ 8,584 $ 9,753
Reinsurance assumed....................... -- 12,106 10,995
Reinsurance ceded......................... -- -- (618)
------ ------- -------
Net.................................... $4,521 $20,690 $20,130
====== ======= =======
</TABLE>
14
<PAGE> 17
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 10 -- REINSURANCE (CONTINUED)
The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions
or economic characteristics of the reinsurers. The Company generally requires
that its reinsurers be rated "A (Excellent)" or better by A.M. Best and Company
("A.M. Best").
As of December 31, 1996, receivables from reinsurers and investment
deposits recoverable, consisting primarily of contract holder liabilities
transferred to reinsurers, were approximately $38.2 million. Of this total,
approximately $25.5 million or 66.8% has been placed in trust under agreements
which generally require that amounts in trust be equal to at least 100% of the
regulatory contract holder liability balances at all times.
Effective January 1, 1995, the Company entered into a reinsurance
agreement and assumed primarily ordinary life reinsurance premiums from an
unaffiliated company. The amounts of reinsurance assumed related to this
agreement for the years ended December 31, 1995 and 1996 are as follows:
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Premiums and contract changes earned............... $ 12,106 $ 10,995
Benefits........................................... 2,265 (2,480)
Commissions and general expenses................... 9,816 13,450
</TABLE>
NOTE 11 -- INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense...................... $ 4,820 $ 2,987 $ 2,882
Deferred tax expense (benefit)........... (2,517) 871 1,761
------- ------- -------
Provision for income tax............. $ 2,303 $ 3,858 $ 4,643
======= ======= =======
</TABLE>
Current tax expense was reduced by $0.2 million from the utilization of
net operating loss carryovers in 1996.
The income tax provisions differ from the amounts determined by
multiplying pre-tax income by the statutory federal income tax rate of 35%.
Reconciliations between the actual tax provisions and expected tax provisions
for the years ended December 31, 1994, 1995 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at statutory rate........... $ 2,100 $ 3,670 $ 5,018
Amortization of goodwill.............. 190 175 175
Net decrease of valuation allowance... -- -- (545)
Other, net............................ 13 13 (5)
------- ------- --------
Provision for income taxes............... $ 2,303 $ 3,858 $ 4,643
======= ======= ========
</TABLE>
15
<PAGE> 18
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 11 -- INCOME TAXES (CONTINUED)
The significant temporary differences included in the net deferred income
tax asset as of December 31, 1995 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Policy reserves and other insurance items....... $ 23,626 $ 22,841
Net operating loss carryforward................. 2,485 2,503
Other deductible temporary differences.......... 327 401
-------- --------
Deferred income tax assets................... 26,438 25,745
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs and value of
insurance inforce.............................. (13,806) (14,170)
Market discount on bonds and other investment
items........................................ (2,056) (2,901)
Other taxable temporary differences............. (21) (423)
-------- --------
Deferred income tax liabilities............. (15,883) (17,494)
-------- --------
Unrealized (gains) losses and related deferred
acquisition costs allocated to equity.............. (7,266) (2,926)
-------- --------
Valuation allowance................................ (1,637) (1,092)
-------- --------
Net deferred income tax asset.................. $ 1,652 $ 4,233
======== =======
</TABLE>
Net deferred income tax assets are included in other assets in the
accompanying balance sheets.
Approximately $7.1 million of net operating loss carry-forwards ("NOLs")
remain as of December 31, 1996 which expire through the year 2010. The
utilization of these NOLs, which were acquired in connection with the purchase
of ACL, is limited to the taxable earnings of the Company and is further subject
to an annual limitation of $0.6 million. Future utilization of these net
operating loss carry-forwards may also be affected by the sale of the Company to
SunAmerica.
Management believes, based on the Company's earnings history and its
future expectations, that the Company will have sufficient taxable income in
future years to realize the net deferred income tax asset. In evaluating the
expectation of sufficient future taxable income, management considered the
future reversal of temporary differences and available tax planning strategies
that could be implemented, if required. Except as noted below, a valuation
allowance was not required as of December 31, 1996 and 1995 as it was
management's assessment that, based on available information, it is not more
likely than not that any or all of the deferred tax asset will not be realized.
A valuation allowance will be established if there is a change in management's
assessment of the amount of the net deferred income tax asset that is expected
to be realized. However, a valuation allowance of $1.6 million was established
in 1995 in order to reflect uncertainties associated with the utilization of
certain tax benefits acquired in connection with the purchase of ACL. During
1996, the valuation allowance was reduced by $0.5 million as a result of
management's reevaluation of the uncertainties associated with the utilization
of certain tax benefits acquired in connection with the purchase of ACL.
Prior to 1994, the Company was permitted to exclude from taxable income
those amounts determined under a formula established by provisions of the
Internal Revenue Code of 1954, as amended. At December 31, 1996, the Company had
accumulated untaxed income of approximately $0.3 million (tax effect of $0.1
million). Although such amounts are taxable under certain circumstances,
management does not intend to take, or fail to take, any action that would cause
all or part of these amounts to be included in taxable income; accordingly,
deferred income taxes have not been provided on these amounts.
16
<PAGE> 19
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, the Company has approximately $49.5 million in their
"shareholder's surplus" tax account from which dividend distributions can me
made without incurring federal income taxes. The Company made federal income
taxes payments of approximately $1.7 million, $4.8 million and $3.8 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
The carrying value and estimated fair value of the Company's financial
assets and financial liabilities at December 31, 1995 and 1996 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- -------------------
CARRYING FAIR CARRYING FAIR VALUATION
VALUE VALUE VALUE VALUE METHOD
-------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Financial assets:
Held-to-maturity securities:
Publicly traded............ $160,695 $ 166,828 $139,296 $141,889 (1)
Private placements......... 45,095 46,898 80,774 81,008 (2)
Available-for-sale securities:
Publicly traded............ 787,165 787,165 870,304 870,304 (1)
Private placements......... 25,774 25,774 25,276 25,276 (2)
Trading account securities.... 2,060 2,060 999 999 (1)
Mortgage Loans:
Performing.................. 223,771 236,987 233,537 243,525 (3)
Non-performing.............. 1,594 1,594 3,075 3,075 (4)
Restructured on other than
market terms.............. 506 506 493 493 (4)
Policy loans and other notes
receivable ............... 8,448 8,448 8,937 8,937 (5)
Cash and cash equivalents..... 40,291 40,291 44,408 44,408 (5)
Accrued investment income..... 14,761 14,761 16,072 16,072 (5)
Financial liabilities:
Investment contracts with
defined maturities.... 37,608 37,864 38,385 38,402 (6)
Investment contracts with no
defined maturities.... 1,201,724 1,135,630 1,319,221 1,253,710 (7)
</TABLE>
(1) Fair value is based on publicly quoted market prices.
(2) Fair value is estimated using publicly quoted market prices for similar
securities and adjusting by a spread which is reevaluated monthly, and
approximates the spread on similar securities which the Company has
purchased.
(3) Fair value is estimated using the discounted cash flow method, using
interest rates currently offered for similar loans to borrowers with
similar credit ratings.
(4) Fair value is based on external and internal appraisals less an allowance
for estimated sales costs.
(5) Carrying value approximates fair value.
(6) Fair value is estimated based upon the discounted cash flow method, using
interest rates currently offered for similar contracts.
(7) Fair value is defined as the amount payable on demand.
NOTE 13 -- STOCKHOLDER'S EQUITY
The Company is limited by state insurance department regulations as to the
amount of dividends and other payments that may be paid to its parent or
affiliates. Dividends generally require regulatory approval. Loans and advances
are limited to certain prescribed maximums in various jurisdictions and, in any
event, require "arms-length" terms.
17
<PAGE> 20
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 13 -- STOCKHOLDER'S EQUITY (CONTINUED)
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. Material
differences in these accounting practices include: value of insurance in force,
deferred policy acquisition costs, goodwill, statutory non-admitted assets and
deferred federal income taxes are recognized under GAAP accounting, while asset
valuation and interest maintenance reserves are not; certain reinsurance
agreements are accounted for as reinsurance for statutory purposes and as
financing transactions under GAAP; premiums for universal life and
investment-type products are recognized as revenues for statutory purposes and
as deposits to policyholders' accounts under GAAP; investments in the Company's
trading and available-for-sale accounts are carried at market value under GAAP
and amortized cost under statutory reporting; and different assumptions are used
in calculating future policyholders' benefits for statutory and GAAP purposes.
The following reconciles capital and surplus and net income determined in
accordance with accounting practices prescribed or permitted by the state
insurance department with stockholder's equity and net income on a GAAP basis
(dollars in thousands):
Stockholder's Equity
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Capital and surplus, on basis of statutory
accounting practices, as filed with
insurance regulatory authorities $ 55,865 $ 64,803
Value of insurance in force ................... 597 245
Deferred policy acquisition costs ............. 47,013 47,799
Goodwill ...................................... 8,518 8,019
Net unrealized gain on investments ............ 13,449 5,413
Adjustment in policy and claim liabilities .... (56,441) (54,915)
Net deferred income tax assets ................ 8,920 7,142
Statutory investment reserves ................. 8,922 10,440
Other, net........................................ 108 (338)
-------- ---------
Stockholders equity, on basis of generally accepted
accounting principles ......................... $ 86,951 $ 88,608
======== =========
</TABLE>
Net Income
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income, on basis of statutory accounting
practices, as filed with insurance
regulatory authorities......................... $ 7,605 $ 3,242 $10,439
Change in unrealized gain (loss) on
trading portfolio............................. (2,844) 305 (34)
Amortization of purchased intangibles........... (1,105) (931) (850)
Capitalization and amortization of deferred
policy acquisition costs...................... 10,526 7,130 785
Adjustment of policy and claim liabilities...... (11,606) (2,981) 1,457
Reverse effect of statutory investment reserves (368) (244) 140
Deferred income taxes........................... 981 (707) (1,779)
Mortgage delinquency reserves................... 519 (135) (334)
Other, net...................................... (10) 949 (131)
------- ------- -------
Net income, on basis of generally accepted
accounting principles.......................... $ 3,698 $ 6,628 $ 9,693
======= ======= =======
</TABLE>
18
<PAGE> 21
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 14 -- LEASES
The Company leases office space, office equipment and computer equipment
under various operating leases with remaining terms ranging up to 4 years. The
Company has no material capital leases. Under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year, approximate
aggregate annual minimum rentals are as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS
RENTALS
-------
<S> <C>
1997............................. $ 451
1998............................. 393
1999............................. 389
2000............................. 127
Later years...................... --
-------
Total minimum future rentals. $ 1,360
=======
</TABLE>
Rental expense, which includes operating expenses associated with leased
office space, for the years ended December 31, 1994, 1995, and 1996
approximately $0.6 million, $0.7 million and $0.6 million, respectively.
NOTE 15 -- RELATED PARTY TRANSACTIONS
The Company receives certain services from affiliates, and incurs charges
under intercompany service agreements. Under such agreements, the Company
incurred the following charges during 1994, 1995 and 1996, respectively:
o $0.6 million, $0.5 million and $0.9 million for data
processing services performed by John Alden Systems Company.
o $0.8 million, $1.1 million and $1.0 million for investment
related services provided by John Alden Asset Management
Company.
o $0.2 million, $0.1 million and $0.2 million for actuarial and
administrative services provided by JALIC.
Until March 31, 1997, employees of JANY participated in, and the Company
contributed to, the JALIC retirement pension and non-pension postretirement
benefit plans. The Company's share of the accumulated benefit obligations of
these plans was approximately $0.5 million and $0.5 million at December 31, 1995
and 1996, respectively.
During 1994 and 1995, the Company received capital contributions from
JALIC of $2.0 million and $5.5 million, respectively.
As described in Note 2, the Company was included in a consolidated federal
income tax return filed by JAFCO on behalf of all its subsidiaries. JANY had a
federal income tax payable of approximately $0.6 million at December 31, 1996
and a federal income tax recoverable of approximately $0.6 million at December
31, 1995. Under the tax sharing agreement, the Company made payments to JALIC
during 1994, 1995 and 1996 in the amount of $3.8 million, $4.8 million and $1.7
million, respectively.
19
<PAGE> 22
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
The Company is routinely involved in litigation incidental to its
businesses. It is management's opinion that the aggregate liability arising from
the disposition of all such pending litigation will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
SUNAMERICA INC.
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
IN THE COINSURANCE PORTION OF THE JOHN ALDEN TRANSACTION
MARCH 31, 1997
ASSETS ACQUIRED
Cash (net of cash purchase price allocation
of $113,282) $ 212,843,000
Investments 3,259,306,000
Accrued investment income 34,393,000
Deferred acquisition cost 301,107,000
--------------
Total assets acquired $3,807,649,000
==============
LIABILITIES ASSUMED
Accumulated value of fixed annuity contracts $3,797,774,000
Other liabilities 9,875,000
--------------
Total liabilities assumed $3,807,649,000
==============
See accompanying notes
-1-
SUNAMERICA INC.
NOTES TO STATEMENT OF ASSETS ACQUIRED AND LIABILITLIES ASSUMED
IN THE COINSURANCE PORTION OF THE JOHN ALDEN TRANSACTION
1. Description of the Transaction.
On March 31, 1997, SunAmerica Inc. (the "Company"), through its wholly
owned subsidiary, SunAmerica Life Insurance Company, completed the
acquisition of all of the outstanding capital stock of John Alden Life
Insurance Company of New York ("John Alden New York") and a block of
annuity contracts from John Alden Life Insurance Company ("John Alden
Life") for a total cash consideration of $238,282,000 (the "John Alden
Transaction").
As part of the transaction, SunAmerica Life Insurance Company acquired
approximately $3,800,000,000 of fixed annuity contracts from John Alden
Life. The transfer of assets necessary to support these annuity
liabilities was effected pursuant to a 100% coinsurance agreement entered
into by John Alden Life and SunAmerica Life Insurance Company. Under a
100% coinsurance agreement, the coinsurer agrees to indemnify the
issuing insurer for all of its obligations under the revelant annuity
contracts. However, the issuing insurer remains the only party obligated
to the insured party. In consideration for its indemnification, the
coinsurer receives assets, usually composed of cash and/or marketable
securities, in an amount equal to the annuity liabilities, computed on a
statutory basis, less a negotiated fee. In the coinsurance portion of the
John Alden Transaction, the allocated purchase was $113,282,000.
The acquisition has been accounted for by using the purchase method of
accounting, and, accordingly, all assets and liabilities presented in the
accompanying Statement of Assets Acquired and Liabilities Assumed in the
Coinsurance Portion of the John Alden Transaction (the "Statement") have
been stated at their estimated fair values to present the balance sheet
impact of assuming the fixed annuity liabilities of John Alden Life as of
March 31, 1997. The Statement does not include the accounts of John Alden
New York.
-2-<PAGE>
2. Investments
Investments acquired, at March 31, 1997, are summarized as follows:
Weighted
Average
Fair Yield to
Value Maturity
----- --------
Bonds, notes and redeemable
preferred stocks $2,232,450,000 7.38%
Commercial mortgage loans 767,858,000 9.18
Residential mortgage loans 254,539,000 8.05
Policy loans 4,459,000 6.00
-------------- -----
Total $3,259,306,000 7.85%
============== =====
All of the portfolio of bonds, notes and redeemable preferred stocks
acquired have been designated by the Company as 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. A summary of
the fair value of bonds, notes and redeemable preferred stocks acquired,
at March 31, 1997, by major category follows:
Securities of the United
States Government $ 6,256,000
Securities of public utilities 139,125,000
Corporate bonds and notes 576,598,000
Redeemable preferred stocks 81,801,000
Mortgage-backed sceurities 1,231,216,000
Other aset-backed securities 197,454,000
--------------
Total
$2,232,450,000
==============
-3-
2. Investments (continued)
A summary of the fair value of bonds, notes and redeemable preferred
stocks acquired, at March 31, 1997, by contractual maturity follows:
Due in one year or less $ 18,869,000
Due after one year through five years 344,940,000
Due after five years through ten years 483,017,000
Due after ten years 154,408,000
Mortgage-backed securities 1,231,216,000
--------------
Total $2,232,450,000
==============
Actual maturities of bonds, notes and redeemable preferred stocks
acquired will differ from those shown above due to prepayments and
redemptions.
At March 31, 1997, no single investment acquired exceeded 10% of the
Company's consolidated shareholders' equity.
At March 31, 1997, bonds having a fair value of $286,000 were not rated
investment grade by nationally recognized credit rating authorities.
At March 31, 1997, mortgage loans were collateralized by properties
located in 46 states, and loans totaling approximately 14% of the
aggregate fair value of mortgage loans were secured by properties
located in each of California and Florida.
At March 31, 1997, the fair value of investments in default as to the
payment of principal or interest was $973,000.
3. Deferred Acquisition Cost
An amount equal to the sum of the allocated purchase price and the fair
value of the related net liabilities assumed in the coinsurance
transaction has been recorded as Deferred Acquisition Cost in the
accompanying Statement. Such amount, totaling $301,107,000 at March 31,
1997, will be amortized, with interest, in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the
annuity contracts assumed. Estimated gross profits are composed of net
interest income, net realized investment gains and losses, surrender
charges and direct administrative expenses.
The deferred acquisition cost attributable to the coinsurance
transaction is substantially less than a computation of the present
value of estimated future gross profits discounted at the applicable
current average crediting rate.
-4-
4. Fixed Annuity Contracts
The fair value of fixed annuity contracts assumed and related average
crediting rates are summarized by denomination ranges as follows:
Weighted
Average
Crediting
Denomination Range Value Rate
------------------ ----- ---------
$ 0 - $ 10,000 $ 301,639,000 5.52%
$ 10,000 - $ 50,000 1,603,512,000 5.58
$ 50,000 - $100,000 942,302,000 5.60
Greater than $100,000 749,512,000 5.66
-------------- -----
3,596,965,000 5.60%
Annuitized contracts 200,809,000 7.00
-------------- -----
Total $3,797,774,000 5.67%
============== =====
The fair value of fixed annuity contracts assummed are summarized by
applicable surrender charge as follows:
Surrender
Charge Value
--------- -----
0% $ 413,839,000
1 410,135,000
2 278,809,000
3 304,180,000
4 415,745,000
5 345,558,000
6 466,465,000
7 766,272,000
8 141,562,000
Greater than 8% 54,400,000
Not surrenderable 200,809,000
--------------
Total $3,797,774,000
==============
-5-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
SunAmerica Inc.
In our opinion, the accompanying statement of assets acquired and liabilities
assumed in the coinsurance portion of the John Alden transaction presents
fairly, in all material respects, the assets acquired and liabilities assumed
by SunAmerica Life Insurance Company, a wholly owned subsidiary of SunAmerica
Inc., in the coinsurance transaction at March 31, 1997 in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Company's management; our responsibility is to express
an opinion on this financial statement based on our audit. We conducted our
audit of this statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether this financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Los Angeles, California
June 11, 1997
-6-
<TABLE>
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Historical Results of
John Alden Life Insurance Co.
of New York Pro Forma Adjustments
------------------------------------ -------------------------------
SunAmerica Estimated Pro Forma
As Reported Deduct Add Full-Year Results
for the For the Quarter Quarter Results of for the
Year ended Year Ended Ended Ended Coinsurance Other Year Ended
9/30/96 12/31/96 12/31/96 12/31/95 Transaction Adjustments 9/30/96
------------ ---------- --------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income $ 1,254,288 $ 99,813 $ (25,921) $ 23,937 $ 283,381 (1) $ (15,488)(4) $1,620,010
Interest expense (761,532) (73,598) 18,902 (19,378) (215,334)(2) -- (1,050,940)
----------- --------- --------- -------- ------------ ----------- -----------
Net investment income 492,756 26,215 (7,019) 4,559 68,047 (15,488) 569,070
Net realized investment
losses (30,314) (654) 825 (128) -- -- (30,271)
Fee income 220,428 -- -- -- -- -- 220,428
General and adminis-
trative expenses (212,701) (14,243) 3,617 (3,956) -- -- (227,283)
Amortization of deferred
acquisition costs (108,176) (8,772) 2,343 (1,696) (26,750) (3) 5,475 (5) (137,576)
Other income
(expense), net 30,034 11,790 (4,442) 3,803 -- -- 41,185
----------- ---------- --------- --------- ------------ ---------- -----------
Pretax income 392,027 14,336 (4,676) 2,582 41,297 (10,013) 435,553
Income tax benefit
(expense) (117,600) (4,643) 1,127 (959) (14,454) (6) 3,505 (6) (133,024)
----------- ---------- ---------- --------- ----------- ---------- -----------
Net income $ 274,427 $ 9,693 $ (3,549) $ 1,623 $ 26,843 $ (6,508) $ 302,529
=========== ========== ========= ========= =========== ========== ===========
Earnings per share $ 1.95 $ 2.16
=========== ===========
-1-
See accompanying explanatory notes.
</TABLE>
SUNAMERICA INC.
PRO FORMA CONDENSED INCOME STATEMENT
EXPLANATORY NOTES
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(1) To record investment income on assets received (before deduction of the
allocated purchase price) in the coinsurance transaction at 7.85%, the
weighted average yield to maturity on the assets on the date of
acquisition.
(2) To record interest expense on the assumed annuity contracts at 5.67%, the
weighted average rate credited to contract holders on the date of
assumption.
(3) To record amortization of the deferred acquisition cost arising from this
transaction based upon the investment income and interest expense
recorded above, as described in Notes (1) and (2), and the Registrant's
estimate of related future gross profits.
(4) To reflect lost interest income on the $238,282,000 purchase price at the
Registrant's average short-term portfolio yield of 6-1/2%.
(5) To eliminate amortization recorded by John Alden Life Insurance Company
of New York ("John Alden New York"), and record $2,650,000 of pro forma
amortization of the deferred acquisition cost arising from the John Alden
New York portion of the transaction based upon the gross profits recorded
by John Alden New York for the year and the Registrant's estimate of
related future gross profits.
(6) To record the income tax effect of the pro forma adjustments at the
statutory rate of 35%.
-2-
<TABLE>
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Historical Results of
John Alden Life Insurance
Company of New York Pro Forma Adjustments
-------------------------- ------------------------------
SunAmerica Pro Forma
As Reported Estimated Results
for the For the Add the Six-Month for the
Six Months Quarter Quarter Results of Six Months
Ended Ended Ended Coinsurance Other Ended
3/31/97 3/31/97 12/31/96 Transaction Adjustments 03/31/97
----------- -------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Income $ 764,221 $ 25,579 $ 25,921 $ 141,691 (1) $ (7,744)(4) $ 949,668
Interest expense (468,548) (19,179) (18,902) (107,667)(2) -- (614,296)
----------- -------- --------- ----------- ---------- -----------
Net investment income 295,673 6,400 7,019 34,024 (7,744) 335,372
Net realized investment
losses (18,746) (849) (825) -- -- (20,420)
Fee income 126,331 -- -- -- -- 126,331
General and adminis-
trative expenses (120,872) (2,858) (3,617) -- -- (127,347)
Amortization of deferred
acquisition costs (60,413) (2,407) (2,343) (13,375)(3) 3,425 (5) (75,113)
Other income
(expense), net 16,829 1,852 4,442 -- -- 23,123
----------- -------- --------- ----------- ---------- -----------
Pretax income 238,802 2,138 4,676 20,649 (4,319) 261,946
Income tax benefit
(expense) (71,600) (793) (1,127) (7,227)(6) 1,512 (6) (79,235)
----------- --------- --------- ----------- ---------- -----------
Net income $ 167,202 $ 1,345 $ 3,549 $ 13,422 $ (2,807) $ 182,711
=========== ========= ========= =========== ========== ===========
Earnings per share $ 1.20 $ 1.32
=========== ===========
-1-
See accompanying explanatory notes.
</TABLE>
SUNAMERICA INC.
PRO FORMA CONDENSED INCOME STATEMENT
EXPLANATORY NOTES
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(1) To record investment income on assets received (before deduction of the
allocated purchase price) in the coinsurance transaction at 7.85%, the
weighted average yield to maturity on the assets on the date of
acquisition.
(2) To record interest expense on the assumed annuity contracts at 5.67%, the
weighted average rate credited to contract holders on the date of
assumption.
(3) To record amortization of the deferred acquisition cost arising from this
transaction based upon the investment income and interest expense
recorded above, as described in Notes (1) and (2), and the Registrant's
estimate of related future gross profits.
(4) To reflect lost interest income on the $238,282,000 purchase price at the
Registrant's average short-term portfolio yield of 6-1/2%.
(5) To eliminate amortization recorded by John Alden Life Insurance Company
of New York ("John Alden New York"), and record $1,325,000 of pro forma
amortization of the deferred acquisition cost arising from the John Alden
New York portion of the transaction based upon the gross profits recorded
by John Alden New York for the six-month period and the Registrant's
estimate of related future gross profits.
(6) To record the income tax effect of the pro forma adjustments at the
statutory rate of 35%.
-2-
