SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-----------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission file number 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
---------------
(Exact Name of Registrant as Specified in Its Charter)
California 86-0198983
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1 SunAmerica Center, Los Angeles, California 90067-6022
-------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (310)772-6000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
--- ---
The number of shares outstanding of the registrants Common Stock on June
30, 1995 was as follows:
Common Stock, par value $1,000 per share, 3,511 shares outstanding
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
Part I - Financial Information
Consolidated Balance Sheet -
June 30, 1995 and September 30, 1994 (Unaudited) 3-4
Consolidated Income Statement -
Three Months and Nine Months Ended June 30, 1995 and 1994
(Unaudited) 5
Consolidated Statement of Cash Flows -
Nine Months Ended June 30, 1995 and 1994 (Unaudited) 6-7
Note to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-19
Part II - Other Information 20
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, September 30,
1995 1994
-------------- -------------
ASSETS
Investments:
Cash and short-term investments $ 206,766,000 $ 157,438,000
Bonds, notes and redeemable
preferred stocks:
Available for sale, at fair value
(amortized cost: June 1995,
$1,226,185,000; September 1994,
$1,108,271,000) 1,219,010,000 1,026,120,000
Held for investment, at amortized cost
(fair value: June 1995, $167,050,000;
September 1994, $180,247,000) 159,726,000 175,885,000
Mortgage loans 93,728,000 108,332,000
Common stocks, at fair value (cost:
June 1995, $7,645,000; September 1994,
$8,789,000) 5,940,000 7,550,000
Real estate 55,798,000 89,539,000
Other invested assets 63,986,000 67,208,000
------------- -------------
Total investments 1,804,954,000 1,632,072,000
Variable annuity assets 4,864,463,000 4,486,703,000
Accrued investment income 19,927,000 17,565,000
Deferred acquisition costs 379,113,000 416,289,000
Other assets 49,876,000 49,497,000
-------------- --------------
TOTAL ASSETS $7,118,333,000 $6,602,126,000
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
June 30, September 30,
1995 1994
-------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $1,508,072,000 $1,437,488,000
Reserves for guaranteed investment
contracts 30,155,000 ---
Payable to brokers for purchases of
securities 82,521,000 124,624,000
Income taxes currently payable 29,729,000 12,331,000
Other liabilities 71,371,000 58,891,000
-------------- --------------
Total reserves, payables
and accrued liabilities 1,721,848,000 1,633,334,000
-------------- --------------
Variable annuity liabilities 4,864,463,000 4,486,703,000
-------------- --------------
Subordinated notes payable to Parent 34,000,000 34,000,000
-------------- --------------
Deferred income taxes 60,705,000 64,567,000
-------------- --------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 252,876,000 252,876,000
Retained earnings 183,647,000 152,088,000
Net unrealized losses on debt and
equity securities available for sale (2,717,000) (24,953,000)
-------------- --------------
Total shareholder's equity 437,317,000 383,522,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,118,333,000 $6,602,126,000
============== ==============
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
<TABLE>
CONSOLIDATED INCOME STATEMENT
For the three months and nine months ended June 30, 1995 and 1994
(Unaudited)
<CAPTION>
Three months Nine months
------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income $34,132,000 $29,692,000 $94,466,000 $95,207,000
----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts (19,145,000) (15,681,000) (53,768,000) (50,358,000)
Guaranteed investment contracts (160,000) --- (160,000) ---
Senior indebtedness --- --- (16,000) (3,000)
Subordinated notes payable
to Parent (609,000) (595,000) (1,812,000) (1,785,000)
----------- ----------- ----------- -----------
Total interest expense (19,914,000) (16,276,000) (55,756,000) (52,146,000)
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 14,218,000 13,416,000 38,710,000 43,061,000
----------- ----------- ----------- -----------
NET REALIZED INVESTMENT LOSSES (3,506,000) (5,860,000) (8,874,000) (26,180,000)
----------- ----------- ----------- -----------
Fee income:
Variable annuity fees 21,143,000 19,743,000 61,175,000 58,865,000
Asset management fees 6,712,000 7,541,000 20,399,000 24,017,000
Net retained commissions 6,168,000 4,794,000 16,139,000 14,344,000
----------- ----------- ----------- -----------
TOTAL FEE INCOME 34,023,000 32,078,000 97,713,000 97,226,000
----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges 1,244,000 1,306,000 4,610,000 3,806,000
General and administrative
expenses (16,539,000) (13,034,000) (42,255,000) (38,955,000)
Amortization of deferred
acquisition costs (16,603,000) (11,433,000) (40,554,000) (31,148,000)
Other, net (958,000) 571,000 (132,000) 3,240,000
----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES (32,856,000) (22,590,000) (78,331,000) (63,057,000)
----------- ----------- ----------- -----------
PRETAX INCOME 11,879,000 17,044,000 49,218,000 51,050,000
Income tax expense (5,607,000) (5,750,000) (17,659,000) (17,640,000)
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES 6,272,000 11,294,000 31,559,000 33,410,000
Cumulative effect of change in
accounting for income taxes --- --- --- (20,463,000)
----------- ----------- ----------- -----------
NET INCOME $ 6,272,000 $11,294,000 $31,559,000 $12,947,000
=========== =========== =========== ===========
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1995 and 1994
(Unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,559,000 $ 12,947,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 53,768,000 50,358,000
Guaranteed investment contracts 160,000 ---
Net realized investment losses 8,874,000 26,180,000
Accretion of net discounts on investments (5,947,000) (678,000)
Amortization of goodwill 876,000 876,000
Provision for deferred income taxes (15,836,000) 17,283,000
Cumulative effect of change in
accounting for income taxes --- 20,463,000
Change in:
Deferred acquisition costs (3,124,000) (30,772,000)
Other assets (1,256,000) (2,047,000)
Income taxes currently payable 17,398,000 (964,000)
Other liabilities (1,198,000) 285,000
Other, net (2,336,000) (891,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 82,938,000 93,040,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale (678,324,000) (935,039,000)
Bonds, notes and redeemable preferred
stocks held for investment --- (1,808,000)
Mortgage loans --- (19,463,000)
Other investments, excluding short-term
investments (11,086,000) (19,759,000)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 478,051,000 751,420,000
Real estate 36,821,000 33,444,000
Other investments, excluding short-term
investments 4,623,000 3,768,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 95,781,000 111,075,000
Bonds, notes and redeemable preferred
stocks held for investment 18,682,000 27,523,000
Mortgage loans 14,834,000 25,124,000
Other investments, excluding short-term
investments 11,718,000 6,939,000
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NET CASH USED BY INVESTING ACTIVITIES (28,900,000) (16,776,000)
------------ ------------
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended June 30, 1995 and 1994
(Unaudited)
1995 1994
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $210,264,000 $ 84,248,000
Guaranteed investment contracts 30,000,000 ---
Net exchanges to (from) the fixed accounts
of variable annuity contracts 40,989,000 (36,500,000)
Withdrawal payments on:
Fixed annuity contracts (209,358,000) (200,331,000)
Guaranteed investment contracts (5,000) ---
Claims and annuity payments on fixed
annuity contracts (25,104,000) (23,538,000)
Net repayments of other short-term
financings (51,496,000) (141,340,000)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (4,710,000) (317,461,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 49,328,000 (241,197,000)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 157,438,000 500,624,000
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $206,766,000 $259,427,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 2,562,000 $ 784,000
============ ============
Income taxes paid, net of refunds received $ 16,026,000 $ 1,317,000
============ ============
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
Anchor National Life Insurance Company (the "Company") is an indirect
wholly owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion
of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's consolidated financial
position as of June 30, 1995 and September 30, 1994, the results of its
consolidated operations for the three and nine months ended June 30, 1995
and 1994 and its consolidated cash flows for the nine months ended June 30,
1995 and 1994. The results of operations for the three and nine months
ended June 30, 1995 are not necessarily indicative of the results to be
expected for the full year. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the fiscal year ended September 30,
1994, contained in the Company's Annual Report on Form 10-K. Certain items
have been reclassified to conform to the current period's presentation.
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial condition
and results of operations of Anchor National Life Insurance Company (the
"Company") for the three months and nine months ended June 30, 1995 and 1994.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $6.3 million in the third quarter of 1995, compared with $11.3 million
in the third quarter of 1994. For the nine months, such income amounted to
$31.6 million in 1995, compared with $33.4 million in 1994. The cumulative
effect of the change in accounting for income taxes resulting from the
implementation of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of
$20.5 million in the first quarter of fiscal 1994. Accordingly, net income
amounted to $12.9 million for the nine months of 1994.
PRETAX INCOME totaled $11.9 million in the third quarter of 1995 and $17.0
million in the third quarter of 1994. The $5.1 million decline in the third
quarter of 1995 primarily resulted from increased amortization of deferred
acquisition costs. For the nine months, pretax income totaled $49.2 million
in 1995, compared with $51.1 million in 1994.
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 $14.2 million in the third quarter
of 1995 from $13.4 million in the third quarter of 1994. These amounts
represent net investment spreads of 3.40% on average invested assets (computed
on a daily basis) of $1.67 billion in the third quarter of 1995 and 3.49% on
average invested assets of $1.54 billion in the third quarter of 1994. For the
nine months, net investment income decreased to $38.7 million in 1995 from
$43.1 million in 1994, representing net investment spreads of 3.17% and 3.67%,
respectively, on average invested assets of $1.63 billion and $1.56 billion,
respectively.
Investment income totaled $34.1 million in the third quarter of 1995,
compared with $29.7 million in the third quarter of 1994. For the nine months,
investment income totaled $94.5 million in 1995, compared with $95.2 million
in 1994. Investment income increased in the third quarter of 1995 as a result
of increased yields on higher levels of average invested assets. The yield on
average invested assets rose to 8.16% in the third quarter of 1995, from 7.73%
in the third quarter of 1994. Investment income declined for the nine months
of 1995, as the yield on average invested assets decreased to 7.73% in 1995
from 8.12% in 1994. Yields are computed without subtracting net realized
investment losses. If net realized investment losses were included in the
computation, the yields would be 7.32% in the third quarter of 1995, 6.21% in
the third quarter of 1994, 7.01% in the nine months of 1995 and 5.88% in the
nine months of 1994. Over the last seven fiscal quarters, the Company's yields
(before considering net realized investment losses) on average invested assets
have ranged from 7.17% to 8.79%; however, there can be no assurance that the
Company will achieve similar yields in future periods.
Increased investment yields in the third quarter of 1995 primarily resulted
from increased contributions from the Company's investments in partnerships.
The decline in investment yield for the nine months of 1995 was primarily due
to lower contributions from the Company's investment in partnerships compared
with 1994. Partnership income in 1995 totaled $4.8 million ($3.9 million in
the third quarter), compared with $8.2 million in 1994 ($1.1 million in the
third quarter). This income represents a yield of 13.18% on average
investments in partnerships of $48.5 million in 1995 (33.08% on average
investments in partnerships of $47.4 million in the third quarter), compared
with a yield of 28.77% on average investments in partnerships of $37.8 million
in 1994 (9.97% on average investments in partnerships of $44.4 million in the
third quarter).
The Company has historically enhanced investment yield through its use of
dollar roll transactions ("Dollar Rolls"). Although the Company continues to
use these programs, their use did not have a significant impact on investment
income in fiscal 1995. (See "Asset-Liability Matching" for additional
discussion of Dollar Rolls).
Total interest expense aggregated $19.9 million in the third quarter of 1995
and $16.3 million in the third quarter of 1994. For the nine months, interest
expense aggregated $55.8 million in 1995, compared with $52.1 million in 1994.
The average rate paid on all interest-bearing liabilities increased to 5.12%
in the third quarter of 1995 from 4.40% in the third quarter of 1994. For the
nine months, the average rate paid on all interest-bearing liabilities
increased to 4.88% in 1995 from 4.58% in 1994. Interest-bearing liabilities
averaged $1.55 billion during the third quarter of 1995, compared with $1.48
billion during the third quarter of 1994. For the nine months, interest
bearing liabilities averaged $1.52 billion in 1995 and 1994.
The increases in the average rate paid on all interest-bearing liabilities
primarily resulted from increased average crediting rates on the Company's
fixed annuity contracts. Average fixed annuity crediting rates were 5.07% in
the third quarter of 1995, 4.34% in the third quarter of 1994, 4.83% in the
nine months of 1995 and 4.52% in the nine months of 1994. During 1995, the
Company increased its average crediting rates on fixed annuity contracts
relative to those issued in the comparable 1994 periods to maintain a generally
competitive market rate. This increase was reflected in a corresponding
increase in the average crediting rate on fixed annuity contracts, the majority
of which reprice annually as interest rate guarantees are renewed.
NET REALIZED INVESTMENT LOSSES totaled $3.5 million in the third quarter of
1995 and $5.9 million in the third quarter of 1994, and include no impairment
writedowns in the third quarter of 1995 and $4.5 million in the third quarter
of 1994. Therefore, net losses from sales of investments totaled $3.5 million
in the third quarter of 1995 and $1.4 million in the third quarter of 1994.
For the nine months, net realized investment losses totaled $8.9 million in
1995, compared with $26.2 million in 1994 and include impairment writedowns of
$3.8 million and $14.2 million, respectively. Therefore, for the nine months
net losses from sales of investments totaled $5.1 million in 1995 and $12.0
million in 1994.
Net losses in 1995 include $9.2 million of net losses ($4.4 million in the
third quarter) realized on $518.2 million of sales of bonds ($311.8 million in
the third quarter). These bond sales include sales of certain collateralized
mortgage obligations ("CMOs") and asset-backed securities, U.S. Treasury
securities, high yield investments and mortgage-backed securities ("MBSs"),
all of which were primarily made to maximize total return.
Net losses in 1994 include $11.6 million of net losses ($1.1 million in the
third quarter) realized on $563.0 million of sales of bonds ($73.6 million in
the third quarter). These bond sales include sales of MBSs made primarily to
acquire other MBSs that were then used in Dollar Rolls. In addition, bond
sales include sales of high-yield investments primarily made to improve the
overall credit quality of the portfolio.
Impairment writedowns include additional provisions applied to bonds
amounting to $3.8 million in 1995 (none in the third quarter) and $14.2 million
in 1994 ($4.5 million in the third quarter). Impairment writedowns in the
first quarter of 1995 included $1.8 million of additional provisions applied
to certain interest-only strips ("IOs"). IOs, a type of MBS used as an asset-
liability matching tool to hedge against rising interest rates, are investment
grade securities that give the holder the right to receive only the interest
payments on a pool of underlying mortgage loans. At June 30, 1995, the
amortized cost of the IOs held by the Company was $6.4 million and their fair
value was $8.6 million.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $21.1
million in the third quarter of 1995 and $19.7 million in the third quarter of
1994. For the nine months, variable annuity fees totaled $61.2 million in
1995, compared with $58.9 million in 1994. Variable annuity assets averaged
$4.69 billion during the third quarter of 1995 and $4.39 billion during the
third quarter of 1994. For the nine months, variable annuity assets averaged
$4.50 billion in 1995, compared with $4.38 billion in 1994. Variable annuity
premiums, which exclude premiums allocated to the fixed accounts of variable
annuity products, aggregated $485.1 million since June 30, 1994. Variable
annuity premiums declined to $151.6 million in the third quarter of 1995 from
$170.1 million in the third quarter of 1994. For the nine months, variable
annuity premiums declined to $362.5 million in 1995 from $647.0 million in
1994. These declines in premiums can be attributed, in part, to a heightened
demand for fixed-rate investment options, including the fixed accounts of
variable annuities. The Company has encountered increased competition in the
variable annuity marketplace in fiscal 1994 and 1995 and anticipates that the
market will remain highly competitive for the foreseeable future.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds and private accounts by SunAmerica Asset Management Corp. Such fees
totaled $6.7 million on average assets managed of $2.06 billion in the third
quarter of 1995, compared with $7.5 million on average assets managed of $2.31
billion in the third quarter of 1994. For the nine months, asset management
fees totaled $20.4 million on average assets managed of $2.07 billion in 1995,
compared with $24.0 million on average assets managed of $2.44 billion in 1994.
Asset management fees decreased due to a decline in assets managed, principally
resulting from $468.2 million of redemptions, excluding redemptions of money
market funds, since June 30, 1994. Mutual fund sales in 1995 were also
affected by these adverse market conditions. Sales of mutual funds, excluding
sales of money market funds, totaled $39.5 million in the third quarter of
1995, compared with $65.9 million in the third quarter of 1994. For the nine
months, such sales totaled $100.0 million in 1995, compared with $302.2 million
in 1994.
NET RETAINED COMMISSIONS are primarily derived from commissions on the sales
of nonproprietary investment products by the Company's broker-dealer
subsidiary, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$6.2 million in the third quarter of 1995 and $4.8 million in the third quarter
of 1994. For the nine months, net retained commissions totaled $16.1 million
in 1995, compared with $14.3 million in 1994. Broker-dealer sales (mainly
mutual funds and general securities) totaled $1.53 billion in the third quarter
of 1995 and $1.37 billion in the third quarter of 1994. For the nine months,
broker-dealer sales totaled $3.80 billion in 1995, compared with $3.87 billion
in 1994. Net retained commissions are not proportionate to sales primarily due
to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $1.2 million in the
third quarter of 1995, compared with $1.3 million in the third quarter of 1994.
For the nine months, surrender charges totaled $4.6 million in 1995 and $3.8
million in 1994. Surrender charges generally are assessed on annuity
withdrawals at declining rates during the first five to seven years of the
contract. Withdrawal payments, which include surrenders and lump-sum annuity
benefits, totaled $228.9 million in the third quarter of 1995 and $186.1
million in the third quarter of 1994. These payments represent 14.9% and
12.9%, respectively, of average fixed and variable annuity reserves. For the
nine months, withdrawal payments totaled $677.0 million in 1995 and $533.5
million in 1994, and represent 14.9% and 12.3%, respectively, of average fixed
and variable annuity reserves. Withdrawals include variable annuity payments
from the separate accounts totaling $159.6 million in the third quarter of
1995, $112.5 million in the third quarter of 1994, $467.7 million in the nine
months of 1995 and $334.5 million in the nine months of 1994. Variable annuity
surrenders have increased primarily due to surrenders on a closed block of
business, policies coming off surrender charge restrictions and increased
competition in the marketplace. In addition, fixed annuity surrenders have
increased in the nine months of 1995 largely due to policies coming off
surrender charge restrictions. Management anticipates that withdrawal rates
will remain relatively stable for the foreseeable future and the Company's
investment portfolio has been structured to provide sufficient liquidity for
anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $16.5 million in the third
quarter of 1995, compared with $13.0 million in the third quarter of 1994. For
the nine months, general and administrative expenses totaled $42.3 million in
1995, compared with $39.0 million in 1994. General and administrative expenses
in fiscal 1995 include expenses related to a national advertising campaign to
increase the Company's brand name awareness. General and administrative
expenses remain closely controlled through a company-wide cost containment
program and represent approximately 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded
during 1994 primarily due to additional fixed and variable annuity and mutual
fund sales and the subsequent amortization of related deferred commissions and
other acquisition costs. Amortization also has been impacted by a reduction
in net realized capital losses and increases in mutual fund redemptions.
Amortization of all deferred acquisition costs totaled $16.6 million in the
third quarter of 1995 and $11.4 million in the third quarter of 1994. For the
nine months, such amortization totaled $40.6 million in 1995 and $31.1 million
in 1994.
INCOME TAX EXPENSE totaled $5.6 million in the third quarter of 1995 and $5.8
million in the third quarter of 1994. For the nine months, income tax expense
totaled $17.7 million in 1995, compared with $17.6 million in 1994,
representing effective tax rates of 36% and 35%, respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $22.0 million to $437.3 million at June 30,
1995 from $415.3 million at March 31, 1995. This increase primarily reflects
$6.3 million of net income and a $15.7 million decrease in net unrealized
losses on debt and equity securities available for sale charged directly to
shareholder's equity.
TOTAL ASSETS increased by $395.5 million to $7.12 billion at June 30, 1995
from $6.72 billion at March 31, 1995, principally due to a $355.2 million
increase in the separate account for variable annuities and a $65.5 million
increase in invested assets.
INVESTED ASSETS at June 30, 1995 totaled $1.80 billion, compared with $1.74
billion at March 31, 1995. This $65.5 million increase primarily resulted
from a $52.6 million decrease in net unrealized losses on debt and equity
securities available for sale.
The Company managed most of its investments internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. The Company carries
the portion of its portfolio of bonds, notes and redeemable preferred stocks
that is available for sale (the "Available for Sale Portfolio") at estimated
fair value. The remaining portion of its portfolio of bonds, notes and
redeemable preferred stocks is held for investment and is carried at amortized
cost.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for
investment and the Available for Sale Portfolio (the "Bond Portfolio"), at June
30, 1995, had a fair value that exceeded its aggregate amortized cost by $0.1
million (including net unrealized losses of $7.2 million on the Available for
Sale Portfolio). The aggregate amortized cost of the Bond Portfolio was $54.1
million above its fair value at March 31, 1995 (including net unrealized losses
of $59.6 million on the Available for Sale Portfolio). The decrease in net
unrealized losses on the Bond Portfolio since March 31, 1995 principally
resulted from a decrease in prevailing long-term interest rates and the
corresponding effect on the fair value of the Bond Portfolio.
Approximately $1.38 billion or 99.9% of the Bond Portfolio (at amortized
cost) at June 30, 1995 was rated by Standard and Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's") or under comparable statutory rating
guidelines established by the National Association of Insurance Commissioners
("NAIC") and implemented by either the NAIC or the Company. At June 30, 1995,
approximately $1.24 billion (at amortized cost) was rated investment grade by
one or both of these agencies or under the NAIC guidelines, including $969.8
million of U.S. government/agency securities and mortgage-backed securities
("MBSs").
At June 30, 1995, the Bond Portfolio included $144.1 million (fair value,
$144.5 million) of bonds not rated investment grade by S&P, Moody's or the
NAIC. Based on their June 30, 1995 amortized cost, these bonds accounted for
2.02% of the Company's total assets and 7.91% of invested assets.
Non-investment grade securities generally provide higher yields and involve
greater risks than investment grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment grade issuers. In addition, the trading market for these
securities is usually more limited than for investment grade securities. The
Company intends that its holdings of such securities not exceed current levels,
but its policies may change from time to time, including in connection with any
possible acquisition. The Company had no material concentrations of non-
investment grade securities at June 30, 1995.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 1995.
<PAGE>
</TABLE>
<TABLE>
<PAGE>
Rated Bonds By Rating Classification
(Dollars in thousands)
Issues not rated by S&P(Moody's)
Issues Rated by S&P(Moody's) By NAIC Category Total
---------------------------------------------- ----------------------------------- ----------------------------------
<CAPTION>
Estimated NAIC Estimated Percent of Estimated
S&P (Moody's) Amortized fair category Amortized fair Amortized invested fair
category(1) cost value (2) cost value cost assets(3) value
--------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3) $780,266 $775,321 1 $264,856 $269,132 $1,045,122 59.10% $1,044,453
BBB+ to BBB-
(Baa1 to Baa3) 54,210 53,566 2 140,137 138,196 194,347 10.99 191,762
BB+ to BB-
(Ba1 to Ba3) - - 3 32,052 34,801 32,052 1.81 34,801
B+ to B-
(B1 to B3) 74,569 74,730 4 32,484 31,349 107,053 6.05 106,079
CCC+ to C-
(Caa to C) 4,336 3,000 5 - - 4,336 0.25 3,000
D - - 6 636 636 636 0.04 636
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $913,381 $906,617 $470,165 $474,114 $1,383,546 $1,380,731
========== ========== ========== ========== ========== ==========
(1) S&P rates debt securities in eleven rating categories, from AAA (the highest) to D (in payment default). A plus (+)
or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is
considered investment grade. Moody's rates debt securities in nine rating categories, from Aaa (the highest) to C
(extremely poor prospects of attaining real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the
lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is
considered investment grade. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both
agencies.
(2) Bonds and short-term promissory instruments are divided into nine 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 nine
categories correspond with the S&P(Moody's) rating groups listed above, with categories 1 and 2 considered investment
grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its
implementation of NAIC rating guidelines.
(3) At amortized cost.
</TABLE>
<PAGE>
<PAGE>
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $71.2 million at June 30, 1995. Secured
Loans are primarily originated by money center or investment banks or are
originated directly by the Company. Secured Loans are senior to subordinated
debt and equity, and virtually all are secured by assets of the issuer. At
June 30, 1995, Secured Loans consisted of loans to 10 borrowers spanning 9
industries, with 21% in the health care industry and no other industry
concentration constituting more than 14% of these assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation
in these transactions has enabled the Company to improve its investment yield.
The majority of the Company's Secured Loans are not rated by S&P or Moody's.
However, 91% of the Secured Loans (at amortized cost) are rated in NAIC
categories 1 and 2. Although, as a result of restrictive financial covenants,
Secured Loans involve greater risk of technical default than do publicly traded
investment grade securities, management believes that generally the risk of
loss upon default for its Secured Loans is mitigated by their financial
covenants and senior secured positions.
MORTGAGE LOANS aggregated $93.7 million at June 30, 1995 and consisted
of 15 first mortgage loans with an average loan balance of approximately
$6.2 million, collateralized by properties located in 8 states. Approximately
24% of the portfolio was office, 22% was hotel, 20% was retail, 18% was
multifamily residential and 16% was other types. At June 30, 1995,
approximately 22% of the portfolio was secured by properties located in
Colorado, approximately 19% of the portfolio was secured by properties located
in California and approximately 16% of the portfolio was secured by properties
located in New Jersey. No more than 13% of the portfolio was secured by
properties in any other single state. At June 30, 1995, there was one loan
with an outstanding balance of $20 million or more, which loan aggregated
approximately 22% of the portfolio. At June 30, 1995, approximately 22% of the
mortgage loan portfolio consisted of loans with balloon payments due before
July 1, 1998. At June 30, 1995, there were no loans delinquent by more than
90 days. There were no loans foreclosed upon and transferred to real estate
in the balance sheet during fiscal 1995. At June 30, 1995, one mortgage loan
having an aggregate carrying value of $8.5 million had been previously
restructured. No mortgage loans were restructured during the 1994 or 1995
fiscal years.
Approximately 64% of the mortgage loans in the portfolio at June 30, 1995
were seasoned loans underwritten to the Company's standards and purchased at
or near par from another financial institution which was downsizing its
portfolio. 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
represent a higher level of risk for the industry than have mortgage loans
secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans, and the effects of general
economic conditions on these commercial properties. However, due to the
seasoned nature of the Company's mortgage loans and its strict underwriting
standards, the Company believes that it has reduced the risk attributable to
its mortgage loan portfolio while maintaining attractive yields.
REAL ESTATE aggregated $55.8 million at June 30, 1995 and consisted of
non-income producing land in the Phoenix, Arizona metropolitan area. The
Company has undertaken to dispose of this Phoenix-area land during the next one
to two years, either to affiliated or nonaffiliated parties, and SunAmerica
Inc., the ultimate parent, has guaranteed that the Company will receive its
statutory carrying value of these assets.
OTHER INVESTED ASSETS aggregated $64.0 million at June 30, 1995,
including $47.6 million of investments in limited partnerships and an aggregate
of $16.4 million of miscellaneous investments, including policy loans,
collateralized mortgage obligation residuals and leveraged leases. The
Company's limited partnership interests primarily include partnerships,
accounted for by using the cost method of accounting, that invest mainly in
equity securities.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed maturities that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope
of the yield curve, the spread at which fixed maturities are priced over the
yield curve and general competitive conditions within the industry. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and guaranteed investment contract ("GIC")
obligations. The Company seeks to achieve a predictable spread between what
it earns on its assets and what it pays on its liabilities by investing
principally in fixed maturities. The Company's fixed-rate products incorporate
surrender charges or other limitations on when contracts can be surrendered for
cash to encourage persistency and discourage withdrawals. Approximately 59%
of the Company's fixed annuity reserves had surrender penalties or other
restrictions at June 30, 1995.
During the third quarter of 1995, the Company began issuing GICs which
currently guarantee the payment of principal and interest at variable rates for
a term of one year. Such contracts do not permit withdrawals of principal
prior to maturity. The Company expects to increase its participation in the
GIC marketplace over the coming year.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. The cash flow obtained from MBSs
helps to maintain the anticipated spread, while providing desired liquidity.
At June 30, 1995, the weighted average life of the Company's investments was
approximately 3.9 years and the portfolio had a duration of approximately 3.2
years. Weighted average life is defined as the average time to receipt of all
principal, incorporating the effects of scheduled amortization and expected
prepayments, weighted by book value. Duration is a common measure for the
price sensitivity of a fixed-income security or portfolio to changes in
interest rates. It is the weighted average time to receipt of all expected
cash flows, both principal and interest, including the effects of scheduled
amortization and expected prepayments, in which the weight attached to each
year of receipt is the proportion of the present value of cash to be received
during that year to the total present value of the portfolio.
The Company also seeks to provide liquidity, while enhancing its spread
income, by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls
and by investing in MBSs. Reverse Repos involve a sale of securities and an
agreement to repurchase the same securities at a later date at an agreed upon
price and are generally over-collateralized. Dollar Rolls are similar to
Reverse Repos except that the repurchase involves securities that are only
substantially the same as the securities sold and the arrangement is not
collateralized, nor is it governed by a repurchase agreement. MBSs are
generally investment grade securities collateralized by large pools of mortgage
loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to enhance its spread income and match its assets and liabilities. The primary
risk associated with Dollar Rolls and Reverse Repos is the risk associated with
counterparty nonperformance. The Company believes, however, that the
counterparties to its Dollar Rolls and Reverse Repos are financially
responsible and that the counterparty risk associated with those transactions
is minimal. Counterparty risk associated with Dollar Rolls is further
mitigated by the Company's participation in an MBS trading clearinghouse. The
sell and buy transactions that are submitted to this clearinghouse are marked
to market on a daily basis and each participant is required to over-
collateralize its net loss position by 30% with either cash, letters of credit
or government securities. The primary risk associated with MBSs is that a
changing interest rate environment might cause prepayment of the underlying
obligations at speeds slower or faster than anticipated at the time of their
purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans,
management generally considers information concerning the mortgaged property
and, among other things, factors impacting the current and expected payment
status of the loan and, if available, the current fair value of the underlying
collateral.
The carrying values of bonds that are determined to have declines in
value that are other than temporary are reduced to net realizable value and no
further accruals of interest are made. Mortgage loan writedowns are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full.
Accrual of interest is suspended when principal and interest payments on
mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost)
that are in default as to the payment of principal or interest, totaled $0.5
million at June 30, 1995, all of which were unsecured non-investment grade
bonds, and $2.4 million at March 31, 1995. At June 30, 1995, defaulted
investments constituted 0.02% of total invested assets at amortized cost and
the fair value was equal to the amortized cost. At March 31, 1995, defaulted
investments constituted 0.1% of total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At June 30, 1995,
approximately $829.2 million of the Company's Bond Portfolio had an aggregate
unrealized gain of $35.2 million, while approximately $556.7 million had an
aggregate unrealized loss of $35.1 million. In addition, the Company's
investment portfolio also currently provides approximately $18.1 million of
monthly cash flow from scheduled principal and interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby
avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities. 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.
REGULATION
The Company is subject to regulation and supervision by the states in
which it is authorized to transact business. State insurance laws establish
supervisory agencies with broad administrative and supervisory powers related
to granting and revoking licenses to transact business, regulating marketing
and other trade practices, operating guaranty associations, licensing agents,
approving policy forms, regulating certain premium rates, regulating insurance
holding company systems, establishing reserve requirements, prescribing the
form and content of required financial statements and reports, performing
financial and other examinations, determining the reasonableness and adequacy
of statutory capital and surplus, regulating the type and amount of investments
permitted, limiting the amount of dividends that can be paid without first
obtaining regulatory approval and other related matters.
In recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies. The NAIC has recently approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. These initiatives include new
investment reserve requirements, risk-based capital standards and restrictions
on an insurance company's ability to pay dividends to its stockholders. The
NAIC is also currently developing model laws to govern insurance company
investments. Current proposals are still being debated and the Company is
monitoring developments in this area and the effects any change would have on
the Company.
SunAmerica Asset Management is registered with the Securities and
Exchange Commission (the "Commission") as a registered investment adviser under
the Investment Advisers Act of 1940. The mutual funds that it markets are
subject to regulation under the Investment Company Act of 1940. SunAmerica
Asset Management and the mutual funds are subject to regulation and examination
by the Commission. In addition, variable annuities and the related separate
accounts of the Company are subject to regulation by the Commission under the
Securities Act of 1933 and the Investment Company Act of 1940.
The Company's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the
National Association of Securities Dealers, Inc. (the "NASD"). The NASD has
broad administrative and supervisory powers relative to all aspects of
business and may examine the subsidiary's business and accounts at any
time.
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
No exhibits are filed with this report and no Current Report on Form 8-K was
filed during the three months ended June 30, 1995.
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
-----------------------------------
Registrant
Dated August 11, 1995 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Director
(Principal Financial Officer)
Dated August 11, 1995 /s/ N. SCOTT GILLIS
---------------------------- -----------------------------------
N. Scott Gillis
Senior Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By
Scott L. Robinson
August 11, 1995 Senior Vice President and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
Senior Vice President and August 11, 1995
Scott L. Robinson Director (Principal Financial
Officer)
Senior Vice President and August 11, 1995
N. Scott Gillis Controller (Principal Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 1,219,010,000
<DEBT-CARRYING-VALUE> 159,726,000
<DEBT-MARKET-VALUE> 167,050,000
<EQUITIES> 5,940,000
<MORTGAGE> 93,728,000
<REAL-ESTATE> 55,798,000
<TOTAL-INVEST> 1,804,954,000
<CASH> 206,766,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 379,113,000
<TOTAL-ASSETS> 7,118,333,000
<POLICY-LOSSES> 1,538,227,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,000,000
<COMMON> 3,511,000
0
0
<OTHER-SE> 433,806,000
<TOTAL-LIABILITY-AND-EQUITY> 7,118,333,000
0
<INVESTMENT-INCOME> 92,638,000
<INVESTMENT-GAINS> (8,874,000)
<OTHER-INCOME> 97,713,000
<BENEFITS> 53,928,000
<UNDERWRITING-AMORTIZATION> 40,554,000
<UNDERWRITING-OTHER> 37,777,000
<INCOME-PRETAX> 49,218,000
<INCOME-TAX> 17,659,000
<INCOME-CONTINUING> 31,559,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,559,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
