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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 1-4618
SUNAMERICA INC.
<TABLE>
<S> <C>
INCORPORATED IN MARYLAND 86-0176061
(IRS EMPLOYER
IDENTIFICATION NO.)
</TABLE>
1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant's telephone number, including area code: (310) 772-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock (par value $1.00 per share) New York Stock Exchange
Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ___ No X
The aggregate market value of voting stock held by non-affiliates of the
Company on November 30, 1998 was $14,390,229,000.
The number of shares outstanding of each of the registrant's classes of
common stock on November 30, 1998 was as follows:
Common Stock (par value $1.00 per share) 191,663,421 shares
Nontransferable Class B Stock
(par value $1.00 per share) 16,272,702 shares
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
SunAmerica Inc. (the "Company") is incorporated in Maryland and maintains
its principal executive offices at 1 SunAmerica Center, Los Angeles, California
90067-6022, telephone
(310) 772-6000. As used herein, the "Company" or "SunAmerica" refers to
SunAmerica Inc. and, unless the context requires otherwise, its subsidiaries.
The Company employs approximately 2,500 people.
SunAmerica is a financial services company specializing in retirement
savings and investment products and services. Together, the SunAmerica life
insurance companies rank among the largest U.S. issuers of tax-deferred fixed
and variable annuities and guaranteed investment contracts ("GICs").
Complementing these annuity and GIC operations are the Company's asset
management operations and the SunAmerica Financial Network, consisting of
broker-dealers, which provide a broad range of financial planning and investment
services through more than 9,700 independent registered representatives
nationwide; its trust company, which provides administrative and custodial
services to qualified retirement plans; and its premium finance company, one of
the nation's leaders in its field. At September 30, 1998, the Company earned
fees or spread income on $109.82 billion of assets, consisting of $26.07 billion
of investments; $11.41 billion of variable annuity assets; $12.95 billion of
assets under custody in retirement trust accounts; $3.00 billion of assets
managed in mutual funds and $56.39 billion of non-proprietary and advisory
assets in the SunAmerica Financial Network.
The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of 45 to 64 will
grow from 46 million to 60 million during the 1990s, making this age group the
fastest-growing segment of the U.S. population. Between 1987 and 1997, annual
industry premiums from fixed and variable annuities and fund deposits increased
from $86.32 billion to $207.64 billion. During the same period, annual industry
sales of mutual funds, excluding money market accounts, rose from $190.63
billion to $874.26 billion.
Benefiting from continued strong growth of the retirement savings market,
industry sales of tax-deferred savings products have represented, for a number
of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its life insurance
operations on the sale of annuities and GICs.
The Company's six wholly-owned broker-dealers comprise the largest network
of independent registered representatives in the nation and the fifth-largest
securities sales force, based on industry data. Its wholly owned broker-dealers
accounted for approximately one-third of the Company's total annuity sales in
fiscal 1998. The Company also distributes its products and services through an
extensive network of independent broker-dealers, full-service securities firms,
independent general insurance agents, major financial institutions and, in the
case of its GICs, by marketing directly to banks, municipalities, asset
management firms and direct plan sponsors and through intermediaries, such as
managers or consultants servicing these groups.
The Company has made significant investments in technology over the past
several years in order to lower operating costs and enhance its marketing
efforts. Its use of optical disk imaging and artificial intelligence has
substantially reduced the more traditional paper-intensive life insurance
processing procedures, reducing annuity processing and servicing costs and
improving customer service. This has also enabled the Company to more
efficiently assimilate acquired business. The Company has also implemented
technology to interface with its wholly owned broker-dealers, which enables the
Company to more effectively market its products and help the affiliated
financial professionals to better service their clients.
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In recent years, the Company has enhanced its marketing efforts and
expanded its offerings of fee-based products and services such as variable
annuities, mutual funds, trust services and premium financing through both
internal growth and acquisition, resulting in significantly increased fee
income. Fee income has also expanded through the receipt of broker-dealer net
retained commissions, resulting primarily from the expansion of the Company's
wholly owned broker-dealer network and increased demand for long-term investment
products. The Company's fee generating businesses entail no portfolio credit
risk and require significantly less capital support than its fixed rate
business, which generates net investment income.
For the year ended September 30, 1998, the Company's net investment income
(including net realized investment losses) and fee income by primary product
line or service are as follows:
NET INVESTMENT AND FEE INCOME
<TABLE>
<CAPTION>
Amount Percent Primary product or service
-------------- ------- ----------------------------------
(In thousands)
<S> <C> <C> <C>
Net investment income (including net
realized investment losses)........ $ 799,925 63.6% Fixed-rate products
---------- -----
Fee income:
Variable annuity fees.............. 204,474 16.2 Variable annuities
Net retained commissions........... 114,461 9.1 Broker-dealer sales
Surrender charges.................. 54,361 4.3 Fixed- and variable-rate products
Asset management fees.............. 29,592 2.4 Mutual funds
Loan servicing fees................ 23,398 1.9 Premium finance
Trust fees......................... 18,080 1.4 Self-directed retirement accounts
Other fees......................... 14,461 1.1
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Total fee income................... 458,827 36.4
---------- -----
Total...................... $1,258,752 100.0%
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</TABLE>
For financial information on the Company's business segments, see Part
IV -- "Notes to Consolidated Financial Statements -- Note 15 -- Business
Segments."
ACQUISITIONS
Acquisitions have been significant to the Company's growth strategy. In
April 1998, the Company acquired Sentra Securities Corporation and Spelman &
Co., Inc. ("Sentra-Spelman"). At the date of acquisition, both firms had
approximately 500 registered representatives. The Sentra-Spelman organization
also provides back-office services to three other broker-dealers with an
aggregate of more than 1,200 representatives. In October 1997, the Company
acquired Financial Service Corporation, the parent company of FSC Securities
Corporation, a national securities broker-dealer, licensing approximately 1,500
representatives at the date of acquisition.
In March 1997, the Company acquired the annuity operations of John Alden
Financial Corporation (including John Alden Life Insurance Company of New York
("JANY")) for approximately $238.3 million in cash. Assets acquired totaled
$5.06 billion and annuity reserves assumed totaled $5.16 billion at the date of
acquisition. On October 31, 1997, JANY was merged with and into First SunAmerica
Life Insurance Company ("First SunAmerica"). In January 1997, the Company
acquired The Financial Group, Inc., the parent company of Keogler Morgan &
Company, an independent broker-dealer, and Keogler Investment Advisory Services,
Inc., a fee-based registered investment advisor. At the date of acquisition,
Keogler Morgan & Company had approximately 400 representatives.
In April 1996, the Company assumed a block of annuity contracts aggregating
$958.7 million and acquired related assets aggregating $939.0 million at the
date of acquisition from The Central National Life Insurance Company of Omaha, a
subsidiary of Beneficial Corp., for approximately
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$20.8 million in cash. In February 1996, the Company acquired Ford Life
Insurance Company ("Ford Life") from a subsidiary of Ford Motor Company ("Ford")
for $172.5 million in cash. At the date of acquisition, Ford Life had assets of
$3.15 billion and reserves for fixed annuity contracts of $3.05 billion. Ford
Life was merged with and into SunAmerica Life Insurance Company in December
1996. In January 1996, the Company acquired Advantage Capital Corporation
("Advantage Capital"), a Houston-based broker-dealer with more than 1,000
affiliated independent registered representatives at the date of acquisition. In
December 1995, the Company acquired CalAmerica Life Insurance Company
("CalAmerica"), from its parent, Zenith National Insurance Corp. for $120
million in cash. At the date of acquisition, CalAmerica had assets of $739.9
million and annuity reserves of $645.4 million.
In July 1998, the Company entered into a definitive agreement to acquire
MBL Life Assurance Corporation's individual life and individual and group
annuity businesses (which had approximately $3 billion of fixed annuity reserves
and $2 billion in reserves for universal life policies) for approximately $130
million in cash. The acquisition is subject to customary conditions and required
regulatory approvals and is expected to be completed by the end of December
1998.
LIFE INSURANCE COMPANIES
SunAmerica's five life insurance subsidiaries had combined assets of $35.33
billion at September 30, 1998. Based on the latest available industry data, the
Company believes that its life insurance group ranks among the largest issuers
of fixed and variable annuities in the nation, as measured by 1997 annuity
premiums and deposits, and among the top 2% of all U.S. life insurance
companies, as measured by 1997 total assets.
The Company's flagship life insurance subsidiary is 108-year old SunAmerica
Life Insurance Company, acquired by the Company in 1971. Chartered in Arizona
and licensed in 49 states and the District of Columbia, it had $17.77 billion of
assets at September 30, 1998 and markets single- and flexible-premium fixed
annuities and GICs. Anchor National Life Insurance Company ("Anchor"), founded
in 1965 and acquired by the Company in 1986, had $14.52 billion of assets at
September 30, 1998 and is chartered in Arizona and licensed in 49 states and the
District of Columbia. Anchor markets flexible-premium variable annuities and
GICs. CalAmerica, founded in 1951 and acquired by the Company in 1996, had
$846.8 million of assets at September 30, 1998 and is chartered in California
and licensed in 8 states. CalAmerica markets single- and flexible-premium fixed
annuities. First SunAmerica, founded by the Company in 1978, had $1.94 billion
of assets at September 30, 1998 and is chartered and licensed in New York and
also licensed in New Mexico and Nebraska. First SunAmerica markets fixed
annuities and flexible-premium variable annuities. SunAmerica National Life
Insurance Company ("SunAmerica National"), formed by the Company in 1995 to
market GICs, had $1.36 billion of assets at September 30, 1998 and is chartered
in Arizona and licensed in 38 states and the District of Columbia. SunAmerica
National is currently seeking authority to transact life insurance business in
an additional 10 states.
SunAmerica Life Insurance Company and Anchor each have a "AA-" (Excellent)
claims-paying ability rating from Standard & Poor's Corporation ("S&P"), a "AA"
(Very High) rating from Duff & Phelps Credit Rating Co. ("DCR"), an "A2" (Good)
rating from Moody's Investors Service ("Moody's") and an "A+" (Superior) rating
from industry analyst A.M. Best Company. CalAmerica has an "A" rating from A.M.
Best Company. First SunAmerica has an "A2" (Good) rating from Moody's and an
"A+" (Superior) rating from A.M. Best Company. SunAmerica National has a "AAA"
(Superior) rating, the highest rating issued by S&P.
In addition to distributing its fixed and variable annuity products through
its six wholly owned broker-dealers, the Company distributes its products
through over 700 other independent broker-dealers, full-service securities firms
and financial institutions as well as through independent general insurance
agents. In total, more than 65,000 independent sales representatives nationally
are licensed to sell the Company's annuity products.
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Fixed Annuities and GICs
The Company offers single-premium and flexible-premium deferred annuities
that provide one-, three-, five-, seven-, or ten-year fixed interest rate
guarantees. Although the Company's contracts remain in force an average of seven
to ten years, a majority (approximately 75% at September 30, 1998) reprice
annually at discretionary rates determined by the Company. In repricing, the
Company takes into account yield characteristics of its investment portfolio,
annuity surrender assumptions and competitive industry pricing, among other
factors. Its fixed annuity products offer many of the same features as
conventional certificates of deposit from financial institutions, giving
investors a choice of interest period and yield as well as additional advantages
particularly applicable to retirement planning, such as tax-deferred
accumulation and flexible payout options (including the option of payout over
the life of the annuitant). The average size of a new single-premium fixed
annuity contract sold by the Company in 1998 was approximately $36,000.
The Company augments its retail annuity sales effort with the marketing of
institutional products. At September 30, 1998, the Company had $8.38 billion of
GIC obligations. At that date, approximately 71% of these obligations were
fixed-rate and approximately 29% were variable-rate obligations that reprice
periodically based upon certain defined indexes. Of the total GIC portfolio at
September 30, 1998, approximately 35% was sold to international markets, 21% was
sold to pension plans, 19% was sold to state and local governmental entities,
17% was sold to short-term portfolio asset management firms and 8% was sold to
banks and long-term portfolio asset management firms. The average size of a new
GIC contract sold by the Company in 1998 was approximately $45.0 million.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and GIC obligations. The Company seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. 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 September 30, 1998.
Variable Annuities
The variable annuity products of Anchor and First SunAmerica offer
investors a broad spectrum of fund alternatives, with a choice of investment
managers, as well as guaranteed fixed-rate account options. These companies earn
fee income through the sale, administration and management of the variable
account options of their variable annuity products. They also earn investment
income on monies allocated to the fixed-rate account options of these products.
Variable annuities offer retirement planning features similar to those offered
by fixed annuities, but differ in that the contractholder's rate of return is
generally dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the
contractholder. Because the investment risk is borne by the customer in all but
the fixed-rate account options, these products require significantly less
capital support than fixed annuities. The Company's flagship variable annuity
product, Polaris, is a multimanager variable annuity that offers investors a
choice of 26 variable funds and 7 guaranteed fixed-rate funds. Polaris sales
have increased significantly in recent years due to 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. At September 30, 1998, total variable product reserves were
$13.31 billion, of which $11.41 billion were held in the separate accounts. The
Company's variable annuity products incorporate surrender charges to encourage
persistency. At September 30, 1998, 79% of the Company's variable annuity
reserves held in separate accounts were subject to surrender penalties. The
Company's variable annuity products also generally limit the number of transfers
made in a specified period between account options without the assessment of a
fee. The average size of a new variable annuity contract sold by the Company in
1998 was approximately $50,000.
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Coinsurance Transactions
In 1989 and 1996, the Company sold, through three separate 100% coinsurance
transactions, the general agency division of SunAmerica Life Insurance Company,
the credit life business of Ford Life and the mortality-based business of
CalAmerica. With respect to these coinsurance transactions, SunAmerica Life
Insurance Company and CalAmerica could become liable for in-force amounts ceded
of $1.86 billion and $1.90 billion, respectively, at September 30, 1998, if the
coinsurers were to become unable to meet the obligations assumed under the
respective coinsurance agreements. At September 30, 1998, related policyholder
reserves carried by the coinsurers were $70.1 million and $157.3 million,
respectively. As part of the 1989 SunAmerica Life Insurance Company coinsurance
transaction, assets substantially equal to the policyholder reserves assumed by
the coinsurer are held in trust to secure the obligations of the coinsurer.
Investment Operations
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. The Company manages most of its invested assets internally. 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.
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 September 30, 1998, these assets had an
aggregate fair value of $24.36 billion with a duration of 3.7. The Company's
fixed-rate liabilities include: fixed annuities; GICs; trust deposits; long-term
notes and debentures; and preferred securities of subsidiary grantor trusts. At
September 30, 1998, these liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $23.10 billion with a duration of 3.4. For the years ended September 30,
1998, 1997 and 1996, the Company's yields on average invested assets were 8.63%,
8.61% and 8.74%, respectively; its average rates paid on all interest-bearing
liabilities were 5.70%, 5.66%, and 5.73%, respectively; and it realized net
investment spreads of 3.36%, 3.26% and 3.43%, respectively, on average invested
assets. Net realized investment losses were 0.17%, 0.14% and 0.21% of average
invested assets in 1998, 1997 and 1996, respectively.
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 credit
quality outlook for certain securities, the Company's need for liquidity and
other similar factors.
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The following table summarizes the Company's investment portfolio at
September 30, 1998:
SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
Percent
Carrying of
value portfolio
-------------- ---------
(In thousands)
<S> <C> <C>
Cash and short-term investments............................. $ 1,796,132 6.9%
U.S. government securities.................................. 828,809 3.2
Mortgage-backed securities.................................. 5,911,623 22.7
Other bonds, notes and redeemable preferred stocks.......... 12,060,415 46.3
Mortgage loans.............................................. 3,412,449 13.1
Equity-method partnerships.................................. 779,098 3.0
Cost-method partnerships.................................... 865,953 3.3
Real estate................................................. 53,605 0.2
Common stock................................................ 82,808 0.3
Other invested assets....................................... 274,515 1.0
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Total investments........................................... $26,065,407 100.0%
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</TABLE>
At September 30, 1998, the Bond Portfolio, (excluding $292.0 million of
redeemable preferred stocks) included $17.21 billion of bonds rated by S&P,
Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") or the National
Association of Insurance Commissioners ("NAIC"), and $1.30 billion of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At September 30, 1998, approximately $16.73 billion of the Bond Portfolio
was investment grade, including $6.71 billion of U.S. government/agency
securities and mortgage-backed securities.
At September 30, 1998, the Bond Portfolio included $1.78 billion of bonds
that were not investment grade. These non-investment-grade bonds accounted for
4.5% of the Company's total assets and 6.8% of its invested assets. In addition
to its direct investment in non-investment-grade bonds, the Company has entered
into total return bond swap agreements with an aggregate notional principal
amount of $533.0 million at September 30, 1998.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $1.89 billion at September 30, 1998. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
September 30, 1998, Secured Loans consisted of loans to 310 borrowers spanning
44 industries, with 26% of these assets concentrated in financial institutions
and 15% concentrated in utilities. No other industry concentration constituted
more than 6% of these assets.
Mortgage loans aggregated $3.41 billion at September 30, 1998 and consisted
of 1,538 commercial first mortgage loans with an average loan balance of
approximately $2.2 million, collateralized by properties located in 47 states.
Approximately 27% of the portfolio was multifamily residential, 23% was retail,
17% was office, 11% was manufactured housing, 7% was industrial and 15% was
other types.
Partnership investments totaled $1.65 billion at September 30, 1998,
constituting investments in approximately 661 separate partnerships with an
average size of approximately $2.5 million. This portfolio includes: (i) $867.7
million of partnerships managed by independent money managers that invest in a
broad selection of equity and fixed-income securities; (ii) $640.7 million of
partnerships that make tax-advantaged investments in multifamily housing
properties; and (iii) $136.7 million of partnerships that invest in mortgage
loans and income-producing real estate.
At September 30, 1998, the carrying value (after impairment writedowns) of
all investments in default as to the payment of principal or interest totaled
$55.0 million, which constituted 0.2% of total invested assets.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
and Liquidity."
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MUTUAL FUNDS AND INVESTMENT SERVICES
Through its registered investment advisor, SunAmerica Asset Management
Corp. ("SunAmerica Asset Management"), and its related distributor, the Company
earns fee income by distributing and managing a diversified family of mutual
funds and by providing professional management of individual, corporate and
pension plan portfolios. The Company offers investors an array of equity,
fixed-income, money market and tax-exempt mutual funds. Sales growth in recent
years is primarily due to sales of the Company's "Style Select Series" product
(which was introduced in November 1996) and the introduction in June 1998 of the
"Dogs" of Wall Street. 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. Founded in 1983 and acquired by the Company in
January 1990, SunAmerica Asset Management managed approximately $3.78 billion of
assets at September 30, 1998, including mutual fund assets, private accounts and
certain of the Company's variable annuity assets.
The SunAmerica mutual funds are distributed nationally through a network of
approximately 400 financial institutions and unaffiliated broker-dealers, as
well as by the Company's broker-dealer subsidiaries.
RETIREMENT TRUST SERVICES
Through Resources Trust, acquired in January 1990, the Company earns fee
income by providing administrative and custodial services for approximately
210,000 self-directed retirement accounts. These self-directed retirement
accounts, including IRAs, Keoghs, 401(k) plans, and pension and profit sharing
plans, had combined account assets at September 30, 1998 of approximately $12.95
billion.
Resources Trust also earns investment income on customer cash balances that
are interest-bearing and insured by the Federal Deposit Insurance Corporation.
Resources Trust's services are sold nationally through approximately 18,000
registered representatives affiliated with 1,000 broker-dealers, including the
Company's broker-dealer subsidiaries.
BROKER-DEALERS
The Company owns six broker-dealers: Royal Alliance Associates, Inc.,
acquired in January 1990; SunAmerica Securities, Inc., which commenced business
in 1989; Advantage Capital Corporation, acquired in 1996; FSC Securities
Corporation, acquired by the Company in October 1997; and Sentra Securities
Corp. and Spelman & Co., Inc., each acquired by the Company in April 1998. As a
result of the Company's ongoing recruitment of independent registered
representatives and acquisitions, the Company has increased its network of
representatives from approximately 6,600 at September 30, 1996 to approximately
9,700 currently.
PREMIUM FINANCE
Through its premium finance company, Imperial, the Company earns fee income
by servicing loans that Imperial has originated and sold. Imperial provides
short-term installment loans for borrowers to fund their property and casualty
insurance premiums. These loans are substantially secured by the unearned
premiums associated with the underlying insurance policies. Currently, Imperial
sells and services most of the short-term loans that it originates. Founded in
1972 and acquired in November 1994, Imperial owned or serviced approximately
89,000 loans with an average loan balance of approximately $5,900 at September
30, 1998.
Imperial generally makes loans to borrowers through a network of
approximately 5,200 qualified independent property and casualty insurance agents
who arrange the loan or refer the client to Imperial.
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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 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 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 advisor under the Investment Advisors 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.
8
<PAGE> 10
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
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.
COMPETITION
The businesses conducted by the Company's subsidiaries are highly
competitive. The Company's life insurance subsidiaries compete with other life
insurers, and also compete for customers' funds with a variety of investment
products offered by financial services companies other than life insurance
companies, such as banks, investment advisors, mutual fund companies and other
financial institutions. Within the U.S. life insurance industry, the 100 largest
writers of individual and group annuities account for approximately 96% of total
net annuity premiums written. Net annuity premiums written among the top 100
companies range from less than $100 million to approximately $10 billion
annually. SunAmerica ranks in the top quartile of this group. Certain of these
companies and other life insurers with which the Company competes are
significantly larger and have available to them much greater financial and other
resources. The Company believes the primary competitive factors among life
insurance companies for investment-oriented insurance products, such as
annuities and GICs, include product flexibility, net return after fees,
innovation in product design, the claims-paying ability rating and the name
recognition of the issuing company, the availability of distribution channels
and service rendered to the customer before and after a contract is issued.
Other factors affecting the annuity business include the benefits (including
before-tax and after-tax investment returns) and guarantees provided to the
customer and the commissions paid.
Competitors of SunAmerica Asset Management include a large number of mutual
fund organizations, both independent and affiliated with other financial
services companies, including banks and insurance companies.
Resources Trust competes for retirement plan assets against other trust
companies, brokerage firms, mutual funds, banks and insurance companies.
The Company's broker-dealers face competition from regional firms and
large, national full service and discount brokerage firms.
Imperial faces competition from other premium finance companies and many
large insurance companies who directly finance their own premiums.
9
<PAGE> 11
ITEM 2. PROPERTIES
The Company's executive offices and the principal offices of its life
insurance subsidiaries are in leased premises at 1 SunAmerica Center, Los
Angeles, California. The Company's life insurance subsidiaries also lease office
space in Woodland Hills, California; Houston, Texas; and New York, New York. The
Company's broker-dealers lease space in Phoenix, Arizona; San Diego, California;
Atlanta, Georgia; New York, New York and Houston, Texas. The Company's asset
management subsidiary leases offices in New York, New York. The retirement trust
services subsidiary occupies leased premises in Englewood, Colorado. The
Company's premium finance subsidiary is headquartered in Sherman Oaks,
California.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses are adequate and any further liabilities and costs will not have a
material adverse impact upon the Company's financial position or results of
operations.
10
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fourth quarter 1998 to a vote of
security-holders, through the solicitation of proxies or otherwise.
On November 18, 1998, subsequent to the Company's fiscal year end, the
Company held a special meeting of shareholders in order to vote on the proposed
merger with and into American International Group, Inc. The matter was approved
with 300,221,917 votes for the proposal, 340,475 votes against and 561,536 votes
abstaining.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the current
executive officers of SunAmerica Inc. as of December 18, 1998:
<TABLE>
<CAPTION>
Year
assumed
Present position at present Other positions and other business
Name Age December 18, 1998 position experience within the last five years From-to
- ------------------------- --- ---------------------- -------- ------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Eli Broad 65 Chairman and Chief 1976 (Cofounded Company in 1957)
Executive Officer 1986
President
Jay S. Wintrob 41 Vice Chairman and 1998 Vice Chairman 1995-1998
Chief Operating Executive Vice President 1991-1995
Officer (Joined Company in 1987)
James R. Belardi 41 Executive Vice 1995 Senior Vice President and 1992-1995
President Treasurer
(Joined Company in 1986)
Marc H. Gamsin 43 Senior Vice President 1996 Partner, O'Melveny & Myers LLP 1989-1996
Jana Waring Greer 46 Senior Vice President 1991 (Joined Company in 1974)
Susan L. Harris 41 Senior Vice President, 1998 Senior Vice President, 1995-1998
General Counsel and General Counsel -- Corporate Affairs
Secretary and Secretary
Vice President, General Counsel -- 1994-1995
Corporate Affairs and Secretary
Vice President, Associate General 1989-1994
Counsel and Secretary
(Joined Company in 1985)
Gary W. Krat 51 Senior Vice President 1992 (Joined Company in 1990)
Scott H. Richland 36 Senior Vice President 1997 Senior Vice President & Treasurer 1997-1998
Vice President and Treasurer 1995-1997
Vice President and
Assistant Treasurer 1994-1995
Assistant Treasurer 1993-1994
(Joined Company in 1990)
Scott L. Robinson 52 Senior Vice President 1991 (Joined Company in 1978)
and Controller
James W. Rowan 36 Senior Vice President 1995 Vice President 1993-1995
(Joined Company in 1992)
David R. Bechtel 31 Vice President and 1998 Vice President 1996-1998
Treasurer Deutsche Morgan Grenfell, Inc.
Associate, 1995-1996
UBS Securities LLC
Associate, 1994
Wachtell Lipton Rosen & Katz
Associate, 1993-1994
Wells Fargo Nikko Investment Advisors
</TABLE>
11
<PAGE> 13
EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
<TABLE>
<CAPTION>
Year
assumed
Present position at present Other positions and other business
Name Age December 18, 1998 position experience within the last five years From-to
- ------------------------- --- ---------------------- -------- ------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Karel Carnohan 42 Vice President 1995 Vice President, Equity Analyst, C.J. 1994-1995
Lawrence/Deutsche Bank Securities
Corporation
First Vice President, Corporate 1990-1994
Finance and Investor Relations,
Countrywide Credit Industries, Inc.
Countrywide Mortgage Investments,
Inc.
Michael L. Fowler 44 Vice President 1988 (Joined Company in 1988)
N. Scott Gillis 45 Vice President 1997 Senior Vice President and Controller, 1994-Present
SunAmerica Life Companies
(Joined Company in 1985)
George L. Holdridge, Jr. 41 Vice President 1997 Senior Vice President, 1994-1995
SunAmerica Financial, Inc.
Vice President and Director 1989-1994
of Technology, SunAmerica
Financial, Inc.
(Joined Company in 1983)
Donald E. Spetner 39 Vice President 1997 Vice President, 1989-1997
Corporate Communications,
Nissan North America, Inc.
</TABLE>
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange. The Company's Common Stock is also traded on the Boston,
Midwest and Philadelphia Stock Exchanges. There is no trading or other market
for the Nontransferable Class B Stock.
High and low sales prices, based on the New York Stock Exchange Composite
Price Tape, for the Company's Common Stock for each quarter during the fiscal
years ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
First quarter............................ $45 5/8 $32 $30 53/64 $23 27/64
Second quarter........................... 50 15/16 37 34 24 43/64
Third quarter............................ 58 46 9/16 34 5/64 24 43/64
Fourth quarter........................... 76 1/4 54 3/4 40 53/64 32 29/64
======= ======= ======= =======
</TABLE>
HOLDERS
As of November 30, 1998, the number of holders of record of each class of
common equity of the Company was as follows:
<TABLE>
<CAPTION>
Number
of holders
Title of Class of record
-------------- ----------
<S> <C>
Common Stock (par value $1.00 per share).................... 2,176
Nontransferable Class B Stock (par value $1.00 per share)... 8
==========
</TABLE>
DIVIDENDS
Dividends paid per share on the Company's Common Stock and Nontransferable
Class B Stock for each quarter during the fiscal years ended September 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Common Nontransferable Common Nontransferable
Stock Class B Stock Stock Class B Stock
------- --------------- ------- ---------------
<S> <C> <C> <C> <C>
First quarter................................. $0.1000 $0.0900 $0.0667 $0.0600
Second quarter................................ 0.1000 0.0900 0.0667 0.0600
Third quarter................................. 0.1000 0.0900 0.0667 0.0600
Fourth quarter................................ 0.1500 0.1350 0.0667 0.0600
------- --------------- ------- ---------------
Total......................................... $0.4500 $0.4050 $0.2668 $0.2400
======= =============== ======= ===============
</TABLE>
13
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company and its
subsidiaries should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which are included
elsewhere herein.
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income.............. $ 841,646 $ 679,377 $ 492,756 $ 365,555 $ 294,454
Net realized investment losses..... (41,721) (29,203) (30,314) (33,012) (21,124)
Fee income......................... 458,827 317,703 248,411 198,604 171,085
General and administrative
expenses......................... (310,273) (265,738) (210,650) (165,434) (135,161)
Amortization of deferred
acquisition costs................ (241,167) (165,089) (108,176) (86,107) (69,253)
--------- --------- --------- --------- ---------
Pretax income...................... 707,312 537,050 392,027 279,606 240,001
Income tax expense................. (191,000) (158,000) (117,600) (85,400) (74,700)
--------- --------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES............................ 516,312 379,050 274,427 194,206 165,301
Cumulative effect of change in
accounting for income taxes...... -- -- -- -- (33,500)
--------- --------- --------- --------- ---------
NET INCOME......................... $ 516,312 $ 379,050 $ 274,427 $ 194,206 $ 131,801
========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES.................. $ 2.61 $ 2.01 $ 1.44 $ 1.04 $ 0.87
Cumulative effect of change in
accounting for income taxes... -- -- -- -- (0.18)
--------- --------- --------- --------- ---------
NET INCOME......................... $ 2.61 $ 2.01 $ 1.44 $ 1.04 $ 0.69
========= ========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES.................. $ 2.34 $ 1.81 $ 1.32 $ 0.96 $ 0.80
Cumulative effect of change in
accounting for income taxes... -- -- -- -- (0.18)
--------- --------- --------- --------- ---------
NET INCOME......................... $ 2.34 $ 1.81 $ 1.32 $ 0.96 $ 0.62
========= ========= ========= ========= =========
CASH DIVIDENDS PER SHARE PAID TO
COMMON SHAREHOLDERS:
Nontransferable Class B Stock.... $ 0.4050 $ 0.2400 $ 0.1800 $ 0.1200 $ 0.0800
========= ========= ========= ========= =========
Common Stock..................... $ 0.4500 $ 0.2668 $ 0.2000 $ 0.1333 $ 0.0889
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
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)........................................ 5.4x 4.6x 5.4x 5.8x 5.8x
==== ==== ==== ==== ====
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).............................. 1.5x 1.5x 1.5x 1.5x 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)........................................ 4.9x 3.9x 3.8x 3.4x 2.8x
==== ==== ==== ==== ====
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).............................. 1.5x 1.4x 1.4x 1.4x 1.4x
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments................ $26,065,407 $24,408,178 $16,199,784 $10,808,959 $ 9,280,390
Variable annuity assets
held in separate
accounts................. 11,405,434 9,514,675 6,380,458 5,263,006 4,513,093
Deferred acquisition
costs.................... 996,503 1,118,582 782,300 526,415 581,874
Other assets............... 733,063 595,451 364,279 245,787 280,868
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS............... $39,200,407 $35,636,886 $23,726,821 $16,844,167 $14,656,225
=========== =========== =========== =========== ===========
Reserves for fixed annuity
contracts................ $12,970,549 $14,445,126 $ 9,654,674 $ 4,862,250 $ 4,519,623
Reserves for guaranteed
investment contracts..... 8,380,844 5,553,292 4,169,028 3,607,192 2,783,522
Variable annuity
liabilities related to
separate accounts........ 11,405,434 9,514,675 6,380,458 5,263,006 4,513,093
Trust deposits............. 439,918 427,433 436,048 426,595 442,320
Other payables and accrued
liabilities.............. 905,202 1,097,418 489,672 747,733 860,763
Long-term notes and
debentures............... 1,216,483 1,136,072 573,335 524,835 472,835
Other senior
indebtedness............. -- -- -- -- 28,662
Deferred income taxes...... 394,910 383,764 125,417 146,847 74,319
Preferred securities of
grantor trusts........... 495,000 495,000 237,631 52,631 --
Shareholders' equity....... 2,992,067 2,584,106 1,660,558 1,213,078 961,088
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY...... $39,200,407 $35,636,886 $23,726,821 $16,844,167 $14,656,225
=========== =========== =========== =========== ===========
</TABLE>
15
<PAGE> 17
ITEM 7. 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 years in the period
ended September 30, 1998 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 $516.3 million ($2.61 per basic share and $2.34 per
diluted share) in 1998, compared with $379.1 million ($2.01 per basic share and
$1.81 per diluted share) in 1997 and $274.4 million ($1.44 per basic share and
$1.32 per diluted share) in 1996. 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 "John Alden Acquisition"). During fiscal 1996, the Company
acquired CalAmerica Life Insurance Company ("CalAmerica") on December 29, 1995;
Ford Life Insurance Company ("Ford Life") on February 29, 1996; and certain
annuity contracts from The Central National Life Insurance Company of Omaha (the
"Central National Annuity Contracts") on April 1, 1996 (collectively, the "1996
Acquisitions"). The John Alden Acquisition and the 1996 Acquisitions
(collectively, the "Acquisitions") were accounted for under the purchase method
of accounting, and, therefore, results of operations include those of the
Acquisitions only from their respective dates of acquisition. Consequently,
operating results for fiscal years 1998, 1997 and 1996 are not comparable. On a
pro forma basis, using the historical operating results of the acquired
businesses and assuming the Acquisitions had been consummated on October 1,
1995, the beginning of the earliest period discussed herein, net income would
have been $397.4 million ($2.11 per basic share and $1.90 per diluted share) in
1997 and $323.2 million ($1.73 per basic share and $1.56 per diluted share) in
1996.
PRETAX INCOME totaled $707.3 million in 1998, $537.1 million in 1997, and
$392.0 million in 1996. The 31.7% improvement in 1998 over 1997 and the 37.0%
improvement in 1997 over 1996 primarily resulted from increased net investment
income and fee income. These favorable factors were partially offset by
increased amortization of deferred acquisition costs, higher general and
administrative expenses and, only with respect to 1998, higher net realized
investment losses.
16
<PAGE> 18
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 $841.6 million in 1998 from $679.4
million in 1997 and $492.8 million in 1996. These amounts equal 3.36% on average
invested assets (computed on a daily basis) of $25.03 billion in 1998, 3.26% on
average invested assets of $20.86 billion in 1997 and 3.43% on average invested
assets of $14.36 billion in 1996. On a pro forma basis, assuming the
Acquisitions had been consummated on October 1, 1995, net investment income on
related average invested assets would have been 3.14% in 1997 and 2.97% in 1996.
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 $1.88 billion in 1998, $1.15 billion in 1997 and $1.06 billion in
1996. The difference between the Company's yield on average invested assets and
the rate paid on average interest-bearing liabilities (the "Spread Difference")
was 2.93% in 1998, 2.95% in 1997 and 3.01% in 1996. On a pro forma basis,
assuming the Acquisitions had been consummated on October 1, 1995, the Spread
Difference would have been 2.91% in 1997 and 2.82% in 1996.
Investment income (and the related yields on average invested assets)
totaled $2.16 billion (8.63%) in 1998, compared with $1.80 billion (8.61%) in
1997 and $1.25 billion (8.74%) in 1996. Investment income and the related yields
reflect the effects of the Acquisitions from their respective dates of
acquisition. The invested assets associated with the Acquisitions 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 the invested assets that comprise the remainder of the Company's
portfolio. On a pro forma basis, assuming the Acquisitions had been consummated
on October 1, 1995, the yield on related average invested assets would have been
8.53% in 1997 and 8.37% in 1996. Thus, the increased yields in 1998 and 1997,
when compared to the pro forma 1996 yield, reflect a partial reallocation of
lower-yielding invested assets acquired as part of the Acquisitions into
generally higher-yielding asset classes in which the Company has historically
invested a portion of its portfolio. The increases in investment income also
reflect 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 Acquisitions).
Partnership income increased to $371.1 million (a yield of 23.42% on
related average assets of $1.58 billion) in 1998, compared with $241.5 million
(a yield of 21.00% on related average assets of $1.15 billion) in 1997 and
$178.6 million (a yield of 19.04% on related average assets of $937.8 million)
in 1996. Partnership income includes income recognized by using the cost method
of accounting, which amounted to $211.2 million in 1998, $114.7 million in 1997
and $82.1 million in 1996. 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 historically sought to enhance investment yield through
total return bond swap agreements (the "Total Return Agreements"). However,
because of recent significant market declines in the non-investment-grade bond
sector, the Company recorded losses of $33.7 million on Total Return Agreements
in 1998. The Company recorded income of $35.4 million in 1997 and $32.5 million
in 1996 on Total Return Agreements. (See "Asset-Liability Matching" for
additional discussion of Total Return Agreements.)
Total interest and dividend expense totaled $1.32 billion in 1998, $1.12
billion in 1997 and $761.5 million in 1996. The average rate paid on all
interest-bearing liabilities was 5.70% in 1998, compared with 5.66% in 1997 and
5.73% in 1996. Interest-bearing liabilities averaged $23.15 billion during 1998,
compared with $19.71 billion during 1997 and $13.29 billion during 1996. On a
pro forma basis, assuming the Acquisitions had been consummated on October 1,
1995, the average rate paid on all interest-bearing liabilities would have been
5.62% in 1997 and 5.55% in 1996. These increases in overall rates paid primarily
reflect year-over-year 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.
17
<PAGE> 19
GROWTH IN AVERAGE INVESTED ASSETS since 1996 primarily reflects the impact
of the Acquisitions and growth of the Company's GIC reserves. The Company
acquired $722.5 million of invested assets of CalAmerica on December 29, 1995,
$3.10 billion of invested assets of Ford Life on February 29, 1996, $908.8
million of invested assets associated with the Central National Annuity
Contracts on April 1, 1996 and $5.00 billion of invested assets associated with
the John Alden Acquisition on March 31, 1997. The Company intends to continue to
pursue a strategy of enhancing its internal growth with complementary
acquisitions. On July 15, 1998, the Company entered into a definitive agreement
to acquire MBL Life Assurance Corporation's individual life and individual and
group annuity business (which has approximately $2 billion of individual life
reserves and $3 billion of fixed annuity reserves) for a purchase price of
approximately $130 million in cash. The acquisition is subject to customary
conditions and required regulatory approvals, and is expected to be completed by
the end of December 1998.
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. Fixed annuity premiums totaled $1.80 billion in 1998, compared with
$1.49 billion in 1997 and $993.4 million in 1996. These amounts represent 12%,
15% and 20% of the fixed annuity reserve balance at the beginning of the
respective periods. The decreases in percentages in 1998 and 1997 reflect the
impact of the Acquisitions, which increased fixed annuity reserve balances at
the beginning of the respective periods. Fixed annuity premiums include premiums
for the fixed accounts of variable annuities totaling $1.59 billion, $1.17
billion and $782.6 million, in 1998, 1997 and 1996, respectively. Increases in
premiums for the fixed accounts of variable annuity products principally reflect
higher variable annuity product sales and the use of the fixed accounts for
dollar cost averaging into the variable accounts.
GIC premiums increased to $4.01 billion in 1998 from $2.08 billion in 1997
and $1.02 billion in 1996. These amounts represent 72%, 50% and 28% of the GIC
reserve balance at the beginning of the respective periods. The increases in GIC
premiums 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 size of the Company's GIC reserves increased over
the three-year period to $8.38 billion at September 30, 1998 from $3.61 billion
at September 30, 1995.
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 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 LOSSES totaled $41.7 million in 1998, compared with
$29.2 million in 1997 and $30.3 million in 1996. Net realized investment losses
include impairment writedowns of $109.8 million in 1998, $65.3 million in 1997
and $34.9 million in 1996. Thus, net gains from sales and redemptions of
investments totaled $68.1 million in 1998, $36.1 million in 1997 and $4.6
million in 1996.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $22.90 billion in 1998, $19.13 billion in 1997 and $11.21 billion in
1996, respectively. Sales of
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<PAGE> 20
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 from sales and redemptions of investments fluctuate from
period to period, and represent 0.27%, 0.17%, and 0.03% of average invested
assets for 1998, 1997 and 1996, 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, option, liquidity and interest-rate risk.
Historically, impairment writedowns primarily have been applied to
defaulted bonds. However, in 1998, as a result of equity market declines in the
later part of the fiscal year, impairment writedowns were also applied to
various cost-method partnerships. Impairment writedowns represent 0.44%, 0.31%
and 0.24% of average invested assets for 1998, 1997 and 1996, respectively. For
the five years ended September 30, 1998, impairment writedowns as a percentage
of average invested assets have ranged from 0.24% to 0.63% and have averaged
0.41%. Such writedowns are based upon estimates of the net realizable value of
the applicable assets. Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $204.5 million
in 1998, $141.2 million in 1997 and $104.7 million in 1996. 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. Variable annuity fees represent 1.9%, 1.8% and
1.8% of average variable annuity assets for 1998, 1997 and 1996, respectively.
Variable annuity assets averaged $10.93 billion during 1998, $7.66 billion
during 1997 and $5.75 billion during 1996. Variable annuity premiums, which
exclude premiums allocated to the fixed accounts of variable annuity products,
have aggregated $1.88 billion in 1998, $1.31 billion in 1997 and $929.2 million
in 1996. These amounts represent 20%, 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 $3.47 billion,
$2.47 billion and $1.71 billion in 1998, 1997 and 1996, 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 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. In recent weeks, subsequent to the Company's fiscal
year end, sales of variable annuities have slowed as investors paused to
reevaluate their investment decisions in light of volatile markets. The Company
believes that fluctuating market conditions increase the value of financial
planning services and make the flexibility and security of variable annuities
even more attractive.
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.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of non-proprietary 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
$114.5 million in 1998, $64.9 million in 1997 and $49.8 million in 1996. Broker-
dealer sales (mainly sales of general securities, mutual funds and annuities)
totaled $29.31 billion in 1998, $17.52 billion in 1997 and $12.78 billion in
1996. The increases in sales and net retained commissions reflect a greater
number of registered representatives, higher average production per
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<PAGE> 21
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 $54.4 million
(including $37.4 million attributable to the Acquisitions) in 1998, $35.2
million (including $24.5 million attributable to the Acquisitions) in 1997 and
$22.1 million (including $11.1 million attributable to the Acquisitions) in
1996. 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 $3.12
billion (including $1.85 billion attributable to the Acquisitions) in 1998,
compared with $2.28 billion (including $1.00 billion attributable to the
Acquisitions) in 1997 and $1.42 billion (including $245.8 million attributable
to the Acquisitions) in 1996. These payments represent 13.2% (23.7% of average
fixed annuity reserves associated with the Acquisitions), 12.0% (15.0% of
average fixed annuity reserves associated with the Acquisitions) and 11.1% (9.3%
of average fixed annuity reserves associated with the 1996 Acquisitions),
respectively, of average fixed and variable annuity reserves. Withdrawals
include variable annuity withdrawals from the separate accounts totaling $964.9
million (8.8% of average variable annuity reserves), $827.3 million (10.8% of
average variable annuity reserves) and $637.0 million (11.1% of average variable
annuity reserves) in 1998, 1997 and 1996, respectively. Consistent with the
assumptions used in connection with the Acquisitions, 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 the Acquisitions, withdrawal payments represented
8.7% in 1998, 10.4% in 1997 and 11.6% in 1996 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.
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 $29.6 million on
average assets managed of $2.89 billion in 1998, $25.8 million on average assets
managed of $2.34 billion in 1997 and $25.4 million on average assets managed of
$2.14 billion in 1996. 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, aggregated $853.6 million in
1998, compared with $454.8 million in 1997 and $223.4 million in 1996. The
significant increases in sales principally resulted from sales of the Company's
"Style Select Series" product (which was introduced in November 1996) and the
introduction in June 1998 of the "Dogs" of Wall Street. 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. Sales of
these products totaled $611.1 million in 1998, compared with $267.8 million in
1997, 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 $402.5 million in 1998, $412.8 million in 1997 and $379.9
million in 1996, which represent 17.5%, 22.0% and 21.4%, respectively, of
average mutual fund assets.
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<PAGE> 22
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 $23.4 million on average
loans serviced of $483.0 million in 1998, compared with $24.3 million on average
loans serviced of $490.5 million in 1997 and $23.8 million on average loans
serviced of $457.8 million in 1996.
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 $18.1 million in 1998 (on an average of 208,000 trust accounts) from $17.9
million in 1997 (on an average of 204,000 trust accounts) and $16.7 million in
1996 (on an average of 202,000 trust accounts).
GENERAL AND ADMINISTRATIVE EXPENSES totaled $310.3 million in 1998,
compared with $265.7 million in 1997 and $210.7 million in 1996. General and
administrative expenses reflect the impact of the Acquisitions, as well as the
acquisitions of Sentra-Spelman, Financial Service Corporation and The Financial
Group, Inc. As a result, the number of employees has increased to approximately
2,500 at September 30, 1998 from approximately 2,000 at September 30, 1997 and
approximately 1,600 at September 30, 1996. As a result, compensation (net of
deferrals) has increased to $174.8 million in 1998 from $145.3 million in 1997
and $123.5 million in 1996. 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 $241.2 million in 1998,
compared with $165.1 million in 1997 and $108.2 million in 1996. The increases
in amortization primarily reflect the amortization of the deferred acquisition
costs attributable to the Acquisitions, which aggregated $133.0 million in 1998,
$65.2 million in 1997 and $16.8 million in 1996. 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 $191.0 million in 1998, compared with $158.0
million in 1997 and $117.6 million in 1996, representing effective tax rates of
27% in 1998, 29% in 1997 and 30% in 1996. 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 15.8% to $2.99 billion at September 30, 1998
from $2.58 billion at September 30, 1997, primarily due to $516.3 million of net
income recorded in 1998, which was partially offset by $100.5 million of
dividends paid to shareholders.
On August 20, 1998, the Company entered into an agreement to merge with
American International Group, Inc. ("AIG"). The merger will be treated as a
pooling of interests for accounting purposes, and will be a tax-free
reorganization. Each share of the Company's Common Stock (including
Nontransferable Class B) will be exchanged for 0.855 shares of AIG's common
stock. The transaction was approved by both the Company's and AIG's shareholders
at special meetings on November 18, 1998. The merger is expected to be completed
in late 1998 or early 1999.
On September 22, 1998, the Company announced that it would redeem all of
its Series E Preferred Stock. The redemption was completed on October 30, 1998
and resulted in the issuance of approximately 11.3 million shares of common
stock. For the year ending September 30, 1998, the Series E Preferred Stock was
included in the computation of diluted earnings per share as 12.2 million of
common stock equivalents.
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<PAGE> 23
On October 7, 1998, subsequent to the Company's fiscal year end, the
Company announced that it will redeem all of its 8 1/2% Premium Equity
Redemption Cumulative Security Units ("PERCS Units") on December 6, 1998. In
connection with this redemption, the Company will issue approximately 10.1
million shares of its common stock and will receive $431.3 million in cash
proceeds. For the year ending September 30, 1998, the PERCS Units were included
in the computation of diluted earnings per share as 4.3 million of common stock
equivalents.
BOOK VALUE PER SHARE amounted to $14.45 at September 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 $13.50 at
September 30, 1998 and $11.39 at September 30, 1997. On a pro forma basis,
assuming that the PERCS Units were converted to Common Stock, book value per
share would have been $16.02 at September 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 $15.10 at September 30, 1998 and
$12.47 at September 30, 1997.
INVESTED ASSETS at September 30, 1998 totaled $26.07 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 72% of the Company's total investment
portfolio, had an aggregate fair value that exceeded its amortized cost by
$399.2 million at September 30, 1998, compared with an excess of $398.8 million
at September 30, 1997.
At September 30, 1998, the Bond Portfolio (excluding $292.0 million of
redeemable preferred stocks) included $17.21 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 $1.30 billion of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At September 30, 1998, approximately $16.73 billion of the Bond
Portfolio was investment grade, including $6.71 billion of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1998, the Bond Portfolio included $1.78 billion of bonds
that were not investment grade. These non-investment-grade bonds accounted for
4.5% of the Company's total assets and 6.8% 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
$533.0 million at September 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
September 30, 1998.
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<PAGE> 24
The following table summarizes the Company's rated bonds by rating
classification as of September 30, 1998 (dollars in thousands):
<TABLE>
<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)/ Percent of
[DCR]/{Fitch} Amortized Estimated NAIC Amortized Estimated Amortized Estimated invested
category(1) cost fair value category(2) cost fair value cost fair value assets
- -------------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $10,060,902 $10,397,846 1 $2,260,032 $2,436,591 $12,320,934 $12,834,437 49.24%
BBB+ to BBB-
(Baa1 to
Baa3)
[BBB+ to
BBB-]
{BBB+ to
BBB-} 3,189,664 3,246,243 2 653,558 646,319 3,843,222 3,892,562 14.93
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 216,920 198,649 3 73,663 73,835 290,583 272,484 1.05
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 1,257,636 1,154,397 4 285,700 261,659 1,543,336 1,416,056 5.43
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 35,491 31,274 5 73,349 61,032 108,840 92,306 0.35
CI to D
[DD]
{D} -- -- 6 1,436 968 1,436 968 0.00
----------- ----------- ---------- ---------- ----------- -----------
Total rated
issues $14,760,613 $15,028,409 $3,347,738 $3,480,404 $18,108,351 $18,508,813
=========== =========== ========== ========== =========== ===========
</TABLE>
(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 and Fitch ratings
if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups
listed above, with categories 1 and 2 considered investment grade. The NAIC
categories include $1.30 billion of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $1.89 billion at September 30, 1998. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
September 30, 1998, Secured Loans consisted of $982.0 million of publicly traded
securities and $903.5 million of privately traded securities. These Secured
Loans are composed of loans to 310 borrowers spanning 44 industries, with 26% of
these assets 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.
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<PAGE> 25
MORTGAGE LOANS aggregated $3.41 billion at September 30, 1998 and consisted
of 1,538 commercial first mortgage loans with an average loan balance of
approximately $2.2 million, collateralized by properties located in 47 states.
Approximately 27% of this portfolio was multifamily residential, 23% was retail,
17% was office, 11% was manufactured housing, 7% was industrial and 15% was
other types. At September 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 7% of this portfolio was secured by properties
located in any other single state. At September 30, 1998, there were 59 mortgage
loans with outstanding balances of $10 million or more, which loans collectively
aggregated approximately 30% of this portfolio. At September 30, 1998,
approximately 31% of the mortgage loan portfolio consisted of loans with balloon
payments due before October 1, 2001. During 1998, 1997 and 1996 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 September 30, 1998, approximately 40% 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 attributable to its
mortgage loan portfolio while maintaining attractive yields.
PARTNERSHIP investments totaled $1.65 billion at September 30, 1998,
constituting investments in approximately 661 separate partnerships with an
average size of approximately $2.5 million. This portfolio includes: (i) $867.7
million of partnerships managed by independent money managers that invest in a
broad selection of equity and fixed-income securities, currently including
approximately 4,700 separate issuers; (ii) $640.7 million of partnerships that
make tax-advantaged investments in affordable housing properties, currently
involving approximately 540 multifamily projects in 41 states; and (iii) $136.7
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 September 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
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<PAGE> 26
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
September 30, 1998, these assets had an aggregate fair value of $24.36 billion
with a duration of 3.7. The Company's fixed-rate liabilities include: fixed
annuities; GICs; trust deposits; long-term notes and debentures; and preferred
securities of subsidiary grantor trusts. At September 30, 1998, these
liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $23.10 billion
with a duration of 3.4. The Company's potential exposure due to a 10% increase
in prevailing interest rates from their September 30, 1998 levels is a loss of
$50.8 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 September 30, 1998, the Company had 38 outstanding Swap
Agreements with an aggregate notional principal amount of $1.87 billion. These
agreements mature in various years through 2010 and have an average remaining
maturity of 43 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.
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
25
<PAGE> 27
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.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $55.0 million at September 30,
1998, including $19.7 million of bonds and notes and $35.3 million of mortgage
loans. At September 30, 1998, defaulted investments constituted 0.2% of total
invested assets. At September 30, 1997, defaulted investments totaled $38.0
million, including $15.1 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 September 30, 1998, approximately $15.74 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $717.0 million, while
approximately $3.06 billion of the Bond Portfolio had an aggregate unrealized
loss of $317.8 million. In addition, the Company's investment portfolio
currently provides approximately $209.4 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
26
<PAGE> 28
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
September 30, 1998, had invested assets with a fair value of $2.53 billion and
outstanding senior indebtedness of $1.22 billion, comprising all of the
Company's outstanding senior indebtedness. Additionally, as of September 30,
1998, the Parent had three GICs purchased by local government entities, which
aggregated $213.7 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 $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 10 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 $292.0
million for fiscal 1999, $563.5 million for fiscal 2000, $139.0 million for
fiscal 2001, $297.4 million for fiscal 2002, $112.3 million for fiscal 2003 and
$4.14 billion, in the aggregate, thereafter. On December 6, 1998, the Company is
contractually scheduled to receive $431.3 million upon delivery of 10.1 million
shares of the Company's Common Stock in accordance with the terms of the
Company's PERCS Units.
The Parent received dividends from its regulated life insurance
subsidiaries totaling $143.0 million in September 1998, $118.7 million in April
1997 and $94.3 million in March 1996. The Parent also received dividends of
$12.9 million in fiscal 1998, $17.5 million in fiscal 1997 and $16.0 million in
fiscal 1996 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
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 $894.7 million,
$962.2 million and $1.90 billion, respectively, at September 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 September 30, 1998, related
policyholder reserves carried by the coinsurers were $59.3 million, $10.9
million and $157.3 million, 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
27
<PAGE> 29
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.
In the ordinary course of business, the Company has agreed to make capital
contributions, if required, aggregating approximately $670.2 million, to 121
limited partnerships over the next 5 years in exchange for ownership interests
in such partnerships.
YEAR 2000
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems are not presently year 2000
compliant, which means that because they have historically used only two digits
to identify the year in a date, they will fail to distinguish dates in the
"2000s" from dates in the "1900s." 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 these dates.
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 1997, the Company recorded a $15.0
million provision for estimated programming costs to make necessary repairs of
certain specific noncompliant systems. Management is making expenditures which
it expects to ultimately total $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 calendar 1998. Testing of both the
repaired and replacement systems will be conducted during calendar 1999.
In addition, the Company has distributed a year 2000 questionnaire to
certain of its significant suppliers, distributors, financial institutions,
lessors and others with which it does business to evaluate their year 2000
compliance plans and state of readiness and to determine the extent to which the
Company's systems and applications may be affected by the failure of others to
remediate their own year 2000 issues. To date, however, the Company has received
only preliminary feedback from such parties and has not independently confirmed
any information received from other parties with respect to the year 2000
issues. Therefore, there can be no assurance that such other parties will
complete their year 2000 conversions in a timely fashion or will not suffer a
year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.
ITEM 7A. 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 Disclosure and
Analysis of Financial Condition and Results of Operations on pages 24 through 26
herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules are included on pages S-3 through
S-7 herein. Reference is made to the Index to Financial Statement Schedules on
page S-1 herein.
28
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required under Part III (Items 10, 11, 12 and 13) will be
filed by amendment to Form 10-K, except for the information regarding the
executive officers of the Company, which is included in Part I on pages 11-12.
Based solely on the review of the Forms 3, 4 and 5 furnished to the Company
and certain representations made to the Company, the Company believes that the
only filing deficiencies under Section 16(a) by its directors and executive
officers during 1998 was one late report filed by James R. Belardi, relating to
two gifts of an aggregate of 10 shares.
29
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2(a) Stock Purchase Agreement between the Company and The
American Road Insurance Company, dated as of November 10,
1995, whereby the Company acquired all of the outstanding
stock of Ford Life Insurance Company from The American Road
Insurance Company, a subsidiary of Ford Motor Company, is
incorporated herein by reference to Exhibit 10.1 of the
Company's Form 8-K, filed on December 12, 1995.
2(b) Share Exchange Agreement, dated January 12, 1996, among the
Company, Stanford Ranch, Inc., and the Stockholders of
Stanford Ranch, Inc. named therein, whereby the Company
issued shares of its Common Stock in exchange for all of
the outstanding shares of common stock of Stanford Ranch,
Inc., is incorporated herein by reference to the Company's
Notice of 1996 Annual Meeting and Proxy Statement, filed
January 15, 1996.
2(c) Asset Purchase and Sale Agreement between SunAmerica Life
Insurance Company and John Alden Life Insurance Company,
dated as of November 29, 1996 is incorporated herein by
reference to Exhibit 2(c) to the Company's 1996 Annual
Report on Form 10-K, filed December 10, 1996.
2(d) Stock Purchase Agreement between SunAmerica Life Insurance
Company and John Alden Financial Corporation, dated as of
November 29, 1996, regarding all of the outstanding stock
of John Alden Life Insurance Company of New York, is
incorporated herein by reference to Exhibit 2(d) to the
Company's 1996 Annual Report on Form 10-K, filed December
10, 1996.
2(e) Purchase and Sale Agreement by and among the Company, Anchor
National Life Insurance Company, First SunAmerica Life
Insurance Company and MBL Life Assurance Corporation, dated
as of July 15, 1998.
2(f) Agreement and Plan of Merger, dated as of August 19, 1998,
providing, among other things, for the merger of the
Company with and into American International Group, Inc.
("AIG"), is incorporated herein by reference to AIG's
Current Report on Form 8-K, filed August 24, 1998, File No.
1-8787.
3(a) Restated Charter, dated October 3, 1991, is incorporated
herein by reference to Exhibit 3(a) to the Company's Form 8
dated and filed October 4, 1991, amending the Company's
Annual Report on Form 10-K for the year ended September 30,
1990, filed December 20, 1990.
3(b) Articles Supplementary, dated June 24, 1992, which define
the rights of the holders of the Company's 9 1/4% Preferred
Stock, Series B, are incorporated herein by reference to
Exhibit 3(c) to the Company's 1992 Annual Report on Form
10-K, filed November 30, 1992.
3(c) Amendment to the Company's Restated Articles of
Incorporation, dated February 1, 1993, is incorporated
herein by reference to Exhibit 1 to the Company's Form 8-K,
filed February 3, 1993.
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3(d) Articles Supplementary, dated March 9, 1993, which define
the rights of the holders of the Company's Series D
Mandatory Conversion Premium Dividend Preferred Stock, are
incorporated herein by reference to Exhibit 3(e) to the
Company's Registration Statement No. 33-66048 on Form S-4,
filed July 22, 1993.
3(e) Articles Supplementary, dated August 31, 1993, which define
the rights of the holders of the Company's Adjustable Rate
Cumulative Preferred Stock, Series C, are incorporated
herein by reference to Exhibit 3(f) to the Company's 1993
Annual Report on Form 10-K, filed December 16, 1993.
3(f) Articles Supplementary, dated January 27, 1995, which define
the reacquisition of the Company's Series A Mandatory
Conversion Premium Dividend Preferred Stock, are
incorporated herein by reference to Exhibit 3(g) to the
Company's 1995 Annual Report on Form 10-K, filed November
29, 1995.
3(g) Articles Supplementary, dated October 30, 1995, which define
the rights of the holders of the Company's Series E
Mandatory Conversion Premium Dividend Preferred Stock, are
incorporated herein by reference to Exhibit 3(h) to the
Company's Annual Report on Form 10-K, filed November 29,
1995.
3(h) Articles of Amendment, dated October 30, 1995, are
incorporated herein by reference to Exhibit 3(i) to the
Company's Annual Report on Form 10-K, filed November 29,
1995.
3(i) Articles of Amendment, dated June 7, 1996, are incorporated
herein by reference to Exhibit 3(j) to the Company's Annual
Report on Form 10-K, filed December 10, 1996.
3(j) Articles of Amendment, dated February 14, 1997, are
incorporated herein by reference to Exhibit 3(j) to the
Company's Annual Report on Form 10-K, filed December 10,
1997.
3(k) Bylaws, as amended and restated on November 8, 1996, are
incorporated herein by reference to Exhibit 3(k) to the
Company's Annual Report on Form 10-K, filed December 10,
1996.
4(a) Restated Charter, dated October 3, 1991. See Exhibit 3(a).
4(b) Bylaws, as amended and restated on November 8, 1996. See
Exhibit 3(k).
4(c) Articles Supplementary, dated June 24, 1992. See Exhibit
3(b).
4(d) Articles Supplementary, dated March 9, 1993. See Exhibit
3(d).
4(e) Articles Supplementary, dated August 31, 1993. See Exhibit
3(e).
4(f) Form of Subordinated Indenture, dated as of October 28,
1996, between the Company and The First National Bank of
Chicago, as Trustee, is incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement No.
333-14201 on Form S-3, filed October 16, 1996.
4(g) Senior Indenture, dated as of April 15, 1993, between the
Company and The First National Bank of Chicago, as Trustee,
defining the rights of the holders of the Company's 8 1/8%
Debentures due April 28, 2023 and certain other debt
securities of the Company, is incorporated herein by
reference to Exhibit 4(h) to the Company's 1993 Annual
Report on Form 10-K, filed December 16, 1993.
4(h) Supplemental Indenture, dated as of June 28, 1993,
supplementing the Senior Indenture, dated as of April 15,
1993, is incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement No. 333-14201 on Form
S-3, filed October 16, 1996.
4(i) Supplemental Indenture, dated October 28, 1996,
supplementing the Senior Indenture, dated as of April 15,
1993, as amended by the Supplemental Indenture, dated as of
June 28, 1993, between the Company and The First National
Bank of Chicago, as Trustee, is incorporated herein by
reference to Exhibit 4.7 to the Company's Current Report on
Form 8-K, filed November 6, 1996.
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
4(j) Junior Subordinated Indenture, dated as of March 15, 1995,
as supplemented by the First Supplemental Indenture, dated
as of March 15, 1995, defining the rights of the holders of
the Company's 9.95% Junior Subordinated Debentures, Series
A, due 2044, between the Company and The First National
Bank of Chicago, is incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement No.
33-62405 on Form S-3, filed September 6, 1995.
4(k) Form of Second Supplemental Indenture, dated October 11,
1995, to the Junior Subordinated Indenture dated as of
March 15, 1995, defining the rights of the holders of the
Company's 8.35% Junior Subordinated Debentures due 2044,
between the Company and The First National Bank of Chicago,
as Trustee, is incorporated herein by reference to Exhibit
4.12 to the Company's Registration Statement No. 33-64205
on Form S-3, filed September 6, 1995.
4(l) Supplemental Indenture, dated October 28, 1996,
supplementing the Junior Subordinated Indenture, dated as
of March 15, 1995, between the Company and The First
National Bank of Chicago, as Trustee, is incorporated
herein by reference to Exhibit 4.8 to the Company's Current
Report on Form 8-K, filed November 6, 1996.
4(m) Fourth Supplemental Indenture, dated November 13, 1996, to
the Junior Subordinated Indenture, dated as of March 15,
1995, defining the rights of the holders of the Company's
8.30% Junior Subordinated Debentures due 2045, between the
Company and The First National Bank of Chicago, as Trustee,
is incorporated herein by reference to Exhibit 4.16 to the
Company's Current Report on Form 8-K, filed November 12,
1996.
4(n) Purchase Contract Agreement, dated November 6, 1996, between
the Company and The Bank of New York, as Purchase Contract
Agent (including Form of Security Certificate), is
incorporated herein reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K, filed November 6,
1996.
4(o) Pledge Agreement, dated November 6, 1996, among the Company,
The First National Bank of Chicago, as Collateral Agent,
and The Bank of New York, as Purchase Contract Agent, is
incorporated herein by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K, filed November 6,
1996.
4(p) Prepaid Securities Indenture, dated November 1, 1996,
between the Company and The Bank of New York, as Trustee,
is incorporated herein by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K, filed November 6,
1996.
4(q) Supplemental Indenture, dated November 6, 1996, to the
Prepaid Securities Indenture (including Form of Certificate
for the Prepaid Securities), is incorporated herein by
reference to Exhibit 4.6 to the Company's Current Report on
Form 8-K, filed November 6, 1996.
4(r) Form of Senior Indenture, dated November 15, 1991, defining
the rights of the holders of the Company's 9% Notes due
January 15, 1999 and 9.95% Debenture due February 1, 2012
between the Company and Security Pacific National Bank,
Trustee, is incorporated herein by reference to Exhibit 4.1
to the Company's Registration Statement No. 33-44084 on
Form S-3, filed November 20, 1991.
4(s) Tri-Party Agreement, dated as of July 1, 1993, among The
First National Bank of Chicago, Bank of America, NT & SA
and the Company, appointing The First National Bank of
Chicago as Successor Trustee to Bank of America NT & SA for
the Company's 9% Notes due January 15, 1995 and 9.95%
Debentures due February 1, 2012, is incorporated herein by
reference to Exhibit 4(i) to the Company's 1993 Annual
Report on Form 10-K, filed December 16, 1993.
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
4(t) Form of Amended and Restated Declaration of Trust of
SunAmerica Capital Trust I, dated as of June 6, 1995, among
the Company and the Trustees of the Trust, is incorporated
herein by reference to Exhibit 4.5 to the Company's
Registration Statement Nos. 33-56961 and 33-56961-01 on
Form S-4, filed April 12, 1995.
4(u) Form of Amended and Restated Declaration of Trust of
SunAmerica Capital Trust II, dated as of October 11, 1995,
among the Company and the Trustees of the Trust, is
incorporated herein by reference to Exhibit 4.10 to the
Company's Registration Statement Nos. 33-62405 and
33-62405-01 on Form S-3, filed September 6, 1995.
4(v) Amended and Restated Declaration of Trust of SunAmerica
Capital Trust III, dated as of November 13, 1996, among the
Company and Trustees of the Trust, is incorporated herein
by reference to Exhibit 4.13 to the Company's Current
Report on Form 8-K, filed November 12, 1996.
4(w) Form of Guarantee Agreement, dated October 11, 1995, between
the Company and The Bank of New York, as Trustee, relating
to the Preferred Securities of SunAmerica Capital Trust II,
is incorporated herein by reference to Exhibit 4.14 to the
Company's Registration Statement Nos. 33-62405 and
33-62405-01 on Form S-3, filed September 6, 1995.
4(x) Form of Guarantee Agreement, dated November 13, 1996,
between the Company and The Bank of New York, as Trustee,
relating to the Preferred Securities of SunAmerica Capital
Trust III, is incorporated herein by reference to Exhibit
4.19 of the Company's Registration Statement Nos. 333-14201
and 333-14201-01 on Form S-3, filed October 16, 1996.
4(y) 9.95% Debentures due August 1, 2008, offered by the Company
in exchange for issued and outstanding 9.95% Debentures due
February 1, 2012, issued pursuant to a Senior Indenture,
dated as of November 1, 1991. See Exhibit 4(r).
10(a) Employment Agreement, dated July 14, 1992, between the
Company and Michael L. Fowler, is incorporated herein by
reference to Exhibit 10(f) to the Company's 1992 Annual
Report on Form 10-K, filed November 30, 1992.
10(b) Employment Agreement, dated April 27, 1995, between the
Company and Jay S. Wintrob, is incorporated herein by
reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q, for the quarter ended June 30, 1995,
filed August 14, 1995.
10(c) Employment Agreement, dated August 15, 1997, between the
Company and Gary W. Krat, is incorporated herein by
reference to Exhibit 10(d) to the Company's 1997 Annual
Report on Form 10-K, filed December 10, 1997.
10(d) 1988 Employee Stock Plan is incorporated herein by reference
to Exhibit B to the Company's and Kaufman and Broad Home
Corporation's Notice of and Joint Proxy Statement for
Special Meeting of Shareholders held on February 21, 1989,
filed January 24, 1989.
10(e) Amended and Restated 1978 Employee Stock Option Program, is
incorporated herein by reference to Appendix A to the
Company's Notice of 1987 Annual Meeting of Shareholder's
and Proxy Statement, filed March 24, 1987.
10(f) Executive Deferred Compensation Plan is incorporated herein
by reference to Exhibit 10(1) to the Company's 1985 Annual
Report on Form 10-K, filed February 27, 1986.
10(g) 1987 Restricted Stock Plan is incorporated herein by
reference to Appendix A to the Company's Notice of 1988
Annual Meeting of Shareholders and Proxy Statement, filed
March 22, 1988.
10(h) Executive Deferred Compensation Plan, dated as of October 1,
1989, is incorporated herein by reference to Exhibit 10(h)
to the Company's 1994 Annual Report on Form 10-K, filed
December 1, 1994.
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10(i) SunAmerica Supplemental Deferral Plan is incorporated herein
by reference to Exhibit 10(m) to the Company's 1989 Annual
Report on Form 10-K, filed December 20, 1989.
10(j) Long-Term Performance-Based Incentive Plan, Amended and
Restated 1997, is incorporated herein by reference to
Appendix C to the Company's Notice of 1997 Annual Meeting
of Shareholders and Proxy Statement, filed December 30,
1996.
10(k) Performance Incentive Compensation Plan is incorporated
herein by reference to the Company's Notice of 1995 Annual
Meeting of Shareholders and Proxy Statement, filed December
1, 1994.
10(l) 1995 Performance Stock Plan as amended and restated is
incorporated herein by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, filed May 15, 1997.
10(m) Registered Representatives' Deferred Compensation Plan is
incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement No. 333-10523 on Form S-3,
filed August 20, 1996.
10(n) Deferred Compensation Agreement is incorporated herein by
reference to Exhibit 4.2 of the Company's Registration No.
333-10523 on Form S-3, filed August 20, 1996.
10(o) Amendment to Performance Incentive Compensation Plan is
incorporated herein by reference to the Company's Notice of
1996 Annual Meeting of Shareholders and Proxy Statement,
filed January 15, 1996.
10(p) Amendment and Restatement, dated December 31, 1996, to the
$250,000,000 Credit Agreement, dated as of October 27,
1996, among the Company and SunAmerica Financial, Inc. as
Borrowers and Citibank, N.A. as Agent for the banks named
therein, is incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q, for
the quarter ended December 31, 1996, filed February 13,
1997.
10(q) Executive Savings Plan, effective January 1, 1997, is
incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q, for the quarter
ended December 31, 1996, filed February 13, 1997.
10(r) SunAmerica 1997 Employee Incentive Stock Plan is
incorporated herein by reference to Appendix A to the
Company's Notice of 1997 Annual Meeting and Proxy
Statement, filed December 30, 1996.
10(s) SunAmerica Long-Term Incentive Plan is incorporated herein
by reference to Appendix B to the Company's Notice of 1997
Annual Meeting and Proxy Statement, filed December 30,
1996.
10(t) Non-Employee Directors' Stock Option Plan is incorporated
herein by reference to Appendix D to the Company's Notice
of 1997 Annual Meeting and Proxy Statement, filed December
30, 1996.
10(u) SunAmerica 1997 Employee Stock Purchase Plan is incorporated
herein by reference to Appendix A to the Company's Notice
of 1998 Annual Meeting and Proxy Statement, filed January
2, 1998.
10(v) 1998 Long-Term Performance-Based Incentive Plan is
incorporated herein by reference to Appendix B to the
Company's Notice of 1998 Annual Meeting and Proxy
Statement, filed on January 2, 1998.
10(w) List of Executive Compensation Plans and Arrangements.
12(a) Statement re Computation of ratio of earnings to fixed
charges.
12(b) Statement re Computation of ratio of earnings to combined
fixed charges and preferred stock dividends.
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
REPORTS ON FORM 8-K
On July 17, 1998, the Company filed a Current Report on Form 8-K to file a
press release in connection with the Company's acquisition of, on behalf of its
subsidiary, Anchor National Life Insurance Company, a block of individual life
and individual and group annuity business of MBL Life Assurance Corporation.
On August 25, 1998, the Company filed a Current Report on Form 8-K to file
the Agreement and Plan of Merger, dated August 19, 1998, between the Company and
American International Group, Inc. ("AIG") (incorporated by reference to Form
8-K filed by AIG on August 24, 1998, File No. 1-8787), and a Joint Press Release
dated August 20, 1998, issued by the Company and AIG (incorporated by reference
to Form 8-K filed by AIG on August 20, 1998, File No. 1-8787).
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 18, 1998 By: SCOTT L. ROBINSON
------------------------------------
Scott L. Robinson
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
ELI BROAD Chairman, President December 18, 1998
- ------------------------------------------------ and Chief Executive Officer
Eli Broad (Principal Executive Officer)
JAY S. WINTROB Vice Chairman, Chief Operating December 18, 1998
- ------------------------------------------------ Officer and Director
Jay S. Wintrob
JAMES R. BELARDI Executive Vice President December 18, 1998
- ------------------------------------------------ (Principal Financial Officer)
James R. Belardi
SCOTT L. ROBINSON Senior Vice President and December 18, 1998
- ------------------------------------------------ Controller (Principal
Scott L. Robinson Accounting Officer)
WILLIAM F. ALDINGER Director December 18, 1998
- ------------------------------------------------
William F. Aldinger
PHILIP G. HEASLEY Director December 18, 1998
- ------------------------------------------------
Philip G. Heasley
DAVID O. MAXWELL Director December 18, 1998
- ------------------------------------------------
David O. Maxwell
BARRY MUNITZ Director December 18, 1998
- ------------------------------------------------
Barry Munitz
LESTER POLLOCK Director December 18, 1998
- ------------------------------------------------
Lester Pollack
CARL E. REICHARDT Director December 18, 1998
- ------------------------------------------------
Carl E. Reichardt
SANFORD C. SIGOLOFF Director December 18, 1998
- ------------------------------------------------
Sanford C. Sigoloff
HAROLD M. WILLIAMS Director December 18, 1998
- ------------------------------------------------
Harold M. Williams
KAREN HASTIE WILLIAMS Director December 18, 1998
- ------------------------------------------------
Karen Hastie Williams
</TABLE>
36
<PAGE> 38
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
----------------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of September 30, 1998 and
1997...................................................... F-3
Consolidated Income Statement for the years ended September
30, 1998, 1997 and 1996................................... F-4
Consolidated Statement of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... F-5 through F-6
Notes to Consolidated Financial Statements.................. F-7 through F-29
</TABLE>
Separate financial statements of subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted because
they do not individually constitute a significant subsidiary.
F-1
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of SunAmerica Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of SunAmerica Inc. and its
subsidiaries at September 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1998, 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.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
F-2
<PAGE> 40
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments........................... $ 1,796,132 $ 993,349
Bonds, notes and redeemable preferred stocks available for
sale, at fair value (amortized cost: 1998,
$18,401,656,000; 1997, $18,124,837,000)................ 18,800,847 18,523,655
Mortgage loans............................................ 3,412,449 3,139,309
Common stocks available for sale, at fair value (cost:
1998, $34,843,000; 1997, $32,821,000).................. 82,808 96,541
Equity-method partnerships................................ 779,098 561,336
Cost-method partnerships.................................. 865,953 725,457
Real estate............................................... 53,605 81,569
Other invested assets..................................... 274,515 286,962
----------- -----------
Total investments......................................... 26,065,407 24,408,178
Variable annuity assets held in separate accounts........... 11,405,434 9,514,675
Accrued investment income................................... 297,313 296,637
Deferred acquisition costs.................................. 996,503 1,118,582
Other assets................................................ 435,750 298,814
----------- -----------
TOTAL ASSETS................................................ $39,200,407 $35,636,886
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts...................... $12,970,549 $14,445,126
Reserves for guaranteed investment contracts.............. 8,380,844 5,553,292
Trust deposits............................................ 439,918 427,433
Payable to brokers for purchases of securities............ 91,463 266,477
Income taxes currently payable............................ 2,684 2,025
Other liabilities......................................... 811,055 828,916
----------- -----------
Total reserves, payables and accrued liabilities.......... 22,696,513 21,523,269
----------- -----------
Variable annuity liabilities related to separate accounts... 11,405,434 9,514,675
----------- -----------
Long-term notes and debentures.............................. 1,216,483 1,136,072
----------- -----------
Deferred income taxes....................................... 394,910 383,764
----------- -----------
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.............................................. 179,526 179,076
Additional paid-in capital................................ 755,776 750,401
Retained earnings......................................... 1,596,220 1,180,446
Net unrealized gains on debt and equity securities
available for sale..................................... 196,272 209,910
----------- -----------
Total shareholders' equity................................ 2,992,067 2,584,106
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $39,200,407 $35,636,886
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 41
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
(In thousands, except per-share amounts)
<S> <C> <C> <C>
Investment income..................................... $ 2,160,463 $ 1,795,826 $1,254,288
----------- ----------- ----------
Interest expense on:
Fixed annuity contracts............................. (721,490) (644,426) (410,269)
Guaranteed investment contracts..................... (426,496) (314,144) (252,027)
Trust deposits...................................... (9,400) (9,726) (9,968)
Senior indebtedness................................. (120,253) (106,279) (69,033)
----------- ----------- ----------
Total interest expense.............................. (1,277,639) (1,074,575) (741,297)
----------- ----------- ----------
Dividends paid on preferred securities of grantor
trusts.............................................. (41,178) (41,874) (20,235)
----------- ----------- ----------
NET INVESTMENT INCOME................................. 841,646 679,377 492,756
----------- ----------- ----------
NET REALIZED INVESTMENT LOSSES........................ (41,721) (29,203) (30,314)
----------- ----------- ----------
Fee income:
Variable annuity fees............................... 204,474 141,204 104,661
Net retained commissions............................ 114,461 64,911 49,824
Surrender charges................................... 54,361 35,241 22,086
Asset management fees............................... 29,592 25,764 25,413
Loan servicing fees................................. 23,398 24,264 23,846
Trust fees.......................................... 18,080 17,912 16,684
Other fees.......................................... 14,461 8,407 5,897
----------- ----------- ----------
TOTAL FEE INCOME...................................... 458,827 317,703 248,411
----------- ----------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES................... (310,273) (265,738) (210,650)
----------- ----------- ----------
AMORTIZATION OF DEFERRED ACQUISITION COSTS............ (241,167) (165,089) (108,176)
----------- ----------- ----------
PRETAX INCOME......................................... 707,312 537,050 392,027
Income tax expense.................................... (191,000) (158,000) (117,600)
----------- ----------- ----------
NET INCOME............................................ $ 516,312 $ 379,050 $ 274,427
=========== =========== ==========
NET INCOME PER SHARE:
Basic............................................... $ 2.61 $ 2.01 $ 1.44
=========== =========== ==========
Diluted............................................. $ 2.34 $ 1.81 $ 1.32
=========== =========== ==========
</TABLE>
See accompanying notes
F-4
<PAGE> 42
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 516,312 $ 379,050 $ 274,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts...................... 721,490 644,426 410,269
Guaranteed investment contracts.............. 426,496 314,144 252,027
Trust deposits............................... 9,400 9,726 9,968
Net realized investment losses................. 41,721 29,203 30,314
Accretion of net discounts on investments...... (61,691) (38,684) (28,610)
Provision for deferred income taxes............ 22,477 128,001 (3,457)
Change in:
Accrued investment income....................... (881) (59,214) (10,347)
Deferred acquisition costs...................... (48,187) (78,564) (50,495)
Other assets.................................... (47,894) (32,846) (18,958)
Income taxes currently payable.................. (3,687) (84,424) 19,052
Other liabilities............................... (15,653) 157,598 38,275
Other, net........................................ 1,247 (1,652) 15,721
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 1,561,150 1,366,764 938,186
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of:
Bonds, notes and redeemable preferred stocks.... (21,020,936) (19,506,303) (11,476,827)
Mortgage loans.................................. (1,048,059) (990,408) (320,748)
Partnerships.................................... (1,372,571) (1,062,133) (712,749)
Other investments, excluding short-term
investments.................................. (398,387) (269,538) (132,711)
Net assets of acquired businesses............... (44,784) 173,239 62,790
Sales of:
Bonds, notes and redeemable preferred stocks.... 16,978,966 13,108,441 7,490,441
Mortgage loans.................................. -- 333,763 --
Partnerships.................................... 786,919 679,169 318,303
Other investments, excluding short-term
investments.................................. 73,676 92,626 63,556
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks.... 3,704,503 4,425,246 2,891,448
Mortgage loans.................................. 774,408 428,636 199,564
Partnerships.................................... 156,708 321,901 183,014
Other investments, excluding short-term
investments.................................. 373,178 180,868 50,819
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES............. (1,036,379) (2,084,493) (1,383,100)
------------ ------------ ------------
</TABLE>
F-5
<PAGE> 43
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders............ $ (100,538) $ (67,819) $ (61,721)
Premium receipts on:
Fixed annuity contracts............................. 1,797,798 1,490,556 993,376
Guaranteed investment contracts..................... 4,007,478 2,076,941 1,019,275
Net exchanges from the fixed accounts of variable
annuity contracts................................... (1,365,106) (660,332) (260,635)
Receipts of trust deposits............................ 877,698 787,599 454,237
Withdrawal payments on:
Fixed annuity contracts............................. (2,158,737) (1,454,718) (786,724)
Guaranteed investment contracts..................... (1,607,875) (1,010,127) (708,743)
Trust deposits...................................... (874,615) (805,937) (454,718)
Claims and annuity payments on fixed annuity
contracts........................................... (474,851) (387,181) (232,361)
Net proceeds from issuances of long-term notes and
debentures.......................................... 98,544 559,332 47,478
Net proceeds from issuances of preferred securities of
subsidiary grantor trusts........................... -- 299,586 179,476
Payment for redemption of preferred securities of a
subsidiary grantor trust............................ -- (52,631) --
Net proceeds from issuance of Preferred Stock......... -- -- 240,547
Payments for redemptions of Preferred Stock........... -- (136,549) --
Net proceeds from issuance of Common Stock............ -- 577,268 --
Other, net............................................ 78,216 (34,273) (310,560)
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 278,012 1,181,715 118,927
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS......................................... 802,783 463,986 (325,987)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD.............................................. 993,349 529,363 855,350
----------- ----------- ----------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 1,796,132 $ 993,349 $ 529,363
=========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness......................... $ 156,511 $ 130,461 $ 66,037
=========== =========== ==========
Income taxes paid, net of refunds received............ $ 172,441 $ 114,423 $ 102,005
=========== =========== ==========
</TABLE>
See accompanying notes
F-6
<PAGE> 44
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS
SunAmerica Inc. (the "Company") conducts its business through five
segments: annuity operations, asset management, retirement trust services,
broker-dealer operations and premium financing. Annuity operations, which
include the sale and administration of fixed and variable annuities and
guaranteed investment contracts, are conducted through the Company's five life
insurance subsidiaries: SunAmerica Life Insurance Company; Anchor National Life
Insurance Company; CalAmerica Life Insurance Company ("CalAmerica"); First
SunAmerica Life Insurance Company; and SunAmerica National Life Insurance
Company. Asset management, which includes the sale and management of mutual
funds, is conducted by SunAmerica Asset Management Corp. Retirement trust
services are provided by Resources Trust Company and include custodial and
administrative services for self-directed retirement plans. Broker-dealer
operations include the sale of securities and financial services products, and
are conducted by the Company's six broker-dealer subsidiaries: Royal Alliance
Associates, Inc.; SunAmerica Securities, Inc.; Advantage Capital Corporation;
FSC Securities Corporation; Sentra Securities Corporation; and Spelman & Co.,
Inc. Premium financing is provided by Imperial Premium Finance, Inc. and
involves the origination, sale and servicing of short-term premium finance
loans.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level of
sales of the Company's financial products is influenced by many factors,
including general market rates of interest, strength, weakness and volatility of
equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets managed in mutual funds
and held in separate accounts.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of the Company and all of its wholly owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
On August 29, 1997, the Company paid a three-for-two stock split; on August
30, 1996, the Company paid a two-for-one stock split; and on November 10, 1995,
the Company paid a three-for-two stock split (collectively, the "Stock Splits").
The Stock Splits were effected in the form of stock dividends on the Company's
Common Stock and Nontransferable Class B Stock. The par value of the shares paid
in connection with the Stock Splits was charged to Additional Paid-In Capital in
the balance sheet. Per-share amounts, average shares outstanding, stock option
plan data and related prices have been restated, for all periods presented, to
reflect the Stock Splits.
INVESTMENTS. Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such
F-7
<PAGE> 45
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments are carried at cost plus accrued interest, which approximates fair
value, have maturities of three months or less and are considered cash
equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholders' equity.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Real estate is carried at the lower of cost or fair value.
Partnerships are accounted for by using the equity method if the Company
exercises significant influence over their operating affairs; otherwise, the
cost method is used. For partnerships that invest in tax-advantaged affordable
housing units, interest is capitalized during construction. The Company invests
in such partnerships principally with the intent to syndicate them to
third-party investors once construction of the underlying projects is completed.
Investments in such partnerships are accounted for by using the equity method
and sales of such partnerships are accounted for as sales of real estate.
Because the Company provides certain operating and yield guarantees to the
buyers, the gain realized upon sale is deferred, after recognition of
syndication compensation, and amortized over a 15-year period. Syndication
compensation, imputed interest and amortization of deferred gains are included
in Investment Income in the income statement. The carrying value of partnerships
that are determined by the general partner to have declines in value that are
other than temporary are reduced to net realizable value.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
Prior to September 24, 1998, the Company entered into certain combined
structured note transactions which have been accounted for as separate notes and
in accordance with the provisions of Consensus No. 96-12 of the Emerging Issues
Task Force. At its November 1998 meeting, the task force issued Consensus No.
98-15 which concludes that combined structured note transactions entered into
after September 24, 1998 should be accounted for as a unit. If the Company had
accounted for these notes as a unit, net income for 1998 would have been
increased by $72,103,000 (or $0.33 per diluted share) to $588,415,000 (or $2.67
per diluted share).
INTEREST RATE SWAP AGREEMENTS. The net differential to be paid or received
on interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Investment Income or Interest
Expense in the income statement. Initially, Swap Agreements are designated as
hedges and, therefore, are not marked to market. However, when a hedged
asset/liability is sold or repaid before the related Swap Agreement matures, the
Swap Agreement is marked to market and any gain/loss is classified with any
gain/loss realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting change in
fair value is included in Investment Income in the income statement. When a Swap
Agreement that is designated as a hedge is terminated before its contractual
maturity, any resulting gain/loss is credited/charged to the carrying value of
the asset/liability that it hedged and is treated as premium/discount for the
remaining life of the asset/liability.
F-8
<PAGE> 46
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TOTAL RETURN CORPORATE BOND SWAP AGREEMENTS. Total return corporate bond
swap agreements ("Total Return Agreements") have been entered into for
investment purposes, and, accordingly, are marked to market with the related
gain/loss classified as Investment Income in the income statement.
DEFERRED ACQUISITION COSTS. Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Costs incurred to sell mutual funds are also deferred
and amortized over the estimated lives of the funds obtained. Deferred
acquisition costs consist of commissions and other costs that vary with, and are
primarily related to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains/losses on debt and equity securities available for sale
that is credited or charged directly to shareholders' equity. Deferred
Acquisition Costs have been decreased by $145,200,000 at September 30, 1998 and
$139,600,000 at September 30, 1997 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES. The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives administrative fees for managing the
funds and other fees for assuming mortality and certain expense risks. Such fees
are included in Variable Annuity Fees in the income statement.
GOODWILL. Goodwill, amounting to $91,886,000 at September 30, 1998, is
amortized by using the straight-line method over periods ranging from 25 to 40
years and is included in Other Assets in the balance sheet. Goodwill is
evaluated for impairment when events or changes in economic conditions indicate
that the carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES. Contractholder reserves for fixed annuity
contracts and guaranteed investment contracts are accounted for as
investment-type contracts in accordance with Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," and are recorded at accumulated value (premiums received, plus
accrued interest, less withdrawals and assessed fees).
FEE INCOME. Variable annuity fees, asset management fees, trust fees and
surrender charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade date basis. Loan servicing fees are recognized
as income ratably over the life of the serviced loans and include the difference
between the loan yield and the rate earned by the purchasers of the loans.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130 is
effective for the Company as of October 1, 1998 and is not included in these
financial statements.
F-9
<PAGE> 47
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 131 establishes standards for the disclosure of information about the
Company's operating segments. SFAS 131 is effective for the year ending
September 30, 1999 and is not included in these financial statements.
Implementation of SFAS 130 and SFAS 131 will not have an impact on the
Company's results of operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 is effective for the Company as of October 1, 1999 and is
not included in these financial statements. The Company has not completed its
analysis of the effect of SFAS 133, but management believes that it will not
have a material impact on the Company's results of operations, financial
condition or liquidity.
NOTE 3 -- PENDING MERGER WITH AMERICAN INTERNATIONAL GROUP, INC.
On August 20, 1998, the Company announced that it has entered into a
definitive agreement to merge with and into American International Group, Inc.
("AIG"). Under the terms of the agreement, each share of the Company's Common
Stock (including Nontransferable Class B) will be exchanged for 0.855 shares of
AIG's common stock. The transaction will be treated as a pooling of interests
for accounting purposes and will be a tax-free reorganization. The transaction
was approved by both the Company's and AIG's shareholders on November 18, 1998,
and, subject to various regulatory approvals, will be completed in late 1998 or
early 1999.
F-10
<PAGE> 48
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- EARNINGS PER SHARE
The calculations of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands, except per-share amounts)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income............................................... $516,312 $379,050 $274,427
-------- -------- --------
Less preferred stock dividends:
9 1/4% Preferred Stock, Series B....................... -- (5,754) (8,124)
Adjustable Rate Cumulative Preferred Stock, Series C... -- (28) (3,408)
Series D Mandatory Conversion Premium Dividend
Preferred Stock..................................... -- -- (4,713)
Series E Mandatory Conversion Premium Dividend
Preferred Stock..................................... (12,400) (12,400) (10,815)
-------- -------- --------
Total preferred stock dividends.......................... (12,400) (18,182) (27,060)
-------- -------- --------
Income available to common shareholders.................. $503,912 $360,868 $247,367
======== ======== ========
Average common shares issued and outstanding............. 195,405 182,640 175,118
Less common shares issued and outstanding but not vested
to participants under various employee stock plans..... (2,382) (3,259) (3,527)
-------- -------- --------
Average shares outstanding............................... 193,023 179,381 171,591
======== ======== ========
Basic earnings per share................................. $ 2.61 $ 2.01 $ 1.44
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income............................................... $516,312 $379,050 $274,427
-------- -------- --------
Less preferred stock dividends:
9 1/4% Preferred Stock, Series B....................... -- (5,754) (8,124)
Adjustable Rate Cumulative Preferred Stock, Series C... -- (28) (3,408)
-------- -------- --------
Total preferred stock dividends.......................... -- (5,782) (11,532)
-------- -------- --------
Income available to common shareholders.................. $516,312 $373,268 $262,895
======== ======== ========
Average common shares issued and outstanding............. 195,405 182,640 175,118
Plus incremental shares from potential common stock:
Average number of shares arising from outstanding
employee stock plans................................ 8,472 5,612 4,147
Average number of shares issuable upon conversion of
Series D Mandatory Conversion Premium Dividend
Preferred Stock..................................... -- -- 3,876
Average number of shares issuable upon conversion of
Series E Mandatory Conversion Premium Dividend
Preferred Stock..................................... 12,216 14,301 16,212
Average number of shares issuable upon conversion of
Premium Equity Redemption Cumulative Security
Units............................................... 4,311 3,173 --
-------- -------- --------
Average shares outstanding............................... 220,404 205,726 199,353
======== ======== ========
Diluted earnings per share............................... $ 2.34 $ 1.81 $ 1.32
======== ======== ========
</TABLE>
F-11
<PAGE> 49
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- 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, for a total cash purchase price of
approximately $238,282,000 (collectively, the "John Alden Acquisition"). As part
of this transaction, the Company acquired assets having an aggregate fair value
of $5,056,098,000, composed primarily of invested assets totaling
$5,000,822,000. Liabilities assumed in this transaction totaled $5,218,828,000,
including $5,161,538,000 of fixed annuity reserves. An amount equal to the sum
of the purchase price and the fair value of the net liabilities assumed,
amounting to $291,786,000 at September 30, 1998, is included in Deferred
Acquisition Costs in the balance sheet. On October 31, 1997, John Alden Life
Insurance Company of New York was merged with and into the Company's other New
York-chartered life insurance subsidiary, First SunAmerica Life Insurance
Company.
On April 1, 1996, the Company completed the acquisition of a $958,672,000
block of annuity contracts (the "Central National Annuity Contracts") from The
Central National Life Insurance Company of Omaha, a subsidiary of Beneficial
Corp. for a purchase price of $20,806,000. As part of this acquisition, the
Company acquired assets having an aggregate fair value of $939,006,000, composed
primarily of invested assets totaling $929,561,000. An amount equal to the
excess of the sum of the purchase price and fair value of the annuity reserves
assumed over the fair value of the assets acquired, amounting to $19,715,000 at
September 30, 1998, is included in Deferred Acquisition Costs in the balance
sheet.
On February 29, 1996, the Company completed the acquisition of all of the
outstanding stock of Ford Life Insurance Company ("Ford Life") for a cash
purchase price of $172,500,000. The Company acquired assets having an aggregate
fair value of $3,146,072,000, composed primarily of invested assets totaling
$3,097,151,000. Liabilities assumed in this acquisition totaled $3,090,123,000,
including $3,050,575,000 of fixed annuity reserves. An amount equal to the
excess of the purchase price over the fair value of the net assets acquired,
amounting to $57,121,000 at September 30, 1998, is included in Deferred
Acquisition Costs in the balance sheet. On December 31, 1996, Ford Life was
merged with and into SunAmerica Life Insurance Company.
On December 29, 1995, the Company completed the acquisition of all of the
outstanding stock of CalAmerica for a cash purchase price of $120,000,000. The
Company acquired assets having an aggregate fair value of $739,852,000, composed
primarily of invested assets totaling $722,461,000. Liabilities assumed in this
acquisition totaled $662,316,000, including $645,379,000 of fixed annuity
reserves. An amount equal to the excess of the purchase price over the fair
value of the net assets acquired, amounting to $28,897,000 at September 30,
1998, is included in Deferred Acquisition Costs in the balance sheet.
These acquisitions have been accounted for by using the purchase method of
accounting. Accordingly, the income statement includes the operating results of
the John Alden Acquisition for only the period from April 1, 1997 through
September 30, 1998; the operating results of the Central National Annuity
Contracts for only the period from April 1, 1996 through September 30, 1998;
Ford Life's operating results for only the period from March 1, 1996 through
September 30, 1998; and CalAmerica's operating results for only the period from
January 1, 1996 through September 30, 1998. On a pro forma (unaudited) basis,
assuming the John Alden Acquisition occurred on October 1, 1996, revenues
(investment income, net realized investment losses and fee income) would have
been $2,269,135,000 and net income would have been $397,402,000 ($1.90 per
diluted share) for the year ended September 30, 1997.
F-12
<PAGE> 50
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- ACQUISITIONS (CONTINUED)
At September 30, 1998, the deferred acquisition costs arising from these
transactions aggregated $397,519,000, and are being amortized, with interest, in
relation to the incidence of estimated gross profits to be realized over the
estimated lives of the assumed annuity contracts. Future annual amortization is
projected to be as follows: 1999, $92,504,000; 2000, $69,717,000; 2001,
$52,786,000; 2002, $39,481,000; 2003, $30,641,000; and thereafter, in the
aggregate, $112,390,000. The deferred acquisition costs are substantially less
than computations of the present values of estimated future profits discounted
at the related weighted average crediting rates.
On July 15, 1998, the Company entered into a definitive agreement to
acquire MBL Life Assurance Corporation's individual life and individual and
group annuity business (which had approximately $3 billion of fixed annuity
reserves and $2 billion in reserves for universal life policies) for
approximately $130 million in cash. The acquisition is subject to customary
conditions and required regulatory approvals, and is expected to be completed by
the end of December 1998.
NOTE 6 -- INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
----------- -----------
(In thousands)
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government.................. $ 791,544 $ 828,809
Mortgage-backed securities.................................. 5,752,003 5,911,623
Securities of public utilities.............................. 1,125,568 1,136,032
Corporate bonds and notes................................... 8,056,639 8,208,342
Asset-backed securities..................................... 1,768,848 1,790,037
Redeemable preferred stocks................................. 293,305 292,034
Other debt securities....................................... 613,749 633,970
----------- -----------
Total available for sale.................................... $18,401,656 $18,800,847
=========== ===========
AT SEPTEMBER 30, 1997:
Securities of the United States Government.................. $ 1,111,064 $ 1,126,468
Mortgage-backed securities.................................. 6,208,610 6,344,036
Securities of public utilities.............................. 532,577 542,583
Corporate bonds and notes................................... 8,086,802 8,288,921
Asset-backed securities..................................... 1,566,605 1,586,242
Redeemable preferred stocks................................. 152,449 162,955
Other debt securities....................................... 466,730 472,450
----------- -----------
Total available for sale.................................... $18,124,837 $18,523,655
=========== ===========
</TABLE>
F-13
<PAGE> 51
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1998, follow:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
----------- -----------
(In thousands)
<S> <C> <C>
Due in one year or less..................................... $ 283,675 $ 279,357
Due after one year through five years....................... 3,903,566 4,094,035
Due after five years through ten years...................... 6,026,726 6,053,320
Due after ten years......................................... 2,435,686 2,462,512
Mortgage-backed securities.................................. 5,752,003 5,911,623
----------- -----------
Total available for sale.................................... $18,401,656 $18,800,847
=========== ===========
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
gains losses
---------- ----------
(In thousands)
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government.................. $ 38,126 $ (861)
Mortgage-backed securities.................................. 177,753 (18,133)
Securities of public utilities.............................. 40,185 (29,721)
Corporate bonds and notes................................... 400,157 (248,454)
Asset-backed securities..................................... 34,942 (13,753)
Redeemable preferred stocks................................. 5,532 (6,803)
Other debt securities....................................... 20,345 (124)
-------- ---------
Total available for sale.................................... $717,040 $(317,849)
======== =========
AT SEPTEMBER 30, 1997:
Securities of the United States Government.................. $ 16,393 $ (989)
Mortgage-backed securities.................................. 158,988 (23,562)
Securities of public utilities.............................. 10,581 (575)
Corporate bonds and notes................................... 236,038 (33,919)
Asset-backed securities..................................... 20,261 (624)
Redeemable preferred stocks................................. 10,564 (58)
Other debt securities....................................... 6,018 (298)
-------- ---------
Total available for sale.................................... $458,843 $ (60,025)
======== =========
</TABLE>
At September 30, 1998, gross unrealized gains on equity securities
available for sale aggregated $49,631,000 and gross unrealized losses aggregated
$1,666,000. At September 30, 1997, gross unrealized gains on equity securities
available for sale aggregated $64,635,000 and gross unrealized losses aggregated
$915,000.
F-14
<PAGE> 52
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVESTMENTS (CONTINUED)
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
1998 1997 1996
--------- --------- --------------
(In thousands)
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS:
Available for sale:
Realized gains................................... $ 306,251 $ 155,610 $ 81,323
Realized losses.................................. (259,249) (141,513) (93,261)
EQUITIES:
Realized gains..................................... 13,768 22,755 8,765
Realized losses.................................... (614) (760) (5,365)
OTHER INVESTMENTS:
Realized gains..................................... 8,858 2,286 13,234
Realized losses.................................... (948) (2,268) (72)
IMPAIRMENT WRITEDOWNS.............................. (109,787) (65,313) (34,938)
--------- --------- --------
Total net realized investment losses............... $ (41,721) $ (29,203) $(30,314)
========= ========= ========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------
1998 1997 1996
---------- ---------- -------------
(In thousands)
<S> <C> <C> <C>
Short-term investments............................. $ 90,994 $ 83,021 $ 66,378
Bonds, notes and redeemable preferred stocks....... 1,413,205 1,169,631 819,812
Mortgage loans..................................... 287,829 222,403 149,476
Equity-method partnerships......................... 159,846 126,865 96,452
Cost-method partnerships........................... 211,228 114,667 82,116
Other invested assets.............................. (2,639) 79,239 40,054
---------- ---------- ----------
Total investment income............................ $2,160,463 $1,795,826 $1,254,288
========== ========== ==========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$30,653,000 for the year ended September 30, 1998, $26,801,000 for the year
ended September 30, 1997 and $21,475,000 for the year ended September 30, 1996
and are included in General and Administrative Expenses in the income statement.
Investments in unconsolidated partnerships accounted for by using the
equity method of accounting totaled $779,098,000 at September 30, 1998. At that
date, total combined assets of these partnerships were $3,033,520,000
(consisting entirely of investments) and total combined liabilities were
$2,156,368,000 (including $1,379,117,000 of nonrecourse notes payable to banks).
For the year then ended, total combined revenues and expenses of such
partnerships were $446,412,000 and $214,010,000, respectively, resulting in
$232,402,000 of total combined pretax income.
Investments in unconsolidated partnerships accounted for by using the
equity method of accounting totaled $561,336,000 at September 30, 1997. At that
date, total combined assets of these partnerships were $2,220,060,000 (including
$2,211,405,000 of investments) and total combined liabilities were
$1,593,596,000 (including $1,543,148,000 of nonrecourse notes payable to banks).
For the year then ended, total combined revenues and expenses of such
partnerships were $290,406,000 and $146,104,000, respectively, resulting in
$144,302,000 of total combined pretax income.
F-15
<PAGE> 53
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVESTMENTS (CONTINUED)
At September 30, 1998, no investment exceeded 10% of the Company's
consolidated shareholders' equity.
At September 30, 1998, mortgage loans were collateralized by properties
located in 46 states, with loans totaling approximately 19%, 12% and 10% of the
aggregate carrying value of the portfolio secured by properties located in
California, New York and Texas, respectively.
At September 30, 1998, bonds, notes and redeemable preferred stocks
included $1,781,814,000 of bonds and notes not rated investment grade. The
Company had no material concentrations of non-investment-grade assets at
September 30, 1998.
At September 30, 1998, the carrying value of investments in default as to
the payment of principal or interest was $55,009,000, consisting of $19,672,000
of non-investment-grade bonds and $35,337,000 of mortgage loans.
As a component of its asset and liability management strategy, the Company
utilizes 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 September
30, 1998, the Company had 38 outstanding Swap Agreements with an aggregate
notional principal amount of $1,870,427,000. These agreements mature in various
years through 2010 and have an average remaining maturity of 43 months. With
respect to swaps that hedge assets, net interest received (paid) amounted to
($6,706,000), ($1,091,000) and $5,214,000 for the years ended September 30,
1998, 1997 and 1996, respectively, and is included in Investment Income in the
income statement. With respect to swaps that hedge liabilities, net interest
paid amounted to $5,430,000, $1,706,000 and $168,000 for the years ended
September 30, 1998, 1997 and 1996, respectively, and is included in Interest
Expense on Guaranteed Investment Contracts in the income statement.
For investment purposes, the Company also has entered into various Total
Return Agreements with an aggregate notional principal amount of $533,000,000
(the "Notional Amount") at September 30, 1998. The Total Return Agreements
effectively exchange a fixed rate of interest (the "Payment Amount") on the
Notional Amount for the coupon income plus or minus the increase or decrease in
the fair value (the "Total Return") of specified non-investment-grade bonds (the
"Bonds"). The Total Return Agreements mature in March 1999; however, the Company
intends to enter into other similar agreements. The Company is exposed to
potential loss, due to credit risk on the underlying non-investment-grade bonds
and bond market fluctuations, equal to the Payment Amount plus any reduction in
the aggregate fair value of the Bonds below the Notional Amount. The Company is
also exposed to potential credit loss in the event of nonperformance by the
investment-grade-rated counterparty with respect to any increase in the
aggregate market value of the Bonds above the Notional Amount. However,
nonperformance is not anticipated and, therefore, no collateral is held or
pledged. Net amounts received (paid) are included in Investment Income in the
income statement and totaled ($33,716,000), $35,368,000, and $32,490,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
F-16
<PAGE> 54
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its partnerships accounted for by
using the equity method, real estate investments and other invested assets) and
liabilities or the value of anticipated future business. The Company does not
plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based
principally on independent pricing services, broker quotes and other independent
information. Fair values include the market value, determined from independent
broker quotes, of Swap Agreements that hedge certain bonds and notes.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for
by using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life contracts are assigned a fair value equal to current net surrender
value, which includes the estimated fair value of hedging Swap Agreements,
determined from independent broker quotes. Annuitized contracts are valued based
on the present value of future cash flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of hedging Swap Agreements, determined from independent
broker quotes.
TRUST DEPOSITS: Trust deposits are carried at the fair value of deposits
payable upon demand.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent
net transactions of a short-term nature for which the carrying value is
considered a reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of
contracts in the accumulation phase are based on net surrender values. Fair
values of contracts in the payout phase are based on the present value of future
cash flows at assumed investment rates.
F-17
<PAGE> 55
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM NOTES AND DEBENTURES: Fair value is estimated based on the quoted
market prices for the same or similar issues.
PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUSTS: Fair value is based upon
independent pricing services.
The estimated fair values of the Company's financial instruments at
September 30, 1998 and 1997, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
Carrying Fair
value value
----------- -----------
(In thousands)
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments........................... $ 1,796,132 $ 1,796,132
Bonds, notes and redeemable preferred stocks.............. 18,800,847 18,800,847
Mortgage loans............................................ 3,412,449 3,543,314
Common stocks............................................. 82,808 82,808
Cost-method partnerships.................................. 865,953 1,213,668
Variable annuity assets held in separate accounts......... 11,405,434 11,405,434
LIABILITIES:
Reserves for fixed annuity contracts...................... 12,970,549 12,487,682
Reserves for guaranteed investment contracts.............. 8,380,844 8,618,089
Trust deposits............................................ 439,918 439,918
Payable to brokers for purchases of securities............ 91,463 91,463
Variable annuity liabilities related to separate
accounts............................................... 11,405,434 10,951,726
Long-term notes and debentures............................ 1,216,483 1,330,568
Preferred securities of subsidiary grantor trusts......... 495,000 507,256
=========== ===========
1997:
ASSETS:
Cash and short-term investments........................... $ 993,349 $ 993,349
Bonds, notes and redeemable preferred stocks.............. 18,523,655 18,523,655
Mortgage loans............................................ 3,139,309 3,269,079
Common stocks............................................. 96,541 96,541
Cost-method partnerships.................................. 725,457 1,158,833
Variable annuity assets held in separate accounts......... 9,514,675 9,514,675
LIABILITIES:
Reserves for fixed annuity contracts...................... 14,445,126 13,806,124
Reserves for guaranteed investment contracts.............. 5,553,292 5,515,335
Trust deposits............................................ 427,433 427,433
Payable to brokers for purchases of securities............ 266,477 266,477
Variable annuity liabilities related to separate
accounts............................................... 9,514,675 9,240,245
Long-term notes and debentures............................ 1,136,072 1,172,392
Preferred securities of subsidiary grantor trusts......... 495,000 507,375
=========== ===========
</TABLE>
F-18
<PAGE> 56
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INDEBTEDNESS
Indebtedness consists of the following long-term notes and debentures
(interest rates are as of September 30):
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
5.6% debentures due July 31, 2097 (net of unamortized
discount of $43,077,000 at September 30, 1998 and
$43,513,000 at September 30, 1997)........................ $ 131,923 $ 131,487
Medium-term notes due 1999 through 2026 (5 3/8% to
7 3/8%)................................................... 228,310 248,335
8 1/8% debentures due April 28, 2023........................ 100,000 100,000
9.95% debentures due February 1, 2012....................... 26,791 100,000
9.95% debentures due August 1, 2008......................... 73,209 --
6.2% notes due October 31, 1999............................. 431,250 431,250
9% notes due January 15, 1999............................... 125,000 125,000
6.75% debentures due October 1, 2007........................ 100,000 --
---------- ----------
Total indebtedness.......................................... $1,216,483 $1,136,072
========== ==========
</TABLE>
In July 1997, the Company filed a shelf registration statement under which
it may issue up to $3,500,000,000 of securities in the form of debt; preferred
stock; common stock; warrants to purchase debt, preferred stock or common stock;
stock purchase contracts or stock purchase units; or preferred securities of the
Company's subsidiary grantor trusts. On July 28, 1997, the Company issued
$175,000,000 of its 5.6% debentures, due July 31, 2097, and received discounted
proceeds of approximately $130,000,000, and on October 7, 1997, the Company
issued $100,000,000 of 6.75% notes due October 1, 2007. Subsequent to these
offerings, $3,225,000,000 remains available to the Company to issue securities
under the July 1997 shelf registration statement.
Short-term borrowings, which include short-term bank notes, reverse
repurchase agreements and borrowings under a commercial paper program, averaged
$514,055,000 at a weighted average interest rate of 5.0% during 1998 and
$611,719,000 at a weighted average interest rate of 6 1/4% during 1997. The
highest level of short-term borrowings at any month-end was $1,167,676,000 at
5 1/4% during 1998 and $1,019,754,000 at 5 3/8% during 1997. There were no
short-term borrowings outstanding at either September 30, 1998 or September 30,
1997.
Principal payments on long-term borrowings are due as follows: 1999,
$17,775,000; 2000, $570,250,000; 2001, $24,000,000; 2002, $24,000,000; 2003,
$18,900,000; and thereafter, $604,635,000.
NOTE 9 -- CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses are adequate and any further liabilities and costs will not have a
material adverse impact upon the Company's financial position or results of
operations.
In 1989 and 1996, the Company sold, through three separate 100% coinsurance
transactions, the general agency division of SunAmerica Life Insurance Company,
the credit life business of Ford Life and the mortality-based business of
CalAmerica. With respect to these coinsurance transactions, SunAmerica Life
Insurance Company and CalAmerica could become liable for in-force amounts ceded
of $1,856,928,000 and $1,897,974,000, respectively, at September 30, 1998, if
the coinsurers were to become unable to meet the obligations assumed under the
respective coinsurance agreements. At
F-19
<PAGE> 57
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- CONTINGENT LIABILITIES (CONTINUED)
September 30, 1998, related policyholder reserves carried by the coinsurers were
$70,123,000 and $157,278,000, respectively. As part of the 1989 SunAmerica Life
Insurance Company coinsurance transaction, assets substantially equal to the
policyholder reserves assumed by the coinsurer are held in trust to secure the
obligations of the coinsurer.
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 Company 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.
In the ordinary course of business, the Company has agreed contingently to
make capital contributions, aggregating approximately $670,192,000, to 121
limited partnerships over the next 5 years (4.5 years on a weighted average
basis) in exchange for ownership interests in such partnerships.
NOTE 10 -- COMPANY-OBLIGATED PREFERRED SECURITIES OF 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 interest and other payment dates on the debentures correspond to the
distribution and other payment dates on the preferred and common securities. The
preferred and common securities will be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
holders of the preferred and common securities in liquidation of the grantor
trust(s). The Company's obligations under the debentures and related agreements,
taken together, provide a full and unconditional guarantee of payments due on
the preferred securities.
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.
F-20
<PAGE> 58
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHAREHOLDERS' EQUITY
The Company is authorized to issue 20,000,000 shares of preferred stock
("Preferred Stock"). All preferred shares of the Company rank on a parity with
each other and rank senior to Common Stock and Nontransferable Class B Stock of
the Company as to payment of dividends and distribution of assets upon
dissolution, liquidation or winding up of the Company.
On November 1, 1995, the Company issued 4,000,000 $3.10 Depositary Shares
(the "Series E Depositary Shares"), each representing one-fiftieth of a share of
Series E Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $62 per share. On September 22, 1998, the Company
announced that it would redeem all of its Series E Depositary Shares. The
redemption was completed on October 30, 1998 and resulted in the issuance of
11,250,709 shares of the Company's Common Stock and cash payment of all accrued
and unpaid dividends through the redemption date.
On March 10, 1993, the Company issued 5,002,500 $2.78 Depositary Shares
(the "Series D Depositary Shares"), each representing one-fiftieth of a share of
Series D Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $37 per share. On January 2, 1996, the Company
redeemed all of the Series D Depositary Shares for a call price equal to $49.95
per share plus accrued and unpaid dividends to the redemption date. The call
price was paid with 5,112,529 shares of the Company's Common Stock.
At September 30, 1996, the Company had outstanding 486,800 shares of
Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred
Shares"), with a liquidation preference of $100 per share. On October 4, 1996,
the Company redeemed all of the Series C Preferred Shares for a cash payment
equal to the total liquidation amount of $48,680,000 plus accrued and unpaid
dividends to the redemption date.
In 1992, the Company issued 5,620,000 shares of 9 1/4% Preferred Stock,
Series B (the "Series B Preferred Shares"), with a liquidation preference of $25
per share. On June 13, 1995, the Company exchanged 2,105,235 Series B Preferred
Shares with a liquidation preference of $52,630,875 for $52,630,875 liquidation
amount of 9.95% Trust Originated Preferred Securities of SunAmerica Capital
Trust I. On June 16, 1997, the Company redeemed all of the remaining Series B
Preferred Shares for a cash payment equal to the total liquidation amount of
approximately $87,869,000 plus accrued and unpaid dividends to the redemption
date.
The Company is authorized to issue 350,000,000 shares of its $1.00 par
value Common Stock and is authorized to repurchase 15,000,000 shares of such
stock. At September 30, 1998, 179,526,000 shares were outstanding and at
September 30, 1997, 179,076,000 shares were outstanding.
On November 6, 1996, the Company issued 11,500,000 8 1/2% Premium Equity
Redemption Cumulative Security Units (the "Units") with a stated amount of
$37.50 per Unit. Each Unit consists of a stock purchase contract (the
"Contract") and a United States Treasury Note (the "Treasury Note") having a
principal amount equal to the stated amount and maturing on October 31, 1999.
The holders of the Units will receive interest on the Treasury Notes payable by
the United States Government at a rate of 7 1/2% per annum and Contract fees
payable by the Company at a rate of 1% per annum (both, the "Unit Payments")
based upon the stated amount. The Contract obligates the Company to deliver on
October 31, 1999 to the holder of each Unit one and one-half shares of Common
Stock of the Company, subject to adjustment under certain defined circumstances,
and obligates the holder of the Unit to pay to the Company $37.50 per Unit. The
Treasury Notes will be held by a collateral agent to secure payment to the
Company as required under the Contract, but may be redeemed by the holders of
the Units under certain defined circumstances. On October 7, 1998,
F-21
<PAGE> 59
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHAREHOLDERS' EQUITY (CONTINUED)
subsequent to the Company's fiscal year end, the Company announced that it will
redeem all of its Units on December 6, 1998. In connection with this redemption,
the Company will issue 10,108,229 shares of the Company's Common Stock and will
make a cash payment for all accrued and unpaid Contract fees.
The Company is authorized to issue 25,000,000 shares of its $1.00 par value
Nontransferable Class B Stock. Holders of this stock have rights identical to
those of the Company's common stockholders except that they have ten votes per
share and are entitled to only 90% of any cash dividend paid on the Common
Stock. This stock is convertible at any time into shares of Common Stock. At
September 30, 1998 and 1997, 16,273,000 shares were outstanding.
Changes in shareholders' equity are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------
1998 1997 1996
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
PREFERRED STOCK:
Beginning balance........................................... $248,000 $384,549 $ 321,642
Issuance of 4,000,000 Series E Preferred Shares............. -- -- 248,000
Redemption of 5,002,500 Series D Depositary Shares.......... -- -- (185,093)
Redemption of 3,514,765 Series B Preferred Shares........... -- (87,869) --
Redemption of 486,800 Series C Preferred Shares............. -- (48,680) --
-------- -------- ---------
Ending balance.............................................. $248,000 $248,000 $ 384,549
======== ======== =========
NONTRANSFERABLE CLASS B STOCK:
Beginning balance........................................... $ 16,273 $ 10,848 $ 10,240
Conversion of 4,816,000 shares to Common Stock.............. -- -- (4,816)
Stock Splits................................................ -- 5,425 5,424
-------- -------- ---------
Ending balance.............................................. $ 16,273 $ 16,273 $ 10,848
======== ======== =========
COMMON STOCK:
Beginning balance........................................... $179,076 $108,604 $ 44,175
Issuance of 10,669,745 shares of Common Stock at $54 1/8 per
share..................................................... -- 10,670 --
Issuance of 5,112,529 shares to redeem the Series D
Depositary Shares......................................... -- -- 5,113
Conversion of Nontransferable Class B Stock to 4,776,000
shares.................................................... -- -- 4,776
Stock options and other employee benefit plans.............. 450 115 252
Stock Splits................................................ -- 59,687 54,288
-------- -------- ---------
Ending balance.............................................. $179,526 $179,076 $ 108,604
======== ======== =========
</TABLE>
F-22
<PAGE> 60
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------
1998 1997 1996
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance........................................ $ 750,401 $ 304,295 $ 185,211
Issuance of Common Stock................................. -- 566,598 --
Cost of issuance of Series E Preferred Shares............ -- -- (7,453)
Excess of redemption value of Series D Preferred Shares
over par value of shares of Common Stock issued, net of
transaction costs...................................... -- -- 179,972
Cost of issuance of 7,400,000 shares of Trust Originated
Preferred Securities of SunAmerica Capital Trust II.... -- -- (5,524)
Cost of issuance of 12,400,000 shares of Trust Originated
Preferred Securities of SunAmerica Capital Trust III... -- (10,414) --
Cost of issuance of 11,500,000 Premium Equity Redemption
Cumulative Security Units.............................. -- (44,605) --
Stock options and other employee benefit plans........... 5,375 (361) 11,801
Stock Splits............................................. -- (65,112) (59,712)
---------- ---------- ---------
Ending balance........................................... $ 755,776 $ 750,401 $ 304,295
========== ========== =========
RETAINED EARNINGS:
Beginning balance........................................ $1,180,446 $ 869,215 $ 656,509
Net income............................................... 516,312 379,050 274,427
Dividends on:
Preferred Stock........................................ (12,400) (18,808) (27,063)
Nontransferable Class B Stock.......................... (6,589) (3,906) (4,878)
Common Stock........................................... (81,549) (45,105) (29,780)
---------- ---------- ---------
Ending balance........................................... $1,596,220 $1,180,446 $ 869,215
========== ========== =========
NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance........................................ $ 209,910 $ (16,953) $ (4,699)
Change in net unrealized gains/losses on debt securities
available for sale..................................... 373 474,414 (44,464)
Change in net unrealized gain on equity securities
available for sale..................................... (15,755) 27,206 18,011
Change in adjustment to deferred acquisition costs....... (5,600) (152,600) 7,600
Tax effects of net changes............................... 7,344 (122,157) 6,599
---------- ---------- ---------
Ending balance........................................... $ 196,272 $ 209,910 $ (16,953)
========== ========== =========
</TABLE>
Dividends that the Company may receive from its life insurance subsidiaries
in any year without prior approval of the Arizona, California or New York
insurance commissioners are limited by statute. At September 30, 1998,
restricted net assets of these consolidated life insurance subsidiaries totaled
approximately $1,934,653,000, none of which is available for the payment of
dividends until calendar year 1999.
The combined statutory equity of the Company's five life insurance
subsidiaries totaled $1,415,095,000 at September 30, 1998, $1,430,935,000 at
December 31, 1997, and $1,187,013,000 at December 31, 1996. The combined
statutory net income of these subsidiaries totaled $294,413,000 for the nine
months ended September 30, 1998, $257,049,000 for the year ended December 31,
1997, and $210,791,000 for the year ended December 31, 1996.
F-23
<PAGE> 61
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- STOCK COMPENSATION PLANS
At September 30, 1998, the Company had five stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
such plans, and, accordingly, no compensation cost has been recognized for stock
options granted pursuant to these plans. If compensation cost for such stock
options had been recognized, based on the fair value at the grant dates and
computed in a manner consistent with a method described by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") then the Company's net income would have been
$486,345,000 ($2.46 per basic share and $2.21 per diluted share), $366,825,000
($1.94 per basic share and $1.75 per diluted share) and $269,878,000 ($1.42 per
basic share and $1.30 per diluted share) for the years ended September 30, 1998,
1997 and 1996, respectively. The weighted average per share fair value used to
compute compensation cost for the year ended September 30, 1998 was $19.78 and
reflects weighted average assumptions including a dividend yield of 0.7%, a
volatility of 40.6%, a risk-free interest rate of 5.9% and an option life of 8.0
years. The weighted average per share fair value used to compute compensation
cost for the year ended September 30, 1997 was $11.92 and reflects weighted
average assumptions including a dividend yield of 0.9%, a volatility of 39.3%, a
risk-free interest rate of 6.2% and an option life of 7.0 years. The weighted
average per share fair value used to compute compensation cost for the year
ended September 30, 1996 was $6.32 and reflects weighted average assumptions
including a dividend yield of 1.3%, a volatility of 40.3%, a risk-free interest
rate of 6.0% and an option life of 6.6 years.
The Company's five stock plans are the 1997 Employee Incentive Stock Plan
(the "1997 Plan"), the 1995 Performance Stock Plan (the "1995 Plan"), the 1988
Employee Stock Plan (the "1988 Plan"), the Long-Term Performance-Based Incentive
Plan (the "CEO Plan") and the Non-Employee Directors' Stock Option Plan. The
1988 Plan has been replaced by the 1997 Plan. Under these stock plans, the
Company may grant an aggregate of 42,632,550 shares to its employees in the form
of either stock options, restricted stock or stock units. At September 30, 1998,
10,298,429 shares remain available for future grant. Options granted under the
plans have an exercise price equal to the market price at the date of grant,
have a maximum term of 10 years and generally become exercisable ratably over a
five-year period.
Under the terms of the stock option agreements, the pending merger with AIG
(See Note 3) constitutes a change in control of the Company and, when
consummated, will cause all unvested stock options to become immediately
exercisable. If the pending merger had been completed in 1998, an additional
$70,806,000 of compensation cost would have been recognized for purposes of the
SFAS 123 pro forma disclosures, and net income for 1998 would have been
$415,539,000 ($2.09 per basic share and $1.89 per diluted share).
Under its CEO Plan, the Company may grant shares of its Common Stock to the
Company's Chief Executive Officer ("CEO") in the form of stock options. Prior to
amendment of the CEO Plan, which was approved by shareholders in fiscal 1997,
awards under this plan were also made in the form of restricted stock or
deferred shares. The actual number of options granted is predicated upon defined
performance of the Company's Common Stock relative to defined performance of the
S&P 500 Index. Restricted shares are held in escrow until the earlier of the
CEO's death, disability or retirement or change in control of the Company.
Deferred shares are held in escrow until 18 months after the earlier of the
CEO's death, disability or retirement or change in control of the Company. Stock
options granted under this plan have an exercise price equal to the market price
at the date of grant, have a maximum term of 10 years and are immediately
exercisable.
F-24
<PAGE> 62
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- STOCK COMPENSATION PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of September
30, 1998, 1997 and 1996 and changes during the years then ended follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(000's) price (000's) price (000's) price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year............................... 14,995 $14.27 12,452 $ 9.23 10,320 $ 6.82
Options granted...................... 2,872 45.99 3,438 30.51 2,593 18.32
Options exercised.................... (942) 8.29 (762) 4.63 (306) 5.00
Options forfeited.................... (690) 21.80 (133) 16.82 (155) 8.83
------ ------ ------
Options outstanding at end of year... 16,235 19.91 14,995 14.27 12,452 9.23
====== ====== ====== ====== ====== ======
Options exercisable at end of year... 11,709 $15.07 9,710 $ 9.65 8,022 $ 6.69
====== ====== ====== ====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------- -------------------
Weighted
average Weighted Weighted
remaining average average
Shares contractual exercise Shares exercise
Range of exercise prices (000's) life price (000's) price
------------------------ ------- ----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.86 to $2.35............................... 2,163 1.8 years $ 2.00 2,163 $ 2.00
$4.50 to $7.15............................... 1,643 4.2 5.74 1,643 5.74
$8.11 to $12.31.............................. 4,160 6.2 10.02 3,402 9.73
$14.97 to $20.46............................. 2,286 7.4 18.08 1,434 16.86
$25.33 to $33.33............................. 2,134 8.1 26.29 1,124 25.41
$39.35 to $60.41............................. 3,849 9.2 44.29 1,943 39.55
------ ------
Total........................................ 16,235 6.5 19.91 11,709 15.07
====== ========= ====== ====== ======
</TABLE>
At September 30, 1998, 2,169,284 shares of unvested restricted stock are
outstanding, and deferred shares and stock units representing 2,121,375 shares
of stock are outstanding. The Company granted restricted stock and stock units
aggregating 370,116 shares in the year ended September 30, 1997 and 527,634
shares in the year ended September 30, 1996. No restricted stock or stock units
were granted in the year ended September 30, 1998. The weighted average per
share fair value of such stock at the date of grant was $23.08 in 1997 and
$15.83 in 1996. Restrictions generally lapse either on an accelerated basis,
upon achievement of defined performance goals, upon a change in control of
Company, or over a defined length of service. Compensation cost charged to
operations for all outstanding restricted stock, deferred shares and stock units
amounted to $10,988,000 for the year ended September 30, 1998, $23,940,000 for
the year ended September 30, 1997 and $21,124,000 for the year ended September
30, 1996.
The pending merger with AIG (See Note 3) constitutes a change in control of
the Company under the terms of the various stock compensation plans and, when
consummated, all unvested restricted stock and 630,000 stock units will vest. As
a result, unamortized compensation cost, aggregating $26,306,000 at September
30, 1998, will be charged to operations upon completion of the merger.
F-25
<PAGE> 63
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
Federal State Total
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
1998:
Currently payable......................................... $155,841 $12,682 $168,523
Deferred.................................................. 20,746 1,731 22,477
-------- ------- --------
Total income tax expense.................................. $176,587 $14,413 $191,000
======== ======= ========
1997:
Currently payable......................................... $ 28,281 $ 1,718 $ 29,999
Deferred.................................................. 127,347 654 128,001
-------- ------- --------
Total income tax expense.................................. $155,628 $ 2,372 $158,000
======== ======= ========
1996:
Currently payable......................................... $110,531 $10,526 $121,057
Deferred.................................................. (991) (2,466) (3,457)
-------- ------- --------
Total income tax expense.................................. $109,540 $ 8,060 $117,600
======== ======= ========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Amount computed at statutory rate........................ $247,560 $187,968 $137,209
Increases (decreases) resulting from:
Affordable housing tax credits......................... (38,806) (24,436) (21,742)
State income taxes, net of federal tax benefit......... 9,368 1,542 5,238
Dividends-received deduction........................... (19,292) (12,634) (8,277)
Other, net............................................. (7,830) 5,560 5,172
-------- -------- --------
Total income tax expense................................. $191,000 $158,000 $117,600
======== ======== ========
</TABLE>
F-26
<PAGE> 64
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability of Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments................................................. $ 105,896 $ 125,852
Deferred acquisition costs.................................. 388,234 341,131
State income taxes.......................................... 4,568 3,428
Other liabilities........................................... 143,453 125,928
Net unrealized gains on certain debt and equity
securities................................................ 105,686 113,028
--------- ---------
Total deferred tax liabilities.............................. 747,837 709,367
--------- ---------
DEFERRED TAX ASSETS:
Contractholder reserves..................................... (298,719) (299,905)
Other assets................................................ (54,208) (25,698)
--------- ---------
Total deferred tax assets................................... (352,927) (325,603)
--------- ---------
Deferred income taxes....................................... $ 394,910 $ 383,764
========= =========
</TABLE>
F-27
<PAGE> 65
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended September 30, 1998 and 1997
follow:
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
1998:
Net investment income........................ $198,153 $205,190 $214,185 $224,118
Net realized investment gains (losses)....... 3,194 2,258 5,772 (52,945)
Fee income................................... 100,822 108,971 123,566 125,468
General and administrative expenses.......... (77,362) (77,398) (81,219) (74,294)
Amortization of deferred acquisition costs... (55,468) (55,628) (63,386) (66,685)
-------- -------- -------- --------
Pretax income................................ 169,339 183,393 198,918 155,662
Income tax expense........................... (45,700) (49,500) (54,000) (41,800)
-------- -------- -------- --------
Net income................................... $123,639 $133,893 $144,918 $113,862
======== ======== ======== ========
Per basic share.............................. $ 0.63 $ 0.68 $ 0.73 $ 0.57
======== ======== ======== ========
Per diluted share............................ $ 0.56 $ 0.60 $ 0.66 $ 0.52
======== ======== ======== ========
1997:
Net investment income........................ $143,669 $152,004 $185,760 $197,944
Net realized investment gains (losses)....... (9,304) (9,442) (12,136) 1,679
Fee income................................... 70,067 73,510 81,796 92,330
General and administrative expenses.......... (59,254) (62,035) (70,419) (74,030)
Amortization of deferred acquisition costs... (30,410) (30,003) (52,080) (52,596)
-------- -------- -------- --------
Pretax income................................ 114,768 124,034 132,921 165,327
Income tax expense........................... (34,400) (37,200) (38,600) (47,800)
-------- -------- -------- --------
Net income................................... $ 80,368 $ 86,834 $ 94,321 $117,527
======== ======== ======== ========
Per basic share.............................. $ 0.43 $ 0.46 $ 0.51 $ 0.60
======== ======== ======== ========
Per diluted share............................ $ 0.39 $ 0.42 $ 0.46 $ 0.54
======== ======== ======== ========
</TABLE>
F-28
<PAGE> 66
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
Total
depreciation
and
Total amortization Pretax Total
revenues expense income assets
---------- ------------ -------- -----------
(In thousands)
<S> <C> <C> <C> <C>
1998:
Annuity operations..................... $2,340,933 $236,298 $652,112 $38,355,034
Broker-dealer operations............... 119,865 7,276 34,141 195,822
Retirement trust services.............. 50,774 1,796 6,133 499,121
Asset management....................... 41,040 14,780 9,171 104,476
Premium financing...................... 24,957 1,050 5,755 45,954
---------- -------- -------- -----------
Total.................................. $2,577,569 $261,200 $707,312 $39,200,407
========== ======== ======== ===========
1997:
Annuity operations..................... $1,905,412 $155,714 $490,349 $34,909,441
Broker-dealer operations............... 67,052 2,401 22,622 101,049
Retirement trust services.............. 49,279 1,497 13,001 487,598
Asset management....................... 35,661 16,357 2,798 81,518
Premium financing...................... 26,922 1,039 8,280 57,280
---------- -------- -------- -----------
Total.................................. $2,084,326 $177,008 $537,050 $35,636,886
========== ======== ======== ===========
1996:
Annuity operations..................... $1,315,553 $ 97,806 $350,183 $23,032,076
Broker-dealer operations............... 51,906 1,228 17,253 74,140
Retirement trust services.............. 45,216 1,166 13,570 481,974
Asset management....................... 33,047 18,295 2,448 74,410
Premium financing...................... 26,663 962 8,573 64,221
---------- -------- -------- -----------
Total.................................. $1,472,385 $119,457 $392,027 $23,726,821
========== ======== ======== ===========
</TABLE>
F-29
<PAGE> 67
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page number in
this Annual Report
on Form 10-K
------------------
<S> <C>
Report of Independent Accountants on Financial Statement
Schedules................................................. S-2
Schedule II -- Condensed Financial Information of
Registrant................................................ S-3 through S-6
Schedule IV -- Reinsurance.................................. S-7
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
S-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of SunAmerica Inc.
Our audits of the consolidated financial statements referred to in our
report dated November 9, 1998 appearing on page F-2 of this Annual Report on
Form 10-K also included an audit of the Financial Statement Schedules listed on
page S-1 of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
S-2
<PAGE> 69
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Investment in and advances to subsidiaries................. $2,626,558,000 $2,086,981,000
Other investments.......................................... 2,533,232,000 2,506,556,000
Other assets............................................... 253,631,000 219,956,000
-------------- --------------
TOTAL ASSETS............................................... $5,413,421,000 $4,813,493,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Senior notes and debentures.............................. $1,216,483,000 $1,136,072,000
Junior subordinated debentures........................... 511,894,000 511,894,000
Reserves for guaranteed investment contracts............. 213,707,000 226,959,000
Payable to brokers for purchases of securities........... 306,000 92,990,000
Other liabilities........................................ 290,204,000 261,472,000
-------------- --------------
Total liabilities........................................ 2,232,594,000 2,229,387,000
Shareholders' equity....................................... 3,180,827,000 2,584,106,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $5,413,421,000 $4,813,493,000
============== ==============
</TABLE>
CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Dividends received from subsidiaries............ $ 155,878,000 $ 136,205,000 $110,256,000
Investment income............................... 411,393,000 280,277,000 189,911,000
Net realized investment gains (losses).......... (73,113,000) 16,835,000 4,598,000
Other income.................................... 4,503,000 1,804,000 3,625,000
------------- ------------- ------------
TOTAL INCOME.................................... 498,661,000 435,121,000 308,390,000
------------- ------------- ------------
Interest expense on senior notes and
debentures.................................... (93,408,000) (78,575,0000) (51,062,000)
Interest expense on junior subordinated
debentures.................................... (42,583,000) (43,290,000) (20,902,000)
Interest expense on guaranteed investment
contracts..................................... (18,357,000) (19,435,000) (20,411,000)
General and administrative expenses, net of
reimbursement from subsidiaries of $12,289,000
in 1998, $38,315,000 in 1997 and $33,930,000
in 1996....................................... (19,774,000) 338,000 (146,000)
------------- ------------- ------------
TOTAL EXPENSES.................................. (174,122,000) (140,962,000) (92,521,000)
------------- ------------- ------------
PRETAX INCOME................................... 324,539,000 294,159,000 215,869,000
Income tax expense.............................. (36,758,000) (45,614,000) (35,404,000)
------------- ------------- ------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES............................... 287,781,000 248,545,000 180,465,000
Equity in undistributed net income of
subsidiaries.................................. 228,531,000 130,505,000 93,962,000
------------- ------------- ------------
NET INCOME...................................... $ 516,312,000 $ 379,050,000 $274,427,000
============= ============= ============
</TABLE>
S-3
<PAGE> 70
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------
1998 1997 1996
------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 516,312,000 $ 379,050,000 $ 274,427,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in net income of
subsidiaries...................... (384,409,000) (266,710,000) (204,218,000)
Net realized investment losses
(gains)........................... 73,113,000 (16,835,000) (4,598,000)
Other, net............................... (108,695,000) 74,750,000 22,644,000
------------- --------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 96,321,000 170,255,000 88,255,000
------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of investments............. (474,486,000) (1,055,976,000) (153,640,000)
Dividends received from subsidiaries..... 155,878,000 136,205,000 110,256,000
Returns (contributions) of capital
received from (paid to) subsidiaries... 2,897,000 (115,861,000) (435,928,000)
------------- --------------- -------------
NET CASH USED BY INVESTING ACTIVITIES.... (315,711,000) (1,035,632,000) (479,312,000)
------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends............... (100,538,000) (67,819,000) (61,721,000)
Withdrawal payments on guaranteed
investment contracts................... (31,610,000) (31,525,000) (31,725,000)
Net proceeds from issuances of long-term
notes and debentures................... 98,544,000 559,332,000 47,478,000
Payments for redemptions of long-term
notes and debentures................... (20,025,000) -- --
Net proceeds from issuances of junior
subordinated debentures................ -- 310,256,000 185,700,000
Payment for redemption of 9.95% junior
subordinated debentures................ -- (54,259,000) --
Payments for redemptions of Preferred
Stock.................................. -- (136,549,000) --
Net proceeds from issuance of Series E
Preferred Stock........................ -- -- 240,547,000
Net proceeds from issuance of Common
Stock.................................. -- 577,268,000 --
Net issuance cost of 8 1/2% Premium
Equity Redemption Cumulative Security
Units.................................. -- (44,605,000) --
------------- --------------- -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES............................. (53,629,000) 1,112,099,000 380,279,000
------------- --------------- -------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS................. (273,019,000) 246,722,000 (10,778,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD.................... 356,903,000 110,181,000 120,959,000
------------- --------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF
PERIOD................................. $ 83,884,000 $ 356,903,000 $ 110,181,000
============= =============== =============
</TABLE>
S-4
<PAGE> 71
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INDEBTEDNESS
Indebtedness consists of the following long-term notes and debentures
(interest rates are as of September 30):
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
SENIOR NOTES AND DEBENTURES:
5.6% debentures due July 31, 2097 (net of unamortized
discount of $43,077,000 in 1998 and $43,513,000 in
1997).................................................... $ 131,923,000 $ 131,487,000
Medium-term notes due 1999 through 2026 (5 3/8% to
7 3/8%).................................................. 228,310,000 248,335,000
8 1/8% debentures due April 28, 2023....................... 100,000,000 100,000,000
9.95% debentures due February 1, 2012...................... 26,791,000 100,000,000
9.95% debentures due August 1, 2008........................ 73,209,000 --
6.75% notes due October 1, 2007............................ 100,000,000 --
6.2% notes due October 31, 1999............................ 431,250,000 431,250,000
9% notes due January 15, 1999.............................. 125,000,000 125,000,000
-------------- --------------
Total senior notes and debentures.......................... 1,216,483,000 1,136,072,000
-------------- --------------
JUNIOR SUBORDINATED DEBENTURES:
8.35% junior subordinated debentures, due 2044............. 191,224,000 191,224,000
8.30% junior subordinated debentures, due 2045............. 320,670,000 320,670,000
-------------- --------------
Total junior subordinated debentures....................... 511,894,000 511,894,000
-------------- --------------
Total indebtedness......................................... $1,728,377,000 $1,647,966,000
============== ==============
</TABLE>
In addition, the Company is the issuer of the following guaranteed
investment contracts ("GICs") (interest rates are as of September 30):
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
8 1/2% GIC due serially through 2002 (including interest
credited of $1,294,000 in 1998 and $1,275,000 in 1997)... $ 183,924,000 $ 187,414,000
8 3/8% GIC due serially through 2003 (including interest
credited of $142,000 in 1998 and $203,000 in 1997)....... 20,567,000 30,308,000
7 3/8% GIC due in 2018 (including interest credited of
$303,000 in 1998 and $303,000 in 1997)................... 9,216,000 9,237,000
-------------- --------------
Total guaranteed investment contracts...................... $ 213,707,000 $ 226,959,000
============== ==============
</TABLE>
Aggregate debt service payments (i.e., principal and interest payments),
including GICs and indebtedness, are due as follows: 1999, $291,967,000; 2000,
$563,506,000; 2001, $139,000,000; 2002, $297,379,000; 2003, $112,290,000 and
$4,137,059,000, in the aggregate, thereafter.
S-5
<PAGE> 72
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- GUARANTEES
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.
NOTE 3 -- CONTINGENCIES
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses are adequate and any further liabilities and costs will not have a
material adverse impact upon the Company's financial position or results of
operations.
In the ordinary course of business, the Parent has agreed contingently to
make capital contributions, aggregating approximately $497,049,000 to 37 limited
partnerships over the next 5 years (4.5 years on a weighted average basis) in
exchange for ownership interests in such partnerships.
S-6
<PAGE> 73
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Percentage
Ceded Assumption of amount
Gross to other from other Net assumed
amount companies companies amount to net
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998:
Life insurance in force........... $4,481,760 $4,198,926 $ -- $ 282,834 --%
========== ========== ======= ========== =====
Premiums:
Annuities and other single
premiums..................... $1,773,945 $ 6,478 $30,331 $1,797,798 1.69%
Annual life insurance
premiums..................... 32,736 24,178 -- 8,558 --
Accident and health insurance
premiums..................... 920 870 -- 50 --
---------- ---------- ------- ---------- -----
Total premiums.......... $1,807,601 $ 31,526 $30,331 $1,806,406 1.68%
========== ========== ======= ========== =====
1997:
Life insurance in force........... $6,749,549 $5,757,164 $ -- $ 992,385 --%
========== ========== ======= ========== =====
Premiums:
Annuities and other single
premiums..................... $1,427,699 $ -- $62,857 $1,490,556 4.22%
Annual life insurance
premiums..................... 30,321 26,232 7,632 11,721 65.11%
Accident and health insurance
premiums..................... (1,338) (1,557) -- 219 --
---------- ---------- ------- ---------- -----
Total premiums.......... $1,456,682 $ 24,675 $70,489 $1,502,496 4.69%
========== ========== ======= ========== =====
1996:
Life insurance in force........... $8,009,173 $7,701,296 $ -- $ 307,877 --%
========== ========== ======= ========== =====
Premiums:
Annuities and other single
premiums..................... $ 984,334 $ -- $ 9,042 $ 993,376 0.91%
Annual life insurance
premiums..................... 42,364 42,364 -- -- --
Accident and health insurance
premiums..................... 16,613 16,613 -- -- --
---------- ---------- ------- ---------- -----
Total premiums.......... $1,043,311 $ 58,977 $ 9,042 $ 993,376 0.91%
========== ========== ======= ========== =====
</TABLE>
S-7
<PAGE> 74
SUNAMERICA INC.
1998 FORM 10-K
[SUNAMERICA LOGO]
<PAGE> 75
1 SUNAMERICA CENTER
LOS ANGELES, CALIFORNIA 90067-6022
(310) 772-6000
<PAGE> 76
SUNAMERICA INC.
LIST OF EXHIBITS FILED
- ----------------------
2(e) Purchase and Sale Agreement, dated July 15, 1998 between the Company
and MBL Life Assurance Corporation.
4(y) 9.95% Debentures due August 1, 2008, offered by the Company in
exchange for issued and outstanding 9.95% Debentures due
February 1, 2012.
10(w) List of Executive Compensation Plans and Arrangements.
12(a) Statement re Computation of ratio of earnings to fixed charges.
12(b) Statement re Computation of ratio of earnings to combined fixed
charges and preferred stock dividends.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 2(e)
AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES
The Company hereby agrees to furnish supplementally to the
Securities and Exchange Commission upon its request a copy of any of
the exhibits and schedules to Exhibit 2(e) to this Report on Form
10-K. Each of such Exhibits to this Report on Form 10-K sets forth a
description of each schedule and exhibit.
<PAGE> 2
PURCHASE AND SALE AGREEMENT, dated as of July 15, 1998,
among MBL Life Assurance Corporation, a New Jersey stock life
insurance company (the "Seller"), SunAmerica Inc., a Maryland
corporation (the "Purchaser"), Anchor National Life Insurance
Company, an Arizona stock life insurance company ("ANLIC"), and
First SunAmerica Life Insurance Company, a New York stock life
insurance company ("First SunAmerica").
W I T N E S S E T H
I. The Seller.
A. On July 16, 1991, pursuant to an order of the Superior
Court of New Jersey (the "Court"), The Mutual Benefit Life
Insurance Company, a New Jersey mutual life insurance
company ("Mutual Benefit"), was placed in rehabilitation
under the supervision of the New Jersey Commissioner of
Insurance (now known as the Commissioner of Banking and
Insurance) (the "Commissioner");
B. Pursuant to the Third Amended and Restated Plan of
Rehabilitation of Mutual Benefit, dated January 24, 1994 (as
amended, the "Plan"), on May 1, 1994, the Seller assumed and
reinsured certain restructured and reaffirmed insurance
contracts of Mutual Benefit in consideration for the sale,
transfer and assignment to the Seller of substantially all
of the assets of Mutual Benefit;
C. The Settlement Agreement In The Matter of Mutual
Benefit Life Insurance Company, approved by the Court on
January 9, 1997 (the "Settlement Agreement"), resolved
certain appeals of and challenges to the Plan;
D. Pursuant to the Plan, Mutual Benefit transferred all of
the Seller's issued and outstanding capital stock to the
Stock Trust (the "Stock Trust"), a New Jersey stock trust
governed by the Third Amended Stock Trust Agreement, dated
April 29, 1994, between Mutual Benefit and the Commissioner
(the "Stock Trust Agreement");
E. The Commissioner is the trustee (the "Trustee") of the
Stock Trust and has the power, subject to Court and other
approvals, to cause the Seller to dispose of all or
substantially all of its assets;
F. Pursuant to the Settlement Agreement, the Report of the
Joint Committee on Allocation, dated July 7, 1997 (the
"Joint Allocation Report"), and the Order of the Court
Approving Methodology for Allocating and Distributing
Policyholder Value Share, dated February 25, 1998, prior to
the Closing Date the Seller will seek an order of the Court
approving certain amendments to the Plan, described in
Exhibit I, including modifications to the calculation and
payment of the Policy Enhancements, with respect to the
annuity and life insurance policies that comprise the
Reinsured Policies as described therein.
II. The Acquisition. Upon the terms and subject to the
conditions of this Agreement, the Seller wishes to cede, and
ANLIC and First SunAmerica wish to assume, the annuity
contracts and life policies that comprise the Reinsured
Policies and the obligations under the Inward Reinsurance
Agreements, and, in connection therewith, the Seller wishes
to transfer, and ANLIC and First SunAmerica wish to acquire,
certain assets of the Seller used or held for use by the
Seller in the conduct of its business of being the issuer of
and administering the Reinsured Policies (the "Business").
As of the Closing Date, all Reinsured Policies will be
reinsured on an indemnity reinsurance basis by ANLIC
pursuant to the Indemnity Reinsurance Agreement. On the New
York Assumption Date, the Indemnity Reinsurance Agreement
will terminate with respect to the Reinsured Policies held
<PAGE> 3
by Residents of New York as of the New York Assumption Date
and the Seller will cede and First SunAmerica will assume
such Reinsured Policies on an assumption reinsurance basis
pursuant to the First SunAmerica Assumption Reinsurance
Agreement. On the Assumption Date for each other
jurisdiction, the Indemnity Reinsurance Agreement will
terminate with respect to the Reinsured Policies held by
Residents of such jurisdiction as of such Assumption Date
and the Seller will cede and ANLIC will assume such
Reinsured Policies on an assumption reinsurance basis
pursuant to the ANLIC Assumption Reinsurance Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. SALE AND PURCHASE
1.1 Ceding Commission; Reinsurance Premium; Acquisition of
Transferred Assets and Assumption of Assumed Liabilities.
1.1.1 Ceding Commission. The ceding commission for the
Reinsured Policies (as adjusted pursuant to the terms hereof, the
"Ceding Commission") will be $131,000,000 (the "Base Ceding
Commission") less the sum of: (a) the Reserve Liabilities
Adjustment Amount; (b) the Outward Reinsurance Adjustment Amount;
(c) the Policy Enhancements Calculation Adjustment Amount; and
(d) the Remedy Compromise Adjustment Amount. The calculation of
the Ceding Commission as set forth above is not intended to
establish the amount, if any, of the "ceding commission"
attributable to the Transactions for Tax purposes.
1.1.2 Reinsurance Premium; Transferred Reserve Assets. The
reinsurance premium for the Reinsured Policies (the "Reinsurance
Premium") will be an amount equal to the Reserve as of the
Closing Date. Subject to the terms and conditions hereof, on the
Closing Date the Seller will transfer, convey, sell, assign and
deliver to ANLIC and ANLIC will purchase and accept from the
Seller, all of the Seller's right, title and interest in and to
Transferred Reserve Assets with an aggregate Value as of the
Closing Date equal to (a) the Reinsurance Premium, less (b) the
Ceding Commission. The Reinsurance Premium and the Ceding
Commission, including each adjustment thereto as set forth in
Section 1.1.1, will be estimated as of the end of the second
calendar month preceding the Closing Date or, if the Closing Date
is December 31, 1998, as of November 30, 1998 (the "Calculation
Date") in accordance with Section 1.2.2, subject to adjustment
following the Closing Date in accordance with Section 1.3.
1.1.3 Changes to Transferred Reserve Assets. The Seller will
deliver, in place of any asset listed on Schedule 3 that is a
receivable due from an Outward Reinsurer under an Outward
Reinsurance Agreement that is not assigned to ANLIC as an
Assigned Contract on the Closing Date pursuant to Section 1.1.4,
cash or Cash Equivalents that have an aggregate Value as of the
Closing Date equal to or greater than the Value reflected in
Schedule 3 for such receivable. The Seller can, without the
prior written consent of the Purchaser, deliver at the Closing,
in place of any asset listed on Schedule 3, cash or Cash
Equivalents that have an aggregate Value as of the Closing Date
equal to or greater than the Value reflected in Schedule 3 for
such asset. If the Seller receives any payment with respect to
any asset listed in Schedule 3 or sells or otherwise disposes of
any such asset on or prior to the Closing Date, the Seller will
reinvest such proceeds in cash or Cash Equivalents that have an
aggregate Value as of the Closing Date equal to or greater than
the Value reflected in Schedule 3 for the asset collected, sold
or disposed of by the Seller.
1.1.4 Other Assets Transferred on the Closing Date. In
addition to the Transferred Reserve Assets, on the Closing Date
the Seller will transfer, convey, sell, assign and deliver to
ANLIC and ANLIC will acquire from the Seller, all of the Seller's
<PAGE> 4
right, title and interest in and to the following: (a) the Books
and Records, provided, however, that the Seller will maintain the
originals of all Books and Records in its possession until the
Transition Period Termination Date (at which time all such
original Books and Records will be delivered to ANLIC and First
SunAmerica, as appropriate) and the Purchaser, ANLIC and First
SunAmerica will have access to such original Books and Records in
accordance with the terms hereof; and (b) Seller's rights in and
all claims arising under the contracts listed on Schedule 4,
comprised of (i) each Outward Reinsurance Agreement for which all
necessary consents to assignment to ANLIC on the Closing Date
(and, if applicable, the subsequent partial assignment by ANLIC
to First SunAmerica relating to the New York Reinsured Policies
on the New York Assumption Date) have been obtained on or prior
to the Closing Date, excluding the Outward Reinsurance Agreements
relating to the Policies ceded to Integrity Life Insurance
Company, and each Substitute Outward Reinsurance Agreement
effective as of the Closing Date; (ii) each Inward Reinsurance
Agreement listed on Section 2.14.2 of the Seller's Disclosure
Schedule of which the ceding insurer is an Outward Reinsurer of
an Outward Reinsurance Agreement assigned to ANLIC pursuant to
clause (i) above and for which all necessary consents to effect
an assignment to ANLIC on the Closing Date have been obtained on
or prior to the Closing Date; and (iii) the Commission Agreements
with respect to the Reinsured Life Policies, provided that the
Purchaser will not be obligated by virtue of the assignment of
such Commission Agreements to appoint the Agents as agents of
ANLIC and/or First SunAmerica except as required pursuant to
Section 5.20 (the agreements listed in clause (b) together with
the agreements listed in Section 1.1.5(a) are, collectively, the
"Assigned Contracts"). Without limiting the generality of the
foregoing, the term "Assigned Contracts" will expressly exclude
any administrative services contracts and other obligations with
respect to group pension contracts, Fully Administered Qualified
Plans or 401(k) Contracts that are not required to be performed
by the Seller by the terms of the Reinsured Policies.
1.1.5 Other Assets Transferred After the Closing Date.
(a) As promptly as reasonably practical following the date on
which, pursuant to Section 5.16: (i) the Seller or the Purchaser
obtains all necessary consents to effect an assignment of any
Remaining Outward Reinsurance Agreement to ANLIC and First
SunAmerica, as applicable (e.g., if such date occurs before the
New York Assumption Date and the Remaining Outward Reinsurance
Agreement relates to any New York Reinsured Policy, all necessary
consents will include consents to an assignment first to ANLIC
and then a subsequent partial assignment by ANLIC to First
SunAmerica on the New York Assumption Date); or (ii) the date on
which the Seller has entered into any Substitute Outward
Reinsurance Agreement with respect to a Remaining Outward
Reinsurance Agreement, the Seller will transfer, convey, sell,
assign and deliver to ANLIC or First SunAmerica, as applicable,
and ANLIC or First SunAmerica, as applicable, will acquire from
the Seller, all of the Seller's right, title and interest in and
to such Remaining Outward Reinsurance Agreement or Substitute
Outward Reinsurance Agreement. If, pursuant to Section 1.1.3,
the Seller transferred cash or Cash Equivalents on the Closing
Date in place of any receivable due from an Outward Reinsurer of
a Remaining Outward Reinsurance Agreement listed on Schedule 3,
and if the Seller subsequently effects an assignment of such
Remaining Outward Reinsurance Agreement pursuant to
Section 5.16.1 and this Section 1.1.5(a) then, together with the
assignment of such Remaining Outward Reinsurance Agreement, the
Seller may transfer, convey, sell, assign and deliver to ANLIC
and First SunAmerica, as applicable, a receivable in an amount
equal to the remainder of (x) (A) the amount due from the
Reinsurer as listed on Schedule 3 minus (B) any amounts
previously recovered by the Seller, minus (y) (A) any amounts in
dispute with respect to such receivable plus (B) any amounts
that, pursuant to the normal accounting cycle of the Remaining
Outward Reinsurance Agreement, should have been paid prior to the
<PAGE> 5
relevant date of transfer. Within five Business Days of transfer
of any such receivable, the Purchaser will deliver, or will cause
ANLIC or First SunAmerica, as applicable, to deliver, cash or
Cash Equivalents with an aggregate Value equal to the Value of
the transferred receivable.
(b) On the Transition Period Termination Date the Seller will
transfer, convey, sell, assign and deliver to ANLIC and First
SunAmerica, as applicable, and ANLIC and First SunAmerica, as
applicable, will acquire from the Seller, all of the Seller's
right, title and interest in and to the Agent Debit Balance as of
the Transition Period Termination Date. In addition, on the
Transition Period Termination Date the Seller will deliver to the
location(s) designated by the Purchaser for such delivery the
originals of all Books and Records; provided, however, that the
Seller will be entitled to keep and maintain copies of all Books
and Records from and after the Transition Period Termination
Date, and to have access to the originals of the Books and
Records in accordance with the terms hereof.
(c) On the Account Values True-Up Date the Seller will transfer,
convey, sell, assign and deliver to ANLIC and First SunAmerica,
as applicable, and ANLIC and First SunAmerica, as applicable,
will acquire from the Seller, all of the Seller's right, title
and interest in and to cash and Cash Equivalents that have an
aggregate Value as of the Account Values True-Up Date equal to
the Account Values True-Up Amount.
(d) On the IBNR Settlement Date the Seller will transfer,
convey, sell, assign and deliver to ANLIC and First SunAmerica,
as applicable, and ANLIC and First SunAmerica, as applicable,
will acquire from the Seller, cash and Cash Equivalents that have
an aggregate Value as of the IBNR Settlement Date equal to the
IBNR Settlement Amount. The assets referred to in Section 1.1.4,
this Section 1.1.5, and the Transferred Reserve Assets are,
collectively, the "Transferred Assets."
1.1.6 Assumption of Liabilities; Excluded Liabilities. Upon
the terms and subject to the conditions of this Agreement: (a)
on the Closing Date ANLIC will reinsure on a 100% coinsurance
basis the Insurance Liabilities as of the Closing Date pursuant
to the Indemnity Reinsurance Agreement; and (b) on the respective
Assumption Dates, ANLIC and First SunAmerica will assume their
respective Insurance Liabilities pursuant to the Assumption
Reinsurance Agreements; provided, however, that with respect to
each Reinstated Policy, ANLIC will reinsure on a 100% coinsurance
basis the Insurance Liabilities in respect of such Reinstated
Policy for the period, if any, from the Reinstatement Date to the
applicable Assumption Date and ANLIC or First SunAmerica, as the
case may be, will assume the Insurance Liabilities in respect of
such Reinstated Policy as of the later of the Reinstatement Date
and the applicable Assumption Date. Other than (a) the Insurance
Liabilities as of the Closing Date, the applicable Assumption
Date or the applicable Reinstatement Date, as the case may be,
and (b) obligations arising under each Assigned Contract on or
after the date of transfer thereof, in each case in accordance
with the terms thereof (e.g., excluding any liabilities or
obligations arising from any breach thereof or default thereunder
on or prior to the date of transfer thereof), none of the
Purchaser, ANLIC or First SunAmerica is assuming, nor will any of
them be deemed to have assumed, any liability or obligation of
the Seller or Mutual Benefit, any predecessor of the Seller
(including Mutual Benefit), or any Affiliate or Representative of
any of them, of any kind or nature, whether absolute, contingent,
accrued or otherwise, known or unknown, and whether arising
before or after the Closing Date, including: (i) any liability
arising under or in connection with any Contract other than the
Reinsured Policies; (ii) any liability in respect of the
marketing, sale or administration of the Reinsured Policies, the
Policies subject to the Inward Reinsurance Agreements or the
ownership or use of any Transferred Asset arising or relating to
a date that is on or prior to the date of transfer thereof;
<PAGE> 6
(iii) the Extra Contractual Obligations; (iv) any liability with
respect to any Outward Reinsurance Agreement that is not an
Assigned Contract, including the Outward Reinsurance Agreement
with Integrity Life Insurance Company or arising under the
Policies subject to such Outward Reinsurance Agreement; (v) any
liability for Commissions accruing with respect to the Reinsured
Annuity Contracts or the Reinsured Life Policies (x) prior to the
Closing or (y) after the Closing other than pursuant to the
express written terms of the relevant Assigned Contract; (vi) any
liability for Commissions accruing with respect to the Reinsured
Annuity Contracts or the Reinsured Life Policies whether before
or after the Closing if arising under agreements or arrangements
that are not Assigned Contracts; (vii) any liability under the
Reinsured Policies or the Policies subject to the Inward
Reinsurance Agreements resulting from the death of a Policyholder
prior to the Closing Date that is reported prior to the
Transition Period Termination Date; (viii) any liability arising
under or in connection with any administrative services contracts
or responsibilities with respect to Fully Administered Qualified
Plans; and (ix) any liability arising under the Plan or any
Rehabilitation Document other than payment of the Policy
Enhancements in accordance with the Policy Enhancements
Procedures and payment of the Account Values True-Up as expressly
contemplated by this Agreement (collectively, the "Excluded
Liabilities").
1.1.7 Transfer and Sales Taxes. Any transfer or sales Tax or
other fees or charges imposed by a Governmental Authority upon
the transfer, sale or recording of the Transferred Assets will be
paid by the Seller.
1.1.8 Allocation of Ceding Commission and Transferred Reserve
Assets. The parties will allocate the Ceding Commission and the
Transferred Reserve Assets between the Reinsured Life Policies
and the Reinsured Annuity Contracts as of the Closing Date and
among the Non New York Reinsured Life Policies, the New York
Reinsured Life Policies, the Non New York Reinsured Annuity
Contracts and the New York Reinsured Annuity Contracts as of the
New York Assumption Date in accordance with procedures described
in Schedule 7. The Seller, the Purchaser, ANLIC and First
SunAmerica will use such allocation procedures for all Tax and
statutory filings and reports.
1.2 Closing; Estimated Closing Statement.
1.2.1 Place and Time of Closing. The closing of the
Transactions (the "Closing") will take place at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022,
as of 12:01 a.m. on the first day of the month immediately
following the date on which all of the Closing Conditions have
been satisfied unless all of the Closing Conditions have been
satisfied during December 1998, in which case the Closing of the
Transactions will take place on December 31, 1998, or at such
other place and time as the Seller and the Purchaser may mutually
agree (the "Closing Date").
1.2.2 Estimated Closing Date Statement. At least ten days
prior to the Closing Date, the Seller will deliver to the
Purchaser a statement (the "Estimated Closing Date Statement") of
the Seller's good faith estimate as of the Calculation Date of
the following: (a) the Reserve (including an updated
Schedule 5); (b) the Ceding Commission, including each adjustment
thereto as set forth in Section 1.1.1; and (c) subject to
compliance with Section 1.1.3 and Section 6.4.13, a list of each
of the Transferred Reserve Assets to be delivered to the
Purchaser at the Closing and the calculation of the Value thereof
(including an updated Schedule 3). Except for the calculation of
the Policy Enhancements Amount (which will be made in accordance
with the terms of this Agreement) and the IBNR Reserve Amount,
the calculation of the Reserve and each component thereof,
including the Tax reserves, reflected in the Estimated Closing
Date Statement will be prepared using the same methodology and
<PAGE> 7
assumptions used in preparing the Seller's December 31, 1997
Audited SAP Statements, including the assumptions that the
Rehabilitation Period Termination Date will be December 31, 1999
and that the applicable credited rate during the Rehabilitation
Period will be calculated as specified in the Settlement
Agreement, notwithstanding any actual change thereto as a
consequence of the Transactions.
1.3 Post-Closing Adjustment.
1.3.1 Final Closing Date Statement. No later than 45 days
after the Closing Date, the Seller will prepare and deliver to
the Purchaser (a) a statement (the "Final Closing Date
Statement") that has been reviewed and certified by Coopers &
Lybrand L.L.P. and that sets forth the actual amount as of the
Closing Date of the following: (i) the Reserve (including an
updated Schedule 5) (as may be finally determined in accordance
with Section 1.3.2, the "Final Reserve"); (ii) the Ceding
Commission, including each adjustment thereto as set forth in
Section 1.1.1 (as may be finally determined in accordance with
Section 1.3.2, the "Final Ceding Commission"); and (iii) a list
of each of the Transferred Reserve Assets delivered to the
Purchaser at the Closing and a calculation of the Value thereof
as of the Closing Date (including an updated Schedule 3) (as may
be finally determined in accordance with Section 1.3.2, the
"Final Reserve Assets"); (b) a detailed explanation of changes
from the Estimated Closing Date Statement; and (c) a copy of all
documents used in the preparation of the Final Closing Date
Statement and the explanation pursuant to clause (b). The Final
Closing Date Statement will be prepared in a manner consistent
with the Estimated Closing Date Statement. The fees and other
expenses of review and certification of the Final Closing Date
Statement by Coopers & Lybrand L.L.P. will be paid by the Seller.
The Final Closing Date Statement will be binding on the Purchaser
unless the Purchaser delivers to the Seller within 45 days after
its receipt of the Final Closing Date Statement from the Seller
written notice of disagreement specifying in reasonable detail
the nature and extent of the disagreement.
1.3.2 Final Determination of Disputes. If the Purchaser and
the Seller are unable to resolve any disagreement with respect to
the Final Closing Date Statement within 30 days after the Seller
receives a timely notice of disagreement, the items of
disagreement alone will be referred for final determination to
the U.S. national office of KPMG Peat Marwick or, if such firm is
unable or unwilling to make such final determination, to such
other independent accounting firm as the parties will mutually
designate. The firm making such determination is referred to
herein as the "Independent Party." The Final Closing Date
Statement will be deemed to be binding on the Purchaser and the
Seller upon the earliest to occur of: (a) the Purchaser's failure
to deliver to the Seller a timely notice of disagreement;
(b) resolution of any disagreement by mutual written agreement of
the parties after a timely notice of disagreement has been
delivered to the Seller; or (c) notification by the Independent
Party of its final determination of the items of disagreement
submitted to it. If the net amount of the payment to be made
pursuant to Section 1.3.3 to either the Seller or ANLIC is closer
to the amount of such payment calculated on the basis of the
Final Closing Date Statement than the amount of such payment
calculated on the basis of the Purchaser's notice of
disagreement, the fees and disbursements of the Independent Party
will be paid by the Purchaser. Otherwise, the fees and
disbursements of the Independent Party will be paid by the
Seller.
1.3.3 Adjustments; Payment and Interest. If the amount of
the Final Reserve less the Final Ceding Commission is greater
than the Value as of the Closing Date of the Final Reserve Assets
transferred to ANLIC on the Closing Date, then the Seller will
pay the difference to ANLIC. If the amount of the Final Reserve
less the Final Ceding Commission is less than the Value as of the
<PAGE> 8
Closing Date of the Final Reserve Assets transferred to ANLIC on
the Closing Date, then the Purchaser will pay (or will cause
ANLIC to pay) the difference to the Seller. Payments to be made
under this Section 1.3.3 will be made, together with interest
thereon from the Closing Date to the date of actual payment at
the rate of 6.8% per annum, by wire transfer in cash by the
applicable party. Any amounts not subject to dispute pursuant to
the Purchaser's notice of disagreement delivered pursuant to
Section 1.3.1 will be paid by the applicable party within five
Business Days of the delivery of such notice of disagreement.
Any amount subject to dispute will be paid by the applicable
party within five Business Days of the final determination of
such amounts, whether through application of Section 1.3.1 or
1.3.2.
1.4 Closing Items. At the Closing, the parties will execute
(where appropriate) and deliver the agreements and instruments
described below, in each case dated as of the Closing Date.
1.4.1 Assumption Reinsurance Agreements. The Seller and
ANLIC on the one hand, and the Seller and First SunAmerica on the
other hand, will enter into the ANLIC Assumption Reinsurance
Agreement and First SunAmerica Assumption Reinsurance Agreement,
respectively, substantially in the forms of Exhibits A-1 and A-2
(collectively, the "Assumption Reinsurance Agreements"),
providing, among other things, for the assumption by First
SunAmerica of the New York Reinsured Policies as of the New York
Assumption Date and the assumption by ANLIC of all other
Reinsured Policies as of the applicable Assumption Dates.
1.4.2 Indemnity Reinsurance Agreement. The Seller and ANLIC
will enter into the Indemnity Reinsurance Agreement substantially
in the form of Exhibit B (the "Indemnity Reinsurance Agreement"),
providing, among other things, for the indemnity reinsurance as
of the Closing Date by ANLIC of the Insurance Liabilities under
the Reinsured Policies, pending reinsurance of such Reinsured
Policies by ANLIC and First SunAmerica on an assumption basis
pursuant to the Assumption Reinsurance Agreements.
1.4.3 Administrative Services Agreement. The Seller and the
Purchaser will enter into the Administrative Services Agreement
substantially in the form of Exhibit C, providing for the
provision by the Purchaser or one or more of its Subsidiaries of
certain administrative services to the Seller following the
Closing Date with respect to the Reinsured Policies.
1.4.4 Transition Services Agreement. The Seller and ANLIC
will enter into the Transition Services Agreement substantially
in the form of Exhibit D, providing for the provision by the
Seller of certain transition services to ANLIC from the Closing
Date to the Transition Period Termination Date.
1.4.5 Escrow Agreement. The Seller, the Purchaser, ANLIC and
First SunAmerica will enter into the Escrow Agreement
substantially in the form of Exhibit E (the "Escrow Agreement"),
providing, among other things, for the deposit by the Seller on
the Closing Date for satisfaction of Escrow Claims of: (a) the
Claims Escrow Amount; (b) the Tax Reserves Indemnity Escrow
Amount; (c) the DAC Reduction Escrow Amount or the DAC Election
Escrow Amount, as the case may be; (d) if applicable, the Outward
Reinsurance Escrow Amount; (e) the COI Adjustment Escrow Amount;
and (f) if applicable, the Policy Enhancements Endorsements
Escrow Amount.
1.4.6 Bill of Sale. The Seller will execute and deliver to
ANLIC and First SunAmerica a Bill of Sale substantially in the
form of Exhibit F providing for the transfer and conveyance of
the Transferred Assets.
1.4.7 Other Deliveries. All other agreements, certificates,
opinions and documents required by the terms of this Agreement to
be delivered by or on behalf of the parties will be executed and
<PAGE> 9
delivered by the relevant Person(s).
2. REPRESENTATIONS AND WARRANTIES OF THE SELLER
Except as expressly set forth in the relevant sections
of the Seller's Disclosure Schedule, the Seller represents and
warrants to the Purchaser as follows:
2.1 Corporate Status of the Seller. The Seller is a stock
insurance company duly organized, validly existing and in good
standing under the laws of the State of New Jersey and has all
requisite corporate power and authority to conduct its business
and to own or lease its properties, as now conducted, owned or
leased.
2.2 Authority. The Seller has full corporate power and
authority to execute and deliver this Agreement and the Ancillary
Agreements, to perform its obligations and to consummate the
Transactions. Such execution, delivery, performance and
consummation have been (a) duly authorized by its Board of
Directors and its sole shareholder, which constitutes all
necessary corporate action on the part of the Seller for such
authorization, and (b) approved by the Commissioner in her
capacity as Liquidator/Rehabilitator of Mutual Benefit. Each of
this Agreement and the Ancillary Agreements has been or will have
been on or prior to the Closing, as applicable, duly executed and
delivered by the Seller and (assuming its due execution and
delivery by the Purchaser, ANLIC and/or, First SunAmerica, to the
extent a party thereto) constitutes the legal, valid and binding
obligation of the Seller, enforceable against the Seller in
accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, reorganization, insolvency,
fraudulent conveyance, moratorium, receivership or similar laws
affecting creditors of insurance companies and creditors' rights
generally and by general principles of equity (whether considered
at law or in equity).
2.3 No Conflicts, Consents and Approvals, etc..
2.3.1 No Conflicts. Neither the execution, delivery or
performance of this Agreement and the Ancillary Agreements by the
Seller, nor the consummation of the Transactions will result in:
(a) any conflict with, or default under, any of the
Organizational Documents of the Seller; (b) any breach or
violation of, or default under, any Applicable Law or any
condition imposed by any Governmental Authority binding upon
Seller or any of its Subsidiaries with respect to the Business,
the Reinsured Policies or any Transferred Asset; (c) any breach
or violation of, or default under, the Plan or any Rehabilitation
Document, or any breach or violation of, or default under any
material mortgage, agreement, deed of trust, guaranty, note,
bond, lease, indenture or any other instrument relating to or
arising in connection with the Business or to which the Seller or
any of its Subsidiaries is a party or by which any of them or any
of their respective properties or assets are bound; (d) the
creation or imposition of any Encumbrances on the Transferred
Assets; or (e) the breach or violation of any of the terms or
conditions of, or a default under, or otherwise cause an
impairment or revocation of, any Permit related to the Business,
the Reinsured Policies or the Transferred Assets, except for such
conflicts, defaults, breaches, violations, conditions or
Encumbrances that would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
2.3.2 Consents. Section 2.3.2 of the Seller's Disclosure
Schedule sets forth each consent, approval, exemption or
authorization required to be obtained from, notice required to be
given to, and filing required to be made with, any Governmental
Authority or any other Person by the Seller or any of its
Subsidiaries in connection with the execution and delivery of
this Agreement and the Ancillary Agreements, the consummation of
the Transactions, or to prevent the termination of any material
<PAGE> 10
right, privilege, franchise, Permit or agreement of the Seller or
any of its Subsidiaries related to the Business, the Reinsured
Policies or any of the Transferred Assets, except filings with,
or consents or approvals of, (a) the Court, as specified in
Section 6.2.3, (b) the Class Four Creditors, as specified in
Section 6.2.4, (c) the Reinsurers, as specified in
Section 6.2.5,(d) filings required with respect to the HSR Act,
or (e) the Governmental Authorities having responsibility for the
regulation of insurance in each jurisdiction in which the Seller
holds a certificate of authority to engage in the business of
insurance. The Seller will deliver to the Purchaser not later
than 30 days prior to the Closing Date an updated Section 2.3.2
of the Seller's Disclosure Schedule setting forth all required
filings with and consents or approvals of the Governmental
Authorities described in clause (e) above.
2.4 Permits, Licenses, etc.. The Seller is duly licensed to
conduct insurance business under the laws of the State of New
Jersey and under the laws of each other State of the United
States and the District of Columbia in the capacity and subject
to the limitations set forth opposite each such jurisdiction on
Section 2.4 of the Seller's Disclosure Schedule. Such
limitations individually or in the aggregate would not reasonably
be expected to result in a Material Adverse Effect. The Seller
has been duly authorized by all necessary Governmental
Authorities to issue the Reinsured Policies and to reinsure the
Policies subject to the Inward Reinsurance Agreements in the
respective jurisdictions in which they have been issued. The
Seller has all Permits necessary to conduct the Business in the
manner and in the areas in which the Business is presently being
conducted, subject, in the case of insurance licenses, to the
limitations set forth opposite each jurisdiction on Section 2.4
of the Seller's Disclosure Schedule, and all such Permits are
valid and in full force and effect, except where the failure to
have such a Permit would not, individually or in the aggregate,
result in a Material Adverse Effect. No revocation or non-
renewal of such Permits has occurred and, to the knowledge of the
Seller, the Seller has not engaged in any activity that would
cause revocation or suspension of any such Permits, no Action
looking to or contemplating the revocation or suspension of any
such Permit is pending or, to the knowledge of the Seller,
threatened, and the Seller has not received notice from any
Person of any intention to revoke or to refuse renewal of any
such Permit, except for such revocations, non-renewals or
suspensions that would not, individually or in the aggregate,
result in a Material Adverse Effect.
2.5 Compliance with Laws. Neither the Seller nor any of its
Subsidiaries is, nor, to the knowledge of the Seller, has any of
their Representatives been, in material violation (or with or
without notice or lapse of time or both, would be in violation)
of any Applicable Law with respect to the Business, the Reinsured
Policies or any of the Transferred Assets except any such
violation that has been cured, resolved through binding
agreements with applicable Governmental Authorities, or barred by
applicable statutes of limitations. Neither the Seller nor any
of its Subsidiaries has received any written notice of any
violation by any of them of any Applicable Law, except for
violations that, individually or in the aggregate, would not
reasonably be expected to materially impair the ability of the
Seller to perform its obligations under, or to consummate the
Transactions.
2.6 Financial Statements. The Seller has delivered to the
Purchaser true, correct and complete copies of the financial
statements described below.
2.6.1 Audited GAAP Statements. The audited consolidated
balance sheets of the Seller and its Subsidiaries as at
December 31, 1996 and December 31, 1997, and the related
consolidated statements of income, changes in shareholders'
equity, and cash flows for the periods then ended, together with
<PAGE> 11
the notes thereto and the unqualified report of Coopers & Lybrand
L.L.P. thereon (the "GAAP Statements");
2.6.2 Statutory Statements. The annual statements of the
Seller, including all notes, exhibits and schedules thereto and
any affirmations and certifications filed therewith and the
actuarial opinions applicable to the Seller for such years (the
"Statutory Statements") as filed with the Department of Banking
and Insurance of the State of New Jersey for the years ended
December 31, 1996 and December 31, 1997; and
2.6.3 Audited SAP Statements. The audited statutory-basis
balance sheets of the Seller as at December 31, 1996 and
December 31, 1997, and the related summaries of operations,
statutory-basis statements of income, capital and surplus, and
cash flow for the periods then ended, together with the notes
thereto and the unqualified report of Coopers & Lybrand L.L.P.
thereon (the "Audited SAP Statements;" and together with the
Statutory Statements, the "SAP Statements").
2.6.4 GAAP Representations. The GAAP Statements present
fairly, in all material respects, the consolidated financial
position of the Seller and its Subsidiaries as at the respective
dates thereof and the results of their consolidated income,
changes in shareholders' equity and cash flows for the respective
periods then ended, in each case, in accordance with GAAP applied
on a consistent basis throughout the periods indicated, except
for the deviations from GAAP disclosed thereon or in the notes
thereto.
2.6.5 SAP Representations. The SAP Statements have been
prepared in accordance with accounting practices prescribed or
permitted by the Department of Banking and Insurance of the State
of New Jersey, and such accounting practices have been applied on
a consistent basis throughout the periods indicated, except as
expressly set forth or disclosed in the respective notes thereto.
The Audited SAP Statements present fairly, in all material
respects, the admitted assets, reserves, liabilities, capital and
surplus of the Seller as at the respective dates thereof and the
results of its operations and its cash flow for the respective
periods then ended. The Statutory Statements complied in all
material respects with all Applicable Laws when filed, were
timely filed with all required Governmental Authorities, and no
material deficiency has been asserted or is otherwise known by
the Seller with respect to such statements by the Department of
Banking and Insurance of the State of New Jersey or any other
applicable Governmental Authority.
2.7 Computer Software. Section 2.7 of the Seller's Disclosure
Schedule sets forth a listing of all Owned Software and a listing
of all Licensed Software (each of which categorizes the Owned
Software or the Licensed Software, as applicable, in accordance
with their respective uses, including: (a) generating
policyholder illustrations; (b) reinsurance administration;
(c) group and individual annuity administration; (d) life
administration; (e) commission payments; and (f) other financial
or management reporting). The Seller is the owner of all Owned
Software necessary to perform the Seller's obligations under the
Transition Services Agreement and has the right under valid
licenses to use all Licensed Software necessary to perform the
Seller's obligations under the Transition Services Agreement, in
each case free and clear of any Encumbrances, except with respect
to Licensed Software for royalty or other payment obligations
(including any one-time license transfer fees imposed by the
licensor). The Owned Software and the Licensed Software
constitute all of the computer software programs that are
necessary to conduct the Business as presently conducted by the
Seller.
2.8 Litigation. To the extent related to the Business, the
Reinsured Policies or the Transferred Assets, there are: (a) no
outstanding orders, decrees or judgments by or with any
<PAGE> 12
Governmental Authority before which the Seller or any of its
Subsidiaries is or was a party; (b) no material Actions, pending
or, to the knowledge of the Seller, threatened or contemplated,
either by or against the Seller or any of its Subsidiaries; or
(c) to the knowledge of the Seller, no events, facts or
circumstances that have arisen or occurred (other than the
routine claims for benefits under insurance policies and
annuities in force, not including any claims for consequential or
punitive damages) that would reasonably be expected to result in
the commencement of any material Action against the Seller or any
of its Subsidiaries. Section 2.8 of the Seller's Disclosure
Schedule, as to each Action disclosed therein, describes the
parties, the nature of the proceeding, the date and method
commenced, and the amount of damages (if known) or other relief
sought, and if applicable, paid or granted.
2.9 Regulatory Filings. The Seller has made available for
inspection by the Purchaser all material registrations, filings
and submissions made by the Seller or any of its Subsidiaries
with any Governmental Authority and final financial, market
conduct and other reports of examinations with respect to the
Seller or any of its Subsidiaries issued by any such Governmental
Authority along with Seller's or the Subsidiary's responses
thereto to the extent that such registrations, filings,
submissions and reports (a) were made or issued on or subsequent
to December 31, 1996 and (b) relate to the Business, the
Reinsured Policies or the Transferred Assets. The Seller and its
Subsidiaries have filed all material reports, statements,
documents, registrations, filings or submissions (including any
sales, marketing or advertising material) required to be filed by
any of them with any Governmental Authority to the extent they
relate to the Business, the Reinsured Policies or the Transferred
Assets. All such reports, statements, registrations, filings and
submissions were in compliance in all material respects with
Applicable Laws when filed or as amended or supplemented. No
material deficiencies have been asserted by any such Governmental
Authority with respect to such registrations, filings or
submissions that have not been cured to the satisfaction of such
Governmental Authority. Since December 31, 1996, neither the
Seller nor any of its Subsidiaries has submitted any written
response with respect to material comments from any Governmental
Authority concerning such reports, statements, registrations,
filings, submissions or reports of examinations. Since
December 31, 1996, no fine or penalty has been imposed on the
Seller or any of its Subsidiaries with respect to the Business,
the Reinsured Policies or the Transferred Assets. No deposits
have been made by the Seller or any of its Subsidiaries with, or
at the direction of, any Governmental Authority with respect to
the Business or the Reinsured Policies that are not shown on the
most recent GAAP Statements of the Seller.
2.10 Tax Matters.
2.10.1 Tax Treatment of Reinsured Policies. None of the
Reinsured Policies fails to meet the requirements under the Code
that must be met in order for the Policyholder thereof to receive
treatment under the Code that is no less favorable than the
treatment that was (a) represented would be received by the
Policyholder or any beneficiary thereof in materials provided to
the Policyholder or any such beneficiary by the Seller, Mutual
Benefit or any of their respective Affiliates or Representatives
at any time prior to the Closing Date with respect to the
Reinsured Policy or the predecessor policy issued by Mutual
Benefit, or (b) customary for that type of Policy when issued.
2.10.2 Tax Reserves. The Seller's tax reserves for the
Reinsured Policies as reflected in the Seller's federal income
tax return for the fiscal year ended December 31, 1996 have been
properly calculated under the Code, and such tax reserves have
been maintained since such date in accordance with all applicable
requirements of the Code.
<PAGE> 13
2.10.3 Tax Impact on Policyholders. The crediting to the
Account Value of an Eligible Policy of the Policy Enhancement as
expressly contemplated by this Agreement will, under the Code,
other Applicable Law and official administrative or controlling
judicial interpretations thereof as currently in effect, be
treated with respect to each Policyholder as a deferred amount
that is not includable in income for federal income tax purposes
unless or until an amount with respect to the Policy Enhancements
is actually received in cash by such Policyholder, its designee,
or the beneficiary of an Eligible Policy; provided, that this
representation will not apply with respect to funding agreements
or annuity contracts described in Section 72(u) of the Code where
interest or dividends are credited to the Account Value in the
ordinary course of business (without regard to the Transactions)
and are includable in taxable income when credited or ratably
over the term of the Contract; and provided, further, that to the
extent that the Purchaser and its Affiliates do not comply with
the requirements of Section 5.23 and such failure causes this
representation to be false, the Purchaser will not be entitled to
assert a claim against the Seller for breach of this
representation.
2.11 Absence of Changes. Except as expressly contemplated or
required by this Agreement, since December 31, 1997 the Seller
has conducted the Business only in the ordinary course (taking
into account the restrictions imposed on the Seller pursuant to
the Plan) consistent with past practice and there has not
occurred or arisen any transaction, commitment, dispute, damage,
destruction, loss or other event or condition of any character
(whether or not in the ordinary course of business), individually
or in the aggregate having, or that would reasonably be expected
to have, a Material Adverse Effect, and neither the Seller nor
any of its Subsidiaries has with respect to the Business, the
Reinsured Policies or the Transferred Assets:
(a) subjected, or permitted to exist with respect to, any of the
Transferred Assets (whether tangible or intangible) to any
material Encumbrance;
(b) amended, terminated, cancelled or compromised any material
claims of the Seller or any of its Subsidiaries or waived any
other rights of substantial value to the Seller or any of its
Subsidiaries;
(c) made any material change in the customary methods of
operation of the Seller or any of its Subsidiaries, including any
of their respective purchasing, marketing, selling, underwriting,
pricing, actuarial or investment practices or policies, or made
any change in any of their respective financial, Tax or
accounting practices or policies, or in any assumption underlying
such a practice or policy, in either case including any basis for
calculating Reserve Liabilities or establishing reserves
contained in the GAAP Statements or the SAP Statements (including
the excess interest reserve) or any depreciation or amortization
policies or rates other than as required by a change in GAAP, SAP
or Applicable Law;
(d) taken any action to forfeit, abandon, modify, waive,
terminate or otherwise change any of its Permits, or any
insurance policies under which the Seller is an insured, or
allowed such Permits or insurance policies to lapse or terminate
except (i) as may have been required in order to comply with
Applicable Law, or (ii) as may have been contemplated by this
Agreement;
(e) amended any Reinsured Policies or issued or sold new
policies in the categories of the Reinsured Policies, or amended
existing Reinsured Policies, except to the extent required to
comply with the terms of the Reinsured Policies or Applicable Law
and disclosed in Section 2.11 of the Seller's Disclosure
Schedule;
<PAGE> 14
(f) abandoned or permitted to lapse any Owned Software or
Licensed Software necessary for the Seller to perform its
obligations under the Transition Services Agreement;
(g) terminated or amended any Outward Reinsurance Agreement or
Inward Reinsurance Agreement, or entered into as ceding or
assuming insurer any reinsurance, coinsurance or other similar
agreement or any trust agreement or security agreement related
thereto, other than renewals of the Outward Reinsurance
Agreements and the Inward Reinsurance Agreements on substantially
the same terms and in the ordinary course of business; or
(h) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 2.11, or granted any options to
purchase, rights of first refusal, rights of first offer or any
other similar rights or commitments with respect to any of the
actions specified in this Section 2.11, except as expressly
contemplated by this Agreement.
2.12 Reinsured Policies.
2.12.1 Forms.
(a) Attached hereto are the following schedules, listing and
describing the forms of all Reinsured Policies, including all
endorsements, Benefit Plans and Qualified Contracts, utilized for
all Reinsured Policies in effect on May 31, 1998: Schedule 1-A
(All Reinsured Life Policies); Schedule 2-A (All Reinsured
Annuity Contracts); Schedule 1-B (Non New York Reinsured Life
Policies); Schedule 1-C (New York Reinsured Life Policies);
Schedule 2-B (Non New York Reinsured Annuity Contracts); and
Schedule 2-C (New York Reinsured Annuity Contracts).
(b) The Seller has delivered to the Purchaser supplements to
Schedule 1-A and Schedule 2-A listing each Policy comprising the
Reinsured Policies (i) in effect on March 31, 1998, and (ii) in
effect on June 30, 1998. Such supplements set forth with respect
to each such Policy the following information: policy number,
Policyholder name (both the owner and the insured) and Resident
jurisdiction, policy form, plan code, Account Balance or
statutory reserve for those Policies that do not have Account
Balances (e.g., Contracts in Pay Status) and face amount, if
applicable, except that the supplements as of March 31, 1998 do
not set forth Policyholder name or policy form information.
(c) All Reinsured Policies in effect on the Closing Date or the
New York Assumption Date, as applicable, will be set forth,
together with (i) updated information in each category described
in the supplements described in paragraph (b) above; (ii) for
each Policy listed in an updated Schedule 1-A, Schedule 1-B,
Schedule 1-C, Schedule 2-A, Schedule 2-B and Schedule 2-C, a
calculation for each such Policy of the Reserves Liabilities
associated with such Policy, where applicable, or for those
Policies in which Reserve Liabilities are only calculated in the
aggregate, a calculation of the aggregate Reserve Liabilities
associated with such Policies; and (iii) for each Policy listed
in an updated Schedule 1-A, Schedule 1-B and Schedule 1-C, a
recalculation as of the Closing Date for each such Policy of the
seven pay test in accordance with Section 7702A of the Code. The
Seller will deliver to the Purchaser such updated schedules not
later than 30 days following each of the Closing Date and the New
York Assumption Date.
2.12.2 Life Policies. The Reinsured Life Policies listed on
Schedule 1-A and the supplements thereto include all Contracts
that are life insurance policies (other than the Contracts ceded
to Integrity Life Insurance Company) in effect on March 31, 1998,
May 31, 1998 or June 30, 1998, as applicable. The Non New York
Reinsured Life Policies listed on Schedule 1-B and the
supplements thereto include all Contracts that are life insurance
policies (other than the Contracts ceded to Integrity Life
Insurance Company) and are in effect on March 31, 1998, May 31,
<PAGE> 15
1998 or June 30, 1998, as applicable, issued to Policyholders
Resident as of such date in jurisdictions other than New York,
and the New York Reinsured Life policies listed on Schedule 1-C
and the supplements thereto include all Contracts that are life
insurance policies (other than the Contracts ceded to Integrity
Life Insurance Company) and are in effect on March 31, 1998,
May 31, 1998 or June 30, 1998, as applicable, issued to
Policyholders Resident as of such date in New York. The
Reinsured Life Policies listed on the updated Schedule 1-A, the
Non New York Reinsured Life Policies listed on the updated
Schedule 1-B and the New York Reinsured Life Policies listed on
the updated Schedule 1-C, each as delivered by the Seller
following each of the Closing Date and the New York Assumption
Date as provided in Section 2.12.1(c), will include all Contracts
that are life insurance policies (other than the Contracts ceded
to Integrity Life Insurance Company) and are in effect on the
Closing Date and the New York Assumption Date, respectively,
issued to all Policyholders or to Policyholders Resident as of
the applicable date in the specified jurisdictions, and will
include updated information in each category set forth in
Section 2.12.1(b) and all additional information required
pursuant to Section 2.12.1(c).
2.12.3 Annuity Contracts. The Reinsured Annuity Contracts
listed on Schedule 2-A and the supplements thereto include all
Covered Accumulation Contracts and Contracts in Pay Status (other
than the Excluded Annuity Contracts) in effect on March 31, 1998,
May 31, 1998 or June 30, 1998, as applicable. The Non New York
Reinsured Annuity Contracts listed on Schedule 2-B and the
supplements thereto include all Covered Accumulation Contracts
and Contracts in Pay Status (other than the Excluded Annuity
Contracts) in effect on March 31, 1998, May 31, 1998 or June 30,
1998, as applicable, issued to Policyholders Resident as of such
date in jurisdictions other than New York. The New York
Reinsured Annuity Contracts listed on Schedule 2-C and the
supplements thereto include all Covered Accumulation Contracts
and Contracts in Pay Status (other than Excluded Annuity
Contracts) in effect on March 31, 1998, May 31, 1998 or June 30,
1998, as applicable, issued to Policyholders Resident as of such
date in New York. The Reinsured Annuity Contracts listed on the
updated Schedule 2-A, the Non New York Reinsured Annuity
Contracts listed on the updated Schedule 2-B and the New York
Reinsured Annuity Contracts listed on the updated Schedule 2-C,
each as delivered by the Seller following each of the Closing
Date and the New York Assumption Date as provided in
Section 2.12.1(c), will include all Covered Accumulation
Contracts and Contracts in Pay Status (other than Excluded
Annuity Contracts) in effect on the Closing Date and the New York
Assumption Date, respectively, issued to all Policyholders or to
Policyholders Resident as of the applicable dates in the
specified jurisdictions, and will include updated information in
each category set forth in Section 2.12.1(b) and all additional
information required pursuant to Section 2.12.1(c).
2.12.4 Compliance with Law.
(a) All of the Reinsured Policies currently in effect or that
the Seller has a current contractual obligation to issue are, to
the extent required under Applicable Laws, on forms approved by
applicable Governmental Authorities of the jurisdiction where
issued or have been filed with and not objected to by such
Governmental Authorities within the period provided for
objection, and such forms comply in all material respects with
Applicable Laws.
(b) All policy applications in respect of Reinsured Policies
required to be filed with or approved by applicable Governmental
Authorities under Applicable Laws have been so filed or approved.
(c) All rated and other elements, including Cost of Insurance
and premium rates, with respect to Reinsured Policies required to
be filed with or approved by applicable Governmental Authorities
<PAGE> 16
under Applicable Laws have been so filed or approved and premiums
charged conform thereto.
(d) No material deficiencies have been asserted by any
Governmental Authority with respect to any filings referenced in
paragraphs (a), (b) or (c) above that have not been cured or
otherwise resolved to the satisfaction of such Governmental
Authority.
(e) None of the Reinsured Policies is a "security" requiring
registration under federal securities laws.
(f) The Seller has timely provided to all relevant Policyholders
all annual statements and other material reports, in either case
to the extent required by the terms of the Reinsured Policies or
Applicable Laws.
(g) Each Reinsured Policy used as a funding vehicle or otherwise
in connection with a Tax Deferred Annuity Arrangement satisfies
and has satisfied all requirements under the Code and Applicable
Law for it to be so used, and there is no obligation based on
Applicable Law to amend or endorse any such Reinsured Policy so
as to maintain such status. Except for conflicts arising solely
due to modifications of any such Reinsured Policy by the Plan
(all of which are disclosed in Section 2.12.4(g) of the Seller's
Disclosure Schedule), to the knowledge of the Seller no such
Reinsured Policy which is an ERISA Plan is in conflict with, or
provides any participant with any right that is in conflict with,
the provisions of ERISA or the applicable provisions of the ERISA
Plan. To the knowledge of the Seller, no rights granted or
provision in any Reinsured Policy violates the Code, ERISA or any
other Applicable Law.
(h) No non-exempt "prohibited transaction," within the meaning
of Section 4975 of the Code and Section 406 of ERISA, has
occurred or, to the Seller's knowledge, is reasonably expected to
occur with respect to any Reinsured Policy that involved any
action or inaction by the Seller.
2.12.5 Policies in Effect.
(a) All of the Reinsured Policies are (i) in full force and
effect, (ii) legal, valid and binding obligations of the Seller,
and, to the knowledge of the Seller, of the other parties
thereto, and (iii) enforceable against the Seller, and, to the
knowledge of the Seller, the other parties thereto, in each case
in accordance with their respective terms.
(b) The Transactions will not affect the legality, validity or
binding character of any Reinsured Policy.
2.12.6 Sales Practices.
(a) Each Reinsured Policy complies with all Applicable Laws and
each Reinsured Policy has been offered, sold and administered in
accordance with its terms and in compliance with all Applicable
Laws (it being understood that, without limiting the definition
of Excluded Liabilities or any other provision of this Agreement,
no representation is made in this Section 2.12.6(a) as to the
Policies issued by Mutual Benefit previously held by
Policyholders who received Restructured Contracts pursuant to the
Plan). All policy illustrations authorized or provided by the
Seller or, to knowledge of the Seller, authorized or provided by
any other Person, to Policyholders comply with the requirements
of all Applicable Laws as in effect at such time and, if and to
the extent applicable, (i) the requirements of Section 10(c) of
the NAIC Life Illustration Model Regulation, and (ii) the
illustration actuarial standards of the American Academy of
Actuaries.
(b) The Seller has no liabilities of any kind or nature arising
from or relating to the conduct or practices of Mutual Benefit,
<PAGE> 17
its Affiliates or Representatives with respect to Policies issued
or offered by Mutual Benefit.
2.12.7 Payment of Policy Benefits. All benefits payable by
the Seller and, to the knowledge of the Seller, by any other
Person that is a party to or bound by any reinsurance,
coinsurance, or other similar contract with the Seller, with
respect to the Reinsured Policies and the Policies subject to the
Inward Reinsurance Agreements have been paid in accordance with
the terms of the Reinsured Policy under which they arose, except
for such benefits for which there is, in the reasonable opinion
of the Seller, a reasonable basis to contest and all such
contested benefits have been disclosed in Section 2.12.7 of the
Seller's Disclosure Schedule.
2.12.8 No Other Distributions. No Reinsured Policy or Policy
subject to an Inward Reinsurance Agreement issued, reinsured, or
underwritten by the Seller entitles the Policyholder or any other
Person to receive dividends, distributions, or other benefits
based on the revenues or earnings of the Seller or any other
Person.
2.12.9 Underwriting Standards. The underwriting standards
utilized and ratings applied by the Seller with respect to the
Reinsured Policies and the Policies subject to the Inward
Reinsurance Agreements conform in all material respects to
industry accepted practices and to the standards and ratings
required pursuant to the terms of the respective reinsurance,
coinsurance, or other similar contracts.
2.12.10 Financial Status of Reinsurers. The Seller has not
received any non-public information that would cause it to
believe that there is or may reasonably be expected to be any
material impairment of or adverse trend with respect to the
financial condition of any reinsurer under any Outward
Reinsurance Agreement or insurer under any Inward Reinsurance
Agreement, in either case if such agreement is included in the
Assigned Contracts.
2.12.11 No Waivers. The Seller has not waived any defenses or
Actions that would have been available to it under the Reinsured
Policies or the Policies subject to the Inward Reinsurance
Agreements that, individually or in the aggregate, have had or
would reasonably be expected to have a material adverse effect on
the applicable Policies on or after the Closing Date.
2.12.12 Consistent with Books and Records. All of the
Reinsured Policies are consistent with the Books and Records and
any amendments, riders, or other modifications to the Reinsured
Policies are fairly and accurately reflected in the Books and
Records.
2.12.13 Guaranty Fund Assessments. The Seller has not received
at any time since December 31, 1997 any written notice of any
assessments imposed or to be imposed on the Seller by any
Governmental Authority or other Person administering any
insurance guaranty fund or association in any jurisdiction with
respect to the Reinsured Policies that is unpaid or will be
unpaid after 30 days following receipt of such notice.
Section 2.12.13 of the Seller's Disclosure Schedule sets forth
the amounts of all unpaid assessments.
2.12.14 Cost of Insurance and Interest Rates. The Seller is in
compliance with all contract provisions and Applicable Laws
relating to Cost of Insurance rates and credited interest rates
with respect to the Reinsured Policies.
2.12.15 Taxable Basis. The Seller's administration systems
and/or the Books and Records (in a reasonably identifiable
location, arranged in an orderly fashion) contain accurate
information regarding the taxable basis of each Reinsured Policy.
<PAGE> 18
2.12.16 Lists of Group Pension Customers.
(a) The Seller has delivered to the Purchaser a true and
complete list, as of March 31, 1998, of each of the following:
(i) (A) the name of each Group Pension Customer; (B) whether the
assets held on behalf of such Group Pension Customer in the Group
Pension Accounts are held for a Qualified Plan, a Tax Deferred
Annuity Arrangement or an Other Plan; (C) in the case of a
Qualified Plan, whether such Qualified Plan is a Fully
Administered Qualified Plan; (D) with regard to each Tax Deferred
Annuity Arrangement or Other Plan, whether such plan is an ERISA
Plan; (E) the dollar amount of assets held by the Seller on
behalf of each Benefit Plan or Qualified Contract of such Group
Pension Customer in each of the Group Pension Accounts;
(F) whether the Group Pension Customer has an individual or a
group annuity contract with the Seller; (G) where the Seller
performs recordkeeping by participant, the number of lives that
are covered by the Seller on behalf of each Benefit Plan or
Qualified Contract of the Group Pension Customer; (H) in the case
of each group annuity contract, whether or not the Group Pension
Customer has an allocated contract for which recordkeeping by the
Seller is done separately for each participant covered by such
contract; and (I) whether or not such Group Pension Customer is
making ongoing contributions to the Seller; and
(ii) an aggregation, by type of product, of the data which sets
forth the dollar amount of assets held by the Seller on behalf of
such Group Pension Customer in each of the Group Pension
Accounts, and, where the Seller performs recordkeeping by
participant, the number of lives which are covered by the Seller
on behalf of such Group Pension Customer in each of the Group
Pension Accounts.
(b) The Seller has delivered to the Purchaser a true and
complete list of each of the following, with respect to each
Group Pension Customer: (i) all fees or other amounts MBL has
collected for administrative services performed during 1997 for
such Group Pension Customer and, to the extent paid in advance,
the amount allocable to future services to be performed; (ii) all
Group Pension Customers who are making ongoing new contributions
to plans with the Seller; (iii) the amount of such ongoing
contributions (excluding loan repayments) by Group Pension
Customers during 1997; (iv) all active life insurance contracts
that the Seller has with a Group Pension Customer, under a
Benefit Plan, along with the scheduled premium on each; and
(v) all outstanding loans as of March 31, 1998 under the Tax
Deferred Annuity Arrangements and Fully Administered Qualified
Plans, including the amount of such loan, whether or not it is
current and whether or not it has been treated as in default for
tax reporting purposes.
2.12.17 Contracts and Administrative Procedures of Group
Pension Business; Group Pension Accounts; Reaffirmed Other
Contracts.
(a) The Books and Records contain, in a reasonably identifiable
location, arranged in an orderly fashion, a true and complete
copy of: (i) each contract and each document or written
communication that establishes (and a written summary of any oral
communications or practices that establish) an agreement,
arrangement, or understanding or practice (including internal
memoranda or administrative manuals), with respect to any
administrative or other services that the Seller provides or has
provided in the calendar years of 1994 through 1997, inclusive,
or under which the Seller has any responsibility relating to, or
covering its Group Pension Business; and (ii) any other contract
or agreement, including plans of operation for its separate
accounts and obligations of indemnification from claims, damages
or other matters relating to the Group Pension Business.
(b) All of the assets held on behalf of the customers in the
<PAGE> 19
Group Pension Accounts are held only under the following types of
contracts or accounts: Covered Contracts, Wrapped Contracts,
Combination Contracts, New Money Accumulation Contracts, pooled
separate accounts, (including Variable Annuities) or are held by
Persons other than the Seller in mutual funds. True and complete
copies of all organizational and operational documents,
governmental filings, agreements with state insurance guarantee
corporations or other insurance companies, prospectuses,
disclosure statements and similar documentation with regard to
the foregoing are contained in the Seller's Books and Records.
2.12.18 Documents Relating to Fully Administered Qualified
Plans.
(a) With respect to each Fully Administered Qualified Plan for
which the Seller provides administrative or other services
currently or as of the Closing Date, the Books and Records
contain, in a reasonably identifiable location, arranged in an
orderly fashion, true and complete copies, if applicable, of:
(i) the documents embodying or relating to such Fully Qualified
Administered Plan, including the Fully Qualified Administered
Plan document(s) (past and present), the adoption agreements, all
amendments thereto, the related trust or funding agreements,
investment management agreements, administrative service
contracts, insurance contracts, the current summary plan
description and any summary of mutual modification since such
summary plan description was distributed and, to the extent in
the Seller's possession or control, all previous summary plan
descriptions, summaries of material modifications, and material
communications(s) to participants; (ii) the latest annual report,
and all Schedule A's, and, to the extent in the Seller's
possession or control, any prior annual reports; and (iii) each
communication received since July 16, 1991 by the Seller or
Mutual Benefit, or by the customer of which the Seller has a
copy, from the IRS, the U.S. Department of Labor ("DOL"), or any
other Governmental Authority, including an opinion letter from
the IRS for each prototype plan, the two most recent applications
for an opinion letter from the IRS submitted by the Seller or
Mutual Benefit, the most recent application for a determination
letter submitted to the IRS, and the most recent determination
letter received from the IRS. None of the Fully Administered
Qualified Plans is subject to regulation under foreign law or is
a "multiemployer plan" (within the meaning of Sections (3)(37) or
4001(a)(3) of ERISA or Section 414(f) of the Code).
(b) Each Fully Administered Qualified Plan for which the Seller
provides administrative or other services currently or as of the
Closing Date has been amended to comply with, and has received a
current determination letter (except in the case of a
standardized prototype plan) from the IRS to the effect that such
Fully Administered Qualified Plan is qualified under,
Section 401(a) of the Code and any trust maintained pursuant
thereto is exempt from federal income taxation under
Section 501(a) of the Code or a current opinion letter from the
IRS in the case of a plan that is a prototype plan to the effect
that the form of the Plan and trust maintained pursuant thereto
satisfy the requirements of Sections 401(a) and 501(a) of the
Code. None of such amendments, opinion or letters is required to
cover amendments required by the Small Business Job Protection
Act of 1996 or the Taxpayer Relief Act of 1997.
2.12.19 No Excluded Policies. The Reinsured Policies do not
include any Excluded Policy.
2.12.20 Account Values True-Up. The Seller's calculation of the
Account Values True-Up for each Reinsured Policy will, when
delivered: (a) be correct and complete, (b) be calculated in
accordance with the requirements of the Plan and the applicable
Rehabilitation Documents, and (c) for each Reinsured Policy
represent the maximum liability in respect thereof.
2.12.21 Eligible Policies. The only Policies eligible for
<PAGE> 20
Policy Enhancements pursuant to the Plan and the Rehabilitation
Documents are the Eligible Policies.
2.12.22 MEC's. The Seller has delivered to the Purchaser a
correct and complete list as of May 31, 1998 of each Reinsured
Life Policy that may, in the absence of the Grandfathering
Ruling, be deemed to be a MEC as a result of the consummation of
the Transactions either (a) if the policyholder of such Policy
makes annual premium payments in an amount equal to or greater
than the average annual premium payment made with respect to such
Policy during the four year period ending May 31, 1998, or (b) if
the policyholder of such Policy makes annual premium payments in
an amount equal to or greater than the premium payments made with
respect to such Policy in 1997.
2.13 Reserves. Section 2.13 of the Seller's Disclosure Schedule
sets forth in detail the components of the Reserve. All reserves
and other liabilities of the Seller with respect to the Reinsured
Policies and the Policies subject to the Inward Reinsurance
Agreements as established or reflected, and all other provisions
made for policy and contract claims with respect to the Reinsured
Policies and the Policies subject to the Inward Reinsurance
Agreements (excluding the Policy Enhancements Amount,
collectively, "Reserve Liabilities") in the Statutory Statements
have been determined in accordance with accounting practices
prescribed or permitted by the Department of Banking and
Insurance of the State of New Jersey (except as set forth
therein) and GAAS using prescribed morbidity and mortality tables
and interest rates that are in accordance with the nature of the
benefits specified in the related Reinsured Policy or the
relevant Policy subject to an Inward Reinsurance Agreement.
Except with respect to the Seller's IBNR reserve in contemplation
of the IBNR Settlement Amount and the Policy Enhancements Amount,
each as expressly contemplated by this Agreement, no insurance
reserving practice or policy of the Seller and its Subsidiaries
with respect to the Business has changed, in any material
respect, since December 31, 1996, and the results of the
application of such practices and policies are reflected in the
Statutory Statements and are at least as great as the minimum
aggregate amounts required for the conduct of the Business in
each other jurisdiction in which the Reinsured Policies and the
Policies subject to the Inward Reinsurance Agreements have been
issued. Without limiting the foregoing, to the knowledge of the
Seller, the Seller has made adequate provision for all Reserve
Liabilities to cover the total amount of all reasonably
anticipated matured and unmatured benefits, claims and other
liabilities under all Reinsured Policies. Reserve Liabilities
with respect to the Restructured Life Contracts are at least as
great as those that would be calculated by applying the CRVM
Method to such Policies. The Seller owns cash, Cash Equivalents
and Investment Grade Securities that qualify as legal reserve
assets under Applicable Laws in an aggregate amount at least
equal to the amount of all such Reserve Liabilities less the
amount of principal and accrued interest on Reinsured Policy
loans. All reserves and accrued liabilities for estimated
losses, settlements, costs and expenses from pending Actions
included in each Statutory Statement were determined in
accordance with SAP and Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards
Board.
2.14 Reinsurance Agreements.
2.14.1 Outward Reinsurance Agreements. Section 2.14.1 of the
Seller's Disclosure Schedule lists all written Outward
Reinsurance Agreements and a description or term sheet with all
material terms of any oral Outward Reinsurance Agreements
pursuant to which the Seller cedes or retrocedes or has any
obligation to cede or retrocede risks assumed under the Reinsured
Policies and all Reinsured Policies that are subject to such
Outward Reinsurance Agreements. All Outward Reinsurance
Agreements: (a) are legal, valid, binding and in full force and
<PAGE> 21
effect; (b) are enforceable against the Seller, and, to the
Seller's knowledge, each other party thereto, in accordance with
their respective terms; (c) conform in all material respects to
all Applicable Laws; and (d) reinsure Reinstated Policies in
accordance with the Seller's customary reinstatement practices
and the terms of the relevant Policies. No Outward Reinsurance
Agreement will cease to be in full force and effect on terms
identical to those currently in effect as a result of the
consummation of the Transactions, nor will the consummation of
the Transactions constitute a breach or default under any such
Outward Reinsurance Agreement. Each Outward Reinsurance
Agreement is assignable to ANLIC on the Closing Date, and may be
partially assigned by ANLIC to First SunAmerica with respect to
the New York Reinsured Polices on the New York Assumption Date,
on terms identical to those currently in effect. Neither the
Seller, nor, to the knowledge of the Seller, any other party
thereto, is in default of any provision of any Outward
Reinsurance Agreement. The Seller has previously furnished or
made available to the Purchaser true, correct and complete copies
of each Outward Reinsurance Agreement.
2.14.2 Inward Reinsurance Agreements. Section 2.14.2 of the
Seller's Disclosure Schedule lists all Inward Reinsurance
Agreements pursuant to which the Seller reinsures or assumes or
has any obligation to reinsure or assume risks of Policies issued
or retroceded by reinsurers under the Outward Reinsurance
Agreements. All Inward Reinsurance Policies are: (a) legal,
valid, binding and in full force and effect; (b) enforceable
against the Seller, and, to the Seller's knowledge, each other
party thereto, in accordance with their respective terms; and
(c) conform in all material respects to all Applicable Laws. No
Inward Reinsurance Agreement will cease to be in full force and
effect on terms identical to those currently in effect as a
result of the consummation of the Transactions, nor will the
consummation of the Transactions constitute a breach or default
under any such Inward Reinsurance Agreement. Each Inward
Reinsurance Agreement is assignable to ANLIC on the Closing Date
on terms identical to those currently in effect. Neither the
Seller nor, to the knowledge of the Seller, any other party
thereto, is in default of any provision of any Inward Reinsurance
Agreement. The Seller has previously furnished or made available
to the Purchaser, true, correct and complete copies of all Inward
Reinsurance Agreements.
2.15 Brokers. All negotiations relating to this Agreement and the
Transactions have been carried out without the intervention of
any Person acting on behalf of the Seller in such a manner as to
give rise to any valid claim against the Purchaser or the Seller
for any brokerage, finder's or financial advisor's commission,
fee or similar compensation, except for Goldman, Sachs & Co.,
whose fees in respect hereof will be paid by the Seller.
2.16 Severance Plan. The Seller's severance and retention plan
as in effect on the date hereof (the "Severance Plan") is
consistent in all material respects with the summary thereof that
the Seller delivered to the Purchaser on June 26, 1998.
2.17 Absence of Undisclosed Liabilities. Neither the Seller nor
any of its Subsidiaries has incurred or is subject to any
material liabilities with respect to the Business, the Reinsured
Policies or the Transferred Assets (including obligations or
liabilities arising from policyholder claims or guaranty fund
assessments), and, to the knowledge of the Seller, the Seller has
not incurred and is not subject to any other material
liabilities, of any kind or nature, whether absolute, accrued,
contingent or otherwise, that are required by GAAP or SAP to be
reflected in a consolidated balance sheet (or reflected in the
notes thereto), except for: (a) liabilities reflected or reserved
against in the GAAP Statements, the Statutory Statements or the
Audited SAP Statements in accordance with the standards of
disclosure applicable thereto; (b) liabilities incurred since the
date of the most recent such statement in the ordinary course of
<PAGE> 22
business; (c) liabilities reflected in Section 2.17 of the
Seller's Disclosure Schedule (and quantified by reference
therein); and (d) liabilities arising after the date hereof for
which separate reserves will be established on or prior to the
Closing Date in addition to those reserves and other holdbacks
referenced in the financial data previously provided by the
Seller to the Purchaser.
2.18 Transferred Assets. The Seller has legal and beneficial
ownership of, and good and marketable title to, all of the
Transferred Assets free and clear of all Encumbrances. All of
the Transferred Reserve Assets qualify as legal reserve assets
and admitted assets under Applicable Laws, including the
insurance laws of the states of New Jersey, New York and Arizona,
and meet the requirements of the Plan for assets comprising the
Reserve. All Transferred Reserve Assets are, and will be when
transferred to the Purchaser, either cash, Cash Equivalents,
Investment Grade Securities, policy loans or amounts due from
Outward Reinsurers or other receivables in respect of the
Reinsured Policies and are, in each case, listed on Schedule 3,
with such changes thereto as are required or permitted by
Section 1.1.3. None of the Investment Grade Securities is, or
will be when transferred to the Purchaser, in default.
2.19 Books and Records. The Books and Records are complete and
accurate in all material respects, and have been maintained in
accordance with all Applicable Laws and with good business and
bookkeeping practices.
2.20 Threats of Cancellation. Since December 31, 1997, through
the date of this Agreement, no Policyholder, group of
Policyholders, or Persons writing, selling, or producing, either
directly or through reinsurance assumed, insurance business that
individually or in the aggregate for each such Policyholder,
group or Person, respectively, accounted for (a) five percent
(5%) or more of the annual premium (as determined in accordance
with SAP) or (b) one percent (1%) of reserves of the Seller
relating to the Reinsured Policies, in each case at or for the
twelve month period then ended, has terminated or, to the
knowledge of the Seller, given notice that it intends to
terminate its relationship with the Seller.
2.21 Rehabilitation Plan.
2.21.1 List of Rehabilitation Documents. The Plan (as
amended, modified or supplemented to date) and all agreements
entered into in connection with the Plan, together with all
exhibits, schedules, attachments and amendments thereto,
including the Rehabilitation Agreement and Settlement Agreement
(collectively, the "Rehabilitation Documents") are listed on
Section 2.21.1 of the Seller's Disclosure Schedule. The Seller
has delivered or made available to the Purchaser true, correct
and complete copies of all of the Rehabilitation Documents.
2.21.2 Approval; Compliance. The Plan and each of the
Rehabilitation Documents have been approved by all necessary
Governmental Authorities, are in full force and effect and are
legal, valid and binding on the Seller or its Subsidiaries, as
applicable, and are enforceable in accordance with their
respective terms. The Seller is in compliance with all
provisions of the Plan and all Rehabilitation Documents. The
Seller has no knowledge of any default by any other party of any
of such other party's obligations under the Plan or any
Rehabilitation Document.
2.21.3 No Actions. There is no Action pending or, to the
knowledge of the Seller, threatened, arising out of, relating to
or based upon the Plan or any Rehabilitation Document that
relates to the Business, the Reinsured Policies or the
Transferred Assets or that would otherwise reasonably be expected
to have a Material Adverse Effect.
<PAGE> 23
2.22 Assigned Contracts. Each of the Assigned Contracts is
legal, valid, binding and enforceable against the Seller in
accordance with its terms and, to the knowledge of the Seller,
each other party thereto, in full force and effect according to
its terms, and is freely assignable to ANLIC on the Closing Date
and, if applicable, may be partially assigned by ANLIC to First
SunAmerica with respect to the New York Reinsured Policies on the
New York Assumption Date pursuant to this Agreement and the
relevant Ancillary Agreements without notice to or consent of any
Person. The Seller is not in default, nor, to the knowledge of
the Seller, is any other party to any Assigned Contract in
default, in any material respect under any Assigned Contract.
2.23 Agreements Relating to Payment of Commissions.
2.23.1 Forms of Commission Agreements. Each of the Commission
Agreements is in one of the forms attached as Section 2.23.1 of
the Seller's Disclosure Schedule and is consistent with the Books
and Records concerning such Commission Agreements. Other than
the Commission Agreements listed on Section 2.23.1 of the
Seller's Disclosure Schedule, there are no agreements or
arrangements pursuant to which Commissions are or may be payable
with respect to the Reinsured Policies. The Seller has duly
performed all of the terms, conditions, covenants and warranties
of the Commission Agreements required of it, including the
payment of all Commissions, and to the knowledge of the Seller,
all other parties to the Commission Agreements have duly
performed all of the terms, conditions, covenants and warranties
of the Commission Agreements required on their part.
2.23.2 Insurance Agents. Section 2.23.2 of the Seller's
Disclosure Schedule sets forth (a) all insurance agents and other
producers with respect to the Reinsured Policies, and
(b) identifies each such agent or producer having an Agent Debit
Balance and the nature and amount of such Agent Debit Balance.
2.23.3 Renewal Commissions. The Seller is not liable to pay
Commissions upon the renewal of any Reinsured Policy nor is it a
party to any agreement providing for the collection of annuity or
insurance premiums payable to the Seller by any other Person,
which Commissions or premiums exceed $50,000 in the aggregate,
except in accordance with customary insurance industry practice.
2.24 Third Party Administration Agreements. Section 2.24 of the
Seller's Disclosure Schedule sets forth a complete and accurate
listing and description of all third party administration
agreements relating to the Reinsured Policies, regardless of
whether the Seller is receiving or providing services (the "Third
Party Administration Agreements"). Neither the Seller, nor, to
the knowledge of the Seller, any other party thereto, is in
breach of any Third Party Administration Agreement, and each
Third Party Administration Agreement is in full force and effect
and is legal, valid and binding on the Seller, enforceable
against the Seller, and to the Seller's knowledge each other
party thereto, in accordance with its terms, except to the extent
that enforcement thereof may be limited by or subject to
applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
application relating to or affecting creditors' rights and to
general equity principles. To the knowledge of the Seller, each
party acting as a third party administrator under a Third Party
Administration Agreement is duly licensed, qualified or admitted
to do business and is in good standing in all jurisdictions in
which it is required to be so licensed, qualified or admitted to
do business as a third party administrator by Applicable Laws.
2.25 Impairments. With respect to the calculation of Impairments
that is delivered by the Seller to the Purchaser pursuant to
Section 4.17, the aggregate amount of the Impairments for the
Reinsured Annuity Contracts and the Excluded Annuity Policies
that are in each case Eligible Policies will be at least 60% of
the aggregate amount of the Impairments for the Reinsured
<PAGE> 24
Policies and the Excluded Policies that are in each case Eligible
Policies as of the date of such calculation.
2.26 Wrapped Accumulation Contracts. Prior to giving effect to
any amendment to the Settlement Agreement contemplated by this
Agreement, all Wrapped Accumulation Contracts terminate
automatically on December 31, 1999 in accordance with the Plan
and the Settlement Agreement.
2.27 Policyholder Lists. Neither the Seller, any of its
Affiliates nor any of their respective Representatives has given
to any Person a complete or partial list (in any form) of holders
of Reinsured Policies, Excluded Annuity Contracts, Wrapped
Annuity Contacts or Variable Annuities, other than (a) the
Purchaser, ANLIC, First SunAmerica or their respective
Representatives or (b) parties to the Plan or participants in the
auction process conducted by the Seller's investment bankers for
the sale of the Seller's capital stock or the sale of all or any
part of the Business (which participants received no greater
information than the Purchaser and are bound by confidentiality
agreements with the Seller).
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Except as expressly set forth in the relevant Sections
of the Purchaser's Disclosure Schedule, the Purchaser represents
and warrants to the Seller as follows:
3.1 Corporate Status and Authority. The Purchaser is duly
organized, validly existing and in good standing under the laws
of the State of Maryland, each of ANLIC and First SunAmerica are
stock life insurance companies duly organized, validly existing
and in good standing under the laws of the States of Arizona and
New York, respectively, and each of Purchaser, ANLIC and First
SunAmerica has all requisite corporate power and authority to
conduct its business and to own or lease its properties, as now
conducted, owned or leased. Each of the Purchaser, ANLIC and
First SunAmerica has full corporate power and authority to
execute and deliver this Agreement and the Ancillary Agreements
to which it is a party, to perform its obligations and to
consummate the Transactions. Such execution, delivery,
performance and consummation have been or will have been on or
prior to the Closing, as applicable, duly authorized by the Board
of Directors of the Purchaser, ANLIC or First SunAmerica, as the
case may be, which constitutes all necessary corporate action on
the part of the Purchaser, ANLIC and First SunAmerica for such
authorization. Each of this Agreement and the Ancillary
Agreements to which it is a party has been or will have been on
or prior to the Closing, as applicable, duly executed and
delivered by each of the Purchaser, ANLIC and First SunAmerica,
as applicable, and (assuming its due execution and delivery by
the Seller) constitutes the legal, valid and binding obligation
of the Purchaser, ANLIC or First SunAmerica, as the case may be,
enforceable against them in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy,
reorganization, insolvency, fraudulent conveyance, moratorium,
receivership or similar laws affecting creditors or insurance
companies and creditors' rights generally and by general
principles of equity (whether considered at law or in equity).
3.2 No Conflicts, Consents and Approvals, etc..
3.2.1 No Conflicts. Neither the execution, delivery or
performance by each of the Purchaser, ANLIC and First SunAmerica
of this Agreement and the Ancillary Agreements to which it is a
party, nor the consummation of the Transactions will result in:
(a) any conflict with, or default under, any of the
Organizational Documents of the Purchaser, ANLIC or First
SunAmerica, as applicable; (b) any breach or violation of, or
default under, any Applicable Law; (c) any breach or violation
of, or default under, any material mortgage, agreement, deed of
trust, guaranty, note, bond, lease, indenture or any other
<PAGE> 25
instrument to which the Purchaser, ANLIC or First SunAmerica is a
party or by which the Purchaser, ANLIC and First SunAmerica or
any of their respective properties or assets are bound; (d) the
creation or imposition of any Encumbrance on their respective
properties or assets; or (e) the breach or violation of any of
the terms and conditions of, or a default under, or otherwise
cause an impairment or revocation of, any Permit held by the
Purchaser, ANLIC or First SunAmerica except for such conflicts,
defaults, breaches, violations, conditions or Encumbrances that
would not, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect.
3.2.2 Consents. No consent, approval, exemption or
authorization is required to be obtained from, no notice is
required to be given to, and no filing is required to be made
with, any Governmental Authority or any other Person by the
Purchaser, ANLIC or First SunAmerica in connection with the
execution and delivery of this Agreement and the Ancillary
Agreements to which the Purchaser, ANLIC or First SunAmerica is a
party or the consummation of the Transactions, except filings,
consents or approvals required with respect to (a) the HSR Act,
and (b) Governmental Authorities having responsibility for the
regulation of insurance in each of the jurisdictions in which
ANLIC or First SunAmerica holds a certificate of authority to
engage in the business of insurance. The Purchaser will deliver
to the Seller not later than 30 days prior to the Closing Date an
updated Section 3.2.2 of the Purchaser's Disclosure Schedule
setting forth all filings with, consents or approvals of,
Governmental Authorities described in clause (b) above.
3.3 Compliance with Laws. None of the Purchaser, ANLIC or First
SunAmerica is in violation or has received any written notice of
any violation of any Applicable Law, except for violations that,
individually or in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect.
3.4 Litigation. Except as would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse
Effect, there are: (a) no outstanding orders, decrees or
judgments by or with any Governmental Authority before which the
Purchaser, ANLIC or First SunAmerica is or was a party; (b) no
Actions, pending or, to the knowledge of the Purchaser,
threatened or contemplated, either by or against the Purchaser,
ANLIC or First SunAmerica; or (c) to the knowledge of the
Purchaser, no events, facts or circumstances that have arisen or
occurred that would reasonably be expected to result in the
commencement of any such Action. Section 3.4 of the Purchaser's
Disclosure Schedule, as to each Action disclosed therein,
describes the parties, the nature of the proceeding, the date and
method commenced, and the amount of damages (if known) or other
relief sought, and, if applicable, paid or granted.
3.5 Permits, Licenses, etc.. First SunAmerica is duly licensed
to conduct insurance business under the laws of the States of New
York, Nebraska and New Mexico, and ANLIC is duly licensed to
conduct insurance business under the laws of the State of Arizona
and under the laws of each other state of the United States and
the District of Columbia, except the State of New York. ANLIC or
First SunAmerica, as applicable, has been duly authorized by all
necessary Governmental Authorities to transact insurance business
of the types reflected by the Reinsured Policies in the
respective jurisdictions in which they have been issued. ANLIC
or First SunAmerica, as applicable, have all Permits necessary to
conduct the Business in the manner and in the areas in which the
Business is presently being conducted, and all such Permits are
valid and in full force and effect, except where the failure to
have such a Permit would not, individually or in the aggregate,
result in a Material Adverse Effect. No revocation or non-
renewal of such Permits has occurred, and, to the knowledge of
the Purchaser, neither ANLIC nor First SunAmerica has engaged in
any activity that would cause the revocation or suspension of any
such Permit, no Action looking to or contemplating the revocation
<PAGE> 26
or suspension of any such Permit is pending or, to the knowledge
of ANLIC or First SunAmerica, as applicable, threatened, and
neither ANLIC nor First SunAmerica has received a notice from any
Person of any intention to revoke or to refuse renewal of any
such Permit, except for such revocations, non-renewals or
suspensions that would not, individually or in the aggregate,
result in a Material Adverse Effect.
3.6 Financial Statements. The Purchaser has delivered to the
Seller true, correct and complete copies of the Financial
Statements described below.
3.6.1 Audited GAAP Statements. The audited consolidated
balance sheet of the Purchaser and its Subsidiaries at
September 30, 1997 and September 30, 1996 and the related
consolidated income statements and statement of cash flows for
the periods then ended, together with the notes thereto and the
unqualified report of Price Waterhouse LLP, the independent
certified public accountant of the Purchaser (the "Audited
Purchaser Financial Statements");
3.6.2 Statutory Statements. The annual statements of each of
ANLIC and First SunAmerica, including all notes, exhibits and
schedules thereto and any affirmations and certifications filed
therewith and the actuarial opinions applicable to the insurance
business for such years as filed with the Arizona Department of
Insurance and the New York State Insurance Department,
respectively, for the years ended December 31, 1996 and
December 31, 1997 (the "ANLIC Statutory Statements"); and
3.6.3 Audited SAP Statements. The audited statutory-basis
balance sheets of each of ANLIC and First SunAmerica as at
December 31, 1996 and December 31, 1997, and the related
summaries of operations, statutory-basis statements of income,
capital and surplus, and cash flow for the periods then ended,
together with the notes thereto and the unqualified report of
Price Waterhouse LLP thereon (the "ANLIC Audited SAP Statements;"
together with the ANLIC Statutory Statements, the "ANLIC SAP
Statements").
3.6.4 GAAP Statement Representations. The Audited Purchaser
Financial Statements present fairly, in all material respects,
the consolidated financial position of the Purchaser and its
Subsidiaries as at the respective dates thereof and the results
of their consolidated income, changes in shareholders' equity and
cash flows for the respective periods then ended, in each case,
in accordance with GAAP applied on a consistent basis throughout
the periods indicated, except for the deviations from GAAP
disclosed thereon or in the notes thereto.
3.6.5 SAP Statement Representations. The ANLIC Audited SAP
Statements have been prepared in accordance with accounting
practices prescribed or permitted by the Arizona Department of
Insurance (with respect to ANLIC) and the New York State
Insurance Department (with respect to First SunAmerica), and such
accounting practices have been applied on a consistent basis
throughout the periods indicated, except as expressly set forth
or disclosed in the respective notes thereto. The ANLIC Audited
SAP Statements present fairly, in all material respects, the
admitted assets, reserves, liabilities, capital and surplus of
ANLIC and First SunAmerica as at the respective dates thereof and
the results of their respective operations and cash flow for the
respective periods then ended. The ANLIC Statutory Statements
complied in all material respects with all Applicable Laws when
filed, were timely filed with all required Governmental
Authorities, and no material deficiency has been asserted with
respect to such statements by either the Arizona Department of
Insurance or the New York State Insurance Department or any other
applicable Governmental Authority.
3.7 Absence of Changes. Except as expressly contemplated or
required by this Agreement, since December 31, 1997 (a) there has
<PAGE> 27
not been any adverse change in the business, financial condition,
results of operations or property of the Purchaser, ANLIC or
First SunAmerica, and (b) the Purchaser has not received notice
of, and it has no knowledge of any circumstances that would
reasonably be expected to result in, any impending downgrades of
the ratings of the Purchaser, ANLIC or First SunAmerica as set
forth in Section 3.9, except for the changes or ratings
downgrades, as the case may be, that have not had and would not
reasonably be expected to have a Material Adverse Effect.
3.8 Brokers. All negotiations relating to this Agreement and
the Transactions have been carried out without the intervention
of any Person acting on behalf of the Purchaser, ANLIC or First
SunAmerica in such a manner as to give rise to any valid claim
against the Purchaser, ANLIC or First SunAmerica or the Seller
for any brokerage or finder's or financial advisor's commission,
fee or similar compensation.
3.9 Rating. As of the date hereof, the Standard & Poor's
Ratings Group Claims-Paying Ability Rating of ANLIC is AA-, the
Moody's Investor Service, Inc. Financial Strength Rating of ANLIC
is A2, the Duff & Phelps Rating of ANLIC is A, and the A.M. Best
& Co. Rating of each of ANLIC and First SunAmerica is A+.
4. PRE-CLOSING COVENANTS
4.1 Consents; Cooperation.
4.1.1 Consents to be Obtained. The Purchaser and the Seller
acknowledge that the consents, approvals and authorizations with
respect to the consummation of the Transactions (a) referenced in
Section 2.3.2 and set forth in Section 2.3.2 of the Seller's
Disclosure Schedule, and (b) referenced in Section 3.2.2 and set
forth in Section 3.2.2 of the Purchaser's Disclosure Schedule are
required from the parties indicated thereon to consummate the
Transactions at the Closing and that such consents, approvals and
authorizations have not, as of the date hereof, been obtained.
4.1.2 Cooperation. Subject to the terms and conditions of
this Agreement, each party will use its commercially reasonable
efforts to cause the Closing to occur, including: (a) causing the
Closing Conditions to be satisfied, to the extent within the
control of such party; (b) cooperating as contemplated by
Section 4.1.3; and (c) defending against any Actions that
challenge this Agreement or any provision of it or the
consummation of the Transactions, including seeking to have any
temporary restraining order, preliminary injunction or other
legal restraint or prohibition entered or imposed by any
Governmental Authority that is not yet final and nonappealable,
vacated or reversed; provided, however, if approval of any
Governmental Authority is necessary to approve any Competitive
Bid that is submitted pursuant to procedures adopted by the Court
after the Seller has satisfied the requirements of Sections 4.15
and 4.16, the Seller will not be required to oppose such
approval. Without limiting the foregoing, the Seller and the
Purchaser will use their respective commercially reasonable
efforts to cause the Closing to occur on or as soon as
practicable after the satisfaction of all of the Closing
Conditions.
4.1.3 Regulatory Filings; Other Consents.
(a) Each of the Seller and the Purchaser will as promptly as
practicable, but in no event later than 15 Business Days
following the date of this Agreement, file with the United States
Federal Trade Commission (the "FTC") and the United States
Department of Justice (the "DOJ") the notification and report
form, if any, required for the Transactions and any supplemental
information requested in connection therewith pursuant to the HSR
Act. Any such notification and report form and supplemental
information will be in substantial compliance with the
requirements of the HSR Act. The Seller and the Purchaser will
<PAGE> 28
as promptly as practicable comply with any Applicable Laws of any
jurisdiction pursuant to which any Permit of, or filing with, any
Governmental Authority or any other Person in connection with the
Transactions is necessary, including the filing by the Purchaser
of a current report on Form 8-K on or after the Closing Date.
The Seller and the Purchaser will keep each other apprised of the
status of any communications with, and any inquiries or requests
for additional information from, the FTC and the DOJ and any
other Governmental Authority and will exercise commercially
reasonable efforts to comply promptly with any such inquiry or
request. Each of the Seller and the Purchaser will use
commercially reasonable efforts to obtain any clearance required
under the HSR Act or any other Permit of any Governmental
Authority necessary for the consummation of the Transactions.
(b) The Seller and the Purchaser will cooperate and use their
commercially reasonable efforts to obtain Permits and agreements
of, and give and make all notices and filings with, any
Governmental Authorities necessary to authorize, approve or
permit the consummation of the Transactions, including the
preparation and filing by the Seller of the Petition for Court
Approval and its attachments including the Plan amendments and
motions for the other orders described in Section 4.11, the
Policyholder Disclosure Statement and the Policy Enhancements
Procedures, the filing by the Purchaser of a current report on
Form 8-K on or after the Closing Date and the preparation and
filing (i) by the Seller of the Policy Enhancements Endorsements
and (ii) by the Purchaser of its endorsements with respect to the
Policy Enhancements. The Seller will not file any Policy
Enhancements Endorsements or the Petition for Court Approval or
any of its attachments without the prior review and approval of
the Purchaser, which will not be unreasonably withheld or
delayed. The Seller will use its commercially reasonable efforts
to obtain all consents and approvals contemplated by this
Agreement and the Ancillary Agreements as referenced in
Section 2.3.2 and as set forth in Section 2.3.2 of the Seller's
Disclosure Schedule. The Purchaser will use its commercially
reasonable efforts to obtain all consents and approvals
contemplated by this Agreement and the Ancillary Agreements as
set forth in Section 3.2.2 of the Purchaser's Disclosure
Schedule.
(c) Each of the Seller and the Purchaser will furnish to the
other such necessary information and reasonable assistance as the
other may request in connection with: (i) its preparation of any
filing that is necessary under any Applicable Law; (ii) its
obtaining all other relevant Permits from Governmental
Authorities; (iii) its obtaining the approval of the Court, as
specified in Section 6.2.3; (iv) its obtaining the approval of
the Class Four Creditors, as specified in Section 6.2.4; (v) its
obtaining the approval of the Reinsurers as specified in
Section 6.2.5; and (vi) its obtaining any other required consents
or approvals of any Person.
4.2 Seller's Conduct of Business, etc. Except as set forth in
Section 4.2 of the Seller's Disclosure Schedule, from the date of
this Agreement until the Closing, the Seller will, and will cause
its Subsidiaries to, unless it receives the prior written consent
of the Purchaser, and except as expressly contemplated by this
Agreement:
(a) operate the Business as presently operated and only in the
ordinary course (taking into account the restrictions imposed on
the Seller by the Plan) and consistent with past practice, and
use commercially reasonable efforts to preserve its relationship
with and the goodwill of its brokers, customers, suppliers,
employees and other Persons having business dealings with the
Seller in connection with the Business;
(b) give prompt notice to the Purchaser of any event, occurrence
or circumstance of which the Seller has knowledge and that is
reasonably likely to result in or contribute to a Material
<PAGE> 29
Adverse Effect or result in or contribute to a breach by the
Seller of this Agreement;
(c) not take any action or omit to take any action that would
result in a breach or inaccuracy of any of the representations
and warranties set forth in Section 2 in any material respect at,
or as of any time prior to, the Closing;
(d) not directly or indirectly assign, transfer, mortgage,
pledge, lease or otherwise dispose of or grant or create or
permit to exist any material Encumbrance on, any Transferred
Assets, other than a disposition of a Transferred Reserve Asset
in accordance with Section 1.1.3;
(e) maintain its Books and Records and the Transferred Assets in
its usual, regular and ordinary manner, consistent with its past
practice;
(f) not make or permit any material change in its underwriting,
pricing, actuarial, or investment practices or policies with
respect to the Business, the Reinsured Policies or the
Transferred Assets or make, or agree to make, any material change
in its financial, Tax or accounting practices or policies, or in
any assumption underlying such a practice or policy, in either
case including any basis for establishing reserves (including
excess interest reserves), or any depreciation or amortization
policies or rates, in each case other than as required by a
change in GAAP, SAP or Applicable Law after the date hereof and
provided that the Seller gives the Purchaser prompt notice of any
such required change;
(g) maintain all, and not take any action to forfeit, abandon,
modify, waive, terminate or otherwise change any, of its Permits
material to the Business, except (i) as may be required in order
to comply with Applicable Law, (ii) as may be expressly
contemplated by this Agreement, or (iii) such modifications or
waivers of Permits made in the ordinary course of business of the
Seller as would not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
(h) not issue or sell new Policies in the categories of the
Reinsured Policies, or amend existing Reinsured Policies, except
to the extent required to comply with the terms of the Reinsured
Policies or Applicable Law;
(i) (i) cause all Reserve Liabilities with respect to Reinsured
Policies established or reflected in the Books and Records to be
(A) established or reflected on a basis consistent with those
Reserve Liabilities and reserving methods followed by the Seller
in the preparation of the December 31, 1997 Annual Statement and
(B) in continued compliance with Section 2.13; and (ii) continue
to own cash, Cash Equivalents, Investment Grade Securities,
policy loans and amounts due from Outward Reinsurers or other
receivables in respect of the Reinsured Policies as listed on
Schedule 3, with such changes thereto as are required or
permitted by Section 1.1.3, that qualify as legal reserve assets
under all Applicable Laws in an amount at least equal to the
amount of the Reserve less the amount listed on Schedule 3 with
respect to principal and accrued interest on Reinsured Policy
loans;
(j) to comply with all Applicable Laws with respect to the
Business, the Reinsured Policies and the Transferred Assets,
comply with the terms of the Plan and the Rehabilitation
Documents, perform all obligations that it or any of its
Subsidiaries have under the Plan and the Rehabilitation Documents
and not amend or modify the Plan or any Rehabilitation Document
except as expressly contemplated by this Agreement;
(k) prepare and deliver to Policyholders of Reinsured Policies
all annual statements and other reports to the extent required by
the terms of the Reinsured Policies or Applicable Laws;
<PAGE> 30
(l) as soon as practicable upon the request of any Policyholder,
provide, prior to the Closing Date, a new illustration to such
Policyholder that gives effect to the Transactions in accordance
with the assumptions set forth on Schedule 8; and
(m) not agree or commit to do, or agree or commit not to do, as
the case may be, any of the actions referred to in this
Section 4.2.
4.3 Access and Information. From the date hereof until the
Closing, upon reasonable notice, the Seller will give to the
Purchaser and its Representatives access at all reasonable times
during normal business hours to the Books and Records and to the
properties of the Seller and its Subsidiaries as they relate to
the Business, the Transferred Assets, the Reinsured Policies, the
Wrapped Accumulation Contracts, the Excluded Annuity Contacts, or
the Variable Annuities and furnish for inspection and copying
such Books and Records as the Purchaser reasonably requests. All
Books and Records obtained by the Purchaser and its
Representatives will be subject to the terms of the
Confidentiality Agreement.
4.4 Certain Transactions. From the date of this Agreement
through the Closing, neither the Seller nor any of its Affiliates
or Representatives will, directly or indirectly, solicit,
encourage or initiate any inquiry, offer or proposal from or any
negotiations or discussions with, provide any information to,
participate in any negotiations or discussions with, or otherwise
cooperate in any manner with, any Person or group (other than the
Purchaser and its Affiliates) concerning (a) any direct or
indirect sale, transfer or other disposition of (i) the Business
(including the Reinsured Policies and, subject to Section 1.1.3,
the Transferred Reserve Assets), (ii) the stock or assets of the
Seller's Subsidiary First Priority Investment Corp., (iii) except
as otherwise agreed by the Seller and the Purchaser, the 51%
partnership interest in Markston Investment Management held by
the Seller's Subsidiary MBL Sales Corporation, or (iv) the stock
or assets of the Seller's Subsidiary Mutual Benefit Marketing
Group d/b/a Financial Partners Marketing Group), or (b) any
acquisition, disposition, merger, tender or exchange offer or
other form of business combination the acceptance of which would
be inconsistent with the consummation of the Transactions;
provided, however, that the Seller will not be required to defend
against any Action brought, nor will it be precluded from
entertaining any bid or offer for the Seller or the Business
required to be entertained by the Court, pursuant to the overbid
procedures described in Section 4.16 or alternate overbid
procedures mandated by the Court. Within five Business Days of
the Seller's receipt of any such inquiries, proposals, offers or
discussions, the Seller will provide the Purchaser with a written
notice of all relevant details of any such inquiries, proposals,
offers or discussions. Compliance with this Section 4.4 will not
relieve the Seller of any other express or implied obligations
under this Agreement, the Ancillary Agreements, or Applicable
Law.
4.5 Financial Statements and Reports. As promptly as
practicable after each calendar quarter and year ending between
the date hereof and the Closing Date, the Seller will deliver to
the Purchaser true and complete copies of the GAAP basis and SAP
basis financial statements prepared by the Seller for the quarter
then ended and audited GAAP basis and SAP basis financial
statements, together with the notes thereto and the unqualified
report of Coopers & Lybrand L.L.P. thereon, for each year then
ended. The Seller will continue to prepare in the ordinary
course consistent with past practice and will deliver, as soon as
available, to the Purchaser, true and complete copies of such
other financial statements and reports, or analyses as may be
prepared or received by the Seller related to the Business, the
Reinsured Policies or the Transferred Assets, including normal
internal reports (such as those reflecting monthly cash flow,
surrenders, assets under administration, operations expense, head
<PAGE> 31
count and claims).
4.6 Intentionally Deleted.
4.7 Reinsurance Agreements. Prior to the Closing Date, the
Seller will either (a) enter into a legal, valid and binding
written agreement embodying the terms of any oral Outward
Reinsurance Agreement described in Section 2.14.1 of the Seller's
Disclosure Schedule, or (b) transfer the Policies covered by any
such oral agreement to a legal, valid and binding written Outward
Reinsurance Agreement with another reinsurer. The Seller will
use its commercially reasonable efforts to cause each of the
Outward Reinsurance Agreements and Inward Reinsurance Agreements
listed on Sections 2.14.1 and 2.14.2, respectively, of the
Seller's Disclosure Schedule to continue to be in full force and
effect and to be assigned to ANLIC on the Closing Date (and, if
applicable, to subsequently be partially assigned by ANLIC to
First SunAmerica with respect to the New York Reinsured Policies
on the New York Assumption Date), including by obtaining any
necessary consent to effect such assignments. Such assignment
must be on terms identical to those currently in effect, except,
if required to effect such assignment, with an adjustment of the
applicable premium, in connection with the consummation of the
Transactions. In lieu of the Seller effecting such an assignment
of any Outward Reinsurance Agreement, the Seller may enter into
an agreement with a substitute reinsurer (each, a "Substitute
Outward Reinsurer") that is identical in all material respects,
other than the applicable premium, to the original Outward
Reinsurance Agreement (each, a "Substitute Outward Reinsurance
Agreement") and that is assignable to ANLIC as of the Closing
Date (and, if applicable, may subsequently be partially assigned
by ANLIC to First SunAmerica relating to the New York Reinsured
Policies on the New York Assumption Date). Each Substitute
Outward Reinsurer must have a rating, as of the date of the
Substitute Outward Reinsurance Agreement and as of the Closing
Date, of "A" or better by both Standard & Poor's Ratings Group
and Moody's Investor Service, Inc.
4.8 Expenses. Subject to Sections 4.14, 4.15, 4.16 and 4.22 and
except as otherwise expressly provided in this Agreement, the
parties to this Agreement will bear their respective expenses
incurred in connection with the preparation, execution and
performance of this Agreement and the Transactions, including all
fees and expenses of Representatives; provided, however, that
(a) the Seller and the Purchaser will share equally the cost of
the filing fees in connection with the filings with the FTC and
the DOJ under the HSR Act with respect to the Transactions;
(b) the Seller will pay the cost of, and reimburse the Purchaser
for the Purchaser's actual out-of-pocket costs (other than fees
and expenses of Representatives) relating to, obtaining required
Permits for the implementation of this Agreement and the
Ancillary Agreements from Governmental Authorities and the actual
out-of-pocket costs of providing Policyholder notices and, with
the exception of the expenses described in (c), otherwise
implementing this Agreement and the Ancillary Agreements in
accordance with their respective terms; and (c) the Purchaser
will pay the costs of, and reimburse the Seller for the Seller's
actual out-of-pocket costs (other than fees and expenses of
Representatives) relating to, the filing and mailing of the
certificates of assumption for the Reinsured Policies.
Notwithstanding the foregoing, if it is commercially reasonable
to do so, the Seller will include the Policyholder notices with
respect to the certificates of assumption with its mailing of
other Policyholder notices, thereby reducing additional mailing
costs with respect to the certificates of assumption.
4.9 Publicity. From and after the date hereof and until the
effectiveness of this Section 4.9 is terminated pursuant to
Section 5.9, except as may be required by (a) Applicable Law (in
the reasonable opinion of counsel), (b) the applicable rules or
regulations of, or any listing agreement with, a national or
foreign securities exchange or (c) any order of any Governmental
<PAGE> 32
Authority of competent jurisdiction, in which case the Seller and
the Purchaser, as the case may be, will use commercially
reasonable efforts to allow the other party sufficient time,
consistent with such obligations, to review the nature of such
legal obligations and to comment upon such disclosure prior to
publication, and except for discussions and filings with
Governmental Authorities and rating agencies, neither the Seller
or its Affiliates or Representatives, on the one hand, nor the
Purchaser or its Affiliates or Representatives, on the other
hand, will make, or cause to be made, any press release or public
announcement in respect of this Agreement or the Ancillary
Agreements or the Transactions or otherwise communicate with news
or other media in respect thereof, without the prior written
consent of the other party. The Seller and the Purchaser will
cooperate as to the timing and contents of any press release or
public announcement.
4.10 Contact with Employees, Policyholders and Other Constituencies.
(a) After reasonable consultation with the Seller regarding the
timing and content of such communication, the Purchaser (and its
Representatives) will be entitled to contact and communicate with
(i) the employees, customers, policyholders, suppliers, creditors
and brokers of the Seller and its Subsidiaries, and (ii) the
Reinsurers, NOLHGA and other parties to the Rehabilitation
Documents in connection with the Transactions. The Purchaser
will make commercially reasonable efforts to allow a
Representative of the Seller to attend or otherwise be present
during any contact or communication covered by this
Section 4.10(a). Prior to the Closing Date, except in compliance
with procedures and a "script" or other content outline mutually
agreed by the Seller and the Purchaser, neither the Seller nor
any of its Subsidiaries will contact or communicate with any of
the Policyholders with respect to the Transactions without the
prior written consent of the Purchaser; provided, however, that
the Seller and its Subsidiaries may contact or communicate with
any of the Policyholders on any other matter in the ordinary
course of business consistent with past practice without the
prior written consent of the Purchaser.
(b) Without the prior written consent of the Seller, neither the
Purchaser nor any of its Affiliates will directly solicit for
employment any of the employees of the Seller with whom the
Purchaser has had direct verbal or written communications during
the investigation of and negotiations with the Seller, except for
such employees who have been involuntarily terminated by the
Seller.
4.11 Amendments to Plan and Other Orders. The Seller and the
Purchaser will cooperate with each other in preparing and filing
with the Court as part of the Petition for Court Approval as
promptly as practicable after execution of this Agreement, the
proposed amendments to the Plan and the Rehabilitation Documents
and motions requesting certain additional orders to effectuate
and confirm the items described in Exhibit I by the respective
dates indicated therein.
4.12 Funding of Policy Enhancements.
4.12.1 Recognition of Liability. As of the Closing, the
Seller will recognize in its financial statements as a liability
under insurance policies an amount equal to the Policy
Enhancements Amount to fund the Policy Enhancements, and will
record an appropriate liability on the Seller's balance sheet for
such purpose. On or before ten days prior to the Closing, the
Seller will deliver to the Purchaser a calculation of the Policy
Enhancements Amount.
4.12.2 Allocation of Policy Enhancements to Policyholders.
(a) The Policy Enhancements will be credited at each Scheduled
Vesting Date, or upon death, if sooner, as specified in the
<PAGE> 33
Policy Enhancements Procedures.
(b) The Policy Enhancement for an individual Policyholder at a
Scheduled Vesting Date will be the greater of (i) the guarantee
to be made to that individual Policyholder under the terms of the
Policy Enhancements Endorsement provided to such Policyholder;
and (ii) the individual Policyholder's Policy Enhancement
calculated in accordance with the Settlement Agreement but
assuming that the total Policy Enhancements credited or paid to
all eligible Policyholders on such Scheduled Vesting Date is the
Guaranteed Policy Enhancement Amount as of such date (calculated
for this purpose without including the aggregate amount of Policy
Enhancements paid as death benefits with respect to deaths
reported prior to such Scheduled Vesting Date and after the
immediately preceding Scheduled Vesting Date, if any). The
guarantee to be made to an individual Policyholder pursuant to
clause (i) above will be determined by ANLIC or First SunAmerica,
as applicable, based on the Maximum Guaranteed Policy Enhancement
Amount, the lapse assumptions used in the "Actuarial Analysis of
MBL Life Assurance Corporation projected as of June 30, 1998"
prepared by Coopers & Lybrand L.L.P., and the preliminary
calculation of Impairments delivered pursuant to Section 4.17.
Such guarantee for an individual Policyholder will in no event
exceed the preliminary calculation of Impairment for that
Policyholder. Such guarantee, once established, may be reduced
to consider net withdrawals by a Policyholder consistent with the
terms of the Settlement Agreement. The Seller will have the
right to review information that it reasonably requests regarding
the calculation of the individual Policyholder guarantees as well
as the calculation of the Policy Enhancements credited or paid at
each Scheduled Vesting Date. Upon the death of a Policyholder,
the Policy Enhancement to be credited or paid to such
Policyholder will be the full remaining amount, whether vested or
unvested, due such Policyholder as of the end of the previous
calendar quarter.
(c) If all or any portion of any of the DAC Election Escrow
Amount (or DAC Reduction Escrow Amount, as applicable), the COLI
DAC Election Escrow Amount or the Policy Enhancements
Endorsements Escrow Amount is released to the Seller prior to the
final Scheduled Vesting Date, the Seller will deliver or cause to
be delivered to ANLIC and First SunAmerica, not less than 60 days
preceding the next Scheduled Vesting Date, cash in an amount
equal to the applicable portion of the amounts released from such
escrows that are to be added to the Policy Enhancements Amount in
accordance with the Settlement Agreement (the "Additional Policy
Enhancements Amount"). The Purchaser will cause ANLIC and First
SunAmerica to credit (or, in the case of Eligible Policies that
are Restructured Contracts in Pay Status, pay) the Additional
Policy Enhancements Amount as of the next Scheduled Vesting Date
to individual Eligible Policies in proportion to the respective
Impairments of Eligible Policies remaining in effect on such
Scheduled Vesting Date. The amount and application of the
Additional Policy Enhancements Amount (i) will be fully
incremental to the amount to be credited (or paid, as the case
may be), pursuant to paragraph (b) above; and (ii) will not
affect the calculation of the guarantee described in clause (i)
of paragraph (b) above. Except for the obligation to credit (or
pay, as the case may be) to policyholders of Eligible Policies
amounts delivered to ANLIC or First SunAmerica as expressly set
forth in this paragraph (c), none of the Purchaser or any of its
Affiliates will have any obligation in connection with the
Additional Policy Enhancements Amount, including the calculation
thereof or the terms or timing of the release of funds from the
COLI DAC Escrow Account.
4.12.3 No Set-off. The Purchaser agrees that it will have no
right to set-off against its obligations under this Section 4.12
any Damages awarded the Purchaser in any Action arising out of or
relating to this Agreement.
4.12.4 Endorsements to Eligible Policies. The Seller will
<PAGE> 34
prepare and file all necessary endorsements and use commercially
reasonable efforts to obtain all necessary Permits to assure
that: (a) each Eligible Policy that is a Reinsured Life Policy
has an endorsement providing that the Policy Enhancement for
which such Policy is eligible will be credited to the Account
Value of such Policy; and (b) each Eligible Policy that is a
Reinsured Annuity Contract has and endorsement providing that the
Policy Enhancement for which such Policy is eligible will be
credited to the Account Value of such Policy (or, in the case of
Eligible Policies that are Restructured Contracts in Pay Status,
paid to the Policyholder) either (i) by the Seller, if the
Closing does not occur and the Policy is not ceded to a reinsurer
prior to December 31, 1999, or (ii) by ANLIC or First SunAmerica,
as the case may be, if the Closing takes place but only if the
Policyholder selects a Replacement Policy in accordance with
Section 5.10 (collectively, the "Policy Enhancements
Endorsements"). The Seller will cooperate with and assist the
Purchaser in filing endorsements and obtaining necessary Permits
with respect to the Policy Enhancements for the applicable
Replacement Policies.
4.12.5 Policy Enhancements Endorsements Escrow Amount.
(a) If the Seller has not obtained, at least five Business Days
prior to the Closing Date, all Permits necessary to attach the
Policy Enhancements Endorsements in all jurisdictions, the Seller
will deposit the Policy Enhancements Endorsements Escrow Amount
in the Policy Enhancements Endorsements Escrow Account
established under the Escrow Agreement. The "Policy Enhancements
Endorsements Escrow Amount" means the dollar amount equal to the
sum of (i) 1.5% of the Account Balances (or statutory reserves in
the case of Restructured Contracts in Pay Status) as of the
Calculation Date of those Reinsured Annuity Contracts that are
Eligible Policies for which all necessary Permits to attach the
Policy Enhancements Endorsements have not been obtained by the
Seller prior to such date; plus (ii) 3.5% of the Account Balances
as of the Calculation Date of those Reinsured Life Policies that
are Eligible Policies for which all necessary Permits to attach
the Policy Enhancements Endorsements have not been obtained by
the Seller prior to such date.
(b) If the Seller obtains all Permits necessary to attach the
Policy Enhancements Endorsements from additional jurisdictions
within 60 days after the Closing Date, the Seller will be
entitled to a payment out of the Policy Enhancements Endorsements
Escrow Account of 100% of such portion of the Policy Enhancements
Endorsements Escrow Amount that relates to the additional
jurisdictions for which such Permits have been obtained during
such period, together with net accrued interest or earnings on
such amount. If the Seller obtains all Permits necessary to
attach the Policy Enhancements Endorsements for additional
jurisdictions not sooner than 60 days but no later than 90 days
after the Closing Date, the Seller will be entitled to a payment
out of the Policy Enhancements Endorsements Escrow Account of 75%
of such portion of the Policy Enhancements Endorsements Escrow
Amount that relates to the additional jurisdictions for such
Permits have been obtained during such period, together with net
accrued interest or earnings on such amount. If the Seller
obtains all Permits necessary to attach the Policy Enhancements
Endorsements for additional jurisdictions not sooner than 90 days
but no later than 120 days after the Closing Date, the Seller
will be entitled to payment out of the Policy Enhancements
Endorsements Escrow Account of 50% of such portion of the Policy
Enhancements Endorsements Escrow Amount that relates to the
additional jurisdictions for which such Permits have been
obtained during such period, together with net accrued interest
or earnings on such amount. All amounts remaining in the Policy
Enhancements Endorsements Escrow Account 120 days after the
Closing Date and not payable to the Seller pursuant to the
foregoing sentences of this Section 4.12.5(b) will be released to
the Purchaser and the Seller will continue to use commercially
reasonable efforts to obtain all remaining Policy Enhancements
<PAGE> 35
Endorsements.
4.13 Endorsement of Certain Associations. The Seller will
cooperate with the Purchaser in obtaining and/or maintaining the
endorsements of the associations representing Policyholders.
4.14 Break-Up Fee; Expense Reimbursement.
4.14.1 Break-Up Fee. If (a) this Agreement has been terminated
for any reason (including a termination by the Purchaser pursuant
to Section 10.3.1(c), a failure to obtain any consent, approval
or order of any Person or Governmental Authority that is required
for the Seller to lawfully consummate the Transactions, or a
failure to satisfy any of the other conditions in Section 6)
other than (i) a breach by the Purchaser of its obligations
hereunder; (ii) a failure by the Purchaser to satisfy any of the
conditions in Section 6.3 in accordance with the terms thereof;
or (iii) a failure to satisfy any of the conditions in
Section 6.2.1, Section 6.2.2 (but excluding for purposes of this
clause (iii) any failure of such condition relating to an
Applicable Law of or Action brought by any New Jersey
Governmental Authority or the Commissioner in any of her
capacities), or Section 6.2.8 (but excluding for purposes of this
clause (iii) any failure to obtain any Permit from a New Jersey
Governmental Authority or the Commissioner in any of her
capacities), provided that the failure to satisfy any of the
conditions specified in clauses (ii) and (iii) above is not
waived by the Purchaser or caused by the failure of the Seller to
fulfill its obligations under this Agreement; and (b) the Seller
has entered into any binding agreement with one or more third
parties prior to October 1, 1999 regarding an Acquisition
Proposal, the Seller will promptly, but not later than five
Business Days after the later of such termination or the date the
Seller enters into any such agreement(s), pay $10,000,000 in same
day funds to the Purchaser.
4.14.2 Expense Reimbursement. On July 14, 1998, the Seller
deposited $2,500,000 into the Expense Reimbursement Escrow
Account. If this Agreement has been terminated for any reason
(including a termination by the Purchaser pursuant to
Section 10.3.1(c), a failure to obtain any consent, approval or
order of any Person or Governmental Authority that is required
for the Seller to lawfully consummate the Transactions, or a
failure to satisfy any of the other conditions in Section 6)
other than a breach by the Purchaser of its obligations hereunder
or the failure of the Purchaser to fulfill when due any of the
conditions in Section 6.3, the Purchaser will be entitled to
payment of said amount out of the Expense Reimbursement Escrow
Account. Such amount constitutes an agreed upon amount in
consideration of the indirect costs and direct out-of-pocket
expenses incurred by the Purchaser and its Representatives in
connection with the Purchaser's due diligence investigation of
the Business and the preparation and negotiation of this
Agreement. Such amount will be payable to the Purchaser without
any showing of proof by the Purchaser of the actual incurrence of
such expenses.
4.14.3 Cumulative Remedies. Sections 4.14.1, 4.14.2 and 4.22
are cumulative, if applicable, and are not mutually exclusive.
The Seller acknowledges: (a) its extensive efforts to sell the
Business and the lengthy bidding process involved in such
efforts; (b) the complexity of the process of negotiating and
consummating the Transactions; (c) its belief that the
Transactions represent a fair purchase price for the Business
that confers a significant benefit on the Seller and Persons
having an interest in the Seller; (d) the considerable time and
expense that the Purchaser has invested and expects to continue
to invest in the Transactions; (e) the magnitude of the
Purchaser's anticipated capital commitment if the Transactions
are consummated; and (f) that without the agreements contained in
this Section 4.14 and in Sections 4.15, 4.16 and 4.22, the
Purchaser would not enter into this Agreement.
<PAGE> 36
4.15 Enforcement of Other Agreements. The Seller has represented
to the Purchaser that each Person with whom the Seller or its
Representatives has had negotiations with respect to the purchase
of the capital stock of the Seller or all or any part of the
Business, or that submitted bids or indications of interest in
connection therewith, are subject to confidentiality agreements
all of which contain the provisions set forth on Schedule 13
under the heading "unsolicited proposals" and certain of which
contain the provisions set forth on Schedule 13 under the heading
"challenges". The Purchaser has relied on that statement in
connection with entering into this Agreement. The Seller will
take such steps as are reasonably necessary to enforce the
provisions of such agreements according to their respective terms
and to prevent and prohibit such "unsolicited proposals" or
"challenges" from such parties.
4.16 Overbidding Procedures. Together with the filing of the
Petition for Court Approval, the Seller will file a motion (which
motion will request review by the Court on the most expedited
basis available) with the Court for an order, in form and
substance reasonably satisfactory to the Purchaser, establishing
the procedures described below for any party other than the
Purchaser (each, a "Competitive Bidder") who wishes to make an
Acquisition Proposal on terms that it considers to be better or
higher than those set forth in this Agreement to make such a
proposal (the "Competitive Bid Order"). The Seller will use its
commercially reasonable efforts to cause the Court to enter the
Competitive Bid Order as soon as possible. The Competitive Bid
Order will include the following conditions and procedures, and
no other conditions or procedures inconsistent in any material
respect with the following:
(a) Before the Seller may commence discussions with the
Competitive Bidder, the Competitive Bidder must move to intervene
in the Court approval proceeding (which motion must include a
mark-up of this Agreement that the Competitive Bidder would be
willing to execute without further negotiation) not later than
the earlier of (i) ten Business Days after the Competitive Bid
Order has been entered by the Court, and (ii) the date scheduled
by the Court for the hearing relating to the approval of the
consummation of the Transactions to be completed at the Closing.
(b) The Competitive Bidder cannot be a Person or an Affiliate of
a Person who (i) participated in the auction process conducted by
the Seller's investment bankers for the sale of the Seller's
capital stock or for the sale of all or any part of the Business,
by receiving non-public information (including a Confidential
Memorandum similar to the one delivered to the Purchaser)
regarding the Seller or the Business, and/or submitting one or
more proposals to acquire the capital stock of the Seller or all
or any part of the Business, or (ii) is a Class Four Creditor
that is or has at any time been a party to an agreement with the
Seller restricting such Class Four Creditor from trading its
Class Four Claims.
(c) The Acquisition Proposal must be with respect to all of the
Business, including all of the Reinsured Life Policies and
Reinsured Annuity Contracts.
(d) The total after-tax present value to the Seller of the
Acquisition Proposal must be at least $12,500,000 higher than
the total after-tax present value to the Company as of the date
hereof of the Transactions (assuming that the Transactions had
closed in accordance with their respective terms), as determined,
based on reasonable and consistent assumptions, by Goldman Sachs
& Co., the Seller's financial advisor.
(e) The other material terms of the Acquisition Proposal,
including the nature and timing of consideration to the Seller
and the conditions to closing, must be no less favorable to the
Seller than the similar terms of the Transactions.
<PAGE> 37
(f) The Competitive Bidder must be at least as creditworthy
(expressed in terms of credit ratings of at least two national
ratings agencies) as ANLIC.
(g) The Acquisition Proposal must be accompanied by the latest
available certified SAP basis and GAAP basis financial statements
of the Competitive Bidder and such subsequent financial
statements and other financial information that would enable the
Seller to evaluate the Competitive Bidder's ability to consummate
the Acquisition Proposal.
(h) The Competitive Bidder will have 10 Business Days after it
submits the mark-up referred to in paragraph (a) above to conduct
due diligence, after which it must, within three Business Days,
submit to the Seller its best and last proposed purchase price
and other terms.
(i) The Competitive Bidder will secure and deliver to the
Seller, not later than the date it submits the mark-up referred
to in paragraph (a) above, a surety bond in an amount equal to
10% of the ceding commission under the Acquisition Proposal as a
guarantee of payment of such ceding commission.
(j) If one or more Acquisition Proposals meet all of the above
requirements, the Seller will select the highest and best to
consider. If the Seller commences consideration of such
Acquisition Proposal, the Seller will, within ten Business Days,
deliver to Purchaser a copy of the executed definitive agreement
relating to such Acquisition Proposal, which will provide that
the Seller may not amend or modify such agreement in any material
respect except in a manner that would make it more favorable to
the Seller and which will be subject to the Purchaser's right to
match as set forth in this paragraph. The Seller will be
obligated to terminate such definitive agreement and proceed to
consummate the Transactions with the Purchaser if the Purchaser
agrees, within ten Business Days of its receipt of the definitive
agreement relating to the Acquisition Proposal, to modify this
Agreement to meet (without any requirement that the Purchaser
exceed such terms) the material terms thereof.
(k) If the Purchaser does not elect to meet the material terms
of the Acquisition Proposal as finally proposed by the
Competitive Bidder pursuant to paragraphs (h) and (j) above, the
Purchaser will be entitled, upon notice to the Seller to such
effect, to immediate payment of the amounts required pursuant to
Sections 4.14.1, 4.14.2 and 4.22.
4.17 Calculation of Impairments. As soon as reasonably
practicable, but not later than the earlier of (i) October 15,
1998, and (ii) fifteen days after the end of the second calendar
month preceding the Closing Date (or, if the Closing Date is
December 31, 1998, November 30, 1998), the Seller will deliver to
the Purchaser a preliminary calculation of the Impairment as of
the last day of the month immediately preceding the date of
delivery for each Reinsured Policy and each other Eligible
Policy, which calculation will include the effect of the Account
Values True-Up Amount that has accrued through the date of
calculation, together with all supporting documentation used by
the Seller as a basis for its calculation.
4.18 COI.
4.18.1 Modified COI Scale. The Seller will use its
commercially reasonable efforts to file and obtain all Permits
necessary to permit changes to mortality charges as set forth
below (the "Modified COI Scale"). Mortality charges may be
changed on the policy anniversary beginning 15 months after the
Rehabilitation Period Termination Date, to scales reflecting the
greater of (a) actual mortality experience and (b) anticipated
mortality experience based on the following formulas:
----------------------------------------------------------------------
<PAGE> 38
- -
| (A) | (B)
|
----------------------------------------------------------------------
- -
| Aggregate Account Values of all |
|
| Reinsured Life Policies in effect |
|
| One Year following the Rehabilitation | Increase in COIs
|
| Period Termination Date as a percent of |
|
| aggregate Account Values on 12/31/97 |
|
----------------------------------------------------------------------
- -
| 95% or more | 0%
|
| |
|
| Less than 95% | .7% for each 1% that the
|
| | Aggregate Account Values
|
| | percentage in column (A)
|
| | is less than 95%
|
----------------------------------------------------------------------
- -
Such amounts may be further adjusted to reflect items such
as: (i) an increase or anticipated increase in the
reinsurance rates charged by Outward Reinsurers where such
increase is made subsequent to the Closing Date and not
considered in the Outward Reinsurance Adjustment Amount;
(ii) changes in taxation; and (iii) changes in Applicable
Laws that increase the cost of administering the Reinsured
Policies. In no event will any change in the Cost of
Insurance scale increase the Cost of Insurance rate for any
Reinsured Policy above the guaranteed COI rate contained in
such Reinsured Policy.
4.18.2 COI Adjustment Amount. The COI Adjustment Amount will
be calculated by the Purchaser as of the first anniversary of the
Rehabilitation Period Termination Date and such calculation,
together with a detailed statement explaining how such
calculation was made, will be delivered to the Seller within 30
days after the first anniversary of the Rehabilitation Period
Termination Date. The Seller will then have ten Business Days to
dispute the Purchaser's calculation. If the Seller does not give
timely notice of any dispute regarding the Purchaser's
calculation, the Purchaser will be entitled to payment of such
amount out of the COI Adjustment Escrow Account. If the Seller
gives timely notice of any dispute regarding the Purchaser's
calculation, the Purchaser will file a notice of its COI
Adjustment Escrow Claim pursuant to the Escrow Agreement, and the
parties will proceed to resolve such dispute by submitting such
dispute to the Independent Party in accordance with Section 8.5.
4.19 Acquisition Agreement Regarding Broker/Dealer. The Seller
and the Purchaser will negotiate in good faith to reach an
agreement prior to the Closing for the acquisition by the
Purchaser or any Subsidiary designated by the Purchaser of the
assets of the Seller's Subsidiaries First Priority Investment
Corp. and Mutual Benefit Marketing Group d/b/a Financial Partners
Marketing Group for a purchase price of $125,000.
4.20 Grandfathering Ruling. On or before the date on which the
Petition for Court Approval is filed, the Seller will file a
request for a ruling which describes the facts associated with
<PAGE> 39
the Transactions in a manner reasonably satisfactory to the
Purchaser, and thereafter will use its best efforts to obtain, as
promptly as possible a private letter ruling from the IRS (the
"Grandfathering Ruling"): (a) describing the modification or
restructuring of the Reinsured Life Policies that has or will
have occurred as part of the rehabilitation of Mutual Benefit or
the Seller pursuant to the Plan, including any modifications
occurring pursuant to the Settlement Agreement or this Agreement
(and including the attachment of the Policy Enhancements
Endorsements to the Reinsured Life Policies), and (b) concluding,
based on representations provided by the Seller (which
representations will be reasonably acceptable to the Purchaser
when submitted to the IRS) that the assumption of the Reinsured
Life Policies by the Purchaser and its Affiliates pursuant to
this Agreement (i) will not have an effect on the date that the
Reinsured Life Policies were issued, entered into, or purchased
for purposes of Sections 72, 101(f), 264, 7702 and 7702A of the
Code, and (ii) will not require retesting or the start of a new
test period under Sections 264(c)(1), 7702(f)(7)(B)-(E) and
7702A(c); and (c) referring to the application of Rev. Proc. 92-
57 to the Policy Enhancements and the Additional Policy
Enhancements without negative comment. The Purchaser will be
provided an opportunity to participate in all material
communications with the IRS with respect to the Grandfathering
Ruling through its designated Representative, and the Seller will
not withdraw the request for the Grandfathering Ruling without
the Purchaser's written consent, which consent will not be
unreasonably withheld. The Purchaser will cooperate with the
Seller in obtaining the Grandfathering Ruling on a timely basis.
4.21 Additional Enhancements DAC Amount. The Additional
Enhancements DAC Amount will be calculated by the Seller as of
each date on which any Additional Policy Enhancement Amount is
paid by the Seller to the Purchaser pursuant to
Section 4.12.2(c), and such calculation, together with a detailed
statement explaining how such calculation was made, will be
delivered to the Purchaser within 30 days of such payment date.
The Seller will then have 30 days to pay to the Purchaser the
Additional Enhancements DAC Amount, and if such amount is not so
paid, Purchaser will be entitled to payment of such amount out of
the Claims Escrow Account; provided, that if the payment to the
Purchaser in connection with the release to the Seller of the
COLI DAC Escrow Amount or the Policy Enhancements Endorsements
Escrow Amount occurs in the tax year of the Seller which includes
the Closing Date and at the time of such payment there has not
been a Final Determination that the Seller is qualified to make
the Election, then the Seller may pay the Additional Enhancements
DAC Amount into the DAC Tax Indemnity Account as an addition to
the DAC Election Escrow Amount which will be released only under
the terms of Section 7.1 hereof; and provided, further, that the
Additional Enhancements DAC Amount will not be payable if, and to
the extent that, pursuant to the Letter Ruling (but no other form
of Final Determination) and as a result of the Election (or a
comparable election pursuant to Treas. Reg. Section 1.848-2(i)(4)
for the year in which such payment date occurs), the Seller
demonstrates to the Purchaser's reasonable satisfaction that
there will be an additional "reduction amount," as determined
under the Allocation Regulations, available to the Purchaser or
its Affiliates that is attributable to the payment and receipt of
the Additional Policy Enhancements Amount.
4.22 Reimbursable Transition Expenses. Prior to the Closing
Date, the Purchaser will incur certain transition expenses
relating to the conversion of its computer and other systems,
including data mapping and conversion testing in preparation for
the acquisition of the Business. Before the Purchaser incurs any
such expenses, the Purchaser will notify the Seller of the
expenditure. The Seller will then have five Business Days to
approve or reject such expenditure. If the Seller approves such
expenditure, the Seller will immediately deposit a sum equal to
the amount of such expenditure into the Expense Reimbursement
Escrow Account. If this Agreement has been terminated for any
<PAGE> 40
reason (including a termination by the Purchaser pursuant to
Section 10.3.1(c), a failure to obtain any consent, approval or
order of any Person or Governmental Authority that is required
for the Seller to lawfully consummate the Transactions, or a
failure to satisfy any of the other conditions in Section 6),
other than a breach by the Purchaser of its obligations hereunder
or the failure of the Purchaser to fulfill when due any of the
conditions set forth in Section 6.3, the Purchaser will be
entitled to payment of all such approved expenditures out of the
Expense Reimbursement Escrow Account upon presentation by the
Purchaser of invoices or other reasonable evidence of such
expenditures. If the Seller rejects such expenditure and the
Purchaser elects to incur it in any event, then the Purchaser
will not be entitled to reimbursement for such expenditure. Upon
the Closing of the Transactions, the Seller will be entitled to
payment of all amounts in the Expense Reimbursement Escrow
Account (including amounts deposited pursuant to Section 4.14.2).
4.23 Transfer of Class Four Claims. On the date hereof, the
Seller has delivered to the Purchaser letter agreements executed
by certain Class Four Creditors providing, among other things,
for such Class Four Creditors' support of the provisions of
Sections 4.14, 4.15 and 4.16. Following the date hereof, the
Seller will seek to obtain the consent of the Class Four
Creditors to the consummation of the Transactions at the Closing
and the other matters set forth in Exhibit I. In each case,
these documents provide for the agreements set forth therein to
be binding on the Class Four Creditors' successors and assigns
and require the Class Four Creditors to deliver a written
confirmation of any successor or assign of a Class Four Claim
acknowledging that the terms of such documents are binding on
such Person to the same extent as if a signatory thereto. In
furtherance thereof, the Seller will instruct the transfer agent
of such claims not to effect the transfer of any such claims
without first being provided such confirmation.
4.24 Delivery of Updated Policy Lists. On or prior to the
Calculation Date, the Seller will deliver to the Purchaser
correct and complete lists as of such date of each Reinsured Life
Policy that may, in the absence of the Grandfathering Ruling, be
deemed to be a MEC as a result of the consummation of the
Transactions if (a) the policyholder makes annual premium
payments in an amount equal to or greater than the average annual
premium payment made with respect to such Policy during the four
year period ending on the Calculation Date; and (b) if the
policyholder makes annual premium payments in an amount equal to
or greater than the premium payments made with respect to such
Policy for the 12 month period ending on the Calculation Date;
provided, however, if the Grandfathering Ruling is obtained prior
to the Calculation Date, the Seller will not be required to
deliver the lists described in this Section 4.24.
5. CONTINUING COVENANTS
5.1 Continuing Access Obligations.
5.1.1 Access Obligations During Transition Period. Following
the Closing Date until the Transition Period Termination Date,
the Seller will continue to provide the Purchaser with all rights
of access as provided in Section 4.3. On the Transition Period
Termination Date, the Seller will deliver to the location(s)
designated by the Purchaser for such delivery, the originals of
all Books and Records.
5.1.2 Continuing Access Obligations of the Purchaser.
Following the Transition Period Termination Date, the Purchaser
will (a) allow the Seller, upon reasonable prior notice and
during regular business hours, through its Representatives, the
right, at the Seller's expense, to examine and make copies of the
Books and Records delivered to the Purchaser on the Transition
Period Termination Date, for any reasonable business purpose
including the preparation or examination of Tax returns, filings
<PAGE> 41
with Governmental Authorities and financial statements and the
conduct of any Action whether pending or threatened, and
(b) maintain such Books and Records for not less than seven years
after the Closing Date for the Seller's examination and copying.
Access to such Books and Records will be at the Seller's expense
and may not unreasonably interfere with the Purchaser's or any
successor company's business operations.
5.1.3 Continuing Access Obligations of the Seller. Following
the Transition Period Termination Date, the Seller will (a) allow
the Purchaser, upon reasonable prior notice and during regular
business hours, through its Representatives, the right, at the
Purchaser's expense, to examine and make copies of any documents,
filings, information, records and lists relating to the Business,
the Reinsured Policies, the Transferred Assets or the Excluded
Policies retained by the Seller (the "Retained Books and
Records"), for any reasonable business purpose, including (i) the
preparation or examination of Tax Returns, filings with any
Governmental Authority and financial statements and (ii) the
conduct of any Action, whether pending or threatened, concerning
the conduct of the Business prior to the Closing Date and
(b) maintain such Retained Books and Records for not less than
seven years after the Closing Date for the Purchaser's
examination and copying; provided that if the Seller liquidates
or dissolves prior to such date, Seller will deliver all such
Retained Books and Records to the Purchaser. Access to such
Retained Books and Records will be at the Purchaser's expense and
can not unreasonably interfere with the Seller's or any successor
company's business operations.
5.2 Distribution of Class Four Creditor Value Share;
Liquidation.
5.2.1 Provision of Adequate Reserves.The Seller will not
distribute any amount in respect of the Class Four Creditor Value
Share or otherwise distribute assets in liquidation without
providing and maintaining adequate reserves to satisfy the
Seller's obligations under this Agreement and the Ancillary
Agreements and all of the Seller's other liabilities and
obligations, whether known or contingent. The Seller will not
dissolve or otherwise cease its corporate existence prior to the
end of the sixth month following the Transition Period
Termination Date.
5.2.2 Distribution of Class Four Creditor Value Share.
Without limiting the generality of Section 5.2.1 above, the
distribution of the Class Four Creditor Value Share will be
subject to the provisions of this Section 5.2.2.
(a) The Seller will not make any distribution of the Class Four
Creditor Value Share prior to the Certified Statement Date (as
defined below). The "Certified Statement Date" means the earlier
to occur of (i) the date of delivery to the Purchaser of the
Final Closing Date Statement, or (ii) the date of delivery to the
Purchaser of the Certified Estimated Closing Date Statement (as
defined below); provided, however, that the Certified Statement
Date will in no event be earlier than the Closing Date; further
provided, that the Seller may only deliver the Certified
Estimated Closing Date Statement on or before the 15th day
following the Closing Date. The "Certified Estimated Closing
Date Statement" means the Estimated Closing Date Statement as
reviewed and certified by Coopers & Lybrand L.L.P to accurately
set forth the actual amount (rather than the Seller's good faith
estimate) as of the Calculation Date of each of the amounts
required to be set forth in the Estimated Closing Date Statement.
Following the Certified Statement Date (and except as provided in
Section 5.2.2(b)), the Seller may only distribute that portion of
the Class Four Creditor Value Share that exceeds the Reserved
Value Share (as defined below). The "Reserved Value Share" means
the sum of $285 million plus (x) if the Certified Statement Date
is the date of delivery of the Final Closing Date Statement, an
amount (which will not be less than zero) equal to the remainder
<PAGE> 42
of (1) the Reserve minus the Ceding Commission, each as
determined pursuant to the Final Closing Date Statement, minus
(2) the Value (as of the Closing Date) of the Transferred Reserve
Assets transferred to ANLIC on the Closing Date, or (y) if the
Certified Statement Date is the date of delivery of the Certified
Estimated Closing Date Statement, an amount (which will not be
less than zero) equal to the remainder of (1) the Reserve minus
the Ceding Commission, each as determined pursuant to the
Certified Estimated Closing Date Statement, minus (2) the Value
(as of the Closing Date) of the Transferred Reserve Assets
transferred to ANLIC on the Closing Date. The Reserved Value
Share will be retained in cash and Cash Equivalents by the
Seller.
(b) After (i) the earlier to occur of (A) the date the Purchaser
delivers a notice of disagreement with the Final Closing Date
Statement or (B) the end of the period provided for the
Purchaser's review thereof as provided in Section 1.3.1, and
(ii) the Seller's payment to ANLIC out of the Reserved Value
Share of all undisputed amounts owing to ANLIC pursuant to
Section 1.3.3, the Seller may make a distribution to the Class
Four Creditors out of the remaining portion of the Reserved Value
Share equal to the remainder of (x) the remaining portion of the
Reserved Value Share, minus (y) the amount claimed as owing to
ANLIC in such notice of disagreement to the extent disputed by
the Seller. Upon final resolution of such disputes and payment
out of the remaining portion of the Reserved Value Share to ANLIC
of the full amount owing to ANLIC with respect thereto, the
Seller may make an additional distribution to the Class Four
Creditors equal to any remaining portion of the Reserved Value
Share.
5.2.3 Restriction on Liquidating Distributions. Without
limiting the generality of Section 5.2.1 above, except as
expressly contemplated pursuant to Section 5.2.2 above, the
Seller will not distribute any amount in respect of the Class
Four Creditor Value Share or otherwise distribute assets in
liquidation prior to the Transition Period Termination Date.
5.3 Termination of Excluded Annuity Contracts. If approved by
the Court pursuant to Section 4.11, the Seller will make
commercially reasonable efforts to terminate all Excluded Annuity
Contracts (other than Variable Annuities that are Contracts in
Pay Status) at the end of the Rehabilitation Period.
5.4 Termination of Wrapped Accumulation Contracts. The Seller
will, promptly after the termination of the Wrapped Accumulation
Contracts, apply the surplus contained in Seller's Separate
Account B as carried on the Seller's books on such date to such
policies in compliance with the terms of the Plan and the
relevant Rehabilitation Documents.
5.5 Marketing Support. The Seller will: (a) provide the
Purchaser with any information reasonably requested by the
Purchaser or its Representatives with respect to the owners and
holders of Wrapped Accumulation Contracts, Excluded Annuity
Contracts and Variable Annuities (collectively, the "Terminating
Policies"); (b) not provide any information with respect to the
Terminating Policies to any other Person other than as necessary
for the administration of the Terminating Policies; and
(c) otherwise cooperate fully with the Purchaser in its marketing
efforts to offer Replacement Policies to all owners and holders
of Terminating Policies subject to the terms of the Transition
Services Agreement.
5.6 Sufficiency of Staff and Assets. The Seller will continue
to maintain sufficient levels of employees and assets (whether
tangible or intangible) and all Permits necessary to perform the
services contemplated by the Transition Services Agreement.
5.7 Policy Endorsements. At the Seller's cost and expense, the
Seller will obtain all Permits from all relevant Governmental
<PAGE> 43
Authorities regarding all endorsements to the Reinsured Policies
and all other Policies issued by the Seller that are required to
effect the termination of the Rehabilitation Period in accordance
with the terms of this Agreement, each of which must be made
available for review by, and be reasonably acceptable to, the
Purchaser prior to the filing thereof with any Governmental
Authority. The Purchaser and First SunAmerica, as applicable,
will cooperate with the Seller in preparing, filing and obtaining
the Purchaser's related endorsements for the Replacement
Policies.
5.8 Rehabilitation Documents. The Seller will continue to
perform, and will cause each of its Subsidiaries to perform, all
of their respective obligations relating to the Business, the
Reinsured Policies and the Transferred Assets pursuant to the
Plan and each Rehabilitation Document, as amended in accordance
with this Agreement, to the extent that any such obligations
continue in effect after the Closing.
5.9 Post-Closing Publicity. Following the Closing Date and
until the Assumption Reinsurance Agreements have become effective
with respect to all Reinsured Policies, the provisions of
Section 4.9 will continue to apply.
5.10 Post-Rehabilitation Treatment of Reinsured and Replacement
Policies.
5.10.1 Continuation or Replacement. With respect to each
Reinsured Life Policy, the Purchaser agrees to provide or cause
ANLIC or First SunAmerica to provide a continuation of the
existing Reinsured Life Policy in accordance with its terms.
With respect to each Reinsured Annuity Contract, Purchaser agrees
to provide or cause ANLIC or First SunAmerica to provide, as
applicable, in its sole discretion, either (a) a continuation of
the existing Reinsured Annuity Contract in accordance with its
terms, or (b) a replacement policy written by the Purchaser,
ANLIC or First SunAmerica, as applicable, that is substantially
similar to the existing Reinsured Annuity Contract (each such
replacement policy, a "Preserved Replacement Policy"). Any
Preserved Replacement Policy will fully preserve all
contractually guaranteed rights and values expressly provided in
the existing Policy. Except for the Reinsured Policies for which
the Policyholders have elected reduced paid-up or reduced face-
amount options, to the extent any such Reinsured Policy has cash
surrender rights, the cash surrender value of the Preserved
Replacement Policy immediately after replacement will equal or
exceed the Account Value of the Reinsured Policy immediately
before replacement (without reduction for any moratorium or
surrender charges).
5.10.2 Additional Replacement Policies. The Purchaser may
offer, or may cause ANLIC or First SunAmerica to offer, as
applicable, other replacement Policies written by the Purchaser
or any Subsidiary of the Purchaser, that do not need to comply
with the requirements of Section 5.10.1 (each, an "Additional
Replacement Policy"; each Preserved Replacement Policy and each
Additional Replacement Policy is referred to as a "Replacement
Policy"). For all such Additional Replacement Policies, the
Purchaser agrees to establish, as applicable, all guaranteed
contractual terms in a commercially fair and reasonable manner
which terms are in the aggregate at least as favorable as those
provided by the Purchaser, ANLIC or First SunAmerica, as the case
may be, to its own existing policyholders under substantially
similar Policies currently in force. Such exchange will be based
on the full Account Value from the Reinsured Policy without
application of any front-end sales charges other than premium
taxes, if applicable, but such Additional Replacement Policy can
include surrender charges and other customary policy features.
5.10.3 Non-Guaranteed Elements. For all Replacement Policies
issued pursuant to either Section 5.10.1 or 5.10.2, the Purchaser
agrees to establish, or to cause ANLIC or First SunAmerica to
<PAGE> 44
establish, as applicable, all non-guaranteed elements of
Replacement Policies in a competitive manner which elements will
be, in the aggregate, at least as favorable as those provided
from time to time by the Purchaser, ANLIC, First SunAmerica or
any other Subsidiary of the Purchaser that may assume Reinsured
Policies or issue Replacement Policies, as the case may be, to
its own policyholders under substantially similar circumstances.
In establishing such non-guaranteed elements, the Purchaser may
take into consideration all relevant factors, including the
presence or absence of surrender charges, actual and anticipated
persistency, the interest rate environment in which the premium
was received and in which crediting rates were established,
actual and anticipated mortality, reinsurance premiums charged by
third party reinsurers, administrative expenses and Taxes,
notwithstanding the non-guaranteed elements used in policy
illustrations prior to the date hereof.
5.10.4 Eligible Policies. The following Policies are the only
Policies that are eligible for Policy Enhancements: (a) each
Policy that is either a continuation of an existing Reinsured
Life Policy or a Replacement Policy for any such Reinsured Life
Policy; (b) each Policy that is an Additional Replacement Policy
for any Reinsured Annuity Contract that is a Covered Accumulation
Contract; (c) each Additional Replacement Policy for any Excluded
Annuity Contract that is a Covered Accumulation Contract; and
(d) each Policy that is a continuation of an existing Reinsured
Policy that is a Restructured Contract in Pay Status
(collectively, the "Eligible Policies"). A Replacement Policy
offered pursuant to Section 5.10.1 or 5.10.2 that falls within
one of the above categories, will constitute an Eligible Policy
even if such Replacement Policy is accepted by a policyholder
prior to the Rehabilitation Period Termination Date. With
respect to such Eligible Policies, the Purchaser, ANLIC and First
SunAmerica agree to comply with all of the terms of Sections
5.10.1, 5.10.2, and 5.10.3 without regard to the Policy
Enhancements Amount to be applied to such Eligible Policies. The
amount of any Policy Enhancement must be fully incremental to
each Eligible Policy (other than the Restructured Contracts in
Pay Status where such Policy Enhancement is paid in cash),
including any cash surrender value (other than Reinsured Policies
that have elected "reduced paid up" or "reduced face amount"
options in connection with the Rehabilitation), on the date such
amount is applied.
5.10.5 Approvals. The Purchaser agrees that prior to the time
it offers or causes ANLIC or First SunAmerica to offer, as
applicable, any Replacement Policy pursuant to this Section 5.10,
the Purchaser, ANLIC or First SunAmerica, as applicable, will
have obtained all policy form and endorsement Permits required to
be obtained from Governmental Authorities for such Replacement
Policy. Prior to the Closing, the Seller will cooperate with the
Purchaser and its Subsidiaries in securing all such policy form
and endorsement Permits.
5.10.6 Guidelines for Restructured Life Policies. In addition
to the above provisions, the Purchaser, ANLIC and First
SunAmerica agree to the following with respect to the
administration of Reinsured Life Policies (excluding those
Reinsured Policies with respect to which the Policyholders have
elected non-forfeiture options, including reduced paid-up and
extended term insurance).
(a) Mortality and expense charges will be initially established
at the end of the Rehabilitation Period at the current
"Preferred" COI scales, as modified prior to the Closing Date by
mutual agreement of the Seller and the Purchaser.
(b) Credited rates will be initially established at the end of
the Rehabilitation Period at 5.0% based on the United States
Treasury Rate on March 12, 1998. Such rate will be adjusted
upward to the nearest 25 basis points if such rate declines, or
downward to the nearest 25 basis points if such rate increases,
<PAGE> 45
in either case from the United States Treasury Rate on March 12,
1998 as compared to the United States Treasury Rate on last
Business Day of the fourth month preceding the Rehabilitation
Period Termination Date.
(c) year crediting rates on funds paid into any Restructured
Life Policy after the Rehabilitation Period Termination Date will
be initially established at the end of the Rehabilitation Period
at a level at least 50 basis points higher than the generally
applicable crediting rate with respect to that Reinsured Policy.
Such rate, once established, will remain in effect through
December 31, 1999 and will apply to funds received prior to such
date for one year from the date of receipt.
(d) After the current elements have been initially established
as set forth above, the Purchaser may establish, or cause ANLIC
or First SunAmerica to establish, as applicable, such rates and
charges from time to time in accordance with the requirements of
Sections 4.18 and 5.10.3.
5.10.7 Covered Accumulation Contract Replacement Policies.
Except as set forth in the last sentence in this Section 5.10.7
and in Section 5.14, the Purchaser agrees to offer, or to cause
ANLIC or First SunAmerica to offer, as applicable, at least one
suitable contemporary fixed annuity and one suitable contemporary
variable annuity as an Additional Replacement Policy, to be
written by the Purchaser or any Subsidiary of the Purchaser with
an issue date on or prior to January 1, 2000, for each Reinsured
Annuity Contract (other than a 401(k) Contract) that is a Covered
Accumulation Contract and each Excluded Annuity Contract that is
a Covered Accumulation Contract and to offer at least one
suitable contemporary Additional Replacement Policy to be written
by any such Person for each Reinsured Annuity Contract that is a
401(k) Contract; provided, however, that the Purchaser and its
Subsidiaries will only be obligated to offer a fixed annuity with
respect to any Unallocated Accumulation Contract included in the
Reinsured Policies. Such exchange will be based on the full
Account Value from the relevant Policy without application of any
front-end sales charges other than premium taxes, if applicable,
but such Additional Replacement Policy can include surrender
charges and other customary policy features. Notwithstanding the
foregoing, the Purchaser will not be required to offer Additional
Replacement Policies to those policyholders in any jurisdiction
for which all necessary endorsements (including the Policy
Enhancements Endorsements) and/or Permits have not been received.
5.11 Election to Capitalize Specified Policy Acquisition
Expenses. Pursuant to Treas. Reg Section 1.848-2(g)(8), the
Seller, the Purchaser, ANLIC and First SunAmerica hereby elect to
determine specified policy acquisition expenses with respect to
the Transactions without regard to the general deductions
limitation. The provisions of this Section 5.11 will remain in
effect for all taxable years for which the Indemnity Reinsurance
Agreement remains in effect. The Seller, the Purchaser, ANLIC
and First SunAmerica agree that the entity with net positive
consideration for each taxable year will capitalize specified
policy acquisition expenses with respect to the Transactions
without regard to the general deductions limitation of
Section 848(c)(1) of the Code. The Seller, the Purchaser, ANLIC
and First SunAmerica agree to exchange information pertaining to
the amount of net positive consideration for all reinsurance
agreements in force between the Seller, on the one hand, and the
Purchaser, ANLIC and First SunAmerica, on the other, each year to
maintain consistency. To achieve this, the Seller will provide
to the Purchaser a schedule of its calculation of net positive
consideration for all reinsurance agreements in force between the
Seller and the Purchaser, ANLIC or First SunAmerica for each
taxable year by no later than April 30 of the succeeding year.
The Purchaser will advise the Seller if it disagrees with the
amounts provided by no later than May 31 of such year, otherwise
the amounts will be presumed correct and will be reported by the
parties in their respective federal income Tax returns for such
year. If the Purchaser contests the Seller's calculation of the
<PAGE> 46
net positive consideration, the parties agree to act in good
faith to resolve any differences within 30 days of the date the
Purchaser submits its alternative calculation in accordance with
the provisions of Section 8.2.2. Any disputed item that cannot
be resolved within such period will be submitted to the
Independent Party in accordance in Section 8.5. The Seller,
ANLIC and First SunAmerica represent and warrant that they are
subject to U.S. taxation under Subchapter L of the Code. The
first taxable year for which this election will be effective is
the taxable year in which the Closing Date occurs. As used in
this Section 5.11, the terms "net positive consideration,"
"specified policy acquisition expenses," and "general deductions
limitation" will have the meanings specified in Section 848 of
the Code and Treas. Reg. Section 1.848-2.
5.12 Maintenance of Business. The Seller will refrain and will
cause its present and future Affiliates to refrain from causing
or attempting to cause or influence (or assisting any other
Person in causing or attempting to cause or influence) (a) any
Policyholder or customer to replace or terminate any Reinsured
Policy or any Replacement Policy issued by the Purchaser or any
of its Affiliates, in whole or in part, with products of any
other Person at any time; or (b) any reinsurer to terminate or
reduce any reinsurance, coinsurance or other similar contact, or
sever a relationship with the Purchaser or any of its Affiliates
at any time. The Seller will include in any transaction for the
sale or disposition of any of its present and future Affiliates a
covenant of the purchaser or successor thereof undertaking the
terms of this Section 5.12 and making the Purchaser a third party
beneficiary of such covenant. The Seller further agrees to
promptly take all reasonable actions to enforce the terms of any
rights it may have, whether under contract or Applicable Law,
against any Person causing or attempting to cause or influence
any event set forth above.
5.13 IBNR Settlement Amount.
5.13.1 Allocation of Liability. Any liability under the
Reinsured Policies or the Policies subject to the Inward
Reinsurance Agreements resulting from the death of a Policyholder
prior to the Closing Date that is reported to the Seller prior to
the Transition Period Termination Date is an Excluded Liability
and the Seller agrees that it will promptly service all such
claims in the ordinary course of its business in accordance with
past practices, including the Seller's policies regarding claims
in course of settlement, due and unpaid claims and resisted
claims. The Purchaser will make the payments with respect to the
Account Values of such Policies required by the Transition
Services Agreement. Any liability under the Reinsured Policies
or the Policies subject to Inward Reinsurance Agreements
resulting from the death of a Policyholder prior to the Closing
Date that is not reported to the Seller prior to the Transition
Period Termination Date will, subject to the terms hereof, become
an Insurance Liability assumed by ANLIC or First SunAmerica, as
applicable, on the IBNR Settlement Date and the Seller will
transfer to ANLIC and First SunAmerica, as applicable, cash
and/or Cash Equivalents equal to the IBNR Settlement Amount on
the IBNR Settlement Date.
5.13.2 Calculation of IBNR Settlement Amount.
(a) The IBNR Settlement Amount will be calculated as follows:
if the Transition Period Termination Date occurs no more than
five days after the end of the preceding calendar quarter, the
Purchaser will use the Social Security Sweep for such calendar
quarter to determine the Policyholders who have died prior to the
<PAGE> 47
Closing Date and whose deaths have not been reported to the
Seller. If the Transition Period Termination Date occurs more
than five days after the end of the preceding calendar quarter,
the Purchaser will use the Social Security Sweep for the next
calendar quarter ending after the Transition Period Termination
Date to determine the Policyholders who have died prior to the
Closing Date and whose deaths have not otherwise been reported to
the Seller. With respect to all such Policyholders, the IBNR
Settlement Amount will be an amount in cash equal to the face
amount of such Policyholders' Policies less the sum of (i) the
Account Value of such Policies; (ii) the amount recoverable from
any Outward Reinsurer with respect to such Policies, provided
that such Outward Reinsurance Agreement or Substitute Outward
Reinsurance Agreement has been assigned to ANLIC or First
SunAmerica; and (iii) any amounts paid by the Seller in
settlement of death benefits with respect to such Policies
(exclusive of amounts paid in (i) and (ii) above).
(b) If the Transition Period Termination Date occurs no more
than five days after the end of the preceding calendar quarter,
the Purchaser will deliver its calculation of the amount of the
IBNR Settlement Amount to the Seller within 60 days after the end
of such calendar quarter. If the Transition Period Termination
Date occurs more than five days after the end of the preceding
calendar quarter, the Purchaser will deliver its calculation of
the amount of the IBNR Settlement Amount to the Seller within 60
days after the end of the next calendar quarter following the
Transition Period Termination Date. The Purchaser will provide
the Seller access to any information used by the Purchaser in
making its calculation of the IBNR Settlement Amount.
5.14 Solicitation of Policyholders. If the Purchaser solicits
any policyholder to take any Replacement Policy prior to the end
of the Rehabilitation Period, the Purchaser will make
commercially reasonable efforts to solicit all of the
Policyholders within 90 days of the first solicitation; provided
that if any Policyholder accepts a Replacement Policy, the Seller
will, with respect to the Account Value transferred to the
Replacement Policy, conditionally waive the moratorium charge
applicable to the surrendered Policy, which waiver will become
irrevocable if the Replacement Policy is in force on the day
following the last day of the applicable "free look" period.
Notwithstanding the foregoing, neither the Purchaser nor any of
its Affiliates will be required to offer any Policyholder a
product if that Policyholder (a) does not meet the Purchaser's or
such Affiliate's customary underwriting requirements for such
product; or (b) is a Resident of a jurisdiction in which the
Seller has not taken all actions and obtained all Permits
required in connection with the Seller's Policy Enhancements
Endorsement. In addition, neither the Purchaser nor any of its
Affiliates will be required to offer a Replacement Policy with
respect to any Restructured Contract in Pay Status.
5.15 Reinstated Policies. The Seller will only permit lapsed
Policies in the categories of the Reinsured Policies to be
reinstated as expressly required by the terms of such Policies.
All reinstatement premiums received by the Seller will, for the
period from the Closing Date through the Transition Period
Termination Date, be transferred to ANLIC in accordance with the
Indemnity Reinsurance Agreement and the Transition Services
Agreement, and thereafter by direct payment from the Seller to
ANLIC or First SunAmerica, as applicable.
5.16 Outward Reinsurance Agreements.
5.16.1 Remaining Outward Reinsurance Agreements. If on or
prior to the Closing Date the Seller has not, with respect to
100% of the aggregate face amount reinsured of all Reinsured
Policies subject to Outward Reinsurance Agreements, either
(a) effected an assignment (with or without an adjustment to the
applicable premium) of the Outward Reinsurance Agreements by the
Seller to ANLIC, including obtaining any consents required to
effect such assignment (and, if applicable, the subsequent
partial assignment by ANLIC to First SunAmerica relating to the
New York Reinsured Policies on the New York Assumption Date), or
(b) entered into one or more Substitute Outward Reinsurance
Agreements (each Outward Reinsurance Agreement not so assigned or
substituted being a "Remaining Outward Reinsurance Agreement" and
<PAGE> 48
the reinsurer thereunder being a "Remaining Outward Reinsurer"),
the provisions of this Section 5.16 will apply. The Seller will
use its commercially reasonable efforts to effect the
assignment(s) or substitution of all Remaining Outward
Reinsurance Agreements within 90 days after the Closing Date. At
the end of such period, the Seller will, within five Business
Days, pay to the Purchaser the amount that would have been added
to the Outward Reinsurance Adjustment Amount with respect to the
Outward Reinsurance Agreements assigned and the Substitute
Outward Reinsurance Agreements effected during such period had
the Outward Reinsurance Adjustment Amount been calculated as of
the date such assignment or substitution became effective,
together with interest thereon at a rate of 6.8% per annum from
such effective date to the date of payment. If the Seller does
not pay such amount within the stated time period, the Purchaser
will be entitled to payment of such amount out of the Outward
Reinsurance Escrow Account.
5.16.2 Outward Reinsurance Escrow Amount. On the Closing
Date, the Seller will deposit into escrow under the Escrow
Agreement an amount (the "Outward Reinsurance Escrow Amount")
equal to the sum of (a) for each Remaining Outward Reinsurance
Agreement the greater of (i) five times the average aggregate
claims paid by the Remaining Outward Reinsurer with respect to
Reinsured Policies in 1996 and 1997, and (ii) five times the
average aggregate reinsurance premium paid to such Remaining
Outward Reinsurer in 1996 and 1997; plus (b) for all Remaining
Outward Reinsurance Agreements, the sum of the two largest single
life or second-to-die policies, with the respective size of
single life policies measured as 100% of the net amount at risk,
and with the respective size of second-to-die policies measured
as 100% of the net amount at risk if only one Policyholder is
alive or 50% of the net amount at risk if both Policyholders are
alive. Such calculation will be made based on the financial
information as of the Calculation Date for the Remaining Outward
Reinsurance Agreements.
5.16.3 Monthly Accounting. If at the beginning of the month
in which the Closing Date occurs or any month following the
Closing Date there are Reinsured Life Policies subject to a
Remaining Outward Reinsurance Agreement (such month being an
"Uncovered Month"), ANLIC and First SunAmerica will submit to the
Seller within 30 days after the end of such Uncovered Month a
calculation of (a) the amounts that would have been recoverable
from the Remaining Outward Reinsurers for such month had the
relevant Outward Reinsurance Agreements been assigned on the
Closing Date, minus (b) an amount equal to one-twelfth of the
cumulative annualized premium that would have been paid by the
Purchaser to such Remaining Outward Reinsurers (adjusted for
reinsurance of risk under Policies that would no longer be in
force at the end of the Uncovered Month), in each case between
the Closing Date and the end of the month for which the
accounting is being prepared. If such calculation yields a net
amount owing to ANLIC and/or First Sun America, then a portion of
the Outward Reinsurance Escrow Amount equal to such amount plus
interest thereon at a rate of 6.8% per annum from the end of the
relevant Uncovered Month to the date of payment will be released
from escrow and paid to ANLIC and/or First SunAmerica, as
applicable.
5.16.4 Settlement. If within 90 days after the Closing Date
the Seller has failed to effect the assignment or substitution of
all Remaining Outward Reinsurance Agreements, then the Purchaser
will have an additional 180 days to obtain such assignment or
substitution on such terms as the Purchaser, acting in good
faith, deems appropriate. The Seller will provide information
reasonably requested by the Purchaser and prospective Substitute
Reinsurers at the Seller's cost. At the end of such period, the
Seller will, within five Business Days, pay to the Purchaser the
amount that would have been added to the Outward Reinsurance
Adjustment Amount with respect to the Outward Reinsurance
Agreements assigned and the Substitute Outward Reinsurance
<PAGE> 49
Agreements effected during such period, together with interest
thereon at a rate of 6.8% per annum from the date such assignment
or substitution became effective to the date of payment. If the
Purchaser is not able to obtain all needed assignments or
substitutions within such period, the parties will negotiate in
good faith for a period of 30 days for a reduction of the Ceding
Commission in accordance with the terms of Section 8.2.2. If
they are unable to reach a settlement, the issue will be
submitted to the Independent Party for a binding resolution to be
determined in accordance with the procedures set forth in
Section 8.5. Prior to the assignment or substitution of all
Remaining Outward Reinsurance Agreements or the agreement of the
parties set forth above, the Seller will continue to assume
responsibility for claims thereunder and will make all
appropriate claims against the applicable Outward Reinsurers with
respect thereto.
5.16.5 Release of Escrowed Funds and Payment of Net
Reinsurance Premium to Seller. After obtaining all assignments
or substitutions of Remaining Outward Reinsurance Agreements or
the Seller's payment in full of any settlement with the Purchaser
described in Section 5.16.4, (a) any remaining amounts in the
Outward Reinsurance Escrow Account in excess of 10% of the
original Outward Reinsurance Escrow Amount will be released to
the Seller, and the remaining amounts will be held to satisfy
claims arising during the Uncovered Months and (b) the Purchaser
will pay (or will cause ANLIC or First SunAmerica, as applicable,
to pay) to the Seller an amount in cash equal to the amount of
net positive reinsurance premium for all Uncovered Months, if
any, owing to the Seller pursuant to the calculation set forth in
Section 5.16.3. After release of all amounts owing to ANLIC and
First SunAmerica for Uncovered Months ending during such 180 day
period, all remaining amounts in the Outward Reinsurance Escrow
Account will be released to the Seller and the Seller will have
no further liability for death claims incurred during any
Uncovered Month.
5.17 Taxable Basis of Reinsured Policies. On or prior to
December 31, 1998, the Seller's Life Insurance Administration
System will contain accurate information regarding the taxable
basis of all but 13,000 or fewer Reinsured Life Policies with an
Account Value of $5,000 or more. If this requirement is not
satisfied on or prior to December 31, 1998, the Purchaser will be
entitled to be paid $250,000 from the Claims Escrow Account.
5.18 Calculation of Account Values True-Ups. On or prior to the
Account Values True- Up Date, the Seller will deliver to the
Purchaser an audited calculation of the Account Values True-Up
Amount for each Reinsured Policy as of the Rehabilitation Period
Termination Date. Such calculation will be complete and correct
when delivered and will comply with all applicable requirements
of the Plan and the Rehabilitation Documents. The Purchaser's
only obligation with respect thereto will be to credit or pay
such amount promptly following receipt of cash and/or Cash
Equivalents from the Seller as provided in Section 1.1.5(c).
5.19 Sale of Broker/Dealer. If the parties have not reached an
agreement for the sale of the assets described in Section 4.19
prior to the Closing Date, the Seller agrees that it will not
consummate a sale of such assets to any other Person for six
months after the Transition Period Termination Date unless as
part of such sale, the Seller obtains a non-competition covenant
of the purchaser or successor thereof pursuant to which such
Person undertakes the terms of Section 5.12 of this Agreement and
makes the Purchaser a third party beneficiary of such covenant.
5.20 Agents. From and after the Closing Date the Purchaser
agrees to pay, or cause ANLIC and/or First SunAmerica to pay, to
Agents the commissions and other fees and compensation accruing
after such date under the express written terms of the Assigned
Contracts. The Purchaser further agrees that, to the extent
necessary in order to allow it to fulfill its obligations to pay
<PAGE> 50
such commissions and other fees and compensation, it will cause
ANLIC and/or First SunAmerica, as applicable, to appoint the
Agents as agents of ANLIC and/or First SunAmerica under the
Reinsured Life Policies, enter into appropriate agency contracts
with the Agents and make all appropriate regulatory filings to
effectuate such appointment.
5.21 Transfer of Assets to First SunAmerica. On the New York
Assumption Date, ANLIC will transfer the appropriate amount of
assets to First SunAmerica in respect of Reinsured Policies that
First SunAmerica is assuming pursuant to the First SunAmerica
Assumption Reinsurance Agreement. All assets transferred by
ANLIC to First SunAmerica pursuant to this Section 5.21 will
comply with applicable New York insurance laws and regulations
relating to reserve assets. The Seller will have the right to
review the documents effecting such transfer, such documents to
be in form and substance that are reasonably satisfactory to the
Seller.
5.22 Amendment of Schedules. On or prior to the New York
Assumption Date, the Seller will deliver to the Purchaser amended
and restated versions of Schedules 3, 5 and Section 2.13 of the
Seller's Disclosure Schedule allocating the items reflected in
such Schedules to reflect the termination of the Indemnity
Reinsurance Agreement with respect to the New York Reinsured Life
Policies and the New York Reinsured Annuity Contracts and the
assumption reinsurance of such Policies by First SunAmerica
pursuant to the First SunAmerica Assumption Reinsurance
Agreement.
5.23 Treatment of Policy Enhancements. Except with respect to
Eligible Policies for which cash is distributed with respect to
the Policy Enhancements to the Policyholder, its designee or the
beneficiary of the Eligible Policy, as of the date the Policy
Enhancements are credited to any Eligible Policy, the Purchaser
and its Affiliates will reflect such crediting for SAP and Tax
purposes as credited interest in the calculation of reserves with
respect to such Eligible Policy, except to the extent required by
a change in the Code, a published IRS ruling or a change in
Applicable Law or SAP after the date of this Agreement.
5.24 Sale of Non-Terminated Variable Annuities. If the Court
does not approve the termination of all Variable Annuities in
accordance with Section 4.11, (a) the Seller will not enter into
any transaction to reinsure or otherwise transfer any Variable
Annuities in accumulation phase to any other Person prior to the
three month anniversary of the Transition Period Termination
Date; and (b) the Seller will not enter into any transaction to
reinsure or otherwise transfer any Variable Annuities in pay-out
status to any other Person prior to the Transition Period
Termination Date; provided, however, that before the Seller
enters into any binding agreement to reinsure or otherwise
transfer any Variable Annuities, the Purchaser will have a right
of first offer with respect thereto; and provided, further, any
such sale to another Person must be on terms that are no less
favorable to the Seller than the terms offered by the Purchaser.
5.25 Grandfathered Premiums Indemnity.
(a) If the Grandfathering Ruling has not been obtained prior to
the Closing Date, the Seller will keep track of the Grandfathered
Premiums and Net Grandfathered Premiums as part of the services
provided to the Purchaser under the Transition Services Agreement
prior to the Transition Period Termination Date. If the
Grandfathering Ruling has not been received prior to the ten
month anniversary of the Closing Date or such earlier date as the
Purchaser and the Seller in good faith agree that the
Grandfathering Ruling will not be obtained, the Grandfathered
Premiums Indemnity Amount will be calculated by the Purchaser as
of the 14th month anniversary of the Closing Date, and such
calculation, together with a detailed statement explaining how
such calculation was made, will be delivered to the Seller within
<PAGE> 51
30 Business Days after the 14th month anniversary of the Closing
Date. The Seller will then have ten Business Days to dispute the
Purchaser's calculation. If the Seller does not give timely
notice of any dispute regarding the Purchaser's calculation, the
Purchaser will be entitled to payment of such amount out of the
Claims Escrow Account. If the Seller gives timely notice of any
dispute regarding the Purchaser's calculation, the Purchaser will
file a notice of its Claims Escrow Claim pursuant to the Escrow
Agreement, and the parties will proceed to resolve such dispute
by submitting such dispute to the Independent Party in accordance
with Section 8.5.
(b) If the Grandfathering Ruling has not been received prior to
the ten month anniversary of the Closing Date, the Purchaser will
cause ANLIC and/or First SunAmerica, as applicable, to give the
policyholders of the Reinsured Policies listed on the deliveries
specified in Section 4.24 the option to have Grandfathered
Premiums returned and to have their Account Value reduced
accordingly. The Purchaser may provide such notice earlier than
the ten month anniversary of the Closing Date if the Purchaser
and the Seller in good faith agree that the Grandfathering Ruling
will not be obtained.
5.26 Severance Plan. Prior to the Transition Period Termination
Date, the Seller will maintain in effect and not amend or modify
its Severance Plan in any material respect without the prior
written consent of the Purchaser, which will not be unreasonably
withheld.
5.27 Transition Period Termination Date Policy Lists. On or
prior to the 15th Business Day after the Transition Period
Termination Date, the Seller will deliver to the Purchaser a
correct and complete schedule containing the following
information with respect to each Reinsured Policy: (a) the
Account Value as of the Transition Period Termination Date;
(b) all premiums received after the Closing Date and prior to the
Transition Period Termination Date; and (c) each premium
identified in clause (b) accumulated to the Transition Period
Termination Date at the credited interest rate actually applied
to that premium; provided, however, the Seller will not be
obligated to provide the information specified in clauses (b) and
(c) above if the Grandfathering Ruling has been obtained on or
prior to the Transition Period Termination Date.
6. CONDITIONS PRECEDENT
6.1 General. The respective obligations set forth herein of the
Seller and the Purchaser to consummate the Transactions at the
Closing are subject to the satisfaction, on or before the Closing
Date, in the case of the Seller, of the conditions set forth in
Sections 6.2 and 6.3, and in the case of the Purchaser, of the
conditions set forth in Sections 6.2 and 6.4 (collectively, the
"Closing Conditions"). It is the specific intent of the parties
that each obligation to be satisfied and each agreement to be
performed prior to the Closing Date or in the event of a
termination prior to the consummation of the Transactions is a
separate agreement of the parties and is a presently enforceable
obligation of the relevant parties not subject to satisfaction of
the Closing Conditions except as expressly set forth in the
provision giving rise to such obligation or agreement. The
Seller will not contest or support the effort of any Person to
contest the enforceability of any such obligation or agreement
and, to the fullest extent permitted by Applicable Law, waives
any claim or objection it might have to the effect that any such
obligation or agreement is subject to satisfaction of the Closing
Conditions.
6.2 Conditions to Obligations of Both Parties.
6.2.1 HSR Act. The waiting period under the HSR Act will
have expired or been terminated.
<PAGE> 52
6.2.2 No Injunction, etc. Except with respect to the
approval of the Court as set forth in Section 6.2.3 below or in
connection with the proceedings before the Court with respect to
such approval: (a) consummation of the Transactions will not
have been restrained, enjoined or otherwise prohibited by any
Applicable Law, including any order, injunction, decree or
judgment of any Governmental Authority; and (b) no Action will
have been instituted and remain pending at the Closing Date by
any Governmental Authority or any other Person to restrain,
enjoin or otherwise prevent the consummation of the Transactions.
There will not have been promulgated, entered, issued or
determined by any Governmental Authority to be applicable to this
Agreement or the Ancillary Agreements any Applicable Law making
illegal the consummation of the Transactions.
6.2.3 Approval of the Court. The Court will have entered
orders, none of which will be subject to conditions that are
materially burdensome and each of which will have become a Final
Order, with respect to the amendments and other orders to be
filed with the Court as described in Exhibit I and indicated in
Exhibit I as conditions to the obligations of both the Seller and
the Purchaser to consummate the Transactions to be completed at
the Closing.
6.2.4 Approval of the Class Four Creditors. The Class Four
Creditors, representing the requisite percentage as set forth in
the Plan, the Stock Trust Agreement and the Settlement Agreement,
will have approved, in the form attached hereto as Exhibit J, the
consummation of the Transactions in accordance with
Section 6.08(b) of the Plan and Section 4.1(b) of the Stock Trust
Agreement.
6.2.5 Approval of the Reinsurers. A majority in interest of
the Reinsurers (determined in accordance with the Reinsurance
Agreement) will have approved, in form and substance satisfactory
to the Purchaser, (a) the consummation of the Transactions in
accordance with Section 12(j) of the Reinsurance Agreement, and
(b) the amendments to the Plan modifying their participation,
obligations and rights under certain Rehabilitation Documents as
of the Rehabilitation Period Termination Date.
6.2.6 Approval of NOLHGA on Behalf of the Participating
Guaranty Associations. NOLHGA, on behalf of the Participating
Guaranty Associations, will have approved, in form and substance
satisfactory to the Purchaser, the amendments to the Plan
modifying their participation, obligations and rights under
certain Rehabilitation Documents as of the Rehabilitation Period
Termination Date.
6.2.7 Approval of First SunAmerica by the Commissioner. The
Commissioner will have approved First SunAmerica as an accredited
reinsurer in the State of New Jersey.
6.2.8 Other Permits. All other Permits required to be made
or obtained prior to the Closing in connection with the execution
and delivery of this Agreement and the Ancillary Agreements and
consummation of the Transactions, in addition to those referred
to in Sections 6.2.1 through 6.2.7, will have been made or
obtained.
6.2.9 Ancillary Agreements. Each Ancillary Agreement will
have been signed and delivered by the parties thereto.
6.2.10 Additional Instruments and Documents. Additional
instruments or documents reasonably requested by a party in
connection with the execution of this Agreement and the Ancillary
Agreements and the consummation of the Transaction will have been
signed and delivered by the parties thereto.
6.2.11 Change in Law Regarding Tax Impact on Policyholders.
There has not been, since the date of this Agreement, (a) a
change in the Code, (b) a published IRS ruling, or (c) a change
<PAGE> 53
in SAP or other Applicable Law that would result in a change in
the Purchaser's treatment for SAP and Tax purposes of the
crediting of the Policy Enhancements from that provided in
Section 5.23, in any case that causes the representation and
warranty in Section 2.10.3 not to be true and correct in all
material respects.
6.3 Conditions to Obligations of the Seller.
6.3.1 Representations, Warranties and Agreements of the
Purchaser. The representations and warranties in Section 3 will
be true and correct in all material respects when made and at and
as of the Closing with the same effect as though made at and as
of such time. The Purchaser will have duly performed and
complied in all material respects with all agreements contained
herein required to be performed or complied with by it at or
before the Closing.
6.3.2 Officer's Certificate. The Purchaser will have
delivered to the Seller a certificate, dated the Closing Date and
signed by an authorized executive officer, as to the fulfillment
of the conditions set forth in Section 6.3.1.
6.3.3 Opinions of Counsel. The Seller will have received
opinions from the general counsel of the Purchaser and O'Melveny
& Myers LLP and McElroy, Deutsch and Mulvaney, each as special
counsel for the Purchaser, in the form of Exhibits G-1, G-2 and G-
3, respectively.
6.4 Conditions to Obligations of the Purchaser.
6.4.1 Representations, Warranties and Agreements of the
Seller. The representations and warranties in Section 2 will be
true and correct in all material respects when made and at and as
of the Closing with the same effect as though made at and as of
such time. The Seller will have duly performed and complied in
all material respects with all agreements contained herein
required to be performed or complied with by it at or before the
Closing.
6.4.2 Officer's Certificate. The Seller will have delivered
to the Purchaser a certificate, dated the Closing Date and signed
by an authorized executive officer, as to the fulfillment of the
conditions set forth in Section 6.4.1.
6.4.3 Opinions of Counsel. The Purchaser will have received
opinions from the general counsel of the Seller, and Debevoise &
Plimpton and Gibbons, Del Deo, Dolan, Griffinger & Vecchione,
each as special counsel for the Seller, as set forth on
Exhibits H-1, H-2 and H-3, respectively.
6.4.4 Funding of Escrow Agreement. The Seller will have
deposited into escrow cash and Cash Equivalents with an aggregate
Value on the Closing Date equal to the sum of: (a) the Claims
Escrow Amount; (b) the Tax Reserves Indemnity Escrow Amount;
(c) the DAC Reduction Escrow Amount or the DAC Election Escrow
Amount, as the case may be; (d) if applicable, the Outward
Reinsurance Escrow Amount; (e) the COI Adjustment Escrow Amount;
and (f) if applicable, the Policy Enhancements Endorsements
Escrow Amount, in each case in accordance with the terms of the
Escrow Agreement.
6.4.5 Policy Enhancements Amount. The Policy Enhancements
Amount as of the Closing Date will not be less than the remainder
of (a) $225,000,000, minus (b) the Integrity Policy Enhancements
Amount.
6.4.6 Reserve Liabilities. The aggregate amount of the
Reserve Liabilities as of the Closing Date excluding reserves for
pending death claims will not be less than (a) if the Closing
Date is on or before January 1, 1999: (i) $5,248,519,895 if the
Reinsured 401(k) Contracts exclude the Policies described in
<PAGE> 54
clause (b) of the definition thereof, or (ii) $5,340,004,108 if
the Reinsured 401(k) Contracts include the Policies described in
clause (b) of the definition thereof; and (b) if the Closing Date
is after January 1, 1999: $4,849,175,990 if the Reinsured 401(k)
Contracts exclude the Policies described in clause (b) of the
definition thereof, or (ii) $4,933,699,448 if the Reinsured
401(k) Contracts include the Policies described in clause (b) of
the definition thereof, and, in either case, the Seller will have
delivered to the Purchaser a certificate signed by its chief
financial officer confirming the foregoing.
6.4.7 Assurances Regarding Simultaneous Assumption of
Reinsured Policies. The Purchaser will have received assurances
in form and substance reasonably satisfactory to it that a
simultaneous assumption of all Reinsured Policies held by
Residents of the states of New York, New Jersey and Arizona can
be effected on the Rehabilitation Period Termination Date without
obtaining Policyholder consent thereto in any such jurisdiction.
6.4.8 Outward Reinsurance Agreements. The Seller will have,
with respect to not less than 75% of the aggregate face amount
reinsured of all Reinsured Policies subject to Outward
Reinsurance Agreements on the date of this Agreement, either
(a) effected an assignment to the Purchaser of the Outward
Reinsurance Agreements (with or without an adjustment to the
applicable premium), or (b) entered into one or more Substitute
Outward Reinsurance Agreements.
6.4.9 Court Order, Regulatory Approvals and Other Filings.
(a) The Court will have entered orders, each of which will have
become a Final Order with respect to the amendments and other
orders to be filed with the Court as described in Exhibit I and
indicated in Exhibit I as conditions to the obligations of the
Purchaser to consummate the Transactions at the Closing.
(b) The New York State Insurance Department will have waived any
requirement for the posting of security by reason of ANLIC's
status as a non-New York licensed reinsurer and the Purchaser
will have received assurances in form and substance reasonably
satisfactory to it that ANLIC will not be subject to regulatory
requirements in New York or regulatory oversight by the New York
State Insurance Department by virtue of the transactions
contemplated by the Indemnity Reinsurance Agreement or this
Agreement.
(c) The Seller will have obtained the approval from the
appropriate Governmental Authority in all jurisdictions of the
forms of the Reaffirmed Contracts and the Restructured Contracts.
If the approval of a particular jurisdiction is not obtained, the
Purchaser may elect to treat the Policies of that jurisdiction as
Excluded Policies with appropriate adjustments to the Ceding
Commission, the Policy Enhancements Amount and other applicable
elements.
(d) The Seller will have obtained all necessary Permits to
attach the Policy Enhancements Endorsements in at least as many
jurisdictions as are required to account for 85% of the aggregate
Account Values of each of the Reinsured Life Policies and the
Reinsured Annuity Contracts, measured as of the Calculation Date,
and such jurisdictions will include Arizona, New York, New
Jersey, Michigan and Illinois.
6.4.10 Updated Calculation of Impairments. The Seller will
have delivered to the Purchaser an updated calculation of the
Impairment for each Reinsured Policy and each other Eligible
Policy as of a date not more than 45 nor less than 30 days before
the Closing Date, which calculation will include the effect of
the Account Values True-Up Amount that has accrued through the
date of calculation, together with all supporting documentation
used by the Seller as a basis for its calculation.
<PAGE> 55
6.4.11 Changes to COI Scale. The Seller will have obtained
all necessary Permits for the Purchaser to implement the Modified
COI Scale in Arizona, New York and New Jersey.
6.4.12 Estimated Closing Date Statement and Updated Schedules.
The Seller will have delivered to the Purchaser the documents
required to be delivered prior to the Closing Date pursuant to
Section 1.2.2.
6.4.13 Transferred Reserve Assets. Of the Transferred Reserve
Assets transferred to ANLIC at Closing, not less than
$1.0 billion will consist of cash, Cash Equivalents and
Investment Grade Securities that mature no later than
September 30, 1999.
6.4.14 Updated Policy Lists. Unless the Grandfathering Ruling
has been obtained prior to the Closing Date, the Seller will have
delivered to the Purchaser a copy of the lists described in
Section 4.24, which lists will not reflect a material increase in
either the total number of policyholders or total amount of
premiums with respect to the Reinsured Life Policies contained on
such lists from the lists provided to the Purchaser in accordance
with Section 2.12.22. For purposes of this Section 6.4.14,
(a) the list provided to the Purchaser pursuant to
Section 2.12.22(a) will be compared to the list provided to the
Purchaser pursuant to Section 4.24(a) and the list provided to
the Purchaser pursuant to Section 2.12.22(b) will be compared to
the list provided to the Purchaser pursuant to Section 4.24(b);
(b) a "material increase" in the number of Policyholders will
mean that the list provided to the Purchaser pursuant to
Section 4.24(a) includes 100,000 or more Policyholders; and (c) a
"material increase" in the total amount of premiums will mean
that the aggregate amount of premiums reflected on the list
provided pursuant to Section 4.24(a) is 120% or more of the
aggregate amount of premiums reflected on the list provided
pursuant to Section 2.12.22(a).
7. INDEMNIFICATION AND SURVIVAL
7.1 Tax Indemnification and Other Tax Matters.
7.1.1 Section 848 Election Tax Benefit. In calculating the
payments to be made pursuant to Section 1.1, the parties have
assumed that the Purchaser will not be required to capitalize any
portion of its specified policy acquisition expenses calculated
pursuant to Section 848(c)(1) of the Code as a result of the
assumption and reinsurance (or indemnity reinsurance) of the
Reinsured Policies (any amount of specified policy acquisition
expenses required to be capitalized by the Purchaser as
calculated under Section 848 of the Code is referred to herein as
the "DAC Amount"). To the extent this assumption proves to be
incorrect, the parties agree that payments will be made in
accordance with this Section 7.1, which is intended to reach a
result consistent with this principle.
7.1.2 Assumptions for Insolvent Insurance Company Election
Tax Benefit. The amounts payable pursuant to Section 1.1 have
been agreed to by the parties based, in part, upon the assumption
that: (a) the Seller is qualified to make the election provided
pursuant to Treas. Reg. Section 1.848-2(i)(4) with respect to the
reinsurance of the Reinsured Policies by the Purchaser pursuant
to this Agreement (the "Election"); (b) as a result of the
Election, there will be a "reduction amount," as determined under
Treas. Reg. 1.848-2(i)(4)(iii)(A)-(D) (the "Allocation
Regulations"), that is equal to, and in no event less than, the
DAC Amount that would result from the Purchaser's assumption and
reinsurance of the Reinsured Policies in the absence of the
Election; and (c) the full amount referred to in clause (b) will
be available to the Purchaser as a result of the Election
(collectively, the "Assumptions").
7.1.3 Deposits to DAC Tax Indemnity Account at Closing. If a
<PAGE> 56
ruling from the IRS, reasonably satisfactory to the Purchaser
addressing the Transactions and in which the Purchaser has
participated, to the effect that Seller is qualified to make the
Election (the "Letter Ruling") has been received prior to the
Closing Date, then the Seller at Closing will deposit the DAC
Reduction Escrow Amount into the DAC Tax Indemnity Account
created pursuant to the Escrow Agreement. If the Letter Ruling
has not been received prior to the Closing Date, then the Seller
will deposit the DAC Election Escrow Amount into the DAC Tax
Indemnity Account created pursuant to the Escrow Agreement.
7.1.4 Computation of DAC Reduction Amount.
(a) No later than 135 days after the end of its taxable year
that includes the Closing Date, the Seller will provide to the
Purchaser its initial calculation of the DAC Reduction Amount,
together with all reasonably requested documentation supporting
such calculation (the "Initial Calculation"). If the Seller
fails to provide such Initial Calculation by the date set forth
in the preceding sentence, the Initial Calculation amount will
equal the DAC Reduction Escrow Amount. Regardless of whether the
Letter Ruling will have been received prior to the date thereof,
such calculation will be prepared in a manner consistent with the
Assumption set forth in clause (a) of Section 7.1.2. Within 30
Business Days following its receipt of such Initial Calculation,
including supporting documentation, the Purchaser will inform the
Seller, in writing, of any dispute regarding the amounts set
forth in such report, and such dispute, if not resolved by the
parties within 30 Business Days following the Seller's receipt of
notice of the dispute, will be resolved by the Independent Party.
The amount determined pursuant to the preceding sentence,
including the resolution of any dispute with respect thereto, is
referred to as the "Final DAC Reduction Amount".
(b) On the date that is 30 Business Days after the determination
of the Final DAC Reduction Amount an amount equal to the Final
DAC Reduction Amount (but not less than the Initial Calculation
amount) will be paid from the DAC Tax Indemnity Account to the
Purchaser, together with a pro rata portion of the earnings on
such amount in the DAC Tax Indemnity Account from the date of
deposit until the date of such payment ("Interest"). If, on the
date provided in the preceding sentence, there will have been a
Final Determination that the Seller is qualified to make the
Election, the remaining balance in the DAC Tax Indemnity Account
will be paid from the DAC Tax Indemnity Account to the Seller.
If, on such date, a Final Determination that the Seller is
qualified to make the Election has not occurred, the remaining
balance in the DAC Tax Indemnity Account will be retained in such
account and distributed only as provided below.
7.1.5 Release of the DAC Election Escrow Amount. If a Final
Determination that the Seller is qualified to make the Election
occurs at any time at least 30 days prior to the last date,
taking into account automatic extensions, that First SunAmerica
(if the Closing Date is in 1998) or ANLIC (if the Closing Date is
in 1999) is eligible to file its federal income tax return for
the taxable year that includes the Closing Date (the "Filing
Date"), then, on the date that is 20 Business Days after the date
on which the Seller provides to the Purchaser a copy of the
Letter Ruling or a copy of such other documents evidencing a
Final Determination, Seller will be paid the following from the
DAC Tax Indemnity Account:
(a) if, on or before such date, the Purchaser has received
payment pursuant to Section 7.1.4(b), the remaining balance in
the DAC Tax Indemnity Account will be paid to Seller; or
(b) if, on or before such date, the Purchaser has not received
payment pursuant to Section 7.1.4(b) an amount equal to the
excess of (x) the amount deposited by the Seller into the DAC Tax
Indemnity Account pursuant to Section 7.1.3 over (y) the DAC
Reduction Escrow Amount, plus a pro rata portion of Interest on
<PAGE> 57
such excess, will be paid to Seller.
If at least 30 days prior to the Filing Date a Final
Determination that the Seller is qualified to make the
Election has not occurred, then the amount held in the DAC
Tax Indemnity Account (as reduced by any distribution to the
Purchaser pursuant to Section 7.1.4(b)) will be retained in
the account and distributed only as provided in
Section 7.1.6 or Section 7.1.7.
7.1.6 Filing of the Purchaser's Tax Return.
(a) If at least 30 days prior to the Filing Date a Final
Determination that the Seller is qualified to make the Election
has not occurred, the Seller will provide to the Purchaser a
legal opinion (the "Qualification Opinion") addressed to the
Purchaser from a nationally recognized law firm, which firm is
reasonably acceptable to the Purchaser (an "Acceptable Law Firm")
concluding that a court would more likely than not hold that the
Seller is qualified to make the Election. If, and only if, a
Final Determination that the Seller is qualified to make the
Election has occurred or the Purchaser has received the
Qualification Opinion when and as provided for pursuant to this
Section 7.1.6, then the Purchaser will, and will cause its
Affiliates to, make (and not modify or withdraw) the Election as
required by Treas. Reg. 1.848-2(i)(4)(iv) and prepare and file
its federal income tax returns (and all state or local tax
returns and all financial and statutory reports reflecting the
Tax consequences of the Transactions) in a manner consistent with
having made the Election. If the Purchaser is not required,
pursuant to this Section 7.1.6, to file its federal income tax
returns for the taxable year in which the Closing Date occurs, in
a manner consistent with having made the Election, then the
amount in the DAC Tax Indemnity Account will be paid to the
Purchaser from such account on the Filing Date.
(b) If the Purchaser is required pursuant to Section 7.1.6(a) to
make the Election and to file its federal income tax returns in a
manner consistent with having made the Election, the Seller will
make (and not modify or withdraw) the Election and will give
evidence to the Purchaser that such Election has been properly
made under Treas. Reg. 1.848-2(i)(4)(iv). Appropriate forms for
making the Election will be executed by the Seller at Closing and
deposited with the Purchaser. If the Purchaser is required
pursuant to Section 7.1.6(a) to make the Election and to file its
federal income tax returns in a manner consistent with having
made the Election, the Seller will, and will cause its Affiliates
to, prepare and file its federal income Tax returns (and all
state or local Tax returns and all financial and statutory
reports reflecting the Tax consequences of the Transactions) in a
manner consistent with having made the Election.
7.1.7 Method for Ensuring Benefits. The Seller will
indemnify the Purchaser for the benefit determined under
Section 7.1.1 (the "Insolvent Insurer Election Tax Indemnity");
provided, that the Purchaser's right to indemnification will be
limited to the funds held in the DAC Tax Indemnity Account, as
reduced by any amounts previously distributed from such account
in accordance with the terms of this Agreement. The Insolvent
Insurer Election Tax Indemnity will be implemented as follows:
(a) If a Final Determination that the Seller is qualified to
make the Election has not occurred as of 30 days prior to the
Filing Date, then 30 days after a Final Determination that the
Seller is eligible to make the Election and has done so, if the
distribution to the Purchaser has been made pursuant to
Section 7.1.4(b), the remaining balance in the DAC Tax Indemnity
Account, or if the distribution to the Purchaser has not been
made pursuant to Section 7.1.4(b), an amount equal to (x) the
amount deposited by the Seller into the DAC Tax Indemnity Account
pursuant to Section 7.1.3 over (y) the DAC Reduction Escrow
Amount, plus a pro rata portion of Interest on such excess, will
be paid to Seller from the DAC Tax Indemnity Account.
<PAGE> 58
(b) If a Final Determination is made, whether as a result of a
settlement agreement with the IRS or otherwise, that the
Purchaser is entitled to a portion of the federal income tax
benefit attributable to the Election, then a portion of the
remaining DAC Election Escrow Amount in an amount that is not
greater than the amount necessary to indemnify the Purchaser
(including any previously unreimbursed reasonable out-of-pocket
costs of contest, interest and penalties) with respect to the
disallowed portion of such benefit, will be paid to the Purchaser
from the DAC Tax Indemnity Account, together with Interest on
such portion, and any remainder of the DAC Election Escrow
Amount, together with Interest on such remainder, will be paid to
the Seller from the DAC Tax Indemnity Account.
(c) Upon a Final Determination that the Seller is not eligible
to make the Election, provided the Purchaser has filed its
federal income Tax return consistent with having made the
Election to the extent required by Section 7.1.6(a) or (b), the
remaining balance in the DAC Tax Indemnity Account will be paid
to the Purchaser from the DAC Tax Indemnity Account.
(d) Any amount payable from the DAC Tax Indemnity Account
pursuant to Section 7.1.7(b) will be determined by agreement
between the Purchaser and the Seller, and any dispute between
them will be resolved, in a manner consistent with the principles
set forth in Section 7.1.1, by the Independent Party.
All amounts payable to the Seller pursuant to this
Section 7.1.7 will be reduced by any previously unreimbursed
reasonable out-of-pocket costs of contest with the IRS
incurred by the Purchaser in reaching a Final Determination,
which amount will be paid from the DAC Tax Indemnity Account
to the Purchaser.
7.1.8 Calculation of DAC Escrow Amounts.
(a) The DAC Election Escrow Amount will be determined by the
Seller in good faith on an estimated basis in accordance with the
procedures set forth in Schedule 9 and reported to the Purchaser
no later than five Business Days prior to the Closing Date, and
such estimated amount will, if a Final Determination that the
Seller is qualified to make the Election has not occurred by such
date, be used on the Closing Date for purposes of determining the
amount deposited in the DAC Tax Indemnity Account. No later than
60 days after the Closing Date the Purchaser will provide to the
Seller its report of the final DAC Election Escrow Amount,
calculated in a manner consistent with the preceding sentence,
and any dispute with respect thereto will be resolved by the
Independent Party. If a Final Determination that the Seller is
qualified to make the Election has not occurred within five
Business Days after the later of Seller's receipt of such report
or the resolution of any such dispute, the Seller will deposit
into the DAC Tax Indemnity Account an additional amount, equal to
the excess, if any, of the DAC Election Escrow Amount as so
finally determined over the amount deposited on the Closing Date,
or an amount equal to the excess, if any, of the amount of the
DAC Election Escrow Amount deposited on the Closing Date over the
amount as so finally determined will be released from escrow and
delivered to the Seller.
(b) The DAC Reduction Escrow Amount will be determined by the
Seller in good faith on an estimated basis in accordance with the
procedures set forth in Schedule 9 and reported to the Purchaser
no later than five Business Days prior to the Closing Date, and,
if a Final Determination that the Seller is qualified to make the
Election has occurred, such estimated amount will be used on the
Closing Date for purposes of determining the DAC Reduction Escrow
Amount deposited in the DAC Tax Indemnity Account on the Closing
Date. No later than 60 days after the end of its taxable year
that includes the Closing Date, the Seller will deliver to the
Purchaser its report of the final DAC Reduction Escrow Amount in
a manner consistent with preceding sentences, and any dispute
with respect thereto will be resolved by the Independent Party.
<PAGE> 59
If a Final Determination that the Seller is qualified to make the
Election has not occurred, within five Business Days after the
later of the Purchaser's receipt of such report or the resolution
of any such dispute, the Seller will deposit into the DAC Tax
Indemnity Account an additional amount equal to the excess, if
any, of the DAC Reduction Escrow Amount as so finally determined
over the amount deposited on the Closing Date, or an amount equal
to the excess, if any, of the amount of the DAC Reduction Escrow
Amount deposited on the Closing Date over the amount as so
finally determined will be released from escrow and delivered to
the Seller.
7.2 Survival of Representations and Covenants of the Purchaser.
The representations and warranties set forth in Section 3 will
survive the execution, delivery and performance of this Agreement
and the consummation of the Transactions for a period of two
years following the Closing Date. The covenants and agreements
of the Purchaser set forth in this Agreement will survive such
execution, delivery, performance and consummation until the
expiration of all applicable statutes of limitations. No Action
can be commenced by the Seller with respect to any claim arising
out of or relating to such warranties, representations, covenants
or agreements after the expiration of the period for which such
representations, warranties, covenants and agreements will
survive pursuant to this Section 7.2 (the "Applicable Purchaser
Survival Period"); provided, however, that subject to this
Section 7.2, the Seller will have the right to commence an Action
after the expiration of the Applicable Purchaser Survival Period
with respect to claims arising out of or relating to such
representations, warranties, covenants or agreements that have
been asserted by Seller under Section 7.4 hereof before the
expiration of the Applicable Purchaser Survival Period.
7.3 Survival of Representations and Covenants of the Seller.
The representations and warranties set forth in Section 2 will
survive the execution, delivery and performance of this Agreement
and the consummation of the Transactions for a period of two
years following the Closing Date; provided, however, that the
representations contained in Sections 2.2, 2.3, 2.10, 2.18 and
2.21 will survive until the expiration of all applicable statutes
of limitations (including all periods of extension, whether
automatic or permissive). The covenants and agreements of the
Seller set forth in this Agreement will survive such execution,
delivery, performance and consummation until the expiration of
all applicable statutes of limitations. No Action, including any
Escrow Claim, can be commenced by the Purchaser with respect to
any claim arising out of or relating to such warranties,
representations, covenants or agreements after the expiration of
the period for which such representations, warranties, covenants
and agreements will survive pursuant to this Section 7.3 (the
"Applicable Seller Survival Period"); provided, however, that,
subject to this Section 7.3, Purchaser will have the right to
commence an Action or make an Escrow Claim after the expiration
of the Applicable Seller Survival Period with respect to claims
arising out of or relating to such representations, warranties,
covenants and agreements that have been asserted by Purchaser, as
the case may be, under Section 7.5 before the expiration of the
Applicable Seller Survival Period.
7.4 Indemnification by the Purchaser. Subject to Section 7.2,
the Purchaser will indemnify the Seller for, and will hold it
harmless from, any and all Damages incurred or sustained by the
Seller relating to, associated with or arising out of (a) any
breach of any covenant or agreement contained in this Agreement
or in any Ancillary Agreement by the Purchaser, ANLIC or First
SunAmerica; (b) any breach of any of the warranties or
representations of the Purchaser set forth in Section 3 of this
Agreement or in any Ancillary Agreement; (c) any Insurance
Liability; (d) the failure by the Purchaser, ANLIC or First
SunAmerica to administer the Policy Enhancements in accordance
<PAGE> 60
with the Policy Enhancements Procedures; or (e) the failure of
the Purchaser, ANLIC or First SunAmerica to perform its
obligations arising under Assigned Contracts.
7.5 Indemnification by the Seller.
7.5.1 General Indemnity. Subject to Section 7.3, the Seller
will indemnify the Purchaser, ANLIC and First SunAmerica for, and
will hold the Purchaser, ANLIC and First SunAmerica harmless
from, any and all Damages asserted against or incurred or
sustained by the Purchaser, ANLIC or First SunAmerica relating
to, associated with or arising out of: (a) any Excluded
Liability; (b) any breach of any covenant or agreement contained
in this Agreement or in any Ancillary Agreement by the Seller;
(c) death benefits, net of the sum of any amounts recovered from
reinsurers and Account Values, on deaths occurring on or before
the Closing Date that are reported prior to the Transition Period
Termination Date; and (d) any breach of any of the warranties or
representations of the Seller set forth in Section 2 of this
Agreement (deleting, for this purpose, (i) any materiality or
knowledge qualifier or requirement regarding Material Adverse
Effect contained in the following: Section 2.3.1, Section 2.5,
Section 2.8, Section 2.12.4, Section 2.12.6, Section 2.12.11 and
Section 2.17; and (ii) any scheduled exception contained in
Section 2.12.4(g) of the Seller's Disclosure Schedule).
7.5.2 Tax Treatment of Policies Indemnity. Without limiting
the generality of Section 7.5.1 and subject to Section 7.6.1, the
Seller will indemnify the Purchaser, ANLIC and First SunAmerica
for, and will hold the Purchaser, ANLIC and First SunAmerica
harmless from, any and all Damages asserted against or incurred
or sustained by the Purchaser, ANLIC or First SunAmerica
attributable to: (a) costs and losses incurred by Policyholders
of Reinsured Policies, or payments required to be made to any
Governmental Authority or Policyholders of Reinsured Policies in
respect of such costs or losses as a result of the breach of the
representation contained in Section 2.10.1; and (b) increased
Taxes of the Purchaser, ANLIC or First SunAmerica as a result of
the breach of the representation contained in Section 2.10.1;
provided, that unless and until the cumulative amounts described
in clauses (a) and (b) of this Section 7.5.2 exceed $750,000, the
Seller's indemnification obligation will be limited to 50% of
such Damages and only such 50% share will be applied against and
reduce the threshold described in Section 7.6.1. Notwithstanding
the foregoing sentence, the Seller will have no obligation to
indemnify or hold harmless the Purchaser, ANLIC or First
SunAmerica hereunder solely to the extent that any such Damages
arise as a result of an amendment or modification of a Reinsured
Policy effected after the assumption of such Policy by ANLIC by
any Person other than the Seller.
7.5.3 Tax Reserves Indemnity. Without limiting the
generality of Section 7.5.1, the Seller will indemnify the
Purchaser, ANLIC and First SunAmerica for, and will hold the
Purchaser, ANLIC and First SunAmerica harmless from, any and all
Damages asserted against or incurred or sustained by the
Purchaser, ANLIC or First SunAmerica attributable to costs,
expenses and increased Taxes as a result of any overstatement in
the tax reserves as of the Closing Date due to the treatment by
the Seller (for tax reserving purposes) of the moratorium
charges.
7.5.4 Tax Contests. The Purchaser will: (a) give prompt
notice to the Seller of any federal income tax adjustment
proposed in writing pursuant to any tax audit or other proceeding
with respect to the Purchaser or any of its Affiliates that could
give rise to a claim under Section 7.1 or with respect to the
breach of any representation contained in Section 2.10; (b) upon
the Seller's reasonable request, discuss with the Seller and the
Seller's counsel the position that the Purchaser or its Affiliate
intends to take regarding such proposed adjustment; (c) afford
the Seller and its counsel reasonable opportunity to participate
<PAGE> 61
in any IRS conference, other administrative proceeding or
judicial proceeding regarding such proposed adjustment, including
the right to attend conferences or submit pertinent material in
support of the Seller's position. Subject to the preceding
sentence, the Purchaser will control the forum and contest of any
challenge by the IRS to the claimed benefit of the Election or
that could otherwise give rise to a claim for indemnification
under this Section 7 arising in connection with the audit of a
federal income tax return or report filed by the Purchaser or its
Affiliates. The Seller will control the contest of all other Tax
matters relating to the Seller or its Affiliates; however, the
Seller will (i) promptly provide the Purchaser with copies of all
correspondence and other written communication and notice of
other communication to or from the IRS with respect to any of the
Transactions, the Reinsured Policies, the Replacement Policies
issued with respect to the Reinsured Policies, and the Additional
Replacement Policies issued with respect to the Excluded
Policies; (ii) not settle any Tax matter described in clause (i)
above in a manner which purports to bind the Purchaser or
adversely affects the Purchaser or its policyholders without the
Purchaser's written consent, which consent will not be
unreasonably withheld; and (iii) consult with the Purchaser with
respect to such Tax matters. The Purchaser or the Seller will
appeal any adverse IRS determination arising in a contest subject
to its control to a court of competent jurisdiction, only if a
law firm reasonably acceptable to the Seller (or the Purchaser,
as the case may be) renders an opinion that the Purchaser (or the
Seller, as the case may be) would have a reasonable likelihood of
success if such determination were appealed. Such contest will
continue only so long as reasonable out-of-pocket expenses of
such contest (including reasonable legal, accounting and
actuarial costs, fees and expenses) have been paid by the party
requesting such appeal within 20 Business Days of a written
request therefor by the Purchaser. The Purchaser will not settle
any dispute with respect to any issue described in clause (a) of
this Section 7.5.4 absent express written consent by the Seller,
which will not be unreasonably withheld; provided, however, that
if the Seller breaches its obligations with respect to reporting
or fails to pay the out-of-pocket expenses of the contest and
appeal of the matter when due, the Purchaser will be entitled to
settle the dispute in its judgment without the Seller's consent.
So long as amounts are held in the Claims Escrow Account, the
Purchaser will not, and will not permit any of its Affiliates to,
request relief from the IRS with respect to any alleged failure
of any Reinsured Life Policy or Reinsured Annuity Policy to meet
the requirements for any tax treatment under the Code (for
example, relief pursuant to Section 7702(f)(8) of the Code,
Treas. Reg. 1.817-5(a)(2) or any comparable provision of law,
regulation, rulings or IRS procedures presently or subsequently
adopted) without the express written consent of the Seller, which
consent will not be unreasonably withheld. In connection with
any such request, and any administrative or judicial proceedings
with respect thereto, the Seller will be afforded the rights
granted to it pursuant to this Section 7.5.4 with respect to a
proposed adjustment arising in connection with the audit of a
federal income tax return or report filed by the Seller or its
Affiliates, including the right to consent to any settlement that
could give rise to the claim for indemnification under this
Agreement (which consent will not be unreasonably withheld),
subject to the conditions described above.
7.6 Damages.
7.6.1 Basket and Threshold. No claim for indemnification
will be made by the Purchaser, ANLIC and First SunAmerica on the
one hand, or the Seller on the other hand, until and unless the
cumulative Damages incurred by it or them exceeds $1,500,000 in
the aggregate, it being understood that after such Damages exceed
such amount, the Indemnifying Party will be liable to the
Indemnified Party or Parties, in the aggregate, for all
cumulative Damages in excess of $750,000; provided, however, that
the limitations in this Section 7.6.1 will not apply to Damages
<PAGE> 62
claimed or other amounts to be paid out of escrow pursuant to
Sections 4.12.5, 4.18, 4.21, 5.17, 5.25 and 7.5.3, which Damages
and amounts will be recoverable from the first dollar thereof.
7.6.2 Limit on Tax Reserves Indemnity. The maximum aggregate
liability of the Seller with respect to Damages claimed pursuant
to the indemnity set forth in Section 7.5.3 will be the Tax
Reserves Indemnity Escrow Amount and the earnings thereon held in
the Tax Reserves Indemnity Escrow Account under the terms of the
Escrow Agreement.
7.6.3 Limit on COI Adjustment Amount Recovery. The maximum
aggregate liability of the Seller with respect to Damages claimed
pursuant to Section 4.18 will be the COI Adjustment Escrow Amount
and the earnings thereon held in the COI Adjustment Escrow
Account under the terms of the Escrow Agreement.
7.6.4 Limit on Policy Enhancements Endorsements Indemnity.
The maximum aggregate liability of the Seller with respect to
Damages claimed pursuant to Sections 4.12.4 and 4.12.5 will be
the Policy Enhancements Endorsements Escrow Amount and the
earnings thereon held in the Policy Enhancements Endorsements
Escrow Account under the terms of the Escrow Agreement.
7.6.5 Intentionally Deleted.
7.6.6 Excluded Damages. Except with respect to Damages
arising from any Indemnifying Party's intentional, willful or
reckless misrepresentation or breaches of warranties or
agreements made as part of or pursuant to this Agreement, no
Indemnitor will be liable to any Indemnitee for any punitive,
exemplary, lost profits, consequential or similar Damages
relating to the breach or alleged breach of this Agreement. In
addition, the Seller will not be liable for Damages relating to
the breach or alleged breach of any representation or warranty
set forth in Section 2.10 if the Purchaser takes any position
with respect to the Reinsured Policies, the calculation of the
tax reserves for the Reinsured Policies or the crediting of the
Policy Enhancements Amount to the Account Value of an Eligible
Policy for federal income tax purposes which is inconsistent with
such representation or warranty unless the Purchaser, prior to
taking such position, will have provided to the Seller a legal
opinion, addressed to the Seller from a nationally recognized law
firm, which firm is reasonably acceptable to the Seller,
concluding that there is not substantial authority (as determined
for purposes of Section 6662 of the Code) for the Purchaser to
take a position that is consistent with such representation or
warranty.
7.6.7 Exclusive Remedy. Except with respect to Damages
arising from: (a) the Seller's failure to pay when due the
amounts described in Section 4.14.1 and 4.14.2; (b) the Seller's
failure to authorize the release of funds from escrow to pay the
expense reimbursements set forth in Sections 4.14.2 and 4.22;
(c) the Seller's failure to pay or deliver when due amounts or
other assets relating to the Ceding Commission, the Transferred
Reserve Assets, the other Transferred Reserve Assets, and the
amounts to be funded into escrow under the Escrow Agreement; or
(d) the Excluded Liabilities, the indemnities provided for in
this Section 7 will be the sole and exclusive remedy for monetary
damages of the Purchaser after the Closing for any inaccuracy of
any representation or warranty of the Seller or any failure or
breach of any covenant, obligation, condition or agreement to be
performed or fulfilled by the Seller in this Agreement and the
Seller's maximum liability under such indemnities will be limited
to the amounts deposited into escrow and, where applicable, the
earnings thereon, under the Escrow Agreement. Except as provided
in the preceding sentence, no claim may be brought by the
Purchaser, ANLIC or First SunAmerica in excess of the aggregate
escrowed amount plus all accrued interest and earnings on such
amount; provided, however, none of the Purchaser, ANLIC or First
SunAmerica will be prohibited from bringing any claim against the
<PAGE> 63
Seller, whether pursuant to this Section 7 or another Action,
arising from the Seller's intentional, willful or reckless
misrepresentation or breach of representations, warranties or
agreements made as part of or pursuant to this Agreement even if
such claim, when taken together with all prior Damages recovered
pursuant to this Section 7, exceeds the aggregate escrowed
amount; and provided further, Outward Reinsurance Escrow Claims
(as defined in the Escrow Agreement) that exceed the Outward
Reinsurance Escrow Amount will be satisfied out of the Claims
Escrow Account.
7.7 Indemnification Procedure.
7.7.1 Notice of Claim. Within a reasonable time after
obtaining knowledge thereof, a Person who may be entitled to
indemnification hereunder (the "Indemnitee") will promptly give
the party who may be obligated to provide such indemnification
(the "Indemnitor") written notice (a "Notice of Claim") of any
Damages suffered by the Indemnitee that the Indemnitee has
reasonably determined has given or could give rise to a claim for
indemnification hereunder. No failure or delay in giving any
such Notice of Claim will relieve the Indemnitor of its
obligations unless, and only to the extent, that it is materially
prejudiced thereby. A Notice of Claim will specify in reasonable
detail the nature and scope of such Damages. The Indemnitor,
after making a good faith determination, based on the facts
alleged in such Notice of Claim or that are otherwise known to
Indemnitor, will, within 30 days after the Indemnitor has
received such Notice of Claim, either (a) inform the Indemnitee
in writing that the Indemnitor acknowledges that it has an
indemnification obligation hereunder in respect of such Damages
set forth in the Notice of Claim (a "Claim Acceptance Notice")
and will perform its indemnification obligations in respect of
such Damages, including, where the Seller is the Indemnitor, by
executing an instruction to the escrow agent under the Escrow
Agreement to release escrowed funds in the amount of such
Damages; or (b) dispute such Notice of Claim in writing,
specifying in reasonable detail the nature and extent of the
dispute (a "Claim Dispute Notice"); provided, however, that with
respect to Tax matters arising in connection with a government
tax audit of the Seller, the Purchaser or their Affiliates, for
which procedures are provided in Section 7.1 or Section 7.5.4,
the parties will follow the procedures set forth in Section 7.1.
The Indemnitee can take any action it deems necessary to preserve
its rights with respect to such Damages during such 30 day
period, but will not settle the claim giving rise to such Damages
or proceed to final judgment with respect thereto prior to the
expiration of such 30 day period. If Indemnitor fails to respond
with either a Claim Acceptance Notice or a Claim Dispute Notice
within such 30 day period, Indemnitor will be deemed to have
delivered a Claim Acceptance Notice on the 30th day.
7.7.2 Third Party Claims. Other than with respect to those
Tax matters that are covered by Section 7.1 or Section 7.5.4, if
the Damages relate to a Third Party Claim and the Indemnitor has
delivered a Claim Acceptance Notice, the Indemnitor will be
entitled, in good faith and at its own cost and expense, to
participate in any Action and/or direct the defense or settlement
of any Action or otherwise to cure, remediate, mitigate, remedy
or otherwise handle any event or circumstance that gives rise to
such Damages. Subject to the following provisions of this
Section 7.7.2 and, other than with respect to those Tax matters
that are covered by Section 7.5.4, such right will include:
(a) the right to investigate any such event or circumstance;
(b) the right to cure, mitigate, remediate, remedy and otherwise
handle any such event or circumstance on such terms and
conditions and by such means as the Indemnitor may reasonably
determine; and (c) the right to defend, contest or otherwise
oppose any Third Party Claim with legal counsel selected by it.
The Indemnitor will promptly inform the Indemnitee of all
material developments related to any such Third Party Claim.
Other than with respect to Tax matters which are covered by
<PAGE> 64
Section 7.5.4, notwithstanding anything contained herein to the
contrary, the Indemnitee will have the right, but not the
obligation, to participate, at its own cost and expense, in the
defense, contest or other opposition of any such Third Party
Claim through legal counsel selected by it, and will have the
right, but not the obligation, to assert any and all
cross-claims, counterclaims or other Actions that it may have. So
long as the Indemnitor is assuming the defense of such Action in
accordance with this Section 7.7.2, the Indemnitee will (a) at
Indemnitor's cost and expense, cooperate in all reasonable ways
with, make its relevant files and records available for
inspection and copying by, make its employees reasonably
available to and otherwise render reasonable assistance to the
Indemnitor upon request and (b) not compromise or settle any such
Action without the prior written consent of the Indemnitor. If
the Indemnitor does not elect to assume the defense of any such
claim or action, the Indemnitee will act reasonably and in
accordance with its good faith business judgment with respect
thereto, and will not settle or compromise any such claim or
action without providing the Indemnitor the opportunity to
participate in the settlement or reassume the defense of the
Action. If the Indemnitee is entitled to indemnification
hereunder in respect of the event or circumstance as to which the
Indemnitee takes such actions, then the Indemnitor will, in
addition to indemnifying Indemnitee for the Damages, indemnify
the Indemnitee for all of the reasonable legal, accounting,
actuarial and other costs, fees and expenses incurred in
connection therewith; provided, however, that after notice to the
Indemnitee of the Indemnitor's election to assume the defense of
such claim or action, the Indemnitor will not be liable to the
Indemnitee under this Section 7 for any such legal, accounting,
actuarial costs, fees and expenses subsequently incurred by the
Indemnitee in connection with the defense thereof other than
reasonable costs of investigation, provided that the Indemnitee
will have the right to employ counsel to represent it if the
Indemnitee has available to it one or more defenses or
counterclaims that are inconsistent with one or more of those
claims alleged by the Indemnitor, and in any such event the fees
and expenses of such separate counsel will be paid by the
Indemnitee. If the Indemnitor proposes to settle or compromise
any such Third Party Claim, the Indemnitor will give written
notice to that effect (together with a statement in reasonable
detail of the terms and conditions of such settlement or
compromise) to the Indemnitee a reasonable time prior to
effecting such settlement or compromise. The Indemnitee will
have the right: (x) to approve such settlement or compromise;
(y) to object to such settlement or compromise, whereupon, if
such settlement or compromise is solely for cash, the Indemnitee
will assume the defense, contest or other opposition of such
Third Party Claim for its own account and as if it were the
Indemnitor and the Indemnitor will be released from any and all
liability with respect to such Third Party Claim to the extent
that such liability exceeds the liability that the Indemnitor
would have had in respect of such a settlement or compromise; or
(z) to assume, at any time by giving written notice to that
effect to the Indemnitor, the cure, mitigation, remediation,
remedy or other handling of such event or circumstance and the
defense, contest or other opposition of such Third Party Claim
for its own account, whereupon the Indemnitor will be released
from any and all liability with respect to such event or
circumstance and such Third Party Claim.
7.7.3 Disputes. If the Indemnitor timely delivers a Claim
Dispute Notice, the Indemnitor and the Indemnitee will proceed to
resolve the dispute in accordance with the provisions of
Section 8. Prior to final resolution thereof, the Indemnitee can
take any action it deems necessary to preserve its rights with
respect to the relevant Damages, but will not settle the claim
giving rise to such Damages or proceed to final judgment with
respect thereto.
7.7.4 Mitigation. Notwithstanding anything contained herein
<PAGE> 65
to the contrary, each party will use, and will cause its
Affiliates to use, commercially reasonable efforts to mitigate
any and all Damages in respect of which it may be entitled to
indemnification hereunder.
7.8 Release of Funds From Escrow.
7.8.1 DAC Election/Reduction Escrow Amount. Subject to the
terms of the Escrow Agreement with respect thereto, the remaining
amount, if any, in the DAC Tax Indemnity Account, less the
aggregate amount sought under any pending claims, will be
released from escrow and delivered to the Seller as provided in
Section 7.1.
7.8.2 Outward Reinsurance Escrow Amount. Subject to the
terms of the Escrow Agreement with respect thereto, the remaining
amount, if any, in the Outward Reinsurance Escrow Account, less
the aggregate amount of any pending claims, will be released from
escrow and delivered to the Seller as provided in Section 5.16.
7.8.3 Tax Reserves Indemnity Escrow Amount. Subject to the
terms of the Escrow Agreement with respect thereto, the remaining
amount, if any, in the Tax Reserves Indemnity Escrow Amount, less
the aggregate amount sought under any pending claims, will be
released from escrow and delivered to the Seller upon the
earliest to occur of (a) the date that is 20 Business Days after
the date on which the Seller provides to the Purchaser a copy of
the documents evidencing a Final Determination that the treatment
either (x) by the Purchaser of the moratorium charges (for tax
reserving purposes), so long as the Purchaser's treatment is
consistent with the Seller's treatment, is appropriate, or (y) by
the Seller of the moratorium charges, if the Purchaser's
treatment is not consistent with the Seller's treatment of such
charges, is appropriate; (b) the Business Day following payment
in full of the Purchaser's Damages (up to the amount held in the
Tax Reserves Indemnity Account) as a result of a Final
Determination that the treatment by the Seller of the moratorium
charges is not appropriate; or (c) on the Escrow Termination
Date. If the Purchaser and the Seller are unable to agree on the
calculation of the Purchaser's Damages within 30 days of the
Seller's providing to the Purchaser the documents specified in
clause (b) above, the dispute will be submitted for final
resolution by the Independent Party in accordance with
Section 8.5.
7.8.4 Claims Escrow Amount. Subject to the terms of the
Escrow Agreement with respect thereto, (a) the remaining amount
in the Claims Escrow Account in excess of the sum of $22,500,000
and the aggregate amount sought under any pending claims will be
released from escrow and delivered to the Seller on the second
anniversary of the Closing Date; (b) the remaining amount in the
Claims Escrow Account in excess of the sum of $11,250,000 and the
aggregate amount sought under any pending claims, will be
released from escrow and delivered to the Seller on the fourth
anniversary of the Closing Date; and (c) the remaining amount in
the Claims Escrow Account in excess of the aggregate amount
sought under any pending claims will be released from escrow and
delivered to the Seller on the Escrow Termination Date.
7.8.5 COI Adjustment Escrow Amount. Subject to the terms of
the Escrow Agreement with respect thereto, the remaining amount,
if any, in the COI Adjustment Escrow Account, less the aggregate
amount sought under any pending claims, will be released from
escrow and delivered to the Seller on the last day of the 15th
month following the Rehabilitation Period Termination Date.
7.8.6 Policy Enhancements Endorsements Escrow Amount.
Subject to the terms of the Escrow Agreement with respect
thereto, the remaining amount, if any, in the Policy Enhancements
Endorsements Escrow Account, less the aggregate amount sought
under any pending claims, will be released from escrow and
delivered as provided in Section 4.12.5.
<PAGE> 66
7.8.7 Notices and Joint Instructions. In each case where
funds are to be added to or released from escrow pursuant to this
Agreement on a date that is not certain as of the date hereof,
the parties will each execute and deliver an appropriate notice
or joint instruction to the Escrow Agent establishing such date,
specifying the amount to be added to or released from escrow and
either directing the Escrow Agent to release such amount to the
party entitled to receive such amount or including with such
notice or instruction a deposit from the party obligated to add
such amount to the relevant escrow. The parties will also each
execute a notice to the Escrow Agent if this Agreement is
terminated pursuant to Section 10.3.
8. DISPUTE RESOLUTION
8.1 Governing Law. This Agreement will be construed, performed
and enforced in accordance with the laws of the State of New
Jersey.
8.2 Arbitration of Disputes.
8.2.1 Matters in Exclusive Jurisdiction of Court. Prior to
the Closing Date, any dispute will remain in the exclusive
jurisdiction of the Court. Following the Closing Date, any claim
for indemnification or other dispute involving any of the
following matters will remain in the exclusive jurisdiction of
the Court: the calculation or payment of the Policy Enhancements
or Account Values True-Up, the issuance of Replacement Policies
in accordance with the terms of this Agreement and the
termination of the Rehabilitation Period.
8.2.2 Pre-Arbitration Dispute Resolution. Except as
expressly provided in Section 8.2.1, the parties will attempt in
good faith to resolve any dispute, controversy or claim under,
arising out of, relating to, or in connection with this Agreement
or any of the Ancillary Agreements, including the negotiation,
execution, interpretation, construction, performance, non-
performance, breach, termination, validity, scope, coverage or
enforceability of this Agreement or any of the Ancillary
Agreements or of this Section 8.2 (a "Dispute"), promptly by
negotiations between the parties without the initiation of an
Action by either party, unless necessary to preserve any
applicable statute of limitations. If the parties are unable to
resolve said Dispute within 30 days after a party gives a notice,
referring to this Section 8.2, that it wants to commence such
negotiations (which period can be extended by mutual agreement),
the parties will resolve the Dispute as set forth below;
provided, however, if this Agreement expressly provides that such
Dispute will be resolved by the Independent Party, the parties
will proceed in accordance with the procedures set forth in
Section 8.5.
8.2.3 Arbitration. If the parties are unable to resolve any
Dispute in the time period set forth in Section 8.2.2, and such
Dispute is not to be resolved by the Independent Party pursuant
to the terms of this Agreement, the parties hereby agree to
arbitrate all such Disputes pursuant to the terms of this
Section 8.2.3. To initiate arbitration, a party must give notice
to the other party after the time period set forth in
Section 8.2.2 expires. All arbitrations will be conducted in
accordance with the Center For Public Resources ("CPR") Rules for
Non-Administered Arbitration of Business Disputes before a panel
of three arbitrators, one of whom will be selected by the
Purchaser, the second of whom will be selected by the Seller and
the third of whom will be selected by the other two arbitrators
and will chair the tribunal. If either party fails or refuses to
select an arbitrator within fifteen days after notice of the
selection of the first arbitrator, or the two arbitrators
selected fail to select the third arbitrator within fifteen days
after their selection, the necessary arbitrator or arbitrators
will be selected by the presiding judge of a court of general
jurisdiction in New York. Decisions of the tribunal must be made
<PAGE> 67
by not less than two of the arbitrators. The arbitration will be
governed by the Federal Arbitration Act (9 U.S.C. 1-16). The
arbitration, including the determination of any amount of Damages
suffered by any party hereto by reason of the acts or omissions
of any party, will be final and binding upon the parties to the
maximum extent permitted by Applicable Law, except that the
arbitrators will not be authorized to award punitive damages with
respect to any such Dispute or to revise or restructure the
business or economic terms of the Transactions. No party will
seek punitive Damages relating to any matter under, arising out
of, in connection with or relating to this Agreement in any other
forum. The parties intend this Section 8 to be legal, valid,
binding, enforceable and irrevocable and that it survive any
termination of this Agreement.
(a) Upon request of either party, the arbitrators will order
such discovery (including third-party discovery) as the
arbitrators determine to be reasonable under the circumstances.
The arbitrators will, however, impose reasonable schedules and
deadlines to ensure that discovery is produced, conducted and
concluded on a timely basis and will impose sanctions on either
party for abuse or delay of discovery. Rules of evidence will be
applied as the arbitrators determine to be reasonable under the
circumstances.
(b) In their award, the arbitrators must allocate between the
parties all costs and expenses of arbitration, including the fees
and expenses of the arbitrators, and reasonable attorneys' fees,
costs and expert witness and other expenses. Any arbitration
proceedings hereunder must be held in New York, New York.
Judgment upon any award rendered by the arbitrators can be
entered by any Court having jurisdiction thereof.
(c) If the rules of the CPR differ from those of this
Section 8.2.3, the provisions of this Section 8.2.3 will control.
8.2.4 Confidentiality. All offers, promises, conduct and
statements, whether oral or written, made in the course of the
settlement discussions, Independent Party process or arbitration
process (including the notices) by any party or its
Representatives are confidential. All such information will be
considered "settlement negotiations" and will not be referred to
or used, or be admissible or discoverable, for any purpose in any
subsequent Action between the parties (other than to the limited
extent that it would be relevant to establish the intent of the
parties if necessary to clarify any ambiguity in any final,
written settlement reached). Notwithstanding the foregoing, the
Independent Party and/or the arbitrators are disqualified as
witnesses in any subsequent Action for any party to the
Independent Party proceedings or arbitration and any oral or
written statement or opinion expressed by the Independent Party
or the arbitrators during the Independent Party proceedings or
arbitration is inadmissible for all purposes in any subsequent
Action.
8.2.5 Interim Relief. If a party believes immediate interim
relief is necessary to preserve the status quo during or prior to
Independent Party proceedings or arbitration, or to compel
Independent Party proceedings or arbitration as required hereby,
it can file an Action in an appropriate court identified in
Section 8.3 to seek interim relief as contemplated by
Section 8.4. The substantially prevailing party under this
Section 8.2.5 will have all of its reasonably incurred costs in
bringing, or opposing, as the case may be, such Action, including
all reasonable attorneys' fees and any out-of-pocket expenses
paid by the other party.
8.2.6 Enforcement. Any refusal to proceed with Independent
Party review or arbitrate under this Section 8.2 is a breach of
contract for which Damages can be recovered. If the party who
ultimately prevails in any Action institutes an Action (other
than under Section 8.2.5) without first attempting Independent
Party review or arbitration as required hereby, such party will
<PAGE> 68
not be entitled to attorneys' fees or costs that might otherwise
be available to it under this Agreement in connection with such
Action. If a party refuses to proceed with Independent Party
review or arbitrate prior to filing an Action and ultimately is
not the substantially prevailing party in the Action, it will be
liable for all attorneys' fees and costs reasonably incurred in
the Action by the other party.
8.3 Consent to Jurisdiction; Waiver of Jury Trial, etc..
8.3.1 Consent to Jurisdiction.
(a) Subject to Sections 8.2 and 8.5, each of the parties hereto
hereby submits to the jurisdiction of the Court, and any
appellate court thereof, to enforce any settlement, Independent
Party or arbitration award pursuant to Sections 8.2 and 8.5, and
each of the parties hereto hereby agrees that all such claims may
be heard and determined in such New Jersey state court or, to the
extent permitted by Applicable Law, in a federal court in New
Jersey. A final judgment in any such Action will be conclusive
and can be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by Applicable Law.
(b) Each of the parties hereto hereby waives, to the fullest
extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any Action
in any New Jersey state or federal court. Each of the parties
hereto hereby waives, to the fullest extent permitted by
Applicable Law, the defense of an inconvenient forum to the
maintenance of such Action in any such court.
(c) Each party to this Agreement irrevocably consents to service
of process in the manner provided for notices in Section 10.5.
Nothing in this Agreement will affect the right of any party to
this Agreement to serve process in any other manner permitted by
Applicable Law.
8.3.2 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND
AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT
IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS.
8.4 Injunctive Relief. Each party acknowledges and agrees that
its failure to perform any of its agreements and covenants in
this Agreement would cause irreparable injury to the other party
and would cause Damages that would be difficult to ascertain or
quantify. Accordingly, without limiting any remedies that may be
available with respect to any breach of this Agreement, each
party consents to the entry by an arbitrator or a court of
temporary restraining orders, preliminary and permanent
injunctions, and other appropriate interim relief or equitable
remedies or to compel Independent Party proceedings or
arbitration as required hereby.
8.5 Independent Party. Except with respect to Disputes
involving the calculation of the Final Closing Date Statement,
which will be resolved in accordance with the procedures set
forth in Section 1.3.2, the parties will employ the following
procedures with respect to the submission of Disputes to the
Independent Party. If the parties are unable to resolve a
Dispute that is required by this Agreement to be submitted to the
Independent Party within the time period set forth in
Section 8.2.2 (or such other time period provided in the relevant
<PAGE> 69
section), such Dispute will be submitted to the Independent
Party, who will be selected in the manner described in
Section 1.3.2. To initiate the Independent Party review process,
a party must give notice to the other party of its intent to
commence such review process after the time period set forth in
Section 8.2.2 (or such other time period provided in the relevant
section) expires. Upon confirmation or selection of the
Independent Party by the parties, the parties will have ten
Business Days to provide the Independent Party with any and all
information relevant to the Independent Party's determination,
and will otherwise cooperate with the Independent Party to assist
its prompt resolution of any Dispute brought before it. The
parties will also notify the Independent Party if final payment
of a Dispute will be made out of one of the escrow accounts
established pursuant to this Agreement and the Escrow Agreement,
and if so, the proper address that the Independent Party should
use for notifying the Escrow Agent of its final decision of the
Dispute (as required below). The Independent Party will make a
final decision within 30 days of the submission of such
information. Once the Independent Party makes a final decision
as to a Dispute brought before it, the Independent Party will
notify the parties and the Escrow Agent, if applicable, of its
decision. The decision of the Independent Party will be final
and binding upon the parties to the maximum extent permitted by
Applicable Law. Within five Business Days of the Independent
Party's notice of its final decision, the relevant party will
deliver to the recipient party cash, or where amounts with
respect to such Dispute are to be paid out one of the escrow
accounts established pursuant to this Agreement and the Escrow
Agreement, a written consent to the immediate release of such
amount to the recipient party, in the amount indicated in such
notice, together (except with respect to amounts payable out of
the DAC Tax Indemnity Account) with interest on such amount from
the date initially due under this Agreement to the date of
payment at the rate of 6.8% per annum. The fees and expenses of
the Independent Party will be paid by the party that is not
deemed by the Independent Party to be the substantially
prevailing party of such Dispute. However, if either (i) no
party is deemed the substantially prevailing party by the
Independent Party, or (ii) the Dispute is settled by the parties
prior to resolution by the Independent Party, then the fees and
expenses of the Independent Party will be paid equally by the
Seller and the Purchaser.
9. DEFINITIONS
As used herein, the following terms have the following meanings:
"401(k) Contract" means a Covered Contract relating to a plan
intended to qualify under Section 401(k) of the Code.
"Acceptable Law Firm" is defined in Section 7.1.6.
"Account Value" means, as of a reference date, (i) with respect
to each Contract other than Contracts in Pay Status and term life
policies, the amount that would be payable to the Policyholder in
the event of surrender on such date, before the application of
surrender charges or moratorium charges, and (ii) with respect to
each Contract in Pay Status and term life policy, the statutory
reserve for such Contract as of such date.
"Account Values True-Up" means the amount of additional credited
interest to be applied to certain Reinsured Policies pursuant to
enhanced guarantees under the Plan and certain Rehabilitation
Documents.
"Account Values True-Up Amount" means the maximum amount of the
Account Values True-Up as calculated by the Seller in compliance
with the terms of the Plan and the Rehabilitation Documents as in
effect on the Closing Date.
"Account Values True-Up Date" means as soon as reasonably
practicable after the Rehabilitation Period Termination Date, but
in no event later than the 15th Business Day following the
Rehabilitation Period Termination Date.
"Accumulation Contract" means any individual or group annuity
Contract, except that the term "Accumulation Contract" does not
<PAGE> 70
include a Separate Account Contract or a Contract in Pay Status.
The term "Accumulation Contract" includes an income certificate
elected prior to July 16, 1991 pursuant to the election of an
"interest income option" under a matured or surrendered life
insurance Contract (including pursuant to the application of
death benefit proceeds).
"Action" means any action, complaint, petition, audit,
investigation, suit, claim, dispute, controversy or other
proceeding whether civil, criminal or administrative, in law or
in equity or by or before any Governmental Authority.
"Acquisition Proposal" means any proposal or proposals for, or
agreement or agreements relating to, the sale or disposition
(including pursuant to a reinsurance or similar arrangement
involving the Reinsured Life Policies, the Reinsured Annuity
Contracts and the Transferred Assets) of all or substantially all
of the Business in one or a series of transactions with one or
more Persons other than the Purchaser or its Affiliates.
"Additional Enhancements DAC Amount" means the product of (a) .22
multiplied by (b) the sum of the products of (i) the amount of
the Additional Policy Enhancements Amount paid to the Purchaser
or its Affiliates that is allocated to each category (as
described in Section 848(c) of the Code) of Specified Insurance
Contracts (as defined in Section 848(e) of the Code) (following
allocation of the Additional Policy Enhancements Amount between
Specified Insurance Contracts and non-Specified Insurance
Contracts) based on the relative Impairments of all contracts on
the Scheduled Vesting Date, multiplied by (ii) the percentage
provided in Section 848(c)(1) of the Code applicable to each such
category of Specified Insurance Contracts.
"Additional Policy Enhancements Amount" is defined in
Section 4.12.2.
"Additional Replacement Policy" is defined in Section 5.10.2.
"Administrative Services Agreement" means the Administrative
Services Agreement to be entered into between the Seller and the
Purchaser substantially in the form of Exhibit C.
"Affiliate" with respect to any Person means any other Person
that directly or indirectly controls, is controlled by, or is
under common control with, the referenced Person.
"Agent Debit Balance" means a balance owed to the Seller by an
insurance agent or other producer for advances, loans and other
payments.
"Agreement" means this Purchase and Sale Agreement, including the
Schedules and Exhibits.
"Allocation Regulations" is defined in Section 7.1.2.
"Allowed Claim" is defined in the Plan.
"Ancillary Agreements" means the Assumption Reinsurance
Agreements, the Indemnity Reinsurance Agreement, the
Administrative Services Agreement, the Transition Services
Agreement, the Bill of Sale, the Escrow Agreement, the Expense
Reimbursement Escrow Agreement and any other agreements to
effect, or in connection with, the Transactions.
"ANLIC" is defined in the introductory paragraph.
"ANLIC Assumption Reinsurance Agreement" means the Assumption
Reinsurance Agreement that is substantially in the form of
Exhibit A-1.
"ANLIC Audited SAP Statements" is defined in Section 3.6.3.
<PAGE> 71
"ANLIC SAP Statements" is defined in Section 3.6.3.
"ANLIC Statutory Statements" is defined in Section 3.6.2.
"Annuity Contracts" means all individual and group annuity
Contracts in effect on the date hereof, or on the Closing Date,
as applicable, including the Reinsured Annuity Contracts and the
Excluded Annuity Contracts.
"Applicable Law" with respect to any Person means any domestic
or foreign, federal, state, provincial or local statute, law
(including common law), ordinance, rule, administrative
interpretation or other interpretation by a Governmental
Authority, regulation, bulletin, order, writ, injunction,
directive, judgment, decree, rule or other requirement of any
Governmental Authority applicable to such Person, its business or
any of its respective properties or assets, including the
insurance laws, rules and regulations of the jurisdictions in
which the Reinsured Policies are issued, as well as those of any
other applicable jurisdictions.
"Applicable Purchaser Survival Period" is defined in Section 7.2.
"Applicable Seller Survival Period" is defined in Section 7.3.
"Assigned Contracts" is defined in Section 1.1.4.
"Assumption Date" is defined in the Assumption Reinsurance
Agreements.
"Assumption Reinsurance Agreements" is defined in Section 1.4.1.
"Assumptions" is defined in Section 7.1.2.
"Audited Purchaser Financial Statements" is defined in
Section 3.6.1.
"Audited SAP Statements" is defined in Section 2.6.3.
"Base Ceding Commission" is defined in Section 1.1.1.
"Benefit Plan" means a Fully Administered Qualified Plan, a Tax
Deferred Annuity Arrangement or an Other Plan.
"Bill of Sale" means the Bill of Sale to be delivered by the
Seller at the Closing substantially in the form of Exhibit F.
"Books and Records" means the originals or copies of all
policyholder, accountholder, and customer lists, policy
information, Reinsured Policies, forms and rating plans,
disclosure and other documents and filings required under
Applicable Laws, claim records, sales records, underwriting
records and financial, accounting, Tax, business, marketing and
compliance records relating to the operation of the Business, the
Reinsured Policies or the Transferred Assets, including any data
base, magnetic, electronic or optical media (to the extent not
subject to licensing restrictions) and any other form of
recorded, computer generated or stored information or process.
"Business" is defined in the Recitals.
"Business Day" means any day other than a Saturday, Sunday or a
day on which banking institutions in the States of New Jersey,
Arizona, California or New York are permitted or obligated by law
to be closed.
"Calculation Date" is defined in Section 1.1.2.
"Cash Equivalents" means: (a) securities issued or directly and
unconditionally guaranteed by the United States Government or
issued by any agency thereof and backed by the full faith and
credit of the United States, in each case maturing not later than
<PAGE> 72
June 30, 1999; (b) commercial paper maturing not later than
June 30, 1999 and, as of the relevant date of valuation having a
rating of at least A-1 from Standard & Poor's Ratings Group and
at least P-1 from Moody's Investors Service; (c) certificates of
deposit or bankers' acceptances maturing not later than June 30,
1999 issued by any commercial bank organized under the laws of
the United States of America or any state thereof or the District
of Columbia having unimpaired capital and surplus of not less
than $500,000,000; and (d) money market funds that maintain a
stable net asset value and have the highest rating obtainable
from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc.
"Ceding Commission" is defined in Section 1.1.1.
"Certified Estimated Closing Date Statement" is defined in
Section 5.2.2.
"Certified Statement Date" is defined in Section 5.2.2.
"Claim Acceptance Notice" is defined in Section 7.7.1.
"Claim Dispute Notice" is defined in Section 7.7.1.
"Claims Escrow Account" is defined in the Escrow Agreement.
"Claims Escrow Amount" means $45,000,000, comprised of cash and
Cash Equivalents, each valued at their respective Value as of the
Closing Date, and deposited by the Seller on the Closing Date in
the Claims Escrow Account.
"Class Four Creditor" is defined in the Settlement Agreement.
"Class Four Creditor Value Share" is defined in the Settlement
Agreement.
"Closing" is defined in Section 1.2.1.
"Closing Conditions" is defined in Section 6.1.
"Closing Date" is defined in Section 1.2.1.
"Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"COI Adjustment Amount" means an amount equal to $750,000
multiplied by the product of (a) 100 multiplied by (b) the
percentage increase in the Modified COI Scale pursuant to
Section 4.18, plus accrued interest at a rate of 6.8% per annum
from the date of any such adjustment pursuant to Section 4.18.2
until the date of payment. For example, if the Account Values
for Reinsured Life Policies remaining one year following the
Transition Period Termination Date, expressed as a percentage of
Account Values on December 31, 1997, is 91.8%, then the percent
increase in COI is calculated as follows: the result of:
(i) (A) .7% multiplied by (B) 95% minus 91.8%; divided by
(ii) 1%. This example would yield a COI Scale factor equal to
2.24 and a COI Adjustment Amount of $1,680,000 (2.24 multiplied
by $750,000) plus interest thereon at the above rate.
"COI Adjustment Escrow Account" is defined in the Escrow
Agreement.
"COI Adjustment Escrow Amount" means $6,000,000, comprised of
cash and Cash Equivalents, each valued at their respective Value
as of the Closing Date, and deposited by the Seller on the
Closing Date in the escrow account established pursuant to the
Escrow Agreement.
"COLI DAC Election Escrow Amount" means the amount placed in
escrow in connection with the separate sale of the Seller's COLI
business to a third party with respect to the DAC election sought
<PAGE> 73
by the Seller in such transaction.
"Combination Contracts" means Contracts with respect to which
assets are held in both Seller's general account and in Seller's
Separate Account B.
"Commission Agreements" means all agreements providing for the
payment of Commissions relating to any Reinsured Policy.
"Commissioner" is defined in the Recitals.
"Competitive Bidder" is defined in Section 4.16.
"Competitive Bid Order" is defined in Section 4.16.
"Confidentiality Agreement" means that certain Confidentiality
Agreement dated October 30, 1997 between the Purchaser and
Goldman Sachs & Co., as representative of the Seller.
"Contract" means a life insurance, health insurance, disability
income insurance, endowment or annuity contract issued by the
Seller or Mutual Benefit. The term "Contract" includes, without
limitation, any and all individual and group annuity and
investment contracts issued by the Seller or Mutual Benefit under
or in connection with employee benefit plan or programs to which
Section 401, 403(b), 408 or 457 of the Code relate, to whomever
or whatever Persons such Contracts are issued, together with all
individual annuities issued pursuant to such Contracts.
"Contract in Pay Status" means any Contract, the terms of which
provide for the Seller or Mutual Benefit to make periodic
payments for a period measured by the life or lives of
individuals or for a period of years, including: (a) obligations
under individual annuity contracts (including individual
retirement annuities); (b) annuity certificates issued under
group annuity contracts; and (c) income certificates evidencing
settlement options elected under matured or surrendered life
insurance policies (other than "interest income options" elected
prior to July 16, 1991), provided such payments have commenced.
The term "Contract in Pay Status" includes a Contract designated
by the Seller or Mutual Benefit as a dedicated investment
portfolio Contract or as a lottery Contract and does not include
a Separate Account Contract.
"Cost of Insurance" means the monthly rate to be charged to
provide mortality and other ancillary benefits on a life
insurance policy.
"Court" is defined in the Recitals.
"Covered Accumulation Contracts" means Accumulation Contracts
that are Covered Contracts.
"Covered Contract" means (i) those Restructured Contracts and
Reaffirmed Contracts that are covered, in whole or in part, by a
Participating Guaranty Association under the Participation
Agreement and (ii) those unsupported Contracts that would have
been Covered Contracts if the relevant Guaranty Association had
been a Participating Guaranty Association.
"CPR" is defined in Section 8.2.3.
"CRVM Method" means the Commissioner Reserve Valuation Method as
prescribed by each jurisdiction in which the Seller files its
Statutory Statements.
"DAC Amount" is defined in Section 7.1.1.
"DAC Election Escrow Amount" means the amount determined in
accordance with the calculation set forth in Section 1 of
Schedule 9, as provided in Section 7.1.8(a), with respect to the
Purchaser's assumption and reinsurance of the Reinsured Policies
<PAGE> 74
in the absence of the Election.
"DAC Reduction Amount" means the product of .22 multiplied by
that portion of the sum of (a) the unamortized balance (as of the
beginning of its taxable year which includes the Closing Date) of
amounts previously capitalized by the Seller under Section 848(a)
of the Code, plus (b) any amount required to be capitalized by
the Seller under Section 848(a) of the Code for its taxable year
which includes the Closing Date that is allocable to the
Purchaser and its Affiliates in connection with the Transactions,
as determined under the Allocation Regulations.
"DAC Reduction Escrow Amount" means the amount determined in
accordance with the calculation set forth in Section 3 of
Schedule 9, as provided in Section 7.1.8(b).
"DAC Tax Indemnity Account" means the separate account
established pursuant to the Escrow Agreement for the DAC
Reduction Escrow Amount or the DAC Election Escrow Amount, as the
case may be.
"Damages" means any and all costs, damages, liabilities, fines,
fees, penalties, interest obligations, deficiencies, losses and
expenses, amounts paid in settlement, interest, court costs,
costs of investigation, reasonable fees and expenses of
attorneys, accountants, actuaries and other experts.
"Dispute" is defined in Section 8.2.2.
"DOJ" is defined in Section 4.1.3.
"DOL" is defined in Section 2.12.18.
"Election" is defined in Section 7.1.2.
"Eligible Policy" is defined in Section 5.10.4.
"Encumbrances" means any liens, security interests, pledges,
mortgages, adverse claims, charges, encumbrances on, licenses,
royalty or profit sharing obligations, or similar agreements.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Plan" means each "employee pension benefit plan" within
the meaning of Section 3(2) of ERISA (a) the assets of which are
held in whole or in part in the Group Pension Account or (b) with
respect to which the Seller has any obligation.
"Escrow Agent" means the escrow agent pursuant to the Escrow
Agreement.
"Escrow Agreement" is defined in Section 1.4.5.
"Escrow Claim" means a claim by the Purchaser, ANLIC and/or
First SunAmerica for satisfaction (a) out of the Claims Escrow
Amount in respect of Damages determined in accordance with
Sections 5.17, 7.5.1, 7.5.2 and 7.5.6; (b) out of the Tax
Reserves Indemnity Escrow Amount in respect of Damages determined
in accordance with Section 7.5.3; (c) out of the DAC Election
Escrow Amount or the DAC Reduction Amount, as the case may be,
for amounts determined in accordance with Section 7.1; (d) out of
the Outward Reinsurance Escrow Amount for amounts determined in
accordance with Section 5.16; (e) out of the COI Adjustment
Escrow Amount for amounts determined in accordance with
Section 4.18.2; and (f) out of the Policy Enhancements
Endorsements Escrow Amount for amounts determined in accordance
with Section 4.12.5.
"Escrow Termination Date" means the sixth anniversary of the
Closing Date.
<PAGE> 75
"Estimated Closing Date Statement" is defined in Section 1.2.2.
"Excluded Annuity Contracts" means, collectively, (a) each
Wrapped Accumulation Contract; (b) each Separate Account Contract
(including each Variable Annuity and each 401(k) Contract with
respect to which assets are held in any of the Seller's Separate
Accounts); (c) if termination thereof is approved by the Court
pursuant to Section 4.11, each 401(k) Contract with respect to
which assets are held in the Seller's general account and for
which the Seller provides services; and (d) each Covered
Accumulation Contract issued as a Restructured Contract together
with any Variable Annuity.
"Excluded Liabilities" is defined in Section 1.1.6.
"Excluded Policies" means all of (a) the Excluded Annuity
Contracts, (b) the Purchase Opt-Out Contracts, (c) the LICGC
Contract, (d) if the Court does not approve bifurcation thereof
pursuant to Section 4.11, the Combination Contracts, (e) any
Policy that would otherwise be a Reinsured Policy with respect to
which Seller has received notice of a death claim on or prior to
the Closing Date and (f) the Policies ceded to Integrity Life
Insurance Company.
"Expense Reimbursement Escrow Account" is defined in the Expense
Reimbursement Escrow Agreement.
"Expense Reimbursement Escrow Agreement" means the escrow
agreement dated as of July 14, 1998 attached hereto as Exhibit K.
"Extra Contractual Obligations" means all liabilities (a) for
compensatory, consequential, exemplary, punitive or similar
damages that relate to or arise in connection with any alleged or
actual act, error, omission, fraud or misrepresentation by the
Seller, any predecessor of the Seller including Mutual Benefit,
any of their respective Affiliates or any of their respective
Representatives, prior to the Closing Date, whether intentional
or otherwise, or (b) from any actual or alleged reckless conduct
or bad faith by the Seller, any predecessor of the Seller
including Mutual Benefit, any of their respective Affiliates or
any of their respective Representatives in connection with the
handling of any claim under any of the Reinsured Policies or any
predecessor Policy in connection with the issuance, offer, sale,
delivery, cancellation or administration of any of the Reinsured
Policies or any predecessor Policy.
"Filing Date" is defined in Section 7.1.5.
"Final Ceding Commission" is defined in Section 1.3.1.
"Final Closing Date Statement" is defined in Section 1.3.1.
"Final Determination" will have been made with respect to an
issue upon the earliest to occur of: (a) with respect to the
Election, the receipt of the Letter Ruling; (b) a decision,
judgment, decree, or other Final Order being issued by any court
of competent jurisdiction, other than a decision adverse to the
Purchaser by the first court of competent jurisdiction, in which
case, such adverse decision will be a Final Tax Determination,
unless appealed by the IRS; (c) the IRS having entered into a
binding agreement with the Purchaser or having reached a final
administrative or judicial determination with respect to the
Purchaser that, whether by Applicable Law or agreement, has
become a Final Order; and (d) the expiration of the applicable
statute of limitations, including extensions thereof granted by
the Purchaser to the IRS, which the Purchaser can grant in its
sole discretion (such expiration will be treated as a Final
Determination that the position as reported on the Purchaser's
Federal income tax return is correct) with respect to the
Purchaser's return. If (i) either (x) a private letter ruling
has been issued by the IRS, or (y) a decision, judgment, decree
or other Final Order has been issued by any court of competent
<PAGE> 76
jurisdiction, providing that the Seller is qualified to make the
election provided in Treas. Reg. 1.848-2 (i)(4) with respect to
any other reinsurance transaction occurring in the Seller's Tax
year that includes the Closing Date; and (ii) the Seller has
provided to the Purchaser an opinion, reasonably acceptable to
the Purchaser, of nationally recognized Tax counsel (which
counsel will be reasonably acceptable to the Purchaser),
concluding, based upon the reasoning underlying such private
letter ruling, decision, judgment, decree or other order, that it
is more likely than not that the Seller is entitled to make the
Election, together with non-cancelable insurance, all of the
premiums of which have been fully prepaid and that will pay to
the Purchaser or its Affiliates an amount equal to the amount to
be paid to the Seller as a consequence of having satisfied the
requirements of this sentence, plus interest and potential
penalties thereon in the event of a Final Determination (as
defined without regard to this sentence) that the Seller is not
qualified to make the Election on terms, including that the
expenses of obtaining any Final Determination are paid by the
insurer and the Purchaser is entitled to control any contest to
the same extent as set forth in Section 7.5.4 hereof, and from a
carrier (with at least an AA claims-paying ability rating from
Standard & Poors Rating Group and an A+ claims-paying rating from
A. M. Best & Co.) each reasonably acceptable to the Purchaser,
then the delivery of such opinion and insurance to the Reinsurer
will be treated for purposes of this Agreement as a Final
Determination that the Seller is entitled to make the Election.
If, following the Closing Date, the Seller will have provided to
the Purchaser an opinion, reasonably acceptable to the Purchaser,
of nationally recognized Tax counsel (which counsel will be
reasonably acceptable to the Purchaser), concluding, based on
(x) any statute enacted after the date hereof; (y) any published
IRS ruling or regulation promulgated after the date hereof,
addressing the treatment of moratorium charges similar to the
moratorium charges as adjustments to tax reserves; or (z) any
decision, judgment, decree or other Final Order of a court of
competent jurisdiction after the date hereof, addressing the
treatment of moratorium charges similar to the moratorium charges
as adjustments to tax reserves, that the Seller's treatment of
the moratorium charges for Tax reserving purposes as of the
Closing Date will more likely than not be considered appropriate
under the Code, together with non-cancelable insurance all of the
premiums of which have been fully prepaid and that will pay to
the Purchaser or its Affiliates an amount equal to the amount
paid to the Seller as a consequence of having satisfied the
requirements of this sentence, plus interest and potential
penalties thereon, in the event of a Final Determination (as
defined without regard to this sentence) that the Seller's
treatment of the moratorium charges (for tax reserving purposes)
is not appropriate on terms, including that the expenses of
obtaining any Final Determination are paid by the insurer and the
Purchaser is entitled to control any contest to the same extent
as set forth in Section 7.5.4 hereof, and from a carrier (with at
least an AA claims-paying rating from Standard & Poors and an A+
claims-paying rating from A.B. Best & Company) each reasonably
acceptable to the Purchaser, then the delivery of such opinion
and insurance will be treated for purposes of this Agreement as a
Final Determination that the treatment by the Seller of the
moratorium charges (for tax reserving purposes) is appropriate.
"Final Order" means an order or judgment of a court entered on
the docket, which has not been reversed, vacated or stayed and as
to which the time to appeal, petition for certiorari or move for
a new trial, reargument or rehearing has expired and as to which
no appeal, petition for certiorari or other proceedings for a new
trial, reargument or rehearing will then be pending or if an
appeal, writ of certiorari, new trial, reargument or rehearing
thereof has been sought, such order or judgment of the court
shall have been affirmed by the highest court to which such order
was appealed, or certiorari shall have been denied or a new
trial, reargument or rehearing shall have been denied or resulted
in no modification of such order, and the time to take any
<PAGE> 77
further appeal, petition for certiorari or move for a new trial,
reargument or rehearing shall have expired; provided, however,
the possibility that a motion under Rule 60 of the Federal Rules
of Civil Procedure, or similar rule or civil procedure of any
state, may be filed relating to such order will not cause such
order to lose its status as a Final Order.
"Final Reserve" is defined in Section 1.3.1.
"Final Reserve Assets" is defined in Section 1.3.1.
"First SunAmerica" is defined in the introductory paragraph.
"First SunAmerica Assumption Reinsurance Agreement" means the
Assumption Reinsurance Agreement to be delivered at Closing
substantially in the form of Exhibit A-2.
"FTC" is defined in Section 4.1.3.
"Fully Administered Qualified Plan" means each Qualified Plan
that uses, or has used since July 16, 1991, any of the Seller's
or Mutual Benefit's compliance services or that maintains, or on
or after July 16, 1991 maintained, a prototype plan sponsored by
the Seller or Mutual Benefit.
"GAAP" means United States generally accepted accounting
principles, consistently applied.
"GAAP Statements" is defined in Section 2.6.1.
"GAAS" means generally accepted actuarial standards as adopted by
the Actuarial Standards Board and the National Association of
Insurance Commissioners, as applicable, including Actuarial
Guidelines as found in the Financial Condition Examiners
Handbook, consistently applied.
"Governmental Authority" means any national government, any state
or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, including any
government authority, agency, department, board, commission,
court, tribunal or instrumentality of the United States, any
State of the United States, or any political subdivision thereof,
and any alternative dispute resolution tribunal with binding
authority.
"Grandfathered Premiums" means the premiums collected from the
policyholders of Reinsured Policies listed or required to be
listed on the delivery specified in clause (a) of Section 4.24 on
or prior to the 12 month anniversary of the Closing Date.
"Grandfathered Premiums Indemnity Amount" means an amount (that
is not less than zero) which will be calculated as follows: the
product of (a) 50% multiplied by (b) the remainder of
(i) $20,000,000 less (ii) Net Grandfathered Premiums.
"Grandfathering Ruling" is defined in Section 4.20.
"Group Pension Accounts" means the assets held by the Seller for
the benefit of its Group Pension Customers which are accounted
for in the Seller's annual report to contractholders as part of
MBL's group pension line of business, including any Tax Deferred
Annuity Arrangement or Qualified Plan, Qualified Plan Contract
and Other Plan.
"Group Pension Business" means the business that is accounted for
in the Seller's annual report to contractholders as the Seller's
group pension line of business.
"Group Pension Customer" means each customer on whose behalf
assets are held by the Seller or any former customer to whom the
Seller has any liabilities that, in each case are accounted for
<PAGE> 78
in the Seller's annual report to contractholders as part of the
Seller's group pension line of business. References to a Group
Pension Customer will not include non-related business of such
customer with the Seller or Mutual Benefit.
"Guaranteed Policy Enhancement Amount" means, with respect to any
Scheduled Vesting Date, (a) the amount vested on such Scheduled
Vesting Date, plus (b) the amount unvested but accelerated on
deaths between the previous Scheduled Vesting Date and such
Scheduled Vesting Date, if any, and therefore credited or paid,
the aggregate amount of which equals the applicable amounts
credited or paid as set forth in Schedule 10.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations thereunder.
"IBNR Reserve Amount" means $250,000, such amount to be a reserve
for liabilities incurred for deaths prior to the Closing Date but
not reported prior to the Transition Period Termination Date.
Deaths "reported" pursuant to the Social Security Sweep
procedures described in Section 5.13.2 will be deemed reported
prior to the Transition Period Termination Date for all purposes
under this Agreement.
"IBNR Settlement Amount" means a dollar amount calculated as
described in Section 5.13.2.
"IBNR Settlement Date" means the 10th Business Day after the
delivery by the Purchaser of its calculation of the IBNR
Settlement Amount.
"Impairment" is defined in the Joint Allocation Report.
"Indemnitee" is defined in Section 7.7.1.
"Indemnitor" is defined in Section 7.7.1.
"Indemnity Reinsurance Agreement" means the Indemnity Reinsurance
Agreement that is substantially in the form of Exhibit B.
"Independent Party" is defined in Section 1.3.2.
"Initial Calculation" is defined in Section 7.1.4.
"Insolvent Insurer Election Tax Indemnity" is defined in
Section 7.1.7.
"Insurance Liabilities" means the following liabilities with
respect to the Reinsured Policies only and no other liabilities
whatsoever: (a) the contractual liabilities and obligations
arising under the Reinsured Policies as evidenced by the written
policy forms and riders; (b) liability for the Policy
Enhancements in accordance with the terms of Section 4.12 not in
excess of the Policy Enhancements Amount as represented by the
Seller; (c) all liability for premium Taxes arising on account of
premiums paid or annuities purchased after the Closing Date;
(d) all amounts payable after the Closing Date for returns or
refunds of premiums under the Reinsured Policies; (e) all
liability for Commissions payable with respect to the Reinsured
Life Policies to or for the benefit of brokers and service
providers, including renewal Commissions and service fees, to the
extent that such amounts accrue after the Closing Date under the
terms of Commission Agreements that are Assigned Contracts; and
(f) all Guaranty Fund Assessments and similar charges imposed
with respect to the Reinsured Policies based on premiums paid
after the Closing Date. Without limiting the generality of the
foregoing, Insurance Liabilities do not include Excluded
Liabilities or Extra Contractual Obligations.
"Integrity Policy Enhancements Amount" means the portion of the
Policy Enhancements attributable to Policies ceded to Integrity
Life Insurance Company pursuant to reinsurance agreements, which
<PAGE> 79
amount will not exceed $5,000,000.
"Interest" is defined in Section 7.1.4.
"Investment Grade Security" means: (a) a security issued or
directly and unconditionally guaranteed by the United States
Government or issued by an agency thereof and backed by the full
faith and credit of the United States; (b) any corporate bond
that (i) is Marketable (as defined below); (ii) is rated by at
least two nationally recognized statistical rating organizations
and that does not have (A) a rating below BBB- by Standard &
Poor's Ratings Group, (B) a rating below Baa3 by Moody's
Investors Service, or (C) a rating below a comparable investment
grade by another nationally recognized statistical rating
organization; (iii) has a rating of at least category "2" by the
Securities Valuation Office, or any successor thereto, of the
National Association of Insurance Commissioners; and (iv) is not
in default. For purposes of the foregoing, "Marketable" means
securities (i) that will have a readily available public bid by
at least two broker/dealers in the OTC market and/or have a
posted bid price on listed markets and which carry no
restrictions as to their transferability; or (ii) that were sold
pursuant to Rule 144A of the Securities Act of 1933, as amended,
and for which (A) the initial issuance was at least $100 million,
(B) the sale was either through initial purchasers to qualified
institutional buyers or pursuant to a medium term notes facility,
and (C) there is a public CUSIP number. Notwithstanding the
foregoing, an instrument is not "Marketable" if (1) it is subject
to lock-ups or other legal or contractual restrictions on
transferability, including restrictions on the amount that can be
transferred, or (2) it is not registered under the Securities Act
of 1933, as amended, or freely transferable without registration
thereunder.
"Inward Reinsurance Agreements" means any binder, agreement,
treaty, certificate, retrocession or other instrument of
reinsurance assumed by the Seller with respect to any annuity
contract or life insurance policy of a type included in the
Reinsured Policies from any of the Reinsurers under the Outward
Reinsurance Agreements.
"IRS" means the Internal Revenue Service of the United States.
"Joint Allocation Report" is defined in the Recitals.
"Letter Ruling" is defined in Section 7.1.3.
"Licensed Software" means all computer software programs used in
the conduct of the Business that are either licensed by the
Seller from a third party or licensed by a third party and
assigned by such third party to the Seller in accordance with the
terms of such licenses.
"LICGC Contract" means the Accumulation Contract issued to the
Life Insurance Company Guaranty Corporation of New York in
exchange for payment to the Seller of payments under the Plan.
"Market Value" means with respect to each asset that is a Cash
Equivalent or Investment Grade Security, (a) that matures not
later than six months after Closing Date, the average of the
"bid" and "ask" price quotations, and (b) that matures later than
six months after the Closing Date, the "bid" price quotation, in
each case as provided by Goldman, Sachs & Co. as of the close of
business (New York City time) on the Business Day immediately
preceding the Closing Date, for settlement on the Closing Date.
"Material Adverse Effect" means (a) with respect to the Seller,
a material adverse effect on the business, property, financial
condition or results of operations of the Seller and its
Subsidiaries with respect to the Business taken as a whole or on
the Reinsured Policies or Transferred Assets or on the legality,
validity or enforceability of this Agreement or the Ancillary
<PAGE> 80
Agreements or on the consummation of the Transactions, and
(b) with respect to the Purchaser, a material adverse effect on
the business, property, financial condition or results of
operation of the Purchaser and its Subsidiaries taken as a whole
or on the legality, validity or enforceability of this Agreement
or the Ancillary Agreements or on the consummation of the
Transactions. In either case, effects attributable to (x) the
Transactions or (y) changes in general economic conditions,
including changes affecting the insurance industry, will not be
considered to be, or to contribute to, a Material Adverse Effect.
"Maximum Guaranteed Policy Enhancements Amount" means the amount
that is determined pursuant to Schedule 10 based on "Account
Value (or Statutory Reserves for Restructured Contracts in Pay
Status or Supplementary Contracts) Eligible at Vesting Date"
being greater than or equal to $4.3 billion.
"MEC's" means those Life Policies that qualify as modified
endowment contracts under 7702A of the Code.
"Modified COI Scale" is defined in Section 4.18.
"Mutual Benefit" is defined in the Recitals.
"Net Grandfathered Premiums" means the total premiums collected
from the policyholders of Reinsured Policies listed or required
to be listed on the delivery specified in clause (a) of
Section 4.24 on or prior to the 12-month anniversary of the
Closing Date, less any refund paid to such policyholders on or
prior to the 14-month anniversary of the Closing Date.
"New Money Accumulation Contract" means a contract covering
assets delivered to Mutual Benefit or the Seller on or after
July 16, 1991.
"New York Assumption Date" means the date on which the mandatory
simultaneous assumption of the New York Reinsured Policies
pursuant to the First SunAmerica Reinsurance Agreement becomes
effective, which will be no earlier than the Rehabilitation
Period Termination Date.
"New York Reinsured Annuity Contracts" means the Reinsured
Annuity Contracts listed on Schedule 2-B, as updated as of the
Closing Date, and as further updated as of the New York
Assumption Date.
"New York Reinsured Life Policies" means the Reinsured Life
Policies listed on Schedule 1-B as updated a of the Closing Date,
and as further updated as of the New York Assumption Date.
"NOLHGA" means the National Organization of Life and Health
Insurance Guaranty Associations.
"Non New York Reinsured Annuity Contracts" means the Reinsured
Annuity Contracts listed on Schedule 1-A, as updated as of the
Closing Date, and as further updated as of the New York
Assumption Date.
"Non New York Reinsured Life Policies" means the Reinsured Life
Policies listed on Schedule 2-A, as updated as of the Closing
Date, and as further updated as of the New York Assumption Date.
"Notice of Claim" is defined in Section 7.7.1.
"Organizational Documents" as to any Person, as applicable, means
its certificate or articles of incorporation or charter, by-laws,
trust agreement, partnership agreement and any other
organizational documents, as amended to date.
"Other Plan" means any individual or group annuity contract or
other contract, arrangement or plan, other than a Qualified Plan,
a Qualified Plan Contract or a Tax Deferred Annuity Plan, (a) the
<PAGE> 81
assets of which are held in whole or in part in the Group Pension
Accounts, or (b) with respect to which the Seller has any
responsibility to a Group Pension Customer, including Code
Section 457 plans and deferred compensation arrangements.
"Outward Reinsurance Adjustment Amount" means an amount equal to
the sum of the present value of the excess of future reinsurance
premium for each of the subsequent 30 years (a) charged by a
reinsurer of an Outward Reinsurance Agreement pursuant to any
amendment or modification to the Outward Reinsurance Agreement
after the date hereof, including in connection with giving
consent to the assignment of such Outward Reinsurance Agreement
to the Purchaser, over those charged by such reinsurer under the
Outward Reinsurance Agreement as in effect on the date hereof,
and (b) charged by each Substitute Outward Reinsurer over those
charged by the reinsurer of the original Outward Reinsurance
Agreement, in each case calculated based on an 11% discount rate
compounded annually. For purposes of calculating the Outward
Reinsurance Adjustment Amount, the reinsurance premium under both
the original Outward Reinsurance Agreement and the modified
Outward Reinsurance Agreement or the Substitute Outward
Reinsurance Agreement, as the case may be, will be based on the
Reinsured Life Policies as of the end of the second month
preceding the Closing Date and as projected using persistency
assumptions outlined in the "Actuarial Appraisal of MBL Life
Assurance Corporation projected as of June 30, 1998" prepared by
Coopers & Lybrand L.L.P.
"Outward Reinsurance Agreements" means any binder, contract,
agreement, treaty, certificate, retrocession, understanding or
other instrument of reinsurance ceded by the Seller, other than
the Assumption Reinsurance Agreements or the Indemnity
Reinsurance Agreements, in respect of any Reinsured Policy.
"Outward Reinsurance Escrow Account" is defined in the Escrow
Agreement.
"Outward Reinsurance Escrow Amount" means an amount determined
pursuant to Section 5.16.2, comprised of cash and Cash
Equivalents, each valued at their respective Value as of the
Closing Date, and deposited by the Seller on the Closing Date in
the Outward Reinsurance Escrow Account as defined in and
established pursuant to the Escrow Agreement.
"Outward Reinsurer" means a reinsurer under an Outward
Reinsurance Agreement or a Substitute Outward Reinsurance
Agreement, as applicable.
"Owned Software" means all computer software programs used in the
conduct of the Business that are owned by the Seller.
"Participating Guaranty Association" means a life and health
insurance guaranty association (or other entity performing
similar functions) established under the laws of any jurisdiction
that is a party to the Participation Agreement.
"Participation Agreement" means the Third Amended Participation
Agreement, dated January 24, 1994, as amended, among the Seller,
Mutual Benefit, the Commissioner, NOLHGA and each of the
Participating Guaranty Associations.
"Permits" means all licenses, permits, orders, consents,
approvals, registrations, authorizations, qualifications and
filings with any Governmental Authority or pursuant to any
Applicable Laws.
"Petition for Court Approval" means the petition filed by the
Seller with the Court to approve inter alia, the proposed
amendments to the Plan and the Rehabilitation Documents and
certain other orders as described in Exhibit I, the consummation
of the Transactions to be completed at Closing, and the Policy
Enhancements Procedures.
<PAGE> 82
"Person" means any individual, partnership, limited liability
company, corporation, unincorporated organization or association,
trust, or other entity.
"Plan" is defined in the Recitals.
"Policies" means all forms of insurance policies, annuity
contracts and guaranteed interest contracts, and amendments and
riders thereto.
"Policy Enhancements" means the enhancements described in Article
6 of the Settlement Agreement (as such Settlement Agreement will
be modified pursuant to the terms of this Agreement) to provide
Policyholders reimbursement of a portion of previously impaired
amounts which are in the aggregate the amount of the sum of the
Policy Enhancements Amount and the Integrity Policy Enhancements
Amount.
"Policy Enhancements Amount" means an amount equal to the total
liability for Policy Enhancements as determined by the Seller
pursuant to the terms of the Plan and the Rehabilitation
Documents as of the Closing Date, excluding the Integrity Policy
Enhancements Amount.
"Policy Enhancements Calculation Adjustment Amount" means an
amount equal to 15% of the remainder, if any, of (a) the Policy
Enhancements Amount as of the Closing Date minus (b) the
remainder of (i) $275,000,000, minus (ii) the amount of the
Integrity Policy Enhancements Amount.
"Policy Enhancements Endorsements" is defined in Section 4.12.4.
"Policy Enhancements Endorsements Escrow Account" is defined in
the Escrow Agreement.
"Policy Enhancements Endorsements Escrow Amount" is defined in
Section 4.12.5.
"Policy Enhancements Procedures" means the detailed procedures
for calculation and administration of the Policy Enhancements
(including the Policy Enhancements Amount and the Additional
Policy Enhancements Amount) as submitted with the Petition for
Court Approval.
"Policyholder" means any holder, owner or beneficiary of a
Reinsured Policy.
"Policyholder Disclosure Statement" means the statement provided
by the Seller to its policyholders notifying them of the
Transactions.
"Preserved Replacement Policy" is defined in Section 5.10.1.
"Purchase Opt-Out Contracts" means the Accumulation Contracts
issued to Participating Guaranty Associations (other than the
LICGC Contract) in exchange for payment to the Seller of opt-out
payments under the Plan.
"Purchaser" is defined in the introductory paragraph; provided,
however, for purposes of all Tax matters, including Section 7.1,
any reference to the "Purchaser" will be deemed to mean the
Purchaser and its Subsidiaries, including ANLIC and First
SunAmerica, unless the context otherwise clearly indicates.
"Purchaser's Disclosure Schedule" means the Disclosure Schedule
delivered by the Purchaser on the date hereof. Section numbers
in the Purchaser's Disclosure Schedule refer to the corresponding
section numbers in this Agreement and, together with all matters
under such heading will be deemed to qualify only that
Section unless any matter under any heading is explicitly stated
to qualify other Sections.
<PAGE> 83
"Qualification Opinion" is defined in Section 7.1.6.
"Qualified Contract" means an individual or group annuity
contract (a) pursuant to which the assets of a Qualified Plan or
Tax Deferred Annuity Arrangement are held in its Group Pension
Accounts, or (b) with respect to which the Seller has any
responsibility to a Group Pension Customer.
"Qualified Plan" means a plan intended to qualify under
Section 401(a) or 403(a) of the Code, (a) the assets of which are
held in whole or in part in the Group Pension Accounts or
(b) with respect to which the Seller has any responsibility to a
Group Pension Customer.
"Reaffirmed Contract" means any Contract or portion of a Contract
that is reaffirmed by Mutual Benefit and then transferred and
assigned to, and assumed and reinsured by the Seller, as provided
in the Plan and in Articles 2 and 4 of the Rehabilitation
Agreement.
"Rehabilitation Agreement" means the Third Amended Agreement in
Connection with the Rehabilitation of The Mutual Benefit Life
Insurance Company between Mutual Benefit and the Seller dated
January 24, 1994.
"Rehabilitation Documents" is defined in Section 2.21.1.
"Rehabilitation Period" means the period commencing on April 29,
1994 and ending on December 31, 1999, as modified pursuant to the
terms of this Agreement to end on the Rehabilitation Period
Termination Date.
"Rehabilitation Period Termination Date" means the date on which
the Rehabilitation Period ends as accelerated to the Transition
Period Termination Date pursuant to the Court's approval of the
Transactions.
"Reinstated Policies" is defined in the Indemnity Reinsurance
Agreement.
"Reinstatement Date" with respect to any Reinstated Policy means
the date on which such Reinstated Policy is deemed to be in force
in accordance with the terms of such Reinstated Policy.
"Reinsurance Agreement" means the Third Amended and Restated
Reinsurance and Participation Agreement, dated January 24, 1994,
as amended, among the Seller and each of the Reinsurers.
"Reinsurance Premium" is defined in Section 1.1.2.
"Reinsured 401(k) Contracts" means (a) 401(k) Contracts for which
assets are held only in the Seller's general account and for
which the Seller does not provide services; and (b) 401(k)
Contracts for which assets are held only in the Seller's general
account and for which the Seller does provide services if and
only if the Court has not approved their termination in
accordance with Section 4.11.
"Reinsured Annuity Contracts" means the Annuity Contracts listed
on Schedule 2-A, Schedule 2-B and Schedule 2-C, as updated as of
the Closing Date.
"Reinsured Life Policies" means the life insurance policies
listed on Schedule 1-A, Schedule 1-B, and Schedule 1-C, as
updated as of the Closing Date.
"Reinsured Policies" means (a) Reinsured Life Policies, Reinsured
Annuity Contracts and Reinsured 401(k) Contracts in effect as of
the Closing Date; (b) any Reinstated Policy in effect as of the
Reinstatement Date; and (c) any Resurrected Policy in effect as
of the Resurrection Date. The term Reinsured Policies will also
include all certificates and participation agreements in effect
<PAGE> 84
as of the Closing Date (or in the case of Reinstated Policies or
Resurrected Policies, as of the Reinstatement Date or the
Resurrection Date, as applicable) issued in accordance with the
terms of such Reinsured Life Policies, Reinsured Annuity
Contracts, Reinsured 401(k) Contracts, Reinstated Policies and
Resurrected Policies (including all supplements, endorsements,
riders and ancillary agreements in connection therewith).
"Reinsurers" means the reinsurers named in Schedule B to the
Reinsurance Agreement.
"Remaining Outward Reinsurance Agreement" is defined in
Section 5.16.1.
"Remaining Outward Reinsurer" is defined in Section 5.16.1.
"Remedy Compromise Adjustment Amount" means $2,580,000, which
amount is equal to 3% of the sum of the Base Ceding Commission
less the Claims Escrow Amount.
"Replacement Policy" is defined in Section 5.10.2.
"Representatives" means, with respect to any Person, such
Person's employees, officers, directors, legal counsel,
investment bankers, accountants, actuaries and other agents.
"Reserve" means an amount equal to (a) the sum of the Statutory
Values of all the Reserve Liabilities in respect of the Reinsured
Policies, plus (b) the Policy Enhancements Amount, plus (c) the
IBNR Reserve Amount, all of which are listed in Schedule 5.
"Reserve Liabilities" is defined in Section 2.13.
"Reserve Liabilities Adjustment Amount" means an amount equal to
the sum of (a) (i) 1% of the Base Ceding Commission multiplied by
(ii) a fraction, (x) the numerator of which is a number equal to
the basis point decline, from and excluding 300 basis points to
and including 500 basis points, of the aggregate Reserve
Liabilities as of the Closing Date (the "Closing Date Reserve
Liabilities") from the aggregate Reserve Liabilities as of
December 31, 1997 (calculated in accordance with the December 31,
1997 Audited SAP Statements, the "Base Reserve Liabilities"), and
(y) the denominator of which is 100, plus (b) (i) 2% of the Base
Ceding Commission multiplied by (ii) a fraction, (1) the
numerator of which is a number equal to the basis point decline,
from but excluding 500 basis points to and including 800 basis
points, of the Closing Date Reserve Liabilities from the Base
Reserve Liabilities, and (2) the denominator of which is 100. In
addition, if the Closing Date is after January 1, 1999, the
Reserve Liabilities Adjustment Amount will be increased by an
amount equal to the sum of (A) 5% of the amount by which the
Closing Date Reserve Liabilities have declined when compared to
the Base Reserve Liabilities to the extent such decline is from
but excluding 800 basis points to and including 1100 basis
points, plus (B) 7% of the amount by which the Closing Date
Reserve Liabilities have declined when compared to the Base
Reserve Liabilities to the extent such decline is from but
excluding 1100 basis points to and including 1500 basis points.
For example, if the Closing Date Reserve Liabilities are 98% of
the Base Reserve Liabilities, the Reserve Liabilities Adjustment
Amount is zero. However, if the Closing Date Reserve Liabilities
are 93.5% of the Base Reserved Liabilities, the Reserve
Liabilities Adjustment Amount is the sum of (a) 1% of the Base
Ceding Commission multiplied by 2, plus (b) 2% of the Base Ceding
Commission multiplied by 1.5. Assuming the Base Ceding
Commission is $131,000,000, this example would yield a Reserve
Liabilities Adjustment Amount of $6,550,000. If the Closing Date
Reserve Liabilities are 88% of the Base Reserve Liabilities and
the Closing Date is after January 1, 1999, assuming the same Base
Ceding Commission and Base Reserve Liabilities of $4 billion, the
Reserve Liabilities Adjustment Amount is the sum of (a) 1% of the
Base Ceding Commission multiplied by 2, plus (b) 2% of the Base
<PAGE> 85
Ceding Commission multiplied by 3, plus (c) .05 multiplied by the
product of $4 billion multiplied by .03 (i.e., the 300 basis
point additional decline calculated at 5%), plus (d) .07
multiplied by the product of $4 billion multiplied by .01 (i.e.,
the 100 basis point additional decline calculated at 7%). This
example would yield a Reserve Liabilities Adjustment Amount of
$19,280,000.
"Reserved Value Share" is defined in Section 5.2.2.
"Resident" means, with respect to a jurisdiction, Persons
residing or domiciled in such jurisdiction as of the referenced
date; provided, that certain Reinsured Annuity Contracts that are
group annuity contracts for which the plan sponsor or custodian
is a Resident of another jurisdiction but the majority of
participants are Residents of New York (all of which are
indicated on the supplement as of June 30, 1998 to Schedule 2-
C) will be deemed to be held by Residents of New York.
"Restructured Annuity Contract" means the annuity contracts that
are Restructured Contracts.
"Restructured Contract" means any Contact or portion of a
Contract that is or has been restructured by Mutual Benefit, and
then transferred and assigned to, and assumed and reinsured by
the Seller as provided in the Plan and Articles 2 and 4 of the
Rehabilitation Agreement.
"Restructured Contract in Pay Status" means a Restructured
Contract that is a Contract in Pay Status.
"Restructured Life Policies" means the life insurance policies
that are Restructured Contracts.
"Resurrected Policy" means any Policy that is considered on the
Calculation Date to be an Excluded Policy under clause (e) of the
definition of Excluded Policies but for which the Seller
subsequently receives a notice that the death claim with respect
to such Policy was made in error.
"Resurrection Date" with respect to any Resurrected Policy means
the date on which the Seller transfers to ANLIC and First
SunAmerica, as applicable, cash and Cash Equivalents with an
aggregate Value equal to the Account Value with respect to such
Resurrected Policy.
"Retained Books and Records" is defined in Section 5.1.3.
"SAP" means the statutory accounting principles and practices
required or permitted for life insurance companies by Applicable
Laws of the National Association of Insurance Commissioners and
the insurance regulatory authority in the State of New Jersey, as
the case may be, consistently applied throughout the specified
period and in the immediately prior comparable period.
"SAP Statements" is defined in Section 2.6.3.
"Scheduled Vesting Date" means any of January 1, 2000, June 30,
2001, June 30, 2002, or June 30, 2003.
"Seller" is defined in the introductory paragraph.
"Seller's Disclosure Schedule" means the Disclosure Schedule
delivered by the Seller on the date hereof. Section numbers in
the Seller's Disclosure Schedule refer to the corresponding
section numbers in this Agreement and, together with all matters
under such heading, will be deemed to qualify only that
Section unless any matter under any heading is explicitly stated
to qualify other Sections.
"Seller's Separate Account B" means the separate account of the
Seller with respect to assets relating to the Wrapped
<PAGE> 86
Accumulation Contracts.
"Seller Separate Accounts" means Seller's Separate Account B and
the separate accounts of the Seller with respect to assets
relating to the Variable Annuities, all of which accounts are
listed on Schedule 6.
"Separate Account Contract" means a variable life or annuity
Contract or any Contract to the extent that assets held under
such Contacts are allocated to one or more Separate Accounts,
except that the term "Separate Account Contract" will not include
a Wrapped Accumulation Contract.
"Settlement Agreement" is defined in the Recitals.
"Severance Plan" is defined in Section 2.16.
"Social Security Sweep" means the quarterly listing published by
the Untied States Social Security Administration of American
deaths for the two years prior to Closing.
"Statutory Statements" is defined in Section 2.6.2.
"Statutory Value" means the value of an asset or liability
determined in accordance with SAP, utilizing the same accounting
principles, consistently applied, as those used in the
preparation of the December 31, 1997 Audited SAP Statements.
"Stock Trust" is defined in the Recitals.
"Stock Trust Agreement" is defined in the Recitals.
"Subsidiary" means, with respect to any Person, any other Person
of which more than 50% of the securities or other ownership
interests having by their terms ordinary voting power to elect a
majority of the board of directors, or other Persons performing
similar functions, of such other Person, is directly or
indirectly owned or controlled by such Person, by one or more of
such Person's Subsidiaries or by such Person and any one or more
of such Person's Subsidiaries.
"Substitute Outward Reinsurance Agreement" is defined in
Section 4.7.
"Substitute Outward Reinsurer" is defined in Section 4.7.
"Tax Deferred Annuity Arrangement" means an individual or group
annuity contract intended to satisfy the requirements of
Section 403(b) of the Code, whether or not subject to the
requirements of ERISA, (a) the assets of which are held in whole
or in part in the Group Pension Accounts, or (b) with respect to
which the Seller has any responsibility to a Group Pension
Customer.
"Tax Reserves Indemnity Escrow Account" is defined in the Escrow
Agreement.
"Tax Reserves Indemnity Escrow Amount" means $1,500,000,
comprised of cash and Cash Equivalents, each valued at their
respective Value as of the Closing Date, and deposited by the
Seller on the Closing Date in the Tax Reserves Indemnity Escrow
Account as defined and established pursuant to the Escrow
Agreement.
"Tax Returns" means all federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms and
information returns and any amendments to any of the foregoing
relating to Taxes.
"Taxes" means all federal, state, local and foreign taxes, and
other assessments of a similar nature (whether imposed directly
or through withholding), including any interest, additions to
<PAGE> 87
tax, or penalties applicable thereto.
"Terminating Policies" is defined in Section 5.5.
"Third Party Administration Agreements" is defined in
Section 2.24.
"Third Party Claim" means any demand or Action for which an
Indemnitee would have a Loss that is asserted against or sought
to be collected from the Indemnitee by any Person other than a
party hereto or an Affiliate thereof.
"Transactions" means the transactions contemplated by this
Agreement and the Ancillary Agreements.
"Transferred Assets" is defined in Section 1.1.5.
"Transferred Reserve Assets" means the assets listed on
Schedule 3, with such changes therein, additions thereto or
deletions therefrom as are permitted or required pursuant to the
terms of Section 1.1.3 or as otherwise agreed by the Seller and
the Purchaser in writing. The Transferred Reserve Assets listed
on Schedule 3 consist of: (a) cash; (b) Cash Equivalents;
(c) Investment Grade Securities; (d) all of the Seller's rights
and interests under the Reinsured Policies to receive principal
and interest paid on Reinsured Policy loans on or after the
Closing Date; (e) amounts due from reinsurers under the Outward
Reinsurance Agreements and Substitute Outward Reinsurance
Agreements that are transferred as Assigned Contracts on the
Closing Date pursuant to Section 1.1.4, in each case due in
accordance with the terms of such Outward Reinsurance Agreements
and Substitute Outward Reinsurance Agreements; and (f) other
receivables listed on Schedule 3 in respect of the Reinsured
Policies.
"Transition Period" means the period from the Closing Date to and
including the Transition Period Termination Date.
"Transition Period Termination Date" means the day that is the
six month anniversary of the Closing Date or, if not a Business
Day, the next succeeding Business Day.
"Transition Services Agreement" means the Transition Services
Agreement to be entered into between the Seller and ANLIC at the
Closing, substantially in the form of Exhibit D.
"Trustee" is defined in the Recitals.
"Unallocated Accumulation Contract" means any Accumulation
Contract for which allocation to individual participants is not
provided by the Policyholder or otherwise required for the
administration of such Accumulation Contract.
"Uncovered Month" is defined in Section 5.16.3.
"United States Treasury Rate" means the five-year treasury
constant maturity rate on U.S. government securities as reported
in the Federal Reserve Statistical Release H.15(519) on a given
date.
"Value" means with respect to (a) cash, the actual amount of
immediately available funds; (b) Cash Equivalents, Market Value;
(c) Investment Grade Securities, Market Value; (d) receivables
with respect to Reinsured Policy loans, Statutory Value;
(e) receivables with respect to Outward Reinsurance Agreements,
Statutory Value; and (f) other receivables, Statutory Value.
"Value Sharing Percentage" means the percentages set forth in
Article 5 of the Settlement Agreement.
"Variable Annuities" means all variable Annuity Contracts with
respect to which assets are held in any of the Seller's Separate
<PAGE> 88
Accounts.
"Wrapped Accumulation Contracts" means all Restructured Annuity
Contracts with respect to which assets are held in Seller's
Separate Account B.
10. GENERAL PROVISIONS
10.1 Modification; Waiver. This Agreement can be modified only
by agreement of all of the parties hereto. Any provision of this
Agreement can be waived at any time by the party entitled to the
benefits thereof, but such waiver must be in writing. Every
amendment must be in writing and designated as an amendment and
signed by all parties. No failure by any party to insist on the
strict performance of any provision of this Agreement or any
Ancillary Agreement, or to exercise any right or remedy, will be
deemed a waiver of such performance, right or remedy, or of any
other provision of this Agreement or any Ancillary Agreement.
10.2 Entire Agreement. This Agreement, including the Schedules
and Exhibits (which are hereby incorporated by reference and made
a part hereof), together with the Ancillary Agreements, represent
the entire agreement of the parties with respect to the subject
matter hereof. It supersedes all other prior agreements,
understandings, statements, representations and warranties, oral
or written, express or implied, between the parties hereto and
their respective Affiliates and Representatives in respect of the
subject matter hereof (including the Confidential Memorandum,
dated October 1997, with respect to the Seller, and any
supplements thereto). This Agreement does not, however, as to
the Seller's business that is not part of the Business, supersede
the Confidentiality Agreement, which the parties expressly
reaffirm.
10.3 Termination By the Parties.
10.3.1 Events Causing Termination. This Agreement can be
terminated:
(a) at any time prior to the Closing Date by mutual consent of
the Purchaser and the Seller;
(b) at any time prior to the Closing by the Purchaser upon ten
days notice to the Seller if the conditions set forth in Sections
6.2.4 and 6.2.5 have not been fulfilled within 15 Business Days
after the date hereof, or the condition set forth in
Section 6.2.6 has not been fulfilled within the later of (i) 15
days after the date hereof or (ii) the date the Petition for
Court Approval is first filed with the Court, and, in each case,
have not been waived by the Purchaser or cured during said notice
period;
(c) at any time prior to the Closing by the Purchaser upon
notice to the Seller if (i) the Court fails to approve the
overbid procedures set forth in Section 4.16 in all material
respects prior to the later of (x) 75 days after the date of this
Agreement or (y) the date on which an Acquisition Proposal is
presented to the Seller or the Court, or (ii) an Acquisition
Proposal is entertained by the Seller or the Court prior to
approval of the overbid procedure set forth in Section 4.16 in
all material respects, or (iii) an Acquisition Proposal that does
not comply with the requirements of Section 4.16 is entertained
by the Seller or the Court at any time;
(d) by the Purchaser or the Seller, upon notice to the other, if
the Closing has not taken place on or before April 1, 1999 or
such later date as the parties agree to, provided that the
non-occurrence of the Closing is not attributable to a breach
hereof by the party seeking termination;
(e) at any time prior to the Closing by the Seller, upon ten
days notice to the Purchaser, if any of the conditions set forth
<PAGE> 89
in Sections 6.2 and 6.3 have become incapable of fulfillment and
have not been waived by the Seller or cured during said notice
period, provided the non-fulfillment of such conditions is not
attributable to a breach hereof by the Seller; or
(f) at any time prior to the Closing by the Purchaser, upon ten
days notice to the Seller if: (i) any of the conditions set forth
in Sections 6.2 and 6.4 have become incapable of fulfillment and
have not been waived by the Purchaser or cured during said notice
period, provided the non-fulfillment of such conditions is not
attributable to a breach hereof by the Purchaser; (ii) the Seller
or any of its Representatives violates Section 4.4 or 4.14, 4.15
or 4.16; or (iii) an event or condition occurs that has resulted
in or would reasonably be expected to result in a Material
Adverse Effect that is incapable of cure and has not been waived
by the Purchaser.
10.3.2 Automatic Termination.
(a) If the Court approves the overbid procedures as set forth in
Section 4.16 in all material respects and if the Seller has
complied in all respects with Sections 4.14, 4,15 and 4.16, this
Agreement will automatically terminate, without any further
action taken by the parties, upon the election of the Purchaser
not to match the Acquisition Proposal of a Competitive Bidder
pursuant to paragraph (j) of Section 4.16.
(b) If the Court does not approve the overbid procedures as set
forth in Section 4.16 in all material respects and the Purchaser
does not terminate this Agreement as a result of such failure,
then this Agreement will immediately terminate, without any
further action taken by the parties, if the Seller has after the
date hereof, pursuant to a bidding procedure approved by the
Court or any other bid or offer required to be entertained by the
Court, entered into a definitive agreement or agreements with
another Person regarding an Acquisition Proposal.
10.3.3 Effect of Termination. If this Agreement is terminated,
no party (or any of their respective Representatives) will have
any further liability hereunder, except as set forth in the next
sentence and except with respect to a breach occurring prior to
the termination. The Confidentiality Agreement, this
Section 10.3, Section 4.14.1, Section 4.14.2, Section 4.14.3,
Section 4.22, and second and third sentences of Section 6.1,
Section 8.2, Section 10.5 and Section 10.11 will survive any
termination and remain in full force and effect.
10.4 Further Actions. Each party will execute and deliver such
certificates and other documents and take such other commercially
reasonable actions as may reasonably be requested by the other
party in order to consummate or implement the Transactions.
10.5 Notices. All notices, requests, demands and other
communications hereunder must be in writing and will be deemed to
have been duly given or made as follows: (a) if sent by
registered or certified mail in the United States return receipt
requested, upon receipt; (b) if sent by reputable overnight air
courier (such as DHL or Federal Express), two Business Days after
delivery to the courier; (c) if sent by facsimile transmission,
with a copy sent on the same day in the manner provided in (a) or
(b) above, when transmitted and receipt is confirmed by
telephone; or (d) if actually personally delivered, when
delivered. Any such materials must be delivered as follows:
if to the Seller: if to the Purchaser, ANLIC or First
SunAmerica:
MBL Life Assurance
Corporation SunAmerica Inc.
520 Broad Street 1 SunAmerica Center
Newark, New Jersey 07102 Los Angeles, CA
Attention: Alan J. Bowers 90067-6022
Fax Number: (973) 268-4319 Attention: Jay S. Wintrob
Fax Number: (310) 772-6604
<PAGE> 90
with a copy to:
with a copy to:
Debevoise & Plimpton
875 Third Avenue O'Melveny & Myers LLP
New York, New York 10022 1999 Avenue of the Stars, #700
Attn: Thomas M. Kelly, Esq. Los Angeles, CA 90067
Fax Number: (212) 909-6836 Attention: Kent V. Graham, Esq.
Fax Number: (310) 246-6779
or to such other address or to such other person as either
party hereto last designated by notice to the other party.
10.6 Assignment. This Agreement is binding upon and will inure
to the benefit of the parties hereto and their respective
successors and permitted assigns, but will not be assignable, by
operation of law or otherwise, by either party hereto without the
prior written consent of the other party, except that the
Purchaser may assign all or part of its, ANLIC's or First
SunAmerica's rights and obligations to any Subsidiary of the
Purchaser, provided that no such assignments will relieve the
Purchaser of its obligations hereunder. Any purported assignment
or other transfer made in violation of this Section 10.6 will be
void and unenforceable.
10.7 No Third-Party Beneficiaries. Nothing in this Agreement
will confer any rights or remedies upon any Person not a party or
a successor or permitted assignee of a party to this Agreement,
nor does anything in this Agreement relieve or discharge any
obligation or liability of any third person to any party. No
provision of this Agreement gives any third person any right of
subrogation or action over or against any party to this
Agreement.
10.8 Counterparts. This Agreement may be executed in
counterparts, all of which will constitute one and the same
instrument.
10.9 Certain Rules of Construction.
10.9.1 Headings, etc. All Article, Section, Subsection or
paragraph titles or other captions in this Agreement are for
convenience only, are not part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any of
its provisions.
10.9.2 General Concepts. Unless the context otherwise
requires: (a) a term has the meaning assigned to it; (b) an
accounting term not otherwise defined has the meaning assigned to
it in accordance with GAAP; (c) "or" is not exclusive; (d) words
in the singular include the plural, and words in the plural
include the singular; (e) "amended," with reference to a law,
statute, rule or regulation, is deemed to be followed by "from
time to time"; (f) "herein," "hereof" and other words of similar
import refer to this Agreement as a whole and not to any
particular Article, Section, Subsection, paragraph, clause, or
other subdivision; (g) all references to "Appendix," "clause,"
"Exhibits," "Section," "Subsection," "Paragraph" or "Article"
refer to the particular Appendices, clauses, Exhibits, Sections,
Subsections, Paragraphs or Articles in or attached to this
Agreement; (h) "desirable" includes "necessary," "advisable" and
"appropriate"; and (i) "including" or "includes," when following
any general provision, sentence, clause, statement, term or
matter, will be deemed to be followed by ", but not limited to,"
and ", but is not limited to," respectively.
10.9.3 Discretion. If in this Agreement a Person is permitted
or required to make a decision or determination: (a) in its
"discretion" or "sole discretion" or under a grant of similar
authority or latitude, the Person will be entitled to consider
any interests and factors as it desires, including its own
interests; (b) in its "good faith," in a "commercially
reasonable" manner, using "reasonable best efforts," or under
<PAGE> 91
another express standard, the Person will act under that express
standard and will not be subject to any other or different
standards imposed by this Agreement or otherwise; or (c) and no
standard is expressed, the Person will apply relevant provisions
of this Agreement in making the decision or determination.
10.9.4 Interpretation. If any claim is made by a party
relating to any conflict, omission or ambiguity in the provisions
of this Agreement, no presumption or burden of proof or
persuasion will be implied because this Agreement was prepared by
or at the request of any party or its counsel. The parties waive
any statute or rule of law to the contrary.
10.10 Knowledge. Any references to the Seller's knowledge or
the knowledge of the Seller will mean the actual knowledge of
those individuals listed on Schedule 11 after reasonable inquiry.
Any references to the Purchaser's knowledge or the knowledge of
the Purchaser will mean the actual knowledge of those individuals
listed on Schedule 12 after reasonable inquiry.
10.11 Severability. If any provision of this Agreement is
held to be illegal, invalid, or unenforceable under any present
or future Applicable Law, and if the rights or obligations of the
parties under this Agreement will not be materially and adversely
affected thereby, (a) such provision will be fully severable;
(b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised
a part hereof; (c) the remaining provisions of this Agreement
will remain in full force and effect and will not be affected by
the illegal, invalid, or unenforceable provision or by its
severance herefrom; and (d) in lieu of such illegal, invalid, or
unenforceable provision, there will be added automatically as a
part of this Agreement a legal, valid, and enforceable provision
as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
<PAGE> 92
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
MBL LIFE ASSURANCE CORPORATION
By:
--------------------------------
Name:
Title:
SUNAMERICA INC.
By:
--------------------------------
Name:
Title:
ANCHOR NATIONAL LIFE INSURANCE
COMPANY
By:
--------------------------------
Name:
Title:
FIRST SUNAMERICA LIFE INSURANCE
COMPANY
By:
--------------------------------
Name:
Title:
<PAGE> 93
Acknowledgement and Agreement of the Commissioner
The Commissioner, in her relevant capacities as
rehabilitator/liquidator of Mutual Benefit and as trustee of the
Stock Trust, hereby acknowledges and consents to the foregoing
agreement and to the execution, delivery and performance of the
foregoing agreement by the Seller.
Further, the undersigned agrees that she will, unless
otherwise required by law or legal responsibility: (a) not
approve any arrangement or agreement with any third party that
(i) would restrict or prevent the Purchaser's collection of the
amounts set forth in Sections 4.14.1, 4.14.2, or 4.22 when due;
and (ii) would permit a sale of all or substantially all of the
Business (including the Reinsured Policies and the Transferred
Assets) in one or a series of transactions without providing for
the payment to the Purchaser of such amounts; (b) not initiate or
support, directly or indirectly, any legal or administrative
proceeding or other attempt to modify or set aside the provisions
of Sections 4.14, 4.15, or 4.16; (c) to the extent necessary,
join in and/or file affidavits or other documents to support the
Seller's motion contemplated by Section 4.16 in the same
capacities in which she executed this Acknowledgement and
Agreement; and (d) take all actions as are reasonably necessary
to obtain from Governmental Authorities any consents or approvals
that are necessary to consummate the Transactions, including
correspondence, filings and other communications encouraging
approval by the insurance commissioners of other jurisdictions.
Dated: July ___, 1998
-----------------------------------
Elizabeth E. Randall
New Jersey Commissioner
of Banking and Insurance
<PAGE> 94
SCHEDULE 7
Allocation Procedures for Ceding Commission
Allocation of Ceding Commission between Reinsured Life Policies
and Reinsured Annuity Contracts
The initial allocation of Ceding Commission and Final Ceding
Commission to Reinsured Life Policies and Reinsured Annuity
Contracts will be made assuming that each of the Seller and the
Purchaser makes an Election. The allocation to each of the
Reinsured Life Policies and Reinsured Annuity Contracts will be
calculated so that Ceding Commission that results has the same
internal rate of return (IRR) for each of Reinsured Life Policies
and Reinsured Annuity Contracts, where such determination of IRR
considers the projected profits of the Reserves, the required
capital and investment income thereon, and one time expenses for
each block of business, all on an after-tax basis.
As amounts are released from escrow pursuant to Section 7.1, the
allocation to each of the Reinsured Annuity Contracts and
Reinsured Life Polices will be recalculated using the assumptions
described in the preceding paragraph.
Allocation of Ceding Commission between Non New York Reinsured
Life Policies and New York Reinsured Life Policies
Allocation between Non New York Reinsured Life Policies and New
York Reinsured Life Policies will be made pro-rata on the basis
of the total Account Values thereof or, for the Policies that do
not provide for accumulation of Account Value, the Statutory
Reserves of the respective Reinsured Life Policies; provided,
however, such allocation will be adjusted as appropriate to
reflect the elapsed time period between the Closing Date and the
New York Assumption Date.
Allocation of Ceding Commission between Non New York Reinsured
Annuity Contracts and New York Reinsured Annuity Contracts
Allocation between the Non New York Reinsured Annuity Contracts
and New York Reinsured Annuity Contracts will be made pro-rata on
the basis of the total of Account Value for Covered Accumulation
Contracts and Statutory Reserves for Contracts in Pay Status of
the respective Reinsured Annuity Contracts; provided, however,
such allocation will be adjusted as appropriate to reflect the
elapsed time period between the Closing Date and the New York
Assumption Date.
Allocation of Transferred Reserve Assets
With respect to all Transferred Reserve Assets that relate to
specific Policies or groups of Policies, an updated Schedule 3 as
of the New York Assumption Date indicates which of such assets
relate to New York Life Policies and Annuity Contracts.
<PAGE> 95
SCHEDULE 8
Assumptions Regarding Illustrations
In the preparation of Policyholder illustrations, the Seller will
use the following assumptions from the date of this Agreement
through the Closing Date:
- Credited Interest Rates After the Rehabilitation Period
Termination Date: The assumed credited rates for all Reinsured
Life Policies other than "reduced paid up" policies will be 5.0%.
The assumed credited rate will be adjusted upward to the nearest
.25% for decreases and downward to the nearest .25% for increases
in the United States Treasury Rate from March 12, 1998 as
compared to the United States Treasury Rate on the Rehabilitation
Period Termination Date on all Account Values other than Account
Values resulting from premiums assumed to be deposited after the
Rehabilitation Period Termination Date ("Post Moratorium
Premiums"). Post Moratorium Premiums will, for one year from
receipt, be credited at a rate .50% higher than that generally
credited on the Account Value.
The assumed credited rates for all Reinsured Life Policies
that are "reduced paid up" policies will be 4.0%.
From time to time the Purchaser will notify the Seller of
the crediting rate to use on a periodic basis, but in any
case no more frequently than once each month.
- Cost of Insurance Rates and Expense Charges After the
Rehabilitation Period Termination Date: The current "Preferred"
COI scales as modified by mutual agreement of the Seller and the
Purchaser.
- End of the Rehabilitation Period: Beginning on the Closing
Date, the Rehabilitation Period will be projected to end on the
Transition Period Termination Date.
- Disclosures: From the date of this Agreement, the Seller
will make the following disclosures, which will be subject to the
Purchaser's review and approval prior to implementation, as part
of or provided together with the Policyholder illustrations:
- that there is a pending sale of the Business, which may
shorten the Rehabilitation Period. After December 31, 1999,
the Current Elements (as defined below) otherwise guaranteed
during the Rehabilitation Period pursuant to the Plan will
no longer be guaranteed.
- if the Policyholder holds an Eligible Policy, the
Policy Enhancements Amount applicable to such Policy will
vest proportionately on each of January 1, 2000, July 1,
2001, July 1, 2002, and July 1, 2003 if his Policy is still
in force on each of these dates. Such Policy Enhancement
may increase the cash value of the Policy. The Policy
Enhancement vests fully on death for deaths after the
Rehabilitation Period Termination Date but before July 1,
2003. The impact of the application of such Policy
Enhancements Amount is not reflected in the illustration,
and may increase the death benefit over and above that shown
in the illustration.
*****
Definition: "Current Elements" means credited interest, Cost of
Insurance rates, and expense charges that may be different than
those guaranteed in the applicable Policy.
<PAGE> 96
SCHEDULE 9
DAC Calculation Procedures
1. DAC Election Escrow Amount
A. Reinsured Reserve Liabilities at Closing will be divided
into life and annuity and qualified vs. nonqualified subgroups.
B. The DAC Election Escrow Amount will be calculated as
$40 million minus the product of .22 multiplied by the positive
or negative difference of (x) $174 million, over (y) 7.7% of the
Reinsured Reserve Liability for the nonqualified life subgroup,
as determined in 1A above.
2. DAC Reduction Amount
A. The net consideration for the year that includes the Closing
Date for each reinsurance arrangement, to which the Seller is a
party, that yields a net negative consideration will be
determined.
B. The DAC taxable income associated with each of these will be
determined as prescribed in Section 848 of the Code and summed.
C. The ratio applicable to this Transaction will be calculated
by dividing the DAC taxable income attributable to this
Transaction by the sum of the amounts determined in 2B.
D. The Seller's usable DAC will be determined by adding its
unamortized DAC balance as of December 31 for the year preceding
the Closing Date to the positive DAC taxable income arising from
direct premiums and positive net reinsurance considerations
during the year that includes the Closing Date.
E. The DAC Reduction Amount will be calculated as the product
of .22 multiplied by the usable DAC determined in 2D multiplied
by the ratio determined in 2C.
3. DAC Reduction Escrow Amount
A. To determine the escrow amount at time of closing, the
method described in 2 above will be used to calculate an
estimated DAC Reduction Amount.
B. For this purpose, (i) reinsurance transactions in the
ordinary course of business will be ignored; and (ii) for
reinsurance transactions other than in the ordinary course, only
reinsurance transactions that have closed by the Closing Date of
this transaction and within the Seller's same tax year, will be
considered in determining the ratio described in 2C.
C. For usable DAC, the Seller's estimate of positive DAC for
the year that includes the Closing Date will be combined with the
actual unamortized DAC balance as of December 31 for the year
preceding the Closing Date (or the Seller's estimate thereof if
the Closing occurs after December 31, 1998.
D. The DAC Reduction Escrow Amount will be calculated as 120%
of 22% of the product of the ratio determined in 3B multiplied by
the estimate of usable DAC determined in 3C. Notwithstanding the
foregoing, if (i) the separate sale of the COLI business has
closed, the DAC Reduction Escrow Amount will be no less than
$3 million and no more than $7 million, and (ii) if the separate
sale of the COLI business has not closed, the DAC Reduction
Escrow Amount will be no less than $5 million and no more than $7
million.
<PAGE> 97
SCHEDULE 10
<TABLE>
<CAPTION>
Guaranteed Policy Enhancements Amount
- ---------------------------------------------------------------------------
- -------------
| | Guaranteed Policy
|
| | Enhancements Amount
|
| | per Vesting Date
|
- ---------------------------------------------------------------------------
- -------------
|Account Value | Policy Enhancements Amount | Policy |Policy |
|(or Statutory Reserves for | Greater than | Enhancements |Enhancements |
|Restructured Contracts in | $250 million** | Amount |Amount |
|Pay Status or Supplemen- | | $250 million |$225 million |
|tary Contracts) Eligible* | | |
|at Vesting Date | | |
|
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
|Greater than or equal to | | |
|
|$4.30 billion | $80 million + 110% of A | $80.0 million |$72.0 million|
- ----------------------------------------------------------------------------------------
|Greater than 3.85 billion | | |
|but less than $4.30 billion| $74 million + 107% of A | $74.0 million |$66.6 million|
- ----------------------------------------------------------------------------------------
|Greater than $3.40 billion | | |
|but less than $3.85 billion| $68 million + 103% of A | $68.0 million |$61.2 million|
- ----------------------------------------------------------------------------------------
|$3.40 billion or less | $62.5 million + 100% of A | $62.5 million |$56.3 million|
- ----------------------------------------------------------------------------------------
</TABLE>
For a Policy Enhancement Amount between $225 million and $250 million,
the amounts shown in the table will be interpolated. Should the
Policy Enhancement Amount be less than $225 million due to the
Integrity Policy Enhancements Amount, the Guaranteed Policy
Enhancement Amounts will be pro rated down from $225 million.
* For purposes of this Schedule 10, the term "Eligible" means those
Contracts for which the Policy Enhancements Endorsement has been
obtained.
** A = (Policy Enhancement Amount less $250 million) divided by 4
Adjustment to Guaranteed Policy Enhancements Amount for Closing Dates
Beyond January 1, 1999:
For each month that the Closing Date is delayed beyond January 1,
1999, the following adjustments will be made to reduce the
Guaranteed Policy Enhancement Amounts (expressed as a percent of
the Guaranteed Policy Enhancement Amount).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
| Account Value (or Statutory Reserves for Restructured Contracts |Monthly |
| in Pay Status or Supplementary Contracts) Eligible at Vesting |Adjustment |
| Date |
- -----------------------------------------------------------------------------------
<S> <C>
| Greater than or equal to $4.30 billion |.125% |
- -----------------------------------------------------------------------------------
| Greater than $3.85 billion but less than $4.30 billion |.083% |
- -----------------------------------------------------------------------------------
| Greater than $3.40 billion but less than $3.85 billion |.042% |
- -----------------------------------------------------------------------------------
| $3.40 billion or less | 0%
|
- -----------------------------------------------------------------------------------
</TABLE>
The result would be rounded to the nearest $100,000.
For example: If the Closing Date is April 1, 1999 and the Policy
Enhancement Amount is $270 million, the Guaranteed Policy
Enhancement Amount is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
| Account Value (or Statutory Reserves | Calculation of Guaranteed |Guaranteed |
| for Restructured Contracts in | Policy Enhancement |Policy |
| Pay Status or Supplementary Contracts) | |Enhancement |
| Eligible at Vesting Date | |
|
- -----------------------------------------------------------------------------------------
<S> <C> <C>
| Greater than or equal to $4.30 billion |80 +110%(5) - 3 * .125% * 270 |$84.5 million|
- -----------------------------------------------------------------------------------------
| Greater than $3.85 billion but
| less than $4.30 billion |74 + 107%(5) - 3 * .083% * 270 |$78.7 million|
- -----------------------------------------------------------------------------------------
| Greater than $3.40 billion but
| less than $3.85 billion | 68 +103%(5) - 3 * .042% * 270 |$72.8 million|
- -----------------------------------------------------------------------------------------
| $3.40 billion or less | 62.5 + 100%(5) - 3 * 0 * 270 |$67.5 million|
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
SCHEDULE 12
Purchaser's Employee List for Knowledge Qualifications
(a) For all of Section 3:
Andrew Cushnir
Lorin Fife
Marc Gamsin
Deborah Gero
James Rowan
Richard Smith
(b) With respect to Sections 3.6 and 3.7, only:
Eli Broad
Jay Wintrob
Scott Robinson
(c) With respect to Section 3.7 only:
James Belardi
<PAGE> 99
SCHEDULE 13
Confidentiality Agreement Language
"unsolicited proposals"
You hereby acknowledge that the Evaluations Material is
being furnished to you in consideration of your
agreement that you will not propose to the Company or
any other person any transaction between you and the
Company and/or its security holders or involving any of
its securities or security holders unless the Company
shall have requested in writing that you make such a
proposal, and that you will not acquire, or assist,
advise or encourage any other persons in acquiring,
directly or indirectly, control of the Company or any
of the Company's securities, business or assets for a
period of three years from the date of this letter
unless the Company shall have consented in advance in
writing to such acquisition. You also agree that the
Company shall be entitled to equitable relief,
including injunction, in the event of any breach of the
provisions of this paragraph and that you shall not
oppose the granting of such relief.
"challenges"
As long as you and the Company have not entered into a
written agreement regarding a transaction, you agree
that in the event the Company enters into an agreement
with another party to pursue with the Company a
transaction of the type that is the subject of this
letter, you will not, directly or indirectly, challenge
such proposed transaction in any judicial forum,
including, but not limited to, any hearing before the
Superior Court of New Jersey to approve such proposed
transaction, solicit or encourage the initiation of any
competing proposal or offer by another party in any
judicial forum or otherwise interfere with the
consummation of such transaction.
For purposes of this Schedule 13, "the Company" means the Seller.
<PAGE> 100
PURCHASE AND SALE AGREEMENT
By and Among
MBL LIFE ASSURANCE CORPORATION
on the one hand
and
SUNAMERICA INC.,
ANCHOR NATIONAL LIFE INSURANCE COMPANY
and
FIRST SUNAMERICA LIFE INSURANCE COMPANY
on the other hand
Dated as of July 15, 1998
<PAGE> 101
TABLE OF CONTENTS
1. SALE AND PURCHASE 2
1.1 Ceding Commission; Reinsurance Premium;
Acquisition of Transferred Assets and Assumption
of Assumed Liabilities 2
1.1.1 Ceding Commission 2
1.1.2 Reinsurance Premium; Transferred Reserve
Assets 2
1.1.3 Changes to Transferred Reserve Assets 3
1.1.4 Other Assets Transferred on the Closing
Date 3
1.1.5 Other Assets Transferred After the Closing
Date 4
1.1.6 Assumption of Liabilities; Excluded
Liabilities 5
1.1.7 Transfer and Sales Taxes 6
1.1.8 Allocation of Ceding Commission and
Transferred Reserve Assets 6
1.2 Closing; Estimated Closing Statement 6
1.2.1 Place and Time of Closing 6
1.2.2 Estimated Closing Date Statement 6
1.3 Post-Closing Adjustment 7
1.3.1 Final Closing Date Statement 7
1.3.2 Final Determination of Disputes 7
1.3.3 Adjustments; Payment and Interest 7
1.4 Closing Items 8
1.4.1 Assumption Reinsurance Agreements 8
1.4.2 Indemnity Reinsurance Agreement 8
1.4.3 Administrative Services Agreement 8
1.4.4 Transition Services Agreement 8
1.4.5 Escrow Agreement 8
1.4.6 Bill of Sale 9
1.4.7 Other Deliveries 9
2. REPRESENTATIONS AND WARRANTIES OF THE SELLER 9
2.1 Corporate Status of the Seller 9
2.2 Authority 9
2.3 No Conflicts, Consents and Approvals, etc. 9
2.3.1 No Conflicts 9
2.3.2 Consents 10
2.4 Permits, Licenses, etc. 10
2.5 Compliance with Laws 11
2.6 Financial Statements 11
2.6.1 Audited GAAP Statements 11
2.6.2 Statutory Statements 11
2.6.3 Audited SAP Statements 11
2.6.4 GAAP Representations 11
2.6.5 SAP Representations 11
2.7 Computer Software 12
2.8 Litigation 12
2.9 Regulatory Filings 12
2.10 Tax Matters 13
2.10.1 Tax Treatment of Reinsured Policies 13
2.10.2 Tax Reserves 13
2.10.3 Tax Impact on Policyholders 13
2.11 Absence of Changes 14
2.12 Reinsured Policies 15
2.12.1 Forms 15
2.12.2 Life Policies 16
2.12.3 Annuity Contracts 16
2.12.4 Compliance with Law 16
2.12.5 Policies in Effect 17
2.12.6 Sales Practices 18
2.12.7 Payment of Policy Benefits 18
2.12.8 No Other Distributions 18
2.12.9 Underwriting Standards 18
2.12.10 Financial Status of Reinsurers 18
2.12.11 No Waivers 19
2.12.12 Consistent with Books and Records 19
2.12.13 Guaranty Fund Assessments 19
2.12.14 Cost of Insurance and Interest Rates 19
2.12.15 Taxable Basis 19
2.12.16 Lists of Group Pension Customers 19
2.12.17 Contracts and Administrative Procedures of
Group Pension Business; Group Pension
Accounts; Reaffirmed Other Contracts 20
2.12.18 Documents Relating to Fully Administered
Qualified Plans 21
2.12.19 No Excluded Policies 21
2.12.20 Account Values True-Up 21
2.12.21 Eligible Policies 22
2.12.22 MEC's 22
2.13 Reserves 22
2.14 Reinsurance Agreements 23
<PAGE> 102
2.14.1 Outward Reinsurance Agreements 23
2.14.2 Inward Reinsurance Agreements 23
2.15 Brokers 23
2.16 Severance Plan 24
2.17 Absence of Undisclosed Liabilities 24
2.18 Transferred Assets 24
2.19 Books and Records 24
2.20 Threats of Cancellation 24
2.21 Rehabilitation Plan 24
2.21.1 List of Rehabilitation Documents 25
2.21.2 Approval; Compliance 25
2.21.3 No Actions 25
2.22 Assigned Contracts 25
2.23 Agreements Relating to Payment of Commissions 25
2.23.1 Forms of Commission Agreements 25
2.23.2 Insurance Agents 25
2.23.3 Renewal Commissions 26
2.24 Third Party Administration Agreements 26
2.25 Impairments 26
2.26 Wrapped Accumulation Contracts 26
2.27 Policyholder Lists 26
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 27
3.1 Corporate Status and Authority 27
3.2 No Conflicts, Consents and Approvals, etc. 27
3.2.1 No Conflicts 27
3.2.2 Consents 28
3.3 Compliance with Laws 28
3.4 Litigation 28
3.5 Permits, Licenses, etc. 28
3.6 Financial Statements 29
3.6.1 Audited GAAP Statements 29
3.6.2 Statutory Statements 29
3.6.3 Audited SAP Statements 29
3.6.4 GAAP Statement Representations 29
3.6.5 SAP Statement Representations 29
3.7 Absence of Changes 30
3.8 Brokers 30
3.9 Rating 30
4. PRE-CLOSING COVENANTS 30
4.1 Consents; Cooperation 30
4.1.1 Consents to be Obtained 30
4.1.2 Cooperation 30
4.1.3 Regulatory Filings; Other Consents 31
4.2 Seller's Conduct of Business, etc 32
4.3 Access and Information 33
4.4 Certain Transactions 34
4.5 Financial Statements and Reports 34
4.6 Intentionally Deleted 34
4.7 Reinsurance Agreements 34
4.8 Expenses 35
4.9 Publicity 35
4.10 Contact with Employees, Policyholders and Other
Constituencies 36
4.11 Amendments to Plan and Other Orders 36
4.12 Funding of Policy Enhancements 36
4.12.1 Recognition of Liability 36
4.12.2 Allocation of Policy Enhancements to
Policyholders 37
4.12.3 No Set-off 38
4.12.4 Endorsements to Eligible Policies 38
4.12.5 Policy Enhancements Endorsements Escrow
Amount 38
4.13 Endorsement of Certain Associations 39
4.14 Break-Up Fee; Expense Reimbursement 39
4.14.1 Break-Up Fee 39
4.14.2 Expense Reimbursement 40
4.14.3 Cumulative Remedies 40
4.15 Enforcement of Other Agreements 40
4.16 Overbidding Procedures 40
4.17 Calculation of Impairments 42
4.18 COI 42
4.18.1 Modified COI Scale 42
<PAGE> 103
4.18.2 COI Adjustment Amount 43
4.19 Acquisition Agreement Regarding Broker/Dealer 43
4.20 Grandfathering Ruling 43
4.21 Additional Enhancements DAC Amount 44
4.22 Reimbursable Transition Expenses 44
4.23 Transfer of Class Four Claims 45
4.24 Delivery of Updated Policy Lists 45
5. CONTINUING COVENANTS 45
5.1 Continuing Access Obligations 45
5.1.1 Access Obligations During Transition
Period 45
5.1.2 Continuing Access Obligations of the
Purchaser 46
5.1.3 Continuing Access Obligations of the
Seller 46
5.2 Distribution of Class Four Creditor Value Share;
Liquidation 46
5.2.1 Provision of Adequate Reserves 46
5.2.2 Distribution of Class Four Creditor Value
Share 46
5.2.3 Restriction on Liquidating Distributions 47
5.3 Termination of Excluded Annuity Contracts 47
5.4 Termination of Wrapped Accumulation Contracts 48
5.5 Marketing Support 48
5.6 Sufficiency of Staff and Assets 48
5.7 Policy Endorsements 48
5.8 Rehabilitation Documents 48
5.9 Post-Closing Publicity 48
5.10 Post-Rehabilitation Treatment of Reinsured and
Replacement Policies 48
5.10.1 Continuation or Replacement 48
5.10.2 Additional Replacement Policies 49
5.10.3 Non-Guaranteed Elements 49
5.10.4 Eligible Policies 49
5.10.5 Approvals 50
5.10.6 Guidelines for Restructured Life Policies 50
5.10.7 Covered Accumulation Contract Replacement
Policies 51
5.11 Election to Capitalize Specified Policy
Acquisition Expenses 51
5.12 Maintenance of Business 52
5.13 IBNR Settlement Amount 52
5.13.1 Allocation of Liability 52
5.13.2 Calculation of IBNR Settlement Amount 52
5.14 Solicitation of Policyholders 53
5.15 Reinstated Policies 53
5.16 Outward Reinsurance Agreements 54
5.16.1 Remaining Outward Reinsurance Agreements 54
5.16.2 Outward Reinsurance Escrow Amount 54
5.16.3 Monthly Accounting 54
5.16.4 Settlement 55
5.16.5 Release of Escrowed Funds and Payment of
Net Reinsurance Premium to Seller 55
5.17 Taxable Basis of Reinsured Policies 55
5.18 Calculation of Account Values True-Ups 56
5.19 Sale of Broker/Dealer 56
5.20 Agents 56
5.21 Transfer of Assets to First SunAmerica 56
5.22 Amendment of Schedules 56
5.23 Treatment of Policy Enhancements 57
5.24 Sale of Non-Terminated Variable Annuities 57
5.25 Grandfathered Premiums Indemnity 57
5.26 Severance Plan 58
5.27 Transition Period Termination Date Policy Lists 58
6. CONDITIONS PRECEDENT 58
6.1 General 58
6.2 Conditions to Obligations of Both Parties 58
6.2.1 HSR Act 58
6.2.2 No Injunction, etc 58
6.2.3 Approval of the Court 59
6.2.4 Approval of the Class Four Creditors 59
6.2.5 Approval of the Reinsurers 59
<PAGE> 104
6.2.6 Approval of NOLHGA on Behalf of the
Participating Guaranty Associations 59
6.2.7 Approval of First SunAmerica by the
Commissioner 59
6.2.8 Other Permits 59
6.2.9 Ancillary Agreements 59
6.2.10 Additional Instruments and Documents 59
6.2.11 Change in Law Regarding Tax Impact on
Policyholders 60
6.3 Conditions to Obligations of the Seller 60
6.3.1 Representations, Warranties and Agreements
of the Purchaser 60
6.3.2 Officer's Certificate 60
6.3.3 Opinions of Counsel 60
6.4 Conditions to Obligations of the Purchaser 60
6.4.1 Representations, Warranties and Agreements
of the Seller 60
6.4.2 Officer's Certificate 60
6.4.3 Opinions of Counsel 60
6.4.4 Funding of Escrow Agreement 60
6.4.5 Policy Enhancements Amount 61
6.4.6 Reserve Liabilities 61
6.4.7 Assurances Regarding Simultaneous
Assumption of Reinsured Policies 61
6.4.8 Outward Reinsurance Agreements 61
6.4.9 Court Order, Regulatory Approvals and
Other Filings 61
6.4.10 Updated Calculation of Impairments 62
6.4.11 Changes to COI Scale 62
6.4.12 Estimated Closing Date Statement and
Updated Schedules 62
6.4.13 Transferred Reserve Assets 62
6.4.14 Updated Policy Lists 62
7. INDEMNIFICATION AND SURVIVAL 63
7.1 Tax Indemnification and Other Tax Matters 63
7.1.1 Section 848 Election Tax Benefit 63
7.1.2 Assumptions for Insolvent Insurance
Company Election Tax Benefit 63
7.1.3 Deposits to DAC Tax Indemnity Account at
Closing 63
7.1.4 Computation of DAC Reduction Amount 63
7.1.5 Release of the DAC Election Escrow Amount 64
7.1.6 Filing of the Purchaser's Tax Return 65
7.1.7 Method for Ensuring Benefits 65
7.1.8 Calculation of DAC Escrow Amounts 66
7.2 Survival of Representations and Covenants of the
Purchaser 67
7.3 Survival of Representations and Covenants of the
Seller 67
7.4 Indemnification by the Purchaser 68
7.5 Indemnification by the Seller 68
7.5.1 General Indemnity 68
7.5.2 Tax Treatment of Policies Indemnity 68
7.5.3 Tax Reserves Indemnity 69
7.5.4 Tax Contests 69
7.6 Damages 70
7.6.1 Basket and Threshold 70
7.6.2 Limit on Tax Reserves Indemnity 70
7.6.3 Limit on COI Adjustment Amount Recovery 70
7.6.4 Limit on Policy Enhancements Endorsements
Indemnity 71
7.6.5 Intentionally Deleted 71
7.6.6 Excluded Damages 71
7.6.7 Exclusive Remedy 71
7.7 Indemnification Procedure 72
7.7.1 Notice of Claim 72
7.7.2 Third Party Claims 72
7.7.3 Disputes 74
7.7.4 Mitigation 74
7.8 Release of Funds From Escrow 74
7.8.1 DAC Election/Reduction Escrow Amount 74
7.8.2 Outward Reinsurance Escrow Amount 74
<PAGE> 105
7.8.3 Tax Reserves Indemnity Escrow Amount 74
7.8.4 Claims Escrow Amount 74
7.8.5 COI Adjustment Escrow Amount 75
7.8.6 Policy Enhancements Endorsements Escrow
Amount 75
7.8.7 Notices and Joint Instructions 75
8. DISPUTE RESOLUTION 75
8.1 Governing Law 75
8.2 Arbitration of Disputes 75
8.2.1 Matters in Exclusive Jurisdiction of Court 75
8.2.2 Pre-Arbitration Dispute Resolution 75
8.2.3 Arbitration 76
8.2.4 Confidentiality 77
8.2.5 Interim Relief 77
8.2.6 Enforcement 77
8.3 Consent to Jurisdiction; Waiver of Jury Trial,
etc. 77
8.3.1 Consent to Jurisdiction 77
8.3.2 Waiver of Jury Trial 78
8.4 Injunctive Relief 78
8.5 Independent Party 78
9. DEFINITIONS 79
10. GENERAL PROVISIONS 101
10.1 Modification; Waiver 101
10.2 Entire Agreement 101
10.3 Termination By the Parties 101
10.3.1 Events Causing Termination 101
10.3.2 Automatic Termination 102
10.3.3 Effect of Termination 102
10.4 Further Actions 103
10.5 Notices 103
10.6 Assignment 103
10.7 No Third-Party Beneficiaries 103
10.8 Counterparts 104
10.9 Certain Rules of Construction 104
10.9.1 Headings, etc. 104
10.9.2 General Concepts 104
10.9.3 Discretion 104
10.9.4 Interpretation 104
10.10 Knowledge 104
10.11 Severability 105
Exhibits
Exhibit A-1 ANLIC Assumption Reinsurance Agreement
Exhibit A-2 First SunAmerica Assumption Reinsurance
Agreement
Exhibit B Indemnity Reinsurance Agreement
Exhibit C Administrative Services Agreement
Exhibit D Transition Services Agreement
Exhibit E Escrow Agreement
Exhibit F Bill of Sale
Exhibit G-1 Opinion of Purchaser's General Counsel
Exhibit G-2 Opinion of O'Melveny & Myers LLP
Exhibit G-3 Opinion of McElroy, Deutsch and Mulvaney
Exhibit H-1 Opinion of Seller's General Counsel
Exhibit H-2 Opinion of Debevoise & Plimpton
Exhibit H-3 Opinion of Gibbons, Del Deo, Dolan,
Griffinger & Vecchione
Exhibit I Proposed Amendments to the Plan and Other Orders
Exhibit J Class Four Creditors Approval
Exhibit K Expense Reimbursement Escrow Agreement
Schedules
Seller's Disclosure Schedule
Purchaser's Disclosure Schedule
Schedule 1-A All Reinsured Life Policies
Schedule 1-B Non New York Reinsured Life Policies
<PAGE> 106
Schedule 1-C New York Reinsured Life Policies
Schedule 2-A All Reinsured Annuity Contracts
Schedule 2-B Non New York Reinsured Annuity Contracts
Schedule 2-C New York Reinsured Annuity Contracts
Schedule 3 Transferred Reserve Assets
Schedule 4 Assigned Contracts Transferred at Closing
Schedule 5 Reserve Liabilities
Schedule 6 Seller Separate Accounts
Schedule 7 Allocation Procedures
Schedule 8 Assumptions Regarding Illustrations
Schedule 9 DAC Calculation Procedures
Schedule 10 Guaranteed Policy Enhancements Amount
Schedule 11 Seller's Employee List for Knowledge
Qualifications
Schedule 12 Purchaser's Employee List for Knowledge
Qualifications
Schedule 13 Confidentiality Agreement Language
<PAGE> 1
EXHIBIT 4(y)
[FRONT SIDE OF NOTE]
SUNAMERICA INC.
9.95% Debenture due August 1, 2008
Number
R-1
CUSIP 866930 AK 6
Unless and until this certificate is exchanged in whole or in part for
Debentures in definitive registered form, this Debenture may not be transferred
except as a whole by The Depository Trust Company, a New York corporation
("DTC"), to its nominee or by its nominee to DTC or another nominee of DTC or
by DTC or any such nominee to a successor Depositary or a nominee of such
successor Depositary. Any certificate issued in exchange herefor shall be
registered in the name of Cede & Co. or in such other name as is requested by
an authorized representative of DTC (and any payment in respect hereof shall be
made to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC).
SUNAMERICA INC., a Maryland corporation (the "Issuer", which term includes
any successor corporation under the Senior Indenture hereafter referred to),
for value received, hereby promises to pay to Cede & Co. or registered assigns,
at the office or agency of the Issuer in the Borough of Manhattan, The City of
New York, or at such other locations as the Issuer may from time to time
designate, the principal sum of SEVENTY-THREE MILLION TWO HUNDRED NINE THOUSAND
DOLLARS ($73,209,000) on August 1, 2008, in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts, and to pay interest, semi-annually on
February 1 and August 1 of each year, commencing February 1, 1999, on said
principal sum at said office or agency, in like coin or currency, at the rate
per annum specified in the title of this Debenture, from the February 1 or the
August 1, as the case may be, next preceding the date of this Debenture to
which interest has been paid or duly provided for, unless the date hereof is a
date to which interest has been paid or duly provided for, in which case from
the date of this Debenture, or unless no interest has been paid on this
Debenture or duly provided for, in which case from August 1, 1998, until
payment of said principal sum has been made or duly provided for; provided,
that payment of interest may be made at the option of the Issuer by check
mailed by first class mail to the address of the person entitled thereto as
such address shall appear on the Security register. Notwithstanding the
foregoing, if the date hereof is after January 15 or July 15, as the case may
be, and before the following February 1, or August 1, this Debenture shall bear
interest from such February 1 or August 1; provided, that if the Issuer shall
default in the payment of interest due on such February 1 or August 1, then
this Debenture shall bear interest from the next preceding February 1 or August
1, to which interest has been paid or duly provided for or, if no interest has
been paid on this Debenture or duly provided for, from August 1, 1998. The
interest so payable on any February 1 or August 1 will, subject to certain
exceptions provided in the Senior Indenture referred to on the reverse hereof,
be paid to the person in whose name this Debenture (for one or more predecessor
Debentures) is registered at the close of business on the January 15 or July 15
(whether or not a Business Day), as the case may be, next preceding such
February 1 or August 1.
Reference is made to the further provisions of this Debenture set forth on
the reverse hereof. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been executed by the
Trustee under the Senior Indenture referred to on the reverse hereof by manual
signature.
IN WITNESS WHEREOF, SunAmerica Inc. has caused this instrument to be signed
by facsimile by one of its duly authorized officers and has caused a facsimile
of its corporate seal to be affixed hereunto or imprinted hereon.
Dated: August 19, 1998
TRUSTEE'S CERTIFICATE
OF AUTHENTICATION
<PAGE> 2
This is one of the Securities referred to in the within-mentioned Senior
Indenture.
THE FIRST NATIONAL BANK OF CHICAGO,
as Trustee
/s/ [Illegible]
----------------------------------------
AUTHORIZED SIGNATORY TRUST OFFICER
SUNAMERICA INC.
/s/ James R. Belardi
----------------------------------------
EXECUTIVE VICE PRESIDENT
[REVERSE OF NOTE]
SUNAMERICA INC.
9.95% Debenture due August 1, 2008
This Debenture is one of a duly authorized issue of debentures, notes,
bonds or other evidences of indebtedness of the Issuer (hereinafter called the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to a senior indenture dated as of November 15, 1991 (herein
called the "Senior Indenture"), duly executed and delivered by the Issuer to
The First National Bank of Chicago, as Trustee (herein called the "Trustee"),
to which Senior Indenture and all indentures supplemental thereto reference is
hereby made for a description of the rights, limitations of rights,
obligations, duties and immunities thereunder of the Trustee, the Issuer and
the Holders of the Securities. The Securities may be issued in one or more
series, which different series may be issued in various aggregate principal
amounts, may mature at different times, may bear interest (if any) at different
rates, may be subject to different redemption provisions (if any), may be
subject to different sinking, purchase or analogous funds (if any) and may
otherwise vary as provided in the Senior Indenture. This Debenture is one of a
series designated as the 9.95% Debentures due August 1, 2008 (the "Debentures")
of the Issuer, limited in aggregate principal amount to $100,000,000.
Except as otherwise provided in the Senior Indenture, this Debenture will
be issued in global form only registered in the name of the Depositary or its
nominee. This Debenture will not be issued in definitive form, except as
otherwise provided in the Senior Indenture, and ownership of this Debenture
shall be maintained in book-entry form by the Depositary for the accounts of
participating organizations of the Depositary.
In case an Event of Default with respect to the Debentures shall have
occurred and be continuing, the principal hereof may be declared, and upon such
declaration shall become, due and payable, in the manner, with the effect and
subject to the conditions provided in the Senior Indenture.
The Senior Indenture contains provisions permitting the Issuer and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series issued under such
Senior Indenture then Outstanding and affected, voting as one class, to add any
provisions to, or change in any manner or eliminate any of the provisions of,
such Senior Indenture or modify in any manner the rights of the Holders of the
Securities of each series so affected; provided that the Issuer and the Trustee
may not, without the consent of the Holder of each outstanding Security
affected thereby, (i) extend the stated maturity of the principal of any
Security, or reduce the principal amount thereof or reduce the rate or extend
the time of payment of interest thereon, or reduce any amount payable on
redemption thereof or change the currency in which the principal thereof
(including any amount in respect of original issue discount) or interest
thereon is payable or reduce the amount of any original issue discount security
payable upon acceleration or provable in bankruptcy or impair the right to
institute suit for the enforcement of any payment on any Security when due or
(ii) reduce the aforesaid percentage in principal amount of Securities of any
<PAGE> 3
series issued under such Senior Indenture, the consent of the Holders of which
is required for any such modification. It is also provided in the Senior
Indenture that, with respect to certain defaults or Events of Default regarding
the Securities of any series, prior to any declaration accelerating the
maturity of such Securities, the Holders of a majority in aggregate principal
amount Outstanding of the Securities of such series (or, in the case of certain
defaults or Events of Default, all or certain series of the Securities) may on
behalf of the Holders of all the Securities of such series (or all or certain
series of the Securities, as the case may be) waive any such past default or
Event of Default and its consequences. The preceding sentence shall not,
however, apply to a default in the payment of the principal of or interest on
any of the Securities. Any such consent or waiver by the Holder of this
Debenture (unless revoked as provided in the Senior Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Debenture and any Debentures which may be issued in exchange or
substitution herefor or on registration of transfer hereof, irrespective of
whether or not any notation thereof is made upon this Debenture or such other
Debentures.
No reference herein to the Senior Indenture and no provision of this
Debenture or of the Senior Indenture shall alter or impair the obligation of
the Issuer, which is absolute and unconditional, to pay the principal of and
interest on this Debenture in the manner, at the respective times, at the rate
and in the coin or currency herein prescribed.
The Debentures are issuable in registered form without coupons in
denominations of $1,000 and any integral multiple thereof at the office or
agency of the Issuer in the Borough of Manhattan, The City of New York, or at
such other locations as the Issuer may from time to time designate, and in the
manner and subject to the limitations provided in the Senior Indenture, but
without the payment of any service charge, Debentures may be exchanged for a
like aggregate principal amount of Debentures of other authorized
denominations.
The Debentures are not redeemable prior to maturity and are not entitled
to any sinking fund.
Upon due presentment for registration of transfer of this Debenture at the
office or agency of the Issuer in the Borough of Manhattan, The City of New
York, or at such other locations as the Issuer may from time to time designate,
a new Debenture or Debentures of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Senior Indenture, without
charge except for any tax or other governmental charge imposed in connection
therewith.
The Issuer, the Trustee and any authorized agent of the Issuer or the
Trustee may deem and treat the registered Holder hereof as the absolute owner
of this Debenture (whether or not this Debenture shall be overdue and
notwithstanding any notation of ownership or other writing hereon), for the
purpose of receiving payment of, or on account of, the principal hereof and
subject to the provisions on the face hereof, interest hereon, and for all
other purposes, and none of the Issuer, the Trustee or any authorized agent of
the Issuer or the Trustee shall be affected by any notice to the contrary.
No recourse under or upon any obligation, covenant or agreement of the
Issuer in the Senior Indenture or any indenture supplemental thereto or in any
Debenture, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer or director, as
such, of the Issuer or of any successor corporation, either directly or through
the Issuer or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any
legal or equitable proceeding or otherwise, all such liability being expressly
waived and released by the acceptance hereof and as part of the consideration
for the issue hereof.
This Debenture shall for all purposes be governed by, and construed in
accordance with, the laws of the State of New York.
Terms used herein which are defined in the Senior Indenture shall have the
respective meanings assigned thereto in the Senior Indenture.
<PAGE> 4
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT-_____________Custodian____________
(Cust) (Minor)
Under Uniform Gifts to Minors
Act_______________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________________________________________________
_______________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
_______________________________________________________________________________
the within Debenture and all rights thereunder, hereby irrevocably constituting
and appointing such person attorney to transfer such note on the books of the
Issuer, with full power of substitution in the premises.
Dated:________________________ Signed:__________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Debenture in every particular without
attention or enlargement or any change whatsoever.
Signature Guarantee:____________________________________________________________
<PAGE> 1
EXHIBIT 10(w)
SUNAMERICA INC.
List of Executive and Director Compensation Plans and Arrangements
<TABLE>
<CAPTION>
Exhibit
No. Description
====== =======================================================
<S> <C>
10(a) Employment Agreement, dated July 14, 1992, between
the Company and Michael L. Fowler, is incorporated herein
by reference to Exhibit 10(f) to the Company's 1992
Annual Report on Form 10-K, filed November 30,
1992.
10(b) Employment Agreement, dated April 27, 1995, between the
Company and Jay S. Wintrob, is incorporated herein by
reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q, for the quarter ended June 30, 1995,
filed August 14, 1995.
10(c) Employment Agreement, dated August 15, 1997, between the
Company and Gary W. Krat is incorporated herein by
reference to Exhibit 10(d) to the Company's 1997 Annual
Report on Form 10-K, filed December 10, 1997.
10(d) 1988 Employee Stock Plan is incorporated herein by
reference to Exhibit B to the Company's and Kaufman and
Broad Home Corporation's Notice of and Joint Proxy
Statement for Special Meeting of Shareholders held on
February 21, 1989, filed January 24, 1989.
10(e) Amended and Restated 1978 Employee Stock Option Program
is incorporated herein by reference to Appendix A to the
Company's Notice of 1987 Annual Meeting of Shareholders
and Proxy Statement, filed March 24, 1987.
10(f) Executive Deferred Compensation Plan is incorporated
herein by reference to Exhibit 10(l) to the Company's
1985 Annual Report on Form 10-K, filed February 27, 1986.
10(g) 1987 Restricted Stock Plan is incorporated herein by
reference to Appendix A to the Company's Notice of 1988
Annual Meeting of Shareholders and Proxy Statement, filed
March 22, 1988.
10(h) Executive Deferred Compensation Plan, dated as of October
1, 1989, is incorporated herein by reference to Exhibit
10(h) to the Company's 1994 Annual Report on Form 10-K,
filed December 1, 1994.
10(i) SunAmerica Supplemental Deferral Plan is incorporated
herein by reference to Exhibit 10(m) to the Company's
1989 Annual Report on Form 10-K, filed December 20, 1989.
10(j) Long-Term Performance-Based Incentive Plan, Amended and
Restated 1997, is incorporated herein by reference to
Appendix C to the Company's Notice of 1997 Annual Meeting
of Shareholders and Proxy Statement, filed December 30,
1996.
10(k) Performance Incentive Compensation Plan is incorporated
herein by reference to the Company's Notice of 1995
Annual Meeting of Shareholders and Proxy Statement, filed
December 1, 1994.
10(l) 1995 Performance Stock Plan as amended and restated is
incorporated herein by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1997, filed May 15, 1997.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
10(m) Registered Representatives' Deferred Compensation Plan is
incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement No. 333-10523 on Form S-
3, filed August 20, 1996.
10(n) Deferred Compensation Agreement is incorporated herein by
reference to Exhibit 4.2 of the Company's Registration
No. 333-10523 on Form S-3, filed August 20, 1996.
10(o) Amendment to Performance Incentive Compensation Plan is
incorporated herein by reference to the Company's Notice
of 1996 Annual Meeting of Shareholders and Proxy
Statement, filed January 15, 1996.
10(q) Executive Savings Plan, effective January 1, 1997, is
incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q, for the quarter
ended December 31, 1996, filed February 13, 1997.
10(r) SunAmerica 1997 Employee Incentive Stock Plan is
incorporated herein by reference to Appendix A to the
Company's Notice of 1997 Annual Meeting and Proxy
Statement, filed December 30, 1996.
10(s) SunAmerica Long-Term Incentive Plan is incorporated
herein by reference to Appendix B to the Company's Notice
of 1997 Annual Meeting and Proxy Statement, filed
December 30, 1996.
10(t) Non-Employee Directors' Stock Option Plan is incorporated
herein by reference to Appendix D to the Company's Notice
of 1997 Annual Meeting and Proxy Statement, filed
December 30, 1996.
10(u) SunAmerica 1997 Employee Stock Purchase Plan is
incorporated herein by reference to Appendix A to the
Company's Notice of 1998 Annual Meeting and Proxy
Statement, filed January 2, 1998.
10(v) 1998 Long-Term Performance-Based Incentive Plan is
incorporated herein by reference to Appendix B to the
Company's Notice of 1998 Annual Meeting and Proxy
Statement, filed on January 2, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 12(a)
SUNAMERICA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(FIXED CHARGES 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)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Earnings:
Pretax income. . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001
Add:
Interest incurred on
senior indebtedness. . . . . . . 120,253 106,279 69,033 55,985 50,292
Dividends paid on preferred
securities of grantor trusts . . . 41,178 41,874 20,235 1,673 --
---------- ---------- ---------- ---------- --------
Total earnings . . . . . . . . . . . $ 868,743 $ 685,203 $ 481,295 $ 337,264 $290,293
========== ========== ========== ========== ========
Fixed charges:
Interest incurred on
senior indebtedness. . . . . . . . $ 120,253 $ 106,279 $ 69,033 $ 55,985 $ 50,292
Dividends paid on preferred
securities of grantor trusts . . . 41,178 41,874 20,235 1,673 --
---------- ---------- ---------- ---------- --------
Total fixed charges. . . . . . . . . $ 161,431 $ 148,153 $ 89,268 $ 57,658 $ 50,292
========== ========== ========== ========== ========
Ratio of earnings to fixed charges
(which include dividends paid on
preferred securities of grantor
trusts and interest incurred in
senior debt, but exclude interest
incurred on fixed annuities,
guaranteed investment contracts
and trust deposits). . . . . . . . 5.4x 4.6x 5.4x 5.8x 5.8x
========== ========== ========== ========== ========
</TABLE>
<PAGE> 2
EXHIBIT 12(a) (CONTINUED)
SUNAMERICA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS
AND INTEREST INCURRED ON SENIOR DEBT, FIXED ANNUITIES,
GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Earnings:
Pretax income . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001
----------- ----------- ----------- ----------- --------
Add:
Interest incurred on:
Fixed annuity contracts . . . . 721,490 644,426 410,269 258,730 254,464
Guaranteed investment
contracts . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424
Trust deposits. . . . . . . . . 9,400 9,726 9,968 10,519 8,516
Senior indebtedness . . . . . . 120,253 106,279 69,033 55,985 50,292
----------- ----------- ----------- ----------- --------
Total interest incurred . . . . 1,277,639 1,074,575 741,297 538,574 463,696
----------- ----------- ----------- ----------- --------
Dividends paid on preferred
securities of grantor trusts. . . 41,178 41,874 20,235 1,673 --
----------- ----------- ----------- ----------- --------
Total earnings. . . . . . . . . . . $ 2,026,129 $ 1,653,499 $ 1,153,559 $ 819,853 $703,697
=========== =========== =========== =========== ========
Fixed charges:
Interest incurred on:
Fixed annuity contracts . . . . . $ 721,490 $ 644,426 $ 410,269 $ 258,730 $254,464
Guaranteed investment
contracts . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424
Trust deposits. . . . . . . . . . 9,400 9,726 9,968 10,519 8,516
Senior indebtedness . . . . . . . 120,253 106,279 69,033 55,985 50,292
----------- ----------- ----------- ----------- --------
Total interest incurred. . . . . 1,277,639 1,074,575 741,297 538,574 463,696
Dividends paid on preferred
securities of grantor trusts. . . 41,178 41,874 20,235 1,673 --
----------- ----------- ----------- ----------- --------
Total fixed charges . . . . . . . . $ 1,318,817 $ 1,116,449 $ 761,532 $ 540,247 $463,696
=========== =========== =========== =========== ========
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) . . . . . . . 1.5x 1.5x 1.5x 1.5x 1.5x
=========== =========== =========== =========== ========
</TABLE>
<PAGE> 1
EXHIBIT 12(b)
SUNAMERICA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(FIXED CHARGES 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)
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except ratios)
Earnings:
Pretax income. . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001
Add:
Interest incurred on
senior indebtedness. . . . . . 120,253 106,279 69,033 55,985 50,292
Dividends paid on preferred
securities of grantor trusts . . 41,178 41,874 20,235 1,673 --
---------- ---------- ---------- ---------- --------
Total earnings . . . . . . . . . . $ 868,743 $ 685,203 $ 481,295 $ 337,264 $290,293
========== ========== ========== ========== ========
Combined fixed charges and
preferred stock dividends:
Interest incurred on:
Senior indebtedness. . . . . . . $ 120,253 $ 106,279 $ 69,033 $ 55,985 $ 50,292
Dividends paid on preferred
securities of grantor trusts . . 41,178 41,874 20,235 1,673 --
Dividends paid on preferred
stock of SunAmerica Inc.,
on a tax equivalent basis. . . . 16,987 26,648 38,662 41,914 54,528
---------- ---------- ---------- ---------- --------
Total combined fixed charges
and preferred stock dividends. . $ 178,418 $ 174,801 $ 127,930 $ 99,572 $104,820
========== ========== ========== ========== ========
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). . . . . . . 4.9x 3.9x 3.8x 3.4x 2.8x
========== ========== ========== ========== ========
</TABLE>
<PAGE> 2
EXHIBIT 12(b) (CONTINUED)
SUNAMERICA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS
AND INTEREST INCURRED ON SENIOR DEBT, FIXED ANNUITIES,
GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Earnings:
Pretax income . . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001
----------- ----------- ----------- ----------- --------
Add:
Interest incurred on:
Fixed annuity contracts . . . . . 721,490 644,426 410,269 258,730 254,464
Guaranteed investment
contracts . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424
Trust deposits. . . . . . . . . . 9,400 9,726 9,968 10,519 8,516
Senior indebtedness . . . . . . . 120,253 106,279 69,033 55,985 50,292
----------- ----------- ----------- ----------- --------
Total interest incurred . . . . . 1,277,639 1,074,575 741,297 538,574 463,696
----------- ----------- ----------- ----------- --------
Dividends paid on preferred
securities of grantor trusts. . . . 41,178 41,874 20,235 1,673 --
----------- ----------- ----------- ----------- --------
Total earnings. . . . . . . . . . . . $ 2,026,129 $ 1,653,499 $ 1,153,559 $ 819,853 $703,697
=========== =========== =========== =========== ========
Combined fixed charges and
preferred sock dividends:
Interest incurred on:
Fixed annuity contracts . . . . . . $ 721,490 $ 644,426 $ 410,269 $ 258,730 $254,464
Guaranteed investment
contracts . . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424
Trust deposits. . . . . . . . . . . 9,400 9,726 9,968 10,519 8,516
Senior indebtedness . . . . . . . . 120,253 106,279 69,033 55,985 50,292
----------- ----------- ----------- ----------- --------
Total interest incurred. . . . . . 1,277,639 1,074,575 741,297 538,574 463,696
Dividends paid on preferred
securities of grantor trusts. . . . 41,178 41,874 20,235 1,673 --
Dividends paid on preferred
stock of SunAmerica Inc.,
on a tax equivalent basis . . . . . 16,987 26,648 38,662 41,914 54,528
----------- ----------- ----------- ----------- --------
Total combined fixed charges
and preferred stock dividends . . . $ 1,335,804 $ 1,143,097 $ 800,194 $ 582,161 $518,224
=========== =========== =========== =========== ========
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 trusts deposits . . . 1.5x 1.4x 1.4x 1.4x 1.4x
=========== =========== =========== =========== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES
LIST OF SUBSIDIARIES
List of subsidiaries and certain other affiliates with percentage of voting
securities owned by SunAmerica Inc. or SunAmerica Inc.'s subsidiary which is
the immediate parent.
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
COMPANY OR COMPANY'S
SUBSIDIARY WHICH IS
THE IMMEDIATE PARENT
====================
NAME OF COMPANY
===============
<S> <C>
ARIZONA CORPORATIONS: %
Anchor National Life Insurance Company 100
SunAmerica Life Insurance Company of America 100
SunAmerica National Life Insurance Company 100
CALIFORNIA CORPORATIONS:
CalAmerica Life Insurance Company 100
Imperial Premium Finance, Inc. 100
Sentra Securities Corporation 100
Spellman & Co., Inc. 100
COLORADO CORPORATION:
Resources Trust Company 100
DELAWARE CORPORATIONS:
Imperial Premium Finance, Inc. 100
Imperial Premium Funding, Inc. 100
Royal Alliance Associates, Inc. 100
SunAmerica Asset Management Corp. 100
SunAmerica Capital Services, Inc. 100
SunAmerica Capital Trust II 100
SunAmerica Capital Trust III 100
SunAmerica Capital Trust IV 100
SunAmerica Capital Trust V 100
SunAmerica Capital Trust VI 100
SunAmerica Securities, Inc. 100
GEORGIA CORPORATIONS:
FSC Service Corporation 100
Keogler Investment Advisory, Inc. 100
SunAmerica Investments, Inc. 100
NEW YORK CORPORATIONS:
Advantage Capital Corporation 100
First SunAmerica Life Insurance Company 100
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of these Registration Statements on Form S-8 pertaining to the
1997 Employee Stock Purchase Plan (No. 333-28799), 1997 Non-employee Directors
Stock Plan (No. 333-24439), Long-term Performance Based Incentive Plan (No.
333-24441) and the 1997 Employee Incentive Stock Plan (No. 333-24437) and on
Form S-3 pertaining to Debt Securities; Preferred Stock; Common Stock; Warrants
to Purchase Debt Securities, Preferred Stock and Common Stock; Stock Purchase
Contracts; and Stock Purchase Units (No. 333-31619) of SunAmerica Inc. of our
report dated November 9, 1998 appearing on page F-2 of SunAmerica Inc.'s Annual
Report on Form 10-K for the year ended September 30, 1998. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedules, which appears on page S-2 of this Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
December 18, 1998
<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-K
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 18,800,847
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 82,808
<MORTGAGE> 3,412,449
<REAL-ESTATE> 53,605
<TOTAL-INVEST> 26,065,407
<CASH> 1,796,132
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 996,503
<TOTAL-ASSETS> 39,200,407
<POLICY-LOSSES> 21,351,393
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,216,483
0
248,000
<COMMON> 195,799
<OTHER-SE> 2,548,268
<TOTAL-LIABILITY-AND-EQUITY> 39,200,407
0
<INVESTMENT-INCOME> 1,989,632
<INVESTMENT-GAINS> (41,721)
<OTHER-INCOME> 458,827
<BENEFITS> 1,147,986
<UNDERWRITING-AMORTIZATION> 241,167
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 707,312
<INCOME-TAX> 191,000
<INCOME-CONTINUING> 516,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516,312
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
