SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------------------------------
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, 179,469,132 shares outstanding
Nontransferable Class B Stock, par value $1.00 per share, 16,272,702
shares outstanding
SUNAMERICA INC.
INDEX
Page
Number(s)
---------
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) -
June 30, 1998 and September 30, 1997 3-4
Consolidated Income Statement (Unaudited) -
Three Months and Nine Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended June 30, 1998 and 1997 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-34
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 35
Part II - Other Information 36-37
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
June 30, September 30,
1998 1997
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 1,127,282 $ 993,349
Bonds, notes and redeemable preferred stocks
available for sale, at fair value
(amortized cost: June 30, 1998, $18,528,005;
September 30, 1997, $18,124,837) 19,004,533 18,523,655
Mortgage loans 3,555,871 3,139,309
Common stocks available for sale, at fair
value (cost: June 30, 1998, $28,409;
September 30, 1997, $32,821) 99,184 96,541
Equity-method partnerships 745,135 561,336
Cost-method partnerships 872,635 725,457
Real estate 53,605 81,569
Other invested assets 349,453 286,962
------------ -------------
Total investments 25,807,698 24,408,178
Variable annuity assets held in
in separate accounts 12,238,751 9,514,675
Accrued investment income 296,329 296,637
Deferred acquisition costs 1,138,161 1,118,582
Other assets 393,880 298,814
------------ -------------
TOTAL ASSETS $ 39,874,819 $ 35,636,886
============ =============
See accompanying notes
3
<PAGE>
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
June 30, September 30,
1998 1997
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 13,235,627 $ 14,445,126
Reserves for guaranteed investment contracts 7,862,295 5,553,292
Trust deposits 422,290 427,433
Payable to brokers for purchases of securities 157,535 266,477
Income taxes currently payable 1,786 2,025
Other liabilities 810,141 828,916
------------ -------------
Total reserves, payables
and accrued liabilities 22,489,674 21,523,269
------------ -------------
Variable annuity liabilities related
to separate accounts 12,238,751 9,514,675
------------ -------------
Long-term notes and debentures 1,236,374 1,136,072
------------ -------------
Deferred income taxes 448,459 383,764
------------ -------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary grantor
trusts whose sole assets are junior
subordinated debentures of the Company 495,000 495,000
------------ -------------
Shareholders' equity:
Preferred Stock 248,000 248,000
Nontransferable Class B Stock 16,273 16,273
Common Stock 179,345 179,076
Additional paid-in capital 747,739 750,401
Retained earnings 1,514,877 1,180,446
Net unrealized gains on debt and
equity securities available for sale 260,327 209,910
------------ -------------
Total shareholders' equity 2,966,561 2,584,106
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,874,819 $ 35,636,886
============ =============
See accompanying notes
4
<TABLE>
<CAPTION>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and nine months ended June 30, 1998 and 1997
(In thousands, except per-share amounts - unaudited)
Three months Nine months
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Investment income $ 548,057 $ 506,287 $1,592,859 $1,270,508
--------- --------- ---------- ----------
Interest expense on:
Fixed annuity contracts (177,572) (194,977) (548,858) (451,976)
Guaranteed investment contracts (114,077) (83,464) (300,891) (226,959)
Trust deposits (2,294) (2,433) (6,925) (7,393)
Senior indebtedness (29,634) (28,269) (87,773) (71,169)
--------- --------- ---------- ---------
Total interest expense (323,577) (309,143) (944,447) (757,497)
--------- --------- ---------- ---------
Dividends paid on preferred
securities of grantor trusts (10,295) (11,384) (30,884) (31,578)
--------- --------- ---------- ---------
NET INVESTMENT INCOME 214,185 185,760 617,528 481,433
--------- --------- ---------- ---------
NET REALIZED INVESTMENT GAINS (LOSSES) 5,772 (12,136) 11,224 (30,882)
--------- --------- ---------- ---------
Fee income:
Variable annuity fees 54,852 35,684 148,034 99,284
Net retained commissions 31,749 17,432 83,029 46,546
Surrender charges 15,358 10,020 41,151 24,545
Asset management fees 7,707 6,202 21,753 18,925
Loan servicing fees 5,871 6,055 17,530 18,062
Trust fees 4,711 4,413 13,742 13,300
Other fees 3,318 1,990 8,120 4,711
--------- --------- ---------- ---------
TOTAL FEE INCOME 123,566 81,796 333,359 225,373
--------- --------- ---------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES (81,219) (70,419) (235,979) (191,708)
--------- --------- ---------- ---------
AMORTIZATION OF DEFERRED ACQUISITION COSTS (63,386) (52,080) (174,482) (112,493)
--------- --------- ---------- ---------
PRETAX INCOME 198,918 132,921 551,650 371,723
Income tax expense (54,000) (38,600) (149,200) (110,200)
--------- --------- ---------- ---------
NET INCOME $ 144,918 $ 94,321 $ 402,450 $ 261,523
========= ========= ========== =========
NET INCOME PER SHARE:
Basic $ 0.73 $ 0.51 $ 2.04 $ 1.40
========= ========= ========== =========
Diluted $ 0.66 $ 0.46 $ 1.82 $ 1.27
========= ========= ========== =========
See accompanying notes
5
</TABLE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1998 and 1997
(In thousands - unaudited)
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 402,450 $ 261,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 548,858 451,976
Guaranteed investment contracts 300,891 226,959
Trust deposits 6,925 7,393
Net realized investment losses (gains) (11,224) 30,882
Accretion of net discounts on investments (54,303) (21,829)
Provision for deferred income taxes 41,480 100,363
Change in:
Accrued investment income 367 (37,398)
Deferred acquisition costs (26,779) (59,560)
Other assets (26,013) (24,747)
Income taxes currently payable 434 (99,102)
Other liabilities (32,569) 104,510
Other, net 2,647 (2,020)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,153,164 938,950
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (16,486,160) (14,846,335)
Mortgage loans (936,025) (799,089)
Partnerships (1,038,742) (767,308)
Other investments, excluding short-term
investments (237,379) (199,406)
Net assets of Financial Service Corporation (41,295) --
Net assets of Sentra Securities Corp. and
Spelman & Company (3,489) --
The annuity business of John Alden Financial
Corporation -- 173,818
Sales of:
Bonds, notes and redeemable preferred
stocks 13,096,395 10,386,620
Mortgage loans -- 346,064
Partnerships 502,224 440,085
Other investments, excluding short-term
investments 63,386 108,891
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 2,959,032 3,197,919
Mortgage loans 519,661 254,481
Partnerships 179,503 368,457
Other investments, excluding short-term
investments 196,435 11,437
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (1,226,454) (1,324,366)
------------ ------------
6
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended June 30, 1998 and 1997
(In thousands - unaudited)
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (68,019) $ (51,642)
Premium receipts on:
Fixed annuity contracts 1,271,444 1,149,842
Guaranteed investment contracts 2,976,970 1,551,926
Net exchanges from the fixed accounts
of variable annuity contracts (965,674) (431,245)
Receipts of trust deposits 588,315 596,253
Withdrawal payments on:
Fixed annuity contracts (1,704,179) (961,205)
Guaranteed investment contracts (970,230) (592,278)
Trust deposits (600,385) (621,857)
Claims and annuity payments on fixed
annuity contracts (363,288) (273,560)
Net proceeds from issuances of long-term
notes 99,041 429,383
Net repayments of other short-term financings (56,747) (46,073)
Net proceeds from issuance of preferred
securities of a subsidiary grantor trust -- 299,541
Payment for redemption of preferred securities
of a subsidiary grantor trust -- (52,631)
Payments for redemptions of Preferred Stock -- (136,549)
Payment of issuance costs of 8-1/2% Premium
Equity Redemption Cumulative Security Units -- (44,605)
Other (25) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 207,223 815,300
------------ ------------
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 133,933 429,884
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 993,349 529,363
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 1,127,282 $ 959,247
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 120,752 $ 97,528
============ ============
Income taxes paid, net of refunds received $ 107,266 $ 108,939
============ ============
See accompanying notes
7
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's
consolidated financial position as of June 30, 1998 and September 30,
1997, the results of its consolidated operations for the three months and
nine months ended June 30, 1998 and 1997 and its consolidated cash flows
for the nine months ended June 30, 1998 and 1997. The results of
operations for the three months and nine months ended June 30, 1998 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, 1997, contained in the
Company's 1997 Annual Report to Shareholders.
2. Acquisitions
------------
On March 31, 1997, the Company completed the acquisition of 1) a block
of annuity contracts from John Alden Life Insurance Company, a subsidiary
of John Alden Financial Corporation, and 2) all of the outstanding common
stock of John Alden Life Insurance Company of New York. This acquisition
has been accounted for by using the purchase method of accounting.
Accordingly, the income statement for the nine months ended June 30, 1997
includes the operating results of the acquisition for only the period
from April 1, 1997 through June 30, 1997. On a pro forma basis, assuming
the acquisition occurred on October 1, 1996, the beginning of the
earliest period presented herein, revenues (investment income, net
realized investment losses and fee income) would have been $1,649,808,000
and net income would have been $279,875,000 ($1.50 per basic share and
$1.36 per diluted share) for the nine months ended June 30, 1997.
8
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Company-Obligated Preferred Securities of Subsidiary Grantor Trusts
-------------------------------------------------------------------
Preferred securities of subsidiary grantor trusts comprise $185,000,000
liquidation amount of 8.35% Trust Originated Preferred Securities issued
by SunAmerica Capital Trust II in October 1995 and $310,000,000
liquidation amount of 8.30% Trust Originated Preferred Securities issued
by SunAmerica Capital Trust III in November 1996.
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, which
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.
In connection with the issuance of the 8.30% 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 $320,670,000
principal amount of 8.30% junior subordinated debentures, due 2045, which
are redeemable at the option of the Company on or after November 13, 2001
at a redemption price of $25 per debenture plus accrued and unpaid
interest.
The grantor trusts are wholly owned subsidiaries of the Company. The
debentures issued to the grantor trusts and the common securities
purchased by the Company from the grantor trusts are eliminated in the
balance sheet.
9
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE> (Continued)
<CAPTION>
4. Earnings per Share
------------------
The calculations of basic and diluted earnings per share for the three months and
nine months ended June 30, 1998 and 1997 are as follows (in thousands, except
per-share amounts):
BASIC EARNINGS PER SHARE:
Three months Nine months
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $144,918 $ 94,321 $402,450 $261,523
-------- -------- -------- --------
Less preferred stock dividends:
9-1/4% Preferred Stock,
Series B -- (1,692) -- (5,754)
Adjustable Rate Cumulative
Preferred Stock, Series C -- -- -- (28)
Series E Mandatory Conversion
Premium Dividend Preferred
Stock (3,100) (3,100) (9,300) (9,300)
-------- -------- -------- --------
Total preferred stock dividends (3,100) (4,792) (9,300) (15,082)
-------- -------- -------- --------
Income available to common
shareholders $141,818 $ 89,529 $393,150 $246,441
======== ======== ======== ========
Average common shares issued and
outstanding 195,431 179,143 195,293 179,350
Less common shares issued and
outstanding, but not vested
to participants under various
employee stock plans (2,253) (3,259) (2,428) (3,294)
-------- -------- -------- --------
Average shares outstanding 193,178 175,884 192,865 176,056
======== ======== ======== ========
Basic earnings per share $ 0.73 $ 0.51 $ 2.04 $ 1.40
======== ======== ======== ========
</TABLE>
10
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
4. Earnings per Share (continued)
------------------
DILUTED EARNINGS PER SHARE:
Three months Nine months
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $144,918 $ 94,321 $402,450 $261,523
-------- -------- -------- --------
Less preferred stock dividends:
9-1/4% Preferred Stock,
Series B -- (1,692) -- (5,754)
Adjustable Rate Cumulative
Preferred Stock, Series C -- -- -- (28)
-------- -------- -------- --------
Total preferred stock dividends -- (1,692) -- (5,782)
-------- -------- -------- --------
Income available to common
shareholders $144,918 $ 92,629 $402,450 $255,741
======== ======== ======== ========
Average common shares issued
and outstanding 195,431 179,143 195,293 179,350
Plus incremental shares from
potential common stock:
Average number of shares
arising from outstanding
employee stock plans 7,436 5,631 8,630 5,308
Average number of shares
issuable upon conversion
of Series E Mandatory
Conversion Premium Dividend
Preferred Stock 11,974 14,381 12,504 14,645
Average number of shares
issuable upon conversion of
Premium Equity Redemption
Cumulative Security Units 3,867 2,866 4,691 2,343
-------- -------- -------- --------
Average shares outstanding 218,708 202,021 221,118 201,646
======== ======== ======== ========
Diluted earnings per share $ 0.66 $ 0.46 $ 1.82 $ 1.27
======== ======== ======== ========
</TABLE>
11
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
5. Ratios of Earnings to Fixed Charges
-----------------------------------
The ratios of earnings to fixed charges for the three months and nine months
ended June 30, 1998 and 1997 are as follows:
Three months Nine months
--------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
but exclude interest incurred on fixed
annuities, guaranteed investment
contracts and trust deposits) 6.0x 4.4x 5.6x 4.6x
===== ===== ===== =====
Ratio of earnings to fixed charges
(which include dividends paid on
preferred securities of grantor
trusts and interest incurred on
senior debt, fixed annuities,
guaranteed investment contracts
and trust deposits) 1.6x 1.4x 1.6x 1.5x
===== ===== ===== =====
Ratio of earnings to combined fixed
charges and preferred stock dividends
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
but exclude interest incurred on fixed
annuities, guaranteed investment
contracts and trust deposits) 5.4x 3.7x 5.1x 3.8x
==== ==== ==== ====
Ratio of earnings to combined fixed
charges and preferred stock dividends
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
fixed annuities, guaranteed investment
contracts and trust deposits) 1.6x 1.4x 1.5x 1.4x
==== ==== ==== ====
</TABLE>
12
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
6. Subsequent Events
-----------------
On July 15, 1998, the Company entered into a definitive agreement to
acquire the individual life business and the individual and group annuity
business of MBL Life Assurance Corporation via a 100% coinsurance
transaction for approximately $130,000,000 in cash. The transaction will
include approximately $2,000,000,000 of universal life reserves and
$3,000,000,000 of fixed annuity reserves. The Company plans to reinsure
a large portion of the mortality risk associated with the acquired block
of universal life business. Completion of this acquisition is expected
by the end of calendar year 1998 and is subject to customary conditions
and required regulatory approvals.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of SunAmerica Inc. (the "Company") for the three months and nine
months ended June 30, 1998 and June 30, 1997 follows. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based
on historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such
as credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $144.9 million ($0.73 per basic share and $0.66 per
diluted share) in the third quarter of 1998, compared with $94.3 million ($0.51
per basic share and $0.46 per diluted share) in the third quarter of 1997. For
the nine months, net income amounted to $402.5 million ($2.04 per basic share
and $1.82 per diluted share) in 1998, compared with $261.5 million ($1.40 per
basic share and $1.27 per diluted share) in 1997. On March 31, 1997, the
Company acquired certain annuity contracts from John Alden Life Insurance
Company and all of the outstanding common stock of John Alden Life Insurance
Company of New York (collectively, the "Acquisition"). The Acquisition was
accounted for under the purchase method of accounting, and, therefore, results
of operations include those of the Acquisition only from the date of
14
acquisition. Consequently, operating results for the nine months of 1998 and
1997 are not comparable. On a pro forma basis, using the historical operating
results of the acquired businesses and assuming the Acquisition had been
consummated on October 1, 1996, the beginning of the prior-year periods
discussed herein, net income would have been $279.9 million ($1.50 per basic
share and $1.36 per diluted share) for the nine months of 1997.
PRETAX INCOME totaled $198.9 million in the third quarter of 1998 and
$132.9 million in the third quarter of 1997. For the nine months, pretax
income totaled $551.7 million in 1998, compared with $371.7 million in 1997.
The significant improvements in the current periods over the prior periods
primarily resulted from increased net investment income, fee income and net
realized investment gains. These favorable factors were partially offset by
increased amortization of deferred acquisition costs and higher general and
administrative expenses in the 1998 periods.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $214.2 million in the third quarter
of 1998 from $185.8 million in the third quarter of 1997. These amounts equal
3.36% of average invested assets (computed on a daily basis) of $25.47 billion
in the third quarter of 1998 and 3.13% of average invested assets of $23.72
billion in the third quarter of 1997. For the nine months, net investment
income increased to $617.5 million in 1998 from $481.4 million in 1997,
equalling 3.34% of average invested assets of $24.68 billion in 1998 and 3.26%
of average invested assets of $19.69 billion in 1997. On a pro forma basis,
assuming the Acquisition had been consummated on October 1, 1996, net
investment income on related average invested assets would have been 3.11% for
the nine months of 1997.
Net investment spreads include the effect of income earned on the excess
of average invested assets over average interest-bearing liabilities. This
excess amounted to $2.00 billion in the third quarter of 1998, $900.5 million
in the third quarter of 1997, $1.83 billion in the nine months of 1998 and
$1.09 billion in the nine months of 1997. The difference between the Company's
yield on average invested assets and the rate paid on average interest-bearing
liabilities (the "Spread Difference") was 2.92% in both the third quarter of
1998 and the third quarter of 1997, 2.92% in the nine months of 1998 and 2.95%
in the nine months of 1997. On a pro forma basis, assuming the Acquisition had
been consummated on October 1, 1996, the Spread Difference would have been
2.91% in the nine months of 1997.
Investment income (and the related yields on average invested assets)
totaled $548.1 million (8.61%) in the third quarter of 1998, compared with
$506.3 million (8.54%) in the third quarter of 1997. For the nine months,
investment income (and the related yields on average invested assets) totaled
$1.59 billion (8.61%) in 1998, compared with $1.27 billion (8.61%) in 1997.
Investment income and the related yield in the nine months of 1997 reflect the
effects of the Acquisition for only the three months ending June 30, 1997.
The invested assets associated with the Acquisition included high-grade
corporate, government and government/agency bonds and cash and short-term
investments, which are generally lower yielding than a significant portion of
15
the invested assets that comprise the remainder of the Company's portfolio.
On a pro forma basis, assuming the Acquisition had been consummated on October
1, 1996, the yield on related average invested assets would have been 8.50% for
the nine months of 1997. Thus, yields in the 1998 periods have increased when
compared to the third quarter 1997 yield and the pro forma yield for the nine
months of 1997, and reflect a partial reallocation of lower-yielding invested
assets acquired as part of the Acquisition into generally higher-yielding asset
classes in which the Company has historically invested a portion of its
portfolio. The greater investment income in the 1998 periods also reflects
increased income from the Company's investment in partnerships, as well as the
effects of increases in average invested assets (in excess of those acquired
through the Acquisition).
Partnership income increased to $92.3 million (a yield of 21.09% on
related average assets of $1.75 billion) in the third quarter of 1998, compared
with $55.1 million (a yield of 19.12% on related average assets of $1.15
billion) in the third quarter of 1997. For the nine months, partnership income
amounted to $233.1 million (a yield of 19.80% on related average assets of
$1.57 billion) in 1998, compared with $181.7 million (a yield of 21.42% on
related average assets of $1.13 billion) in 1997. Partnership income includes
income recognized by using the cost method of accounting, which amounted to
$51.6 million in the third quarter of 1998, $24.7 million in the third quarter
of 1997, $126.5 million in the nine months of 1998 and $95.5 million in the
nine months of 1997. Such income is based primarily upon cash distributions
received from limited partnerships, the operations of which the Company does
not influence. Consequently, such income is not predictable and there can be
no assurance that the Company will realize comparable levels of such income in
the future.
The Company has enhanced investment yield from time to time through total
return bond swap agreements (the "Total Return Agreements"). The Company
recorded losses of $0.8 million on Total Return Agreements in the third quarter
of 1998, compared with income of $15.0 million recorded in the third quarter
of 1997. For the nine months, the Company recorded income of $13.3 million on
Total Return Agreements in 1998, compared with $22.7 million in 1997. These
results reflect the relative performances of the non-investment grade bonds
underlying the Total Return Agreements. (See "Asset-Liability Matching" for
additional discussion of Total Return Agreements.)
Total interest and dividend expense equalled $333.9 million in the third
quarter of 1998 and $320.5 million in the third quarter of 1997. For the nine
months, interest and dividend expense aggregated $975.3 million in 1998,
compared with $789.1 million in 1997. The average rate paid on all
interest-bearing liabilities was 5.69% in the third quarter of 1998, compared
with 5.62% in the third quarter of 1997. For the nine months, the average rate
paid on all interest-bearing liabilities was 5.69% for 1998 and 5.66% for 1997,
respectively. Interest-bearing liabilities averaged $23.47 billion during the
third quarter of 1998, $22.82 billion during the third quarter of 1997, $22.85
billion during the nine months of 1998 and $18.59 billion during the nine
months of 1997. On a pro forma basis, assuming the Acquisition had been
consummated on October 1, 1996, the average rate paid on all interest-bearing
liabilities would have been 5.59% for the nine months of 1997. The increases
16
in overall rates paid in the 1998 periods as compared with the overall rates
paid in the 1997 periods primarily reflect period-over-period increases in the
percentage of average interest-bearing liabilities composed of guaranteed
investment contracts ("GICs"), which, on average, bear higher interest rates,
while generally bearing lower acquisition costs, than the Company's other
interest-bearing liabilities.
GROWTH IN AVERAGE INVESTED ASSETS between the nine month periods
primarily reflects the impact of the Acquisition. The Company acquired $5.00
billion of invested assets associated with the Acquisition on March 31, 1997.
The Company intends to continue to pursue a strategy of enhancing its internal
growth with complementary acquisitions.
Average invested assets also increased as a result of sales of the
Company's fixed-rate products, consisting of both fixed annuity premiums
(including those for the fixed accounts of variable annuity products) and GIC
premiums, and $806.3 million of aggregate net proceeds from the issuances of
Common Stock and long-term notes and debentures. Since June 30, 1997, fixed
annuity premiums have totaled $1.61 billion and GIC premiums have aggregated
$3.50 billion. Fixed annuity premiums totaled $485.1 million in the third
quarter of 1998, $325.7 million in the third quarter of 1997, $1.27 billion in
the nine months of 1998 and $1.15 billion in the nine months of 1997. On an
annualized basis, these amounts represent 14%, 9%, 12% and 16% of the fixed
annuity reserve balance at the beginning of the respective periods. The
decrease in the percentage for the 1998 nine-month period from the 1997 nine-
month period reflects the impact of the Acquisition which increased the
beginning reserves for the 1998 period by $5.2 billion. Fixed annuity premiums
include premiums for the fixed accounts of variable annuities totaling $443.8
million, $198.0 million, $1.10 billion and $932.5 million, respectively.
Increases in premiums for the fixed accounts of variable annuities in the 1998
periods over those in the 1997 periods principally reflect an expansion of the
Company's distribution efforts and differing promotional activities in each of
those periods.
GIC premiums increased to $1.37 billion in the third quarter of 1998 from
$319.3 million in the third quarter of 1997 and to $2.98 billion in the nine
months of 1998 from $1.55 billion in the nine months of 1997. On an annualized
basis, these amounts represent 82%, 25%, 71% and 50% of the GIC reserve balance
at the beginning of the respective periods. The increases in GIC premiums in
the 1998 periods reflect an expansion of the GIC client base due, in part, to
a broadening of the Company's products and distribution channels, including its
AAA-rated company, SunAmerica National Life Insurance Company and its AAA/Aaa-
rated credit-enhanced GIC products, and an expansion of its international
client base.
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 twelve
years with an average of approximately 7 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
generally imposes surrender penalties in the event of other withdrawals prior
17
to maturity. GICs purchased for their long-term portfolios by banks, asset
management firms, certain trusts and state and local governmental entities
either prohibit withdrawals or permit scheduled book value withdrawals subject
to the terms of the underlying indenture or agreement. GICs purchased by asset
management firms for their short-term portfolios either prohibit withdrawals
or permit withdrawals with notice ranging from 90 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 GAINS totaled $5.8 million in the third quarter
of 1998, compared with net realized investment losses of $12.1 million in the
third quarter of 1997 and include impairment writedowns of $19.3 million and
$26.3 million, respectively. Thus, net gains from sales and redemptions of
investments totaled $25.1 million in the third quarter of 1998 and
$14.2 million in the third quarter of 1997. For the nine months, net realized
investment gains totaled $11.2 million in 1998, compared with $30.9 million of
net losses realized in 1997 and include impairment writedowns of $37.4 million
and $46.5 million, respectively. Thus, for the nine months, net gains from
sales and redemptions of investments totaled $48.6 million in 1998 and $15.6
million in 1997.
The Company sold or redeemed invested assets, principally bonds and
notes, aggregating $6.52 billion in the third quarter of 1998, $6.95 billion
in the third quarter of 1997, $17.50 billion in the nine months of 1998 and
$14.70 billion in the nine months of 1997, respectively. Sales of investments
result from the active management of the Company's investment portfolio.
Because redemptions of investments are generally involuntary and sales of
investments are made in both rising and falling interest rate environments, net
gains and losses from sales and redemptions of investments fluctuate from
period to period, and represent 0.39%, 0.24%, 0.26% and 0.11% of average
invested assets on an annualized basis for the third quarter of 1998, the third
quarter of 1997, the nine months of 1998 and the nine months of 1997,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Company's active portfolio management is to maximize total
returns on the investment portfolio, taking into account credit and interest-
rate risk.
Impairment writedowns primarily have been applied to defaulted bonds and
mortgage loans. Impairment writedowns, on an annualized basis, represent
0.30%, 0.44%, 0.20% and 0.31% of average invested assets for the third quarter
of 1998, the third quarter of 1997, the nine months of 1998 and the nine months
of 1997, respectively. For the 19 fiscal quarters beginning October 1, 1993,
impairment writedowns as a percentage of average invested assets have ranged
from 0.14% to 1.54% and have averaged 0.33%. Such writedowns are based upon
estimates of the net realizable value of the applicable assets. Actual
realization will be dependent upon future events.
18
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $54.9
million in the third quarter of 1998 and $35.7 million in the third quarter of
1997. For the nine months, variable annuity fees totaled $148.0 million in
1998, compared with $99.3 million in 1997. These increased fees reflect growth
in average variable annuity assets, due to increased market values, the receipt
of variable annuity premiums and net exchanges into the separate accounts from
the fixed accounts of variable annuity contracts, partially offset by
surrenders. On an annualized basis, variable annuity fees represent 1.9%,
1.8%, 1.9% and 1.8% of average variable annuity assets for the third quarters
of 1998 and 1997 and the nine months of 1998 and 1997, respectively. Variable
annuity assets averaged $11.77 billion during the third quarter of 1998 and
$7.74 billion during the third quarter of 1997. For the nine months, variable
annuity assets averaged $10.60 billion in 1998, compared with $7.21 billion in
1997.
Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, have aggregated $1.82 billion since June
30, 1997. Variable annuity premiums increased to $537.6 million in the third
quarter of 1998 from $338.8 million in the third quarter of 1997. For the nine
months, variable annuity premiums increased to $1.40 billion in 1998, compared
with $884.5 million in 1997. On an annualized basis, these amounts represent
19%, 19%, 20% and 18% of variable annuity reserves at the beginning of the
respective periods.
Sales of variable annuity products (which include premiums allocated to
the fixed accounts) ("Variable Annuity Product Sales") amounted to $981.4
million, $536.8 million, $2.50 billion and $1.82 billion in the third quarters
of 1998 and 1997 and the nine months of 1998 and 1997, respectively, and
primarily reflect sales of the Company's flagship variable annuity, Polaris.
Polaris is a multi-manager variable annuity that offers investors a choice of
26 variable funds and 7 guaranteed fixed-rate funds. Increases in Variable
Annuity Product Sales in the 1998 periods over those in the 1997 periods are
due, in part, to market share gains through enhanced distribution efforts and
growing consumer demand for flexible retirement savings products that offer a
variety of equity, fixed income and guaranteed fixed account investment
choices.
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. Also, from time to time,
Federal initiatives are proposed which could affect the taxation of variable
annuities and annuities generally (see "Regulation").
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
$31.7 million in the third quarter of 1998 and $17.4 million in the third
quarter of 1997. For the nine months, net retained commissions totaled $83.0
million in 1998 and $46.5 million in 1997. Broker-dealer sales (mainly sales
of general securities, mutual funds and annuities) totaled $8.00 billion in the
19
third quarter of 1998 and $4.46 billion in the third quarter of 1997. For the
nine months, such sales totaled $22.14 billion in 1998 and $12.06 billion in
1997. The increases in sales and net retained commissions in the 1998 periods
over those in the 1997 periods reflect a greater number of registered
representatives, higher average production per representative and generally
favorable market conditions. The greater number of registered representatives
was primarily due to acquisitions, including the April 2, 1998 acquisition of
Sentra Securities Corporation and Spelman & Co., Inc. ("Sentra-Spelman"), the
October 1, 1997 acquisition of Financial Service Corporation and the January
22, 1997 acquisition of The Financial Group, Inc. At their respective dates
of acquisition, these acquired companies licensed through their subsidiaries
approximately 500, 1,500 and 400 independent registered representatives,
respectively. Increases in net retained commissions may not be proportionate
to increases in sales primarily due to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $15.4 million
in the third quarter of 1998 and $10.0 million in the third quarter of 1997.
For the nine months, surrender charges on fixed and variable annuities totaled
$41.2 million (including $9.4 million attributable to the Acquisition) in 1998,
compared with $24.5 million in 1997. Surrender charges generally are assessed
on annuity withdrawals at declining rates during the first seven years of an
annuity contract. Withdrawal payments, which include surrenders and lump-sum
annuity benefits, totaled $848.6 million (including $483.9 million attributable
to the Acquisition) in the third quarter of 1998, compared with $649.7 million
in the third quarter of 1997. These payments, annualized, represent 14.0%
(25.3% of average fixed annuity reserves associated with the Acquisition) and
12.0%, respectively, of average fixed and variable annuity reserves. For the
nine months, withdrawal payments totaled $2.44 billion (including $1.47 billion
attributable to the Acquisition) in 1998 and $1.55 billion in 1997 and,
annualized, represent 13.8% (24.3% of average fixed annuity reserves associated
with the Acquisition) and 11.6%, respectively, of average fixed and variable
annuity reserves. Withdrawals include variable annuity withdrawals from the
separate accounts totaling $261.9 million (8.9% of average variable annuity
reserves), $199.4 million (10.3% of average variable annuity reserves), $736.1
million (9.3% of average variable annuity reserves) and $593.2 million (11.0%
of average variable annuity reserves) in the third quarters of 1998 and 1997
and the nine months of 1998 and 1997, respectively. Consistent with the
assumptions used in connection with the Acquisition and other acquisitions of
annuity businesses in fiscal 1996, management anticipates that the level of
withdrawal payments will continue to reflect higher relative withdrawal rates
in the near future because of higher surrenders on the acquired annuity
businesses.
Excluding the effects of all recent acquisitions, withdrawal payments
represented 9.3% in the third quarter of 1998, 9.8% in the third quarter of
1997, 9.1% in the nine months of 1998 and 10.6% in the nine months of 1997 of
related average fixed and variable annuity reserves. These lower surrender
rates in the current periods reflect the continued decreases in the percentage
of non-acquisition-related annuity contracts that are free of surrender
charges.
20
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 by SunAmerica Asset Management Corp. Such fees totaled $7.7 million on
average assets managed of $3.01 billion in the third quarter of 1998 and
$6.2 million on average assets managed of $2.31 billion in the third quarter
of 1997. For the nine months, asset management fees totaled $21.8 million on
average assets managed of $2.83 billion in 1998, compared with $18.9 million
on average assets managed of $2.27 billion in 1997. Asset management fees are
not proportionate to average assets managed, principally due to changes in
product mix. Sales of mutual funds, excluding sales of money market accounts,
have aggregated $759.4 million since June 30, 1997. Mutual fund sales totaled
$241.5 million in the third quarter of 1998, up 111% from $114.4 million in the
third quarter of 1997. For the nine months, such sales totaled $601.3 million
in 1998, more than double the $296.7 million in 1997. The significant
increases in sales during the 1998 periods principally resulted from the sales
of the Company's "Style Select Series" product and the introduction in June
1998 of the "Dogs" of Wall Street fund and the Style Select Focus Fund. The
"Style Select Series" is a group of mutual funds which are each managed by
three industry recognized fund managers. The "Dogs" of Wall Street fund
contains 30 large capitalization value stocks which are selected by strict
criteria. The Style Select Focus Fund also limits itself to 30 large
capitalization stocks but primarily holds growth stocks. Sales of these
products totaled $181.1 million, $76.1 million, $425.8 million and $161.1
million for the third quarters of 1998 and 1997 and the nine months of 1998 and
1997, respectively, reflecting the addition of five new Style Select funds,
which more than doubled the number of Style Select funds to nine, and generally
favorable market conditions. Redemptions of mutual funds, excluding
redemptions of money market accounts, amounted to $112.5 million in the third
quarter of 1998 and $102.1 million in the third quarter of 1997. For the nine
months, such redemptions amounted to $313.3 million in 1998 and $316.3 million
in 1997.
LOAN SERVICING FEES are earned by Imperial Premium Finance, Inc.
("Imperial"). Imperial provides short-term installment loans for borrowers to
fund their 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 loans it originates and earns fee income
by servicing the sold loans. Such fee income totaled $5.9 million on average
loans serviced of $484.5 million in the third quarter of 1998, compared with
$6.1 million on average loans serviced of $487.1 million in the third quarter
of 1997. For the nine months, loan servicing fees totaled $17.5 million on
average loans serviced of $481.7 million in 1998, compared with $18.1 million
on average loans serviced of $484.6 million in 1997.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts, as well as for other qualified retirement plans. Trust fees
increased to $4.7 million in the third quarter of 1998 (on an average of
208,000 trust accounts) from $4.4 million in the third quarter of 1997 (on an
average of 203,000 trust accounts). For the nine months, trust fees increased
to $13.7 million (on an average of 208,000 trust accounts) from $13.3 million
(on an average of 203,000 trust accounts).
21
GENERAL AND ADMINISTRATIVE EXPENSES totaled $81.2 million in the third
quarter of 1998, up 15% from $70.4 million in the third quarter of 1997. For
the nine months, general and administrative expenses totaled $236.0 million in
1998, up 23% from $191.7 million in 1997. General and administrative expenses
in the 1998 periods reflect the impact of the Acquisition, as well as the
acquisitions of Sentra-Spelman, Financial Service Corporation and The Financial
Group, Inc., which were consummated on April 2, 1998, October 1, 1997 and
January 22, 1997, respectively. The number of employees has increased by 30%
to 2,482 since June 30, 1997. As a result, compensation (net of deferrals) has
increased to $46.4 million in the third quarter of 1998 from $36.8 million in
the third quarter of 1997 and to $135.3 million in the nine months of 1998 from
$106.0 million in the nine months of 1997. General and administrative expenses
remain closely controlled through a company-wide cost containment program and
continue to represent less than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $63.4 million in the
third quarter of 1998, compared with $52.1 million in the third quarter of
1997. For the nine months, such amortization totaled $174.5 million in 1998,
compared with $112.5 million in 1997. The increase in amortization for the
nine months of 1998 primarily reflects the amortization of the deferred
acquisition costs attributable to the Acquisition, which aggregated $32.7
million. Amortization has also increased due to additional fixed and variable
annuity and mutual fund sales and the subsequent amortization of related
deferred commissions and other direct selling costs.
INCOME TAX EXPENSE totaled $54.0 million in the third quarter of 1998,
compared with $38.6 million in the third quarter of 1997 and $149.2 million in
the nine months of 1998, compared with $110.2 million in the nine months of
1997, representing effective tax rates of 27% in the 1998 periods, 29% for the
third quarter of 1997 and 30% for the nine months of 1997. These tax rates
reflect the favorable impact of tax credits associated with tax-advantaged
investments in affordable housing partnerships owned by the Company.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY increased 14.8% to $2.97 billion at June 30, 1998
from $2.58 billion at September 30, 1997, primarily due to $402.5 million of
net income recorded in the nine months of 1998 and a $50.4 million improvement
in net unrealized gains on debt and equity securities available for sale
(credited directly to shareholders' equity). These favorable factors were
partially offset by $68.0 million of dividends paid to shareholders.
BOOK VALUE PER SHARE amounted to $14.31 at June 30, 1998, up from $12.40
at September 30, 1997. Excluding net unrealized gains on debt and equity
securities available for sale, book value per share amounted to $13.06 at June
30, 1998 and $11.39 at September 30, 1997. On a pro forma basis, assuming that
the 8-1/2% Premium Equity Redemption Cumulative Security Units were converted
to Common Stock, book value per share would have been $15.57 at June 30, 1998,
compared with $13.40 at September 30, 1997 and, excluding net unrealized gains
on debt and equity securities available for sale, would have been $14.38 at
June 30, 1998 and $12.47 at September 30, 1997.
22
INVESTED ASSETS at June 30, 1998 totaled $25.81 billion, compared with
$24.41 billion at September 30, 1997. The Company manages most of its invested
assets internally. The Company's general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has 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 relative value of asset sectors and individual securities, changes in
prepayment risk, changes in the credit quality outlook for certain securities,
the Company's need for liquidity and other similar factors.
THE BOND PORTFOLIO, which constitutes 73% of the Company's total
investment portfolio (at amortized cost), had an aggregate fair value that
exceeded its amortized cost by $476.5 million at June 30, 1998, compared with
an excess of $398.8 million at September 30, 1997. The net unrealized gains
on the Bond Portfolio since September 30, 1997 principally reflect the lower
prevailing interest rates at June 30, 1998 and the corresponding effect on the
fair value of the Bond Portfolio.
At June 30, 1998, the Bond Portfolio (at amortized cost, excluding $184.1
million of redeemable preferred stocks) included $17.16 billion of bonds rated
by Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service,
L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC"),
and $1.19 billion of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At June 30, 1998, approximately
$16.31 billion of the Bond Portfolio was investment grade, including
$6.66 billion of U.S. government/agency securities and mortgage-backed
securities ("MBSs").
At June 30, 1998, the Bond Portfolio included $2.04 billion (at amortized
cost with a fair value of $2.04 billion) of bonds that were not investment
grade. Based on their June 30, 1998 amortized cost, these non-investment-grade
bonds accounted for 5.2% of the Company's total assets and 8.1% of its 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 $696.1 million at June 30, 1998 (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 had no material concentrations of non-investment-grade securities
at June 30, 1998.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 1998 (dollars in thousands):
23
<TABLE>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
<CAPTION>
Issues not rated by S&P/Moody's/
Issues rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[DCR]/{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-} $10,031,476 $10,236,607 1 $2,395,319 $2,558,396 $12,426,795 49.19% $12,795,003
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 3,247,273 3,302,245 2 631,862 641,658 3,879,135 15.36 3,943,903
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 224,761 226,703 3 71,281 74,210 296,042 1.17 300,913
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 1,252,628 1,274,376 4 353,099 354,533 1,605,727 6.36 1,628,909
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 75,515 47,134 5 46,365 49,907 121,880 0.48 97,041
CI to D
[DD]
{D} -- -- 6 14,278 17,366 14,278 0.06 17,366
----------- ----------- ---------- ---------- ----------- -----------
TOTAL RATED ISSUES $14,831,653 $15,087,065 $3,512,204 $3,696,070 $18,343,857 $18,783,135
=========== =========== ========== ========== =========== ===========
Footnotes appear on the following page.
24
</TABLE>
Footnotes to the table of rated bonds by rating classification
---------------------------------------------------------------
(1) S&P and Fitch rate 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. DCR 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. Issues are categorized based on
the highest of the S&P, Moody's, DCR or 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/DCR/Fitch rating groups listed above, with categories 1 and
2 considered investment grade. The NAIC categories include $1.19 billion
(at amortized cost) of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
(3) At amortized cost.
25
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $1.85 billion at June 30, 1998. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At June 30, 1998, Secured Loans consisted of $1.00 billion of
publicly traded securities and $852.0 million of privately traded securities.
These Secured Loans are composed of loans to 326 borrowers spanning 44
industries, with 27% of these assets (at amortized cost) concentrated in
financial institutions and 15% concentrated in utilities. No other industry
concentration constituted more than 6% of these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these
Secured Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of
loss upon default for these Secured Loans is mitigated by such financial
covenants and the collateral values underlying the Secured Loans. The
Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by
the Company, pursuant to comparable statutory ratings guidelines established
by the NAIC.
MORTGAGE LOANS aggregated $3.56 billion at June 30, 1998 and consisted of
1,622 commercial first mortgage loans with an average loan balance of
approximately $2.2 million, collateralized by properties located in 47 states.
Approximately 26% of this portfolio was multifamily residential, 22% was
retail, 17% was office, 11% was manufactured housing, 8% was hospitality and
16% was other types. At June 30, 1998, approximately 19%, 12% and 10% of this
portfolio was secured by properties located in California, New York and Texas,
respectively, and no more than 8% of this portfolio was secured by properties
located in any other single state. At June 30, 1998, there were 64 mortgage
loans with outstanding balances of $10 million or more, which loans
collectively aggregated approximately 32% of this portfolio. At June 30, 1998,
approximately 34% of the mortgage loan portfolio consisted of loans with
balloon payments due before July 1, 2001. During the third quarter and nine
months of 1998 and 1997, loans delinquent by more than 90 days, foreclosed
loans and restructured loans have not been significant in relation to the total
mortgage loan portfolio.
At June 30, 1998, approximately 43% of the mortgage loans were seasoned
loans underwritten to the Company's standards and purchased at or near par from
other financial institutions. 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 more
immediate effects of general economic conditions on these commercial property
types. However, due to the seasoned nature of the Company's mortgage loan
portfolio, its emphasis on multifamily loans and its strict underwriting
standards, the Company believes that it has prudently managed the risk
26
attributable to its mortgage loan portfolio while maintaining attractive
yields.
PARTNERSHIP investments totaled $1.62 billion at June 30, 1998,
constituting investments in approximately 650 separate partnerships with an
average size of approximately $2.4 million. This portfolio includes:
(i) $870.6 million of partnerships managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including approximately 3,700 separate issuers; (ii) $632.8 million of
partnerships that make tax-advantaged investments in affordable housing
properties, currently involving approximately 540 multifamily projects in 41
states; and (iii) $114.4 million of partnerships that invest in mortgage loans
and income-producing real estate. 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, to some extent, a) for the affordable housing partnerships,
by the marketability of the tax credits they generate, and b) in the case of
many of the other partnerships, by the existence of contractual termination
provisions.
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-rate investments 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-rate investments are priced
over the yield curve, and general economic conditions. Its portfolio strategy
is constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges,
two-tiered interest rate structures or other restrictions in order to encourage
persistency. Approximately 86% of the Company's fixed annuity and GIC reserves
had surrender penalties or other restrictions at June 30, 1998.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its fixed-
rate products and conducting its investment operations to closely match the
duration of the fixed-rate assets to that of its fixed-rate liabilities. The
Company's fixed-rate assets include: cash and short-term investments; bonds,
notes and redeemable preferred stocks; mortgage loans; and investments in
limited partnerships that invest primarily in fixed-rate securities and are
accounted for by using the cost method. At June 30, 1998, these assets had an
aggregate fair value of $24.1 billion with a duration of 3.8. The Company's
fixed-rate liabilities include: fixed annuities; GICs; trust deposits; long-
term notes and debentures; and preferred securities of subsidiary grantor
27
trusts. At June 30, 1998, these liabilities had an aggregate fair value
(determined by discounting future contractual cash flows by related market
rates of interest) of $22.5 billion with a duration of 3.1. The Company's
potential exposure due to a 10% increase in prevailing interest rates from
their June 30, 1998 levels is a loss of $119.0 million in fair value of its
fixed-rate assets that is not offset by a decrease in the fair value of its
fixed-rate liabilities. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of
a fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity and GIC products, allocating its available cash flow amongst its
various investment portfolio sectors and maintaining sufficient levels of
liquidity. Because the calculation of duration involves estimation and
incorporates assumptions, potential changes in portfolio value indicated by the
portfolio's duration will likely be different from the actual changes
experienced under given interest rate scenarios, and the differences may be
material.
As a component of its asset and liability management 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 typically utilizes Swap Agreements to create a hedge
that effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At June 30, 1998, the Company had 38 outstanding Swap Agreements
with an aggregate notional principal amount of $1.88 billion. These agreements
mature in various years through 2010 and have an average remaining maturity of
46 months.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos 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. 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 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.
28
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 bond market fluctuations and the risk associated with counterparty
nonperformance. The primary risk associated with the Company's Reverse Repos
and Swap Agreements is counterparty risk. The Company believes, however, that
the counterparties to its Total Return Agreements, Reverse Repos and Swap
Agreements are financially responsible and that the counterparty risk
associated with those transactions is minimal. It is the Company's policy that
these agreements are entered into with counterparties who have a debt rating
of A/A2 or better from both S&P and Moody's. The Company continually monitors
its credit exposure with respect to these agreements. In addition to
counterparty risk, Swap Agreements also have interest rate risk. However, the
Company's Swap Agreements typically hedge variable-rate assets or liabilities,
and interest rate fluctuations that adversely affect the net cash received or
paid under the terms of a 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. As part of its decision to purchase an MBS, the Company assesses the
risk of prepayment by analyzing the security's projected performance over an
array of interest-rate scenarios. Once an MBS is purchased, the Company
monitors its actual prepayment experience monthly to reassess the relative
attractiveness of the security with the intent to maximize total return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values 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 any collateral, 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. For investments in
partnerships, management reviews the financial statements and other information
provided by the general partners.
The carrying values of investments that are determined to have declines
in value that are other than temporary are reduced to net realizable value and,
in the case of bonds, no further accruals of interest are made. The provisions
for impairment 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.
29
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $52.6 million at June 30, 1998
(at amortized cost after impairment writedowns, with a fair value of $54.7
million), including $18.0 million of bonds and notes and $34.6 million of
mortgage loans. At June 30, 1998, defaulted investments constituted 0.2% of
total invested assets. At September 30, 1997, defaulted investments totaled
$38.5 million, including $15.6 million of bonds and notes and $22.9 million of
mortgage loans, and constituted 0.2% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At June 30, 1998, approximately $15.92 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $589.9 million, while
approximately $2.61 billion of the Bond Portfolio had an aggregate unrealized
loss of $113.4 million. In addition, the Company's investment portfolio
currently provides approximately $202.3 million of monthly cash flow from
scheduled principal and interest payments. Further, $3.23 billion remains
available to the Company to issue securities under a shelf registration
statement filed in July 1997. Historically, cash flows from operations and
from the sale of the Company's annuity and GIC products have been more than
sufficient in amount to satisfy the Company's liquidity needs.
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
June 30, 1998, had invested assets with a fair value of $2.71 billion and
outstanding senior indebtedness of $1.24 billion, comprising all of the
Company's outstanding senior indebtedness. Additionally, as of June 30, 1998,
the Parent had three GICs purchased by local government entities, which
aggregated $217.8 million.
During November 1996 and October 1995, respectively, the Parent purchased
the common securities of SunAmerica Capital Trust III and SunAmerica Capital
Trust II (collectively, the "Grantor Trusts") and issued an aggregate of
30
$511.9 million of junior subordinated debentures (the "Debentures") to the
Grantor Trusts in connection with the public issuance of the preferred
securities of the Grantor Trusts (see Note 3 of Notes to Consolidated Financial
Statements).
The Parent's annual debt service (principal and interest payments) with
respect to its senior indebtedness, GIC obligations and Debentures totals $56.2
million for the remainder of fiscal 1998, $292.0 million for fiscal 1999,
$574.6 million for fiscal 2000, $139.0 million for fiscal 2001, $297.4 million
for fiscal 2002 and $4.27 billion, in the aggregate, thereafter. On or before
October 31, 1999, the Company is contractually scheduled to receive $431.3
million upon delivery of 17.3 million or fewer shares of the Company's Common
Stock in accordance with the terms of the Company's 8-1/2% Premium Equity
Redemption Cumulative Security Units.
The Parent received dividends from its regulated life insurance
subsidiaries totaling $143.0 million in June 1998 and $118.7 million in April
1997. The Parent also received dividends of $1.6 million during fiscal 1998
and $17.5 million during fiscal 1997 from its other directly owned
subsidiaries. The ability of the Company's life insurance subsidiaries to pay
dividends is limited by statute. For the remainder of calendar year 1998, no
amounts are available for dividends to the Parent from its regulated life
insurance subsidiaries.
The Company has sold, through three separate coinsurance transactions: (i)
the general agency division of SunAmerica Life Insurance Company to Savers Life
Insurance Company (in 1989) which subsequently transferred the business to
Winterthur Life Re Insurance Company; (ii) the credit life business of Ford
Life Insurance Company to Vista Life Insurance Company (in 1996); and (iii) the
mortality-based business of CalAmerica Life Insurance Company to Protective
Life Insurance Company (in 1996). With respect to these coinsurance
transactions, SunAmerica entities could become liable for in-force amounts
ceded of $943,764,229, $1,180,397,718, and $2,046,661,989, respectively, at
June 30, 1998, if the coinsurers were to become unable to meet the obligations
assumed under the respective coinsurance agreements. However, the Company
considers these contingencies to be remote because the coinsurers are strong
credit-worthy institutions and, in the case of the 1989 transaction, assets
substantially equal to the policyholder reserves assumed by the coinsurer are
held in trust to secure the obligations of the coinsurer. At June 30, 1998,
related policyholder reserves carried by the coinsurers were $59,875,797,
$14,178,643, and $97,342,653, respectively.
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. Based on
an evaluation of the underlying housing projects, management does not
anticipate any material cash payments with respect to the guarantees.
31
In the ordinary course of business, the Company has agreed to make capital
contributions, if required, aggregating approximately $636.9 million, to 105
limited partnerships over the next 5 years in exchange for ownership interests
in such partnerships.
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems and applications are not presently
year 2000 compliant. The Company's business, financial condition and results
of operations could be materially and adversely affected by the failure of the
Company's systems and applications (and those operated by third parties
interfacing with the Company's systems and applications) to properly operate
or manage dates beyond the year 1999. The Company has a coordinated plan to
repair or replace these noncompliant systems and to obtain similar assurances
from third parties interfacing with the Company's systems and applications.
In fiscal year 1997, the Company recorded a $15.0 million provision for
estimated programming costs to make necessary repairs of certain specific
noncompliant systems. Management also expects to make expenditures totaling
$15.0 million to replace certain other specific noncompliant systems, which
expenditures will be capitalized as software costs and amortized over future
periods. Both phases of the project are currently proceeding in accordance
with the plan and management expects them to be substantially completed by the
end of 1998. Testing of both the repaired and replacement systems will be
conducted during calendar 1999.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the insurance regulatory agencies of the states in which they
are authorized to transact business. State insurance laws establish supervisory
agencies with broad administrative and supervisory powers. Principal among
these powers are 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 and valuation requirements, prescribing the form and content of
required financial statements and reports, performing financial, market conduct
and other examinations, determining the reasonableness and adequacy of
statutory capital and surplus, defining acceptable accounting principles,
regulating the type, valuation and amount of investments permitted, and
limiting the amount of dividends that can be paid and the size of transactions
that can be consummated without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the
National Association of Insurance Commissioners ("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 or
allowing combinations between insurance companies, banks and other entities.
In recent years, the NAIC has developed several model laws and regulations
designed to reduce the risk of insurance company insolvencies and market
32
conduct violations. These initiatives include investment reserve requirements,
risk-based capital ("RBC") standards, codification of insurance accounting
principles, new investment standards and restrictions on an insurance company's
ability to pay dividends to its stockholders. The NAIC is also currently
developing model laws or regulations relating to product design, product
reserving standards and illustrations of annuity products 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.
The RBC standards consist of formulas which establish capital
requirements relating to insurance, business, assets and interest rate risks,
and which help to identify companies which are under capitalized and require
specific regulatory actions in the event an insurer's RBC falls below specified
levels. Each of the Company's life insurance subsidiaries has more than enough
statutory capital to meet the NAIC's RBC requirements as of the most recent
calendar year-end. The states of Arizona, California, and New York have
adopted these RBC standards, and the Company's life insurance subsidiaries
domiciled in these states are in compliance with such laws. Further, for
statutory reporting purposes, the annuity reserves of the Company's life
insurance subsidiaries are calculated in accordance with statutory requirements
and are adequate under current cash-flow testing models.
SunAmerica Asset Management is registered with the SEC 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 SEC. In addition, variable annuities and the
related separate accounts of the Company's life insurance subsidiaries are
subject to regulation by the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940.
Resources Trust Company is subject to regulation by the Colorado State
Banking Board and the Federal Deposit Insurance Corporation. It has applied
to the Office of Thrift Supervision to convert its charter to a federal savings
association.
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
SEC and the National Association of Securities Dealers ("NASD"). The SEC and
the NASD have broad administrative and supervisory powers relative to all
aspects of business and may examine the broker-dealer subsidiaries' business
and accounts at any time. The SEC also has broad jurisdiction to oversee
various activities of the Company and its other subsidiaries.
The Company's premium finance business is subject to regulation and
supervision by substantially all of the states in which it is 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
33
and reports, performing financial and other examinations and other related
matters.
From time to time, Federal initiatives are proposed that could affect the
Company's businesses. Such initiatives include employee benefit plan
regulations and tax law changes affecting the taxation of insurance companies
and the tax treatment of insurance and other investment products. Proposals
made in recent years to limit the tax deferral of annuities or otherwise modify
the tax rules related to the treatment of annuities have not been enacted.
While certain of such proposals, if implemented, could have an adverse effect
on the Company's sales of affected products, and consequently on its results
of operations, the Company believes such proposals have a small likelihood of
being enacted, because they would discourage retirement savings and there is
strong public and industry opposition to them.
34
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
on pages 27 and 28 herein.
35
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
- --------------------------
The Company shall be entitled to exercise discretionary voting authority as to
any shareholder proposal presented at the Company's annual meeting and not
included as a proposal in the Company's annual proxy statement unless the
Company receives notice of the matter prior to November 16, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBITS
27 Financial Data Schedule
REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed during the three months ended June 30,
1998. However, on July 15, 1998, the Company filed a current report on
Form 8-K concerning its proposed acquisition of MBL Life Assurance Corp.
36
SUNAMERICA INC.
PART II - OTHER INFORMATION
(Continued)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNAMERICA INC.
-----------------------------------
Registrant
Dated August 13, 1998 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Vice Chairman
Dated August 13, 1998 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
37
SUNAMERICA INC.
LISTS OF EXHIBITS FILED
- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 19,004,533
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 99,184
<MORTGAGE> 3,555,871
<REAL-ESTATE> 53,605
<TOTAL-INVEST> 25,807,698
<CASH> 1,127,282
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,138,161
<TOTAL-ASSETS> 39,874,819
<POLICY-LOSSES> 21,097,922
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,236,384
0
248,000
<COMMON> 195,618
<OTHER-SE> 2,522,943
<TOTAL-LIABILITY-AND-EQUITY> 39,874,819
0
<INVESTMENT-INCOME> 1,467,277
<INVESTMENT-GAINS> 11,224
<OTHER-INCOME> 333,359
<BENEFITS> 849,749
<UNDERWRITING-AMORTIZATION> 174,482
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 551,660
<INCOME-TAX> 149,200
<INCOME-CONTINUING> 402,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 402,450
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 1.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
