<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-08877
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 2
------------------------
ANCHOR NATIONAL LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ARIZONA 6311 86-0198983
(State or other jurisdiction of Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
1 SUNAMERICA CENTER
LOS ANGELES, CALIFORNIA 90067-6022
(310) 772-6000
(Address, including zip code, and telephone number, including
area code, or registrant's principal executive offices)
SUSAN L. HARRIS, ESQUIRE
ANCHOR NATIONAL LIFE INSURANCE COMPANY
1 SUNAMERICA CENTER
LOS ANGELES, CALIFORNIA 90067-6022
(310) 772-6000
(Name, address, including zip code, and telephone number, including
area code of agent for service)
------------------------
APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after effectiveness of the Registration Statement. If
any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities act of
1933 check the following box. /X/
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET PURSUANT TO
REGULATION S-K, ITEM 501(b)
<TABLE>
<CAPTION>
FORM S-1 ITEM NO. AND CAPTION HEADING IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover
3. Summary of Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Front Cover; Profile; Investment Options
4. Use of Proceeds...................................... The Seasons Variable Annuity; Purchasing a Seasons
Variable Annuity; Investment Options; Access to Your
Money
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Purchasing a Seasons Variable Annuity; Access to Your
Money
9. Description of Securities to be Registered........... The Seasons Variable Annuity; Annuity Income Options;
Investment Options; Expenses
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Other Information
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
[LOGO]
PROFILE
July 28, 1998
This Profile is a summary of some of the more important points you should know
before purchasing the Seasons Variable Annuity. The sections in this Profile
correspond to sections in the prospectus which discuss the topics in more
detail. Please read the prospectus carefully.
1. THE SEASONS VARIABLE ANNUITY
The Seasons Variable Annuity Contract is a contract between you and Anchor
National Life Insurance Company. It is designed to help you save on a
tax-deferred basis and diversify your investments among asset classes and
managers to meet long-term financial goals, such as retirement funding. Tax
deferral means all your money, including the amount you would otherwise pay in
current income taxes, remains in your contract to generate more earnings. Your
money could grow faster than it would in a comparable taxable investment.
The Seasons Variable Annuity helps you meet these goals by offering four
variable investment STRATEGIES which are managed by five different professional
investment managers. The value of any portion of your contract allocated to the
STRATEGIES will fluctuate up or down based on the performance of the STRATEGIES
you select and you may experience a loss. Five fixed investment options, each
for a different length of time and offering different interest rates that are
guaranteed by Anchor National are available. In addition, the DCA fixed accounts
also offer fixed interest rates guaranteed by Anchor National and are available
under the contract as source accounts for the Dollar Cost Averaging program.
The STRATEGIES and fixed investment options are designed to be used in concert
in order to achieve your desired investment goals. You may put money into any of
the STRATEGIES and/or fixed investment options. You may transfer between
STRATEGIES and/or the fixed investment options four times per year without
charge.
Like most annuities, the contract has an Accumulation Phase and an Income Phase.
During the Accumulation Phase, you invest money in your contract. Your earnings
are based on the investment performance of the STRATEGY or STRATEGIES to which
your money is allocated and/or the interest rate earned on the fixed investment
options. You may withdraw money from your contract during the Accumulation
Phase. However, as with other tax-deferred investments, you will pay taxes on
earnings and untaxed contributions when you withdraw them. An IRS tax penalty
may apply if you make withdrawals before age 59 1/2. During the Income Phase,
you will receive payments from your annuity. Your payments may be fixed in
dollar amount, vary with investment performance or be a combination of both,
depending on where your money is allocated. Among other factors, the amount of
money you are able to accumulate in your contract during the Accumulation Phase
will determine the amount of your payments during the Income Phase.
<PAGE>
2. ANNUITY PAYMENT OPTIONS
You can select from one of five annuity income options:
(1) payments for your lifetime;
(2) payments for your lifetime and your survivor's lifetime;
(3) payments for your lifetime and your survivor's lifetime, but for not
less than 10 years;
(4) payments for your lifetime, but for not less than 10 or 20 years; and
(5) payments for a specified period of 5 to 30 years.
You will also need to decide if you want your payments to fluctuate with
investment performance or remain constant, and the date on which your payments
will begin. Once you begin receiving payments, you cannot change your annuity
option. If your contract is non-qualified, payments during the Income Phase are
considered partly a return of your original investment. The "original
investment" part of each payment is not taxable but any gain to your original
investment is currently taxable as ordinary income upon distribution. For
qualified contracts, the entire payment is currently taxable as ordinary income.
3. PURCHASING A SEASONS VARIABLE ANNUITY
You can buy a contract through your financial representative, who can also help
you complete the proper forms. For Non-Qualified contracts the minimum initial
investment is $5000. For Qualified contracts the minimum initial investment is
$2000. You can add $500 or more to your contract at any time during the
Accumulation Phase.
4. INVESTMENT OPTIONS
You can put your money into any one or more of the four multi-manager variable
investment STRATEGIES and/or one or more of the seven fixed investment options.
The fixed investment options offer fixed rates of interest for specified lengths
of time.
Each STRATEGY has a different investment objective and uses an asset allocation
investment approach, investing in a combination of underlying investment
portfolios which invest in a combination of stocks, bonds and cash in varying
degrees, to achieve its investment objective. The four investment STRATEGIES
are:
GROWTH
MODERATE GROWTH
BALANCED GROWTH
CONSERVATIVE GROWTH
Each STRATEGY invests in three underlying investment portfolios. The underlying
investment portfolios are managed by the following five investment managers:
PUTNAM INVESTMENT MANAGEMENT, INC.
T. ROWE PRICE ASSOCIATES, INC.
JANUS CAPITAL CORPORATION
SUNAMERICA ASSET MANAGEMENT CORP.
WELLINGTON MANAGEMENT COMPANY, LLP
5. EXPENSES
Each year we deduct a $35 ($30 in North Dakota) contract administration fee on
your contract anniversary. We currently waive this fee if your contract value is
at least $50,000 on your contract anniversary.
We also deduct insurance charges which amount to 1.40% annually of the average
daily value of your contract allocated to the STRATEGIES. The insurance charges
include Mortality and Expense Risk, 1.25% and Distribution Expense, .15%. There
are also investment charges and other expenses if you put money into the
STRATEGIES, which are estimated to range from 1.12% to 1.25%. Investment charges
may be more or less than the percentages reflected here.
If you take your money out in excess of the "free withdrawal" amount allowed for
in your contract, you may be assessed a withdrawal charge that is a percentage
of the money you withdraw. The percentage declines with each year the money is
in the contract as follows:
<TABLE>
<S> <C> <C> <C>
Year 1......... 7% Year 5......... 4%
Year 2......... 6% Year 6......... 3%
Year 3......... 6% Year 7......... 2%
Year 4......... 5% Year 8......... 0%
</TABLE>
Additionally, if you take money out of a multi-year fixed investment option
before the end of the selected period, you may be assessed an adjustment which
could increase or decrease the value of your money.
In some states you may also be assessed a state premium tax of up to 3.5%,
depending upon the state in which you reside.
If you transfer among the STRATEGIES and/or fixed investment options more than
four times per year, you will be charged a $25 dollar transfer fee for each
subsequent transfer ($10 in Pennsylvania and Texas).
<PAGE>
The following chart is designed to help you understand the charges in your
contract. THE COLUMN "TOTAL ANNUAL CHARGES" SHOWS THE TOTAL OF THE $35 CONTRACT
ADMINISTRATION CHARGE, THE 1.40% INSURANCE CHARGES AND THE INVESTMENT CHARGES
FOR EACH STRATEGY. WE CONVERTED THE CONTRACT ADMINISTRATION CHARGE TO A
PERCENTAGE (.09%) USING AN ASSUMED CONTRACT SIZE OF $40,000. The actual impact
of this charge on your contract may differ from this percentage.
<TABLE>
<CAPTION>
Total Annual
Insurance
Related Total Annual EXAMPLES
Charges Investment Total Total Total
STRATEGY Related Annual Expenses Expenses
Charges Charges at end of at end of
1 YEAR 10 YEARS
<S> <C> <C> <C> <C> <C> <C>
Growth 1.49% (1.40% + .09%) 1.25% 2.74% $98 $307
Moderate Growth 1.49% (1.40% + .09%) 1.21% 2.70% $97 $303
Balanced Growth 1.49% (1.40% + .09%) 1.17% 2.66% $97 $299
Conservative Growth 1.49% (1.40% + .09%) 1.12% 2.61% $96 $294
</TABLE>
The examples assume that you invested $1,000 in a STRATEGY which earns 5%
annually and that you withdrew your money at the end of a 1 year period and at
the end of a 10 year period. For year 1, the total annual charges are assessed
as well as the withdrawal charge. For year 10, the example reflects the total
annual charges but there is no withdrawal charge. The annual investment-related
expenses may vary. The amounts shown here are estimates and reflect the waiver
or reimbursement of expenses by the investment adviser. No premium taxes are
reflected. Please see the Fee Tables in the prospectus for more detailed
information regarding the fees and expenses incurred under the contract.
6. TAXES
Unlike taxable investments where earnings are taxed in the year they are earned,
taxes on amounts earned in a non-qualified contract (one that is established
with after tax dollars) are deferred until they are withdrawn. In a qualified
contract (one that is established with before tax dollars) all amounts are
taxable when they are withdrawn.
When you begin taking distributions or withdrawals from your contract, earnings
are considered to be taken out first and will be taxed at your ordinary income
tax rate. You may be subject to a 10% IRS tax penalty for distributions or
withdrawals before age 59 1/2.
7. ACCESS TO YOUR MONEY
Withdrawals may be made from your contract in the amount of $1,000 or more. Each
year, you can take out up to 10% of the total amount you invested without
charge. Withdrawals in excess of the 10% will be assessed a withdrawal charge.
If you withdraw your entire contract value you will not receive the benefit of
any free withdrawal amount. A separate withdrawal charge schedule applies to
each purchase payment. After a purchase has been in the contract for seven full
years, withdrawal charges no longer apply to that portion of the money. Of
course, you may also have to pay income tax and a 10% IRS tax penalty may apply.
Neither withdrawal charges nor the 10% IRS penalty are assessed when a death
benefit is paid.
8. PERFORMANCE
The value of your annuity will fluctuate depending upon the investment
performance of the STRATEGY or STRATEGIES you select. From time to time we may
advertise a STRATEGY'S total return. The total return figures are based on
historical data and are not intended to indicate future performance.
The following chart shows total return for each STRATEGY since the STRATEGIES
first became available on April 15, 1997. These numbers reflect the insurance
charges, the contract maintenance fee and investment charges. Withdrawal charges
are not reflected in the chart. Past performance is not a guarantee of future
results.
<TABLE>
<CAPTION>
INCEPTION
TO
STRATEGY 3/31/98
<S> <C>
Growth 30.86%
Moderate Growth 27.51%
Balanced Growth 24.34%
Conservative Growth 20.52%
</TABLE>
9. DEATH BENEFIT
If you, or, if there is a joint owner, either of the two, should die during the
Accumulation Phase, your Beneficiary will receive a death benefit.
If you die before age 75, the death benefit will be the greater of: (1) the
money you put into the contract less any withdrawals, charges and market value
adjustments, accumulated at 3%; or (2) the current value of your contract.
If you die after age 75, the death benefit will be the greater of: (1) the money
you put into the contract less any withdrawals, charges and market value
adjustments, accumulated at 3% until your 75th birthday plus any subsequent
Purchase Payments and less any withdrawals; or (2) the current value of your
contract.
<PAGE>
In the instance of joint owners, the amount of the death benefit is calculated
based upon the age of the youngest joint owner.
10. OTHER INFORMATION
OWNERSHIP: The contract is an allocated fixed and variable group annuity
contract. A group contract is issued to a contractholder, for the benefit of the
participants in the group. You, as an owner of a Seasons Variable Annuity, are a
participant in the group and will receive a certificate evidencing your
ownership. You, as the owner of a certificate, are entitled to all the rights
and privileges of ownership. As used in this Profile and the prospectus, the
term contract refers to your certificate. In some states an individual fixed and
variable annuity contract may be available instead, which is identical to the
group contract described in this Profile and the prospectus except that it is
issued directly to the individual owner.
FREE LOOK: You may cancel your contract within 10 days of receiving it (or
whatever period is required by your state) by mailing it to our Annuity Service
Center. Your contract will be treated as void on the date we receive it and we
will pay you an amount equal to the value of the money in the STRATEGIES plus
any money you put into the fixed investment options. Its value may be more or
less than the money you initially invested. Thus, the investment risk is borne
by you during the free look period.
SYSTEMATIC WITHDRAWAL PROGRAM: If selected by you, this program allows you to
receive either monthly, quarterly, semi-annual or annual checks during the
Accumulation Phase. Systematic withdrawals may also be electronically wired to
your bank account. Of course, withdrawals during the Accumulation Phase may be
taxable and a 10% IRS tax penalty may apply if you are under age 59 1/2.
DOLLAR COST AVERAGING: If selected by you, this program allows you to invest
gradually into one or more of the STRATEGIES.
PRINCIPAL ADVANTAGE PROGRAM: If selected by you, this program allows you to put
money in a fixed investment option and one or more STRATEGIES and we will
guarantee that the portion allocated to the fixed investment option assuming
that it remains invested in that option, will grow to equal your principal
investment.
AUTOMATIC PAYMENT PLAN: You can add to your contract directly from your bank
account with as little as $50 per month.
CONFIRMATIONS AND QUARTERLY STATEMENTS: You will receive a confirmation of each
transaction within your contract. On a quarterly basis, you will receive a
complete statement of your transactions over the past quarter and a summary of
your account values.
11. INQUIRIES:
If you have questions about your contract or need to make changes, call your
financial representative or contact us at:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
800/445-SUN2
If money accompanies your correspondence, you should direct it to:
Anchor National Life Insurance Company
P.O. Box 100330
Pasadena, California 91189-0001
<PAGE>
[LOGO]
ALLOCATED FIXED AND VARIABLE GROUP ANNUITY
issued by
VARIABLE ANNUITY ACCOUNT FIVE
and
ANCHOR NATIONAL LIFE INSURANCE COMPANY
The annuity contract has 11 investment choices - 7 fixed investment options
which offer interest rates guaranteed by Anchor National for different periods
of time and 4 variable investment STRATEGIES:
GROWTH
MODERATE GROWTH
BALANCED GROWTH
CONSERVATIVE GROWTH
which invest in the underlying portfolios of
SEASONS SERIES TRUST
which is managed by:
PUTNAM INVESTMENT MANAGEMENT, INC.
T. ROWE PRICE ASSOCIATES, INC.
JANUS CAPITAL CORPORATION
SUNAMERICA ASSET MANAGEMENT CORP.
WELLINGTON MANAGEMENT COMPANY, LLP
You can put your money into any one or all of the STRATEGIES and/or fixed
investment options.
Please read this prospectus carefully before investing and keep it for your
future reference. It contains important information you should know about the
Seasons Variable Annuity.
To learn more about the annuity offered by this prospectus, you can obtain a
copy of the Statement of Additional Information ("SAI") dated July 28,
1998. The SAI has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this prospectus. The table of
contents of the SAI appears on page 20 of this prospectus. For a free copy of
the SAI, call us at 800/445-SUN2 or write us at our Annuity Service Center, P.O.
Box 54299, Los Angeles, California 90054-0299.
In addition, the SEC maintains a website (http://www.sec.gov) that contains the
SAI, materials incorporated by reference and other information filed
electronically with the SEC.
ANNUITIES INVOLVE RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, AND ARE NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GLOSSARY OF TERMS......................................................... 3
FEE TABLES................................................................ 4
Owner Transaction Expenses.......................................... 4
Annual Separate Account Expenses.................................... 4
Portfolio Expenses.................................................. 4
EXAMPLES.................................................................. 5
THE SEASONS VARIABLE ANNUITY.............................................. 6
ANNUITY INCOME OPTIONS.................................................... 6
Allocation of Annuity Payments...................................... 7
Transfers During the Income Phase................................... 7
Deferment of Payments............................................... 7
PURCHASING A SEASONS VARIABLE ANNUITY..................................... 7
Allocation of Purchase Payments..................................... 7
Accumulation Units.................................................. 7
Free Look Period.................................................... 8
INVESTMENT OPTIONS........................................................ 8
Variable Investment Options: The STRATEGIES......................... 8
Substitution........................................................ 11
Fixed Investment Options............................................ 11
Transfers During the Accumulation Phase............................. 12
EXPENSES.................................................................. 13
Insurance Charges................................................... 13
Investment Charges.................................................. 13
Contract Maintenance Charge......................................... 13
Withdrawal Charge................................................... 14
Transfer Fee........................................................ 14
Premium Taxes....................................................... 14
Income Taxes........................................................ 14
Reduction or Elimination of Certain Charges and Additional Amounts
Credited........................................................... 14
TAXES..................................................................... 15
Annuity Contracts in General........................................ 15
Tax Treatment of Distributions --Non-Qualified Contracts............ 15
Tax Treatment of Distributions --Qualified Contracts................ 15
Diversification..................................................... 15
ACCESS TO YOUR MONEY...................................................... 16
Systematic Withdrawal Program....................................... 16
Suspension of Payments.............................................. 16
Minimum Contract Value.............................................. 16
PERFORMANCE............................................................... 16
DEATH BENEFIT............................................................. 17
Death of the Annuitant.............................................. 17
OTHER INFORMATION......................................................... 17
Anchor National..................................................... 17
The Separate Account................................................ 18
The General Account................................................. 18
Distribution........................................................ 18
Administration...................................................... 18
Legal Proceedings................................................... 18
Other Information about Anchor National............................. 19
FINANCIALS................................................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 23
INDEPENDENT ACCOUNTANTS................................................... 35
FINANCIAL STATEMENTS...................................................... 36
APPENDIX A--CONSOLIDATED FINANCIAL DATA................................... 49
APPENDIX B--MARKET VALUE ADJUSTMENT....................................... 50
APPENDIX C--PREMIUM TAXES................................................. 51
</TABLE>
2
<PAGE>
GLOSSARY OF TERMS
We have capitalized some of the technical terms used in this prospectus. To help
you understand these terms, we have defined them below:
ACCUMULATION PHASE -- The period during which you invest money in your contract.
ACCUMULATION UNITS -- A measurement we use to calculate the value of the
variable portion of your contract during the Accumulation Phase.
ANNUITANT(S) -- The person(s) on whose life(lives) we base annuity payments.
ANNUITY DATE -- The date on which annuity payments are to begin, as selected by
you.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under the
contract if you or the Annuitant dies.
INCOME PHASE -- The period during which we make annuity payments to you.
NON-QUALIFIED (CONTRACT) -- A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account.
PURCHASE PAYMENTS -- The money you give us to buy a contract, as well as any
additional money you give us to invest after you own it.
QUALIFIED (CONTRACT) -- A contract purchased with pre-tax dollars. These
contracts are generally purchased under a pension plan, specially sponsored
program or individual retirement account.
STRATEGY(IES) -- A sub-account of Variable Annuity Account Five which provides
for the variable investment options available under the contract. Each STRATEGY
has its own investment objective and is invested in the underlying investment
portfolios of Seasons Series Trust.
3
<PAGE>
SEASONS VARIABLE ANNUITY FEE TABLES
------------------------------------------------------------
OWNER TRANSACTION EXPENSES
Withdrawal Charge as a percentage of Purchase Payments:
<TABLE>
<S> <C> <C> <C>
Year 1.............. 7% Year 5.............. 4%
Year 2.............. 6% Year 6.............. 3%
Year 3.............. 6% Year 7.............. 2%
Year 4.............. 5% Year 8.............. 0%
</TABLE>
<TABLE>
<S> <C>
Contract Maintenance Charge........ $35 each year ($30 in North Dakota)
Transfer Fee....................... No charge for first 4 transfers each
year; thereafter, the fee is $25 per
transfer ($10 in
Pennsylvania and Texas)
</TABLE>
ANNUAL SEPARATE ACCOUNT EXPENSES
(as a percentage of daily net asset value)
<TABLE>
<S> <C>
Mortality Risk Charge........................ 0.90%
Expense Risk Charge.......................... 0.35%
Distribution Expense Charge.................. 0.15%
---
Total Separate Account Expenses........ 1.40%
</TABLE>
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of daily net asset value of each investment portfolio after
reimbursement of expenses.)*
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Stock .85% .36% 1.21%
Asset Allocation: Diversified Growth .85% .36% 1.21%
Multi-Managed Growth .89% .40% 1.29%
Multi-Managed Moderate Growth .85% .36% 1.21%
Multi-Managed Income/Equity .81% .33% 1.14%
Multi-Managed Income .77% .29% 1.06%
- ------------------------------------------------------------------------------------------------
* The percentages set forth above are based on estimated amounts for the current fiscal year.
</TABLE>
The Investment Portfolio Expenses table set forth above identifies the total
investment expenses charged by the underlying investment portfolios of Seasons
Series Trust. Each contractholder within a STRATEGY will incur a portion of
these total investment expenses in relation to the investment by such STRATEGY
in the respective portfolio. The table entitled "Investment Portfolio Expenses
by STRATEGY" which follows the total investment portfolio expenses by STRATEGY
based upon the allocation of contract values within each STRATEGY to the
underlying investment portfolios after the quarterly rebalancing described on
page 11. However, the actual investment portfolio expenses incurred by
contractholders within a STRATEGY will vary depending upon the daily net asset
value of each investment portfolio in which such STRATEGY is invested.
THE ABOVE INVESTMENT PORTFOLIO EXPENSES WERE PROVIDED BY SEASONS SERIES TRUST.
WE HAVE NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.
4
<PAGE>
INVESTMENT PORTFOLIO EXPENSES BY STRATEGY
(based on the total annual expenses of the underlying investment portfolios
reflected above, after reimbursement of expenses)**
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
STRATEGY
Growth .87% .38% 1.25%
Moderate Growth .85% .36% 1.21%
Balanced Growth .83% .34% 1.17%
Conservative Growth .80% .32% 1.12%
- ----------------------------------------------------------------------------------------------
** The percentages set forth above are based on estimates for the current fiscal year.
</TABLE>
EXAMPLES
You will pay the following expenses on a $1,000 investment in each STRATEGY,
assuming a 5% annual return on assets and:
(a) surrender of the contract at the end of the stated time period;
(b) if the contract is annuitized or not surrendered.
<TABLE>
<CAPTION>
TIME PERIODS
STRATEGY 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Growth (a) $98 (a) $145 (a) $185 (a) $307
(b) $28 (b) $ 85 (b) $145 (b) $307
Moderate Growth (a) $97 (a) $144 (a) $183 (a) $303
(b) $27 (b) $ 84 (b) $143 (b) $303
Balanced Growth (a) $97 (a) $143 (a) $181 (a) $299
(b) $27 (b) $ 83 (b) $141 (b) $299
Conservative Growth (a) $96 (a) $141 (a) $178 (a) $294
(b) $26 (b) $ 81 (b) $138 (b) $294
</TABLE>
EXPLANATION OF FEE TABLES AND EXAMPLES
1. The purpose of the Fee Tables is to show you the various expenses you
will incur directly and indirectly by investing in the contract. The
example reflects owner transaction expenses, separate account expenses
and investment portfolio expenses by STRATEGY.
2. For certain investment portfolios in which the STRATEGIES invest, the
adviser, SunAmerica Asset Management Corp., has voluntarily agreed to
waive fees or reimburse certain expenses, if necessary, to keep annual
operating expenses at or below the following percentages of each
investment portfolio's average net assets: Stock and Asset Allocation:
Diversified Growth Portfolios: 1.21%; Multi-Managed Growth: 1.29%;
Multi-Managed Moderate Growth: 1.21%; Multi-Managed Income/Equity: 1.14%,
Multi-Managed Income: 1.06%. The adviser also may voluntarily waive or
reimburse additional amounts to increase an investment portfolios'
investment return. All waivers and/or reimbursements may be terminated at
any time. Furthermore, the adviser may recoup any waivers or
reimbursements within two years after such waivers or reimbursements are
granted, provided that the investment portfolio is able to make such
payment and remain in compliance with the foregoing expense limitations.
3. The Examples assume that no transfer fees were imposed. Premium taxes are
not reflected but may be applicable.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE HISTORICAL ACCUMULATION
UNIT VALUES ARE CONTAINED IN
APPENDIX A--CONDENSED FINANCIAL INFORMATION
5
<PAGE>
THE SEASONS VARIABLE ANNUITY
- --------------------------------------------------------------------------------
An annuity is a contract between you (the owner) and an insurance company. The
contract provides tax deferral for your earnings, as well as a death benefit and
guaranteed income in the form of annuity payments beginning on a date you
select. Until you decide to begin receiving annuity payments, your annuity is in
the Accumulation Phase. Once you begin receiving annuity payments, your contract
switches to the Income Phase. If you die during the Accumulation Phase, the
insurance company guarantees a death benefit to your Beneficiary. The Seasons
Variable Annuity is issued by Anchor National Life Insurance Company.
During the Accumulation Phase, the value of your annuity benefits from tax
deferral. This means your earnings accumulate on a tax-deferred basis until you
take money out of your contract. The Income Phase occurs when you begin to
receive annuity payments. You select the date on which annuity payments are to
begin.
The contract is called a variable annuity because you can choose among four
variable investment STRATEGIES, which invest in underlying investment portfolios
managed by five investment managers. Depending upon market conditions, you can
make or lose money in any of these STRATEGIES. If you allocate money to the
STRATEGIES, the amount of money you are able to accumulate in your contract
during the Accumulation Phase depends upon the investment performance of the
STRATEGIES you select. The amount of the annuity payments you receive during the
Income Phase from the variable portion of your contract also depends upon the
investment performance of the STRATEGIES you select for the Income Phase.
The contract also offers seven fixed investment options. Your money will earn
interest at the rate guaranteed by us for the period of time you agree to leave
your money in the fixed investment option. We currently offer fixed investment
options for periods of one, three, five, seven and ten years and special one
year and six-month DCA fixed accounts specifically for the Dollar Cost Averaging
Program. Only one year fixed investment options are available in Maryland and
Washington. The seven and ten year guarantee periods are not available in
Oregon. If you allocate money to a fixed investment option, the amount of money
you are able to accumulate in your contract during the Accumulation Phase
depends upon the total interest credited to your contract. An adjustment to your
contract will apply to withdrawals or transfers from the multi-year fixed
investment options prior to the end of the selected guarantee period. If your
money is in a fixed account option when you begin taking income from your
contract, the amount of annuity payments you receive will remain level for the
entire Income Phase.
ANNUITY INCOME OPTIONS
- --------------------------------------------------------------------------------
When you switch to the Income Phase, you will receive regular income payments
under the contract. You can choose to have your annuity payments sent to you by
check or electronically wired to your bank. The contract offers 5 annuity
options. Other annuity options may be available in the future.
You select the date on which annuity payments are to begin, which must be the
first day of a month at least two years after the date of your contract. We call
this the Annuity Date. You may change your Annuity Date at least seven days
prior to the date that your payments are to begin. However, annuity payments
must begin by the later of your 90th birthday or ten years after the date your
contract is issued. We call this the Latest Annuity Date. If no Annuity Date is
selected we will begin payments based on the Latest Annuity Date. Certain states
may require that you begin receiving annuity payments prior to this date. If the
Annuity Date is past your 85th birthday, it is possible that the contract would
not be treated as an annuity and you may incur adverse tax consequences.
Unless you are a non-natural owner, you may change the Annuitant at any time
prior to the Annuity Date. You may also designate a second person on whose life
annuity payments are based. If the Annuitant dies before the Annuity Date, you
must notify us and designate a new Annuitant.
If you do not choose an annuity option, annuity payments will be made in
accordance with option 4 (below) for 120 months. If the annuity payments are for
joint lives, then we will make payments in accordance with option 3. If
permitted by state law, we may pay the annuity in one lump sum if your contract
is less than $5,000. Likewise, if your annuity payments would be less than $50 a
month, we have the right to change the frequency of your payment to be
quarterly, semi-annual or annual so that your annuity payments are at least $50.
Annuity payments will be made to you unless you designate another person to
receive them. In that case, you must notify us in writing at least 30 days
before the Annuity Date. You will remain fully responsible for any taxes related
to annuity payments.
OPTION 1 - LIFE INCOME
Under this option, we will make annuity payments as long as the Annuitant is
alive. Annuity payments stop when the Annuitant dies.
OPTION 2 - JOINT AND SURVIVOR ANNUITY
Under this option, we will make annuity payments as long as the Annuitant and a
designated second person are alive. Upon the death of either person, we will
continue to make annuity payments so long as the survivor is alive. You choose
the amount of the annuity payments to the survivor, which can be equal to 100%,
66.66% or 50% of the full amount. Annuity payments stop upon the death of the
survivor.
6
<PAGE>
OPTION 3 - JOINT AND SURVIVOR LIFE ANNUITY - 120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2 above, with the additional guarantee that
payments will be made for at least 120 months. If the Annuitant and survivor die
before all guaranteed payments have been made, the rest will be made to the
Beneficiary.
OPTION 4 - LIFE ANNUITY WITH 120 OR 240 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 1 above, with the additional guarantee that
payments will be made for at least 120 or 240 months, as selected by you. Under
this option, if the Annuitant dies before all guaranteed payments have been
made, the remaining payments will be made to the Beneficiary.
OPTION 5 - INCOME FOR A SPECIFIED PERIOD
Under this option, we will make annuity payments for any period of time from 5
to 30 years, as selected by you. However, the period must be for full 12 month
increments. Under this option, if the Annuitant dies before all guaranteed
payments have been made, the remaining payments will be made to the beneficiary.
This option does not contain an element of mortality risk. Therefore, you will
not get the benefit of the mortality component of the mortality and expense risk
charge if this option is selected.
ALLOCATION OF ANNUITY PAYMENTS
On the Annuity Date, if your money is invested in a fixed investment option(s),
your annuity payments will be fixed in amount. If your money is invested in a
STRATEGY(IES), your annuity payments will vary depending on the investment
performance of the STRATEGY(IES) you select. If you have money in the fixed and
variable investment options, your annuity payments will be based on the
respective allocations. You may not convert between fixed and variable payments
once annuity payments begin.
VARIABLE ANNUITY PAYMENTS
If you choose to have any portion of your annuity payments come from the
STRATEGIES, the dollar amount of your payment will depend upon three things: (1)
the value of your contract in the STRATEGIES on the Annuity Date, (2) the 3.5%
assumed investment rate used in the annuity table for the contract and (3) the
performance of the STRATEGIES you selected. If the actual performance exceeds
the 3.5% assumed rate, your annuity payments will increase. Similarly, if the
actual rate is less than 3.5%, your annuity payments will decrease. The
Statement of Additional Information contains detailed information and sample
calculations.
TRANSFERS DURING THE INCOME PHASE
You may transfer money among the STRATEGIES during the Income Phase. Transfers
are subject to the same limitations as transfers during the Accumulation Phase.
However, you may not transfer money from the fixed account into the STRATEGIES
or from the STRATEGIES into the fixed accounts during the Income Phase.
DEFERMENT OF PAYMENTS
We may defer making fixed payments for up to six months, or less if required by
state law. Interest will be credited to you during the deferral period.
PURCHASING A SEASONS VARIABLE ANNUITY
- --------------------------------------------------------------------------------
A Purchase Payment is the money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it. You can
purchase a Non-Qualified contract with a minimum initial investment of $5,000
and a Qualified contract with a minimum initial investment of $2,000. The
maximum we accept is $1,000,000 without our prior approval. Payments in amounts
of $500 or more may be added to your contract at any time during the
Accumulation Phase. You can make scheduled subsequent Purchase Payments of $50
or more per month by enrolling in the Automatic Payment Plan.
We may refuse any Purchase Payment. In general, we will not issue a
Non-Qualified contract to anyone who is over age 90 or a Qualified contract to
anyone who is over age 70 1/2.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, you will allocate your Purchase Payment to one or
more of the STRATEGIES and/or the fixed investment options. You should specify
your investment allocations on the contract application. If you make additional
Purchase Payments, we will allocate them the same way as your first Purchase
Payment unless you tell us otherwise.
Once we receive your Purchase Payment and a complete application at our
principal place of business, we will issue your contract and allocate your first
Purchase Payment within two business days. If we are unable to complete this
process within five business days, we will either send back your money or get
your permission to keep it until we get all the necessary information.
ACCUMULATION UNITS
The value of the variable portion of your contract will go up or down depending
upon the investment performance of the STRATEGY(IES) you select. In order to
keep track of the value of your contract, we use a unit of measure called an
Accumulation Unit which works like a share of a mutual fund. During the Income
Phase, we call them Annuity Units.
7
<PAGE>
An Accumulation Unit value is determined each day that the New York Stock
Exchange ("NYSE") is open. We calculate an Accumulation Unit for each STRATEGY
after the NYSE closes each day. We do this by:
(1) determining the total value of money invested in the particular
STRATEGY;
(2) subtracting from that amount any asset-based charges and any other
charges such as taxes we have deducted; and
(3) dividing this amount by the number of outstanding Accumulation Units.
The value of an Accumulation Unit may go up or down from day to day. When you
make a Purchase Payment, we credit your contract with Accumulation Units. The
number of Accumulation Units credited is determined by dividing the amount of
the Purchase Payment allocated to a STRATEGY by the value of the Accumulation
Unit for that STRATEGY.
Example:
We receive a $25,000 Purchase Payment from you on Wednesday. You want your
money to be invested in the Moderate Growth STRATEGY. We determine that the
value of an Accumulation Unit for the Moderate Growth STRATEGY is $11.10
when the NYSE closes on Wednesday. We then divide $25,000 by $11.10 and
credit your contract on Wednesday night with 2252.252 Accumulation Units for
the Moderate Growth STRATEGY.
FREE LOOK PERIOD
If you change your mind about owning the contract, you can cancel it within 10
days after receiving it (or longer if required by state law) by mailing it back
to our Annuity Service Center. Unless otherwise by state law, you will receive
back the value of the money allocated to the STRATEGIES on the day we receive
your request plus any Purchase Payment in the fixed investment options. This
value may be more or less than the money you initially invested. Thus, the
investment risk is borne by you during the free look period.
In certain states, or if you purchase your contract as an IRA we may be required
to return your Purchase Payment. If that is the case, we reserve the right to
put your money in the one-year fixed account option during the free look period.
At the end of this period, we will reallocate your money as you selected. If you
cancel your contract during the free look period, we will return to you, the
greater of your purchase payments or the value of your contracts.
INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
The contract offers variable investment options which we call STRATEGIES and
fixed investment options. The contract was designed to meet your varying
investment needs over time, which can be achieved by using the STRATEGIES alone
or in concert with the fixed investment options in order to lower the risk
associated with investing only in a variable investment option.
VARIABLE INVESTMENT OPTIONS:
THE STRATEGIES
The contract offers four multi-manager variable investment STRATEGIES, each with
a different investment objective. The STRATEGIES are designed to meet your
investment needs over time and considering factors such as your age, goals and
risk tolerance. However, each STRATEGY is designed to achieve different levels
of growth over time.
Each STRATEGY invests in three of the six underlying investment portfolios of
the Seasons Series Trust. The allocation of money among these investment
portfolios will vary depending on the objective of the STRATEGY.
Seasons Series Trust is managed by SunAmerica Asset Management Corp.
("SAAMCo."), which is affiliated with Anchor National. SAAMCo. has engaged
sub-advisers to provide investment advice for certain investment portfolios.
The underlying investment portfolios of Seasons Series Trust include the Asset
Allocation: Diversified Growth Portfolio, the Stock Portfolio and the
Multi-Managed Growth, Multi-Managed Moderate Growth, Multi-Managed Income/Equity
and Multi-Managed Income Portfolios (the "Multi-Managed Portfolios").
The Asset Allocation: Diversified Growth Portfolio is managed by Putnam
Investment Management, Inc. The Stock Portfolio is managed by T. Rowe Price
Associates, Inc. All of the Multi-Managed Portfolios include the same three
basic investment components: a growth component managed by Janus Capital
Corporation, a balanced component managed by SAAMCo. and a fixed income
component managed by Wellington Management Company, LLP. The Growth STRATEGY and
the Moderate Growth STRATEGY also have an aggressive growth component which is
managed by SAAMCo. The percentage that any one of these components represents in
the Multi-Managed Portfolio varies in accordance with the investment objective.
YOU SHOULD READ THE PROSPECTUS FOR SEASONS SERIES TRUST CAREFULLY BEFORE
INVESTING. THE PROSPECTUS CONTAINS DETAILED INFORMATION ABOUT THE INVESTMENT
PORTFOLIOS AND IS ATTACHED TO THIS PROSPECTUS.
Each STRATEGY uses an asset allocation investment approach to achieve its
objective and allocates your money into underlying investment portfolios which
invest in a combination of stocks, both domestic and international, bonds and
cash. Although the asset mix within each STRATEGY will vary over time, each
STRATEGY has a neutral asset allocation mix, including a cash component in order
to reflect the anticipated cash holdings required to rebalance each STRATEGY
quarterly, as reflected on the following pages. Additionally, after the
quarterly rebalancing described on page 10, the contract value within each
STRATEGY will be allocated to the various underlying investment portfolios in
the percentages identified on the following pages.
8
<PAGE>
GROWTH
GOAL: Long-term growth of capital, allocating its assets primarily to stocks.
This STRATEGY may be best suited for those with longer periods to invest.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 80%
Bonds 15%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED
GROWTH PORTFOLIO 25%
Managed by Putnam Investment
Management, Inc.
STOCK PORTFOLIO 25%
Managed by T. Rowe Price
Associates, Inc.
MULTI-MANAGED GROWTH PORTFOLIO 50%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
MODERATE GROWTH
GOAL: Growth of capital through investments in equities, with a secondary
objective of conservation of principal by allocating more of its assets to bonds
than the Growth STRATEGY. This STRATEGY may be best suited for those nearing
retirement years but still earning income.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 70%
Bonds 25%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED
GROWTH PORTFOLIO 25%
Managed by Putnam Investment
Management, Inc.
STOCK PORTFOLIO 20%
Managed by T. Rowe Price
Associates, Inc.
MULTI-MANAGED MODERATE GROWTH
PORTFOLIO 55%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
9
<PAGE>
BALANCED GROWTH
Goal: Focuses on conservation of principal by investing in a more balanced
weighting of stocks and bonds, with a secondary objective of seeking a high
total return. This STRATEGY may be best suited for those approaching retirement
and with less tolerance for investment risk.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 55%
Bonds 40%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED
GROWTH PORTFOLIO 25%
Managed by Putnam Investment
Management, Inc.
STOCK PORTFOLIO 20%
Managed by T. Rowe Price
Associates, Inc.
MULTI-MANAGED INCOME/EQUITY
PORTFOLIO 55%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
CONSERVATIVE GROWTH
Goal: Capital preservation while maintaining some potential for growth over the
long term. This STRATEGY may be best suited for those with lower investment risk
tolerance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Stocks 42%
Bonds 53%
Cash 5%
</TABLE>
UNDERLYING INVESTMENT
PORTFOLIOS & MANAGERS
ASSET ALLOCATION: DIVERSIFIED
GROWTH PORTFOLIO 25%
Managed by Putnam Investment
Management, Inc.
STOCK PORTFOLIO 15%
Managed by T. Rowe Price
Associates, Inc.
MULTI-MANAGED INCOME PORTFOLIO 60%
Managed by:
Janus Capital Corporation
SunAmerica Asset Management Corp.
Wellington Management Company, LLP
10
<PAGE>
STRATEGY REBALANCING
Each STRATEGY is designed to meet its investment objective by allocating a
portion of your money to three different investment portfolios. In order to
maintain the mix of investment portfolios consistent with each STRATEGY's
objective, each STRATEGY within your contract will be rebalanced such that on
the first business day of each quarter (or as close to such date as is
administratively practicable) it will be allocated among the various investment
portfolios according to the percentages set forth on the prior pages.
Additionally, within each Multi-Managed Portfolio, your money will be rebalanced
among the various components. We also reserve the right to rebalance any
STRATEGY more frequently if deemed necessary and in no event adverse to the
interests of contract owners invested in such STRATEGY. Rebalancing a STRATEGY
may involve shifting a portion of assets out of underlying investment portfolios
with higher returns into underlying investment portfolios with relatively lower
returns. Transfers made as a result of rebalancing a STRATEGY are not counted
against your 4 free transfers per year.
SUBSTITUTION
If any of the underlying investment portfolios is no longer available, we may be
required to substitute shares of another investment portfolio. We will seek any
required prior approval of the SEC and give you notice before doing this.
FIXED INVESTMENT OPTIONS
The contract also offers seven fixed investment options. Anchor National will
guarantee the interest rate earned on money you allocate to any of these fixed
investment options. We currently offer fixed investment options for periods of
one, three, five, seven and ten years, which we call Guarantee Periods. In
Maryland or Washington only the one year fixed investment option is available.
The seven and ten year guarantee periods are not available in Oregon.
Additionally, we guarantee the interest rate for money allocated to the six-
month DCA fixed account and/or the one year DCA fixed account (the "DCA fixed
accounts") which are available only in conjunction with the Dollar Cost
Averaging Program. Please see the section on the Dollar Cost Averaging Program
on the next page for additional information about, including limitations on, the
availability and operation of the DCA fixed accounts. The DCA fixed accounts are
only available for new Purchase Payments.
Interest rates offered for the different Guarantee Periods and the DCA fixed
accounts will differ from time to time due to changes in market conditions but
will not be less than an annual effective rate of 3%. The interest rate offered
for a particular Guarantee Period for new Purchase Payments may differ from the
interest rate offered for money already invested in such account. An interest
rate established for a Guarantee Period or the DCA fixed accounts will not
change during the stated term of that period.
You may reallocate money to a fixed investment option (other than the DCA fixed
accounts) or to any of the STRATEGIES after the end of the Guarantee Period.
However, if you do not give us different instructions within 30 days after the
end of your Guarantee Period, we will keep your money in the fixed account for
the same Guarantee Period you previously selected. You will receive the renewal
interest rate then in effect for that Guarantee Period.
MARKET VALUE ADJUSTMENT
THE FOLLOWING DISCUSSION APPLIES TO MONIES YOU PUT INTO THE THREE, FIVE, SEVEN
AND TEN YEAR FIXED INVESTMENT OPTIONS ONLY AND DOES NOT APPLY TO WITHDRAWALS TO
PAY A DEATH BENEFIT OR CONTRACT FEES AND CHARGES.
If you take your money out of a multi-year fixed investment option (whether by
withdrawal, transfer or annuitization) before the end of the Guarantee Period,
we will make an adjustment to the value of your contract. We call this a Market
Value Adjustment. The Market Value Adjustment reflects the differing interest
rate environments between the time you put your money into the fixed account and
the time you take your money out of the fixed account. The adjustment can
increase or decrease the value of your contract. You may withdraw your money
within 30 days following the end of a Guarantee Period without incurring a
Market Value Adjustment.
We calculate the Market Value Adjustment by comparing the interest rate you
received on the money you put into the fixed account against the interest rate
we are currently offering to contract owners for the period of time remaining in
the Guarantee Period (rounded up to the nearest year unless otherwise required
by state law). If the amount of time remaining is not equal to an available
guarantee period for which we offer a fixed interest rate, the interest rate
will be determined by linear interpolation between interest rates for the two
nearest periods that are available.
Generally, if interest rates have dropped between the time you put your money
into the fixed account and the time you take it out, there will be a positive
adjustment to the value of your contract. Conversely, if interest rates have
increased between the time you put your money into the fixed account and the
time you take it out, there will be a negative adjustment to the value of your
contract.
If the Market Value Adjustment is negative, it will be assessed first against
any remaining money allocated to the fixed account out of which you took your
money and then against the amount of money you take out of the fixed account. If
the Market Value Adjustment is positive, it will be added to the amount you take
out of the fixed account.
Appendix A provides more information about how we calculate the Market Value
Adjustment and gives some examples of the impact of the adjustment.
The one year fixed investment option and DCA fixed accounts do not impose a
market value adjustment and are not registered under the Securities Act of 1933
and are not subject to the provisions of the Investment Company Act of 1940.
11
<PAGE>
TRANSFERS DURING THE ACCUMULATION PHASE
Except as provided in the next sentence with respect to the DCA fixed accounts,
you can transfer money among the STRATEGIES and the fixed investment options by
written request or by telephone. Although you may transfer money out of the DCA
fixed accounts, you may not transfer money into the DCA fixed accounts from any
STRATEGY or any fixed investment option. You can make four transfers every year
without incurring a transfer charge. We measure a year from the anniversary of
the day we issued your contract. If you make more than four transfers in a year,
there is a $25 transfer fee per transfer ($10 in Pennsylvania and Texas).
Additionally, transfers out of a multi-year fixed investment option may be
subject to a market value adjustment.
The minimum amount you can transfer is $500 or a lesser amount if you transfer
the entire balance from a STRATEGY or a fixed investment option. If any money
will remain in a STRATEGY or fixed investment option after making a transfer, it
must be at least $500. Your request for transfer must clearly state which
STRATEGY(IES) and/or fixed investment option(s) are involved and the amount you
want to transfer. Please see the section below on Dollar Cost Averaging for
specific rules regarding the DCA fixed accounts.
We will accept transfers by telephone unless you specify otherwise on your
contract application. We have in place procedures to provide reasonable
assurance that instructions given to us by telephone are genuine. Thus, we
disclaim all liability for any claim, loss or expense from any error. If we fail
to use such procedures, we may be liable for any losses due to unauthorized or
fraudulent instructions.
We reserve the right to modify, suspend or terminate the transfer privileges at
any time.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
percentage or amount from any STRATEGY or the one year fixed investment option
(we call these source accounts) to another STRATEGY. You can also select to
transfer the entire value in a STRATEGY or the one year fixed investment option
in a stated number of transfers. Transfers may be monthly or quarterly. You can
change the amount or frequency at any time by notifying us in writing.
When you make either your initial Purchase Payment or a subsequent Purchase
Payment and want to participate in the Dollar Cost Averaging Program with that
money, you may also use a DCA fixed account as a source account. You cannot
transfer money from a STRATEGY or other fixed investment option into a DCA fixed
account.
When the One-Year DCA fixed account is used for the DCA Program, all of your
money in the One-Year DCA fixed account will be transferred to the STRATEGY(IES)
you select in either monthly or quarterly transfers (as selected by you) by the
end of the one year period for which the interest rate is guaranteed (one year
from the date of your deposit). Once selected, you cannot change the frequency.
When the Six-Month DCA fixed account is used, all of the money you allocate to
the Six-Month DCA fixed account is transferred to the STRATEGY(IES) you select
in monthly transfers by the end of the six month period for which the interest
rate is guaranteed.
The minimum amount that may be allocated to a DCA fixed account is $500 and the
minimum amount that may be transferred from a DCA fixed account to the
STRATEGY(IES) you select is $100. Therefore, if the amount allocated to a DCA
fixed account is such that the transfer amount under the frequency selected
would fail to meet the $100 minimum transfer requirement, the number of
transfers under the program would be reduced to comply with the minimum transfer
requirement. For example, if you allocate $500 to the Six-Month DCA fixed
account, your money will be transferred out over a period of five months.
If you want to stop participation in the Dollar Cost Averaging Program and you
are using a DCA fixed account as your source account, we will either transfer
your money to the STRATEGY(IES) or fixed investment option(s) you select, or, in
the absence of express instructions, we will transfer your money to the one year
fixed investment option which will earn interest at the rate then being offered
for new purchase payments for a period of one year.
By allocating amounts to the STRATEGIES on a regular schedule as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations. However, there is no assurance that you
will earn a greater profit. You are still subject to loss in a declining market.
Dollar cost averaging involves continuous investment in securities regardless of
fluctuating price levels. You should consider your financial ability to continue
to invest through periods of low prices.
Transfers under this program are not counted against your four free transfers
per year. In addition, any transfer to the one-year fixed investment option upon
termination of this program will not be counted against your four free
transfers.
We reserve the right to modify, suspend or terminate this program at any time.
Example:
Assume that you want to gradually move $750 each quarter from the
Conservative Growth STRATEGY to the Growth STRATEGY over six quarters. You
set up dollar cost averaging and purchase Accumulation Units at the
following values:
<TABLE>
<CAPTION>
QUARTER ACCUMULATION UNIT UNITS PURCHASED
- ------------- ----------------- -------------------
<S> <C> <C>
1 $7.50 100
2 $5.00 150
3 $10.00 75
4 $7.50 100
5 $5.00 150
6 $7.50 100
</TABLE>
You paid an average price of only $6.67 per Accumulation Unit over the six
quarters, while the average market price actually was $7.08. By investing an
equal amount of money each month, you automatically buy more Accumulation
Units when the market price is low and fewer Accumulation Units when the
market price is high.
12
<PAGE>
PRINCIPAL ADVANTAGE PROGRAM
The Principal Advantage Program allows you to allocate Purchase Payments to a
fixed investment option and one or more STRATEGIES. You decide how much you want
to invest and when you would like a return of your principal. We will calculate
how much of your Purchase Payment needs to be allocated to the fixed investment
options you select to ensure that this money will grow to equal the full amount
of your Purchase Payment by the end of the selected period. The rest of your
Purchase Payment may then be invested in the STRATEGY(IES), where it has the
potential to achieve greater growth.
We reserve the right to modify, suspend or terminate this program at any time.
Example:
Assume that you want to allocate a portion of your initial Purchase Payment
of $100,000 to the fixed investment option. You want the amount allocated to
the fixed investment option to grow to $100,000 in 7 years. If the 7-year
fixed investment option is offering a 7% interest rate, we will allocate
$62,275 to the 7-year fixed investment option to ensure that this amount
will grow to $100,000 at the end of the 7-year period. The remaining $37,725
may be allocated among the STRATEGIES, as determined by you, to provide
opportunity for greater growth.
VOTING RIGHTS
Anchor National is the legal owner of the shares of the Seasons Series Trust.
However, when the underlying investment portfolios of the Seasons Series Trust
solicit proxies in conjunction with a vote of shareholders, we are required to
obtain from you instructions as to how to vote those shares. When we receive
those instructions, we will vote all of the shares we own in proportion to those
instructions. This will also include any shares that we own on our behalf.
Should we determine that we are no longer required to comply with the above, we
will vote the shares in our own right.
SUBSTITUTION
If any of the STRATEGIES you selected are no longer available, we may be
required to substitute shares of another STRATEGY. We will seek any required
prior approval of the SEC and give you notice before doing this.
EXPENSES
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There are charges and other expenses associated with the contract that will
reduce your investment return. These charges and deductions are described below.
INSURANCE CHARGES
Each day, we make a deduction for our insurance charges from amounts allocated
to the STRATEGIES. This is done as part of our calculation of the values of the
Accumulation Units during the Accumulation Phase and the Annuity Units during
the Income Phase. The insurance charges consist of the mortality and expense
risk charge and the distribution expense charge.
MORTALITY AND EXPENSE RISK CHARGE
This charge is equal, on an annual basis, to 1.25% of the daily value of the
contract invested in a STRATEGY. This charge is for our obligation to make
annuity payments, to provide a death benefit and for assuming the risk that the
current charges will be insufficient in the future to cover the cost of
administering the contract. Approximately .90% is for mortality risks and .35%
is for expense risks. If the charges under the contract are not sufficient, we
will bear the loss. We will not increase this charge. We may use any profits
from this charge to pay for the costs of distributing the contract.
DISTRIBUTION EXPENSE CHARGE
This charge is equal, on an annual basis, to .15% of the daily value of the
contract invested in a STRATEGY. This charge is for all expenses associated with
the distribution of the contract. These expenses include preparing the contract,
confirmations and statements, providing sales support, and maintaining contract
records. If this charge is not enough to cover the costs of distributing the
contract, we will bear the loss.
INVESTMENT CHARGES
If you have money allocated to the STRATEGIES, there are deductions from and
expenses paid out of the assets of the various underlying investment portfolios.
These investment charges are summarized in the Fee Tables on pages 3 and 4. For
more detailed information, you should refer to the prospectuses for the Seasons
Series Trust.
CONTRACT MAINTENANCE CHARGE
During the Accumulation Phase, every year on the anniversary of the date when
your contract was issued, we deduct $35 ($30 in North Dakota) from the value of
your contract as a contract maintenance charge (unless otherwise required by
state law). This charge is for expenses incurred to establish and maintain your
contract. This charge cannot be increased. If you make a complete withdrawal
from your contract, the contract maintenance charge will be deducted prior to
the withdrawal. We will not deduct the contract maintenance charge if, when this
charge is to be made, the value of your contract is $50,000 or more. We may
discontinue this waiver at some point in the future.
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WITHDRAWAL CHARGE
During the Accumulation Phase you may make withdrawals from your contract.
However, a withdrawal charge may apply. For purposes of calculating any
applicable withdrawal charge, amounts withdrawn from your contract will come
first from the Free Withdrawal Amount (as described below), then from Purchase
Payments no longer subject to a withdrawal charge which have not previously been
withdrawn, then from Purchase Payments subject to a withdrawal charge which have
not previously been withdrawn and last from earnings. However, for tax purposes,
earnings are considered withdrawn first. You will not receive the benefit of the
Free Withdrawal Amount if you make a complete surrender of your contract.
Generally, each contract year you may withdraw up to 10% of your total Purchase
Payments which are subject to a withdrawal charge free of any withdrawal charge
(the "Free Withdrawal Amount").
In order to determine the applicable withdrawal charge, we keep track of each
Purchase Payment and assess a charge based on the length of time a Purchase
Payment is in your contract before being withdrawn. After a Purchase Payment has
been in your contract for seven years, no withdrawal charge is assessed against
withdrawals of the Purchase Payment.
The withdrawal charge is assessed as a percentage of the Purchase Payment you
are withdrawing as follows:
<TABLE>
<S> <C> <C> <C>
Year 1......... 7% Year 5......... 4%
Year 2......... 6% Year 6......... 3%
Year 3......... 6% Year 7......... 2%
Year 4......... 5% Year 8......... 0%
</TABLE>
If the withdrawal is for only part of the contract, you may elect how you would
like to pay the withdrawal charge. In the absence of instruction from you, we
will deduct the withdrawal charge from the remaining value in your contract. You
have the option of asking us to issue the withdrawal check so that the requested
amount takes into consideration the withdrawal charge.
We will not assess any withdrawal charges for withdrawals to pay contract
charges, a death benefit or for annuity payments during the Income Phase.
The withdrawal charge is intended to cover the actual costs of distribution.
However, to the extent that such charge is insufficient, the Company may use any
of its corporate assets to make up any difference.
TRANSFER FEE
You can make four free transfers every year. We measure a year from the day we
issued your contract. If you make more than four transfers a year, we will
deduct a $25 transfer fee per transfer ($10 in Pennsylvania and Texas). The
transfer fee will be deducted from the STRATEGY or fixed investment option from
which the transfer is requested. If the transfer is part of the Dollar Cost
Averaging Program, it will not count against your four free transfers per year.
PREMIUM TAXES
We are responsible for the payment of premium taxes charged by a limited number
of states and will make a deduction from your contract for them. Premium taxes
range from 0.50% to 3.5%. These taxes are due either when the contract is issued
or when annuity payments begin or when you make a full surrender of the
contract. It is our current practice not to charge you for these taxes until
annuity payments begin or when a full surrender is made. In the future, we may
discontinue this practice and assess the tax when it is due or upon the payment
of the death benefit.
Appendix B provides more information about the premium taxes assessed in each
state.
INCOME TAXES
Although we do not currently deduct any income taxes borne under your contract,
we reserve the right to do so in the future.
REDUCTION OR ELIMINATION OF CERTAIN CHARGES AND ADDITIONAL AMOUNTS CREDITED
We may reduce or eliminate the amount of certain insurance charges when the
contract is sold to groups of individuals under circumstances which reduce its
sales and administrations expenses. We will determine the eligibility of such
groups by considering the following factors: (1) the size of the group; (2) the
total amount of Purchase Payments we expect to receive from the group; (3) the
nature of the purchase and the persistency we expect in that group; (4) the
purpose of the purchase and whether that purpose makes it likely that expenses
will be reduced; and (5) any other circumstances which we believe to be relevant
in determining whether reduced sales expenses may be expected.
In addition, we may waive or reduce the insurance charges, credit additional
amounts or grant bonus guaranteed interest rates in connection with contracts
sold to employees, employees of affiliates, registered representatives,
employees of broker/dealers which have a current selling agreement with us
("Eligible Individuals") and immediate family members of all Eligible
Individuals when purchased directly through SunAmerica Capital Services, Inc.
Such reductions, waivers or additional amounts credited may be withdrawn or
modified by us. Commissions may be waived or reduced with respect to contracts
established for the personal accounts of Eligible Individuals.
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TAXES
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NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU ARE CAUTIONED
TO SEEK COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE
THE TAX STATUS OF THE ANNUITY.
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the tax
treatment of annuity contracts. From time to time, Federal initiatives are
proposed that could affect the Company's business, including employee benefit
plan regulation, tax law changes affecting the taxation of insurance companies
and the tax treatment of insurance products. Recent administration budget
proposals include the proposed taxation of exchanges involving variable annuity
contracts, reallocation within variable annuity contracts and certain other
proposals relating to annuities. Please consult your tax advisor for further
information.
Generally, you will not be taxed on the earnings on the money held in your
annuity contract until you take the money out. Different rules apply depending
on how you take the money out and whether your contract is Qualified or
Non-Qualified.
If you do not purchase your contract under a pension plan, specially sponsored
program or an individual retirement account, your contract is referred to as a
Non-Qualified contract and receives different tax treatment than a Qualified
contract. In general, your cost basis in a Non-Qualified contract is equal to
the Purchase Payments you put into the contract. You have already been taxed on
the cost basis in your contract.
If you purchase your contract under a pension plan, specially sponsored program
or as an individual retirement account, your contract is referred to as a
Qualified contract. Examples of Qualified plans are: Individual Retirement
Annuities, Tax-sheltered Annuities (referred to as 403(b) contracts), H.R. 10
Plans (referred to as Keogh Plans) and pension and profit sharing plans,
including 401(k) plans. Typically you have not paid any tax on the Purchase
Payments used to buy your contract and therefore you have no cost basis in your
contract.
TAX TREATMENT OF DISTRIBUTIONS --
NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the IRC treats such a withdrawal as
first coming from the earnings and then as coming from your Purchase Payments.
For annuity payments, a portion of each payment is considered a return of your
Purchase Payment and will not be taxed. Withdrawn earnings are treated as income
to you and are taxable. The IRC further provides for a 10% tax penalty on any
earnings that are withdrawn other than in conjunction with the following
circumstances: (1) after you reach age 59 1/2; (2) after you die; (3) after you
become disabled (as described in the IRC); (4) in a series of substantially
equal installments made for the life of the taxpayer or for the joint lives of
the taxpayer and his or her Beneficiary; (5) under an immediate annuity; or (6)
which come from Purchase Payments made prior to August 14, 1982.
TAX TREATMENT OF DISTRIBUTIONS --
QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy a
Qualified contract or on any earnings and therefore any amount you take out as a
withdrawal or as annuity payments will be taxable income. The IRC further
provides for a 10% tax penalty on any withdrawal or annuitization other than in
conjunction with the following circumstances: (1) after reaching age 59 1/2; (2)
by your beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) in a series of substantially equal installments made for the life
of the taxpayer or for the joint lives of the taxpayer and his or her
Beneficiary; (5) to fund certain first time home purchase expenses; (6) to fund
certain higher education expenses (as defined in the IRC) and, except in the
case of an IRA as to the following (7) after you separate from service after
attaining age 55; (8) to the extent such withdrawals do not exceed limitations
set by the IRC for amounts paid during the taxable year for medical care; and
(9) amounts paid to an alternate payee pursuant to a qualified domestic
relations order.
The IRC limits the withdrawal of Purchase Payments made by owners from certain
Tax-sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his or her job; (3) dies; (4) becomes disabled (as
defined in the IRC); or (5) in the case of hardship. In the case of hardship,
the owner can only withdraw Purchase Payments and not earnings.
MINIMUM DISTRIBUTIONS
Generally, the IRC requires that you take annual minimum distributions from a
Qualified Contract beginning no later than April 1 of the year after you attain
age 70 1/2. Failure to take minimum distributions may result in disqualification
of the Qualified status of your contract. In addition, other federal tax
penalties may apply, if minimum distributions are not taken. As the contract
owner, it is your responsibility to make sure that you take the required annual
minimum distributions. For more information on minimum distribution
requirements, please consult your tax adviser.
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity in order to be treated as a variable annuity
for tax purposes. We believe that the underlying investment portfolios are being
managed so as to comply with these requirements.
Neither the IRC nor any guidelines issued in conjunction with the IRC provide
guidance regarding when you, because of the degree of control you exercise over
the way your money is
15
<PAGE>
invested, and not Anchor National, would be considered the owner of the shares
of the underlying investment portfolios. It is unknown to what extent the
ability to select investments, make transfers among STRATEGIES or choose from a
wide selection of investment options will ultimately impact this issue. If
guidance is provided, generally it would be applied prospectively. However, if
such guidance is not considered a new position, it may be applied retroactively.
Due to the uncertainty is this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Under your contract, money can be accessed in the following ways: (1) by making
a withdrawal either for a part of the value of your contract or for the entire
value of your contract during the Accumulation Phase; (2) by receiving annuity
payments during the Income Phase; and (3) when a death benefit is paid to your
Beneficiary.
Generally, withdrawals are subject to a withdrawal charge, a market value
adjustment if the money withdrawn comes from a multi-year fixed investment
option and, if you withdraw your full contract value, a contract maintenance
charge. (See "Expenses" for more complete information.)
If you make a complete withdrawal you will receive the value of your contract,
less any applicable fees, charges and market value adjustments, at the price
calculated following receipt of a complete request to make such a withdrawal at
our Annuity Service Center. Your contract must be submitted as well.
Under most circumstances, partial withdrawals must be for a minimum of $1,000.
We require that the value left in any STRATEGY or fixed investment option be at
least $500 after a withdrawal. Unless you provide us with different
instructions, partial withdrawals will be made pro rata from each STRATEGY and
fixed investment option in which your contract is invested. You must send a
written withdrawal request to us prior to any withdrawal being made.
SYSTEMATIC WITHDRAWAL PROGRAM
This program allows you to receive either monthly, quarterly, semi-annual or
annual checks during the Accumulation Phase. You can also choose to have
systematic withdrawals electronically wired to your bank account. Any
withdrawals you make using this program count against your Free Withdrawal
Amount as described in "Expenses". Withdrawals in excess of the Free Withdrawal
Amount may be subject to a withdrawal charge. The minimum amount of each
withdrawal under this program is $250. Withdrawals may be taxable and a 10% IRS
tax penalty may apply if you are under age 59 1/2. There is no charge for
participating in this program.
This program is not available to everyone, so please check with our Annuity
Service Center, which can provide the necessary enrollment forms. We reserve the
right to modify, suspend or terminate this program at any time.
SUSPENSION OF PAYMENTS
We may be required to suspend or postpone the payment of a withdrawal for any
period of time when: (1) the New York Stock Exchange is closed (other than a
customary weekend and holiday closings); (2) trading on the New York Stock
Exchange is restricted; (3) an emergency exists such that disposal of or
determination of the value of shares of the investment portfolios is not
reasonably practicable; (4) the Securities and Exchange Commission, by order, so
permits for the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from the
fixed account for the period permitted by law but not for more than six months.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if it is less than
$500 as a result of withdrawals and no Purchase Payments have been made during
the past three years. We will provide you with sixty days written notice and
distribute the contract's remaining value to you.
WITHDRAWAL CHARGES, MARKET VALUE ADJUSTMENTS, INCOME TAXES, TAX PENALTIES AND
CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL YOU MAKE.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time we will advertise the performance of the STRATEGIES. Any such
performance results are based on historical earnings and are not intended to
indicate future performance.
For each STRATEGY we will show performance against a comparison index which is
made up of the S&P 500 Index, the Lehman Brothers Corporate/Government Index and
the Lipper Money Market Index. The comparison index will blend the referenced
indices in proportion to the neutral allocation of stocks, bonds and cash within
each STRATEGY as indicated on pages 9 and 10 of this prospectus.
Additionally, we may show performance of each STRATEGY in comparison to various
appropriate indexes and the performance of other similar variable annuity
products with similar objectives as reported by such independent reporting
services as Morningstar, Inc., Lipper Analytical Services, Inc. and the Variable
Annuity Research Data Service ("VARDS").
16
<PAGE>
Please see the Statement of Additional Information for additional information
regarding the methods used to calculate performance data.
DEATH BENEFIT
- --------------------------------------------------------------------------------
If you should die before beginning the Income Phase of your contract, we will
pay a death benefit to your Beneficiary.
If you should die prior to reaching age 75 or, if there are joint owners, if an
owner should die prior to the youngest owner reaching age 75, the death benefit
will be equal to the greater of:
1. The value of your contract at the time we receive adequate proof of death
and the Beneficiary's election as to how the benefit should be paid; or
2. Total Purchase Payments less any withdrawals, applicable charges, market
value adjustments and taxes, accumulated at 3% from the date your contract
was issued until the date of death, plus any Purchase Payments received,
less any withdrawals, applicable charges, market value adjustments and taxes
made or charged, after the date of death.
If the contract was issued after your 75th birthday or if you should die after
you reach age 75, or, if there are joint owners, if the contract was issued
after both owners' 75th birthday or if an owner dies after the youngest owner
reaches age 75, the death benefit will be the greater of:
1. The value of your contract at the time we receive adequate proof of death
and the Beneficiary's election as to how the death benefit will be paid; or
2. Total Purchase Payments received by us before age 75 (in the case of joint
owners, before the younger owner reaches age 75) less any withdrawals,
applicable charges, market value adjustments and taxes, accumulated at 3%
from the date your contract was issued until your 75th birthday (or, if
there is a joint owner, the 75th birthday of the youngest owner), plus any
subsequent Purchase Payments received, less any withdrawals, applicable
charges, market value adjustments and taxes made or charged, after your 75th
birthday.
The death benefit is not paid after you switch to the Income Phase. During the
Income Phase, your Beneficiary(ies) will receive any remaining guaranteed
annuity payments in accordance with the annuity option you choose.
You select the Beneficiary(ies) to receive any amounts payable on death. You may
change the Beneficiary at any time, unless you previously made an irrevocable
Beneficiary designation. A new Beneficiary designation is not effective until we
record the change.
The death benefit must begin payment immediately upon receipt of all necessary
documents and, in any event, must be paid within 5 years of the date of death
unless the Beneficiary elects to have it payable in the form of an annuity. If
the Beneficiary elects an annuity option, it must be paid over the Beneficiary's
lifetime or for a period not extending beyond the Beneficiary's life expectancy
and payments must begin within one year of your death. If the Beneficiary is the
spouse of the owner, he or she can elect to continue the contract at the then
current value.
The death benefit will be paid out when we receive adequate proof of death: (1)
a certified copy of a death certificate; (2) a certified copy of a decree of
court of competent jurisdiction as to the finding of death; (3) a written
statement by a medical doctor who attended the deceased at the time of death; or
(4) any other proof satisfactory to us. We may also require additional
documentation or proof in order for the death benefit to be paid. If the
Beneficiary does not make a specific election within sixty days of our receipt
of adequate proof of death, the death benefit will be paid in a lump sum.
DEATH OF THE ANNUITANT
If the Annuitant dies before annuity payments begin, you can name a new
Annuitant. If no Annuitant is named within 30 days, you will become the
Annuitant. However, if the owner is a non-natural person (for example, a
corporation), then the death of the Annuitant will be treated as the death of
the owner, no new Annuitant may be named and the death benefit will be paid.
OTHER INFORMATION
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ANCHOR NATIONAL
Anchor National is a stock life insurance company domiciled under the laws of
the state of California on April 12, 1965 and redomiciled under the laws of the
state of Arizona on January 1, 1996. Its principal business address is 1
SunAmerica Center, Los Angeles, California 90067-6022. Anchor National conducts
business in the District of Columbia and in all states except New York. Anchor
National is an indirect wholly owned subsidiary of SunAmerica Inc., a Maryland
corporation.
Anchor National and its affiliates, SunAmerica Life Insurance Company, First
SunAmerica Life Insurance Company, CalAmerica Life Insurance Company, SunAmerica
National
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Life Insurance Company, SunAmerica Asset Management Corp., Imperial Premium
Finance, Inc., Resources Trust Company and four broker-dealers, specialize in
retirement savings and investment products and services, including fixed and
variable annuities, mutual funds, premium finance and trust administration
services.
THE SEPARATE ACCOUNT
Anchor National established a separate account, Variable Annuity Account Five
("Separate Account"), under Arizona law on July 3, 1996. The Separate Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940.
There are no pending legal proceedings affecting the Separate Account. Anchor
National and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, are not of material importance to their
respective total assets or material with respect to the Separate Account.
Anchor National owns the assets in the Separate Account. However, the assets in
the Separate Account are not chargeable with liabilities arising out of any
other business Anchor National may conduct. Income, gains and losses (realized
and unrealized) resulting from the assets in the Separate Account are credited
to or charged against the Separate Account. The obligations of the Separate
Account under the contracts are not the obligations of Anchor National.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, serves as the custodian of the assets of the Separate Account. We pay
State Street Bank for services based on a schedule of fees.
THE GENERAL ACCOUNT
If you put your money into a fixed investment option it goes into Anchor
National's general account ("General Account"). The General Account is made up
of all of Anchor National's assets other than assets attributable to a separate
account. All of the assets in the General Account are chargeable with the claims
of any Anchor National contract holder, as well as all creditors. The General
Account is invested in assets permitted by state insurance law.
DISTRIBUTION
The contract is sold through registered representatives of broker-dealers. We
pay commissions to registered representatives for the sale of contracts.
Commissions are not expected to exceed 7.25% of your Purchase Payment. Under
some circumstances we pay a persistency bonus in addition to standard
commissions. Usually the standard commission is lower when we pay a persistency
bonus, which is not anticipated to exceed 1.00% annually. Commissions paid to
Registered Representatives are not directly deducted from your purchase payment.
Furthermore, we may from time, pay or allow additional promotional incentives,
in the form of cash or other compensation. In some instances, these additional
incentives may be offered only to certain broker-dealers that sell or are
expected to sell, during specified time periods, certain minimum amounts of the
contract, or other contracts offered by us.
Commissions may be waived or reduced with respect to contracts established for
the personal account of our employees, or the employees of any of our
affiliates, or of persons engaged in distribution of the contracts, or of
certain family members of such employees or persons.
SunAmerica Capital Services, Inc., 733 Third Avenue, 4th Floor, New York, New
York, 10017, acts as the distributor of the contracts. SunAmerica Capital
Services, Inc. is an affiliate of Anchor National.
ADMINISTRATION
We are responsible for all the administrative servicing of your contract. Please
contact Anchor National's Annuity Service Center at the telephone number and
address provided in the Profile of this prospectus if you have any comment,
question or service request.
We will send out transaction confirmations and quarterly statements. Please
review these documents carefully and notify us of any questions immediately. We
will investigate all questions and, to the extent we have made an error, we will
retroactively adjust your contract provided you have notified us within 30 days
of receiving the transaction confirmation or quarterly statement, as applicable.
All other adjustments will be made as of the time we receive notice of the
error.
The Company relies significantly on computer systems and applications in its
daily operations. Many of these systems are not currently year 2000 compliant.
The Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of the Company's systems and
applications (and those operated by third parties interfacing with the Company's
systems and applications) to properly operate or manage dates beyond the year
1999. The Company has a coordinated plan to repair or replace these
non-compliant systems and to obtain similar assurances from third parties
interfacing with the Company's systems and applications and expects to
significantly complete its plan by the end of the calendar year 1998, leaving
1999 for testing.
LEGAL PROCEEDINGS
There are no legal proceedings affecting the separate account. Anchor National
and its subsidiaries are engaged in various kinds of routine litigation which in
management's judgment, are not of materials importance to the respective total
assets or material with respect to the separate account.
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OTHER INFORMATION ABOUT ANCHOR NATIONAL
Anchor National is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Securities and Exchange Commission ("SEC"). Such
reports and other information filed by the Company can be inspected and copied;
and copies can be obtained at the public reference facilities of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the regional offices
in Chicago and New York. The addresses of these regional offices are as follows:
500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material also can be obtained by
mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington D.C. 20549, upon payment of the fees prescribed by the rules and
regulations of the SEC at prescribed rates.
Registration statements have been filed with the SEC, Washington, D.C., under
the Securities Act of 1933 as amended, with respect to the contracts offered by
this prospectus. This prospectus does not contain all the information set forth
in the registration statements and the exhibits filed as part of the
registration statements, to all of which reference is hereby made for further
information concerning the Separate Account, Anchor National and its general
account, the investment portfolios and the contract. Statements found in this
prospectus as to the terms of the contracts and other legal instruments are
summaries, and reference is made to such instruments as filed.
PROPERTIES
Anchor National's executive offices and principal office are in leased premises
at 1 SunAmerica Center, Los Angeles, California. Anchor National, through
affiliates, also leases office space in Torrance and Woodland Hills, California.
Anchor National believes that such properties, including the equipment located
therein are suitable and adequate to meet the requirements of its businesses.
STATE REGULATION
Anchor National is subject to regulation and supervision by the insurance
regulatory agencies of the states in which it is authorized to transact
business. State insurance laws establish supervisory agencies with broad
administrative and supervisory powers. Principal among these powers are granting
and revoking licenses to transact business, regulating marketing and other trade
practices, operating guaranty associations, licensing agents, approving policy
forms, regulating certain premium rates, regulating insurance holding company
systems, establishing reserve requirements, prescribing the form and content of
required financial statements and reports, performing financial, market conduct
and other examinations, determining the reasonableness and adequacy of statutory
capital and surplus, defining acceptable accounting principles, regulating the
type, valuation and amount of investments permitted, and limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has 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, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The NAIC is also currently developing model laws relating to
product design and illustrations for annuity products. Current proposals are
still being debated and we are monitoring developments in this area and the
effects any changes would have on Anchor National.
SunAmerica Asset Management Co. is registered with the SEC as a registered
investment advisor under the Investment Advisors Act of 1940. The mutual funds
that it markets are subject to regulation under the Investment Company Act of
1940. SunAmerica Asset Management Co. and the mutual funds are subject to
regulation and examination by the SEC. In addition, variable annuities and the
related separate accounts of Anchor National are subject to regulation by the
SEC under the Securities Act of 1933 and the Investment Company Act of 1940.
Anchor National's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the SEC
and the National Association of Securities Dealers ("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.
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DIRECTORS AND EXECUTIVE OFFICERS
Anchor National's directors and executive officers as of June 30, 1998 are
listed below:
<TABLE>
<CAPTION>
YEAR ASSUMED
PRESENT OTHER POSITIONS AND OTHER BUSINESS
NAME AGE PRESENT POSITION POSITION EXPERIENCE WITHIN LAST FIVE YEARS** FROM-TO
- --------------------- --- -------------------------------------- ------------ ------------------------------------- ---------
<C> <C> <S> <C> <C> <C>
Eli Broad* 65 Chairman, CEO and President of Anchor 1994 Cofounded SunAmerica Inc. ("SAI") in
National; 1957
Chairman, CEO and President of SAI 1986
Jay S. Wintrob* 41 EVP of Anchor National; 1991 SVP 1989-1991
Vice Chairman of SAI 1995 (Joined SAI in 1987)
Victor E. Akin 33 SVP of Anchor National 1996 VP, SunAmerica Life Companies 1995-1996
Director, SunAmerica Life Companies 1994-1995
Manager, SunAmerica Life Companies 1993-1994
Actuary, Milliman & Robertson 1992-1993
Consultant, Chalke Inc. 1991-1992
David R. Bechtel 30 VP and Treasurer of Anchor National 1998 VP, Deutsche Morgan Grenfell 1996-1998
VP and Treasurer of SAI Associate, UBS Securities 1995-1996
Associate, Wachtell, Lipton, Rosen & 1994
Katz
Associate, Wells Fargo Nikko Inv. 1993-1994
Adv. 1990-1992
Associate, Alex Brown & Sons
James R. Belardi* 41 SVP of Anchor National; 1992 VP and Treasurer 1989-1992
EVP of SAI 1995 (Joined SAI in 1986)
Lorin M. Fife* 44 SVP, General Counsel and Asst. 1994 VP and General Counsel-Regulatory 1994-1995
Secretary of Anchor National; Affairs;
SVP, General Counsel-Regulatory 1995 VP and Associate General Counsel 1989-1994
Affairs and Asst. Secretary of SAI (Joined SAI in 1989)
N. Scott Gillis 44 SVP and Controller of Anchor National 1994 VP and Controller, SunAmerica Life 1989-1994
Companies
VP of SAI 1997 (Joined SAI in 1985)
Jana Waring Greer* 45 SVP of Anchor National and SAI; 1991 VP 1981-1991
President of SunAmerica Marketing 1995 (Joined SAI in 1974)
Susan L. Harris* 41 SVP and Secretary of Anchor National; 1994 VP, General Counsel-Corporate Affairs 1994-1995
and Secretary;
SVP, General Counsel-Corporate Affairs 1995 VP, Associate General Counsel and 1989-1994
and Secretary of SAI Secretary
(Joined SAI in 1985)
Peter McMillan, III* 40 EVP and Chief Investment Officer of 1994 SVP of SunAmerica Investments, Inc. 1989-1994
SunAmerica Investments, Inc.
Edwin R. Reoliquio* 40 SVP and Chief Actuary of Anchor 1995 VP and Actuary, SunAmerica Life 1989-1994
National Companies
Scott H. Richland 35 VP of Anchor National 1994 VP and Treasuer 1995-1997
SVP of SAI VP and Asst. Treasurer 1994-1995
1997 Asst. Treasurer 1993-1994
(Joined SAI in 1990) 1990-1993
Scott L. Robinson* 52 SVP of Anchor National; 1991 VP and Controller 1986-1991
SVP and Controller of SAI (Joined SAI in 1978)
James W. Rowan* 35 SVP of Anchor National and SAI 1996 VP; 1993-1995
Asst. to the Chairman; 1992
SVP, Security Pacific Corp. 1990-1992
</TABLE>
* Also serves as a director CEO = Chief Executive Officer
** Unless otherwise noted, positions EVP = Executive Vice President
with SunAmerica Inc. SVP = Senior Vice President
VP = Vice President
20
<PAGE>
EXECUTIVE COMPENSATION
All of Anchor National's executive officers are also employees of SunAmerica
Inc. or its affiliates and do not receive direct compensation from Anchor
National. Allocations have been made as to each individual's time devoted to his
or her duties as an executive officer of Anchor National during fiscal year
1997.
The following table shows the cash compensation paid or earned, based on these
allocations, to the chief executive officer and top four executive officers of
the Company whose allocated compensation exceeds $100,000 for services rendered
in all capacities to the Company during 1997:
<TABLE>
<CAPTION>
Allocated Cash
Name of Individual Capacities in Which Served Compensation
<S> <C> <C>
Eli Broad Chairman, Chief Executive Officer and President $ 1,438,587
Joseph M. Tumbler Executive Vice President 835,680
Jay S. Wintrob Executive Vice President 837,376
James R. Belardi Senior Vice President 357,144
Jana Waring Greer Senior Vice President 630,854
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of Anchor National are owned by any executive officer or director.
Anchor National is an indirect wholly owned subsidiary of SunAmerica Inc. Except
for Mr. Eli Broad, Chairman and Chief Executive Officer of SunAmerica Inc., the
percentage of shares of SunAmerica Inc. beneficially owned by any director does
not exceed one percent of the class outstanding. At June 30, 1998, Mr. Broad was
the beneficial owner of 10,717,822 shares of Common Stock (5.76% of the class
outstanding) and 13,340,591 shares of Class B Common Stock (81.99% of the class
outstanding). Of the Common Stock, 1,063,773 shares represent restricted shares
granted under SunAmerica Inc.'s employee stock plans as to which Mr. Broad has
no investment power, 113,769 shares are registered in the name of a corporation
of which Mr. Broad is a director and has sole voting and dispositive powers,
97,704 shares are held by a foundation of which Mr. Broad is a director and
shares voting and dispositive powers; and 6,985,512 shares represent employee
stock options held by Mr. Broad which are or will become exercisable on or
before August 30, 1998 and as to which he has no voting or investment power. Of
the Class B Stock, 12,284,360 shares are held directly by Mr. Broad; and
1,056,231 shares are registered in the name of a corporation as to which Mr.
Broad exercises sole voting and dispositive powers. At June 30, 1998, all
directors and officers as a group beneficially owned 14,431,966 shares of Common
Stock (7.64% of the class outstanding) and 13,340,591 shares of Class B Common
Stock (81.99% of the class outstanding).
21
<PAGE>
FINANCIALS
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS)
The following selected consolidated financial information for Anchor National
Life Insurance Company, insofar as it relates to each of the years 1993-1997,
has been derived from audited annual financial statements, including the
consolidated balance sheets at September 30, 1996 and 1997 and the related
consolidated statements of income and of cash flows for each of the three years
in the period ended September 30, 1997 and the notes thereto appearing elsewhere
herein. The information for the six months ended March 31, 1997 and 1998 has
been derived from unaudited financial information also appearing herein and
which, in the opinion of management, includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods.
This information should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which follow this
selected information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income........... $ 48,717 $ 30,837 $ 73,201 $ 56,843 $ 50,083 $ 58,996 $ 48,912
Net realized investment gains
(losses)....................... 23,232 (20,290) (17,394) (13,355) (4,363) (33,713) (22,247)
Fee income...................... 133,191 97,435 213,146 169,505 145,105 141,753 123,567
General and administrative
expenses....................... (47,470) (47,196) (98,802) (81,552) (64,457) (54,363) (50,783)
Provision for future guaranty
fund assessments............... -- -- -- -- -- -- (4,800)
Amortization of deferred
acquisition costs.............. (35,579) (27,258) (66,879) (57,520) (58,713) (44,195) (30,825)
Annual commissions.............. (7,674) (3,434) (8,977) (4,613) (2,658) (1,158) (312)
----------- ----------- ----------- ---------- ---------- ---------- ----------
PRETAX INCOME................... 114,417 30,094 94,295 69,308 64,997 67,320 63,512
Income tax expense.............. (39,758) (10,503) (31,169) (24,252) (25,739) (22,705) (21,794)
----------- ----------- ----------- ---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES................... 74,659 19,591 63,126 45,056 39,258 44,615 41,718
Cumulative effect of change in
accounting for income taxes.... -- -- -- -- -- (20,463) --
----------- ----------- ----------- ---------- ---------- ---------- ----------
NET INCOME...................... $ 74,659 $ 19,591 $ 63,126 $ 45,056 $ 39,258 $ 24,152 $ 41,718
----------- ----------- ----------- ---------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ---------- ----------
<CAPTION>
AT MARCH 31, AT SEPTEMBER 30,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments..................... $ 2,634,763 $ 2,781,068 $ 2,608,301 $2,329,232 $2,114,908 $1,632,072 $2,093,100
Variable annuity assets in
separate accounts.............. 11,172,416 6,997,289 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Deferred acquisition costs...... 601,594 508,161 536,155 443,610 383,069 416,289 336,677
Other assets.................... 97,999 78,716 83,283 120,136 55,474 67,062 71,337
----------- ----------- ----------- ---------- ---------- ---------- ----------
TOTAL ASSETS.................... $14,506,772 $10,365,234 $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
----------- ----------- ----------- ---------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ---------- ----------
Reserves for fixed annuity
contracts...................... $ 2,100,772 $ 2,162,084 $ 2,098,803 $1,789,962 $1,497,052 $1,437,488 $1,562,136
Reserves for guaranteed
investment contracts........... 301,540 420,408 295,175 415,544 2 --77,095 --
Variable annuity liabilities in
separate accounts.............. 11,172,416 6,997,289 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Other payables and accrued
liabilities.................... 183,672 178,358 155,256 96,196 227,953 195,134 495,308
Subordinated notes payable to
Parent......................... 33,380 35,972 36,240 35,832 35,832 34,712 34,432
Deferred income taxes........... 66,878 64,938 67,047 70,189 73,459 64,567 38,145
Shareholder's equity............ 648,114 506,185 575,218 485,255 442,060 383,522 371,093
----------- ----------- ----------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY........... $14,506,772 $10,365,234 $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
----------- ----------- ----------- ---------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ---------- ----------
</TABLE>
22
<PAGE>
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 years in the period ended September 30, 1997 follows. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law and changes in
interest rates. Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and other
risks associated with the Company's investment portfolio. Investors are also
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the SEC. The Company disclaims any obligation to update
forward-looking information.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1996 AND 1997
NET INCOME totaled $63.1 million in 1997, compared with $45.1 million in 1996
and $39.3 million in 1995.
PRETAX INCOME totaled $94.3 million in 1997, $69.3 million in 1996 and $65.0
million in 1995. The 36.1% improvement in 1997 over 1996 primarily resulted from
increased fee income and net investment income, partially offset by higher
general and administrative expenses and increased amortization of deferred
acquisition costs. The 6.6% improvement in 1996 over 1995 primarily resulted
from increased net investment income and significantly increased fee income,
partially offset by increased net realized investment losses and additional
general and administrative expenses.
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 $73.2 million in 1997 from $56.8 million in 1996 and
$50.1 million in 1995. These amounts equal 2.77% on average invested assets
(computed on a daily basis) of $2.65 billion in 1997, 2.59% on average invested
assets of $2.19 billion in 1996 and 2.95% on average invested assets of $1.70
billion in 1995.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $126.5 million in 1997, $142.9 million in 1996 and $108.4 million in
1995. The difference between the Company's yield on average invested assets and
the rate paid on average interest-bearing liabilities (the "Spread Difference")
was 2.51% in 1997, 2.25% in 1996 and 2.63% in 1995.
Investment income (and the related yields on average invested assets) totaled
$210.8 million (7.97%) in 1997, compared with $164.6 million (7.50%) in 1996 and
$129.5 million (7.62%) in 1995. These increased yields in 1997 include the
effects of a greater proportion of mortgage loans in the Company's portfolio. On
average, mortgage loans have higher yields than that of the Company's overall
portfolio. In addition, the Company experienced higher returns on its
investments in partnerships. The increases in investment income in 1997 and 1996
also reflect increases in average invested assets.
Partnership income increased to $6.7 million (a yield of 15.28% on related
average assets of $44.0 million) in 1997, compared with $4.1 million (a yield of
10.12% on related average assets of $40.2 million) in 1996 and $5.1 million (a
yield of 10.60% on related average assets of $48.4 million) in 1995. Partnership
income is based upon cash distributions received from limited partnerships, the
operations of which the Company does not influence. Consequently, such income is
not predictable and there can be no assurance that the Company will realize
comparable levels of such income in the future.
Total interest expense equalled $137.6 million in 1997, $107.8 million in 1996
and $79.4 million in 1995. The average rate paid on all interest-bearing
liabilities was 5.46% in 1997, compared with 5.25% in 1996 and 4.99% in 1995.
Interest-
23
<PAGE>
bearing liabilities averaged $2.52 billion during 1997, compared with $2.05
billion during 1996 and $1.59 billion during 1995.
The increases in the overall rates paid on interest-bearing liabilities during
1997 and 1996 primarily resulted from the impact of certain promotional one-year
interest rates offered on the fixed account portion of the Company's Polaris
variable annuity product. The increase in the overall rates paid on all
interest-bearing liabilities during 1996 was also impacted by the growth in
average reserves for GICs, which generally bear higher rates of interest than
fixed annuity contracts. Average GIC reserves were $340.5 million in 1996 and
$60.8 million in 1995. Most of the Company's GICs are variable rate and are
repriced quarterly at the then-current interest rates.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the sales of the
Company's fixed-rate products, consisting of both fixed annuity premiums
(including those for the fixed accounts of variable annuity products) and GIC
premiums. Fixed annuity premiums totaled $1.10 billion in 1997, compared with
$741.8 million in 1996 and $284.4 million in 1995. The premiums for the fixed
accounts of variable annuities have increased primarily because of increased
sales of the Company's Polaris product and greater inflows into the one-year
fixed account of that 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 $55.0 million in 1997, $135.0 million in 1996 and $275.0
million in 1995. GIC surrenders and maturities totaled $198.1 million in 1997,
$16.5 million in 1996 and $1.6 million in 1995. The Company does not actively
market GICs, so premiums may vary substantially from period to period. The large
increase in surrenders and maturities in 1997 was primarily due to contracts
maturing in 1997. The GICs issued by the Company generally guarantee the payment
of principal and interest at fixed or variable rates for a term of three to five
years. Contracts that are purchased by banks for their long-term portfolios, or
state and local governmental entities either prohibit withdrawals or permit
scheduled book value withdrawals subject to terms of the underlying indenture or
agreement. GICs purchased by asset management firms for their short term
portfolios either prohibit withdrawals or permit withdrawals with notice ranging
from 90 to 270 days. In pricing GICs, the Company analyzes cash flow information
and prices accordingly so that it is compensated for possible withdrawals prior
to maturity.
NET REALIZED INVESTMENT LOSSES totaled $17.4 million in 1997, $13.4 million in
1996 and $4.4 million in 1995. Net realized investment losses include impairment
writedowns of $20.4 million in 1997, $16.0 million in 1996 and $4.8 million in
1995. Therefore, net gains from sales of investments totaled $3.0 million in
1997, $2.6 million in 1996 and $0.4 million in 1995.
The Company sold invested assets, principally bonds and notes, aggregating $2.19
billion, $1.28 billion and $1.15 billion in 1997, 1996 and 1995, respectively.
Sales of investments result from the active management of the Company's
investment portfolio. Because sales of investments are made in both rising and
falling interest rate environments, net gains from sales of investments
fluctuate from period to period, and represent 0.11%, 0.12% and 0.02% of average
invested assets for 1997, 1996 and 1995, respectively. Active portfolio
management involves the ongoing evaluation of asset sectors, individual
securities within the investment portfolio and the reallocation of investments
from sectors that are perceived to be relatively overvalued to sectors that are
perceived to be relatively undervalued. The intent of the Company's active
portfolio management is to maximize total returns on the investment portfolio,
taking into account credit and interest-rate risk.
Impairment writedowns reflect $15.7 million and $15.2 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, 1996
and 1995, respectively, to the Company 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 in 1995 include $3.8 million of additional provisions applied to
defaulted bonds. Impairment writedowns represent 0.77%, 0.73% and 0.28% of
average invested assets for 1997, 1996 and 1995, respectively. For the five
years ended September 30, 1997, impairment writedowns as a percentage of average
invested assets have ranged from 0.28% to 2.20% and have averaged 1.16%. Such
writedowns are based upon estimates of the net realizable value of the
applicable assets. Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $139.5 million
in 1997, $104.0 million in 1996 and $84.2 million in 1995. These increased fees
reflect growth in average variable annuity assets, principally due to the
receipt of variable annuity premiums, increased market values and net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. Variable annuity assets averaged
$7.55 billion during 1997, $5.70 billion during 1996 and $4.65 billion during
1995. Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, totaled $1.27 billion in 1997, $919.8
million in 1996 and $577.2 million in 1995. Sales of variable annuity products
(which include premiums allocated to the fixed accounts) ("Variable Annuity
Product Sales") amounted to $2.37 billion, $1.66 billion and $861.0 million in
1997, 1996 and 1995, respectively. Increases in Variable Annuity Product Sales
are due, in part, to market share gains through enhanced distribution efforts
and growing consumer demand for flexible retirement savings products
24
<PAGE>
that offer a variety of equity, fixed income and guaranteed fixed account
investment choices. The Company has encountered increased competition in the
variable annuity marketplace during recent years and anticipates that the market
will remain highly competitive for the foreseeable future. Also, recent
administrative budget proposals include the proposed taxation of exchanges
involving variable annuity contracts and reallocation within variable annuity
contracts and certain other proposals relating to annuities (see "Regulation").
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 $39.1 million in
1997, $31.5 million in 1996 and $24.1 million in 1995. Broker-dealer sales
(mainly sales of general securities, mutual funds and annuities) totaled $11.56
billion in 1997, $8.75 billion in 1996 and $5.67 billion in 1995. The increases
in sales and net retained commissions reflect a greater number of registered
representatives, due to the Company's ongoing recruitment of representatives and
to the transfer of representatives from an affiliated broker-dealer, higher
average production per representative and generally favorable market conditions.
Increases in net retained commissions may not be proportionate to increases in
sales primarily due to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $5.5 million in 1997,
compared with $5.2 million in 1996 and $5.9 million in 1995. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first seven years of an annuity contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $1.06 billion in 1997,
compared with $898.0 million in 1996 and $908.9 million in 1995. These payments
represent 11.22%, 12.44% and 15.06%, respectively, of average fixed and variable
annuity reserves. Withdrawals include variable annuity withdrawals from the
separate accounts totaling $822.0 million in 1997, $634.1 million in 1996 and
$632.1 million in 1995. Management anticipates that withdrawal rates will remain
relatively stable 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 by SunAmerica Asset Management Corp. Such fees totaled $25.8 million on
average assets managed of $2.34 billion in 1997, $25.4 million on average assets
managed of $2.14 billion in 1996 and $26.9 million on average assets managed of
$2.07 billion in 1995. Asset management fees are not proportionate to average
assets managed, principally due to changes in product mix. Sales of mutual
funds, excluding sales of money market accounts, amounted to $454.8 million in
1997, compared with $223.4 million in 1996 and $140.2 million in 1995.
Redemptions of mutual funds, excluding redemptions of money market accounts,
amounted to $412.8 million in 1997, $379.9 million in 1996 and $426.5 million in
1995. The significant increases in sales during 1997 principally resulted from
the introduction in November 1996 of the Company's "Style Select Series"
product. Higher mutual fund sales and lower redemptions in 1996 both reflect
enhanced marketing efforts and the favorable performance records of certain of
the Company's mutual funds, and heightened consumer demand for equity
investments generally.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $98.8 million in 1997, compared with
$81.6 million in 1996 and $65.3 million in 1995. General and administrative
expenses in 1997 include a $6.2 million provision for estimated programming
costs associated with the year 2000. Management believes that this provision is
adequate and does not anticipate any material future expenses associated with
this project. General and administrative expenses remain closely controlled
through a company-wide cost containment program and continue to represent less
than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $66.9 million in 1997,
compared with $57.5 million in 1996 and $58.7 million in 1995. The increase in
amortization during 1997 was primarily due to additional fixed and variable
annuity sales and the subsequent amortization of related deferred commissions
and other direct selling costs. The decline in amortization for 1996 is due to
lower redemptions of mutual funds from the rate experienced in 1995, partially
offset by additional fixed and variable annuity and mutual fund sales in recent
years and the subsequent amortization of related deferred commissions and other
acquisition costs.
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. Annual commissions totaled $9.0 million in 1997, $4.6 million in
1996 and $2.7 million in 1995. The increase in annual commissions since 1995
reflects increased sales of annuities that offer this commission option. The
Company estimates that approximately 45% of the average balances 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.
INCOME TAX EXPENSE totaled $31.2 million in 1997, compared with $24.3 million in
1996 and $25.7 million in 1995, representing effective tax rates of 33% in 1997,
35% in 1996 and 40% in 1995. The higher effective tax rate in 1995 was due to a
prior year tax settlement. Without such payment, the effective tax rate would
have been 33%.
FINANCIAL CONDITION AND LIQUIDITY AT SEPTEMBER 30, 1997
SHAREHOLDER'S EQUITY increased 18.5% to $575.2 million at September 30, 1997
from $485.3 million at September 30, 1996, primarily due to $63.1 million of net
income recorded in 1997 and $18.4 million of net unrealized gains on debt and
equity securities available for sale (credited directly to shareholder's
equity), versus $5.5 million of net
25
<PAGE>
unrealized losses on such securities recorded at September 30, 1996. In
addition, the Company received a contribution of capital of $28.4 million in
December 1996 and paid a dividend of $25.5 million in April 1997.
INVESTED ASSETS at year end totaled $2.61 billion in 1997, compared with $2.33
billion at year-end 1996. This 12.0% increase primarily resulted from sales of
fixed annuities and the $44.7 million net unrealized gain recorded on debt and
equity securities available for sale at September 30, 1997, versus the $12.7
million net unrealized loss recorded on such securities at September 30, 1996.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company has
determined that all of its portfolio of bonds, notes and redeemable preferred
stocks (the "Bond Portfolio") is available to be sold in response to changes in
market interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which comprises 76% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $43.7 million at September 30, 1997. At September 30, 1996,
the amortized cost exceeded the fair value of the Bond Portfolio by $13.8
million. The net unrealized gains on the Bond Portfolio since September 30, 1996
principally reflect the lower prevailing interest rates at September 30, 1997
and the corresponding effect on the fair value of the Bond Portfolio.
At September 30, 1997, the Bond Portfolio (at amortized cost, excluding $6.1
million of redeemable preferred stocks) included $1.82 billion of bonds rated by
Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch")
or the National Association of Insurance Commissioners ("NAIC"), and $124.4
million of bonds rated by the Company pursuant to statutory ratings guidelines
established by the NAIC. At September 30, 1997, approximately $1.72 billion of
the Bond Portfolio was investment grade, including $650.3 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1997, the Bond Portfolio included $216.9 million (at amortized
cost with a fair value of $227.2 million) of bonds that were not investment
grade. Based on their September 30, 1997 amortized cost, these non-
investment-grade bonds accounted for 1.7% of the Company's total assets and 8.5%
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 had no material concentrations of non-investment-grade securities at
September 30, 1997. The following table summarizes the Company's rated bonds by
rating classification as of September 30, 1997.
26
<PAGE>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P/ MOODY'S/
ISSUES RATED BY S&P/MOODY'S/DCR/FITCH DCR/FITCH, BY NAIC CATEGORY TOTAL
- ------------------------------------------------------- ----------------------------------- -------------------------------------
S&P/(MOODY'S)/ NAIC PERCENT OF
[DCR]/{FITCH} AMORTIZED ESTIMATED CATEGORY AMORTIZED ESTIMATED AMORTIZED INVESTED ESTIMATED
CATEGORY (1) COST FAIR VALUE (2) COST FAIR VALUE COST ASSETS (3) FAIR VALUE
- ------------------------------ ----------- ----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-}................. $ 935,866 $ 953,440 1 $ 142,548 $ 143,940 $ 1,078,414 42.07% $ 1,097,380
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}.............. 494,521 504,442 2 146,548 150,521 641,069 25.01 654,963
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}................ 13,080 14,597 3 13,811 13,917 26,891 1.05 28,514
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}.................. 163,603 170,960 4 25,777 27,089 189,380 7.39 198,049
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}................ 0 0 5 0 0 0 0.00 0
C1 to D
[DD]
{D}......................... 0 0 6 606 606 606 0.02 606
----------- ----------- ----------- ----------- ----------- -----------
Total rated issues $ 1,607,070 $ 1,643,439 $ 329,290 $ 336,073 $ 1,936,360 $ 1,979,512
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates
the debt's relative standing within the rating category. A security rated
BBB- or higher is considered investment grade. Moody's rates debt securities
in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2
or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative
standing within the rating category. A security rated Baa3 or higher is
considered investment grade. DCR rates debt securities in rating categories
ranging from AAA (the highest) to DD (in payment default). A plus (+) or
minus (-) indicates the debt's relative standing within the rating category.
A security rated BBB- or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, D&P and Fitch ratings
if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/ DCR/Fitch rating
groups listed above, with categories 1 and 2 considered investment grade.
The NAIC categories include $124.4 million (at amortized cost) of assets
that were rated by the Company pursuant to applicable NAIC rating
guidelines.
(3) At amortized cost.
27
<PAGE>
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and
their amortized cost aggregated $329.3 million at September 30, 1997. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At September 30, 1997, Secured Loans consisted of loans to 80
borrowers spanning 28 industries, with 17% of these assets (at amortized cost)
concentrated in financial institutions. 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. As a
result of restrictive financial covenants, Secured Loans involve greater risk of
technical default than do publicly traded investment-grade securities. However,
management believes that the risk of loss upon default for its Secured Loans is
mitigated by such financial covenants and the collateral values underlying the
Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR,
Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings
guidelines established by the NAIC.
MORTGAGE LOANS aggregated $339.5 million at September 30, 1997 and consisted of
73 commercial first mortgage loans with an average loan balance of approximately
$4.7 million, collateralized by properties located in 21 states. Approximately
23% of this portfolio was multifamily residential, 18% was office, 14% was
manufactured housing, 13% was hotels, 11% was retail, 11% was industrial and 10%
was other types. At September 30, 1997, approximately 13% and 12% of this
portfolio was secured by properties located in New York and California,
respectively, and no more than 10% of this portfolio was secured by properties
located in any other single state. At September 30, 1997, there were four
mortgage loans with outstanding balances of $10 million or more, which loans
collectively aggregated approximately 17% of this portfolio. At the time of
their origination or purchase by the Company, virtually all mortgage loans had
loan-to-value ratios of 75% or less. At September 30, 1997, approximately 23% of
the mortgage loan portfolio consisted of loans with balloon payments due before
October 1, 2000. During 1997, 1996 and 1995, loans delinquent by more than 90
days, foreclosed loans and restructured loans have not been significant in
relation to the total mortgage loan portfolio.
At September 30, 1997, approximately 18% of the mortgage loans were seasoned
loans underwritten to the Company's standards and purchased at or near par from
other financial institutions. Such loans generally have higher average interest
rates than loans that could be originated today. The balance of the mortgage
loan portfolio has been originated by the Company under strict underwriting
standards. Commercial mortgage loans on properties such as offices, hotels and
shopping centers generally represent a higher level of risk than do mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans and the more immediate effects
of general economic conditions on these commercial property types. However, due
to its emphasis on multifamily loans and its strict underwriting standards, the
Company believes that it has prudently managed the risk attributable to its
mortgage loan portfolio while maintaining attractive yields.
OTHER INVESTED ASSETS aggregated $143.7 million at September 30, 1997, including
$46.9 million of investments in limited partnerships, $70.9 million of separate
account investments and an aggregate of $25.9 million of miscellaneous
investments, including policy loans, residuals and leveraged leases. The
Company's limited partnership interests, accounted for by using the cost method
of accounting, are invested primarily in a combination of debt and 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-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed-rate investments are priced over the
yield curve, and general economic conditions. Its portfolio strategy is
constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 77% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at September 30, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At September 30, 1997, these assets had an
aggregate fair value of $2.48 billion with a duration of 3.4. The Company's
fixed-rate liabilities include fixed annuities and GICs. At September 30, 1997,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $2.32 billion
with a duration of 1.3. The Company's potential exposure due to a relative 10%
increase in interest rates prevalent at September 30, 1997 is a loss of
approximately $31.2 million in fair value of its fixed-rate assets that is not
offset by an increase in the fair value of its fixed-rate liabilities. Because
the Company actively manages its assets
28
<PAGE>
and liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the Company
will continue to utilize its existing strategies of pricing its fixed annuity
and GIC products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes experienced under
given interest rate scenarios, and the differences may be material.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements ("Swap Agreements") to match assets and
liabilities more closely. 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 currently utilizes Swap Agreements to create a hedge that
effectively converts fixed-rate liabilities into floating-rate instruments. At
September 30, 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") and by investing in MBSs. It also seeks
to enhance its spread income by using Reverse Repos. 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. 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 Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is
minimal. In addition to counterparty risk, Swap Agreements also have interest
rate risk. However, the Company's Swap Agreements typically hedge variable-rate
assets or liabilities, and interest rate fluctuations that adversely affect the
net cash received or paid under the terms of a Swap Agreement would be offset by
increased interest income earned on the variable-rate assets or reduced interest
expense paid on the variable-rate liabilities. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase. As part of its decision to purchase an MBS, the Company
assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is purchased,
the Company monitors its actual prepayment experience monthly to reassess the
relative attractiveness of the security with the intent to maximize total
return.
INVESTED ASSETS EVALUATION 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 values of
such investments at least quarterly to determine whether specific investments
should be placed on a nonaccrual basis and to determine declines in value that
may be other than temporary. In making these reviews for bonds, management
principally considers the adequacy of any collateral, compliance with
contractual covenants, the borrower's recent financial performance, news reports
and other externally generated information concerning the creditor's affairs. In
the case of publicly traded bonds, management also considers market value
quotations, if available. For mortgage loans, management generally considers
information concerning the mortgaged property and, among other things, factors
impacting the current and expected payment status of the loan and, if available,
the current fair value of the underlying collateral.
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.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $1.4 million at September 30, 1997 (at
amortized cost after impairment writedowns, with a fair value of $1.4 million),
including $0.5 million of bonds and notes and $0.9 million of mortgage loans. At
September 30, 1997, defaulted investments constituted 0.1% of total invested
assets. At September 30, 1996, defaulted investments totaled $3.1 million,
including $1.6 million of bonds and notes and $1.5 million of mortgage loans,
and constituted 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of the
Company's existing portfolio of cash and short-term investments, Reverse Repo
capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1997, approximately $1.80 billion of the Company's Bond
Portfolio had an aggregate unrealized
29
<PAGE>
gain of $46.5 million, while approximately $139.8 million of the Bond Portfolio
had an aggregate unrealized loss of $2.7 million. In addition, the Company's
investment portfolio currently provides approximately $22.5 million of monthly
cash flow from scheduled principal and interest payments. Historically, cash
flows from operations and from the sale of the Company's annuity and GIC
products have been more than sufficient in amount to satisfy the Company's
liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease over
time, reflecting lower interest crediting rates on its fixed annuities and GICs.
Should increased liquidity be required for withdrawals,the Company believes that
a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
The Company relies significantly on computer systems and applications in its
daily operations. Many of these systems and applications are not presently year
2000 compliant. The Company's business, financial condition and results of
operations could be materially and adversely affected by the failure of the
Company's systems and applications (and those operated by third parties
interfacing with the Company's systems and applications) to properly operate or
manage dates beyond the year 1999. The Company has a coordinated plan to repair
or replace these noncompliant systems and to obtain similar assurances from
third parties interfacing with the Company's systems and applications and
expects to significantly complete its plan by the end of calendar year 1998. In
fiscal year 1997, the Company recorded a $6.2 million provision for estimated
programming costs to make necessary repairs of certain specific noncompliant
systems. Management believes that this provision is adequate and does not
anticipate any material future expenses associated with the repair phase of this
project. Management also expects to make an additional $5.0 million expenditure
to replace certain other specific noncompliant systems, which expenditure will
be capitalized as software costs and amortized over future periods.
RESULTS OF OPERATIONS FOR THE FIRST
SIX MONTHS OF 1998
NET INCOME totaled $74.7 million for the first six months of 1998, compared with
$19.6 million for the first six months of 1997.
PRETAX INCOME totaled $114.4 million in the first six months of 1998, compared
with $30.1 million in the first six months of 1997. The significant improvement
in the current period over the prior period primarily resulted from increased
net realized investment gains, fee income and net investment income.
NET INVESTMENT INCOME increased to $48.7 million in the first six months of 1998
from $30.8 million in the first six months of 1997. These amounts equal 3.86% on
average invested assets (computed on a daily basis) of $2.52 billion in the
first six months of 1998 and 2.37% on average invested assets of $2.60 billion
in the first six months of 1997.
The excess of average invested assets over average interest-bearing liabilities
amounted to $96.4 million in the first six months of 1998 and $149.0 million in
the first six months of 1997. The Spread Difference was 3.65% in the first six
months of 1998 and 2.06% in the first six months of 1997.
Investment income (and the related yields on average invested assets) totaled
$114.4 million (9.06%) in the first six months of 1998 and $97.4 million (7.48%)
in the first six months of 1997. Investment income and the related yields in the
first six months of 1998 primarily reflect the higher returns realized on the
Company's investments in limited partnerships.
Partnership income amounted to $22.1 million (a yield of 301.18% on related
average assets of $14.7 million) in the first six months of 1998, compared with
$2.2 million (a yield of 9.88% on related average assets of $43.7 million) in
the first six months of 1997. Partnership income is based upon cash
distributions received from limited partnerships, the operations of which the
Company does not influence. Consequently, such income is not predictable and
there can be no assurance that the Company will realize comparable levels of
such income in the future.
Total interest expense equalled $65.6 million in the first six months of 1998,
compared with $66.6 million in the first six months of 1997. The average rate
paid on all interest-bearing liabilities was 5.41% in the first six months of
1998, compared with 5.42% in the first six months of 1997. Interest-bearing
liabilities averaged $2.43 billion during the first six months of 1998 and $2.46
billion during the first six months of 1997.
The modest decline in average invested assets in the first six months of 1998
reflects the modest decline in average interest-bearing liabilities and is
primarily due to a decline in sales of the Company's fixed-rate products. Since
March 31, 1997, fixed annuity premiums have aggregated $1.04 billion. Fixed
annuity premiums (composed primarily of premiums for the fixed accounts of
variable annuities) totaled $629.9 million in
30
<PAGE>
the first six months of 1998 and $688.9 in the first six months of 1997. The
changes in premiums for the fixed accounts of variable annuities in the first
six months of 1998 principally reflect differing promotional activities in that
period.
GIC premiums totaled $5.6 million in the first six months of 1998 and $55.0
million in the first six months of 1997.
NET REALIZED INVESTMENT GAINS totaled $23.2 million in the first six months of
1998, compared with net realized investment losses of $20.3 million in the first
six months of 1997, and include impairment writedowns of $1.5 million and $16.1
million, respectively. Therefore, net gains from sales and redemptions of
investments totaled $24.7 million in the first six months of 1998, compared with
net losses of $4.2 million in the first six months of 1997. The Company sold or
redeemed invested assets, principally bonds and notes, aggregating $1.08 billion
in the first six months of 1998 and $1.58 billion in the first six months of
1997. Sales of investments result from the active management of the Company's
investment portfolio. Because redemptions of investments are generally
involuntary and sales of investments are made in both rising and falling
interest rate environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 1.96% and 0.32% of
average invested assets on an annualized basis for the first six months of 1998
and the first six months of 1997, respectively.
Impairment writedowns in the first six months of 1997 reflect $15.7 million of
provisions applied to non-income producing land owned in Arizona. Impairment
writedowns, on an annualized basis, represent 0.12% and 1.24% of average
invested assets for the first six months of 1998 and the first six months of
1997, respectively. For the 18 fiscal quarters beginning October 1, 1993,
impairment writedowns as a percentage of average invested assets have ranged up
to 3.64% and have averaged 0.84%.
VARIABLE ANNUITY FEES totaled $91.7 million in the first six months of 1998,
compared with $62.9 million in 1997. These increased fees reflect growth in
average variable annuity assets, principally due to increased market values, the
receipt of variable annuity premiums and net exchanges into the separate
accounts from the fixed accounts of variable annuity contracts, partially offset
by surrenders. Variable annuity assets averaged $9.82 billion in the first six
months of 1998, compared with $6.85 billion in the first six months of 1997.
Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, have aggregated $1.57 billion since March
31, 1997. Variable annuity premiums increased to $834.8 million in the first six
months of 1998, compared with $531.0 million in the first six months of 1997.
Variable Annuity Product Sales amounted to $1.46 billion and $1.22 billion in
the first six months of 1998 and in the first six months of 1997, respectively.
Increases in Variable Annuity Product Sales are due, in part, to market share
gains through enhanced distribution efforts and growing consumer demand for
flexible retirement savings products that offer a variety of equity, fixed
income and guaranteed fixed account investment choices.
NET RETAINED COMMISSIONS totaled $22.7 million in the first six months of 1998
and $17.6 million in the first six months of 1997. Broker-dealer sales totaled
$8.13 billion in the first six months of 1998 and $4.70 billion in the first six
months of 1997. The increases in sales and net retained commissions reflect a
greater number of registered representatives, higher average production per
representative and generally favorable market conditions.
SURRENDER CHARGES on fixed and variable annuities totaled $3.2 million in the
first six months of 1998, compared with $2.5 million in the first six months of
1997. Withdrawal payments totaled $569.0 million in the first six months of 1998
and $515.9 million in the first six months of 1997 and, annualized, represent
9.6% and 11.8%, respectively, of average fixed and variable annuity reserves.
Withdrawals include variable annuity withdrawals from the separate accounts
totaling $467.6 million (9.6% of average variable annuity reserves) in the first
six months of 1998 and $391.4 million (11.5% of average variable annuity
reserves) in the first six months of 1997. Approximately 76% of the Company's
fixed annuity and GIC reserves had surrender penalties or other restrictions at
March 31, 1998. Management anticipates that withdrawal rates will remain
relatively stable for the foreseeable future.
ASSET MANAGEMENT FEES totaled $14.0 million on average assets managed of $2.74
billion in the first six months of 1998, compared with $12.7 million on average
assets managed of $2.26 billion in the first six months of 1997. Sales of mutual
funds, excluding sales of money market accounts, have aggregated $632.2 million
since March 31, 1997. Mutual fund sales totaled $359.7 million in the first six
months of 1998, up from $182.3 million in the first six months of 1997. The
significant increase in sales during the first six months of 1998 principally
resulted from the introduction in November 1996 of the Company's "Style Select
Series" product. Sales of this product totaled $244.7 million in the first six
months of 1998 and $85.0 million in the first six months of 1997, reflecting the
addition of four new Style Select funds, which doubled the number of Style
Select funds to eight, and generally favorable market conditions. Redemptions of
mutual funds, excluding redemptions of money market accounts, amounted to $200.9
million in the first six months of 1998 and $214.1 million in the first six
months of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $47.5 million in the first six
months of 1998, compared with $47.2 million in the first six months of 1997.
General and administrative expenses remain closely controlled through a
company-wide cost containment program and continue to represent less than 1% of
average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $35.6 million in the first
six months of 1998, compared with $27.3 million in the first six months of 1997.
The increase in amortization was primarily due to additional fixed and variable
annuity and mutual fund sales and the subsequent amortization of related
deferred commissions and other direct selling costs.
31
<PAGE>
ANNUAL COMMISSIONS totaled $7.7 million in the first six months of 1998 and $3.4
million in the first six months of 1997. The increase in annual commissions
reflects increased sales of annuities that offer this commission option. The
Company estimates that approximately 50% of the average balances 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.
INCOME TAX EXPENSE totaled $39.8 million in the first six months of 1998,
compared with $10.5 million in the first six months of 1997, representing
effective tax rates of 35% in both periods.
FINANCIAL CONDITION AND LIQUIDITY AT MARCH 31, 1998
SHAREHOLDER'S EQUITY increased 12.7% to $648.1 million at March 31, 1998 from
$575.2 million at September 30, 1997, primarily due to $74.7 million of net
income recorded in the first six months of 1998.
INVESTED ASSETS at March 31, 1998 totaled $2.63 billion, compared with $2.61
billion at September 30, 1997.
THE BOND PORTFOLIO, which constitutes 79% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $40.4 million at March 31, 1998, compared with an excess of
$43.7 million at September 30, 1997.
At March 31, 1998, the Bond Portfolio (at amortized cost, excluding $6.1 million
of redeemable preferred stocks) included $1.99 billion of bonds rated by S&P,
Moody's, DCR, Fitch or the NAIC and $63.7 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At March 31,
1998, approximately $1.87 billion of the Bond Portfolio was investment grade,
including $710.4 million of U.S. government/agency securities and MBSs.
At March 31, 1998, the Bond Portfolio included $172.9 million (at amortized cost
with a fair value of $180.4 million) of bonds that were not investment grade.
Based on their March 31, 1998 amortized cost, these non-investment-grade bonds
accounted for 1.2% of the Company's total assets and 6.7% of its invested
assets. The Company had no material concentrations of non-investment-grade
securities at March 31, 1998.
SECURED LOANS are included in the Bond Portfolio and their amortized cost
aggregated $304.0 million at March 31, 1998. At March 31, 1998, Secured Loans
consisted of $171.9 million of publicly traded securities and $132.1 million of
privately traded securities. These Secured Loans are composed of loans to 81
borrowers spanning 25 industries, with 22% of these assets (at amortized cost)
concentrated in financial institutions. No other industry concentration
constituted more than 10% of these assets.
MORTGAGE LOANS aggregated $302.2 million at March 31, 1998 and consisted of 60
commercial first mortgage loans with an average loan balance of approximately
$5.0 million, collateralized by properties located in 20 states. Approximately
23% of this portfolio was multifamily residential, 16% was manufactured housing,
15% was office, 15% was hotel, 12% was industrial and 19% was other types. At
March 31, 1998, approximately 12% and 11% of this portfolio was secured by
properties located in California and New York, respectively, and no more than
10% of this portfolio was secured by properties located in any other single
state. At March 31, 1998, there were four mortgage loans with outstanding
balances of $10 million or more, which loans collectively aggregated
approximately 18% of this portfolio. At March 31, 1998, approximately 19% of the
mortgage loan portfolio consisted of loans with balloon payments due before
April 1, 2001. During Fiscal 1998 and Fiscal 1997, loans delinquent by more than
90 days, foreclosed loans and restructured loans have not been significant in
relation to the total mortgage loan portfolio.
At March 31, 1998, approximately 18% of the mortgage loans were seasoned loans
underwritten to the Company's standards and purchased at or near par from other
financial institutions.
OTHER INVESTED ASSETS aggregated $39.9 million at March 31, 1998, including
$14.0 million of investments in limited partnerships and an aggregate of $25.9
million of miscellaneous investments, including policy loans,residuals and
leveraged leases. The Company's limited partnership interests, accounted for by
using the cost method of accounting, are invested primarily in a combination of
debt and equity securities.
At March 31, 1998, the Company's fixed-rate assets had an aggregate fair value
of $2.52 billion with a duration of 3.9. The Company's fixed-rate liabilities
had an aggregate fair value (determined by discounting future contractual cash
flows by related market rates of interest) of $2.39 billion with a duration of
1.1. The Company's potential exposure due to a 10% increase in prevailing
interest rates from their March 31, 1998 levels is a loss of $40.7 million in
fair value of its fixed-rate assets that is not offset by a decrease in the fair
value of its fixed-rate liabilities. Because the Company actively manages its
assets and liabilities and has strategies in place to minimize its exposure to
loss as interest rate changes occur, it expects that actual losses would be less
than the estimated potential loss.
At March 31, 1998, the Company had one outstanding Swap Agreement with a
notional principal amount of $21.5 million. This agreement matures in December
2024.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $2.4 million at March 31, 1998 (at
amortized cost, with a fair value of $2.4 million), including $1.5 million of
bonds and notes and $0.9 million of mortgage loans. At March 31, 1998, defaulted
investments constituted less than 0.1% of total invested assets. At September
30, 1997, defaulted investments
32
<PAGE>
totaled $1.4 million, including $0.5 million of bonds and notes and $0.9 million
of mortgage loans, and constituted 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of the
Company's existing portfolio of cash and short-term investments, Reverse Repo
capacity on invested assets and, if required, proceeds from invested asset
sales. At March 31, 1998, approximately $1.67 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $49.2 million, while approximately
$385.5 million of the Bond Portfolio had an aggregate unrealized loss of $8.8
million. In addition, the Company's investment portfolio currently provides
approximately $22.8 million of monthly cash flow from scheduled principal and
interest payments.
REGULATION
The Company is subject to regulation and supervision by the insurance regulatory
agencies of the states in which it is authorized to transact business. State
insurance laws establish supervisory agencies with broad administrative and
supervisory powers. Principal among these powers are granting and revoking
licenses to transact business, regulating marketing and other trade practices,
operating guaranty associations, licensing agents, approving policy forms,
regulating certain premium rates, regulating insurance holding company systems,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial, market conduct and other
examinations, determining the reasonableness and adequacy of statutory capital
and surplus, defining acceptable accounting principles, regulating the type,
valuation and amount of investments permitted, and limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has 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, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The NAIC is also currently developing model laws and
regulations relating to product design, actuarial standards, certain separate
account products 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., a subsidiary of the Company, is registered
with the SEC as an 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 Corp. 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, Royal Alliance Associates, Inc., is
subject to regulation and supervision by the states in which it transacts
business, as well as by the SEC and the National Association of Securities
Dealers ("NASD"). The SEC and the NASD have broad administrative and supervisory
powers relative to all aspects of business and may examine the subsidiary's
business and accounts at any time.
From time to time, Federal initiatives are proposed that could affect the
Company's businesses. Such initiatives include employee benefit plan regulations
and tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products. Recent administration budget proposals include
the proposed taxation of exchanges involving variable annuity contracts and
reallocations within variable annuity contracts and certain other proposals
relating to annuities. The Company believes these proposals have a small
likelihood of being enacted, because they would discourage retirement savings
and there is strong popular and industry opposition to them. Other proposals
made in recent years to limit the tax deferral of annuities have not been
enacted. The Company believes that certain of the proposals, if implemented,
would have an adverse effect on the Company's ability to sell variable
annuities, and, consequently, on its results of operations. However, the Company
would not expect this to materially impact earnings in the near term because the
Company believes that adoption of the administration proposals, however
unlikely, would reduce annuity surrenders on the existing block of variable
annuity contracts and the ongoing earnings potential arising from that block
would offset the near-term economic impact of the potential decrease in sales.
33
<PAGE>
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Anchor National Life Insurance Company
as of September 30, 1997 and 1996 and for each of the three years in the period
ended September 30, 1997 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Anchor National have been included in
this prospectus. You should consider these financial statements only with
respect to Anchor National's ability to meet its obligations under the fixed
investment options to pay death benefits under the contracts, to assume the
mortality and expense risks under the Contract and any risk resulting from the
withdrawal charge not being adequate to cover the costs of distributing the
contracts. These financial statements provide no information as it relates to
Seasons Series Trust, its investment portfolios or the value of any money
allocated to the STRATEGIES.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries at September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Los Angeles, California
November 7, 1997
35
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
--------------- ---------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Investments:
Cash and short-term investments........................... $ 174,489,000 $ 113,580,000 $ 122,058,000
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value (amortized cost:
September 1996, $2,001,024,000; September 1997,
$1,942,485,000;
March 1998, $2,053,672,000)............................ 2,094,033,000 1,986,194,000 1,987,271,000
Mortgage loans............................................ 302,157,000 339,530,000 98,284,000
Common stocks available for sale, at fair value (cost:
September 1996, $2,911,000; September 1997, $271,000;
March 1998, $115,000).................................... 157,000 1,275,000 3,970,000
Real estate............................................... 24,000,000 24,000,000 39,724,000
Other invested assets..................................... 39,927,000 143,722,000 77,925,000
--------------- --------------- ---------------
Total investments..................................... 2,634,763,000 2,608,301,000 2,329,232,000
Variable annuity assets..................................... 11,172,416,000 9,343,200,000 6,311,557,000
Receivable from brokers for sales of securities............. -- -- 52,348,000
Accrued investment income................................... 24,183,000 21,759,000 19,675,000
Deferred acquisition costs.................................. 601,594,000 536,155,000 443,610,000
Other assets................................................ 73,816,000 61,524,000 48,113,000
--------------- --------------- ---------------
TOTAL ASSETS.......................................... $14,506,772,000 $12,570,939,000 $ 9,204,535,000
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts...................... $ 2,100,772,000 $ 2,098,803,000 $ 1,789,962,000
Reserves for guaranteed investment contracts.............. 301,540,000 295,175,000 415,544,000
Payable to brokers for purchases of securities............ 21,364,000 263,000 --
Income taxes currently payable............................ 57,261,000 32,265,000 21,486,000
Other liabilities......................................... 105,047,000 122,728,000 74,710,000
--------------- --------------- ---------------
Total reserves, payables and accrued liabilities...... 2,585,984,000 2,549,234,000 2,301,702,000
--------------- --------------- ---------------
Variable annuity liabilities................................ 11,172,416,000 9,343,200,000 6,311,557,000
--------------- --------------- ---------------
Subordinated notes payable to Parent........................ 33,380,000 36,240,000 35,832,000
--------------- --------------- ---------------
Deferred income taxes....................................... 66,878,000 67,047,000 70,189,000
--------------- --------------- ---------------
Shareholder's equity:
Common Stock.............................................. 3,511,000 3,511,000 3,511,000
Additional paid-in capital................................ 308,674,000 308,674,000 280,263,000
Retained earnings......................................... 319,287,000 244,628,000 207,002,000
Net unrealized gains (losses) on debt and equity
securities available for sale............................ 16,642,000 18,405,000 (5,521,000)
--------------- --------------- ---------------
Total shareholder's equity............................ 648,114,000 575,218,000 485,255,000
--------------- --------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............ $14,506,772,000 $12,570,939,000 $ 9,204,535,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes
36
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30,
--------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Investment income................................. $114,357,000 $ 97,431,000 $210,759,000 $164,631,000 $129,466,000
------------ ------------ ------------ ------------ ------------
Interest expense on:
Fixed annuity contracts......................... (54,680,000) (52,346,000) (109,217,000) (82,690,000) (72,975,000)
Guaranteed investment contracts................. (9,042,000) (11,986,000) (22,650,000) (19,974,000) (3,733,000)
Senior indebtedness............................. (345,000) (738,000) (2,549,000) (2,568,000) (227,000)
Subordinated notes payable to Parent............ (1,573,000) (1,524,000) (3,142,000) (2,556,000) (2,448,000)
------------ ------------ ------------ ------------ ------------
Total interest expense.......................... (65,640,000) (66,594,000) (137,558,000) (107,788,000) (79,383,000)
------------ ------------ ------------ ------------ ------------
NET INVESTMENT INCOME............................. 48,717,000 30,837,000 73,201,000 56,843,000 50,083,000
------------ ------------ ------------ ------------ ------------
NET REALIZED INVESTMENT GAINS (LOSSES)............ 23,232,000 (20,290,000) (17,394,000) (13,355,000) (4,363,000)
------------ ------------ ------------ ------------ ------------
Fee income:
Variable annuity fees........................... 91,662,000 62,939,000 139,492,000 103,970,000 84,171,000
Net retained commissions........................ 22,699,000 17,573,000 39,143,000 31,548,000 24,108,000
Surrender charges............................... 3,155,000 2,455,000 5,529,000 5,184,000 5,889,000
Asset management fees........................... 14,046,000 12,723,000 25,764,000 25,413,000 26,935,000
Other fees...................................... 1,629,000 1,745,000 3,218,000 3,390,000 4,002,000
------------ ------------ ------------ ------------ ------------
TOTAL FEE INCOME.................................. 133,191,000 97,435,000 213,146,000 169,505,000 145,105,000
------------ ------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES............... (47,470,000) (47,196,000) (98,802,000) (81,552,000) (64,457,000)
------------ ------------ ------------ ------------ ------------
AMORTIZATION OF DEFERRED ACQUISITION COSTS........ (7,674,000) (3,434,000) (66,879,000) (57,520,000) (58,713,000)
------------ ------------ ------------ ------------ ------------
ANNUAL COMMISSIONS................................ (35,579,000) (27,258,000) (8,977,000) (4,613,000) (2,658,000)
------------ ------------ ------------ ------------ ------------
PRETAX INCOME..................................... 114,417,000 30,094,000 94,295,000 69,308,000 64,997,000
Income tax expense................................ (39,758,000) (10,503,000) (31,169,000) (24,252,000) (25,739,000)
------------ ------------ ------------ ------------ ------------
NET INCOME........................................ $ 74,659,000 $ 19,591,000 $ 63,126,000 $ 45,056,000 $ 39,258,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes
37
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1998 1997 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 74,659,000 $ 19,591,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts........................... 54,680,000 52,346,000 109,217,000 82,690,000
Guaranteed investment contracts................... 9,042,000 11,986,000 22,650,000 19,974,000
Net realized investment losses (gains)............ (23,232,000) 20,291,000 17,394,000 13,355,000
Amortization (accretion) of net premiums
(discounts) on investments....................... 1,174,000 (4,927,000) (18,576,000) (8,976,000)
Amortization of goodwill.......................... 597,000 583,000 1,187,000 1,169,000
Provision for deferred income taxes............... 779,000 (4,404,000) (16,024,000) (3,351,000)
Change in:
Accrued investment income........................... (2,424,000) (3,535,000) (2,084,000) (5,483,000)
Deferred acquisition costs.......................... (63,839,000) (63,451,000) (113,145,000) (60,941,000)
Other assets........................................ (12,889,000) (7,976,000) (14,598,000) (8,000,000)
Income taxes currently payable...................... 24,996,000 3,533,000 10,779,000 5,766,000
Other liabilities................................... (15,189,000) 5,053,000 14,187,000 5,474,000
Other, net............................................ 129,000 117,000 418,000 (129,000)
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 48,483,000 29,207,000 74,531,000 86,604,000
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks...... $ (1,031,150,000) $ (1,822,206,000) $ (2,566,211,000) $ (1,937,890,000)
Mortgage loans.................................... (577,000) (96,504,000) (266,771,000) (15,000,000)
Other investments, excluding short-term
investments...................................... -- (4,889,000) (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable preferred stocks...... 624,733,000 1,444,348,000 2,299,063,000 1,241,928,000
Real estate....................................... -- -- -- 900,000
Other investments, excluding short-term
investments...................................... 42,636,000 942,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks...... 330,775,000 215,577,000 376,847,000 288,969,000
Mortgage loans.................................... 38,770,000 -- 25,920,000 11,324,000
Other investments, excluding short-term
investments...................................... 68,110,000 17,634,000 23,940,000 20,749,000
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES...... 73,297,000 (245,098,000) (176,347,000) (420,853,000)
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts........................... 629,875,000 688,942,000 1,097,937,000 651,649,000
Guaranteed investment contracts................... 5,619,000 55,000,000 55,000,000 134,967,000
Net exchanges to (from) the fixed accounts of
variable annuity contracts......................... (564,599,000) (227,868,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts........................... (101,424,000) (124,474,000) (242,589,000) (173,489,000)
Guaranteed investment contracts................... (8,296,000) (62,122,000) (198,062,000) (16,492,000)
Claims and annuity payments on fixed annuity
contracts.......................................... (16,694,000) (16,941,000) (35,731,000) (31,107,000)
Net receipts from (repayment of) other short-term
financings......................................... (5,352,000) 6,113,000 34,239,000 (119,712,000)
Capital contributions received...................... -- 28,411,000 28,411,000 27,387,000
Dividends paid...................................... -- -- (25,500,000) (29,400,000)
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... (60,871,000) 347,061,000 93,338,000 207,098,000
---------------- ---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.......................................... 60,909,000 131,170,000 (8,478,000) (127,151,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD............................................... 113,580,000 122,058,000 122,058,000 249,209,000
---------------- ---------------- ---------------- ----------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 174,489,000 $ 253,228,000 $ 113,580,000 $ 122,058,000
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Supplemental cash flow information:
Interest paid on indebtedness....................... $ 1,290,000 $ 1,608,000 $ 7,032,000 $ 5,982,000
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Income taxes paid, net of refunds received.......... $ 13,987,000 $ 11,378,000 $ 36,420,000 $ 22,031,000
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
<CAPTION>
1995
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 39,258,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts........................... 72,975,000
Guaranteed investment contracts................... 3,733,000
Net realized investment losses (gains)............ 4,363,000
Amortization (accretion) of net premiums
(discounts) on investments....................... (6,865,000)
Amortization of goodwill.......................... 1,168,000
Provision for deferred income taxes............... (1,489,000)
Change in:
Accrued investment income........................... 3,373,000
Deferred acquisition costs.......................... (7,180,000)
Other assets........................................ 7,047,000
Income taxes currently payable...................... 3,389,000
Other liabilities................................... 4,063,000
Other, net............................................ 7,000
----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 123,842,000
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks...... $ (1,556,586,000)
Mortgage loans.................................... --
Other investments, excluding short-term
investments...................................... (13,028,000)
Sales of:
Bonds, notes and redeemable preferred stocks...... 1,026,078,000
Real estate....................................... 36,813,000
Other investments, excluding short-term
investments...................................... 5,130,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks...... 178,688,000
Mortgage loans.................................... 14,403,000
Other investments, excluding short-term
investments...................................... 13,286,000
----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES...... (295,216,000)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts........................... 245,320,000
Guaranteed investment contracts................... 275,000,000
Net exchanges to (from) the fixed accounts of
variable annuity contracts......................... 10,475,000
Withdrawal payments on:
Fixed annuity contracts........................... (237,977,000)
Guaranteed investment contracts................... (1,638,000)
Claims and annuity payments on fixed annuity
contracts.......................................... (31,237,000)
Net receipts from (repayment of) other short-term
financings......................................... 3,202,000
Capital contributions received...................... --
Dividends paid...................................... --
----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... 263,145,000
----------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.......................................... 91,771,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD............................................... 157,438,000
----------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 249,209,000
----------------
----------------
Supplemental cash flow information:
Interest paid on indebtedness....................... $ 3,235,000
----------------
----------------
Income taxes paid, net of refunds received.......... $ 23,656,000
----------------
----------------
</TABLE>
See accompanying notes
38
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica, Inc. (the "Parent"). The Company is an
Arizona-domiciled life insurance company and conducts its business through three
segments: annuity operations, asset management and broker-dealer operations.
Annuity operations include the sale and administration of fixed and variable
annuities and guaranteed investment contracts. Asset management, which includes
the sale and management of mutual funds, is conducted by SunAmerica Asset
Management Corp. Broker-dealer operations include the sale of securities and
financial services products, and are conducted by Royal Alliance Associates,
Inc.
The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government, and
policies of state and other regulatory authorities. The level of sales of the
Company's financial products is influenced by many factors, including general
market rates of interest; strength, weakness and volatility of equity markets;
and terms and conditions of competing financial products. The Company is exposed
to the typical risks normally associated with a portfolio of fixed-income
securities, namely interest rate, option, liquidity and credit risk. The Company
controls its exposure to these risks by, among other things, closely monitoring
and matching the duration of its assets and liabilities, monitoring and limiting
prepayment and extension risk in its portfolio, maintaining a large percentage
of its portfolio in highly liquid securities, and engaging in a disciplined
process of underwriting, reviewing and monitoring credit risk. The Company also
is exposed to market risk, as market volatility may result in reduced fee income
in the case of assets managed in mutual funds and held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with the 1997 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash, commercial
paper, money market investments, repurchase agreements and short-term bank
participations. All such investments are carried at cost plus accrued interest,
which approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholder's equity.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in limited partnerships, which are
accounted for by using the cost method of accounting; separate account
investments; leveraged leases; policy loans, which are carried at unpaid
balances; and collateralized mortgage obligation residuals.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or received on
interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Interest Expense in the
income statement. All outstanding Swap Agreements are designated as hedges and,
therefore, are not marked to market. However, in the event that a hedged
asset/liability were to be sold or repaid before the related Swap Agreement
matures, the Swap Agreement would be marked to market and any gain/loss
classified with any gain/loss realized on the disposition of the hedged
asset/liability. Subsequently, the Swap Agreement would be marked to market and
the resulting change in fair value would be included in Investment Income in the
income statement. In the event that a Swap Agreement that is designated as a
hedge were to be terminated before its contractual maturity, any resulting
gain/loss would be credited/charged to the carrying value of the asset/liability
that it hedged.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net
39
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses. Costs incurred to
sell mutual funds are also deferred and amortized over the estimated lives of
the funds obtained. Deferred acquisition costs consist of commissions and other
costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to deferred acquisition costs equal to the change
in amortization that would have been recorded if such securities had been sold
at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $16,400,000 at September 30, 1997 and
increased by $4,200,000 at September 30, 1996 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting
from the receipt of variable annuity premiums are segregated in separate
accounts. The Company receives administrative fees for managing the funds and
other fees for assuming mortality and certain expense risks. Such fees are
included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $18,311,000 at September 30, 1997, is
amortized by using the straight-line method over periods averaging 25 years and
is included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts
and guaranteed investment contracts are accounted for as investment-type
contracts in accordance with Statement of Financial Accounting Standards No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments," and
are recorded at accumulated value (premiums received, plus accrued interest,
less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees, asset management fees and surrender charges
are recorded in income as earned. Net retained commissions are recognized as
income on a trade-date basis.
INCOME TAXES: The Company is included in the consolidated federal income tax
return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income tax assets
and liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and liabilities using
enacted income tax rates and laws.
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
--------------- ---------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government.................................... $ 18,496,000 $ 18,962,000
Mortgage-backed securities.................................................... 636,018,000 649,196,000
Securities of public utilities................................................ 22,792,000 22,893,000
Corporate bonds and notes..................................................... 984,573,000 1,012,559,000
Redeemable preferred stocks................................................... 6,125,000 6,681,000
Other debt securities......................................................... 274,481,000 275,903,000
--------------- ---------------
Total available for sale...................................................... $ 1,942,485,000 $ 1,986,194,000
--------------- ---------------
--------------- ---------------
AT SEPTEMBER 30, 1996:
Securities of the United States Government.................................... $ 311,458,000 $ 304,538,000
Mortgage-backed securities.................................................... 747,653,000 741,876,000
Securities of public utilities................................................ 3,684,000 3,672,000
Corporate bonds and notes..................................................... 590,071,000 591,148,000
Redeemable preferred stocks................................................... 9,064,000 8,664,000
Other debt securities......................................................... 339,094,000 337,373,000
--------------- ---------------
Total available for sale...................................................... $ 2,001,024,000 $ 1,987,271,000
--------------- ---------------
--------------- ---------------
</TABLE>
40
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1997, follow:
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
--------------- ---------------
<S> <C> <C>
Due in one year or less....................................................... $ 19,067,000 $ 20,575,000
Due after one year through five years......................................... 277,350,000 281,296,000
Due after five years through ten years........................................ 631,083,000 650,242,000
Due after ten years........................................................... 378,967,000 384,885,000
Mortgage-backed securities.................................................... 636,018,000 649,196,000
--------------- ---------------
Total available for sale...................................................... $ 1,942,485,000 $ 1,986,194,000
--------------- ---------------
--------------- ---------------
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will differ
from those shown above due to prepayments and redemptions.
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
------------ -------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government......................................... $ 498,000 $ (32,000)
Mortgage-backed securities......................................................... 14,998,000 (1,820,000)
Securities of public utilities..................................................... 141,000 (40,000)
Corporate bonds and notes.......................................................... 28,691,000 (705,000)
Redeemable preferred stocks........................................................ 556,000 --
Other debt securities.............................................................. 1,569,000 (147,000)
------------ -------------
Total available for sale........................................................... $ 46,453,000 $ (2,744,000)
------------ -------------
------------ -------------
AT SEPTEMBER 30, 1996:
Securities of the United States Government......................................... $ 284,000 $ (7,204,000)
Mortgage-backed securities......................................................... 7,734,000 (13,511,000)
Securities of public utilities..................................................... 1,000 (13,000)
Corporate bonds and notes.......................................................... 11,709,000 (10,632,000)
Redeemable preferred stocks........................................................ 16,000 (416,000)
Other debt securities.............................................................. 431,000 (2,152,000)
------------ -------------
Total available for sale........................................................... $ 20,175,000 $ (33,928,000)
------------ -------------
------------ -------------
</TABLE>
At September 30, 1997, gross unrealized gains on equity securities available for
sale aggregated $1,004,000 and there were no unrealized losses. At September 30,
1996, gross unrealized gains on equity securities available for sale aggregated
$1,368,000 and gross unrealized losses aggregated $309,000.
41
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Available for sale:
Realized gains................................................... $ 22,179,000 $ 14,532,000 $ 15,983,000
Realized losses.................................................. (25,310,000) (10,432,000) (21,842,000)
Held for investment:
Realized gains................................................... -- -- 2,413,000
Realized losses.................................................. -- -- (586,000)
COMMON STOCKS:
Realized gains..................................................... 4,002,000 511,000 994,000
Realized losses.................................................... (312,000) (3,151,000) (114,000)
OTHER INVESTMENTS:
Realized gains..................................................... 2,450,000 1,135,000 3,561,000
Realized losses.................................................... -- -- (12,000)
IMPAIRMENT WRITEDOWNS................................................ (20,403,000) (15,950,000) (4,760,000)
------------- ------------- -------------
Total net realized investment losses................................. $ (17,394,000) $ (13,355,000) $ (4,363,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Short-term investments.............................................. $ 11,780,000 $ 10,647,000 $ 8,308,000
Bonds, notes and redeemable preferred stocks........................ 163,038,000 140,387,000 107,643,000
Mortgage loans...................................................... 17,632,000 8,701,000 7,419,000
Common stocks....................................................... 16,000 8,000 3,000
Real estate......................................................... (296,000) (196,000) (51,000)
Limited partnerships................................................ 6,725,000 4,073,000 5,128,000
Other invested assets............................................... 11,864,000 1,011,000 1,016,000
------------- ------------- -------------
Total investment income....................................... $ 210,759,000 $ 164,631,000 $ 129,466,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $2,050,000 for
the year ended September 30, 1997, $1,737,000 for the year ended September 30,
1996, and $1,983,000 for the year ended September 30, 1995 and are included in
General and Administrative Expenses in the income statement.
At September 30, 1997, no investment exceeded 10% of the Company's consolidated
shareholder's equity.
At September 30, 1997, mortgage loans were collateralized by properties located
in 21 states, with loans totaling approximately 13% of the aggregate carrying
value of the portfolio secured by properties located in New York and
approximately 12% by properties located in California. No more than 10% of the
portfolio was secured by properties in any other single state.
At September 30, 1997, bonds, notes and redeemable preferred stocks included
$216,877,000 (fair value of $227,169,000) of bonds and notes not rated
investment grade. The Company had no material concentrations of
non-investment-grade assets at September 30, 1997.
At September 30, 1997, the amortized cost of investments in default as to the
payment of principal or interest was $1,378,000, consisting of $500,000 of
non-investment-grade bonds and $878,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $1,378,000.
As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge
42
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
that effectively converts floating-rate assets and liabilities to fixed-rate
instruments. At September 30, 1997, the Company had one outstanding Swap
Agreement with a notional principal amount of $15.9 million, which matures in
December, 2024. The net interest paid amounted to $0.1 million for the year
ended September 30, 1997, and is included in Interest Expense on Guaranteed
Investment Contracts in the income statement.
At September 30, 1997, $5,276,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its real estate investments and
other invested assets except for cost-method partnerships) and liabilities or
the value of anticipated future business. The Company does not plan to sell most
of its assets or settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Selling expenses and potential taxes are not
included. The estimated fair value amounts were determined using available
market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally
on independent pricing services, broker quotes and other independent
information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future cash
flows to the present at current market rates, using expected prepayment rates.
COMMON STOCKS: Fair value is based principally on independent pricing services,
broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for by
using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which the
carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life contracts are assigned a fair value equal to current net surrender
value. Annuitized contracts are valued based on the present value of future cash
flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of hedging Swap Agreements, determined from independent
broker quotes.
VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation
phase are based on net surrender values. Fair values of contracts in the payout
phase are based on the present value of future cash flows at assumed investment
rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the
quoted market prices for similar issues.
43
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at September
30, 1997 and 1996, compared with their respective carrying values, are as
follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
--------------- ---------------
<S> <C> <C>
1997:
ASSETS:
Cash and short-term investments...................................... $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable preferred stocks......................... 1,986,194,000 1,986,194,000
Mortgage loans....................................................... 339,530,000 354,495,000
Common stocks........................................................ 1,275,000 1,275,000
Cost-method partnerships............................................. 46,880,000 84,186,000
Variable annuity assets.............................................. 9,343,200,000 9,343,200,000
LIABILITIES:
Reserves for fixed annuity contracts................................. 2,098,803,000 2,026,258,000
Reserves for guaranteed investment contracts......................... 295,175,000 295,175,000
Payable to brokers for purchases of securities....................... 263,000 263,000
Variable annuity liabilities......................................... 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent................................. 36,240,000 37,393,000
--------------- ---------------
--------------- ---------------
1996:
ASSETS:
Cash and short-term investments...................................... $ 122,058,000 $ 122,058,000
Bonds, notes and redeemable preferred stocks......................... 1,987,271,000 1,987,271,000
Mortgage loans....................................................... 98,284,000 102,112,000
Common stocks........................................................ 3,970,000 3,970,000
Cost-method partnerships............................................. 45,070,000 70,553,000
Receivable from brokers for sales of securities...................... 52,348,000 52,348,000
Variable annuity assets.............................................. 6,311,557,000 6,311,557,000
LIABILITIES:
Reserves for fixed annuity contracts................................. 1,789,962,000 1,738,784,000
Reserves for guaranteed investment contracts......................... 415,544,000 416,695,000
Variable annuity liabilities......................................... 6,311,557,000 6,117,508,000
Subordinated notes payable to Parent................................. 35,832,000 37,339,000
--------------- ---------------
--------------- ---------------
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent equalled $36,240,000 at an interest rate of
9% at September 30, 1997 and require principal payments of $7,500,000 in 1998,
$23,060,000 in 1999 and $5,400,000 in 2000.
6. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided liquidity
support for certain short-term securities of three municipalities by agreeing to
purchase such securities in the event there is no other buyer in the short-term
marketplace. In return the Company receives a fee. The maximum liability under
these guarantees is $242,600,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities.
The Company is involved in various kinds of litigation common to its businesses.
These cases are in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses relating
to such litigation are adequate and any further liabilities and costs will not
have a material adverse impact upon the Company's financial position or results
of operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value Common
Stock. At September 30, 1997 and 1996, 3,511 shares were outstanding.
44
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY (CONTINUED)
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance........................................ $ 280,263,000 $ 252,876,000 $ 252,876,000
Capital contributions received........................... 28,411,000 27,387,000 --
------------- ------------- -------------
Ending balance........................................... $ 308,674,000 $ 280,263,000 $ 252,876,000
------------- ------------- -------------
------------- ------------- -------------
RETAINED EARNINGS:
Beginning balance........................................ 207,002,000 191,346,000 152,088,000
Net income............................................... 63,126,000 45,056,000 39,258,000
Dividend paid............................................ (25,500,000) (29,400,000) --
------------- ------------- -------------
Ending balance........................................... $ 244,628,000 $ 207,002,000 $ 191,346,000
------------- ------------- -------------
------------- ------------- -------------
NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance........................................ $ (5,521,000) $ (5,673,000) $ (24,953,000)
Change in net unrealized gains/losses on debt securities
available for sale...................................... 57,463,000 (2,904,000) 71,302,000
Change in net unrealized gains/losses on equity
securities available for sale........................... (55,000) 3,538,000 (1,240,000)
Change in adjustment to deferred acquisition costs....... (20,600,000) (400,000) (40,400,000)
Tax effects of net changes............................... (12,882,000) (82,000) (10,382,000)
------------- ------------- -------------
Ending balance........................................... $ 18,405,000 $ (5,521,000) $ (5,673,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Dividends that the Company may pay to its shareholder in any year without prior
approval of the Arizona Department of Insurance are limited by statute. The
maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior approval
of the Insurance Commissioner is limited to the lesser of either 10% of the
preceding year's statutory surplus or the preceding year's statutory net gain
from operations. Dividends in the amounts of $25,500,000 and $29,400,000 were
paid on April 1, 1997 and March 18, 1996, respectively. No dividends were paid
in fiscal year 1995.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1997 was $45,743,000. The statutory net income for the year ended
December 31, 1996 was $27,928,000 and for the year ended December 31, 1995 was
$30,673,000. The Company's statutory capital and surplus was $325,712,000 at
September 30, 1997, $311,176,000 at December 31, 1996 and $294,767,000 at
December 31, 1995.
45
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS
(LOSSES) OPERATIONS TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
1997:
Currently payable........................................... $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred.................................................... (2,258,000) (13,766,000) (16,024,000)
------------- ------------- -------------
Total income tax expense.................................... $ (5,893,000) $ 37,062,000 $ 31,169,000
------------- ------------- -------------
------------- ------------- -------------
1996:
Currently payable........................................... $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred.................................................... (10,347,000) 6,996,000 (3,351,000)
------------- ------------- -------------
Total income tax expense.................................... $ (4,593,000) $ 28,845,000 $ 24,252,000
------------- ------------- -------------
------------- ------------- -------------
1995:
Currently payable........................................... $ 4,248,000 $ 22,980,000 $ 27,228,000
Deferred.................................................... (6,113,000) 4,624,000 (1,489,000)
------------- ------------- -------------
Total income tax expense.................................... $ (1,865,000) $ 27,604,000 $ 25,739,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Income taxes computed at the United States federal income tax rate of 35% and
income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Amount computed at statutory rate.............................. $ 33,003,000 $ 24,258,000 $ 22,749,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases of net
assets acquired............................................. 666,000 464,000 3,049,000
State income taxes, net of federal tax benefit............... 1,950,000 2,070,000 437,000
Dividends-received deduction................................. (4,270,000) (2,357,000) --
Tax credits.................................................. (318,000) (257,000) (168,000)
Other, net................................................... 138,000 74,000 (328,000)
------------ ------------ ------------
Total income tax expense....................................... $ 31,169,000 $ 24,252,000 $ 25,739,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at September 30, 1997. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
46
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
-------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments...................................................... $ 13,160,000 $ 15,036,000
Deferred acquisition costs....................................... 154,949,000 136,747,000
State income taxes............................................... 1,777,000 1,466,000
Net unrealized gains on debt and equity securities available for
sale............................................................ 9,910,000 --
-------------- -------------
Total deferred tax liabilities................................... 179,796,000 153,249,000
-------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves.......................................... (108,090,000) (77,522,000)
Guaranty fund assessments........................................ (2,707,000) (1,031,000)
Other assets..................................................... (1,952,000) (1,534,000)
Net unrealized losses on debt and equity securities available for
sale............................................................ -- (2,973,000)
-------------- -------------
Total deferred tax assets........................................ (112,749,000) (83,060,000)
-------------- -------------
Deferred income taxes............................................ $ 67,047,000 $ 70,189,000
-------------- -------------
-------------- -------------
</TABLE>
9. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica Securities,
Inc. and Advantage Capital Corp. Commissions paid to these broker-dealers
totaled $25,492,000 in 1997, $16,906,000 in 1996, and $9,435,000 in 1995. These
broker-dealers, when combined with the Company's wholly owned broker-dealer,
represent a significant portion of the Company's business, amounting to
approximately 36.1%, 38.3%, and 40.6% of premiums in 1997, 1996, and 1995,
respectively. The Company also sells its products through unaffiliated
broker-dealers, the largest two of which represented approximately 19.2% and
10.1% of premiums in 1997, 19.7% and 10.2% in 1996, and 18.8% and 4.3% in 1995,
respectively.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $86,116,000 for the year ended September 30, 1997,
$65,351,000 for the year ended September 30, 1996 and $42,083,000 for the year
ended September 30, 1995. Such amounts are included in General and
Administrative Expenses in the income statement.
The Parent made capital contributions of $28,411,000 in December 1996 and
$27,387,000 in December 1995 to the Company, through the Company's direct
parent, in exchange for the termination of its guaranty with respect to certain
real estate owned in Arizona. Accordingly, the Company reduced the carrying
value of this real estate to estimated fair value to reflect the termination of
the guaranty.
During the year ended September 30, 1995, the Company sold to the Parent real
estate for cash equal to its carrying value of $29,761,000.
During the year ended September 30, 1997, the Company sold various invested
assets to SunAmerica Life Insurance Company and to CalAmerica Life Insurance
Company for cash equal to their current market values of $15,776,000 and
$15,000, respectively. The Company recorded net gains aggregating $276,000 on
such transactions.
During the year ended September 30, 1997, the Company also purchased certain
invested assets from SunAmerica Life Insurance Company and from CalAmerica Life
Insurance Company for cash equal to their current market values of $8,717,000
and $284,000, respectively.
During the year ended September 30, 1996, the Company sold various invested
assets to the Parent and to SunAmerica Life Insurance Company for cash equal to
their current market values of $274,000 and $47,321,000, respectively. The
Company recorded net losses aggregating $3,000 on such transactions.
47
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY MATTERS (CONTINUED)
During the year ended September 30, 1996, the Company also purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal to their
current market values, which aggregated $28,379,000.
10. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX
REVENUES EXPENSE INCOME TOTAL ASSETS
------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
1997:
Annuity operations......................... $ 332,845,000 $ 55,675,000 $ 74,792,000 $ 12,438,021,000
Broker-dealer operations................... 38,005,000 689,000 16,705,000 51,400,000
Asset management........................... 35,661,000 16,357,000 2,798,000 81,518,000
------------- ------------ ------------ ----------------
Total...................................... $ 406,511,000 $ 72,721,000 $ 94,295,000 $ 12,570,939,000
------------- ------------ ------------ ----------------
------------- ------------ ------------ ----------------
1996:
Annuity operations......................... $ 256,681,000 $ 43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer operations................... 31,053,000 449,000 13,033,000 37,355,000
Asset management........................... 33,047,000 18,295,000 2,448,000 74,410,000
------------- ------------ ------------ ----------------
Total...................................... $ 320,781,000 $ 62,718,000 $ 69,308,000 $ 9,204,535,000
------------- ------------ ------------ ----------------
------------- ------------ ------------ ----------------
1995:
Annuity operations......................... $ 211,587,000 $ 38,350,000 $ 55,462,000 $ 7,667,946,000
Broker-dealer operations................... 24,194,000 411,000 9,025,000 29,241,000
Asset management........................... 34,427,000 24,069,000 510,000 86,510,000
------------- ------------ ------------ ----------------
Total...................................... $ 270,208,000 $ 62,830,000 $ 64,997,000 $ 7,783,697,000
------------- ------------ ------------ ----------------
------------- ------------ ------------ ----------------
</TABLE>
48
<PAGE>
APPENDIX A - CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION TO
STRATEGIES 3/31/98
- ------------------------------------------------------------------------------------- ------------------
<S> <C>
- ---------------------------------------------------------------------------------------------------------
Growth (Inception Date 4/15/97)
Beginning AUV...................................................................... 10.00
End AUV............................................................................ 13.09
End #AUs........................................................................... 3,950,133
- ---------------------------------------------------------------------------------------------------------
Moderate Growth (Inception Date 4/15/97)
Beginning AUV...................................................................... 10.00
End AUV............................................................................ 12.76
End #AUs........................................................................... 3,639,458
- ---------------------------------------------------------------------------------------------------------
Balanced Growth (Inception Date 4/15/97)
Beginning AUV...................................................................... 10.00
End AUV............................................................................ 12.44
End #AUs........................................................................... 2,789,702
- ---------------------------------------------------------------------------------------------------------
Conservative Growth (Inception Date 4/15/97)
Beginning AUV...................................................................... 10.00
End AUV............................................................................ 12.06
End #AUs........................................................................... 1,536,220
- ---------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
APPENDIX B - MARKET VALUE ADJUSTMENT
- --------------------------------------------------------------------------------
The Market Value Adjustment reflects the impact that changing interest rates
have on the value of money invested at a fixed interest rate. The longer the
period of time remaining in the term you initially agreed to leave your money in
the fixed investment option, the greater the impact of the Market Value
Adjustment. The impact of the Market Value Adjustment can be either positive or
negative, and is computed by multiplying the amount withdrawn, transferred or
annuitized by the following factor:
N/12
[(1+I)/ (1+J+0.005*)] -1
where:
I is the Guarantee Rate you are earning on the money invested in
the fixed investment option;
J is the Guarantee Rate then currently available for the period
of time equal to the number of years (rounded up to an integer) remaining in the
term you initially agreed to leave your money in the fixed investment option;
and
N is the number of full months remaining in the term you
initially agreed to leave your money in the fixed investment option.
* if the issue state is Pennsylvania, this number will be zero.
EXAMPLES OF THE MARKET VALUE ADJUSTMENT
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to the
ten year fixed investment option at a Guarantee Rate of 7%;
(2) You make a partial withdrawal of $4,000 when 2 1/2 years (30 months)
remain in the ten year term you initially agreed to leave your money in the
fixed investment option (N=30);
(3) you have not made any other transfers, additional Purchase Payments, or
withdrawals.
No withdrawal charges are reflected in the examples because your Purchase
Payment has been in the contract for more than 7 full years.
NEGATIVE ADJUSTMENT:
Assume that on the date of withdrawal, the Guarantee Rate in effect for a new
investment in the three year (rounded up to the next full year) fixed investment
option is 8%:
The Market Value Adjustment factor is equal to:
N/12
[(1+I)/(1+J+.005)] -1
30/12
[(1.07)/(1.08+.005)] -1
2.5
(0.986175) -1
0.965795-1
- -0.034205
The requested withdrawal amount is multiplied by the Market Value Adjustment
factor to determine the Market Value Adjustment:
$4,000 X (-0.034205)= -$136.82
$136.82 represents the Market Value Adjustment that will be deducted from the
remaining money in the ten year fixed investment option.
POSITIVE ADJUSTMENT:
Assume that on the date of withdrawal, the Guarantee Rate in effect for a new
investment in the three year (rounded up to the next full year) fixed investment
option is 6%:
The Market Value Adjustment factor is equal to:
N/12
[(1+I)/(1+J+.005)] -1
30/12
[(1.07)/(1.06+.005)] -1
2.5
(1.004695) -1
1.011778-1
+0.011778
The requested withdrawal amount is multiplied by the Market Value Adjustment
factor to determine the Market Value Adjustment:
$4,000 X .011778= +47.11
$47.11 represents the Market Value Adjustment that would be added to your
withdrawal.
50
<PAGE>
APPENDIX C - PREMIUM TAXES
- --------------------------------------------------------------------------------
Premium taxes vary according to the state and are subject to change without
notice. In many states, there is no tax at all. Listed below are the tax rates
payable on premiums in effect in those states that assess a premium tax, as of
the date of this prospectus. For current information you should consult your tax
advisor. Additionally, please see "Expenses" for additional information on
Premium Taxes.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
STATE CONTRACT CONTRACT
- ------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
California..................................................................... .50% 2.35%
District of Columbia........................................................... 2.25% 2.25%
Kentucky....................................................................... 2% 2%
Maine.......................................................................... 0% 2%
Nevada......................................................................... 0% 3.5%
South Dakota................................................................... 0% 1.25%
West Virginia.................................................................. 1% 1%
Wyoming........................................................................ 0% 1%
</TABLE>
51
<PAGE>
[LOGO]
SEASONS SERIES TRUST
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
Seasons Series Trust (the "Trust") is an open-end, management investment
company. The Trust consists of six separate portfolios (the "Portfolios"),
including four multi-managed portfolios (the "Multi-Managed Portfolios"). Each
of the Portfolios has its own investment objective. The Trust seeks to provide
investors with an asset allocation strategy consistent with the investment
strategy selected in the Seasons Variable Annuity Contract (the "Contract").
The following is a brief statement of the investment objective of each
Portfolio:
The MULTI-MANAGED GROWTH PORTFOLIO seeks long-term growth of capital.
The MULTI-MANAGED MODERATE GROWTH PORTFOLIO seeks long-term growth of capital,
with capital preservation as a secondary objective.
The MULTI-MANAGED INCOME/EQUITY PORTFOLIO seeks conservation of principal while
maintaining some potential for long-term growth of capital.
The MULTI-MANAGED INCOME PORTFOLIO seeks capital preservation.
The ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO seeks capital appreciation.
The STOCK PORTFOLIO seeks long-term capital appreciation, and secondarily,
increasing dividend income through investments primarily in well-established
growth companies.
Each Multi-Managed Portfolio of the Trust, representing a different asset
allocation strategy, seeks to achieve its investment objective by investing to
varying degrees in a diverse portfolio of common stocks, securities with equity
characteristics (such as preferred stocks, warrants or fixed income securities
convertible into common stock), corporate and U.S. government fixed income
securities, money market instruments and cash or cash equivalents. The assets of
each Multi-Managed Portfolio are allocated among the same three investment
managers, but in differing percentages depending on the Portfolio's overall
investment strategy. Each of the three investment managers will manage its
respective portion or portions of the Multi-Managed Portfolios according to a
separate investment strategy or strategies as described below.
As a result of the market risk inherent in any investment, there is no assurance
that the investment objectives of any of the Portfolios will be achieved.
INVESTMENTS IN A PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT OR BY ANY OTHER ENTITY OR PERSON. Shares of the Trust are not
deposits or obligations of, or guaranteed or endorsed by, any bank through which
such shares may be sold, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Portfolios can be issued and redeemed only in connection with
investments in and payments under the Contract and may be sold to fund other
variable annuity or variable life insurance contracts issued in the future,
subject to obtaining any required regulatory relief. The Contract involves fees
and expenses not described in this Prospectus and may also involve certain
restrictions on the allocation of purchase payments or contract values to one or
more of the Portfolios. See the Contract prospectus for information regarding
Contract fees and expenses and any restrictions or limitations.
This Prospectus sets forth concisely the information a prospective investor
ought to know before investing in the Trust. Please read it carefully and retain
it for future reference. A Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The Statement of Additional Information may be obtained upon request
and without charge by writing to the Trust at the above address or by calling
1-800-445-7862.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated April 3, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Trust........................................................................................................... 3
Investment Objectives, Policies and Restrictions.................................................................... 3
Multi-Managed Portfolios............................................................................................ 4
Asset Allocation: Diversified Growth Portfolio...................................................................... 7
Stock Portfolio..................................................................................................... 7
Investment Techniques and Risk Factors.............................................................................. 8
Management.......................................................................................................... 16
Portfolio Management................................................................................................ 18
Portfolio Turnover and Brokerage.................................................................................... 19
Dividends, Distributions and Federal Taxes.......................................................................... 19
Price of Shares..................................................................................................... 20
Purchases and Redemptions........................................................................................... 20
Shareholder Voting Rights........................................................................................... 21
Independent Accountants and Legal Counsel........................................................................... 21
Inquiries........................................................................................................... 21
</TABLE>
2
<PAGE>
THE TRUST
- --------------------------------------------------------------------------------
The Trust, organized as a Massachusetts business trust on October 10, 1995, is
an open-end, management investment company. It was established to provide a
funding medium for the Contract, which is issued by Variable Annuity Account
Five (the "Account"), a separate account of Anchor National Life Insurance
Company (the "Life Company"), organized under the laws of the state of
California. All shares may be purchased or redeemed by the Account at net asset
value with no sales or redemption charge.
The Trust currently issues six separate series of shares or Portfolios, each of
which represents a separate portfolio of securities with its own investment
objective. The current Portfolios are the Multi-Managed Growth Portfolio,
Multi-Managed Moderate Growth Portfolio, Multi-Managed Income/Equity Portfolio,
Multi-Managed Income Portfolio, Asset Allocation: Diversified Growth Portfolio
and Stock Portfolio.
SunAmerica Asset Management Corp. ("SunAmerica" or the "Adviser"), an indirect,
wholly owned subsidiary of the Life Company, serves as investment adviser for
all the Portfolios of the Trust. See "Management." Janus Capital Corporation
("Janus") and Wellington Management Company, LLP ("WMC") both serve as
subadvisers for each of the Multi-Managed Portfolios. Each of Janus and WMC is
responsible for managing one particular portion of the assets (each, a "Managed
Component" or "component") of each of the Multi-Managed Portfolios, subject to
the supervision of SunAmerica. Putnam Investment Management, Inc. ("Putnam")
serves as subadviser for the Asset Allocation: Diversified Growth Portfolio and
will be responsible for managing the Portfolio, subject to the supervision of
SunAmerica. T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as
subadviser for the Stock Portfolio and will be responsible for managing the
Portfolio, subject to the supervision of SunAmerica. (Janus, WMC, Putnam and T.
Rowe Price are referred to herein individually as a "Subadviser," and
collectively as the "Subadvisers.") In addition to being responsible for overall
supervision of each Portfolio, SunAmerica manages one or more particular
components of each of the Multi-Managed Portfolios, all as more fully described
below.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
- --------------------------------------------------------------------------------
A description of each Portfolio's investment objective and a summary of the
investment policies followed by the Portfolios are set forth below. However,
please also refer to the section captioned "Investment Techniques and Risk
Factors" for a more detailed description of the characteristics and risks
aassociated with the Portfolios and the types of securities in which they
invest. There can be no assurance that any Portfolio's investment objective will
be met or that the net return on an investment in a Portfolio will exceed that
which could have been obtained through other investment or savings vehicles.
Each Portfolio has certain fundamental investment restrictions, which are
described in the Statement of Additional Information. A Portfolio's fundamental
investment restrictions may not be changed without a majority vote of the
outstanding voting securities of that Portfolio. See "Shareholder Voting
Rights." Except for its fundamental investment restrictions, each Portfolio's
investment objective and policies are not fundamental and may be changed without
a vote of the shareholders.
Each Multi-Managed Portfolio is organized as a "non-diversified" Portfolio of
the Trust (as such term is defined under the Investment Company Act of 1940, as
amended (the "1940 Act")), subject, however, to certain tax diversification
requirements. See "Dividends, Distributions and Federal Taxes."
Reference is made in the following sections to ratings assigned to certain types
of securities by Standard & Poor's Corporation ("S&P") , Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch"), Duff &
Phelps, Inc. ("Duff & Phelps") and Thomson BankWatch, Inc. ("BankWatch"), all of
which
3
<PAGE>
are recognized independent securities ratings institutions. A description of the
rating categories assigned by S&P, Moody's, Fitch, Duff & Phelps and BankWatch
is contained in the Statement of Additional Information.
MULTI-MANAGED PORTFOLIOS
The investment objective of each Multi-Managed Portfolio is as follows:
MULTI-MANAGED GROWTH PORTFOLIO -- long-term growth of capital
MULTI-MANAGED MODERATE GROWTH PORTFOLIO -- long-term growth of capital, with
capital preservation as a secondary objective
MULTI-MANAGED INCOME/EQUITY PORTFOLIO -- conservation of principal while
maintaining some potential for long-term growth of capital
MULTI-MANAGED INCOME PORTFOLIO -- capital preservation
Each Multi-Managed Portfolio seeks to achieve its investment objective by
investing to varying degrees in a diverse portfolio of common stocks, securities
with equity characteristics (such as preferred stocks, warrants or fixed income
securities convertible into common stock), corporate and U.S. government fixed
income securities, money market instruments and cash or cash equivalents. In
order to diversify the management of their assets through different market
sectors and management styles, the assets of each Multi-Managed Portfolio have
been allocated among three or four distinct Managed Components, as shown in the
following chart.
<TABLE>
<CAPTION>
MANAGED COMPONENTS AS A PERCENTAGE
OF EACH MULTI-MANAGED PORTFOLIO
------------------------------------------------------------------------
SunAmerica/ SunAmerica/ WMC/ Fixed
Aggressive Growth Janus/Growth Balanced Income
PORTFOLIO component component component component
- -------------- ----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Multi-Managed
Growth
Portfolio 20% 40% 20% 20%
Multi-Managed
Moderate
Growth
Portfolio 18% 28% 18% 36%
Multi-Managed
Income/
Equity
Portfolio 0% 18% 28% 54%
Multi-Managed
Income
Portfolio 0% 8% 17% 75%
</TABLE>
The Multi-Managed Growth and Moderate Growth Portfolios, in seeking long-term
growth of capital, include a relatively larger allocation to the SunAmerica/
aggressive growth and Janus/growth components than do the Multi-Managed
Income/Equity and Income Portfolios. In contrast, the Multi-Managed Income/
Equity and Income Portfolios, which focus on preservation of principal or
capital, include relatively larger allocations to the SunAmerica/balanced and
WMC/fixed income components than do the other two Multi-Managed Portfolios.
Neither the Multi-Managed Income/Equity Portfolio nor the Multi-Managed Income
Portfolio contains a SunAmerica/aggressive growth component. None of the
Multi-Managed Portfolios contains an "unmanaged" component.
Investments in each Multi-Managed Portfolio (and redemption requests) will be
allocated among the Managed Components of such Portfolio as described below. The
Trust expects that differences in investment returns among the Managed
Components of a Multi-Managed Portfolio will cause the actual percentage of the
Portfolio's assets allocated to each component to vary from the target
allocation over the course of a calendar quarter. Accordingly, the assets of
each Multi-Managed Portfolio will be reallocated or "rebalanced" among the
Managed Components on a quarterly basis to restore the target allocations for
such Portfolio.
4
<PAGE>
Although each Multi-Managed Portfolio has a distinct investment objective and
will be allocated in varying percentages among the Managed Components in
furtherance of that objective, each Manager intends to manage its respective
Managed Component(s) in the same general manner regardless of the objective of
the Multi-Managed Portfolio. However, as described below under
"SunAmerica/balanced component," the equity/ debt weightings of the
SunAmerica/balanced component under normal market conditions (I.E., the
"neutral" weightings) will vary depending on the objective of the Multi-Managed
Portfolio. Each Managed Component of a Multi-Managed Portfolio will be treated
as a separate investment account by the Manager; however, the assets of each
Managed Component that comprises a particular Multi-Managed Portfolio belong to
that Portfolio. Percentage limitations contained in investment policies and
restrictions of each Multi-Managed Portfolio will be applied at the time of
purchase and on a component by component basis for that Portfolio. The Adviser,
however, is ultimately responsible for overseeing compliance with respect to
percentage limitations by each Multi-Managed Portfolio as a whole, and will in
such capacity verify that in the aggregate the investments of each Multi-Managed
Portfolio comply with applicable percentage limitations. The investment policies
relating to each Managed Component are described below.
SUNAMERICA/AGGRESSIVE GROWTH COMPONENT
This component is intended to represent 20% and 18% of the assets in the
Multi-Managed Growth and Moderate Growth Portfolios, respectively. Neither the
Multi-Managed Income/Equity nor Income Portfolio will have a
SunAmerica/aggressive growth component. In managing this component, SunAmerica
will generally invest a significant portion of the component's total assets in
the equity securities of small, lesser known or new growth companies or
industries, such as telecommunications, media and biotechnology. Such "Small
Cap" companies will typically have market capitalizations of under $1 billion
and have achieved, or be expected to achieve, growth or earnings over various
major business cycles. SunAmerica may also invest the component's assets in the
equity securities of medium-sized companies ("Mid-Cap" companies) with market
capitalizations of $1 billion to $5 billion. The SunAmerica/aggressive growth
component may be invested in securities issued by well known and established
domestic or foreign companies, as well as in newer and less-seasoned companies.
Such securities may be listed on an exchange or traded over-the-counter. See
"Investment Techniques and Risk Factors."
The Adviser may, under normal circumstances, invest up to 35% of the
SunAmerica/aggressive growth component's total assets in debt securities that
have the potential for capital appreciation due to anticipated market
conditions. The Adviser may invest the assets of the SunAmerica/aggressive
growth component in securities rated as low as "BBB." See "Investment Techniques
and Risk Factors" and the Statement of Additional Information.
JANUS/GROWTH COMPONENT
This component is intended to represent 40%, 28%, 18% and 8% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, Janus will invest primarily in common
stocks (of both U.S. and foreign issuers) selected for their growth potential.
The Subadviser generally takes a "bottom up" approach to building the portfolio.
In other words, the Subadviser generally seeks to identify individual companies
with earnings growth potential that may not be recognized by the market at
large. Although themes may emerge, securities are generally selected without
regard to any defined industry sector or other similarly defined selection
procedure. Realization of income is not a significant investment consideration.
Any income realized on investments will be incidental.
The Subadviser may invest the assets of the Janus/ growth component to a lesser
degree in other types of U.S. and foreign securities, including preferred stock,
warrants, convertible securities and corporate and government fixed income
securities, including up to 35% of the Janus/growth component's net assets in
high-yield/high-risk securities rated below Baa by Moody's or BBB by S&P, or
unrated bonds determined by the Subadviser to be of comparable quality (I.E.,
"junk bonds"). See "Investment Techniques and Risk Factors." See also the
Statement of Additional Information for a description of securities ratings.
Such securities may offer growth potential because of anticipated changes in
interest rates, credit standing, currency relationships or other factors.
5
<PAGE>
SUNAMERICA/BALANCED COMPONENT
This component is intended to represent 20%, 18%, 28% and 17% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, SunAmerica has the flexibility to
select among different types of investments for capital growth and income and
may alter the composition of the investment portfolio as economic and market
trends change. The Adviser considers both the opportunity for gain and the risk
of loss in making investments. The Adviser anticipates that the investment
portfolio of the SunAmerica/balanced component, over the long term, will consist
of equity investments in the form of common and preferred stocks, warrants and
other rights, as well as long-term bonds and other debt securities such as
convertible securities, short-term debt securities and U.S. government
securities. The Adviser may cause this component to invest in both U.S. and
foreign securities. See "Investment Techniques and Risk Factors."
In selecting equity investments, the Adviser typically seeks companies of medium
to large capitalizations (generally $1 billion or more) which, based on their
future prospects or opportunities, are believed to be undervalued in the
marketplace. The Adviser intends to limit investments in companies with market
capitalizations of less than $1 billion to 20% of the SunAmerica/balanced
component's total assets. See "Investment Techniques and Risk Factors."
In selecting debt investments, the Adviser is primarily concerned with
determining the most appropriate time to buy and sell debt securities. The
Adviser seeks debt securities with longer maturities during periods of
anticipated lower interest rates and shorter-term debt securities when interest
rates are expected to rise. The Adviser generally selects long-term debt
securities from high quality bonds (rated AA or higher, or determined by the
Adviser to be of equivalent quality if unrated) that offer income and capital
gains. The Adviser may also invest in high quality, short-term debt securities
(such as commercial paper rated A-1 or Prime-1, or determined by the Adviser to
be of equivalent quality if unrated). However, the Adviser may invest up to 10%
of the value of the component's total assets (measured at the time of
investment) in securities rated as low as BBB (or determined by the Adviser to
be of equivalent quality if unrated). See "Investment Techniques and Risk
Factors." See also the Statement of Additional Information for a description of
securities ratings.
Under normal circumstances, the "neutral" equity/debt weightings for the
SunAmerica/balanced component will be 70% / 30% for the Multi-Managed Growth and
Moderate Growth Portfolios, and 50% / 50% for the Multi-Managed Income/Equity
and Income Portfolios. This means that at least 30% of the total assets of the
SunAmerica/balanced component of the Multi-Managed Growth and Moderate Growth
Portfolios, and at least 50% of the total assets of the SunAmerica/ balanced
component of the Multi-Managed Income/ Equity and Income Portfolios, will
normally be invested in fixed income securities; however, such investments may
exceed such percentages when the Adviser believes such an adjustment in
portfolio mix to be necessary in order to conserve principal, such as in
anticipation of a decline in the equities market.
WMC/FIXED INCOME COMPONENT
This component is intended to represent 20%, 36%, 54% and 75% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, WMC will invest primarily in a
portfolio of fixed income securities of varying maturities and risk/return
characteristics. The types of fixed income securities in which the Subadviser
may invest include the following: obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities, U.S. and foreign corporate and
other debt obligations, mortgage-backed securities including CMOs, asset-backed
securities, preferred stock, convertible securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. See "Investment Techniques and Risk Factors."
The Subadviser may invest up to 20% of the WMC/fixed income component's assets
in securities rated below Baa by Moody's or BBB by S&P and no more than 10% of
the net assets of the WMC/fixed income component in bonds rated as low as C by
Moody's or D by S&P (or, in each case, if not rated, determined by the
Subadviser to be of comparable quality) (I.E., "junk bonds"). Any subsequent
change in a rating to a security which is assigned by any rating service, or
change in the percentage of assets invested in certain securities or other
instruments resulting from market fluctuations or
6
<PAGE>
other changes in the net assets, will not require the Subadviser to dispose of
an investment. In the event that ratings services assign different ratings to
the same securities, the Subadviser will determine which rating it believes best
reflects the security's quality and risk at the time which may be the higher of
the several assigned ratings. See "Investment Techniques and Risk Factors." See
also the Statement of Additional Information for a description of securities
ratings.
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO
The Asset Allocation: Diversified Growth Portfolio seeks to achieve its
objective of capital appreciation through a strategic allocation of
approximately 80% (with a range of 65-95%) of its assets to an "equity class" of
securities and approximately 20% (with a range of 5-35%) of its assets to a
"fixed income class" of securities. The percentage limitations are applied at
the time of purchase. The Portfolio may also select other investments that do
not fall within these two asset classes, including cash and cash equivalents. A
significant portion of both the equity class and fixed income class may consist
of foreign securities. See "Investment Techniques and Risk Factors."
The "equity class" consists of a diversified portfolio of equity securities that
Putnam believes have the potential for capital appreciation. This includes
equity securities of companies with market capitalizations of over $1 billion
that the Subadviser believes have potential for capital appreciation due to
above-average earnings growth or are undervalued at the time of purchase, equity
securities of smaller, less well-known companies and equity securities
principally traded on foreign equity markets. In selecting equity securities the
Subadviser will consider, among other things, an issuer's financial strength,
competitive position and projected future earnings and dividends. Although
common stocks are normally the main type of equity investment, the Portfolio may
also purchase preferred stocks, convertible securities, warrants and other
equity-type securities. See "Investment Techniques and Risk Factors."
The "fixed income class" consists of a diversified portfolio of fixed income
securities, including both U.S. and foreign government obligations and corporate
obligations. The Subadviser may take advantage of the entire range of fixed
income securities and may adjust the average maturity of the Portfolio's
holdings from time to time depending on its assessment of relative yields on
securities of different maturities and its expectation of future changes in
interest rates. The Portfolio may invest up to 20% of its total assets in
securities rated below Baa by Moody's and BBB by S&P including no more than 5%
of its total assets in bonds rated at the time of purchase below Caa by Moody's
and CCC by S&P (or, in each case, if not rated, determined by the Subadviser to
be of comparable quality) (I.E., "junk bonds"). See "Investment Techniques and
Risk Factors." See also the Statement of Additional Information for a
description of securities ratings.
STOCK PORTFOLIO
The Stock Portfolio seeks to achieve its investment objective of long-term
capital appreciation and, secondarily, increasing dividend income through
investment primarily in well-established growth companies. In managing this
Portfolio, T. Rowe Price will invest, under normal circumstances, at least 65%
of the Portfolio's total assets in the common stocks of a diversified group of
growth companies. The companies in which the Stock Portfolio invests normally
(but not always) pay dividends, which are generally expected to rise in future
years as earnings increase. Most of the Portfolio's assets will be invested in
U.S. common stocks; however, a significant portion of the Portfolio may be
invested in foreign securities from time to time. See "Investment Techniques and
Risk Factors."
The theory of growth stock investing, which is followed by the Subadviser in
managing this Portfolio, is based on the premise that inflation represents a
more serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. In the opinion of the Subadviser, when a company's
earnings grow faster than both inflation and the economy in general, the market
will eventually reward its long-term earnings growth with a higher stock price.
In addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that during periods of
adverse economic and market conditions, stock prices may fall despite favorable
earnings trends.
Growth stocks can be volatile for several reasons. Since the issuers usually
reinvest a high portion of earnings in their own businesses, growth stocks may
lack the comfortable dividend yield associated with value stocks
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that can cushion total return in a bear market. Also, growth stocks normally
carry a higher price/earnings ratio than many other stocks. Consequently, if
earnings expectations are not met, investors often punish growth stocks
inordinately. However, the market frequently rewards growth stocks with price
increases when expectations are met or exceeded.
INVESTMENT TECHNIQUES AND RISK FACTORS
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Unless otherwise specified, each Portfolio, including each Managed Component of
the Multi-Managed Portfolios, may invest in the following securities. As used
herein, the term "Manager" shall mean either the Adviser and/or a Subadviser
(including Putnam and T. Rowe Price), as the case may be. Also, the stated
percentage limitations are applied to an investment at the time of purchase
unless indicated otherwise.
CONVERTIBLE SECURITIES, PREFERRED STOCKS, WARRANTS AND RIGHTS -- Convertible
securities may be debt securities or preferred stock with a conversion feature.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Generally, preferred stock has a specified
dividend and ranks after bonds and before common stocks in its claim on income
for dividend payments and on assets should the company be liquidated. While most
preferred stocks pay a dividend, a Portfolio may purchase preferred stock where
the issuer has omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential. Warrants are options to buy a stated number of shares of common stock
at a specified price any time during the life of the warrants (generally two or
more years). Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.
INVESTMENT IN SMALL CAP COMPANIES -- The SunAmerica/aggressive growth component
of the Multi-Managed Growth and Moderate Growth Portfolios will, and the Asset
Allocation: Diversified Growth Portfolio, Stock Portfolio and other Managed
Components of the Multi-Managed Portfolios may, invest in small companies having
market capitalizations of under $1 billion. It may be difficult to obtain
reliable information and financial data on such companies and the securities of
these small companies may not be readily marketable, making it difficult to
dispose of shares when desirable. Securities of small or emerging growth
companies may be subject to more abrupt or erratic market movements than larger,
more established companies or the market average in general. A risk of investing
in smaller, emerging companies is that they often are at an earlier stage of
development and therefore have limited product lines, market access for such
products, financial resources and depth in management than larger, more
established companies, and their securities may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. In addition, certain smaller issuers may face
difficulties in obtaining the capital necessary to continue in operation and may
go into bankruptcy, which could result in a complete loss of an investment.
Smaller companies also may be less significant factors within their industries
and may have difficulty withstanding competition from larger companies. While
smaller companies may be subject to these additional risks, they may also
realize more substantial growth than larger, more established companies.
FOREIGN SECURITIES -- The Asset Allocation: Diversified Growth Portfolio may
invest up to 60% of its total assets, the Stock Portfolio may invest up to 30%
of its total assets, the SunAmerica/balanced component of each Multi-Managed
Portfolio may invest up to 25% of its total assets, the WMC/fixed income
component of each Multi-Managed Portfolio may invest up to 15% of its total
assets, and the Janus/growth and SunAmerica/ aggressive growth components of
each Multi-Managed Portfolio may invest without limitation, in foreign
securities.
Each Portfolio may also invest in U.S. dollar denominated securities of foreign
issuers, including American Depositary Receipts (ADRs), as well as
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European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The WMC/fixed income component may
invest in U.S. dollar denominated foreign debt securities without limitation.
Each Portfolio also may invest in securities denominated in European Currency
Units (ECUs). An ECU is a "basket" consisting of specified amounts of currencies
of certain of the twelve member states of the European Community. In addition,
the Portfolios may invest in securities denominated in other currency "baskets."
See the Statement of Additional Information for a further discussion of these
types of securities.
RISKS OF FOREIGN SECURITIES. Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange-control regulations and
costs will be incurred in connection with conversions between various
currencies. The value of a security may fluctuate as a result of currency
exchange rates in a manner unrelated to the underlying value of the security.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies may be less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the U.S. In addition, there is generally less governmental regulation of
stock exchanges, brokers and listed companies abroad than in the U.S.
Investments in foreign securities may also be subject to other risks, different
from those affecting U.S. investments, including local political or economic
developments, expropriation or nationalization of assets, confiscatory taxation
and imposition of withholding taxes on income from sources within such
countries.
EMERGING MARKETS. Investments may be made from time to time in issuers
domiciled in, or government securities of, developing countries or emerging
markets as well as developed countries. Although there is no universally
accepted definition, a developing country is generally considered to be a
country which is in the initial stages of its industrialization cycle with a low
per capita gross national product. Historical experience indicates that the
markets of developing countries or emerging markets have been more volatile than
the markets of developed countries; however, such markets can provide higher
rates of return to investors. Investment in an emerging market country may
involve certain risks, including a less diverse and mature economic structure, a
less stable political system, an economy based on only a few industries or
dependent on international aid or development assistance, the vulnerability to
local or global trade conditions, extreme debt burdens, or volatile inflation
rates. To the extent the WMC/fixed income component of a Portfolio invests in
the debt securities of issuers domiciled in emerging market countries, these
investments will be included in the 20% limitation on high yield-bonds.
FOREIGN CURRENCY TRANSACTIONS. Each Portfolio has the ability to hold a portion
of its assets in foreign currencies and to enter into forward foreign currency
exchange contracts. It may also purchase and sell exchange-traded futures
contracts relating to foreign currency and purchase and sell put and call
options on currencies and futures contracts.
Each Portfolio may enter into forward foreign currency exchange contracts to
reduce the risks of fluctuations in exchange rates; however, these contracts
cannot eliminate all such risks and do not eliminate fluctuations in the prices
of the Portfolio's portfolio securities.
Each Portfolio may purchase and write put and call options on currencies for the
purpose of protecting against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on currency will constitute only a partial hedge, up to
the amount of the premium received. A Portfolio could be required to purchase or
sell currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Portfolio's position, the Portfolio may forfeit the entire amount
of the premium plus related transaction costs.
Each Portfolio may enter into forward foreign currency exchange contracts,
currency options and currency swaps for non-hedging purposes when a Manager
anticipates that a foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
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opportunities or are not included in such portfolio. The Portfolio may use
currency contracts and options to cross-hedge, which involves selling or
purchasing instruments in one currency to hedge against changes in exchange
rates for a different currency with a pattern of correlation. To limit any
leverage in connection with currency contract transactions for non-hedging
purposes, a Portfolio will segregate cash or liquid securities in an amount
sufficient to meet its payment obligations in these transactions or otherwise
"cover" the obligation. Initial margin deposits made in connection with currency
futures transactions or premiums paid for currency options traded over-the-
counter or on a commodities exchange may each not exceed 5% of a Portfolio's
total assets in the case of non-bona fide hedging transactions.
Each Portfolio may enter into currency swaps. Currency swaps involve the
exchange by a Portfolio with another party of their respective rights to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Portfolio will maintain in a
segregated account with the its custodian cash or liquid securities equal to the
net amount, if any, of the excess of the Portfolio's obligations over its
entitlements with respect to swap transactions. To the extent that the net
amount of a swap is held in a segregated account consisting of cash or liquid
securities, the Trust believes that swaps do not constitute senior securities
under the 1940 Act and, accordingly, they will not be treated as being subject
to the Portfolio's borrowing restrictions. The use of currency swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If a
Manager is incorrect in its forecasts of market values and currency exchange
rates, the investment performance of a Portfolio would be less favorable than it
would have been if this investment technique were not used.
FIXED INCOME SECURITIES -- Fixed income securities are broadly characterized as
those that provide for periodic payments to the holder of the security at a
stated rate. Most fixed income securities, such as bonds, represent indebtedness
of the issuer and provide for repayment of principal at a stated time in the
future. Others do not provide for repayment of a principal amount, although they
may represent a priority over common stockholders in the event of the issuer's
liquidation. Many fixed income securities are subject to scheduled retirement,
or may be retired or "called" by the issuer prior to their maturity dates. The
interest rate on certain fixed income securities, known as "variable rate
obligations," is determined by reference to or is a percentage of an objective
standard, such as a bank's prime rate, the 90-day Treasury bill rate, or the
rate of return on commercial paper or bank certificates of deposit, and is
periodically adjusted. Certain variable rate obligations may have a demand
feature entitling the holder to resell the securities at a predetermined amount.
The interest rate on certain fixed income securities, called "floating rate
instruments," changes whenever there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely with the
level of interest rates -- when interest rates rise, their values will tend to
decline; when interest rates decline, their values generally will tend to rise.
The potential for capital appreciation with respect to variable rate obligations
or floating rate instruments will be less than with respect to fixed-rate
obligations. Long-term instruments are generally more sensitive to these changes
than short-term instruments. The market value of fixed income securities and
therefore their yield are also affected by the perceived ability of the issuer
to make timely payments of principal and interest.
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. government
include the following: (1) direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and (2) federal agency obligations guaranteed
as to principal and interest by the U.S. Treasury (such as Government National
Mortgage Association certificates and Federal Housing Administration
debentures). For these securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. government. They are of the highest
possible credit quality. These securities are subject to variations in market
value due to fluctuations in interest rates, but if held to maturity, are
guaranteed by the U.S. government to be paid in full.
Securities issued by U.S. government instrumentalities and certain federal
agencies are neither direct obligations of, nor are they guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another. For
example, some are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations
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of the issuer; and others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and instrumentalities
include, but are not limited to, the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, Federal Land Banks, Farmers Home
Administration, Central Bank for Cooperatives, Federal Intermediate Credit Banks
and Federal Home Loan Banks.
CORPORATE DEBT INSTRUMENTS -- These instruments, such as bonds, represent the
obligation of the issuer to repay a principal amount of indebtedness at a stated
time in the future and, in the usual case, to make periodic interim payments of
interest at a stated rate.
Investment Grade -- A designation applied to intermediate and long-term
corporate debt securities rated within the highest four rating categories
assigned by a nationally recognized statistical rating organization such as, for
example, S&P (AAA, AA, A or BBB) or by Moody's (Aaa, Aa, A or Baa), or, if
unrated, considered by the Manager to be of comparable quality. The ability of
the issuer of an investment grade debt security to pay interest and to repay
principal is considered to vary from extremely strong (for the highest ratings)
through adequate (for the lowest ratings given above), although the lower-rated
investment grade securities may be viewed as having speculative elements as
well.
Lower Grade -- A designation applied to intermediate and long-term corporate
debt securities that are not investment grade; commonly referred to as "junk
bonds". These include bonds rated below BBB by S&P, and Baa by Moody's, or which
are unrated but considered by the Subadviser to be of equivalent quality. These
securities are considered speculative. See the Statement of Additional
Information for a complete description of bond ratings. The Stock Portfolio and
the SunAmerica/aggressive growth and SunAmerica/ balanced components of the
Multi-Managed Portfolios will not invest in these types of securities.
RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS -- High-yield, high-risk
bonds are subject to greater fluctuations in value than are higher rated bonds
because the values of high-yield bonds tend to reflect short-term corporate,
economic and market developments and investor perceptions of the issuer's credit
quality to a greater extent. Although under normal market conditions longer-term
securities yield more than shorter-term securities, they are subject to greater
price fluctuations. Fluctuations in the value of a Portfolio's investments will
be reflected in its net asset value per share. The growth of the high-yield bond
market paralleled a long economic expansion, followed by an economic downturn
which severely disrupted the market for high-yield bonds and adversely affected
the value of outstanding bonds and the ability of the issuers to repay principal
and interest. The economy may affect the market for high-yield bonds in a
similar fashion in the future including an increased incidence of defaults on
such bonds. From time to time, legislation may be enacted which could have a
negative effect on the market for high-yield bonds.
High-yield bonds present the following risks:
Sensitivity to Interest Rate and Economic Changes -- High-yield, high-risk bonds
are very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, a Portfolio may incur
losses or expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices (and therefore yields) of high-yield bonds
and the Portfolio's net asset value.
Payment Expectations -- High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining
interest-rate market, a Manager would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors.
Conversely, a high-yield bond's value will decrease in a rising interest rate
market, as will the value of the Portfolio's assets. If the Portfolio
experiences unexpected net redemptions, this may force it to sell high-yield
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing the Portfolio's
rate of return.
Liquidity and Valuation -- There may be little trading in the secondary market
for particular bonds, which may affect adversely a Portfolio's ability to value
accurately or dispose of such bonds. Under such circumstances, the task of
accurate valuation becomes more difficult and judgment would play a greater role
due to the relative lack of reliable and objective data. Adverse publicity and
investor perceptions, whether or not based on
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fundamental analysis, may decrease the values and liquidity of high-yield bonds,
especially in a thin market. The Managers attempt to reduce these risks through
diversification of the assets under its control and by credit analysis of each
issuer, as well as by monitoring broad economic trends and corporate and
legislative developments. If a high-yield bond previously acquired by a
component is downgraded, the Managers, as appropriate, will evaluate the
security and determine whether to retain or dispose of it.
Credit Ratings -- Cedit ratings evaluate the safety of principal and interest
payments and not the risk of fluctuations in market value of high-yield,
high-risk bonds. The success of a Portfolio's investment in such bonds may be
more dependent on the credit analysis of the Adviser or Subadviser than is the
case for higher quality bonds.
ASSET-BACKED SECURITIES -- These securities represent an interest in a pool of
consumer or other types of loans ("asset-backed securities"). Payments of
principal and interest on the underlying loans are passed through to the holders
of asset-backed securities over the life of the securities. See the Statement of
Additional Information. Janus will not cause the Janus/growth component of any
Multi-Managed Portfolio to invest more than 25% of its total assets in
mortgage-and asset-backed securities.
ZERO COUPON BONDS, STEP-COUPON BONDS, DEFERRED INTEREST BONDS AND PIK
BONDS. Fixed income securities in which a Portfolio may invest also include
zero coupon bonds, step-coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued or purchased at a significant
discount from face value. A step-coupon bond is one in which a change in
interest rate is fixed contractually in advance. PIK bonds are debt obligations
which provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
may experience greater volatility in market value due to changes in interest
rates and other factors than debt obligations which make regular payments of
interest. A Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Portfolio's distribution obligations. Janus will not cause the
Janus/ growth component of any Multi-Managed Portfolio to invest more than 10%
of its total assets in zero coupon bonds, step-coupon bonds, deferred interest
bonds and PIK bonds.
SHORT-TERM AND TEMPORARY DEFENSIVE INVESTMENTS -- In addition to their primary
investments, each Portfolio may also invest up to 25% of its total assets in
both U.S. and non-U.S. dollar denominated money market instruments for reasons
which may include (a) liquidity purposes (to meet redemptions and expenses) or
(b) to generate a return on idle cash held by a Portfolio during periods when a
Manager is unable to locate favorable investment opportunities. In order to
facilitate quarterly rebalancing of the Portfolios as described above and to
adjust for the flow of investments into and out of the Portfolios, each
Portfolio may hold a greater percentage of its assets in cash or cash
equivalents at the end of each quarter than might otherwise be the case. For
temporary defensive purposes, each Portfolio may invest up to 100% of its total
assets in cash and short term fixed income securities, including corporate debt
obligations and money market instruments rated in one of the two highest
categories by a nationally recognized statistical rating organization (or
determined by the Manager to be of equivalent quality). Money market instruments
may include, for all Portfolios, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, repurchase agreements, commercial
paper, bankers' acceptances, time deposits and certificates of deposit. In
addition, Janus may invest idle cash of the Janus/growth component of each
Multi-Managed Portfolio in money market mutual funds that it manages. Such an
investment may entail additional fees for the Multi-Managed Portfolios. See the
Statement of Additional Information for a description of short-term debt
securities and the Appendix to the Statement of Additional Information for a
description of securities ratings.
REPURCHASE AGREEMENTS -- Under these types of agreements, a Portfolio buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain appropriate
collateral with the Trust's custodian (or at an appropriate sub-custodian in the
case of tri-or quad-party repurchase agreements). A Portfolio will only enter
into repurchase agreements involving securities in which it could otherwise
invest and with selected banks and securities dealers whose financial condition
is monitored by the Manager, subject to the guidance of the Board of Trustees.
If the seller under the repurchase agreement defaults, the Portfolio
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may incur a loss if the value of the collateral securing the repurchase
agreement has declined, and may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with respect
to the seller, realization of the collateral by the Portfolio may be delayed or
limited.
HEDGING AND INCOME ENHANCEMENT STRATEGIES -- Each Portfolio may write covered
calls to enhance income. After writing such a covered call up to 10% of a
Portfolio's total assets may be subject to calls. All such calls written by a
Portfolio must be "covered" while the call is outstanding (I.E., the Portfolio
must own the securities subject to the call or other securities acceptable for
applicable escrow requirements). For hedging purposes or income enhancement,
each Portfolio may use interest rate futures, and stock and bond index futures,
including futures on U.S. government securities (together, "Futures"); forward
contracts on foreign currencies; and call and put options on equity and debt
securities, Futures, stock and bond indices and foreign currencies (all of the
foregoing are referred to as "Hedging Instruments"). In addition, the Asset
Allocation: Diversified Growth Portfolio may use Futures in order to adjust its
exposure to various equity or fixed income markets or as a substitute for
investment in underlying cash markets. All puts and calls on securities,
interest rate futures or stock and bond index futures or options on such Futures
purchased or sold by a Portfolio will normally either (1) be listed on a
national securities or commodities exchange or (2) on over-the-counter markets.
However, the Asset Allocation: Diversified Growth Portfolio and the Janus/growth
component of each Multi-Managed Portfolio may buy and sell options and Futures
on foreign equity indexes and foreign fixed income securities. Because the
markets for these instruments are relatively new and still developing, the
ability of the Asset Allocation: Diversified Growth Portfolio and the
Janus/growth component of each Multi-Managed Portfolio to engage in such
transactions may be limited.
Each Portfolio may use spread transactions for any lawful purpose consistent
with the Portfolio's investment objective such as hedging or managing risk, but
not for speculation. A Portfolio may purchase covered spread options from
securities dealers. Such covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread option gives a Portfolio the
right to put, or sell, a security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Portfolio does not
own, but which is used as a benchmark. The risk to a Portfolio in purchasing
covered spread options is the cost of the premium paid for the spread option and
any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect a Portfolio against adverse changes in prevailing credit quality
spreads, I.E., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES. Participation in
the options or Futures markets and in currency exchange transactions involves
investment risks and transaction costs to which a Portfolio would not be subject
absent the use of these strategies. If the Manager's predictions of movements in
the direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to a Portfolio may leave the Portfolio in a
worse position than if such strategies were not used. Risks inherent in the use
of options, foreign currency and Futures contracts and options on Futures
contracts include (1) dependence on the Manager's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and Futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability of the Portfolio to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Portfolio to sell a
portfolio security at a disadvantageous time, due to the need for the Portfolio
to maintain "cover" or to segregate securities in connection with hedging
transactions. A transaction is "covered" when the Portfolio owns the security
subject to the option on such security, or some other security acceptable for
applicable escrow requirements. See the Statement of Additional Information for
further information concerning income enhancement and hedging strategies and the
regulation requirements relating thereto.
ILLIQUID AND RESTRICTED SECURITIES -- No more than 15% of the value of a
Portfolio's net assets may be invested in securities which are illiquid,
including repurchase agreements that have a maturity of longer than seven days,
interest rate swaps, currency swaps, caps, floors
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and collars. For this purpose, not all securities which are restricted are
deemed to be illiquid. For example, restricted securities which the Board of
Trustees, or the Manager pursuant to guidelines established by the Board of
Trustees, has determined to be marketable, such as securities eligible for sale
under Rule 144A promulgated under the Securities Act of 1933, as amended, or
certain private placements of commercial paper issued in reliance on an
exemption from such Act pursuant to Section 4(2) thereof, may be deemed to be
liquid for purposes of this restriction. This investment practice could have the
effect of increasing the level of illiquidity in the Portfolio to the extent
that qualified institutional buyers (as defined in Rule 144A) become for a time
uninterested in purchasing these restricted securities. In addition, a
repurchase agreement which by its terms can be liquidated before its nominal
fixed-term on seven days or less notice is regarded as a liquid instrument.
Subject to the applicable limitation on illiquid securities investments, a
Portfolio may acquire securities issued by the U.S. government, its agencies or
instrumentalities in a private placement. See "Illiquid Securities" in the
Statement of Additional Information for a further discussion of investments in
such securities.
HYBRID INSTRUMENTS -- These instruments, including indexed or structured
securities, can combine the characteristics of equity or debt securities,
futures, and options. For example, the principal amount, redemption, or
conversion terms of a security could be related to the market price of some
commodity, currency, or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under certain
conditions, the redemption (or sale) value of such an investment could be zero.
See the Statement of Additional Information for a further discussion of these
types of securities.
BORROWING -- As a matter of fundamental policy each Portfolio is authorized to
borrow up to 33 1/3% of its total assets from banks for temporary or emergency
purposes.
In seeking to enhance investment performance, each of the Multi-Managed Growth
and Moderate Growth Portfolios, through its SunAmerica/aggressive growth
component, may borrow money for investment purposes and may pledge assets to
secure such borrowings. This is the speculative factor known as leverage. This
practice may help increase the net asset value of the assets allocated to this
Managed Component in an amount greater than would otherwise be the case when the
market values of the securities purchased through borrowing increase. In the
event the return on an investment of borrowed monies does not fully recover the
costs of such borrowing, the value of the component's assets would be reduced by
a greater amount than would otherwise be the case. The effect of leverage will
therefore tend to magnify the gains or losses to the component as a result of
investing the borrowed monies. During periods of substantial borrowings, the
value of the component's assets would be reduced due to the added expense of
interest on borrowed monies. Each of the Multi-Managed Growth and Moderate
Growth Portfolios is authorized to borrow, and to pledge assets to secure such
borrowings, up to the maximum extent permissible under the 1940 Act (I.E.,
presently 50% of net assets); provided, that such limitation will be calculated
with respect to the net assets allocated to the SunAmerica/aggressive growth
component of such Multi-Managed Portfolio. The time and extent to which the
SunAmerica/aggressive growth component may employ leverage will be determined by
the Adviser in light of changing facts and circumstances, including general
economic and market conditions, and will be subject to applicable lending
regulations of the Board of Governors of the Federal Reserve Board.
SECURITIES LENDING -- Each Portfolio may lend portfolio securities in amounts up
to 33 1/3% of its respective total assets to brokers, dealers and other
financial institutions, provided such loans are callable at any time by the
Portfolio and are at all times secured by cash or equivalent collateral. By
lending its portfolio securities, a Portfolio will receive income while
retaining the securities' potential for capital appreciation. As with any
extensions of credit, there are risks of delay in recovery and, in some cases,
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by the Manager to be creditworthy. The proceeds of such loans will
be invested in high-quality short-term debt securities, including repurchase
agreements.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD TRANSACTIONS -- These generally
involve the purchase of a security with payment and delivery at some time in the
future -- I.E., beyond normal settlement. A Portfolio does not earn interest on
such securities until settlement and bears the risk of market value fluctuations
in between the purchase and settlement dates. New issues of stocks and bonds,
private placements and U.S. government securities may be sold in this manner.
One form of when-issued or delayed delivery security
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<PAGE>
that the Asset Allocation: Diversified Growth Portfolio and the WMC/fixed income
component of each Multi-Managed Portfolio may purchase is a "to be announced" or
"TBA" mortgage-backed security. A TBA mortgage-backed security transaction
arises when a mortgage-backed security is purchased or sold with the specific
pools to be announced on a future settlement date.
SHORT SALES -- Each of the Multi-Managed Growth and Moderate Growth Portfolios,
through its SunAmerica/ aggressive growth component, may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sales). To complete such a transaction, a Multi-Managed Portfolio must borrow
the security to make delivery to the buyer. The Multi-Managed Portfolio then is
obligated to replace the security borrowed by purchasing it at market price at
the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Multi-Managed Portfolio. Until the
security is replaced, the Multi-Managed Portfolio is required to pay to the
lender any dividends or interest which accrue during the period of the loan. To
borrow the security, the Multi-Managed Portfolio also may be required to pay a
premium, which would increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. Until the
Multi-Managed Portfolio replaces a borrowed security, the Multi-Managed
Portfolio will maintain daily a segregated account, containing cash or liquid
securities, at such a level that (i) the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current value
of the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time it was sold short. A
Multi-Managed Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Multi-Managed Portfolio replaces the borrowed security. A
Multi-Managed Portfolio will realize a gain if the security declines in price
between those dates. This result is the opposite of what one would expect from a
cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Multi-Managed Portfolio may be required to pay in
connection with a short sale.
Each Portfolio may make "short sales against the box." A short sale is against
the box to the extent that the Portfolio contemporaneously owns, or has the
right to obtain without payment, the same securities or securities substantially
similar to those sold short. A Portfolio may not enter into a short sale,
including a short sale against the box, if, as a result, more than 25% of its
net assets would be subject to such short sales.
SPECIAL SITUATIONS -- A "special situation" arises when, in the opinion of the
Manager, the securities of a particular issuer will be recognized and appreciate
in value due to a specific development with respect to that issuer. Developments
creating a special situation might include, among others, a new product or
process, a technological breakthrough, a management change or other
extraordinary corporate event, or differences in market supply of and demand for
the security. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
FUTURE DEVELOPMENTS -- Each Portfolio may invest in securities and other
instruments which do not presently exist but may be developed in the future,
provided that each such investment is consistent with the Portfolio's investment
objectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Prospectus will be amended or supplemented as
appropriate to discuss any such new investments.
See the Statement of Additional Information for further information concerning
these and other types of securities and investment techniques in which the
Portfolios may from time to time invest, including dollar rolls, standby
commitments and reverse repurchase agreements.
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MANAGEMENT
- --------------------------------------------------------------------------------
TRUSTEES -- The Trust's Board of Trustees is responsible for the overall
supervision of the operations of the Trust and performs various duties imposed
on trustees of investment companies by the 1940 Act. The Board has retained
others to provide certain services to the Trust.
INVESTMENT ADVISER -- The Trust, on behalf of each Portfolio, entered into an
Investment Advisory and Management Agreement (the "Management Agreement") with
SunAmerica to handle the Trust's day-to-day affairs, to provide investment
advisory services, office space, and other facilities for the management of the
affairs of the Trust, and to pay the compensation of certain officers of the
Trust who are affiliated persons of SunAmerica. The Management Agreement
authorizes SunAmerica to retain one or more Subadvisers to make the investment
decisions for the Portfolios, and to place the purchase and sale orders for
portfolio transactions. SunAmerica has hired the Subadvisers described below to
manage the Asset Allocation: Diversified Growth Portfolio, the Stock Portfolio
and two of the Managed Components of each of the Multi-Managed Portfolios.
SunAmerica, in consultation with one or more SunAmerica affiliates, monitors the
activities of the Subadvisers, and from time to time will recommend the
replacement of a Subadviser on the basis of investment performance or other
considerations.
SunAmerica may terminate any Subadvisory Agreement without shareholder approval.
Moreover, SunAmerica has obtained an exemptive order from the Securities and
Exchange Commission which would permit SunAmerica, subject to certain
conditions, to enter into Subadvisory Agreements relating to the Trust with
Subadvisers approved by the Board without obtaining shareholder approval. The
exemptive order would also permit SunAmerica, subject to the approval of the
Board but without shareholder approval, to employ new Subadvisers for new or
existing Portfolios, change the terms of particular Subadvisory Agreements or
continue the employment of existing Subadvisers after events that would
otherwise cause an automatic termination of a Subadvisory Agreement.
Shareholders of a Portfolio have the right to terminate such agreements for such
Portfolio at any time by a vote of the majority of the outstanding voting
securities of such Portfolio. Shareholders will be notified when SunAmerica
intends to commence relying on the exemptive order, and would be notified of any
Subadviser changes effected thereafter.
SunAmerica, located at The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204, is a corporation organized in 1982 under the laws of the State
of Delaware. SunAmerica is an indirect, wholly owned subsidiary of the Life
Company, which is an indirect subsidiary of SunAmerica Inc., an investment-grade
financial services company. SunAmerica is engaged in providing investment advice
and management services to the Trust, other mutual funds and pension funds. In
addition to serving as adviser to the Trust, the Adviser and its affiliates
serve as adviser, manager and/or administrator for Anchor Pathway Fund, Anchor
Series Trust, Style Select Series, Inc., SunAmerica Equity Funds, SunAmerica
Income Funds, SunAmerica Money Market Funds, Inc. and SunAmerica Series Trust.
The Adviser and its affiliates managed, advised and/or administered assets in
excess of $8.5 billion as of December 31, 1996 for investment companies,
individuals, pension accounts, and corporate and trust accounts.
Pursuant to the Management Agreement entered into between the Adviser and the
Trust, on behalf of each Portfolio, each Portfolio pays the Adviser a fee,
payable monthly, computed daily at the annual rates of .89% of Assets for the
Multi-Managed Growth Portfolio, .85% of Assets for the Multi-Managed Moderate
Growth Portfolio, .81% of Assets for the Multi-Managed Income/Equity Portfolio,
.77% of Assets for the Multi-Managed Income Portfolio, .85% of Assets for the
Asset Allocation: Diversified Growth Portfolio and .85% of Assets for the Stock
Portfolio.
The Adviser has voluntarily agreed to waive fees or reimburse expenses, if
necessary, to keep annual operating expenses at or below the following
percentages of each of the following Portfolio's average net assets:
Multi-Managed Growth Portfolio 1.29%, Multi-Managed Moderate Growth Portfolio
1.21%, Multi-Managed Income/Equity Portfolio 1.14%, Multi-Managed Income
Portfolio 1.06%, Asset Allocation: Diversified Growth Portfolio 1.21% and Stock
Portfolio 1.21%. The Adviser also may voluntarily waive or
16
<PAGE>
reimburse additional amounts to increase the investment return to a Portfolio's
investors. The Adviser may terminate all such waivers and/or reimbursements at
any time. Further, any waivers or reimbursements made by the Adviser with
respect to a Portfolio are subject to recoupment from that Portfolio within the
following two years, provided that the Portfolio is able to effect such payment
to the Adviser and remain in compliance with the foregoing expense limitations.
The term "Assets" means the average daily net assets of each Portfolio.
SUBADVISERS -- The organizations described below serve as subadvisers to the
Portfolios pursuant to Subadvisory Agreements with SunAmerica. Under the
Subadvisory Agreements, Putnam manages the investment and reinvestment of the
assets of the Asset Allocation: Diversified Growth Portfolio, T. Rowe Price
manages the investment and reinvestment of the assets of the Stock Portfolio,
and the other Subadvisers manage the investment and reinvestment of the assets
of the respective Managed Component of each Multi-Managed Portfolio for which
they are responsible. Each of the Subadvisers is independent of SunAmerica and
discharges its responsibilities subject to the policies of the Trustees and the
oversight and supervision of SunAmerica, which pays the Subadvisers' fees. All
subadvisory fees are payable by the Adviser to the respective Subadviser and do
not increase Portfolio expenses.
Each Subadviser is paid monthly by SunAmerica a fee equal to a percentage of the
Assets of the Portfolio allocated to the Subadviser. SunAmerica has agreed to
pay Janus a composite fee of .60% on the first $200 million and .55% on Assets
over $200 million, and WMC a composite fee of .225% on the first $100 million,
.125% on the next $100 million and .10% on Assets over $200 million, in each
case based on the aggregate Assets it manages in the four Multi-Managed
Portfolios. In addition, SunAmerica has agreed to pay each of Putnam and T. Rowe
Price a fee at the following annual rate, expressed as a percentage of the
Assets of the respective Portfolio: Asset Allocation: Diversified Growth
Portfolio, .50% on the first $150 million, .45% on the next $150 million, and
.40% on Assets over $300 million; and Stock Portfolio, .50% on the first $40
million, and .45% on Assets over $40 million.
Janus is a Colorado corporation with principal offices at 100 Fillmore Street,
Denver, Colorado 80206-4923. Janus serves as investment adviser to all of the
Janus funds, as well as adviser or subadviser to other mutual funds and
individual, corporate, charitable and retirement accounts, and, as of December
31, 1996, had assets under management of approximately $46 billion. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 83% of the outstanding
voting stock of Janus. KCSI is a publicly traded holding company whose primary
subsidiaries are engaged in transportation and financial services. Thomas H.
Bailey, President and Chairman of the Board of Janus, owns approximately 12% of
its voting stock and, by Agreement with KCSI, selects a majority of Janus'
Board.
Putnam is a Massachusetts corporation with principal offices at One Post Office
Square, Boston, Massachusetts. Putnam has been managing mutual funds since 1937
and serves as investment adviser to the funds in the Putnam Family. Putnam and
its affiliates managed assets of approximately $173 billion as of December 31,
1996. Putnam is a subsidiary of Putnam Investments, Inc., which is wholly owned
by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose
principal businesses are international insurance and reinsurance brokerage,
employee benefit consulting and investment management.
T. Rowe Price is a Maryland corporation with principal offices at 100 East Pratt
Street, Baltimore, Maryland 21202. Founded in 1937 by the late Thomas Rowe
Price, Jr., T. Rowe Price and its affiliates managed approximately $97 billion
as of December 31, 1996. T. Rowe Price is a publicly traded company.
WMC is a Massachusetts limited liability partnership of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland, and John R.
Ryan. The principal offices of WMC are located at 75 State Street, Boston,
Massachusetts 02109. WMC is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of December
31, 1996, WMC had discretionary management authority with respect to
approximately $133.2 billion of assets.
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PORTFOLIO MANAGEMENT
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Audrey L. Snell serves as the portfolio manager for the SunAmerica/aggressive
growth component of the Multi-Managed Growth and Moderate Growth Portfolios. Ms.
Snell is a Senior Vice President of SunAmerica and has been a portfolio manager
with the firm since 1991.
Warren B. Lammert serves as the portfolio manager for the Janus/growth component
of each Multi-Managed Portfolio. Mr. Lammert first joined Janus in 1987 and has
been a portfolio manager with the firm since 1993. He served as a Securities
Analyst at Janus from January 1987 to May 1988, and rejoined Janus as a Senior
Analyst in January 1990. He is a Chartered Financial Analyst.
P. Christopher Leary serves as co-portfolio manager of the SunAmerica/balanced
component of each Multi-Managed Portfolio and is responsible for the fixed
income portion thereof. Mr. Leary has served as portfolio manager for certain
SunAmerica income funds, and has served as assistant portfolio manager of the
SunAmerica Balanced Assets Fund since June 1991. Mr. Leary is a Senior Vice
President and Director of Fixed Income of the Adviser and has been a portfolio
manager with the firm since 1990. Previously, Mr. Leary was an investment
manager with Equitable Capital Management.
Gerald P. Sullivan serves as co-portfolio manager of the SunAmerica/balanced
component of each Multi-Managed Portfolio and is responsible for the equity
portion thereof. Mr. Sullivan has been the portfolio manager of the SunAmerica
Growth and Income Fund since July, 1996. Mr. Sullivan has been an equity analyst
for the Adviser since February 1995. Prior to joining the Adviser, Mr. Sullivan
spent two years as a portfolio manager for Texas Commerce Investment Management.
Prior to his time at Texas Commerce, he spent four years as a director for the
Southmore Foundation, Inc. and as an adjunct professor at Rice University in
Houston, Texas.
Thomas L. Pappas serves as the portfolio manager of the WMC/fixed income
component of each Multi-Managed Portfolio. Mr. Pappas is a Senior Vice President
of WMC and joined the company in 1987.
Putnam's Global Asset Allocation Committee has primary responsibility for the
day-to-day management of the Asset Allocation: Diversified Growth Portfolio.
The Stock Portfolio is managed by an Investment Advisory Committee composed of
the following members: Robert W. Smith, Chairman; Charles A. Morris, Larry J.
Puglia and Daniel Theriault. Mr. Smith has day-to-day responsibility for
managing the Stock Portfolio and works with the committee in developing and
executing the Portfolio's investment program. Bob Smith is a Vice President and
Equity Portfolio Manager for T. Rowe Price and Rowe Price-Fleming International.
Bob is the manager of the T. Rowe Price Growth Stock Fund. He is also co-manager
of the T. Rowe Price Global Stock Fund, responsible for North American
securities. In addition to his work with the Global Stock Fund, Bob manages the
North American component of several other Rowe Price-Fleming global accounts.
Additionally, Bob has been on the Investment Advisory Committee for the T. Rowe
Price Growth Stock Fund since 1994. He has previously served on the Investment
Advisory Committee for the T. Rowe Price Blue Chip Growth Fund and the T. Rowe
Price Value Fund.
Prior to joining the firm in 1992, Bob was employed as an Investment Analyst for
Massachusetts Financial Services. He earned a BS (finance and economics) from
the University of Delaware and an MBA (finance) from the Darden Graduate School
of Business Administration, University of Virginia.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT -- State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, is the Trust's custodian, transfer agent and dividend paying agent.
EXPENSES OF THE TRUST -- In addition to the investment advisory fee, the Trust
incurs expenses, including legal, auditing and accounting expenses, Trustees'
fees and expenses, insurance premiums, brokers' commissions, taxes and
governmental fees, expenses of issue or redemption of shares, expenses of
registering or qualifying shares for sale, reports and notices to shareholders,
and fees and disbursements of custodians, transfer agents, registrars,
shareholder servicing agents and dividend disbursing agents, and certain
expenses with respect to membership fees of industry associations.
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PORTFOLIO TURNOVER AND BROKERAGE
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All Portfolios effect portfolio transactions without regard to the length of
time particular investments have been held. Under certain market conditions, the
investment policies of the Portfolios may result in high portfolio turnover,
I.E., over 100%. The quarterly rebalancing of the Portfolios as described under
"Investment Objectives, Policies and Restrictions -- Multi-Managed Portfolios"
above may also result in relatively higher portfolio turnover. Because each
Managed Component of each Multi-Managed Portfolio will be managed independently
of each other, it is possible that the same security may be purchased and sold
on the same day by two separate Managed Components of the same Multi-Managed
Portfolio, resulting in higher brokerage commissions for the Portfolio.
Notwithstanding the foregoing, however, the portfolio turnover rates for the
Portfolios are not expected to exceed 200%. High portfolio turnover involves
correspondingly greater brokerage commissions, to the extent such commissions
are payable, and other transaction costs that are borne directly by the
Portfolio involved. Higher turnover rates reflect an increased rate of
realization of gains and losses by the Portfolio, which would normally affect
the taxable income of the Portfolio's shareholders. Where the shareholder is an
insurance company separate account funding variable annuity contracts, qualified
as such under the Internal Revenue Code of 1986, as amended ("Code"), however,
the contract owners are not currently charged with such income or losses except
to the extent provided under the Code (normally when distributions under the
contracts are made). Corporate bonds and U.S. government securities are
generally traded on a net basis and usually neither brokerage commissions nor
transfer taxes are involved.
Broker-dealers involved in the execution of portfolio transactions on behalf of
the Trust are selected on the basis of their professional capability and the
value and quality of their services. In selecting such broker-dealers, the
Adviser and Subadvisers will consider various relevant factors, including, but
not limited to, the size and type of the transaction; the nature and character
of the markets in which the security can be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the broker-dealer;
the broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions. The Adviser or a Subadviser also may select
broker-dealers which provide it with research services and may cause a Portfolio
to pay such broker-dealers commissions which exceed those which other
broker-dealers may have charged, if in the Adviser's or Subadviser's view the
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by the broker-dealer. Further, the Adviser or a
Subadviser may effect portfolio transactions through broker-dealer affiliates of
the Trust, Adviser or Subadvisers.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
- --------------------------------------------------------------------------------
Under the Code each Portfolio is treated as a separate regulated investment
company provided qualification requirements are met. To qualify as a regulated
investment company, a Portfolio must, among other things, (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks, securities
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stocks, securities or currencies; (b) derive less than 30% of
its gross income from the sale or other disposition of stocks or securities or
certain foreign currencies (or options, futures or forward contracts thereon)
held less than three months ("short-short gains") (foreign currency gains,
including those derived from options, futures and forward contracts, will not,
in any event, be characterized as short-short gains if they are directly related
to the registered investment company's investments in stocks, options or futures
thereon), (c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Portfolio's assets is represented by
cash, government securities and other securities limited in respect of any one
issuer to 5% of the Portfolio's assets and to not more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than government
securities), and (d) distribute to shareholders at least 90% of its investment
company
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taxable income (which does not include net long-term capital gains, if any, of
the Portfolio). So long as the Portfolio qualifies as a regulated investment
company, such Portfolio will not be subject to federal income tax on the net
investment company taxable income or net capital gains distributed to
shareholders as ordinary income dividend or capital gains dividends. Each
Portfolio is intended to meet these qualification requirements.
It is the policy of each Portfolio to distribute to its shareholders
substantially all of its ordinary income and net long-term capital gains
realized during each fiscal year. All distributions are reinvested in shares of
the Portfolio at net asset value unless the transfer agent is instructed
otherwise.
Each Portfolio of the Trust is also subject to variable contract asset
diversification regulations prescribed by the U.S. Treasury Department under the
Code. These regulations generally provide that, as of the end of each calendar
quarter or within 30 days thereafter, no more than 55% of the total assets of
the Portfolio may be represented by any one investment, no more than 70% by any
two investments, no more than 80% by any three investments, and no more than 90%
by any four investments. For this purpose, each Contract generally will be
treated as invested in the underlying assets of the applicable Portfolios, and
all securities of the same issuer are considered a single investment, but each
U.S. agency or instrumentality is treated as a separate issuer. If a Portfolio
fails to comply with these regulations, the contracts invested in that Portfolio
may not be treated as annuity, endowment or life insurance contracts for tax
purposes.
See the Contract prospectus for information regarding the federal income tax
treatment of the contracts and distributions to the separate accounts.
PRICE OF SHARES
- --------------------------------------------------------------------------------
Shares of each Portfolio of the Trust are sold at the net asset value per share
calculated once daily at the close of regular trading on each day the New York
Stock Exchange is open. The current value of the Portfolio's total assets, less
liabilities, is divided by the total number of shares outstanding, and the
result is the net asset value per share. Assets are generally valued at their
market value, where available, except that short-term securities with 60 days or
less to maturity are valued on an amortized cost basis. For a complete
description of the procedures involved in valuing various Trust assets, see the
Statement of Additional Information.
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Shares of the Trust currently are offered only to the Account, a separate
account of the Life Company. At present, Trust shares are only used as the
investment vehicle for the Contract, an annuity contract. The Life Company may
issue variable life contracts that also will use the Trust as the underlying
investment. The offering of Trust shares to variable annuity and variable life
separate accounts is referred to as "mixed funding." It may be disadvantageous
for variable annuity separate accounts and variable life separate accounts to
invest in the Trust simultaneously. Although neither the Life Company nor the
Trust currently foresees such disadvantages either to variable annuity or
variable life contract owners, the Board of Trustees of the Trust would monitor
events in order to identify any material conflicts to determine what action, if
any, should be taken in response thereto. Shares of the Trust may be offered to
separate accounts of other life insurance companies which are affiliates of the
Life Company.
All shares may be purchased or redeemed by the separate account without any
sales or redemption charge at the next computed net asset value. Purchases and
redemptions are made subsequent to corresponding purchases and redemptions of
units of the separate account without delay.
Except in extraordinary circumstances and as permissible under the 1940 Act, the
redemption proceeds are paid on or before the seventh day following the request
for redemption.
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SHAREHOLDER VOTING RIGHTS
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All shares of the Trust have equal voting rights and may be voted in the
election of Trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing Trustees unless and until
such time as fewer than a majority of the Trustees holding office have been
elected by shareholders. At that time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. The Trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
Trustee when requested to do so by the record holders of 10% of the outstanding
shares of the Trust. A Trustee may be removed after the holders of record of not
less than two-thirds of the outstanding shares have declared that the Trustee be
removed either by declaration in writing or by votes cast in person or by proxy.
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees, provided that immediately after the appointment of
any successor Trustee, at least two-thirds of the Trustees have been elected by
the shareholders. Shares do not have cumulative voting rights. Thus, holders of
a majority of the shares voting for the election of Trustees can elect all the
Trustees. No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust, except
that amendments to conform the Declaration to the requirements of applicable
federal laws or regulations or the regulated investment company provisions of
the Code may be made by the Trustees without the vote or consent of
shareholders. If not terminated by the vote or written consent of a majority of
its outstanding shares, the Trust will continue indefinitely.
In matters affecting only a particular Portfolio, the matter shall have been
effectively acted upon by a majority vote of that Portfolio even though: (1) the
matter has not been approved by a majority vote of any other Portfolio; or (2)
the matter has not been approved by a majority vote of the Trust.
Shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. The risk
of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer must be given in each agreement, obligation or
instrument entered into or executed by the Trust or Trustees. The Declaration of
Trust provides for indemnification of any shareholder held personally liable for
the obligations of the Trust and also provides for the Trust to reimburse the
shareholder for all legal and other expenses reasonably incurred in connection
with any such claim or liability.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP has been selected as independent accountants for the
Trust. The firms of Shereff, Friedman, Hoffman & Goodman, LLP and Blazzard,
Grodd & Hasenauer, P.C. have been selected to provide legal counsel to the
Trust.
INQUIRIES
- --------------------------------------------------------------------------------
Contract owner inquiries should be directed to Anchor National Life Insurance
Company, Service Center, P.O. Box 54299, Los Angeles, California 90054-0299,
telephone number (800) 445-7862.
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Please forward a copy (without charge) of the Statement of Additional
Information concerning SEASONS Variable Annuity Contracts to:
(Please print or type and fill in all information.)
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City/State/Zip
- --------------------------------------------------------------------------------
Date: ________________________________ Signed: ________________________________
Return to: Anchor National Life Insurance Company, Annuity Service Center, P.O.
Box 54299, Los Angeles, California 90054-0299.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
Not Applicable
ITEM 14. Indemnification of Directors and Officers.
Not Applicable
ITEM 15. Recent Sales of Unregistered Securities.
Not Applicable
ITEM 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------
<C> <S>
(1) Form of Underwriting Agreement*
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession**
(3) (a) Articles of Incorporation*
(b) By-Laws*
(4) (a) Allocated Fixed and Variable Group Annuity Certificate*
(b) Individual Fixed and Variable Annuity Contract*
(c) Participant Enrollment Form*
(d) Deferred Annuity Application*
(5) Opinion of Counsel re: Legality*
(6) Opinion re Discount on Capital Shares**
(7) Opinion re Liquidation Preference**
(8) Opinion re Tax Matters**
(9) Voting Trust Agreement**
(10) Material Contracts**
(11) Statement re Computation of Per Share Earnings**
(12) Statement re Computation of Ratios**
(14) Material Foreign Patents**
(15) Letter re Unaudited Financial Information**
(16) Letter re Change in Certifying Accountant**
(21) Subsidiaries of Registrant**
(23) (a) Consent of Independent Accountants***
(b) Consent of Attorney*
(24) Powers of Attorney (included on signature page)*
(25) Statement of Eligibility of Trustee**
(26) Invitation for Competitive Bids**
(27) Financial Data Schedule***
(28) Information Reports Furnished to State Insurance Regulatory Authority**
(29) Other Exhibits**
</TABLE>
FINANCIAL STATEMENTS***
* Previously filed
** Not Applicable
*** Herewith
II-1
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant, Anchor National Life Insurance Company, hereby
undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment hereof)
which, individually or in the aggregate, represents a
fundamental change in the information in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-2
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, and the State of California, on this 16th day of July, 1998.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By: /s/ JAY S. WINTROB
----------------------------------------------
Jay S. Wintrob
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ ------------------------------------------ -------------------
<S> <C> <C>
ELI BROAD* President, Chief Executive Officer, &
-------------------------------------- Chairman of Board (Principal Executive
Eli Broad Officer)
SCOTT L. ROBINSON*
-------------------------------------- Senior Vice President & Director
Scott L. Robinson (Principal Financial Officer)
N. SCOTT GILLIS*
-------------------------------------- Senior Vice President & Controller
N. Scott Gillis (Principal Accounting Officer)
LORIN M. FIFE*
-------------------------------------- Director
Lorin M. Fife
JAMES R. BELARDI*
-------------------------------------- Director
James R. Belardi
JANA W. GREER*
-------------------------------------- Director
Jana W. Greer
/s/ SUSAN L. HARRIS
-------------------------------------- Director July 16, 1998
Susan L. Harris
PETER MCMILLAN*
-------------------------------------- Director
Peter McMillan
JAMES W. ROWAN*
-------------------------------------- Director
James W. Rowan
JAY S. WINTROB*
-------------------------------------- Director
Jay S. Wintrob
*By: /s/ SUSAN L. HARRIS
---------------------------------- Attorney-in-Fact
Susan L. Harris
</TABLE>
July 16, 1998
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------
<C> <S>
(23) (a) Consent of Independent Accountants
(27) Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 7, 1997 relating
to the consolidated financial statements of Anchor National Life Insurance
Company, which appear in such Prospectus. We also consent to the reference to us
under the heading "Independent Accountants" in such Prospectus.
PricewaterhouseCoopers LLP
Los Angeles, California
July 14, 1998
<TABLE> <S> <C>
<PAGE>
<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 MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 2,094,033,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 157,000
<MORTGAGE> 302,157,000
<REAL-ESTATE> 24,000,000
<TOTAL-INVEST> 2,634,763,000
<CASH> 174,489,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 601,594,000
<TOTAL-ASSETS> 14,506,772,000
<POLICY-LOSSES> 2,402,312,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 33,380,000
3,511,000
0
<COMMON> 0
<OTHER-SE> 644,603,000
<TOTAL-LIABILITY-AND-EQUITY> 14,506,772,000
0
<INVESTMENT-INCOME> 112,439,000
<INVESTMENT-GAINS> 23,232,000
<OTHER-INCOME> 133,191,000
<BENEFITS> 63,722,000
<UNDERWRITING-AMORTIZATION> 35,579,000
<UNDERWRITING-OTHER> 7,674,000
<INCOME-PRETAX> 114,417,000
<INCOME-TAX> 39,758,000
<INCOME-CONTINUING> 74,659,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,659,000
<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>
