SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 No. 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Incorporated in California 86-0198983
IRS Employer
Identification No.
1 SunAmerica Center, Los Angeles, California 90067-6022
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 May 15,
1997 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
March 31, 1997 and September 30, 1996 3 - 4
Consolidated Income Statement (Unaudited) -
Three Months and Six Months Ended March 31, 1997 and 1996 5
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended March 31, 1997 and 1996 6 - 7
Note to Consolidated Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 22
Part II - Other Information 23
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<TABLE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Unaudited)
<CAPTION>
March 31, September 30,
1997 1996
--------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 253,228,000 $ 122,058,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
March 1997, $2,256,589,000;
September 1996, $2,001,024,000) 2,238,880,000 1,987,271,000
Mortgage loans 188,998,000 98,284,000
Common stocks, at fair value (cost:
March 1997, $2,510,000;
September 1996, $2,911,000) 4,005,000 3,970,000
Real estate 24,000,000 39,724,000
Other invested assets 71,957,000 77,925,000
--------------- --------------
Total investments 2,781,068,000 2,329,232,000
Variable annuity assets 6,997,289,000 6,311,557,000
Receivable from brokers for sales of
securities --- 52,348,000
Accrued investment income 23,210,000 19,675,000
Deferred acquisition costs 508,161,000 443,610,000
Other assets 55,506,000 48,113,000
--------------- --------------
TOTAL ASSETS $10,365,234,000 $9,204,535,000
=============== ==============
See accompanying note
3
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
<CAPTION>
March 31, September 30,
1997 1996
--------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $2,162,084,000 $1,789,962,000
Reserves for guaranteed investment
contracts 420,408,000 415,544,000
Payable to brokers for purchases of
securities 42,103,000 ---
Income taxes currently payable 25,019,000 21,486,000
Other liabilities 111,236,000 74,710,000
--------------- --------------
Total reserves, payables
and accrued liabilities 2,760,850,000 2,301,702,000
--------------- --------------
Variable annuity liabilities 6,997,289,000 6,311,557,000
--------------- --------------
Subordinated notes payable to Parent 35,972,000 35,832,000
--------------- --------------
Deferred income taxes 64,938,000 70,189,000
--------------- --------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 308,674,000 280,263,000
Retained earnings 201,093,000 207,002,000
Net unrealized losses on debt and
equity securities available for sale (7,093,000) (5,521,000)
--------------- --------------
Total shareholder's equity 506,185,000 485,255,000
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $10,365,234,000 $9,204,535,000
=============== ==============
</TABLE>
See accompanying note
4
<PAGE>
<TABLE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<CAPTION>
Three Months Six Months
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income $50,719,000 $40,384,000 $97,431,000 $79,037,000
----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts (27,155,000) (19,694,000) (52,346,000) (38,630,000)
Guaranteed investment contracts (5,948,000) (4,481,000) (11,986,000) (8,753,000)
Senior indebtedness (557,000) (1,426,000) (738,000) (1,621,000)
Subordinated notes payable
to Parent (766,000) (632,000) (1,524,000) (1,265,000)
----------- ----------- ----------- -----------
Total interest expense (34,426,000) (26,233,000) (66,594,000) (50,269,000)
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 16,293,000 14,151,000 30,837,000 28,768,000
----------- ----------- ----------- -----------
NET REALIZED INVESTMENT GAINS
(LOSSES) (1,174,000) 2,037,000 (20,290,000) (10,763,000)
----------- ----------- ----------- -----------
Fee income:
Variable annuity fees 32,333,000 25,192,000 62,939,000 49,482,000
Net retained commissions 9,777,000 8,157,000 17,573,000 14,648,000
Asset management fees 6,305,000 6,361,000 12,723,000 12,864,000
----------- ----------- ----------- -----------
TOTAL FEE INCOME 48,415,000 39,710,000 93,235,000 76,994,000
----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges 1,105,000 1,151,000 2,455,000 2,412,000
General and administrative
expenses (23,210,000) (18,313,000) (45,532,000) (35,310,000)
Amortization of deferred
acquisition costs (13,441,000) (14,181,000) (27,258,000) (27,839,000)
Annual commissions (2,001,000) (1,054,000) (3,434,000) (1,993,000)
Other, net (839,000) 195,000 81,000 702,000
----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES (38,386,000) (32,202,000) (73,688,000) (62,028,000)
----------- ----------- ----------- -----------
PRETAX INCOME 25,148,000 23,696,000 30,094,000 32,971,000
Income tax expense (8,903,000) (8,954,000) (10,503,000) (12,403,000)
----------- ----------- ----------- -----------
NET INCOME $16,245,000 $14,742,000 $19,591,000 $20,568,000
=========== =========== =========== ===========
See accompanying note
5
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended March 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,591,000 $ 20,568,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 52,346,000 38,630,000
Guaranteed investment contracts 11,986,000 8,753,000
Net realized investment losses 20,291,000 10,763,000
Accretion of net discounts on
investments (4,927,000) (3,916,000)
Amortization of goodwill 583,000 584,000
Provision for deferred income taxes (4,404,000) (11,339,000)
Change in:
Accrued investment income (3,535,000) (1,870,000)
Deferred acquisition costs (63,451,000) (28,739,000)
Other assets (7,976,000) (7,629,000)
Income taxes currently payable 3,533,000 13,524,000
Other liabilities 5,053,000 (2,545,000)
Other, net 117,000 188,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,207,000 36,972,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (1,822,206,000) (998,327,000)
Mortgage loans (96,504,000) ---
Other investments, excluding short-term
investments (4,889,000) (4,112,000)
Sales of:
Bonds, notes and redeemable preferred
stocks 1,444,348,000 749,024,000
Other investments, excluding short-term
investments 942,000 1,398,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 215,577,000 151,404,000
Other investments, excluding short-term
investments 17,634,000 20,020,000
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (245,098,000) (80,593,000)
------------ ------------
See accompanying note
6
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
Six Months Ended March 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $688,942,000 $377,752,000
Guaranteed investment contracts 55,000,000 86,158,000
Net exchanges from the fixed
accounts of variable annuity contracts (227,868,000) (93,739,000)
Withdrawal payments on:
Fixed annuity contracts (124,474,000) (132,245,000)
Guaranteed investment contracts (62,122,000) (8,343,000)
Claims and annuity payments on fixed
annuity contracts (16,941,000) (15,060,000)
Net receipts from (repayments of)
other short-term financings 6,113,000 (120,273,000)
Net increase in senior indebtedness --- 19,866,000
Capital contributions received 28,411,000 27,387,000
Dividend paid --- (29,400,000)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 347,061,000 112,103,000
------------ ------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 131,170,000 68,482,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 122,058,000 249,209,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $253,228,000 $317,691,000
============ ============
Supplemental cash flow information:
Interest paid on indebtedness $ 1,608,000 $ 2,606,000
============ ============
Net income taxes paid $ 11,378,000 $ 10,253,000
============ ============
</TABLE>
See accompanying note
7
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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 March 31,
1997 and September 30, 1996, the results of its consolidated operations for the
three months and six months ended March 31, 1997 and 1996 and its consolidated
cash flows for the six months ended March 31, 1997 and 1996. The results of
operations for the three months and six months ended March 31, 1997 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, 1996, contained in the Company's 1996 Annual Report
on Form 10-K. Certain items have been reclassified to conform to the current
period's presentation.
8
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - 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 Anchor National Life Insurance Company (the "Company") for the
three months and six months ended March 31, 1997 and 1996 follows. In
connection with, and because it desires to take advantage of, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
cautions readers regarding certain forward-looking statements contained in the
following discussion 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. In particular, 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 or projected 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 upon 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, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and 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 events or
developments, some of which may be national in scope, such as general economic
conditions and changes in interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility, and other risks associated
with the Company's investment portfolio, and other factors. 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 $16.2 million in the second quarter of 1997 and $14.7
million in the second quarter of 1996. For the six months, net income amounted
to $19.6 million in 1997, compared with $20.6 million in 1996.
PRETAX INCOME totaled $25.1 million in the second quarter of 1997 and
$23.7 million in the second quarter of 1996. For the six months, pretax income
totaled $30.1 million in 1997 and $33.0 million in 1996. This $2.9 million
decline in the six months of 1997 primarily resulted from increased net
realized investment losses and general and administrative expenses, partially
offset by increased fee income.
9
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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 $16.3 million in the second quarter
of 1997 from $14.2 million in the second quarter of 1996. These amounts
represent 2.41% on average invested assets (computed on a daily basis) of $2.70
billion in the second quarter of 1997 and 2.57% on average invested assets of
$2.20 billion in the second quarter of 1996. For the six months, net
investment income increased to $30.8 million in 1997 from $28.8 million in
1996, representing 2.37% on average invested assets of $2.60 billion in 1997
and 2.78% on average invested assets of $2.07 billion in 1996.
Net investment income also includes the effect of income earned on the
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $147.7 million in the second quarter of 1997, $152.3
million in the second quarter of 1996, $149.0 million in the six months of 1997
and $142.0 million in the six months of 1996. The difference between the
Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities was 2.11% in the second quarter of 1997, 2.22% in
the second quarter of 1996, 2.06% in the six months of 1997 and 2.42% in the
six months of 1996.
Investment income totaled $50.7 million in the second quarter of 1997,
up from $40.4 million in the second quarter of 1996. For the six months,
investment income amounted to $97.4 million in 1997, up from $79.0 million in
1996. These amounts represent yields on average invested assets of 7.50% and
7.35% in the second quarters of 1997 and 1996, respectively, and 7.48% and
7.63% in the six months of 1997 and 1996, respectively. Investment income
increased primarily as a result of higher levels of average invested assets.
Partnership income increased to $1.4 million (representing a yield of
13.19% on related average assets of $42.8 million) in the second quarter of
1997, compared with $0.9 million (representing a yield of 10.52% on related
average assets of $35.3 million) in the second quarter of 1996. For the six
months, partnership income amounted to $2.2 million (representing a yield of
9.88% on related average assets of $43.7 billion) in 1997, compared with $2.3
million (representing a yield of 11.15% on related average assets of $42.0
million) in 1996. Partnership income is based upon cash distributions received
from limited partnerships, the operations of which the Company does not
significantly 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.
Total interest expense aggregated $34.4 million in the second quarter of
1997 and $26.2 million in the second quarter of 1996. For the six months,
interest expense aggregated $66.6 million in 1997, compared with $50.3 million
in 1996. The average rate paid on all interest-bearing liabilities was 5.39%
(5.29% on fixed annuity contracts and 5.69% on guaranteed investment contracts
("GICs")) in the second quarter of 1997, compared with 5.13% (5.04% on fixed
annuity contracts and 5.80% on GICs) in the second quarter of 1996. For the
six months, the average rate paid on all interest-bearing liabilities was 5.42%
(5.31% on fixed annuity contracts and 5.75% on GICs) in 1997, compared with
5.21% (5.07% on fixed annuity contracts and 5.98% on GICs) in 1996. Interest-
bearing liabilities averaged $2.56 billion during the second quarter of 1997,
$2.05 billion during the second quarter of 1996, $2.46 billion during the six
months of 1997 and $1.93 billion during the six months of 1996.
10
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The increase in the average rates paid on fixed annuity contracts during
1997 primarily resulted from the impact of certain promotional one-year
interest rates offered on the Company's Polaris variable annuity product. The
decline in interest crediting rates on GICs reflects the generally declining
interest rate environment since early 1995 and its effect on the variable-rate
GIC portfolio.
The growth in average invested assets in 1997 reflects sales of the
Company's fixed-rate products, consisting of both fixed accounts of variable
annuity products and GICs. Since March 31, 1996, fixed annuity premiums have
aggregated $1.05 billion and GIC premiums have totaled $103.8 million. Fixed
annuity premiums totaled $326.1 million in the second quarter of 1997 and
$315.2 million in the second quarter of 1996. For the six months, fixed
annuity premiums totaled $688.9 million in 1997 and $377.8 million in 1996.
The increases in fixed annuity premiums in 1997 resulted primarily from greater
inflows into the one-year fixed account of the Company's Polaris product. The
Company has observed that many purchasers of its variable annuity contracts
allocate new premiums to the one-year fixed account and concurrently elect the
option to dollar cost average into one or more variable funds. Accordingly,
the Company anticipates that it will see a large portion of these premiums
transferred into the variable funds.
GIC premiums totaled $50.0 million in the second quarter of 1997 and $55
million in the six months of 1997. GIC premiums in 1996 amounted to $86.2
million in both the second quarter and the six months. In 1995, the Company
began to issue GICs, which guarantee the payment of principal and interest at
fixed or variable rates for a term of one to five years. The Company's GICs
that are purchased by asset management firms either prohibit withdrawals or
permit withdrawals with notice ranging from 90 to 270 days. Contracts that are
purchased by banks or state and local governmental authorities either prohibit
withdrawals or permit scheduled book value withdrawals subject to terms of the
underlying indenture or agreement. 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 $1.2 million in the second quarter
of 1997, compared with net realized investment gains of $2.0 million in the
second quarter of 1996. For the six months, net realized investment losses
totaled $20.3 million in 1997, compared with $10.8 million in 1996 and include
impairment writedowns of $16.1 million and $13.9 million, respectively.
Therefore, for the six months, net losses from sales of investments totaled
$4.2 million in 1997, compared with net gains of $3.1 million in 1996.
Impairment writedowns were not recorded in the second quarter of either 1997
or 1996.
Net losses in the six months of 1997 include $5.4 million of net losses
realized on $1.39 billion of sales of bonds. Net gains in 1996 include $4.3
million of net gains realized on $690.3 million of sales of bonds. Sales of
investments are generally made to maximize total return.
Impairment writedowns in the six months reflect $15.7 million and $13.9
million of provisions applied to non-income producing land owned in Arizona in
1997 and 1996, respectively. The statutory carrying value of this land had
been guaranteed by the Company's ultimate Parent, SunAmerica Inc.
("SunAmerica"). SunAmerica made capital contributions of $28.4 million and
$27.4 million on December 31, 1997 and 1996, respectively, to the Company
11
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through the Company's direct parent in exchange for the termination of its
guaranty with respect to this land. Accordingly, the Company reduced the
carrying value of this land to estimated fair value to reflect the full
termination of the guaranty. Impairment writedowns, on an annualized basis,
represent 1.24% and 1.44% of average invested assets for the six months of
1997 and 1996, respectively. Such writedowns are based upon estimates of the
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 supporting
variable annuity contracts in separate accounts. Such fees totaled $32.3
million in the second quarter of 1997 and $25.2 million in the second quarter
of 1996. For the six months, variable annuity fees totaled $62.9 million in
1997, compared with $49.5 million in 1996. These increases reflect growth in
average variable annuity assets, due to increased market values, net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts and the receipt of variable annuity premiums, partially offset by
surrenders. Variable annuity assets averaged $7.10 billion during the second
quarter of 1997 and $5.59 billion during the second quarter of 1996. For the
six months, variable annuity assets averaged $6.85 billion in 1997, compared
with $5.44 billion in 1996. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, have aggregated
$1.02 billion since March 31, 1996. Variable annuity premiums increased to
$304.1 million in the second quarter of 1997 from $224.5 million in the second
quarter of 1996. For the six months, variable annuity premiums totaled $531.0
million in 1997, compared with $434.1 million in 1996. These increases may be
attributed, in part, to market share gains through enhanced distributions, as
well as strong demand for equity investments, principally as a result of
generally favorable market conditions. The Company has encountered increased
competition in the variable annuity marketplace during recent years and
anticipates that the market will remain highly competitive for the foreseeable
future.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiary, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$9.8 million in the second quarter of 1997 and $8.2 million in the second
quarter of 1996. For the six months, net retained commissions totaled $17.6
million in 1997 and $14.6 million in 1996. Broker-dealer sales (mainly sales
of general securities, mutual funds and annuities) totaled $2.67 billion in the
second quarter of 1997 and $2.57 billion in the second quarter of 1996. For
the six months, such sales totaled $4.70 billion in 1997 and $4.32 billion in
1996. The increases in sales and net retained commissions during 1997 reflect
a greater number of registered representatives and higher average production,
combined with generally favorable market conditions. Increases in net retained
commissions may not be proportionate to increases in sales primarily due to
differences in sales mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $6.3 million on
average assets managed of $2.31 billion in the second quarter of 1997 and $6.4
million on average assets managed of $2.15 billion in the second quarter of
1996. For the six months, asset management fees totaled $12.7 million on
average assets managed of $2.26 billion in 1997, compared with $12.9 million
on average assets managed of $2.15 billion in 1996. Asset management fees
12
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decreased slightly in 1997, despite increases in average assets managed,
principally due to changes in product mix. Sales of mutual funds, excluding
sales of money market accounts, have aggregated $305.7 million since March 31,
1996. Mutual fund sales totaled $119.9 million in the second quarter of 1997,
up $56.3 million from the $63.6 million recorded in the second quarter of 1996.
For the six months, such sales totaled $182.3 million in 1997, up from $99.9
million in 1996. The significant increases in sales in the 1997 periods
principally resulted from the introduction in November 1996 of the Company's
"Style Select Series" product. Redemptions of mutual funds, excluding
redemptions of money market accounts, amounted to $110.4 million in the second
quarter of 1997 and $102.1 million in the second quarter of 1996. For the six
months, such redemptions amounted to $214.1 million in 1997 and $199.6 million
in 1996.
SURRENDER CHARGES on fixed and variable annuities totaled $1.1 million
in the second quarter of 1997, $1.2 million in the second quarter of 1996, $2.5
million in the six months of 1997 and $2.4 million in the six months of 1996.
Surrender charges generally are assessed on annuity withdrawals at declining
rates during the first five to seven years of an annuity contract. Withdrawal
payments, which include surrenders and lump-sum annuity benefits, totaled
$277.8 million in the second quarter of 1997 and $223.6 million in the second
quarter of 1996. Annualized, these payments represent 12.3% and 12.6%,
respectively, of the aggregate of average fixed and variable annuity reserves.
For the six months, withdrawal payments totaled $515.9 million in 1997 and
$438.8 million in 1996, and, annualized, represent 11.8% and 12.7%,
respectively, of average fixed and variable annuity reserves. Withdrawals
include variable annuity payments from the separate accounts totaling $215.4
million in the second quarter of 1997, $151.8 million in the second quarter of
1996, $391.4 million in the six months of 1997 and $306.3 million in the six
months of 1996. Management anticipates that withdrawal rates will remain
relatively stable for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $23.2 million in the second
quarter of 1997, compared with $18.3 million in the second quarter of 1996.
For the six months, general and administrative expenses totaled $45.5 million
in 1997, compared with $35.3 million in 1996. Expenses in 1997 increased
primarily due a growing block of business. Expenses remain closely controlled
through a company-wide cost containment program and continue to represent
approximately 1% of average total assets on a annualized basis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $13.4 million in the
second quarter of 1997 and $14.2 million in the second quarter of 1996. For
the six months, such amortization totaled $27.3 million in 1997, compared with
$27.8 million in 1996.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in
arrears to maintain the persistency of certain of the Company's variable
annuity contracts. Substantially all of the Company's currently available
variable annuity products allow for an annual commission payment option in
return for a lower immediate commission payment. Annual commissions totaled
$2.0 million in the second quarter of 1997, $1.1 million in the second quarter
of 1996, $3.4 million in the six months of 1997 and $2.0 million in the six
months of 1996. The increase in annual commissions reflects increased sales
of annuities that offer this commission option. The Company estimates that
approximately 43% of the average balance of its variable annuity products is
currently subject to such annual commissions. Based on current sales, this
percentage is expected to increase in future periods.
13
<PAGE>
INCOME TAX EXPENSE totaled $8.9 million in the second quarter of 1997,
$9.0 million in the second quarter of 1996, $10.5 million in the six months of
1997 and $12.4 million in the six months of 1996, and represented effective tax
rates of 35% in 1997 and 38% in 1996. Tax rates are higher in 1996 because a
larger proportion of the total income was from subsidiaries located in states
with higher income tax rates.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY decreased by $23.9 million to $506.2 million at
March 31, 1997 from $530.1 million at December 31, 1996, primarily as a result
of the $25.5 million dividend paid to the Company's parent, partially offset
by the $16.3 million of net income recorded for the quarter. Shareholder's
equity at March 31, 1997 was also unfavorably impacted by the recording of a
$7.1 million net unrealized loss on debt and equity securities available for
sale, which represents a $14.7 million swing from the $7.6 million net
unrealized gain recorded at December 31, 1996.
TOTAL ASSETS increased by $339.5 million to $10.37 billion at March 31,
1997 from $10.03 billion at December 31, 1996, principally due to a $212.9
million increase in the separate accounts for variable annuities and a $77.4
million increase in invested assets.
INVESTED ASSETS at March 31, 1997 totaled $2.78 billion, compared with
$2.70 billion at December 31, 1996. This $77.4 million increase primarily
resulted from sales of fixed annuities and the fixed account of variable
annuities, partially offset by $16.2 million of unrealized losses on debt and
equity securities available for sale, compared to $18.4 million of unrealized
gains at December 31, 1996.
The Company manages most of its invested assets internally. The
Company's general investment philosophy is to hold fixed maturity assets for
long-term investment. Thus, it does not have a trading portfolio. 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 prepayment risk, the
Company's need for liquidity and other similar factors.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair
value by $17.7 million at March 31, 1997. At December 31, 1996, the fair value
of the Bond Portfolio exceeded its amortized cost by $17.0 million. The net
unrealized loss on the Bond Portfolio since December 31, 1996 principally
reflects higher relative prevailing interest rates at March 31, 1997 and their
corresponding effect on the fair value of the Bond Portfolio.
All of the Bond Portfolio ($2.26 billion at amortized cost, excluding
$6.5 million of redeemable preferred stocks) at March 31, 1997 was rated by
Standard and Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"),
Duff and Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P.
("Fitch") or under comparable statutory rating guidelines established by the
National Association of Insurance Commissioners ("NAIC") and implemented by
either the NAIC or the Company. At March 31, 1997, approximately $2.06 billion
of the Bond Portfolio (at amortized cost) was rated investment grade by one or
more of these agencies or by the Company or the NAIC, pursuant to applicable
NAIC guidelines, including $1.02 billion of U.S. government/agency securities
and mortgage-backed securities ("MBSs").
14
<PAGE>
At March 31, 1997, the Bond Portfolio included $188.5 million (fair
value, $187.6 million) of bonds not rated investment grade by S&P, Moody's,
DCR, Fitch or the NAIC. Based on their March 31, 1997 amortized cost, these
non-investment-grade bonds accounted for 1.82% of the Company's total assets
and 6.74% of its 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 the proportion of its portfolio invested in such
securities not exceed current levels, but its policies may change from time to
time, including in connection with any possible acquisition. The Company had
no material concentrations of non-investment-grade securities at March 31,
1997. The table on the following page summarizes the Company's rated bonds by
rating classification.
15
<PAGE>
<TABLE>
RATED BONDS BY RATING CLASSIFICATION
(dollars in thousands)
<CAPTION>
Issues not rated by S&P/Moody's/
Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total
- ---------------------------------------------- ----------------------------------- -----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[DCR]/{Fitch} Amortized fair category Amortized fair Amortized invested fair
category (1) cost value (2) cost value cost assets(3) value
- --------------- ----------- ----------- -------- ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $ 1,371,315 $ 1,356,231 1 $ 144,866 $ 146,878 $ 1,516,181 54.20% $ 1,503,109
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 430,153 426,680 2 115,206 114,776 545,359 19.50 541,456
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 13,802 14,566 3 23,830 24,535 37,632 1.35 39,101
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 114,644 112,983 4 32,369 32,803 147,013 5.26 145,786
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 3,258 2,110 5 --- --- 3,258 0.12 2,110
C1 to D
[DD]
{D} --- --- 6 611 611 611 0.02 611
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RATED ISSUES $ 1,933,172 $ 1,912,570 $ 316,882 $ 319,603 $ 2,250,054 $ 2,232,173
=========== =========== =========== =========== =========== ===========
</TABLE>
Footnotes appear on the following page.
16
<PAGE>
Footnotes to the table of rated bonds by rating classification
--------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moody's
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debt's relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. DCR rates
debt securities in rating categories ranging from AAA (the highest) to DD
(in payment default). A plus (+) or minus (-) indicates the debt's
relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on
the highest of the S&P, Moody's, DCR 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. A substantial portion of the assets in the NAIC categories were
rated by the Company pursuant to applicable of NAIC rating guidelines.
(3) At amortized cost.
17
<PAGE>
Senior Secured Loans ("Secured Loans") are included in the Bond
Portfolio and their amortized cost aggregated $255.0 million at March 31, 1997.
Secured Loans are senior to subordinated debt and equity, and are secured by
assets of the issuer. At March 31, 1997, Secured Loans consisted of loans to
74 borrowers spanning 25 industries, with 18% of these assets (at amortized
cost) concentrated in financial institutions and 15% concentrated in the
utility industry. No other industry concentration constituted more than 10%
of these assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation
in these transactions has enabled the Company to improve its investment yield.
Although, as a result of restrictive financial covenants, Secured Loans involve
greater risk of technical default than do publicly traded investment-grade
securities, management believes that the risk of loss upon default for its
Secured Loans is mitigated by their financial covenants and senior secured
positions. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch
or by the Company or the NAIC, pursuant to comparable statutory rating
guidelines established by the NAIC.
MORTGAGE LOANS aggregated $189.0 million at March 31, 1997 and consisted
of 35 first mortgage loans with an average loan balance of approximately
$5.4 million, collateralized by properties located in 17 states. Approximately
23% of this portfolio was multifamily residential, 19% was retail, 16% was
hotel, 14% was office, and 28% was other types. At March 31, 1997,
approximately 13% of the portfolio was secured by properties located in New
Jersey, 13% by properties located in California and 11% by properties located
in Colorado. The Company had no concentrations in any other single state or
type of property that amounted to more than 10% of the mortgage loan portfolio.
At March 31, 1997, there were four loans with outstanding balances of $10
million or more, the largest of which had a balance of approximately $20.5
million, which collectively aggregated approximately 30% of the portfolio. At
March 31, 1997, approximately 25% of the mortgage loan portfolio consisted of
loans with balloon payments due before March 31, 2001. During the second
quarter and six months of 1997 and 1996, loans delinquent by more than 90 days,
foreclosed loans and restructured loans have not been significant in relation
to the portfolio.
At March 31, 1997, approximately 30% of the mortgage loans in the
portfolio were seasoned loans underwritten to the Company's standards and
purchased at or near par from another financial institution. Such loans
generally have higher average interest rates than loans that could be
originated today. The balance of the mortgage loan portfolio has been
originated by the Company under strict underwriting standards. Commercial
mortgage loans on properties such as offices, hotels and shopping centers
generally represent a higher level of risk than do mortgage loans secured by
multifamily residences. This greater risk is due to several factors, including
the larger size of such loans and the effects of general economic conditions
on these commercial properties. However, due to the seasoned nature of the
Company's mortgage loans and its strict underwriting standards, the Company
believes that it has reduced the risk attributable to its mortgage loan
portfolio while maintaining attractive yields.
OTHER INVESTED ASSETS aggregated $72.0 million at March 31, 1997,
including $41.7 million of investments in limited partnerships and an aggregate
of $30.3 million of miscellaneous investments, including policy loans,
residuals, separate account investments and leveraged leases. The Company's
18
<PAGE>
limited partnership interests, accounted for by using the cost method of
accounting, 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 ecomomic conditions. Its portfolio strategy is
designed to achieve adequate risk-adjusted returns consistent with its
investment objectives of effective asset-liability matching, liquidity and
safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and GIC obligations. The Company seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. The
Company's fixed-rate products incorporate surrender charges or other
limitations on when contracts can be surrendered for cash to encourage
persistency. Approximately 72% of the Company's fixed annuity and GIC reserves
had surrender penalties or other restrictions at March 31, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. At March 31, 1997, the weighted
average life of the Company's investments was approximately five years and the
duration was approximately three. Weighted average life is the average time
to receipt of all principal, incorporating the effects of scheduled
amortization and expected prepayments, weighted by book value. Duration is a
common option-adjusted measure for the price sensitivity of a fixed-income
portfolio to changes in interest rates. It measures the approximate percentage
change in the market value of a portfolio if interest rates change by 100 basis
points, recognizing the changes in portfolio cashflows resulting from embedded
options such as prepayments and bond calls.
As a component of its investment strategy, the Company utilizes interest
rate swap agreements ("Swap Agreements") to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a counterparty
interest rate payments of differing character (for example, variable-rate
payments exchanged for fixed-rate payments) based on an underlying principal
balance (notional principal) to hedge against interest rate changes. The
Company typically utilizes Swap Agreements to create a hedge that effectively
converts floating-rate assets and liabilities into fixed-rate instruments. At
March 31, 1997, the Company had one outstanding Swap Agreement with a notional
principal amount of $15.9 million. This agreement matures in December 2024.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos"), dollar roll transactions
("Dollar Rolls") and by investing in MBSs. It also seeks to enhance its spread
income by using Reverse Repos and Dollar Rolls. Reverse Repos involve a sale
19
<PAGE>
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 provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Dollar Rolls,
Reverse Repos and Swap Agreements is counterparty risk. The Company believes,
however, that the counterparties to its Dollar Rolls, Reverse Repos and Swap
Agreements are financially responsible and that the counterparty risk
associated with those transactions is minimal. Counterparty risk associated
with Dollar Rolls is further mitigated by the Company's participation in an MBS
trading clearinghouse. The sell and buy transactions that are submitted to
this clearinghouse are marked to market on a daily basis and each participant
is required to over-collateralize its net loss position by 30% with either
cash, letters of credit or government securities. In addition to counterparty
risk, Swap Agreements also have interest rate risk. However, the Company's
Swap Agreements 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.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans,
management generally considers information concerning the mortgaged property
and, among other things, factors impacting the current and expected payment
status of the loan and, if available, the current fair value of the underlying
collateral.
The carrying values of bonds that are determined to have declines in
value that are other than temporary are reduced to net realizable value and no
further accruals of interest are made. The valuation allowances on mortgage
loans are based on losses expected by management to be realized on transfers
of mortgage loans to real estate, on the disposition and settlement of mortgage
loans and on mortgage loans that management believes may not be collectible in
full. Accrual of interest is suspended when principal and interest payments
on mortgage loans are past due more than 90 days.
20
<PAGE>
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $5.3 million at March 31, 1997
(at amortized cost, with a fair value of $4.1 million) including $3.8 million
of bonds and notes and $1.5 million of mortgage loans. At March 31, 1997,
defaulted investments constituted 0.2% of total invested assets. At
December 31, 1996, defaulted investments totaled $6.5 million which 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 cash and short-term investments, Reverse Repo
capacity on invested assets and, if required, proceeds from invested asset
sales. At March 31, 1997, approximately $0.8 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $16.8 million, while
approximately $1.45 billion of the Bond Portfolio had an aggregate unrealized
loss of $34.5 million. In addition, the Company's investment portfolio
currently provides approximately $23.8 million of monthly cash flow from
scheduled principal and interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market
rate. Management would seek to place new funds in investments that were
matched in duration to, and higher yielding than, the liabilities assumed. The
Company believes that liquidity to fund withdrawals would be available through
incoming cash flow, the sale of short-term or floating-rate instruments or
Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio,
thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities and GICs. Should increased liquidity be required for withdrawals,
the Company believes that a significant portion of its investments could be
sold without adverse consequences in light of the general strengthening that
would be expected in the bond market.
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, valuation and amount of
investments permitted, limiting the amount of dividends that can be paid and
the size of transactions that can be consummated without first obtaining
regulatory approval and other related matters.
21
<PAGE>
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 approved and recommended to
the states for adoption and implementation several regulatory initiatives
designed to reduce the risk of insurance company insolvencies and market
conduct violations. These initiatives include investment reserve requirements,
risk-based capital standards, 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 relating to product design and
illustrations for 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.
SunAmerica Asset Management Corp. is registered with the SEC as a
registered investment adviser under the Investment Advisers Act of 1940. The
mutual funds that it markets are subject to regulation under the Investment
Company Act of 1940. SunAmerica Asset Management and the mutual funds are
subject to regulation and examination by the SEC. In addition, variable
annuities and the related separate accounts of the Company are subject to
regulation by the SEC 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.
22
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
EXHIBITS
Exhibit
No. Description
- ------- -----------
10(a) Subordinated Loan Agreement for Equity Capital, dated as of
February 19, 1997, between the Company's subsidiary, SunAmerica
Capital Services, Inc. ("SACS") and SunAmerica, Inc. ("SAI"),
defining SAI's rights with respect to the 9% note due March 14,
2000.
27 Financial Data Schedule
No Current Report on Form 8-K was filed during the three months ended March 31,
1997.
23
<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
Date: May 15, 1997 By:/s/ SCOTT L. ROBINSON
- ----------------------- ------------------------
Scott L. Robinson
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
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President and May 15, 1997
- ------------------------ Director (Principal Financial ------------
Scott L. Robinson Officer)
/s/ N. SCOTT GILLIS Senior Vice President and May 15, 1997
- ------------------------ Controller (Principal ------------
N. Scott Gillis Accounting Officer)
24
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
10(a) Subordinated Loan Agreement for Equity Capital, dated as of
February 19, 1997, between the Company's subsidiary, SunAmerica
Capital Services, Inc. ("SACS") and SunAmerica, Inc. ("SAI"),
defining SAI's rights with respect to the 9% note due March 14,
2000.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 2,238,880,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,005,000
<MORTGAGE> 188,998,000
<REAL-ESTATE> 24,000,000
<TOTAL-INVEST> 2,781,068,000
<CASH> 253,228,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 508,161,000
<TOTAL-ASSETS> 10,365,234,000
<POLICY-LOSSES> 2,582,492,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,972,000
<COMMON> 3,511,000
0
0
<OTHER-SE> 502,674,000
<TOTAL-LIABILITY-AND-EQUITY> 10,365,234,000
0
<INVESTMENT-INCOME> 95,169,000
<INVESTMENT-GAINS> (20,290,000)
<OTHER-INCOME> 93,235,000
<BENEFITS> 64,332,000
<UNDERWRITING-AMORTIZATION> 27,258,000
<UNDERWRITING-OTHER> 898,000
<INCOME-PRETAX> 30,094,000
<INCOME-TAX> 10,503,000
<INCOME-CONTINUING> 19,591,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,591,000
<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>
EXHIBIT 10(a)
NASD
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
SL-5
AGREEMENT BETWEEN:
Lender SUNAMERICA INC.
----------------------------------------------------------------
(Name)
1999 Avenue of the Stars, 38th Floor
- --------------------------------------------------------------------------------
(Street Address)
Los Angeles California 90067-6022
- ------------------------------------------- -------------- ---------------
(City) (State) (Zip)
AND
Broker-Dealer SUNAMERICA CAPITAL SERVICES, INC.
------------------------------------------------------------------
733 Third Avenue, 3rd Floor
- --------------------------------------------------------------------------------
(Street Address)
New York New York 10017
- ------------------------------------------- -------------- ---------------
(City) (State) (Zip)
NASD ID No: 13158
--------------------------------------------------------------------
Date Filed: February 28, 1997 NASD
--------------------------------------------------------------------
1
NASD FORM SL-5
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
AGREEMENT dated February 19, 1997 to be effective March 15, 1997 between
SUNAMERICA INC. (the "Lender") and SUNAMERICA CAPITAL SERVICES, INC. (the
"Broker-Dealer").
In consideration of the sum $5,400,000 of and subject to the terms
and conditions hereinafter set forth, the Broker-Dealer promises to pay to the
Lender or assigns on March 14, 2000 (the "Scheduled Maturity Date") (the last
day of the month at least three years from the effective date of this Agreement)
at the principal office of the Broker-Dealer the aforedescribed sum and interest
thereon payable at the rate of 9.0*% per annum from the effective date of this
Agreement, which date shall be the date so agreed upon by the Lender and the
Broker-Dealer unless otherwise determined by the National Association of
Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered
a satisfactory subordination agreement pursuant to the provisions of 17 CFR
240.15c3-d unless and until the NASD has found the Agreement acceptable and such
Agreement has become effective in the form found acceptable.
The cash proceeds covered by this Agreement shall be used and dealt with
by the Broker-Dealer as part of its capital and shall be subject to the risks
of the business. The Broker-Dealer shall have the right to deposit any cash
proceeds of the Subordinated Loan Agreement in an account or accounts in its own
name in any bank or trust company.
The Lender irrevocably agrees that the obligations of the Broker-Dealer
under this Agreement with respect to the payment of principal and interest shall
be and are subordinate in right of payment and subject to the prior payments or
provision for payment in full of all claims of all other present and future
creditors of the Broker-Dealer arising out of any matter occurring prior to the
date on which the related Payment Obligation (as defined herein) matures
consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-d, except for
claims which are the subject of subordination agreements which rank on the same
priority as or are junior to the claim of the Lender under such subordination
agreements.
1. PERMISSIVE PREPAYMENTS
----------------------
At the option of the Broker-Dealer, but not at the option of the Lender,
payment of all or any part of the "Payment Obligation" amount hereof prior to
the maturity date
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NASD FORM SL-5
* INTEREST TO BE PAID QUARTERLY FROM AND AFTER THE EFFECTIVE DATE OF THIS
AGREEMENT.
may be made by the Broker-Dealer only upon receipt of the prior written
approval of the NASD, but in no event may any prepayment be made before the
expiration of one year from the date this Agreement became effective. No
prepayment shall be made if, after given effect thereto (and to all payments
of Payment Obligations under any other subordination agreements then
outstanding, the maturity of which are scheduled to fall due either within
six months after the date such prepayment is to occur or on or prior to the
date on which the Payment Obligation hereof is scheduled to mature, whichever
date is earlier), without reference to any projected profit or loss of the
Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would
exceed 1000 percent of its net capital of such lesser percent as may be made
applicable to the Broker-Dealer from time to time by the NASD, or a governmental
agency or self-regulatory body having appropriate authority, or if the Broker
- -Dealer is operating pursuant to paragraph (a)(1)(ii) of 17 CFR 240.15c3-1,
its net capital would be less than five percent of aggregate debit items
computed in accordance with 17 CFR 1240.15c3-3a, or if registered as a
futures commission merchant, 7 percent of the funds required to be segregated
pursuant to the Commodity Exchange Act and the regulations thereunder, (less
the market value of commodity options purchased by option customers on or
subject to the rules of a contract market, provided, however, the deduction
for each option customer shall be limited to the amount of customer funds in
such option customer's account,) if greater, or its net capital would be
less than 120 percent of the minimum dollar amount required by 17 CFR 15c3-1
including paragraph (a)(1)(ii), if applicable, or such greater dollar amount
as may be made appropriate to the Broker-Dealer by the NASD, or a
governmental agency or self-regulatory body having appropriate authority.
II. SUSPENDED REPAYMENTS
--------------------
(a) The Payment Obligation of the Broker-Dealer shall be suspended
and shall not mature if after giving effect to such payment (together with the
payment of any Payment Obligation of the Broker-Dealer under any other
subordination agreement scheduled to mature on or before such Payment
Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200
percent of its net capital or such lesser percent as may be made applicable to
the Broker-Dealer from time to time by the NASD, or a governmental agency or
self-regulatory body having appropriate authority, or if the Broker-Dealer is
operating pursuant to paragraph (a)(1)(ii) of 17 CFR 240.15c3-1, its net capital
would be less than 5 percent of aggregate debit items computed in accordance
with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6
percent of the funds required to be segregated pursuant to the Commodity
Exchange Act and the regulations thereunder, (less the market value of commodity
options purchased by option customers on or subject to the rules of a contract
market, provided, however, the deduction for each option customer shall be
limited to the amount of customer funds in such option customer's account), if
greater, or its net capital would be less than 120 percent of the minimum dollar
amount required by 17 CFR 240.15c3-1 including paragraph (a)(1)(ii), if
applicable, or such greater dollar amount as may be made
3
NASD FORM SL-5
applicable to the Broker-Dealer by the NASD, or a governmental agency or self-
regulatory body having appropriate authority.
III. NOTICE OF MATURITY
------------------
The Broker-Dealer shall immediately notify the NASD if, after giving
effect to all payments of Payment Obligations under subordination agreements
then outstanding which are then due or mature within six months without
reference to any projected profit or loss of the Broker-Dealer, either the
aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net
capital, or in the case of a Broker-Dealer operating pursuant to paragraph
(a)(1)(ii) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent
of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if
registered as a futures commission merchant, 6 percent of the funds required to
be segregated pursuant to the Commodity Exchange Act and the regulations
thereunder, (less the market value of commodity options purchased by option
customers on or subject to the rules of a contract market, provided, however,
the deduction for each option customer shall be limited to the amount of
customer funds in such option customer's account,) if greater, and in either
case, if its net capital would be less than 120 percent of the minimum dollar
amount required by 17 CFR 240.15c3-1 including paragraph (a)(1)(ii), if
applicable, or such greater dollar amount as may be made applicable to the
Broker-Dealer by the NASD, or a governmental agency or self-regulatory body
having appropriate authority.
IV. BROKER DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS
IN LISTED OPTIONS
---------------------------------------------------------------------
A Broker-Dealer who guarantees, endorses, carries or clears specialist
or market-maker transactions in options listed on a national securities exchange
or facility of a national securities association shall not permit a reduction,
prepayment, or repayment of the unpaid principal amount if the effect would
cause the equity required in such specialist or market-maker accounts to exceed
1000 percent of the Broker-Dealer's net capital or such percent as may be made
applicable to the Broker-Dealer from time to time by the NASD or a governmental
agency or self-regulatory body having appropriate authority.
4
NASD FORM SL-5
V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL
------------------------------------------
The proceeds covered by this Agreement shall in all respects be subject
to the provisions of paragraph (e) of 17 CFR.15c3-1. Pursuant thereto no equity
capital of the Broker-Dealer or subsidiary or affiliate consolidated pursuant
to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners,
par or stated value of capital stock, pain-in capital in excess of par, retained
earnings or other capital accounts, may be withdrawn by action of a stockholder
or partner, or by redemption or repurchase of shares of stock by any of the
consolidated entities or through the payment of dividends or any similar
distribution, nor may any unsecured advance or loan be made to a stockholder,
partner, sole proprietor, or employee if, after giving effect thereto and to any
other such withdrawals, advances or loans and any payments of Payment
Obligations under satisfactory subordination agreements which are scheduled
to occur within six months following such withdrawal, advances or loan, either
aggregate indebtedness of any of the consolidated entities exceed 1000 percent
of its net capital, or in the case of a Broker-Dealer operating pursuant to
paragraph (a)(1)(ii) of 17 CFR 240.15c3-1, its net capital would be less than
5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-
3a, or if registered as a futures commission merchant, 7 percent of the funds
required to be segregated pursuant to the Commodity Exchange Act, and the
regulations thereunder, (less the market value of commodity options purchased
by option customers on or subject to the rules of a contract market, provided,
however, the deduction for each option customer shall be limited to the amount
of customer funds in such option customer's account,) if greater, and in either
case, if its net capital would be less than 120 percent of the minimum dollar
amount required by 17 CFR 240.15c3-1 including paragraph (a)(1)(ii), if
applicable, or such greater dollar amount as may be made applicable to the
Broker-Dealer by the NASD, or a governmental agency or self-regulatory body
having appropriate authority; or should the Broker-Dealer be included within
such consolidation, if the total outstanding principal amounts of satisfactory
subordination agreements of the Broker-Dealer (other than such agreements which
qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70
percent of its debt/equity total, as this term is defined in paragraph (d) of
17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period
which the Commission may upon application of the Broker-Dealer grant in the
public interest or for the protection of investors.
VI. BROKER DEALERS REGISTERED WITH CFTC
-----------------------------------
If the Broker-Dealer is a futures commission merchant or introductory
broker as that term is defined in the Commodity Exchange Act, the Organization
agrees, consistent with the requirements of Section 1.17(h) of the regulations
of the CFTC (17 CFR 1.17(h)), that:
5
NASD FORM SL-5
(a) Whenever prior written notice by the Broker-Dealer to the NASD is
required pursuant to the provisions of this Agreement, the same prior written
notice shall be given by the Broker-Dealer to (i) the CFTC at its principal
office in Washington, D.C., attention Chief Account of Division of Trading and
Markets, and/or (ii) the commodity exchange of which the Organization is a
member and which is then designated by the CFTC as the Organization's designated
self-regulatory organization (the DSRO);
(b) Whenever prior written consent, permission or approval of the NASD is
required pursuant to the provisions of this Agreement, the Broker-Dealer shall
also obtain the prior written consent, permission or approval of the CFTC and/or
of the DSRO; and,
(c) Whenever the Broker-Dealer receives written notice of acceleration of
maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall
promptly give written notice thereof to the CFTC at the address above stated
and/or to the DSRO.
VII. INTENTIONALLY OMITTED.
VIII. GENERAL
-------
In the event of the appointment of a receiver of trustee of the Broker-
Dealer or in the event of its insolvency, liquidation pursuant to the Securities
Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the
benefit of creditors, reorganizations whether or not pursuant to bankruptcy
laws, or any other marshaling of the assets and liabilities of the Broker-
Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder
hereof shall not be entitled to participate or share, ratably or otherwise, in
the distribution of the assets of the Broker-Dealer until all claims of all
other present and future creditors of the Broker-Dealer, whose claims are senior
hereto, have been fully satisfied.
This Agreement shall not be subject to cancellation by either the Lender
or the Broker-Dealer, and no payment shall be made, nor the Agreement
terminated, rescinded or modified by mutual consent or otherwise if the effect
thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and
240.15c3-d.
6
NASD FORM SL-5
This Agreement may not be transferred, sold, assigned, pledged, or
otherwise encumbered or otherwise disposed of, and no lien, charge, or other
encumbrance may be created or permitted to be created thereof without the prior
written consent of the NASD.
The Lender irrevocably agrees that the loan evidenced hereby is not
being made in reliance upon the standing of the Broker-Dealer as a member
organization of the NASD or upon the NASD surveillance of the Broker-Dealer's
financial position or its compliance with the By-Laws, rules and practices of
the NASD. The Lender has made such investigation of the Broker-Dealer and its
partners, officers, directors, and stockholders as the Lender deems necessary
and appropriate under the circumstances.
The Lender is not relying upon the NASD to provide any information
concerning or relating to the Broker-Dealer and agrees that the NASD has no
responsibility to disclose to the Lender any information concerning or relating
to the Broker-Dealer which it may now, or at any future time, have.
The term "Broker-Dealer", as used in this Agreement, shall include the
broker-dealer, its heirs, executors, administrators, successors and assigns.
The term "Payment Obligation" shall mean the obligation of the Broker-
Dealer to repay cash loaned to it pursuant to the Subordinated Loan Agreement.
The provisions of this Agreement shall be binding upon the Broker-Dealer
and the Lender, and their respective heirs, executors, administrators,
successors, and assigns.
Any controversy arising out of or relating to this Agreement may be
submitted to and settled by arbitration pursuant to the By-Laws and rules of the
NASD. The Broker-Dealer and the Lender shall be conclusively bound by such
arbitration.
This instrument embodies the entire agreement between the Broker-Dealer
and the Lender and no other evidence of such agreement has been or will be
executed without prior written consent of the NASD.
This Agreement shall be deemed to have been made under, and shall be
governed by, the laws of the State of California in all respects.
7
NASD FORM SL-5
IN WITNESS WHEREOF the parties have set their hands and seal this 19th
day of February, 1997.
SUNAMERICA CAPITAL SERVICES, INC.
---------------------------------------------
(Name of Broker-Dealer)
/s/ STEVEN ROTHSTEIN
By ------------------------------------- L.S.
(Authorized Person)
Chief Financial Officer
SUNAMERICA INC.
---------------------------------------- L.S.
(Lender)
/s/ JAMES R. BELARDI
By ------------------------------------- L.S.
Executive Vice President
FOR NASD USE ONLY
ACCEPTED BY: ---------------------------------
(Name)
---------------------------------
(Title)
EFFECTIVE DATE: ------------------------------
LOAN NUMBER: ---------------------------------
8
NASD FORM SL-5
SUBORDINATED LOAN AGREEMENT
LENDER'S ATTESTATION
--------------------
It is recommended that you discuss the merits of this investment with
an attorney, accountant or some other person who has knowledge and experience
in financial business matters prior to executing this Agreement.
1. I have received and reviewed NASD Form SLD, which is a reprint of
Appendix D of 17 CFR 240.15c3-1, and am familiar with its
provisions.
2. I am aware that the funds or securities subject to this Agreement
are not covered by the Securities Investor Protection Act of 1970.
3. I understand that I will be furnished financial statements pursuant
to SEC Rule 17a-5(c).
4. On the date this Agreement was entered into, the broker-dealer
carried funds or securities for my account.
(State Yes or No) NO .
--------
5. Lender's business relationship to the broker-dealer is:
ultimate parent company of broker-dealer;
continuously monitors fiscal status, reports of the
Broker-Dealer.
6. If the partner or stockholder is not actively engaged in the
business of the broker-dealer, acknowledge receipt of the
following:
a. Certified audit and accountant's certificate dated _______.
b. Disclosure of financial and/or operational problems since the
last certified audit which required reporting pursuant to
SEC Rule 17a-11. (If no such reporting was required, state
"none")____________________________________________________
__________________________________________________________.
c. Balance sheet and statement of ownership equity dated _____
__________________________________________________________.
d. Most recent computation of net capital and aggregate
indebtedness or aggregate debit items dated ______________,
reflecting a net capital of $_________________ and a ratio
of _____________________________.
e. Debt/equity ratio as of _________________ of _____________.
f. Other disclosures: _______________________________________.
SUNAMERICA INC.
Dated: February 19,1997 /s/ JAMES R. BELARDI
---------------------------- ---------------------------------L.S.
(Lender)
Executive Vice President
9
NASD FORM SL-5
CERTIFICATE OF SECRETARY
I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation,
(this "Corporation"), do hereby certify that (1) the Executive Committee of the
Board of Directors of this Corporation as of August 22, 1996 adopted the
following resolutions, (2) that such resolutions have not been amended or
rescinded from the date of their resolution and are in full force and effect as
of the date hereof, and (3) the principal amount limits set forth in the
following resolutions are not exceeded by that certain $5,400,000 Subordinated
Loan Agreement for Equity Capital dated February 19, 1997, and effective as of
March 15, 1997 between this Corporation and SunAmerica Capital Services, Inc.:
Blanket Authorization of Subordinated Loan Agreements for Equity Capital
------------------------------------------------------------------------
WHEREAS, this Corporation, from time to time, reviews the net capital
infusion needs of its wholly-owned subsidiaries which are broker-dealers
registered with the Securities and Exchange Commission and members of the
National Association of Securities Dealers, Inc., including SunAmerica
Capital Services, Inc., Advantage Capital Corporation, SunAmerica
Securities, Inc. and Royal Alliance Associates, Inc., and in conjunction
with such review, has provided subordinated loans to such subsidiaries
pursuant to Subordinated Loan Agreements for Equity Capital;
WHEREAS, it is in the best interests of this Corporation to provide
blanket authorization for such subordinated loan transactions;
NOW, THEREFORE, BE IT RESOLVED that the Chairman, any Vice Chairman,
any Executive Vice President, or the Treasurer (the "Designated
Officers"), acting alone, be, and each hereby is authorized to effect
subordinated loans to the wholly-owned broker-dealer subsidiaries of
the Corporation, in an aggregate principal amount not to exceed
Fifty Million Dollars ($50,000,000), and to make, execute and deliver
such loan agreements and other documents evidencing such loans,
including any Subordinated Loan Agreement for Equity Capital, as
deemed necessary or appropriate;
RESOLVED FURTHER that each of the Designated Officers are hereby
authorized to make such changes in the terms and conditions of
such Subordinated Loan Agreements as may be necessary to conform
to the requirements of Title 17 CFR Section 240.15c 3-1d and the
rules of the National Association of Securities Dealers; and
RESOLVED FURTHER that the Executive Committee hereby ratifies any
and all action that may have been taken by the officers of this
Corporation in connection with the foregoing resolutions and
authorizes the officers of this Corporation to take any and all
such further actions as may be deemed appropriate to reflect these
resolutions and to carry out their tenor, effect and intent.
IN WITNESS WHEREOF, the undersigned have executed this Certificate and affixed
the seal of this Corporation, this 19th day of February, 1997.
/s/ SUSAN L. HARRIS
------------------------
Susan L. Harris, Secretary
