<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from __________ to __________
Commission File No. 33-47472
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Incorporated in Arizona 86-0198983
IRS Employer
Identification No.
1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant's telephone number, including area code: (310) 772-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS Yes [X] No [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [X]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON DECEMBER 22,
1998 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Anchor National Life Insurance Company (the "Company") is an indirect
wholly owned subsidiary of SunAmerica Inc. (the "Parent"), a financial services
company specializing in retirement savings and investment products and services.
The Company ranks among the largest U.S. issuers of variable annuities.
Complementing these annuity operations are the Company's guaranteed investment
contract ("GIC") operations, its asset management operations and its wholly
owned and affiliated broker-dealer operations, which provide a broad range of
financial planning and investment services through more than 9,700 independent
registered representatives nationwide. At September 30, 1998, the Company held
$17.53 billion of assets, consisting of $14.53 billion of assets on its balance
sheet and $3.00 billion of assets managed in mutual funds.
On August 20, 1998, the Parent announced that it has entered into a
definitive agreement to merge with and into American International Group, Inc.
("AIG"). The transaction was approved by both the Parent's and AIG's
shareholders on November 18, 1998, and, subject to various regulatory approvals,
will be completed in late 1998 or early 1999.
The Company is incorporated in Arizona and maintains its principal
executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022,
telephone (310) 772-6000. The Company has no employees; however, employees of
the Parent and its other subsidiaries perform various services for the Company.
The Parent had approximately 2,500 employees at September 30, 1998,
approximately 1,000 of whom perform services for the Company as well as for
certain of its affiliates.
The Company believes that demographic trends have produced strong
consumer demand for long-term, investment-oriented products. According to U.S.
Census Bureau projections, the number of individuals between the ages of 45 to
64 will grow from 46 million to 60 million during the 1990s, making this age
group the fastest-growing segment of the U.S. population. Between 1987 and 1997,
annual industry premiums from fixed and variable annuities and fund deposits
increased from $86.32 billion to $207.64 billion. During the same period, annual
industry sales of mutual funds, excluding money market accounts, rose from
$190.63 billion to $874.26 billion.
Benefiting from continued strong growth of the retirement savings
market, industry sales of tax-deferred savings products have represented, for a
number of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its life insurance
operations on the sale of annuities and GICs.
The Company's six wholly-owned or affiliated broker-dealers comprise the
largest network of independent registered representatives in the nation and the
fifth-largest securities sales force, based on industry data. Its wholly owned
or affiliated broker-dealers accounted for approximately one-third of the
Company's total annuity sales in fiscal 1998. The Company also distributes its
products and services through an extensive network of independent
broker-dealers, full-service securities firms, independent general insurance
agents, major financial institutions and, in the case of its GICs, by marketing
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directly to banks, municipalities, asset management firms and direct plan
sponsors and through intermediaries, such as managers or consultants servicing
these groups.
The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance its marketing efforts. Its use of optical disk imaging and artificial
intelligence has substantially reduced the more traditional paper-intensive life
insurance processing procedures, reducing annuity processing and servicing costs
and improving customer service. The Company has also implemented technology to
interface with its wholly-owned or affiliated broker-dealers, which enables the
Company to more effectively market its products and help the affiliated
financial professionals to better service their clients.
In recent years, the Company has enhanced its marketing efforts and
expanded its offerings of fee-based products such as variable annuities and
mutual funds, resulting in significantly increased fee income. Fee income has
also expanded through the receipt of broker-dealer net retained commissions,
resulting primarily from increased demand for long-term investment products. The
Company's fee generating businesses entail no portfolio credit risk and require
significantly less capital support than its fixed-rate business, which generates
net investment income.
For the year ended September 30, 1998, the Company's net investment
income (including net realized investment gains) and fee income by primary
product line or service are as follows:
NET INVESTMENT AND FEE INCOME
<TABLE>
<CAPTION>
Primary product or
Amount Percent service
-------- --------- -------------------------
(In thousands)
<S> <C> <C> <C>
Net investment income
(including net realized
investment gains) $106,354 26.8% Fixed-rate products
-------- -----
Fee income:
Variable annuity fees 200,867 50.6 Variable annuities
Net retained commissions 48,561 12.2 Broker-dealer sales
Surrender charges 7,404 1.9 Fixed- and variable-rate
products
Asset management fees 29,592 7.5 Mutual funds
Other fees 3,938 1.0
-------- -----
Total fee income 290,362 73.2
-------- -----
Total $396,716 100.0%
======== =====
</TABLE>
For financial information on the Company's business segments, see Part
IV - "Notes to Consolidated Financial Statements - Note 11 - Business
Segments."
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LIFE INSURANCE OPERATIONS
Founded in 1965, the Company is an Arizona-chartered company licensed in
49 states and the District of Columbia which markets flexible-premium variable
annuities and GICs. It has an "AA-" (Excellent) claims-paying ability rating
from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff
& Phelps Credit Rating Co. ("DCR"), an "A2" (Good) rating from Moody's Investors
Service ("Moody's") and an "A+" (Superior) rating from industry analyst A.M.
Best Company.
In addition to distributing its variable annuity products through its
six wholly owned or affiliated broker-dealers, the Company distributes its
products through over 800 other independent broker-dealers, full-service
securities firms and financial institutions as well as through independent
general insurance agents. In total, more than 49,000 independent sales
representatives nationally are licensed to sell the Company's annuity products.
FIXED ANNUITIES AND GICs
The Company's general account obligations include fixed-rate products,
including fixed annuities issued in prior years, and fixed-rate account options
of its variable annuity contracts. Although the Company's contracts remain in
force an average of seven to ten years, a majority (approximately 85% at
September 30, 1998) reprice annually at discretionary rates determined by the
Company. In repricing, the Company takes into account yield characteristics of
its investment portfolio, annuity surrender assumptions and competitive industry
pricing, among other factors.
The Company augments its retail annuity business with the sale of
institutional products. At September 30, 1998, the Company had $282.3 million of
fixed-maturity, variable-rate GIC obligations that reprice periodically based
upon certain defined indexes. Of the total GIC portfolio at September 30, 1998,
approximately 74% was sold to asset management firms, 18% was sold to banks and
8% was sold to state and local government entities.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity and GIC obligations. The Company seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. The
Company's fixed-rate products incorporate surrender charges or other
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, 1998.
VARIABLE ANNUITIES
The variable annuity products of the Company offer investors a broad
spectrum of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income through the
sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features similar to those offered by fixed
annuities, but differ in that the contractholder's rate of return is generally
dependent upon the investment performance of the particular equity, fixed-
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income, money market or asset allocation fund selected by the contractholder.
Because the investment risk is borne by the customer in all but the fixed-rate
account options, these products require significantly less capital support than
fixed annuities. The Company's flagship variable annuity product, Polaris, is a
multimanager variable annuity that offers investors a choice of 26 variable
funds and 7 guaranteed fixed-rate funds. Polaris sales have increased
significantly in recent years due to enhanced distribution efforts and growing
consumer demand for flexible retirement savings products that offer a variety of
equity, fixed-income and guaranteed fixed account investment choices. At
September 30, 1998, total variable product reserves were $12.93 billion, of
which $11.13 billion were held in separate accounts. The Company's variable
annuity products incorporate surrender charges to encourage persistency. At
September 30, 1998, 77% of the Company's variable annuity reserves held in the
separate accounts were subject to surrender penalties. The Company's variable
annuity products also generally limit the number of transfers made in a
specified period between account options without the assessment of a fee. The
average size of a new variable annuity contract sold by the Company in 1998 was
approximately $50,000.
INVESTMENT OPERATIONS
The Company believes that its fixed-rate liabilities should be backed by
a portfolio principally composed of fixed-rate investments that generate
predictable rates of return. The Company does not have a specific target rate of
return. Instead, its rates of return vary over time depending on the current
interest rate environment, the slope of the yield curve, the spread at which
fixed-rate investments are priced over the yield curve, and general economic
conditions. The Company manages most of its invested assets internally. Its
portfolio strategy is constructed with a view to achieve adequate risk-adjusted
returns consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At September 30, 1998, these assets had an
aggregate fair value of $2.69 billion with a duration of 3.6. The Company's
fixed-rate liabilities include fixed annuities, subordinated notes and GICs. At
September 30, 1998, these liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $2.41 billion with a duration of 1.4. For the years ended September 30, 1998,
1997 and 1996, the Company's yields on average invested assets were 8.53%, 7.97%
and 7.50%, respectively; its average rates paid on all interest-bearing
liabilities were 5.49%, 5.46% and 5.25%, respectively; it realized net
investment spreads of 3.34%, 2.77% and 2.59%, respectively, on average invested
assets; and net realized investment gains and losses were 0.75%, 0.66% and 0.61%
of average invested assets, respectively.
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The Company's general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio. However,
the Company has determined that all of its portfolio of bonds, notes and
redeemable preferred stocks (the "Bond Portfolio") is available to be sold in
response to changes in market interest rates, changes in relative value of asset
sectors and individual securities, changes in prepayment risk, changes in credit
quality outlook for certain securities, and the Company's need for liquidity and
other similar factors.
The following table summarizes the Company's investment portfolio at
September 30, 1998:
SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
Carrying Percent of
value portfolio
------------- ----------
(In thousands)
<S> <C> <C>
Cash and short-term investments $ 333,735 12.2%
U.S. government securities 88,239 3.2
Mortgage-backed securities 584,007 21.4
Other bonds, notes and redeemable
preferred stocks 1,282,508 46.9
Mortgage loans 391,448 14.3
Real estate 24,000 0.9
Common stocks 169 -
Other invested assets 30,636 1.1
------------- ------
Total investments $ 2,734,742 100.0%
============= ======
</TABLE>
At September 30, 1998, the Bond Portfolio (excluding $6.9 million of
redeemable preferred stocks) included $1.90 billion of bonds rated by S&P,
Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") or the National
Association of Insurance Commissioners ("NAIC"), and $53.6 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At September 30, 1998, approximately $1.78 billion of the Bond Portfolio
was investment grade, including $672.1 million of U.S. government/agency
securities and mortgage-backed securities.
At September 30, 1998, the Bond Portfolio included $167.6 million of
bonds that were not investment grade. These non-investment-grade bonds accounted
for 1.2% of the Company's total assets and 6.1% of its invested assets.
Senior secured loans ("Secured Loans") are included in the Bond
Portfolio and aggregated $186.6 million at September 30, 1998. Secured Loans are
senior to subordinated debt and equity, and are secured by assets of the issuer.
At September 30, 1998, Secured Loans consisted of loans to 62 borrowers spanning
21 industries, with 32% of these assets concentrated in financial institutions.
No other industry concentration constituted more than 9% of these assets.
Mortgage loans aggregated $391.4 million at September 30, 1998 and
consisted of 133 commercial first mortgage loans with an average loan balance of
approximately $2.9 million, collateralized by properties located in 29
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states. Approximately 21% of the portfolio was multifamily residential, 17% was
office, 14% was manufactured housing, 13% was industrial, 11% was hotels and 24%
was other types.
At September 30, 1998, the carrying value (after impairment writedowns)
of all investments in default as to the payment of principal or interest totaled
$0.9 million, which constituted less than 0.1% of total invested assets.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
and Liquidity."
MUTUAL FUNDS AND INVESTMENT SERVICES
Through its registered investment advisor, SunAmerica Asset Management
Corp. ("SunAmerica Asset Management"), and its related distributor, the Company
earns fee income by distributing and managing a diversified family of mutual
funds and by providing professional management of individual, corporate and
pension plan portfolios. The Company offers investors an array of equity,
fixed-income, money market and tax-exempt mutual funds. Sales growth in recent
years is primarily due to sales of the Company's "Style Select Series" product
(which was introduced in November 1996) and the introduction in June 1998 of the
"Dogs" of Wall Street. The "Style Select Series" is a group of mutual funds
which are each managed by three industry-recognized fund managers. The "Dogs" of
Wall Street fund contains 30 large capitalization value stocks which are
selected by strict criteria. Founded in 1983 and acquired by the Company in
January 1990, SunAmerica Asset Management managed approximately $3.78 billion of
assets at September 30, 1998, including mutual fund assets, private accounts and
certain of the variable annuity assets of the Company and its affiliates.
The SunAmerica mutual funds are distributed nationally through a network
of approximately 400 financial institutions and unaffiliated broker-dealers, as
well as by the Company's broker-dealer subsidiary and its affiliated
broker-dealers.
BROKER-DEALER
The Company owns a broker-dealer, Royal Alliance Associates, Inc.,
acquired in January 1990. The Company has maintained its network of
representatives at approximately 3,500 during the year.
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 and valuation requirements,
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prescribing the form and content of required financial statements and reports,
performing financial, market conduct and other examinations, determining the
reasonableness and adequacy of statutory capital and surplus, defining
acceptable accounting principles, regulating the type, valuation and amount of
investments permitted, and limiting the amount of dividends that can be paid and
the size of transactions that can be consummated without first obtaining
regulatory approval.
During the last decade, the insurance regulatory framework has been
placed under increased scrutiny by various states, the federal government and
the NAIC. Various states have considered or enacted legislation that changes,
and in many cases increases, the states' authority to regulate insurance
companies. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in the regulation of
insurance companies or allowing combinations between insurance companies, banks
and other entities. In recent years, the NAIC has developed several model laws
and regulations designed to reduce the risk of insurance company insolvencies
and market conduct violations. These initiatives include investment reserve
requirements, risk-based capital ("RBC") standards, codification of insurance
accounting principles, new investment standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. The NAIC is also
currently developing model laws or regulations relating to product design,
product reserving standards and illustrations of annuity products. Current
proposals are still being debated and the Company is monitoring developments in
this area and the effects any changes would have on the Company.
The RBC standards consist of formulas which establish capital
requirements relating to insurance, business, assets and interest rate risks,
and which help to identify companies which are under-capitalized and require
specific regulatory actions in the event an insurer's RBC falls below specified
levels. The Company has more than enough statutory capital to meet the NAIC's
RBC requirements as of the most recent calendar year-end. The state of Arizona
has adopted these RBC standards, and the Company is in compliance with such
laws. Further, for statutory reporting purposes, the annuity reserves of the
Company are calculated in accordance with statutory requirements and are
adequate under current cash-flow testing models.
SunAmerica Asset Management is registered with the Securities and
Exchange Commission (the "SEC") as a registered investment advisor under the
Investment Advisors Act of 1940. The mutual funds that it markets are subject to
regulation under the Investment Company Act of 1940. SunAmerica Asset Management
and the mutual funds are subject to regulation and examination by the SEC. In
addition, variable annuities and the related separate accounts of the Company
are subject to regulation by the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940.
The Company's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the SEC
and the National Association of Securities Dealers ("NASD"). The SEC and the
NASD have broad administrative and supervisory powers relative to all aspects of
business and may examine the broker-dealer subsidiary's business and accounts at
any time. The SEC also has broad jurisdiction to oversee various activities of
the Company and its other subsidiaries.
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
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and the tax treatment of insurance and other investment products. Proposals made
in recent years to limit the tax deferral of annuities or otherwise modify the
tax rules related to the treatment of annuities have not been enacted. While
certain of such proposals, if implemented, could have an adverse effect on the
Company's sales of affected products, and consequently on its results of
operations, the Company believes such proposals have a small likelihood of being
enacted, because they would discourage retirement savings and there is a strong
public and industry opposition to them.
COMPETITION
The businesses conducted by the Company are highly competitive. The
Company's life insurance operations compete with other life insurers, and also
compete for customers' funds with a variety of investment products offered by
financial services companies other than life insurance companies, such as banks,
investment advisors, mutual fund companies and other financial institutions.
Within the U.S. life insurance industry, the 100 largest writers of individual
and group annuities account for approximately 96% of total net annuity premiums
written. Net annuity premiums written among the top 100 companies range from
less than $100 million to approximately $10 billion annually. The Company
together with its affiliates ranks in the top quartile of this group. Certain of
these companies and other life insurers with which the Company competes are
significantly larger and have available to them much greater financial and other
resources. The Company believes the primary competitive factors among life
insurance companies for investment-oriented insurance products, such as
annuities and GICs, include product flexibility, net return after fees,
innovation in product design, the claims-paying ability rating and the name
recognition of the issuing company, the availability of distribution channels
and service rendered to the customer before and after a contract is issued.
Other factors affecting the annuity business include the benefits (including
before-tax and after-tax investment returns) and guarantees provided to the
customer and the commissions paid.
Competitors of SunAmerica Asset Management include a large number of
mutual fund organizations, both independent and affiliated with other financial
services companies, including banks and insurance companies.
The Company's broker-dealer faces competition from regional firms and
large, national full service and discount brokerage firms.
ITEM 2. PROPERTIES
The Company's executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California. The Company, through
an affiliate, also leases office space in Woodland Hills, California. The
Company's broker-dealer and asset management subsidiaries lease offices in New
York, New York.
The Company believes that such properties, including the equipment
located therein, are suitable and adequate to meet the requirements of its
businesses.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses are adequate and any further liabilities and costs will not have a
material adverse impact upon the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fourth quarter 1998 to a vote of
security-holders, through the solicitation of proxies or otherwise.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company and
its subsidiaries should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which are included
elsewhere herein.
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
RESULTS OF OPERATIONS
Net investment income $ 86,872 $ 73,201 $ 56,843 $ 50,083 $ 58,996
Net realized investment gains (losses) 19,482 (17,394) (13,355) (4,363) (33,713)
Fee income 290,362 213,146 169,505 145,105 141,753
General and administrative expenses (96,102) (98,802) (81,552) (64,457) (54,363)
Amortization of deferred acquisition costs (72,713) (66,879) (57,520) (58,713) (44,195)
Annual commissions (18,209) (8,977) (4,613) (2,658) (1,158)
-------- -------- -------- -------- --------
Pretax income 209,692 94,295 69,308 64,997 67,320
Income tax expense (71,051) (31,169) (24,252) (25,739) (22,705)
-------- -------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 138,641 63,126 45,056 39,258 44,615
Cumulative effect of change in accounting
for income taxes --- --- --- --- (20,463)
-------- -------- -------- -------- --------
NET INCOME $138,641 $ 63,126 $ 45,056 $ 39,258 $ 24,152
======== ======== ======== ======== ========
</TABLE>
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ITEM. 6 SELECTED CONSOLIDATED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments $ 2,734,742 $ 2,608,301 $2,329,232 $2,114,908 $1,632,072
Variable annuity assets
held in separate accounts 11,133,569 9,343,200 6,311,557 5,230,246 4,486,703
Deferred acquisition costs 539,850 536,155 443,610 383,069 416,289
Other assets 118,203 83,283 120,136 55,474 67,062
----------- ----------- ---------- ---------- ----------
TOTAL ASSETS $14,526,364 $12,570,939 $9,204,535 $7,783,697 $6,602,126
=========== =========== ========== ========== ==========
Reserves for fixed annuity
contracts $ 2,189,272 $2,098,803 $1,789,962 $1,497,052 $1,437,488
Reserves for guaranteed
investment contracts 282,267 295,175 415,544 277,095 ---
Variable annuity liabilities
related to separate
accounts 11,133,569 9,343,200 6,311,557 5,230,246 4,486,703
Other payables and accrued
liabilities 133,647 155,256 96,196 227,953 195,134
Subordinated notes payable
to Parent 39,182 36,240 35,832 35,832 34,712
Deferred income taxes 95,758 67,047 70,189 73,459 64,567
Shareholder's equity 652,669 575,218 485,255 442,060 383,522
----------- ----------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $14,526,364 $12,570,939 $9,204,535 $7,783,697 $6,602,126
=========== =========== ========== ========== ==========
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of Anchor National Life Insurance Company (the "Company") for the
three years in the period ended September 30, 1998 follows. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $138.6 million in 1998, compared with $63.1 million
in 1997 and $45.1 million in 1996.
PRETAX INCOME totaled $209.7 million in 1998, $94.3 million in 1997 and
$69.3 million in 1996. The 122.4% improvement in 1998 over 1997 primarily
resulted from increased fee income and higher net realized investment gains,
partially offset by increased annual commissions and increased amortization of
deferred acquisition costs. 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.
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 $86.9 million in 1998 from $73.2
million in 1997 and $56.8 million in 1996. These amounts represent 3.34% on
average invested assets (computed on a daily basis) of $2.60 billion in 1998,
2.77% on average invested assets of $2.65 billion in 1997 and 2.59% on average
invested assets of $2.19 billion in 1996.
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<PAGE> 14
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 $140.4 million in 1998, $126.5 million in 1997 and $142.9
million in 1996. The difference between the Company's yield on average invested
assets and the rate paid on average interest-bearing liabilities (the "Spread
Difference") was 3.04% in 1998, 2.51% in 1997 and 2.25% in 1996.
Investment income (and the related yields on average invested assets)
totaled $222.0 million (8.53%) in 1998, compared with $210.8 million (7.97%) in
1997 and $164.6 million (7.50%) in 1996. These increased yields in 1998 and 1997
include the effects of an increasing 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, particularly in 1998. The increase
in investment income in 1997 also reflects an increase in average invested
assets.
Partnership income increased to $24.3 million (a yield of 174.85% on
related average assets of $13.9 million) in 1998, compared with $6.7 million (a
yield of 15.28% on related average assets of $44.0 million) in 1997 and $4.1
million (a yield of 10.12% on related average assets of $40.2 million) in 1996.
Partnership income is based primarily upon cash distributions received from
limited partnerships, the operations of which the Company does not influence.
Consequently, such income is not predictable and there can be no assurance that
the Company will realize comparable levels of such income in the future.
Total interest expense equalled $135.1 million in 1998, $137.6 million
in 1997 and $107.8 million in 1996. The average rate paid on all
interest-bearing liabilities was 5.49% in 1998, compared with 5.46% in 1997 and
5.25% in 1996. Interest-bearing liabilities averaged $2.46 billion during 1998,
compared with $2.52 billion during 1997 and $2.05 billion during 1996. The
increases in the overall rates paid on interest-bearing liabilities primarily
resulted from the impact of certain promotional one-year interest rates offered
on the fixed account portion of the Company's Polaris and Seasons variable
annuity products.
The modest decline in average invested assets in 1998 reflects a similar
modest decline in average interest-bearing liabilities, which results from the
net effect of increased sales of the Company's fixed rate products and net
exchanges from fixed accounts into the separate accounts of variable annuity
contracts. Fixed annuity premiums totaled $1.51 billion in 1998, compared with
$1.10 billion in 1997 and $741.8 million in 1996, and are largely premiums for
the fixed accounts of variable annuities. These amounts represent 72%, 61% and
50% of the fixed annuity reserve balances at the beginning of the respective
periods. The premiums for the fixed accounts of variable annuities have
increased primarily because of increased sales of the Company's variable annuity
products and greater inflows into the one-year fixed account and the new
six-month fixed account of these products, which are used for dollar cost
averaging into the variable accounts. Accordingly, the Company anticipates that
it will see a large portion of these premiums transferred into the variable
funds.
Guaranteed investment contract ("GIC") premiums totaled $5.6 million in
1998, $55.0 million in 1997 and $135.0 million in 1996. GIC surrenders and
maturities totaled $36.3 million in 1998, $198.1 million in 1997 and $16.5
million in 1996. The Company does not actively market GICs; consequently,
premiums and surrenders may vary substantially from period to period. 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. GICs that
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<PAGE> 15
are purchased by banks for their long-term portfolios or by state and local
governmental entities either prohibit withdrawals or permit scheduled book value
withdrawals subject to the terms of the underlying indenture or agreement. GICs
purchased by asset management firms for their short-term portfolios either
prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270
days. In pricing GICs, the Company analyzes cash flow information and prices
accordingly so that it is compensated for possible withdrawals prior to
maturity.
NET REALIZED INVESTMENT GAINS totaled $19.5 million in 1998, compared
with net realized investment losses of $17.4 million in 1997 and $13.4 million
in 1996. Net realized investment gains (losses) include impairment writedowns of
$13.1 million in 1998, $20.4 million in 1997 and $16.0 million in 1996. Thus,
net gains from sales and redemptions of investments totaled $32.6 million in
1998, $3.0 million in 1997 and $2.6 million in 1996.
The Company sold or redeemed invested assets, principally bonds and
notes, aggregating $2.23 billion in 1998, $2.62 billion in 1997 and $1.60
billion in 1996, respectively. Sales of investments result from the active
management of the Company's investment portfolio. Because redemptions of
investments are generally involuntary and sales of investments are made in both
rising and falling interest rate environments, net gains from sales and
redemptions of investments fluctuate from period to period, and represent 1.25%,
0.11% and 0.12% of average invested assets for 1998, 1997 and 1996,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Company's active portfolio management is to maximize total returns
on the investment portfolio, taking into account credit, option, liquidity and
interest-rate risk.
Impairment writedowns include $9.4 million of provisions applied to
partnerships during 1998 and $15.7 million and $15.2 million of provisions
applied to non-income producing land owned in Arizona during 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 a
capital contribution of $28.4 million on December 31, 1996 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 represent 0.50%, 0.77% and
0.73% of average invested assets for 1998, 1997 and 1996, respectively. For the
five years ended September 30, 1998, impairment writedowns as a percentage of
average invested assets have ranged from 0.28% to 0.91% and have averaged 0.64%.
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
$200.9 million in 1998, $139.5 million in 1997 and $104.0 million in 1996. These
increased fees reflect growth in average variable annuity assets, due to
increased market values, the receipt of variable annuity premiums and net
exchanges into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. Variable annuity fees represent 1.9%,
1.8% and 1.8% of average variable annuity assets for 1998, 1997 and 1996,
respectively. Variable annuity assets averaged $10.70 billion during 1998, $7.55
billion during 1997 and $5.70 billion during 1996. Variable
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<PAGE> 16
annuity premiums, which exclude premiums allocated to the fixed accounts of
variable annuity products, have aggregated $1.82 billion in 1998, $1.27 billion
in 1997 and $919.8 million in 1996. These amounts represent 19%, 20% and 18% of
variable annuity reserves at the beginning of the respective periods.
Sales of variable annuity products (which include premiums allocated to
the fixed accounts) ("Variable Annuity Product Sales") amounted to $3.33
billion, $2.37 billion and $1.66 billion in 1998, 1997 and 1996, respectively,
and primarily reflect sales of the Company's flagship variable annuity, Polaris.
Polaris is a multimanager variable annuity that offers investors a choice of 26
variable funds and 7 guaranteed fixed-rate funds. Increases in Variable Annuity
Product Sales are due, in part, to market share gains through enhanced
distribution efforts and growing consumer demand for flexible retirement savings
products that offer a variety of equity, fixed income and guaranteed fixed
account investment choices. In recent weeks, subsequent to the Company's fiscal
year end, sales of variable annuities have slowed as investors paused to
reevaluate their investment decisions in light of volatile markets. The Company
believes that fluctuating market conditions increase the value of financial
planning services and make the flexibility and security of variable annuities
even more attractive.
The Company has encountered increased competition in the variable
annuity marketplace during recent years and anticipates that the market will
remain highly competitive for the foreseeable future. Also, from time to time,
Federal initiatives are proposed which could affect the taxation of variable
annuities and annuities generally.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of 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 $48.6
million in 1998, $39.1 million in 1997 and $31.5 million in 1996. Broker-dealer
sales (mainly sales of general securities, mutual funds and annuities) totaled
$14.37 billion in 1998, $11.56 billion in 1997 and $8.75 billion in 1996. The
increases in sales and net retained commissions reflect higher average
production per representative and generally favorable market conditions and, in
1997, a greater number of registered representatives due primarily to the
transfer of representatives from an affiliated broker-dealer. 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 $7.4 million
in 1998, $5.5 million in 1997 and $5.2 million in 1996. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first seven years of an annuity contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $1.14 billion in 1998, $1.06
billion in 1997 and $898.0 million in 1996. These payments represent 9.0%, 11.2%
and 12.4%, respectively, of average fixed and variable annuity reserves.
Withdrawals include variable annuity withdrawals from the separate accounts
totaling $952.1 million (8.9% of average variable annuity reserves), $822.0
million (10.9% of average variable annuity reserves) and $634.1 million (11.2%
of average variable reserves) in 1998, 1997 and 1996, respectively. 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 $29.6 million on
15
<PAGE> 17
average assets managed of $2.89 billion in 1998, $25.8 million on average assets
managed of $2.34 billion in 1997 and $25.4 million on average assets managed of
$2.14 billion in 1996. Asset management fees are not proportionate to average
assets managed, principally due to changes in product mix. Sales of mutual
funds, excluding sales of money market accounts, aggregated $853.6 million in
1998, compared with $454.8 million in 1997 and $223.4 million in 1996. The
significant increases in sales principally resulted from sales of the Company's
"Style Select Series" product (which was introduced in November 1996) and the
introduction in June 1998 of the "Dogs" of Wall Street. The "Style Select
Series" is a group of mutual funds which are each managed by three
industry-recognized fund managers. The "Dogs" of Wall Street fund contains 30
large capitalization value stocks which are selected by strict criteria. Sales
of these products totaled $611.1 million in 1998, compared with $267.8 million
in 1997, reflecting the addition of five new Style Select funds, which more than
doubled the number of Style Select funds to nine, and generally favorable market
conditions. Redemptions of mutual funds, excluding redemptions of money market
accounts, amounted to $402.5 million in 1998, $412.8 million in 1997 and $379.9
million in 1996, which represent 17.5%, 22.0% and 21.4%, respectively, of
average mutual fund assets.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $96.1 million in 1998,
compared with $98.8 million in 1997 and $81.6 million in 1996. General and
administrative expenses remain closely controlled through a company-wide cost
containment program and continue to represent less than 1% of average total
assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $72.7 million in
1998, compared with $66.9 million in 1997 and $57.5 million in 1996. The
increases in amortization were 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.
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 $18.2 million in 1998,
$9.0 million in 1997 and $4.6 million in 1996. The increases in annual
commissions since 1996 reflect increased sales of annuities that offer this
commission option and gradual expiration of the initial fifteen-month periods
before such payments begin. 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 $71.1 million in 1998, compared with $31.2
million in 1997 and $24.3 million in 1996, representing effective tax rates of
34% in 1998, 33% in 1997 and 35% in 1996.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 13.5% to $652.7 million at September 30,
1998 from $575.2 million at September 30, 1997, primarily due to $138.6 million
of net income recorded in 1998, which was partially offset by $51.2 million of
dividends paid in April 1998 and a $10.0 million decrease in net unrealized
gains on debt and equity securities available for sale.
INVESTED ASSETS at September 30, 1998 totaled $2.73 billion, compared
with $2.61 billion at September 30, 1997. The Company manages most of its
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<PAGE> 18
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, and the
Company's need for liquidity and other similar factors.
THE BOND PORTFOLIO, which constitutes 71% of the Company's total
investment portfolio, had an aggregate fair value that exceeded its amortized
cost by $19.9 million at September 30, 1998, compared with an excess of $43.7
million at September 30, 1997. The decline in the unrealized gain of the Bond
Portfolio in 1998 was due to changes in market value of portions of the
non-investment-grade portfolio.
At September 30, 1998, the Bond Portfolio (excluding $6.9 million of
redeemable preferred stocks) included $1.90 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 $53.6 million of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At September 30, 1998, approximately $1.78 billion of the Bond
Portfolio was investment grade, including $672.1 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1998, the Bond Portfolio included $167.6 million of
bonds that were not investment grade. These non-investment-grade bonds accounted
for 1.2% of the Company's total assets and 6.1% 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, 1998.
The table on the next page summarizes the Company's rated bonds by
rating classification as of September 30, 1998.
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<PAGE> 19
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)/ Estimated NAIC Estimated Estimated Percent of
[DCR]/{Fitch} Amortized fair category Amortized fair Amortized fair invested
category (1) cost value (2) cost value cost value assets
- ------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $ 999,052 $1,025,861 1 $ 180,548 $ 192,187 $1,179,600 $1,218,048 44.54%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 420,087 418,723 2 145,025 143,532 565,112 562,255 20.56
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 43,156 39,179 3 10,181 9,917 53,337 49,096 1.80
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 113,376 102,375 4 12,954 12,065 126,330 114,440 4.18
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 760 655 5 3,500 3,274 4,260 3,929 0.14
CI to D
[DD]
{D} 0 0 6 99 99 99 99 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $1,576,431 $1,586,793 $ 352,307 $ 361,074 $1,928,738 $1,947,867
========== ========== ========== ========== ========== ==========
</TABLE>
Footnotes appear on the following page.
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<PAGE> 20
Footnotes to the table of Rated Bonds by Rating Classification
--------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moody's
rates debt securities in rating categories ranging from Aaa (the
highest) to C (extremely poor prospects of ever attaining any real
investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the
lowest) indicates the debt's relative standing within the rating
category. A security rated Baa3 or higher is considered investment
grade. DCR rates debt securities in rating categories ranging from AAA
(the highest) to DD (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, DCR and Fitch
ratings if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or
near default. These six categories correspond with the
S&P/Moody's/DCR/Fitch rating groups listed above, with categories 1 and
2 considered investment grade. The NAIC categories include $53.6 million
of assets that were rated by the Company pursuant to applicable NAIC
rating guidelines.
19
<PAGE> 21
Senior secured loans ("Secured Loans") are included in the Bond
Portfolio and aggregated $186.6 million at September 30, 1998. Secured Loans are
senior to subordinated debt and equity, and are secured by assets of the issuer.
At September 30, 1998, Secured Loans consisted of $71.6 million of publicly
traded securities and $115.0 million of privately traded securities. These
Secured Loans are composed of loans to 62 borrowers spanning 21 industries, with
32% of these assets concentrated in financial institutions. No other industry
concentration constituted more than 9% of these assets.
While the trading market for the Company's privately traded Secured
Loans is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $391.4 million at September 30, 1998 and
consisted of 133 commercial first mortgage loans with an average loan balance of
approximately $2.9 million, collateralized by properties located in 29 states.
Approximately 21% of this portfolio was multifamily residential, 17% was office,
14% was manufactured housing, 13% was industrial, 11% was hotels and 24% was
other types. At September 30, 1998, approximately 21% and 14% of this portfolio
were secured by properties located in California and New York, respectively, and
no more than 8% of this portfolio was secured by properties located in any other
single state. At September 30, 1998, there were three mortgage loans with
outstanding balances of $10 million or more, which loans collectively aggregated
approximately 11% of this portfolio. At September 30, 1998, approximately 30% of
the mortgage loan portfolio consisted of loans with balloon payments due before
October 1, 2001. During 1998, 1997 and 1996, loans delinquent by more than 90
days, foreclosed loans and restructured loans have not been significant in
relation to the total mortgage loan portfolio.
At September 30, 1998, approximately 11% of the mortgage loans were
seasoned loans underwritten to the Company's standards and purchased at or near
par from other financial institutions. Such loans generally have higher average
interest rates than loans that could be originated today. The balance of the
mortgage loan portfolio has been originated by the Company under strict
underwriting standards. Commercial mortgage loans on properties such as offices,
hotels and shopping centers generally represent a higher level of risk than do
mortgage loans secured by multifamily residences. This greater risk is due to
several factors, including the larger size of such loans and the more immediate
effects of general economic conditions on these commercial property types.
However, due to the seasoned nature of the Company's mortgage loan portfolio,
its emphasis on multifamily loans and its strict underwriting standards, the
Company believes that it has prudently managed the risk attributable to its
mortgage loan portfolio while maintaining attractive yields.
OTHER INVESTED ASSETS aggregated $30.6 million at September 30, 1998,
including $15.0 million of collateralized bond obligations and collateralized
mortgage obligation residuals, $11.2 million of policy loans and $4.4 million of
investments in limited partnerships. The Company's limited partnership
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<PAGE> 22
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, 1998.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At September 30, 1998, these assets had an
aggregate fair value of $2.69 billion with a duration of 3.6. The Company's
fixed-rate liabilities include fixed annuities, subordinated notes and GICs. At
September 30, 1998, these liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $2.41 billion with a duration of 1.4. The Company's potential exposure due to
a 10% increase in prevailing interest rates from their September 30, 1998 levels
is a loss of $26.7 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.
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
21
<PAGE> 23
experienced under given interest rate scenarios, and the differences may be
material.
As a component of its asset and liability management strategy, the
Company utilizes interest rate swap agreements ("Swap Agreements") to match
assets more closely to liabilities. Swap Agreements are agreements to exchange
with a counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate changes.
The Company typically utilizes Swap Agreements to create a hedge that
effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At September 30, 1998, the Company had one outstanding Swap
Agreement with a notional principal amount of $21.5 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. It is the Company's policy that these agreements are entered into with
counterparties who have a debt rating of A/A2 or better from both S&P and
Moody's. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Company's Swap Agreements typically hedge
variable-rate assets or liabilities, and interest rate fluctuations that
adversely affect the net cash received or paid under the terms of a Swap
Agreement would be offset by increased interest income earned on the
variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of its
decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the security's projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual prepayment
experience monthly to reassess the relative attractiveness of the security with
the intent to maximize total return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual
22
<PAGE> 24
covenants, the borrower's recent financial performance, news reports and other
externally generated information concerning the creditor's affairs. In the case
of publicly traded bonds, management also considers market value quotations, if
available. For mortgage loans, management generally considers information
concerning the mortgaged property and, among other things, factors impacting the
current and expected payment status of the loan and, if available, the current
fair value of the underlying collateral. For investments in partnerships,
management reviews the financial statements and other information provided by
the general partners.
The carrying values of investments that are determined to have declines
in value that are other than temporary are reduced to net realizable value and,
in the case of bonds, no further accruals of interest are made. The provisions
for impairment on mortgage loans are based on losses expected by management to
be realized on transfers of mortgage loans to real estate, on the disposition
and settlement of mortgage loans and on mortgage loans that management believes
may not be collectible in full. Accrual of interest is suspended when principal
and interest payments on mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $0.9 million of mortgage loans
at September 30, 1998, and constituted less than 0.1% of total invested assets.
At September 30, 1997, defaulted investments totaled $1.4 million, including
$0.5 million of bonds and notes and $0.9 million of mortgage loans, and
constituted less than 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, 1998, approximately $1.50 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $59.2 million, while approximately
$456.3 million of the Bond Portfolio had an aggregate unrealized loss of $39.3
million. In addition, the Company's investment portfolio currently provides
approximately $23.6 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.
23
<PAGE> 25
YEAR 2000
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems are not presently year 2000
compliant, which means that because they have historically used only two digits
to identify the year in a date, they will fail to distinguish dates in the
"2000s" from dates in the "1900s." The Company's business, financial condition
and results of operations could be materially and adversely affected by the
failure of the Company's systems and applications (and those operated by third
parties interfacing with the Company's systems and applications) to properly
operate or manage these dates.
The Company has a coordinated plan to repair or replace these
noncompliant systems and to obtain similar assurances from third parties
interfacing with the Company's systems and applications. In fiscal 1997, the
Company recorded a $6.2 million provision for estimated programming costs to
make necessary repairs of certain specific noncompliant systems. Management is
making expenditures which it expects to ultimately total $5.0 million to replace
certain other specific noncompliant systems, which expenditures will be
capitalized as software costs and amortized over future periods. Both phases of
the project are currently proceeding in accordance with the plan and management
expects them to be substantially completed by the end of calendar 1998. Testing
of both the repaired and replacement systems will be conducted during calendar
1999.
In addition, the Company has distributed a year 2000 questionnaire to
certain of its significant suppliers, distributors, financial institutions,
lessors and others with which it does business to evaluate their year 2000
compliance plans and state of readiness and to determine the extent to which the
Company's systems and applications may be affected by the failure of others to
remediate their own year 2000 issues. To date, however, the Company has received
only preliminary feedback from such parties and has not independently confirmed
any information received from other parties with respect to the year 2000
issues. Therefore, there can be no assurance that such other parties will
complete their year 2000 conversions in a timely fashion or will not suffer a
year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's Disclosure and
Analysis of Financial Condition and Results of Operations on pages 21 and 22
herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE> 26
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of Anchor National Life Insurance
Company (the "Company") as of December 22, 1998 are listed below, together with
information as to their ages, dates of election and principal business
occupation during the last five years (if other than their present business
occupation).
<TABLE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Eli Broad* 65 Chairman, 1994 Cofounded SAI
Chief Executive in 1957
Officer and
President of
the Company
Chairman, Chief 1986
Executive Officer
and President of
SunAmerica Inc.
("SAI")
Jay S. Wintrob* 41 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman and 1998
Chief Operating
Officer of SAI
James R. Belardi* 41 Senior Vice 1992 (Joined SAI in 1986)
President of the
Company
Executive Vice 1995
President of SAI
Jana Waring Greer* 46 Senior Vice 1991 (Joined SAI in 1974)
President of the
Company and SAI
Peter McMillan, III 41 Director Executive Vice 1994-
President and Chief 1998
Investment Officer
SunAmerica Investments,
Inc. (DE)
Senior Vice President, 1989-
SunAmerica 1994
Investments, Inc. (DE)
</TABLE>
- ----------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
25
<PAGE> 27
<TABLE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Scott L. Robinson* 52 Senior Vice 1991 (Joined SAI in 1978)
President of the
Company
Senior Vice 1991
President and
Controller of SAI
Susan L. Harris* 41 Senior Vice 1994 Vice President, 1994-1995
President and General Counsel-
Secretary of the Corporate Affairs and
Company Secretary of SAI
Senior Vice 1995 Vice President, 1989-1994
President, Associate General
General Counsel Counsel and Secretary
and Secretary of of SAI
SAI (Joined SAI in 1985)
James Rowan* 36 Senior Vice 1996 Vice President of SAI 1993-1995
President of the (Joined SAI in 1992)
Company
Senior Vice 1995
President of SAI
N. Scott Gillis 45 Senior Vice 1994 Vice President and 1989-1994
President and Controller, SunAmerica
Controller of the Life Companies ("SLC")
Company (Joined SAI in 1985)
Vice President of 1997
SAI
Edwin R. Reoliquio 41 Senior Vice 1995 Vice President and 1990-1995
President and Actuary, SLC
Chief Actuary
of the Company
Victor E. Akin 34 Senior Vice 1996 Vice President, 1995-1996
President of SLC
the Company Director, Product 1994-1995
Development, SLC
Manager, Business 1993-1994
Development, SLC
</TABLE>
- ------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
26
<PAGE> 28
<TABLE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Scott H. Richland 36 Vice President 1994 Senior Vice President 1997-1998
of the Company and Treasurer of SAI
Senior Vice 1997 Vice President and 1995-1997
President of SAI Treasurer of SAI
Vice President and 1994-1995
Assistant Treasurer
of SAI
Assistant Treasurer 1993-1994
of SAI
(Joined SAI in 1990)
David R. Bechtel 31 Vice President 1998 Vice President, 1996-1998
and Treasurer of Deutsche Morgan
the Company Grenfell, Inc.
Vice President 1998 Associate, 1995-1996
and Treasurer of UBS Securities LLC
SAI Associate, 1994
Wachtell Lipton Rosen
& Katz
Associate, 1993-1994
Wells Fargo Nikko
Investment Advisers
J. Franklin Grey 46 Vice President 1994 Director, 1991-1994
of the Company Institutional Marketing
Capital Holding Corp.
(Providian)
Keith B. Jones 47 Vice President 1992 (Joined SAI in 1986)
of the Company
Michael L. Lindquist 45 Vice President 1993 (Joined SAI in 1983)
of the Company
Edward P. Nolan, Jr. 49 Vice President 1993 (Joined SAI in 1989)
of the Company
Gregory M. Outcalt 36 Vice President 1993 (Joined SAI in 1986)
of the Company
</TABLE>
- ---------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
27
<PAGE> 29
ITEM 11. EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
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 1998:
<TABLE>
<CAPTION>
Name of Individual or Capacities In Allocated Cash
Number in Group Which Served Compensation
- --------------------- ------------------------- --------------
<S> <C> <C>
Eli Broad Chairman, Chief Executive $1,482,778
Officer and President
Jay S. Wintrob Executive Vice President 857,524
Jana Waring Greer Senior Vice President 775,001
Peter McMillan Director 421,457
James R. Belardi Senior Vice President 408,949
===========
</TABLE>
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At November 30,
1998, Mr. Broad was the beneficial owner of 13,015,360 shares of Common Stock of
SunAmerica Inc. (approximately 6.4% of the class outstanding) and 13,340,591
shares of Nontransferable Class B Common Stock of SunAmerica Inc. (approximately
82% of the class outstanding). Of the Common Stock, 1,053,738 shares represent
restricted shares granted under the Company's employee stock plans as to which
Mr. Broad has no investment power; and 9,283,050 shares represent employee stock
options held by Mr. Broad which are or will become exercisable on or before
January 30, 1999 and as to which he has no voting or investment power. Of the
Nontransferable 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 November 30, 1998, all
directors and officers as a group beneficially owned 16,027,507 shares of Common
Stock (approximately 8% of the class outstanding) and 13,340,591 shares of
Nontransferable Class B Common Stock (approximately 82% of the class
outstanding).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
28
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the index set forth on page F-1 of this report.
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2(a) Purchase and Sale Agreement, dated as of July 15, 1998, by and
among the Company, SunAmerica Inc. ("SAI"), First SunAmerica Life
Insurance Company and MBL Life Assurance Corporation, is
incorporated herein by reference to Exhibit 2(e) to SAI's 1998
Annual Report on Form 10-K, filed December 21, 1998.
3(a) Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance
on December 22, 1995, is incorporated herein by reference to
Exhibit 3(a) to the Company's quarterly report on Form 10-Q for
the quarter ended December 31, 1995, filed February 14, 1996.
3(b) Amended and Restated Bylaws, as adopted January 1, 1996, is
incorporated herein by reference to Exhibit 3(b) to the Company's
quarterly report on Form 10-Q for the quarter ended December 31,
1995, filed February 14, 1996.
4(a) Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance
on December 12, 1996. See Exhibit 3(a).
4(b) Amended and Restated Bylaws, as adopted January 1, 1996. See
Exhibit 3(b).
10(a) Amendment to the Subordinated Loan Agreement for Equity Capital,
dated as of August 22, 1996, between the Company's subsidiary,
SunAmerica Capital Services, Inc. ("SACS") and SAI, extending the
maturity date to September 30, 1999 of a Subordinated Loan
Agreement for Equity Capital, dated as of September 30, 1992,
defining SAI's rights with respect to the 9% notes due September
29, 1996, is incorporated herein by reference to Exhibit 10(f) to
the Company's Form 10-K, filed December 19, 1996.
10(b) Subordinated Loan Agreement for Equity Capital, dated as of July
24, 1996, between the Company's subsidiary, Royal Alliance
Associates, Inc. and SAI, defining SAI's rights with respect to
the 9% notes due August 23, 1999 is incorporated herein by
reference to Exhibit 10(k) to the Company's Form 10-K, filed
December 19, 1996.
10(c) Amendment to the Subordinated Loan Agreement for Equity Capital,
dated as of September 3, 1996, between the Company's subsidiary,
SunAmerica Asset Management Corp., and SAI, extending the maturity
date to September 13, 1999 of a Subordinated Loan Agreement for
Equity Capital, dated as of September 3, 1993, defining SAI's
rights with respect to the 7% notes due September 13, 1996, is
incorporated herein by reference to Exhibit 10(l) to the Company's
Form 10-K, filed December 19, 1996.
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10(d) Subordinated Loan Agreement for Equity Capital, dated as of
February 19, 1997, between the Company's subsidiary, SACS, and
SAI, defining SAI's rights with respect to the 9% notes due March
14, 2000, is incorporated herein by reference to Exhibit 10(a) to
Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997, filed May 15, 1997.
10(e) Subordinated Loan Agreement for Equity Capital, dated as of April
29, 1998, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 8.5% notes due June 27,
2001, is incorporated herein by reference to Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1998, filed August 14, 1998.
10(f) Subordinated Loan Agreement for Equity Capital, dated as of June
3, 1998, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 8.5% notes due July 30,
2001, is incorporated herein by reference to Exhibit 10(b) to the
Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1998, filed August 14, 1998.
10(g) Subordinated Loan Agreement for Equity Capital, dated as of
August 25, 1998, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 8.5% notes due October
30, 2001.
10(h) Asset Lease Agreement, dated June 26, 1998, between the Company
and Aurora National Life Assurance Company ("Aurora"), relating
to a lease from Aurora of certain information relating to single
premium deferred annuities.
21 Subsidiaries of the Company.
27 Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
On July 17, 1998, the Company filed a Current Report on Form 8-K to file a press
release issued by SAI. in connection with the Company's acquisition of a block
of individual life and individual group annuity business of MBL Life Assurance
Corporation.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By/s/ SCOTT L. ROBINSON
--------------------------------------
Scott L. Robinson
December 23, 1998 Senior Vice President and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ELI BROAD Chairman, Chief Executive December 23, 1998
- ------------------------------ Officer and President -----------------
Eli Broad (Principal Executive Officer)
/s/ SCOTT L. ROBINSON Senior Vice President and December 23, 1998
- ----------------------------- Director (Principal -----------------
Scott L. Robinson Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and December 23, 1998
- ------------------------------ Controller (Principal -----------------
N. Scott Gillis Accounting Officer)
/s/ JAY S. WINTROB Executive Vice President December 23, 1998
- ------------------------------ and Director -----------------
Jay S. Wintrob
/s/ JAMES R. BELARDI Senior Vice President, December 23, 1998
- ------------------------------ Treasurer and Director -----------------
James R. Belardi
/s/ JANA W. GREER Senior Vice President December 23, 1998
- ------------------------------ and Director -----------------
Jana W. Greer
/s/ SUSAN L. HARRIS Senior Vice President, December 23, 1998
- ------------------------------ Secretary and Director -----------------
Susan L. Harris
/s/ JAMES W. ROWAN Senior Vice President December 23, 1998
- ------------------------------ and Director -----------------
James W. Rowan
/s/ EDWIN R. REOLIQUIO Senior Vice President December 23, 1998
- ------------------------------ and Chief Actuary -----------------
Edwin R. Reoliquio
/s/ PETER McMILLAN Director December 23, 1998
- ------------------------------ -----------------
Peter McMillan
</TABLE>
31
<PAGE> 33
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet as of September 30, 1998 and 1997 F-3 through
F-4
Consolidated Income Statement for the years ended
September 30, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the years ended
September 30, 1998, 1997 and 1996 F-6 through
F-7
Notes to Consolidated Financial Statements F-8 through
F-25
</TABLE>
F-1
<PAGE> 34
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 (the "Company") at September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
F-2
<PAGE> 35
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At September 30,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 333,735,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks available for
sale, at fair value (amortized
cost: 1998, $1,934,863,000;
1997, $1,942,485,000) 1,954,754,000 1,986,194,000
Mortgage loans 391,448,000 339,530,000
Common stocks available for sale,
at fair value (cost: 1998,
$115,000; 1997, $271,000) 169,000 1,275,000
Real estate 24,000,000 24,000,000
Other invested assets 30,636,000 143,722,000
--------------- ---------------
Total investments 2,734,742,000 2,608,301,000
Variable annuity assets held in
separate accounts 11,133,569,000 9,343,200,000
Accrued investment income 26,408,000 21,759,000
Deferred acquisition costs 539,850,000 536,155,000
Income taxes currently receivable 5,869,000 ---
Other assets 85,926,000 61,524,000
--------------- ---------------
TOTAL ASSETS $14,526,364,000 $12,570,939,000
=============== ===============
</TABLE>
See accompanying notes
F-3
<PAGE> 36
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 2,189,272,000 $ 2,098,803,000
Reserves for guaranteed investment
contracts 282,267,000 295,175,000
Payable to brokers for purchases of
securities 27,053,000 263,000
Income taxes currently payable --- 32,265,000
Other liabilities 106,594,000 122,728,000
--------------- ---------------
Total reserves, payables
and accrued liabilities 2,605,186,000 2,549,234,000
--------------- ---------------
Variable annuity liabilities related to
separate accounts 11,133,569,000 9,343,200,000
--------------- ---------------
Subordinated notes payable to Parent 39,182,000 36,240,000
--------------- ---------------
Deferred income taxes 95,758,000 67,047,000
--------------- ---------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 308,674,000 308,674,000
Retained earnings 332,069,000 244,628,000
Net unrealized gains on debt and equity
securities available for sale 8,415,000 18,405,000
--------------- ---------------
Total shareholder's equity 652,669,000 575,218,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $14,526,364,000 $12,570,939,000
=============== ===============
</TABLE>
See accompanying notes
F-4
<PAGE> 37
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Investment income $ 221,966,000 $ 210,759,000 $ 164,631,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (112,695,000) (109,217,000) (82,690,000)
Guaranteed investment contracts (17,787,000) (22,650,000) (19,974,000)
Senior indebtedness (1,498,000) (2,549,000) (2,568,000)
Subordinated notes payable
to Parent (3,114,000) (3,142,000) (2,556,000)
------------- ------------- -------------
Total interest expense (135,094,000) (137,558,000) (107,788,000)
------------- ------------- -------------
NET INVESTMENT INCOME 86,872,000 73,201,000 56,843,000
------------- ------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES) 19,482,000 (17,394,000) (13,355,000)
------------- ------------- -------------
Fee income:
Variable annuity fees 200,867,000 139,492,000 103,970,000
Net retained commissions 48,561,000 39,143,000 31,548,000
Asset management fees 29,592,000 25,764,000 25,413,000
Surrender charges 7,404,000 5,529,000 5,184,000
Other fees 3,938,000 3,218,000 3,390,000
------------- ------------- -------------
TOTAL FEE INCOME 290,362,000 213,146,000 169,505,000
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES (96,102,000) (98,802,000) (81,552,000)
------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (72,713,000) (66,879,000) (57,520,000)
------------- ------------- -------------
ANNUAL COMMISSIONS (18,209,000) (8,977,000) (4,613,000)
------------- ------------- -------------
PRETAX INCOME 209,692,000 94,295,000 69,308,000
Income tax expense (71,051,000) (31,169,000) (24,252,000)
------------- ------------- -------------
NET INCOME $ 138,641,000 $ 63,126,000 $ 45,056,000
============= ============= =============
</TABLE>
See accompanying notes
F-5
<PAGE> 38
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 138,641,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 112,695,000 109,217,000 82,690,000
Guaranteed investment
contracts 17,787,000 22,650,000 19,974,000
Net realized investment
(gains)losses (19,482,000) 17,394,000 13,355,000
Amortization (accretion) of
net premiums (discounts)
on investments 447,000 (18,576,000) (8,976,000)
Amortization of goodwill 1,422,000 1,187,000 1,169,000
Provision for deferred
income taxes 34,087,000 (16,024,000) (3,351,000)
Change in:
Accrued investment income (4,649,000) (2,084,000) (5,483,000)
Deferred acquisition costs (160,926,000) (113,145,000) (60,941,000)
Other assets (19,374,000) (14,598,000) (8,000,000)
Income taxes currently payable (38,134,000) 10,779,000 5,766,000
Other liabilities (2,248,000) 14,187,000 5,474,000
Other, net (5,599,000) 418,000 (129,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 54,667,000 74,531,000 86,604,000
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts 1,512,994,000 1,097,937,000 741,774,000
Guaranteed investment contracts 5,619,000 55,000,000 134,967,000
Net exchanges from the fixed
accounts of variable annuity
contracts (1,303,790,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts (191,690,000) (242,589,000) (263,614,000)
Guaranteed investment contracts (36,313,000) (198,062,000) (16,492,000)
Claims and annuity payments on
fixed annuity contracts (40,589,000) (35,731,000) (31,107,000)
Net receipts from (repayments of)
other short-term financings (10,944,000) 34,239,000 (119,712,000)
Net receipts from a modified
coinsurance transaction 166,631,000 -- --
Capital contributions received -- 28,411,000 27,387,000
Dividends paid (51,200,000) (25,500,000) (29,400,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 50,718,000 93,338,000 207,098,000
--------------- --------------- ---------------
</TABLE>
F-6
<PAGE> 39
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks $(1,970,502,000) $(2,566,211,000) $(1,937,890,000)
Mortgage loans (131,386,000) (266,771,000) (15,000,000)
Other investments, excluding
short-term investments -- (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable
preferred stocks 1,602,079,000 2,299,063,000 1,241,928,000
Real estate -- -- 900,000
Other investments, excluding
short-term investments 42,458,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks 424,393,000 376,847,000 288,969,000
Mortgage loans 80,515,000 25,920,000 11,324,000
Other investments, excluding
short-term investments 67,213,000 23,940,000 20,749,000
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 114,770,000 (176,347,000) (420,853,000)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 220,155,000 (8,478,000) (127,151,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 113,580,000 122,058,000 249,209,000
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 333,735,000 $ 113,580,000 $ 122,058,000
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 3,912,000 $ 7,032,000 $ 5,982,000
=============== =============== ===============
Net income taxes paid $ 74,932,000 $ 36,420,000 $ 22,031,000
=============== =============== ===============
</TABLE>
See accompanying notes
F-7
<PAGE> 40
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 operations
and broker-dealer operations. Annuity operations include the sale and
administration of fixed and variable annuities and guaranteed investment
contracts. Asset management operations, 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 1998 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
F-8
<PAGE> 41
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 by using the specific
cost identification method. Premiums and discounts on investments are
amortized to investment income by 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
Investment Income or Interest Expense in the income statement.
Initially, Swap Agreements are designated as hedges and, therefore, are
not marked to market. However, when a hedged asset/liability is sold or
repaid before the related Swap Agreement matures, the Swap Agreement is
marked to market and any gain/loss is classified with any gain/loss
realized on the disposition of the hedged asset/liability. Subsequently,
the Swap Agreement is marked to market and the resulting change in fair
value is included in Investment Income in the income statement. When a
Swap Agreement that is designated as a hedge is terminated before its
contractual maturity, any resulting gain/loss is credited/charged to the
carrying value of the asset/liability that it hedged and is treated as a
premium/discount for the remaining life of the asset/liability.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated
gross profits to be realized over the estimated lives of the annuity
contracts. Estimated gross profits are composed of net interest income,
net realized investment gains and losses, variable annuity fees,
surrender charges and direct administrative expenses. Costs incurred to
sell mutual funds are also deferred and amortized over the estimated
lives of the funds obtained. Deferred acquisition costs ("DAC") 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 DAC equal to the change
in amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. The change in this adjustment, net of tax,
is included with the change in net unrealized gains/losses on debt and
equity
F-9
<PAGE> 42
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
securities available for sale that is credited or charged directly to
shareholder's equity. DAC has been decreased by $7,000,000 at September
30, 1998 and $16,400,000 at September 30, 1997 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated
in separate accounts. The Company receives administrative fees for
managing the funds and other fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fees in the
income statement.
GOODWILL: Goodwill, amounting to $23,339,000 at September 30, 1998, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131").
SFAS 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
SFAS 130 is effective for the Company as of October 1, 1998 and is not
included in these financial statements.
SFAS 131 establishes standards for the disclosure of information about
the Company's operating segments. SFAS 131 is effective for the year
ending September 30, 1999 and is not included in these financial
statements.
F-10
<PAGE> 43
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Implementation of SFAS 130 and SFAS 131 will not have an impact on the
Company's results of operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 addresses the accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 is
effective for the Company as of October 1, 1999 and is not included in
these financial statements. The Company has not completed its analysis
of the effect of SFAS 133, but management believes that it will not have
a material impact on the Company's results of operations, financial
condition or liquidity.
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
Amortized fair
cost value
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 84,377,000 $ 88,239,000
Mortgage-backed securities 569,613,000 584,007,000
Securities of public utilities 108,431,000 106,065,000
Corporate bonds and notes 883,890,000 884,209,000
Redeemable preferred stocks 6,125,000 6,888,000
Other debt securities 282,427,000 285,346,000
-------------- --------------
Total $1,934,863,000 $1,954,754,000
============== ==============
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 $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
F-11
<PAGE> 44
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, 1998, follow:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
-------------- --------------
<S> <C> <C>
Due in one year or less $ 19,124,000 $ 19,319,000
Due after one year through
five years 313,396,000 318,943,000
Due after five years through
ten years 744,740,000 750,286,000
Due after ten years 287,990,000 282,199,000
Mortgage-backed securities 569,613,000 584,007,000
-------------- --------------
Total $1,934,863,000 $1,954,754,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
F-12
<PAGE> 45
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
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, 1998:
Securities of the United States
Government $ 3,862,000 $ --
Mortgage-backed securities 15,103,000 (709,000)
Securities of public utilities 2,420,000 (4,786,000)
Corporate bonds and notes 31,795,000 (31,476,000)
Redeemable preferred stocks 763,000 --
Other debt securities 5,235,000 (2,316,000)
------------ ------------
Total $ 59,178,000 $(39,287,000)
============ ============
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 $ 46,453,000 $ (2,744,000)
============ ============
</TABLE>
Gross unrealized gains on equity securities available for sale
aggregated $54,000 and $1,004,000 at September 30, 1998 and 1997,
respectively. There were no unrealized losses at September 30, 1998 and
1997.
F-13
<PAGE> 46
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,
--------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Realized gains $ 28,086,000 $ 22,179,000 $ 14,532,000
Realized losses (4,627,000) (25,310,000) (10,432,000)
COMMON STOCKS:
Realized gains 337,000 4,002,000 511,000
Realized losses -- (312,000) (3,151,000)
OTHER INVESTMENTS:
Realized gains 8,824,000 2,450,000 1,135,000
IMPAIRMENT WRITEDOWNS (13,138,000) (20,403,000) (15,950,000)
------------ ------------ ------------
Total net realized
investment gains and losses $ 19,482,000 $(17,394,000) $(13,355,000)
============ ============ ============
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Short-term investments $ 12,524,000 $ 11,780,000 $ 10,647,000
Bonds, notes and
redeemable preferred stocks 156,140,000 163,038,000 140,387,000
Mortgage loans 29,996,000 17,632,000 8,701,000
Common stocks 34,000 16,000 8,000
Real estate (467,000) (296,000) (196,000)
Cost-method partnerships 24,311,000 6,725,000 4,073,000
Other invested assets (572,000) 11,864,000 1,011,000
------------- ------------- -------------
Total investment income $ 221,966,000 $ 210,759,000 $ 164,631,000
============= ============= =============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$1,910,000 for the year ended September 30, 1998, $2,050,000 for the
year ended September 30, 1997, and $1,737,000 for the year ended
September 30, 1996, and are included in General and Administrative
Expenses in the income statement.
At September 30, 1998, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
F-14
<PAGE> 47
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
At September 30, 1998, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 21% of the
aggregate carrying value of the portfolio secured by properties located
in California and approximately 14% by properties located in New York.
No more than 8% of the portfolio was secured by properties in any other
single state.
At September 30, 1998, bonds, notes and redeemable preferred stocks
included $167,564,000 of bonds and notes not rated investment grade. The
Company had no material concentrations of non-investment-grade assets at
September 30, 1998.
At September 30, 1998, the carrying value of investments in default as
to the payment of principal or interest was $917,000, all of which were
mortgage loans. Such nonperforming investments had an estimated fair
value equal to their carrying value.
As a component of its asset and liability management strategy, the
Company utilizes Swap Agreements to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against
interest rate changes. The Company typically utilizes Swap Agreements to
create a hedge that effectively converts floating-rate assets and
liabilities to fixed-rate instruments. At September 30, 1998, the
Company had one outstanding Swap Agreement with a notional principal
amount of $21,538,000, which matures in December 2024. The net interest
paid amounted to $278,000 and $125,000 for the years ended September 30,
1998 and 1997, respectively, and is included in Interest Expense on
Guaranteed Investment Contracts in the income statement.
At September 30, 1998, $5,154,000 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.
F-15
<PAGE> 48
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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 HELD IN SEPARATE ACCOUNTS: Variable annuity
assets are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and
single premium life contracts are assigned a fair value equal to current
net surrender value. 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 a hedging Swap Agreement, determined from
independent broker quotes.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations
represent net transactions of a short-term nature for which the carrying
value is considered a reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values
of contracts in the accumulation phase are based on net surrender
values. Fair values of contracts in the payout phase are based on the
present value of future cash flows at assumed investment rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on
the quoted market prices for similar issues.
F-16
<PAGE> 49
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, 1998 and 1997, compared with their respective carrying
values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
value value
--------------- ---------------
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks 1,954,754,000 1,954,754,000
Mortgage loans 391,448,000 415,981,000
Common stocks 169,000 169,000
Cost-method partnerships 4,403,000 12,744,000
Variable annuity assets held in
separate accounts 11,133,569,000 11,133,569,000
LIABILITIES:
Reserves for fixed annuity contracts 2,189,272,000 2,116,874,000
Reserves for guaranteed investment
contracts 282,267,000 282,267,000
Payable to brokers for purchases
of securities 27,053,000 27,053,000
Variable annuity liabilities related
to separate accounts 11,133,569,000 10,696,607,000
Subordinated notes payable to Parent 39,182,000 40,550,000
=============== ===============
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 held in
separate accounts 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 related to
separate accounts 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent 36,240,000 37,393,000
=============== ===============
</TABLE>
F-17
<PAGE> 50
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes and accrued interest payable to Parent totaled
$39,182,000 at interest rates ranging from 8.5% to 9% at September 30,
1998, and require principal payments of $23,060,000 in 1999, $5,400,000
in 2000 and $10,000,000 in 2001.
6. REINSURANCE
On August 11, 1998, the Company entered into a modified coinsurance
transaction, approved by the Arizona Department of Insurance, which
involves the ceding of approximately $5,000,000,000 of variable
annuities to ANLIC Insurance Company (Cayman), a Cayman Islands stock
life insurance company, effective December 31, 1997. As a part of this
transaction, the Company received cash amounting to approximately
$188,700,000, and recorded a corresponding reduction of DAC related to
the coinsured annuities.
As payments are made to the reinsurer, the reduction of DAC is relieved.
The net reduction in DAC at September 30, 1998 was $166,631,000. Certain
expenses related to this transaction are being charged directly to DAC
amortization in the income statement. The net effect of this transaction
in the income statement is not material.
7. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided
liquidity support for certain short-term securities of two
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. An additional
$51,000,000 has been committed to investments in the process of being
funded or to be available in the case of certain natural disasters, for
which the Company receives a fee.
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.
F-18
<PAGE> 51
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At September 30, 1998 and 1997, 3,511 shares were
outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances $ 308,674,000 $ 280,263,000 $ 252,876,000
Capital contributions received -- 28,411,000 27,387,000
------------- ------------- -------------
Ending balances $ 308,674,000 $ 308,674,000 $ 280,263,000
============= ============= =============
RETAINED EARNINGS:
Beginning balances $ 244,628,000 $ 207,002,000 $ 191,346,000
Net income 138,641,000 63,126,000 45,056,000
Dividend paid (51,200,000) (25,500,000) (29,400,000)
------------- ------------- -------------
Ending balances $ 332,069,000 $ 244,628,000 $ 207,002,000
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
NET UNREALIZED GAINS (LOSSES) ON
DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balances $ 18,405,000 $ (5,521,000) $ (5,673,000)
Change in net unrealized
gains (losses) on debt
securities available
for sale (23,818,000) 57,463,000 (2,904,000)
Change in net unrealized
gains (losses) on equity
securities available for sale (950,000) (55,000) 3,538,000
Change in adjustment to
deferred acquisition costs 9,400,000 (20,600,000) (400,000)
Tax effects of net changes 5,378,000 (12,882,000) (82,000)
------------- ------------ ------------
Ending balances $ 8,415,000 $ 18,405,000 $ (5,521,000)
============= ============ ============
</TABLE>
F-19
<PAGE> 52
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. SHAREHOLDER'S EQUITY (continued)
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
$51,200,000, $25,500,000 and $29,400,000 were paid on June 4, 1998, April
1, 1997 and March 18, 1996, respectively.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1998 was $64,125,000. The statutory net income for the year
ended December 31, 1997 was $74,407,000, and the statutory net income for
the year ended December 31, 1996 was $27,928,000. The Company's statutory
capital and surplus was $537,542,000 at September 30, 1998, $567,979,000 at
December 31, 1997 and $311,176,000 at December 31, 1996.
9. 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>
1998:
Currently payable $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred (550,000) 34,637,000 34,087,000
------------- ------------ ------------
Total income tax expense $ 3,671,000 $ 67,380,000 $ 71,051,000
============= ============ ============
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
============= ============ ============
</TABLE>
F-20
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. INCOME TAXES (continued)
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Amount computed at
statutory rate $ 73,392,000 $ 33,003,000 $ 24,258,000
Increases (decreases)
resulting from:
Amortization of differences
between book and tax
bases of net assets
acquired 460,000 666,000 464,000
State income taxes, net of
federal tax benefit 5,530,000 1,950,000 2,070,000
Dividends-received deduction (7,254,000) (4,270,000) (2,357,000)
Tax credits (1,296,000) (318,000) (257,000)
Other, net 219,000 138,000 74,000
------------ ------------ ------------
Total income tax expense $ 71,051,000 $ 31,169,000 $ 24,252,000
============ ============ ============
</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, 1998. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
F-21
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. 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,
------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ 17,643,000 $ 13,160,000
Deferred acquisition costs 223,392,000 154,949,000
State income taxes 2,873,000 1,777,000
Other liabilities 144,000 --
Net unrealized gains on debt
and equity securities
available for sale 4,531,000 9,910,000
------------- -------------
Total deferred tax liabilities 248,583,000 179,796,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (149,915,000) (108,090,000)
Guaranty fund assessments (2,910,000) (2,707,000)
Other assets -- (1,952,000)
------------- -------------
Total deferred tax assets (152,825,000) (112,749,000)
------------- -------------
Deferred income taxes $ 95,758,000 $ 67,047,000
============= =============
</TABLE>
F-22
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp. and Spelman & Co. Inc. Commissions paid to these
broker-dealers totaled $32,946,000 in 1998, $25,492,000 in 1997, and
$16,906,000 in 1996. 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 33.6%, 36.1%, and 38.3% of
premiums in 1998, 1997, and 1996, respectively. The Company also sells its
products through unaffiliated broker-dealers, the largest two of which
represented approximately 17.3% and 8.4% of premiums in 1998, 19.2% and
10.1% in 1997, and 19.7% and 10.2% in 1996, respectively.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, whose
purpose is to provide services to the Company and its affiliates. Amounts
paid for such services totaled $84,975,000 for the year ended September 30,
1998, $86,116,000 for the year ended September 30, 1997 and $65,351,000 for
the year ended September 30, 1996. The marketing component of such costs
during these periods amounted to $39,482,000, $31,968,000 and $17,442,000,
respectively, and are deferred and amortized as part of Deferred
Acquisition Costs. The other components of such costs are included in
General and Administrative Expenses in the income statement.
The Parent made a capital contribution of $28,411,000 in December 1996 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, 1998, the Company sold various invested
assets to the Parent for cash equal to their current market value of
$64,431,000. The Company recorded a net gain aggregating $16,388,000 on
such transactions.
During the year ended September 30, 1998, the Company purchased certain
invested assets from the Parent, SunAmerica Life Insurance Company and
CalAmerica Life Insurance Company for cash equal to their current market
value, which aggregated $20,666,000, $10,468,000 and $61,000, respectively.
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 value of
$15,776,000 and $15,000, respectively. The Company recorded a net gain
aggregating $276,000 on such transactions.
During the year ended September 30, 1997, the Company purchased certain
invested assets from SunAmerica Life Insurance Company and CalAmerica Life
Insurance Company for cash equal to their current market value 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 value of $274,000 and $47,321,000,
respectively. The Company recorded a net loss aggregating $3,000 on such
transactions.
F-23
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RELATED-PARTY MATTERS (continued)
During the year ended September 30, 1996, the Company purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal to
their current market value, which aggregated $28,379,000.
11. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
Total
depreciation
and
Total amortization Pretax Total
revenues expense income assets
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1998:
Annuity operations $ 443,407,000 $ 60,731,000 $ 178,120,000 $14,366,018,000
Broker-dealer operations 47,363,000 1,770,000 22,401,000 55,870,000
Asset management
operations 41,040,000 14,780,000 9,171,000 104,476,000
--------------- --------------- --------------- ---------------
Total $ 531,810,000 $ 77,281,000 $ 209,692,000 $14,526,364,000
=============== =============== =============== ===============
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
operations 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
operations 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
=============== =============== =============== ===============
</TABLE>
12. SUBSEQUENT EVENTS
On July 15, 1998, the Company entered into a definitive agreement to
acquire the individual life business and the individual and group annuity
business of MBL Life Assurance Corporation ("MBL Life") via a 100%
coinsurance transaction for approximately $130,000,000 in cash. The
transaction will include approximately $2,000,000,000 of universal life
reserves and $3,000,000,000 of fixed annuity reserves. The Company plans to
reinsure a large portion of the mortality risk
F-24
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. SUBSEQUENT EVENTS (Continued)
associated with the acquired block of universal life business. Completion
of this acquisition is expected by the end of calendar year 1998 and is
subject to customary conditions and required approvals. Included in this
block of business is approximately $250,000,000 of individual life business
and $500,000,000 of group annuity business whose contract owners are
residents of New York State ("the New York Business"). Approximately six
months subsequent to completion of the transaction, the New York Business
will be acquired by the Company's New York affiliate, First SunAmerica Life
Insurance Company, and the remainder of the business will be acquired by
the Company via assumption reinsurance agreements between MBL Life and the
respective companies, which will supersede the coinsurance agreement. The
$130,000,000 purchase price will be allocated between the Company and its
affiliate based on their respective assumed life insurance reserves.
On August 20, 1998, the Parent announced that it has entered into a
definite agreement to merge with and into American International Group,
Inc. ("AIG"). Under the terms of the agreement, each share of the Parent's
common stock (including Nontransferable Class B) will be exchanged for
0.855 shares of AIG's common stock. The transaction will be treated as a
pooling of interests for accounting purposes and will be a tax-free
reorganization. The transaction was approved by both the Parent's and AIG's
shareholders on November 18, 1998, and, subject to various regulatory
approvals, will be completed in late 1998 or early 1999.
F-25
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10(g) Subordinated Loan Agreement for Equity Capital, dated as of
August 25, 1998, between the Company's subsidiary, SACS, and SAI,
defining SAI's rights with respect to the 8.5% notes due October
30, 2001.
10(h) Asset Lease Agreement, dated June 26, 1998, between the Company
and Aurora National Life Assurance Company ("Aurora") relating to
a lease from Aurora of certain information relating to single
premium deferred annuities.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10(g)
NASD
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
SL-5
AGREEMENT BETWEEN:
Lender SunAmerica, Inc.
(Name)
1 SunAmerica Center
(Street Address)
Los Angeles California 90067-6022
(City) (State) (Zip)
AND
Borrower Capital Services Inc.
(Name)
733 Third Avenue
(Street Address)
New York New York 10017
(City) (State) (Zip)
NASD IDNO: 13158
Date Filed: September 2, 1998 NASD
<PAGE> 2
NASD
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
AGREEMENT DATED August 25,1998 to be effective September 30, 1998
between SunAmerica, Inc. (the "Lender") and SunAmerica Capital Services, Inc.
(the "Broker-Dealer").
In consideration of the sum of $3,000,00 and subject to the terms and
conditions hereinafter set forth, the Broker-Dealer promises to pay to the
Lender or assigns on October 30, 2001 (the "Scheduled Maturity Date") (the
last day of the month at least three years from the effective date of this
Agreement) at the principal office of the Broker-Dealer the aforedescribed
sum and interest thereon payable at the rate of 8.5* % per annum from the
effective date of this Agreement, which date shall be the date so agreed upon
by the Lender and the Broker-Dealer unless otherwise determined by the
National Association of Securities Dealers, Inc. (the "NASD"). This
agreement shall not be considered a satisfactory subordination agreement
pursuant to the provisions of 17 CFR 240.15c3-d unless and until the NASD has
found the Agreement acceptable and such Agreement has become effective in the
form found acceptable.
The cash proceeds covered by this Agreement shall be used and dealt with
by the Broker-Dealer as part of its capital and shall be subject to the risks
of the business.
The Broker-Dealer shall have the right to deposit any cash proceeds of the
Subordinated Loan Agreement in an account or accounts in its own name in any
bank or trust company.
The Lender irrevocably agrees that the obligations ofthe Broker-Dealer
under this Agreement with respect to the payment of principal and interest
shall be and are subordinate in right of payment and subject to the prior
payments or provision for payment in full of all claims of all other present
and future creditors of the Broker-Dealer arising out of any matter occurring
prior to the date on which the related Payment Obligation (as defined h
erein) matures consistent with the provisions of 17 CFR 240.15c3-1 and
240.15c3-1d, except for claims which are the subject of subordination
agreements which rank on the same priority as or are junior to the claim of
the Lender under such subordination agreements.
* Interest to be paid quarterly from the effective date of this Agreement.
I. PERMISSIVE PREPAYMENTS
<PAGE> 3
At the option of the Broker-Dealer, but not at the option of the Lender,
payment of all or any part of the "Payment Obligation" amount hereof prior to
the maturity date may be made by the Broker-Dealer, but in no event may
any prepayment be made before the expiration of one year from the date this
Agreement Became effective. No prepayment shall be made if, after giving
effect thereto (and to all payments for Payment Obligations under any
other subordination agreements then outstanding, the maturity of which are
scheduled to fall due either within six months after the date such prepayment
is to occur or on or prior to the date on which the Payment Obligation
hereof is scheduled to mature, whichever date is earlier), without reference
to any projected profit or loss of the Broker-Dealer, either aggregate
indebtedness of the Broker-Dealer would exceed 1000 percent of its net
capital or such lesser percent as may be made applicable to the
Broker-Dealer from time to time by a governmental agency or self-regulatory
body having appropriate authority, or if the Broker-Dealer is operating
pursuant to paragraph (a)(1)(ii) of 17 CFR 240.15c3-1, its net capital would
be less than five percent of aggregate debit items computed in accordance
with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant,
7 percent of the funds required to be segregated pursuant to the Commodity
Exchange Act and the regulations thereunder (less the market value of
commodity options purchased by option customers on or subject to the rules of
a contract market, provided, however, the deduction for each option customer
shall be limited to the amount of customer funds in such option customer's
account), if greater, or its net capital would be less than 120 percent of
the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph
(a)(1)(ii), if applicable, or such greater dollar amount as may be made
applicable to the Broker-Dealer by the NASD, or governmental agency or
self-regulatory body having appropriate authority.
II. SUSPENDED REPAYMENTS
(a) The Payment Obligation of the Broker-Dealer shall be suspended and
shall not mature if after giving effect to such payment (together with the
payment of any Payment Obligation, of the Broker-Dealer under any other
subordination agreement scheduled to mature on or before such Payment
Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200
percent of its net capital or such lesser percent as may be made applicable
to the Broker-Dealer from time to time by the NASD, or a governmental agency
or self-regulatory body having appropriate authority, or if the Broker-Dealer
is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital
would be less than 5 percent of aggregate debit items computed in accordance
with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant,
6 percent of the funds required to be segregated pursuant to the Commodity
Exchange Act and the regulations thereunder, (less the market value of
<PAGE> 4
commodity options purchased by option customers on or subject to the rules
of a contract market, provided, however, the deduction for each option
customer shall be limited to the amount of customer funds in such option
customer's account), if greater, or its net capital would be less than 120
percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including
paragraph (a)(1)(ii), if applicable, or such greater dollar amount as may be
made applicable to the Broker-Dealer by the NASD, or a governmental agency or
self-regulatory body having appropriate authority.
III. NOTICE OF MATURITY
The Broker-Dealer shall immediately notify the NASD if, after giving
effect to all payments of Payment Obligations under subordination agreements
then outstanding which are then due or mature within six months without
reference to any projected profit or loss of the Broker-Dealer, either the
aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its
net capital, or in the case of a Broker-Dealer operating pursuant to
paragraph (a)(1)(ii) of 17 CFR 240.15c3-1, its net capital would be less than
5 percent of aggregate debit items computed in accordance with 17 CFR
240.15c3-3a, or if registered as a futures commission merchant 6 percent of
the funds required to be segregated pursuant to the Commodity Exchange Act
and the regulations thereunder, (less the market value of commodity options
purchased by option customers on or subject to the rules of a contract
market, provided, however, the deduction for each option customer shall be
limited to the amount of customer funds in such option customer's account,)
if greater, and in either case, if its net capital would be less than 120
percent of the minimum dollar amount required by 17 CFR 240.15c3-1
including paragraph (a)(1)(ii), if applicable, or such greater dollar amount
as may be made applicable to the Broker-Dealer by the NASD, or a governmental
agency or self-regulatory body having appropriate authority.
IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF
SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS
A Broker-Dealer who guarantees, endorses, carries or clears specialist
or market-maker transactions in options listed on a national securities
exchange or facility of a national securities association shall not permit a
reduction, prepayment, or repayment of the unpaid principal amount if the
effect would cause the equity required in such specialist or market-maker
accounts to exceed 1000 percent of the Broker-Dealer's net capital or
such percent as may be made applicable to the Broker-Dealer from time to time
by the NASD, or a governmental agency or self-regulatory body having
appropriate authority.
<PAGE> 5
V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL
The proceeds covered by this Agreement shall in all respects be subject
to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no
equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated
pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions
by partners, par or stated value of capital stock, paid-in capital in excess
of par, retained earnings or other capital accounts, may be withdrawn by
action of a stockholder or partner, or by redemption or repurchase of shares
of stock by any of the consolidated entities or through the payment of
dividends or any similar distribution, nor may any unsecured advance
or loan be made to a stockholder, partner, sole proprietor, or employee if,
after giving effect thereto and to any other such withdrawals, advances or
loans and any payments of Payment Obligations under satisfactory
subordination agreements which are scheduled to occur within six months
following such withdrawals, advances or loans, either aggregate indebtedness
of any of the consolidated entities exceeds 1000 percent of its net
capital, or in the case of a Broker-Dealer operating pursuant to paragraph
(a)(1)(ii) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent
of aggregate debit items computed in accordance with 17 CFR
240.15c3-3a, or if registered as a futures commission merchant, 7 percent of
the funds required to be segregated pursuant to the Commodity Exchange Act,
and the regulations thereunder (less the market value of commodity options
purchased by option customers on or subject to the rules of a contract
market, provided, however, the deduction for each option customer shall be
limited to the amount of customer funds in such option customer's
account), if greater, and in either case, if its net capital would be less
than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1
including paragraph (a)(1)(ii), if applicable, or such greater dollar amount
as may be made applicable to the Broker-Dealer by the NASD, or a governmental
agency or self-regulatory body having appropriate authority; or should the
Broker-Dealer be included within such consolidation, if the total outstanding
principal amounts of satisfactory subordination agreements of the
Broker-Dealer (other than such agreements which qualify as equity under
paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its
debt/equity total, as this term is defined in paragraph (d) of 17 CFR
240.15c3-1, for a period in excess of 90 days, or for such longer period
which the Commission may upon application of the Broker-Dealer grant in the
public interest or for the protection of investors.
<PAGE> 6
VI. BROKER-DEALERS REGISTERED WITH CFTC
If the Broker-Dealer is a futures commission merchant or introductory
broker as that term is defined in the Commodity Exchange Act, the
Broker-Dealer agrees, consistent with the requirements of Section 1.17(h) of
the regulations of the CFTC (17 CFR 1.17(h)), that:
(a) Whenever prior written notice by the Broker-Dealer to the NASD
is required pursuant to the provisions of this Agreement, the same prior
written notice shall be given by the Broker-Dealer to (i) the CFTC
at its principal office in Washington, D.C., attention Chief Account of
Division of Trading and Markets, and/or (ii) the commodity exchange of which
the Organization is a member and which is then designated by the CFTC as the
Organization's designated self-regulatory organization (the DSRO);
(b) Whenever prior written consent, permission or approval of the
NASD is required pursuant to the provisions of this Agreement, the
Broker-Dealer shall also obtain the prior written consent, permission or
approval of the CFTC and/or of the DSRO.
VII. GENERAL
In the event of the appointment of a receiver or trustee of the
Broker-Dealer or in the event of its insolvency, liquidation pursuant to the
Securities Investor Protection Act of 1970 or otherwise, bankruptcy,
assignment for the benefit of creditors, reorganizations whether or not
pursuant to bankruptcy laws, or any other marshaling of the assets and
liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer
shall mature, and the holder hereof shall not be entitled to participate or
share, ratably or otherwise, in the distribution of the assets of the
Broker-Dealer until all claims of all other present and future creditors of
the Broker-Dealer, whose claims are senior hereto, have been fully satisfied.
This Agreement shall not be subject to cancellation by either the Lender
or the Broker-Dealer, and no payment shall be made, nor the Agreement
terminated, rescinded or modified by mutual consent or otherwise if the
effect thereof would be inconsistent with the requirements of 17
CFR 240.15c3-1 and 240.15c3-d.
The Agreement may not be transferred, sold, assigned, pledged, or
otherwise encumbered or otherwise disposed of, and no lien, charge, or other
encumbrance may be created or permitted to be created thereof without the
prior written consent of the NASD.
<PAGE> 7
The Lender irrevocably agrees that the loan evidenced hereby is not
being made in reliance upon the standing of the Broker-Dealer as a member
organization of the NASD or upon the NASD surveillance of the Broker-Dealer's
financial position or its compliance with the By-laws, rule and practices of
the NASD. The Lender has made such investigation of the Broker-Dealer and
its partners, officers, directors, and stockholders as the Lender deems
necessary and appropriate under the circumstances.
The Lender is not relying upon the NASD to provide any information
concerning or relating to the Broker-Dealer and agrees that the NASD has no
responsibility to disclose to the Lender any information concerning or
relating to the Broker-Dealer which it may now, or at any future time, have.
The term "Broker-Dealer," as used in this Agreement, shall include the
Broker-Dealer, its heirs, executors, administrators, successors and assigns.
The term "Payment Obligation" shall mean the obligation of the Borrower
to repay cash loaned to it pursuant to this Subordinated Loan Agreement.
The provisions of this Agreement shall be binding upon the Broker-Dealer
and the Lender, and their respective heirs, executors, administrators,
successors, and assigns.
Any controversy arising out of or relating to this Agreement may be
submitted to and settled by arbitration pursuant to the By-Laws and rules of
the NASD. The Broker-Dealer and the Lender shall be conclusively bound
by such arbitration.
This instrument embodies the entire agreement between the Broker-Dealer
and the Lender and no other evidence of such agreement has been or will be
executed without prior written consent of the NASD.
This Agreement shall be deemed to have been made under, and shall be
governed by, the laws of the State of California in all respects.
IN WITNESS WHEREOF the parties have set their hands and seal this 25th
day of August, 1998.
SunAmerica Capital services, Inc.
(Name of Broker-Dealer)
By: /s/ Debbi Potash-Turner L.S.
(Authorized Person)
Chief Financial Officer
<PAGE> 8
By: /s/ SunAmerica, Inc. L.S.
(Lender)
By: /s/ James R. Belardi L.S.
Executive Vice President
FOR NASD USE ONLY
ACCEPTED BY:
(Name)
EFFECTIVE DATE:
LOAN NUMBER:
<PAGE> 9
SUBORDINATED LOAN AGREEMENT
LENDER'S ATTESTATION
It is recommended that you discuss the merits of this investment with
an attorney, accountant or some other person who has knowledge and experience
in financial and business matters prior to executing this Agreement.
1. I have received and reviewed NASD Form SLD, which is a reprint of
17 CFR 240.15c3-1, and am familiar with its provisions.
2. I am aware that the funds or securities subject to this Agreement
are not covered by the Securities Investor Protection Act of 1970.
3. I understand that I will be furnished financial statements
pursuant to SEC Rule 17a-5(c).
4. On the date this Agreement was entered into, the Broker-Dealer
carried funds or securities for my account.
(State Yes or No) No.
5. Lender's business relationship to the Broker-Dealer is: ultimate
parent of the Broker-Dealer; continuously monitors fiscal status, reports of
the Broker-Dealer.
6. If not a partner or stockholder is not actively engaged in the
business of the Broker-Dealer, acknowledge receipt of the following:
(a) Certified audit and accountant's certificate dated
______________.
(b) Disclosure of financial and/oroperational problems since the
last certified audit which required reporting pursuant to SEC Rule 17a-11.
(If no such reporting was required, state "none")
_________________________________________________________________________
_________________________________________________________.
(c) Balance sheet and statement of ownership equity dated
_____________.
(d) Most recent computation of net capital and aggregate
indebtedness or aggregate debit items dated _________________, reflecting a
net capital of $________________ and a ratio of _______________.
(e) Debt/equity ratio as of ______________ of ________________.
(f) Other disclosures:_______________.
Dated: August 25, 1998
SunAmerica Inc.
/s/ James R. Belardi L.S.
(Lender)
Executive Vice President
<PAGE> 10
CERTIFICATE OF SECRETARY
I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation
(this "Corporation), do hereby certify that 91) the Executive Committee of
the Board of Directors of this corporation as of August 22, 1996, adopted the
following resolutions, (2) that such resolutions have not been amended or
rescinded from the date of their resolution and are in full force and effect
as of the date hereof, (3) the principal amount limits set forth in the
following resolutions are not exceeded by that certain $3,500,000
Subordinated Loan Agreement for Equity Capital dated April 29, 1998, and
effective May 28,1998 between this Corporation and SunAmerica Capital
Services, Inc.
Blanket Authorization of Subordinated Loan Agreements for Equity Capital
WHEREAS, this Corporation, from time to time, reviews the net capital
infusion needs of its wholly-owned subsidiaries which are broker-dealers
registered with the Securities and Exchange Commission and members of the
National Association of Securities Dealers, Inc., including SunAmerica
Capital Services, Inc., Advantage Capital Corporation, SunAmerica Securities,
Inc. and Royal Alliance Associates, Inc., and in conjunction with such
review, has provided subordinated loans to such subsidiaries pursuant to
Subordinated Loan Agreements for Equity Capital;
WHEREAS, it is in the best interests of this Corporation to provide
blanket authorization for such subordinated loan transactions;
NOW, THEREFORE, BE IT RESOLVED that the Chairman, any Vice Chairman,
any Executive Vice President, or the Treasurer (the "Designated Officers"),
acting alone, be, and each hereby is authorized to effect subordinated loans
to the wholly-owned broker-dealer subsidiaries of the Corporation, in an
aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000),
and to make,execute and deliver such loan agreements and other documents
evidencing such loans, including any Subordinated Loan Agreement for Equity
Capital, as deemed necessary or appropriate;
RESOLVED FURTHER that each of the Designated Officers are hereby
authorized to make such changes in the terms and conditions of such
Subordinated Loan Agreements as may be necessary to conform to the
requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the
National Association of Securities Dealers; and
RESOLVED FURTHER that the Executive Committee hereby ratifies any and
all action that may have been taken by the officers of this Corporation in
connection with the foregoing resolutions and authorizes the officers of this
Corporation to take any and all such further actions as may be deemed
appropriate to reflect these resolutions and to carry out their tenor, effect
and intent.
IN WITNESS WHEREOF, the undersigned has executed this Certificate and
affixed the seal of this corporation this 25th day of August, 1998.
/s/ Susan L. Harris
SUSAN L. HARRIS
(SEAL)
<PAGE> 1
EXHIBIT 10(h)
ASSET LEASE AGREEMENT
This ASSET LEASE AGREEMENT dated June 26, 1998, is entered into
between ANCHOR NATIONAL LIFE INSURANCE COMPANY, an Arizona
corporation ("ANLIC") and AURORA NATIONAL LIFE ASSURANCE COMPANY, a
California corporation ("AURORA").
RECITAL
ANLIC, an affiliate of Aurora, desires to lease from Aurora
certain information relating to owners of Executice Life restructured
single premium deferred annuities assumed by Aurora ("SPDAs") for the
purpose of engaging in a direct-mail marketing campaign for the sale
of variable annuity contracts to such owners, and Aurora desires to
lease such information to ANLIC for such purpose.
NOW, THEREFORE, with respect to the foregoing recital and in
consideration of the covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the parties
agree as follows:
1. Lease of Contract Owner Information
a. ANLIC will lease from Aurora certain information relating
to the SPDAs ("Contract Owner Information"), and will use the
information to conduct a direct-mail campaign for the sale of ANLIC's
The Polaris II variable annuity contract ("ANLIC Contract) to the
owners of SPDAs ("Contract Owners") during the period July 15, 1998
through December 31, 1998 (the "Campaign"). The Contract Owner
Information is described in Exhibit A to this Agreement. The
Campaign will be conducted by ANLIC through appropriately licensed
individuals affiliated with a broker/dealer or brokers/dealers
selected by ANLIC (collectively, the "Campaign Broker/Dealer"). This
agreement shall not prohibit the Campaign Broker/Dealer from
responding to inquiries from Contract Owners about purchasing an
ANLIC Contract after the Campaign if the inquiry is the result of the
Campaign
<PAGE> 2
2. Compensation to Aurora
a. ANLIC will compensate Aurora for the lease of the Contract
Owner Information based upon all purchase payments made and other
moneys received by ANLIC under ANLIC Contracts issued during the
period July 15, 1998 through December 31, 1999 as a result of the
Campaign. The compensation shall be at the rate of 5.75% of purchase
payments and other moneys received under the ANLIC Contracts and
shall be paid to Aurora monthly beginning October 1, 1998. Aurora
will not be compensated for any ANLIC Contract that is issued by
ANLIC to a Contract Owner through a non-Campaign Broker/Dealer.
During the period July 15, 1998 through December 31, 1999, ANLIC will
allow Aurora's accountants reasonable access to its books and records
relating to sales of ANLIC Contracts for the purpose of confirming
the accuracy of the compensation paid to Aurora.
3. Duties of Aurora
a. Aurora will provide ANLIC with Contract Owner Information
as described in Exhibit A attached hereto.
b. Aurora will send a letter to Contract Owners informing them
of the Campaign. The letter will be in the forms set forth in
Exhibit B attached to this Agreement.
c. It is mutually understood that moratorium charges will not
be applicable to the exchange of an SPDA for an ANLIC Contract.
Aurora will waive any surrender charge that may be applicable to the
exchange of an SPDA for an ANLIC Contract prior to December 31, 1998.
d. Upon receipt of proper Contract Owner authorization, Aurora
will use its reasonable efforts to expeditiously process within 60
days of such receipt the exchange of the Contract Owner's SPDA for
an ANLIC Contract. ANLIC recognizes and understands that the
Campaign will occur when the moratorium period ends relatice to the
Executive Life rehabilitation and the increased demands which may be
placed on Aurora processing.
e. During the Campaign, Aurora will not provide any other
outside provider of insurance, annuity or investment products with
its list of Conract Owner names and addreses for the purpose of
assisting the provider to conduct a sales program directed to
Contract Owners, and will not endorse any other program to solicit
Contract Owners to exchange their SPDA for an investment product
issued by such a provider.
<PAGE> 3
4. Duties of ANLIC
a. ANLIC and its employees, brokers, agents and representatives
will conduct the Campaign using all reasonable efforts and in full
compliance with all applicable laws and regulations, including all
applicable state insurance laws and regulations and all applicable
federal securities laws and regulations, and in full compliance with
the rules and regulations of the National Association of Securities
Dealers, Inc. and/or NASD Regulation, Inc.
b. ANLIC will not request Aurora, its directors, officers or
employees to become involved in the offer or sale of its variable
contracts to Contract Owners in any way that would require them to
be licensed as an insurance agent or registered as a securities
broker or registered as a representative of a registered securities
broker.
c. During the Campaign, ANLIC and its affiliates will not
engage in any other sales campaign or promotion for the sale of
insurance, annuity or investment products directed at the Contract
Owners.
d. During the Campaign, ANLIC and its affiliates will not
directly or indirectly encourage any broker/dealer, agent or other
representative, other than a Campaign Broker/Dealer, to solicit
exchanges of a SPDA for an ANLIC Contract or for any other annuity,
life insurance or invetment product issued by ANLIC or its
affiliates.
5. Confidentiality
a. ANLIC understands that the Contract Owner Information is to
be used solely in conducting the Campaign and for no other purpose.
ANLIC will maintain strict confidentiality of the Contract Owner
Information, and will not disclose it to any person, firm or
corporation other than persons who have a need to know in order for
ANLIC to conduct the Campaign. ANLIC will cause its officers,
employees, brokers, agents, respresentatives and other persons to
whom it has provided Contract Owner Information to maintain the same
strict confidentiality as it is obligated to maintain. ANLIC may
make copies or records of the Contract Owner Information only to the
extent necessary to conduct the Campaign and at the end of the
Campaign ANLIC will return to Aurora the original Contract Owner
Information and all copies and records thereof in its possession and
in the possession of its officers, employees, brokers, agents,
representatives and any other persons.
<PAGE> 4
b. ANLIC and Aurora will treat as confidential all information
regarding the other's internal affairs, business plans and busines
oractices which it may acquire in connection with this Agreement.
6. Representatives and Warranties
a. Each party represents and warrants to the other party as
follows:
(i) Organization. It is duly organized, validly existing and
in good standing under the laws of the state of incorporation and has
all requisite corporate power to own its properties and conduct its
business as now being conducted and to perform its obligations as
contemplated by this Agreement.
(ii) Corporate Power. It has all requisite corporate power and
authority to enter into this Agreement. The execution, delivery and
performance of this Agreement have been duly and validly authorized
by all necessary corporate action and this Agreement constitutes the
legal, valid and binding agreement of such party, enforceable against
it in accordance with its terms, except as the same may be limited
by bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and general principles of equity. Neither the execution
and delivery of this Agreement nor the performance of its obligations
under this Agreement will (subject to obtaining the approvals and
making the filings referred to in this Agreement) violate any
judgment, order, writ, injunction, decree, statute, rule or
regulations applicable to it, or to any of its subsidiaries or
affiliates which will enter into an agreement provided for in this
Agreement.
(iii) Non-Contravention. The performance of this Agreemenr and
the consummation of the transactions contemplated by this Agreement
will not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, or
agreement or instrument to which it is a party or by which it is
bound, its Articles of Incorporation or Bylaws, or any order, rule
or regulation of any court or government agency or body having
jurisdiction over it or any of its properties.
(iv) No Proceedings. There are no material legal or
governmental proceedings pending to which it is a party or which any
property of its is the subject which, if determined adversely to it,
would individually or in the aggregate have a meterial adverse effect
on its financial position, surplus or operations.
<PAGE> 5
(v) No aApprovals. Each party has obtained, or otherwise
provided, all necessary approvals, authorization, consents, licenses,
clearance or order of, declaration or notification to, or filing or
registration with, any governmental or regulatory authority
(including, without limitation, any non-governmental regulatory
agencies or authorities) required for the consummation of the
transactions contemplated by this Agreement.
(vi) Insurance Company Holding Act. Each party has made an
independent determination with respect to its respective obligation
under any applicable Insurance Holding Company Act and concluded that
no prior filing obligation exists.
(b) Licenses. ANLIC represents and warrants to Aurora that it
has (or will have at such time as it is performing it obligations)
all licenses, approvals, permits and authorizations of, and
registrations with, all authorities and agencies, including non-
governmental self-regulatory agencies, required under all federal,
state, and local laws and regulations to enable it to perform its
obligations as contemplated by this Agreement.
7. Indemnification
a. Aurora agrees to indemnfy and hold harmless ANLIC and its
affiliates and each of their respective directors and officers and
each person, it any, who controls ANLIC and its affiliates against
any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses), arising out of activities
undertaken pursuant to this Agreement, to which ANLIC and its
affiliates or such directors, officers or controlling persons may
become subject, under any statute, at common law, or otherwise, which
may be based upon any wrongful act or breach of this Agreement by
Aurora, any of its employees or representatives, any affiliates of
or any person acting on behalf of Aurora.
b. ANLIC agrees to indemnify and hold harmless Aurora and its
affiliates and each of their directors and officers and each person,
if any, who controls Aurora against any any all losses, claims,
damages, liabilities or litigation (including legal and other
expenses) arising out of activities undertaken pursuant to this
Agreement, to which Aurora and its affiliates or such directors,
officers or controlling persons may become subject, under any
statute, at common law, or otherwise, which may be based upon any (i)
wrongful act or breach of this Agreement by ANLIC, any of its
employees, brokers, agents or representatives and affiliates or any
person acting on behalf of ANLIC or (ii) any claim or cause of action
<PAGE> 6
by a Contract Owner, ANLIC Contract Owner, or regulatory authority
relative to the conduct, propriety or result of the Campaign by ANLIC
or its employees, brokers, agents, representatives, affiliates and
other persons acting on its behalf including without limitation,
suitability of the ANLIC Contract for the Contract Owner and the
performance of the ANLIC Contract following its sale to a Contract
Owner. ANLIC is not indemnifying or holding harmless Aurora or its
affiliates and each of their directors, officers or control persons
against losses, claims, damages, liabilities or litigation (including
legal and other expenses) that are based solely on Aurora's lease of
the Contract Owner Information to ANLIC or its obligations and
commitments under this Agreement.
c. This Section 7 shall survive any termination of this
Agreement.
8. Additional Agreement of the Parties
a. The parties shall act reasonably and in good faith in
complying with their obligations under this Agreement. The parties
shall cooperate with one another to carry out to the fullest extent
possible the purposes of this Agreement.
b. This Agreement may be amended only by the mutual written
consent of the parties to this Agreement.
c. This Agreement shall be governed by, construed and enforced
in accordance with the laws of the State of California and shall be
interpreted in such a manner as to be effective and valid under tje
laws of the State of California. If any provisions of this Agreement
dhall be deemed to be prohibited by law or invalid, such provisions
shall be ineffective only to the extent of the prohibition or
validity, without invalidating the remainder of such provision or the
remaining provisions of the Agreement.
d. The waiver by one party of the performance in observance of
any covenant or condition to be performed or observed by the the
other hereunder shall not invalidate this Agreement, nor constitute
a waiver by such party of any other covenant, or condition to be
performed or observed by the other hereunder. The exercise by either
party hereto of any right, privelege or remedy provided by this
Agreement shall not constitute a waiver by such party of any other
covenant, or condition to be performed or observed by the other party
under this Agreement. The exercise by either party hereto of any
right, privilege or remedy provided by this Agreement or otherwise
by law shall not exclude the exercise of any gifts, privilege or
remedy.
<PAGE> 7
e. This Agreement may not be assigned or transferred by either
party without the prior written consent of the other parties hereto.
f. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have
given if delivered personally, given by facsimile or mailed by
registered or certified mail (return receipt requested) or by Federal
Express or other overnight delivery, as follows:
TO ANLIC: Anchor Life Insurance Company
1 SunAmerica Center
Los Angeles, CA 90067-6022
Attn: Jana Greer
President
SunAmerica Retirement Markets, Inc.
COPY TO: SunAmerica Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
Attn: Susan L. Harris
Senior Vice President
General Counsel-Corporate Affairs
IF TO AURORA: Aurora National Life Assurance Company
2525 Colorado Avenue
Santa Monica, CA 90404-3540
Attn: Kevin Frankel
General Counsel
Any party to this AGreement may change the address to which such
communications are to be directed to such party by giving notice of
such change to the other party in the manner provided above.
IN WITNESS WHEREOF, the parties in this Agreement have caused
this Agreement to be executed by their duly authorized
representatives as of the date set forth above,
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By: /s/ Jana W. Greer
Jana W. Greer
Senior Vice President
AURORA NATIONAL LIFE ASSURANCE COMPANY
BY: /s/ Michael Parks
Michael Parks
President
<PAGE> 8
EXHIBIT A
Contract Owner Information
Contract Owner Information means contract numbers, contract owner
names and addresses, annuitant names, contract anniversary dates and
contract values, and such other Contract Owner Information as ANLIC
and Aurora may agree upon, with respect to all active SPDAs other
than those executed below:
Contracts where the annuitant age is less than 21 or greater
than 75
Contracts with acount values less than $5,000
Contracts where the owner resides in New York, Alaska, Hawaii,
Idaho, North Dakota, Wyoming, Oregon
Contracts with a foreign mailing address
International Contracts (Plan Code I11)
Contracts with loans
DEFRA Contracts
Clinton Mills Contracts
Joint Owner Contracts specifically excluded by SunAmerica
Qualified Contracts specifically excluded by SunAmerica
See document titled "Sun Extract File Layout" attached to this
Exhibit A, for information on processing Contract Owner Information
<PAGE> 9
EXHIBIT A
Sun Extract File Layout
Field Field Name Type Length Comments
1 Contract Number A/N 10
2 Owner Name A/N 25
3 Owner Address line 1 A/N 25
4 Owner Address line 2 A/N 25
5 Owner Address line 3 A/N 25
6 Owner Address line 4 A/N 25
7 Owner State Code A/N 2
8 Owner Zip-5 A/N 5 First five digits
of Zip code
9 Owner Date of Birth* A/N 8 YYYYMMDD
10 Owner Sex Code* A/N 1 'M' or 'F'
11 Owner Soc Security Number A/N 11 999-99-9999
12 Owner Phone Number A/N 13 (999)999-9999
13 Annuitant Name A/N 25
14 Annuitant Address Line 1* A/N 25 Owner Address-1
15 Annuitant Address Line 2* A/N 25 Owner Address-2
16 Annuitant Address Line 3* A/N 25 Owner Address-3
17 Annuitant Address Line 4* A/N 25 Owner Address-4
18 Annuitant State Code* A/N 2 State Code
19 Annuitant Zip-5* A/N 5 First five digits
of Zip code
20 Annuitant Date of Birth A/N 8 YYYYMMDD
21 Annuitant Sex Code A/N 1 'M' or 'F'
22 Annuitant Soc Security Number* A/N 11 999-99-9999
23 Annuitant Phone Number* A/N 13 (999)999-9999
24 Owner Code A/N 1 See Table 1.
25 Withholding Code A/N 1 See Table 2.
26 Account Value*** as of Valuation Date N 9 9999999v99
27 SPDA+ Offer made A 1 Y/N (See specs
below)
Field 27 specs. When a contract meets all the criteria in Item 2, read the
Rollover Mailfile for the same contract number. If contract is not on the
Rollover file, move an "N" to field 27. If contract is on the Rolover file
AND any occurrence of plan is not = blank, move "Y: to field 27, Else, move
"N".
* Only preent if Owner Code = '1'
** Not available on all contracts
*** Account Value only, do not deduct Moratorium or Surrender Charges
<PAGE> 10
Table 1. Owner Codes
0 Owner is not Annuitant
1 Owner is annuitant
2 Joint ownership
3 Collateral Assignment
4 Joint with Survivor
5 Corporate Business Trust
9 Trust Ownership - Individual
A Trust Ownership - Corporation
Table 2. Withholding Codes
Code Meaning
1 Non-Qualified
2 IRA
3 Pension Plans/Trusts
4 IRA Rollover
5 Keogh
6 TSA
7 Profit Sharing
8 Participant Pension
9 SEP
A IRA Transfer
B IRA Custodial
Table 3. Conversion of Aurora Withholding codes to SunAmerica Contract Type
Sun Form Sun Form Field Name Equivalent
Aurora Withholding
Code
Request for Transfer or 1035
Exchange - Item F Non-qualified 1
IRA A, B, 2, 4
Def Comp N/A
Corp Retirement 3, 7
TSA (403b) 6
SEP 9
Keogh 5
Terminally Funded 8
Anuities (DST)
<PAGE> 11
EXHIBIT B
July X, 1998
C01234567D
William F. Healy
4321 Countdown Lane
Missile, MO 98765
Address 3
Address 4
Contract Number C01234567D
Annuitant William F. Healy
Dear William F. Healy:
I wrote to you earlier this year for your support of Aurora. I want
to thank you again. We at Aurora value you business.
A number of our policyholders have expressed interest in higher
growth potential opportunities such as variable annuities. Although
Aurora does not offer variable annuities, our affiliate, SunAmerica
Inc. speciailzes in retirement investments and offers variable
annuities through its subsidiary Anchor National Life Insurance
Company.
In the next several days, be sure to look for information from
SunAmerica that details the Polaris Exchange Program, an opportunity
to exchange your fixed annuity into the Polaris II variable annuity.*
A charge for the Moratorium Amount will not apply to an exchange of
you ELIC Restructured single premium deferred annuity into the offer
from Anchor National. Aurora will waive any surrender charge that
may be applicable to a 1035 tax-free exchange by you prior to
December 31, 1998, of your ELIC Restructured single premium deferred
annuity into a variable annuity.
If you believe a fixed annuity is the right investment for you, we
believe we can offer you a bright future. Our AuroraPlus exchange
offer has received a very positive response and, at current rates,
remains available to you.
Now Aurora customers will have three choices:
very soon you can participate in our affiliate SunAmerica's
Polaris Exchange Program and exchange into a variable annuity
issued by Anchor National,
you can exchange into our AuroraPlus fixed annuity, or
you can keep you current annuity, which pays competitive renewal
interest.
Sincerely
/s/ Michael K. Parks
Michael K. parks
<PAGE> 12
President
P.S. Watch you mailbox for details coming soon from SunAmerica and
Anchor National.
* Please note that this letter is not to be construed as an offer of
the Polaris II. All offers of the Polaris II are made by Anchor
National and its licensed representatives through a prospectus.
<PAGE> 13
EXHIBIT B
July X, 1998
C01234567D
Mr. William F. Healy
4321 Countdown Lane
Missile, MO 98765
Address 3
Address 4
Contract Number: C01234567D
Annuitant: William F. Healy
Dear William F. Healy
I wrote to your earlier this year to thank you for your suport of
Aurora. I want to thank you again.
We at Aurora value you business and believe we can offer you a
bright future. Your annuity earns competiteve interest and continues
to offer you valuable features and benefits that may not be available
elsewhere,
While a fixed annuity may be the right investment for many people,
a number of our policyholders have expressed interesy in higher
growth potential opportunities such as variable annuities. Although
Aurora does not offer variable annuities, our affiliate SunAmerica
Inc., specializes in retirement investments and offers variable
annuities through its subsidiary Anchor National LIfe Insurance
Company.
In the next several days, be sure to look for information from
SunAmerica that details the Polaris Exchange Program, an opportunity
to exchange your fixed annuity into the Polaris II variable annuity.*
A charge for the Moratorium Amount will not apply to an exchange of
your ELIC Restructured single premium deferred annuity into the offer
from Anchor National. Aurora will waive any surrender charge that
may be applicable to a 1035 tax-free exchange by you prior to
December 31, 1998, of your ELIC Restructured single premium deferred
annuity into a variable annuity.
Watch your mailbox for details coming soon from SunAmerica and Anchor
National.
Sincerely,
/s/ Michael K. Parks
Michael K. Parks
President
*Please note that this letter is not, and may not be construed as an
offer of the Polaris II. ALl offers of the Polaris II are made by
Anchor National and its licensed representatives, through a
prospectus.
<PAGE> 1
EXHIBIT 21
ANCHOR NATIONAL LIFE INSURANCE COMPANY AND CONSOLIDATED SUBSIDIARIES
LIST OF SUBSIDIARIES
List of subsidiaries and certain other affiliates with percentage of voting
securities owned by Anchor National Life Insurance Company or Anchor National
Life Insurance Company's subsidiary which is the immediate parent.
PERCENTAGE OF VOTING
SECURITIES OWNED BY
COMPANY OR COMPANY'S
SUBSIDIARY WHICH IS
NAME OF COMPANY THE IMMEDIATE PARENT
=============== ==================
CALIFORNIA CORPORATIONS: %
Sam Holdings Corporation 100
Sun Royal Holdings Corporation 100
DELAWARE CORPORATIONS:
Saamsun Holdings Corp. 100
Royal Alliance Associates, Inc. 100
SunAmerica Asset Management Corp. 100
SunAmerica Capital Services, Inc. 100
SunAmerica Fund Services, Inc. 100
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE
INSURANCE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,954,754,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 169,000
<MORTGAGE> 391,448,000
<REAL-ESTATE> 24,000,000
<TOTAL-INVEST> 2,734,742,000
<CASH> 333,735,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 539,850,000
<TOTAL-ASSETS> 14,526,364,000
<POLICY-LOSSES> 2,471,539,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 39,182,000
<COMMON> 3,511,000
0
0
<OTHER-SE> 649,158,000
<TOTAL-LIABILITY-AND-EQUITY> 14,526,364,000
0
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</TABLE>
