SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from January 1, 1999 to March 31, 1999
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
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No ___
--
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON MAY
13, 1999 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares outstanding
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
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Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
March 31, 1999 and December 31, 1998 3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) - Three Months Ended March 31,
1999 and 1998 5
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998 6-7
Notes to Consolidated Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-25
Quantitative and Qualitative Disclosures About
Market Risk 26
Part II - Other Information 27
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 1,294,949,000 $ 3,303,454,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
March 1999, $5,967,365,000;
December 1998, $4,252,740,000 5,910,805,000 4,248,840,000
Mortgage loans 500,424,000 388,780,000
Policy loans 315,223,000 320,688,000
Common stocks available for sale, at fair
value (cost: March 1999, $3,119,000;
December 1998,$1,409,000) 5,326,000 1,419,000
Partnerships 54,384,000 4,577,000
Real estate 24,000,000 24,000,000
Other invested assets 121,781,000 15,185,000
--------------- ---------------
Total investments 8,226,892,000 8,306,943,000
Variable annuity assets held in separate
accounts 14,936,096,000 13,767,213,000
Accrued investment income 93,515,000 73,441,000
Deferred acquisition costs 940,794,000 866,053,000
Receivable from brokers for sales of
securities 11,402,000 22,826,000
Other assets 96,988,000 109,857,000
--------------- ---------------
TOTAL ASSETS $24,305,687,000 $23,146,333,000
=============== ===============
See accompanying notes
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3
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
March 31, December 31,
1999 1998
---------------- ----------------
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LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 5,387,271,000 $ 5,453,476,000
Reserves for universal life insurance
contracts 2,336,399,000 2,339,199,000
Reserves for guaranteed investment
contracts 353,152,000 353,137,000
Payable to brokers for purchases of
securities 53,937,000 ---
Income taxes currently payable 23,292,000 11,123,000
Other liabilities 200,616,000 160,020,000
---------------- ----------------
Total reserves, payables
and accrued liabilities 8,354,667,000 8,316,955,000
---------------- ----------------
Variable annuity liabilities related to
separate accounts 14,936,096,000 13,767,213,000
---------------- ----------------
Subordinated notes payable to affiliates 209,803,000 209,367,000
---------------- ----------------
Deferred income taxes 40,707,000 105,772,000
---------------- ----------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 378,674,000 378,674,000
Retained earnings 403,648,000 366,460,000
Accumulated other comprehensive loss (21,419,000) (1,619,000)
---------------- ----------------
Total shareholder's equity 764,414,000 747,026,000
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $24,305,687,000 $23,146,333,000
================ ================
See accompanying notes
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4
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
-------------- -------------
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Investment income $ 130,357,000 $ 54,502,000
-------------- -------------
Interest expense on:
Fixed annuity contracts (64,565,000) (26,859,000)
Universal life insurance contracts (30,171,000) ---
Guaranteed investment contracts (5,158,000) (4,492,000)
Senior indebtedness (1,273,000) (152,000)
Subordinated notes payable to affiliates (3,453,000) (764,000)
-------------- -------------
Total interest expense (104,620,000) (32,267,000)
-------------- -------------
NET INVESTMENT INCOME 25,737,000 22,235,000
-------------- -------------
NET REALIZED INVESTMENT GAINS 884,000 2,297,000
-------------- -------------
Fee income:
Variable annuity fees 66,945,000 47,298,000
Net retained commissions 12,957,000 12,238,000
Asset management fees 9,279,000 7,143,000
Life insurance mortality fees 6,377,000 ---
Surrender charges 4,379,000 1,866,000
Other fees 3,746,000 662,000
-------------- -------------
TOTAL FEE INCOME 103,683,000 69,207,000
-------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES (35,415,000) (24,451,000)
-------------- -------------
AMORTIZATION OF DEFERRED ACQUISITION COSTS (27,604,000) (18,377,000)
-------------- -------------
ANNUAL COMMISSIONS (9,088,000) (4,148,000)
-------------- -------------
PRETAX INCOME 58,197,000 46,763,000
Income tax expense (21,009,000) (16,452,000)
-------------- -------------
NET INCOME 37,188,000 30,311,000
Other comprehensive income, net of tax:
Net unrealized gains on bonds and notes
available for sale:
Net unrealized gains (losses)
identified in the current period (19,569,000) 1,794,000
Less reclassification adjustment for
net realized gains included in net
income (231,000) (2,807,000)
-------------- -------------
OTHER COMPREHENSIVE LOSS (19,800,000) (1,013,000)
-------------- -------------
COMPREHENSIVE INCOME $ 17,388,000 $ 29,298,000
============== =============
See accompanying notes
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5
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---------------- --------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,188,000 $ 30,311,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 64,565,000 26,859,000
Universal life insurance contracts 30,171,000 ---
Guaranteed investment contracts 5,158,000 4,492,000
Net realized investment gains (884,000) (2,297,000)
Amortization (accretion) of net premiums
(discounts) on investments 3,847,000 (792,000)
Amortization of goodwill 358,000 304,000
Provision for deferred income taxes (54,403,000) (903,000)
Change in:
Accrued investment income (20,074,000) (855,000)
Deferred acquisition costs (54,741,000) (35,463,000)
Other assets 12,511,000 (2,569,000)
Income taxes currently payable 12,169,000 4,043,000
Other liabilities 46,622,000 (11,153,000)
Other, net (11,246,000) 3,000
---------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 71,241,000 11,980,000
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (2,862,010,000) (574,978,000)
Mortgage loans (121,189,000) (577,000)
Other investments, excluding short-term
investments (155,761,000) ---
Sales of:
Bonds, notes and redeemable preferred
stocks 1,080,439,000 336,331,000
Other investments, excluding short-term
investments 1,519,000 (499,000)
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 125,032,000 116,670,000
Mortgage loans 9,767,000 32,774,000
Other investments, excluding short-term
investments 5,683,000 635,000
---------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (1,916,520,000) (89,644,000)
---------------- --------------
See accompanying notes
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6
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---------------- ---------------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $ 397,623,000 $ 367,909,000
Universal life insurance contracts 18,003,000 ---
Net exchanges from the fixed
accounts of variable annuity contracts (414,402,000) (322,133,000)
Withdrawal payments on:
Fixed annuity contracts (103,126,000) (52,010,000)
Universal life insurance contracts (16,351,000) 000
Guaranteed investment contracts (5,143,000) (4,165,000)
Claims and annuity payments on:
Fixed annuity contracts (16,221,000) (7,818,000)
Universal life insurance contracts (18,019,000) ---
Net receipts from (repayments of) other
short-term financings (5,590,000) 6,194,000
---------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES (163,226,000) __(12,023,000)
---------------- ---------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS (2,008,505) (89,687,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD _3,303,454,000 71,060,000
---------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 1,294,949,000 $ (18,627,000)
================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 1,709,000 $ 972,000
================ ===============
Net income taxes paid $ 67,099,000 $ 13,193,000
================ ===============
See accompanying notes
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7
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
-----------------------
At December 31, 1998, Anchor National Life Insurance Company (the
"Company") was a wholly owned indirect subsidiary of SunAmerica Inc. On January
1, 1999, SunAmerica Inc. merged with and into American International Group, Inc.
("AIG") in a tax-free reorganization that has been treated as a pooling of
interests for accounting purposes. Thus, SunAmerica Inc. ceased to exist on that
date. However, on the date of merger, substantially all of the net assets of
SunAmerica Inc. were contributed to a newly formed subsidiary of AIG named
SunAmerica Inc. ("SunAmerica").
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's consolidated financial
position as of March 31, 1999 and December 31, 1998, and the results of its
consolidated operations and its consolidated cash flows for the three months
ended March 31, 1999 and 1998. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
The Company has changed its fiscal year end from September 30 to December 31.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the fiscal
year ended September 30, 1998, contained in the Company's Annual Report on Form
10-K, and the unaudited consolidated financial statements as of and for the
three months ended December 31, 1998, contained in the Company's Transition
Report on Form 10-Q. Certain items have been reclassified to conform to the
current period's presentation.
2. Reinsurance
-----------
On December 31, 1998, the Company acquired the individual life business and the
individual and group annuity business of MBL Life Assurance Corporation ("MBL
Life"), via a 100% coinsurance transaction, for a cash purchase price of
$128,420,000. As part of this transaction, the Company acquired assets having
an aggregate fair value of $5,718,227,000, composed primarily of invested assets
totaling $5,715,010,000. Liabilities assumed in this acquisition totaled
$5,831,266,000, including $3,413,827,000 of fixed annuity reserves,
$2,317,365,000 of universal life reserves and $70,687,000 of guaranteed
investment contract reserves. The excess of the purchase price over the fair
value of net assets received amounted to $113,039,000 and is included in
Deferred Acquisition Costs in the accompanying consolidated balance sheet. The
income statement for 1999 includes the impact of the Acquisition. On a pro
forma basis, assuming the Acquisition had been consummated on January 1, 1998,
the beginning of the prior-year period discussed herein, investment income would
have been $134,248,000 and net income would have been $32,732,000 for the three
months ended March 31, 1998.
This business was assumed from MBL life subject to existing reinsurance
ceded agreements. At December 31, 1998, the maximum retention on any single
life was $2 million, and a total credit of $5,057,000 was taken against the life
insurance reserves, representing predominantly yearly renewable term
reinsurance. In order to limit
8
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Reinsurance (continued)
-----------
even further the exposure to loss on any single insured and to recover an
additional portion of the benefits paid over such limits, the Company entered
into a reinsurance treaty, effective January 1, 1999, under which the Company
retains no more than $100,000 of risk on any one insured life. At March 31,
1999, a total reserve credit of $4,852,000 was taken against the life insurance
reserves. With respect to these coinsurance agreements, the Company could
become liable for all obligations of the reinsured policies if the reinsurers
were to become unable to meet the obligations assumed under the respective
reinsurance agreements.
Included in the block of business acquired from MBL Life is approximately
$250,000,000 of individual life business and $590,000,000 of group annuity
business whose contract owners are residents of New York State ("the New York
Business"). On June 30, 1999, the New York Business will be acquired by the
Company's New York affiliate, First SunAmerica Life Insurance Company, via an
assumption reinsurance agreement, and the remainder of the business will be
acquired by the Company via an assumption reinsurance agreement with MBL Life,
which will supersede the coinsurance agreement. The $128,420,000 purchase price
will be allocated between the Company and its affiliate based on their
respective assumed reserves at that time.
On December 31, 1998, the Company recaptured the business previously ceded
through a modified coinsurance transaction to ANLIC Insurance Company (Cayman).
As part of this recapture, the Company paid cash of $170,436,000 and recorded an
increase in deferred amortization costs ("DAC") of $167,202,000 with the balance
of $3,234,000 being recorded as DAC amortization in the income statement.
3. Subordinated Notes Payable to Affiliates
--------------------------------------------
On December 30, 1998, the Company received cash totaling $170,436,000 in
exchange for issuance of a surplus note payable to SunAmerica Life Insurance
Company, which has been included in Subordinated Notes Payable to Affiliates in
the accompanying consolidated balance sheet. This note bears interest at a rate
of 7%, and is repayable upon approval by the Arizona Department of Insurance.
4. Capital Contribution
---------------------
On December 31, 1998, SunAmerica Life Insurance Company contributed
additional capital of $70,000,000 to the Company.
5. Adoption of New Accounting Standard
---------------------------------------
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
which requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
adoption of SFAS 130 did not have an impact on the Company's results of
operations, financial condition or liquidity. Comprehensive income amounts for
the prior year are presented to conform to the current year's
9
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Adoption of New Accounting Standard (continued)
---------------------------------------
presentation. Net unrealized gains on bonds and notes available for sale
decreased by $19,800,000 during the three months ended March 31, 1999, and
decreased by $1,013,000 during the three months ended March 31, 1998.
The before tax, after tax, and tax benefit (expense) amounts for each component
of the increase (decrease) in unrealized gains on bonds and notes available for
sale for both the current and prior periods are summarized below:
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Tax Benefit
Before Tax (Expense) Net of Tax
------------- ---------- -------------
Three months ended March 31,
1999:
<S> <C> <C> <C>
Net unrealized losses on bonds
and notes available for sale
identified in the current
period $(50,107,000) $17,538,000 $(32,569,000)
Increase in Deferred Acquisition
Cost adjustment identified in
the current period 20,000,000 (7,000,000) 13,000,000
------------- ------------ -------------
(30,107,000) 10,538,000 (19,569,000)
Reclassification adjustment for
net realized gains included
in net income (356,000) 125,000 (231,000)
------------- ------------ -------------
Total decrease in net
unrealized gains on bonds
and notes available for
sale $(30,463,000) $10,663,000 $(19,800,000)
============= ============ =============
Three months ended March 31,
1998:
Net unrealized gains on bonds
and notes available for sale
identified in the current
period $ 1,556,000 $ (542,000) $ 1,014,000
Increase in Deferred Acquisition
Cost adjustment identified in
the current period 1,200,000 (420,000) 780,000
------------- ------------ -------------
2,756,000 (962,000) 1,794,000
Reclassification adjustment for
net realized gains included
in net income (4,318,000) 1,511,000 (2,807,000)
------------- ------------ -------------
Total decrease in net
unrealized gains on
bonds and notes
available for sale $ (1,562,000) $ 549,000 $ (1,013,000)
============= ============ =============
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10
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Anchor National Life Insurance Company (the "Company") for the
three months ended March 31, 1999 ("1999") and three months ended March 31, 1998
("1998") follows. The Company has changed its fiscal year end to December 31.
Accordingly, the quarter ended December 31, 1998 was a transition period.
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 or profitability of the
Company's activities.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which 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 $37.2 million in 1999, compared with $30.3 million in
1998. On December 31, 1998, the Company acquired the individual life business
and the individual and group annuity business of MBL Life Assurance Corporation
(the "Acquisition"). The Acquisition was accounted for under the purchase
method of accounting, and, therefore, results of operations include those of the
Acquisition only from its date of acquisition. Consequently, the operating
results for 1999 and 1998 are not comparable. On a pro forma basis, using the
historical financial information of the acquired business and assuming that the
Acquisition had been consummated on January 1, 1998, the beginning of the
prior-year period discussed herein, net income would have been $32.7 million in
1998.
PRETAX INCOME totaled $58.2 million in 1999, compared with $46.8 million in
1998. The 24.5% improvement in 1999 over 1998 primarily resulted from increased
fee income and net investment income, partially offset by increased general and
administrative expenses and amortization of deferred acquisition costs ("DAC").
11
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NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, totaled $25.7 million in 1999 and $22.2 million in
1998. These amounts equal 1.24% on average invested assets (computed on a daily
basis) of $8.31 billion in 1999 and 3.52% on average invested assets of $2.53
billion in 1998. On a pro forma basis, assuming the Acquisition had been
consummated on January 1, 1998, net investment income on related average
invested assets would have been 1.31% in 1998.
Net investment spreads include the effect of interest paid or income earned
on the difference between average invested assets and average interest-bearing
liabilities. Average interest-bearing liabilities exceeded average interest
bearing assets by $79.4 million in 1999, compared with a $108.1 million excess
of average invested assets over average interest-bearing liabilities in 1998.
The difference between the Company's yield on average invested assets and the
rate paid on average interest-bearing liabilities (the "Spread Difference") was
1.28% in 1999 and 3.29% in 1998. On a pro forma basis, assuming the Acquisitions
had been consummated on January 1, 1998, the Spread Difference would have been
1.32% in 1998.
Investment income (and the related yields on average invested assets)
totaled $130.4 million (6.27%) in 1999 and $54.5 million (8.62%) in 1998. Both
the significant increase in investment income and the decrease in the related
yield in 1999 as compared with 1998 principally resulted from the Acquisition.
The invested assets associated with the Acquisition included high-grade
corporate, government and government/agency bonds and cash and short-term
investments, which are generally lower yielding than a significant portion of
the invested assets that comprise the remainder of the Company's portfolio. On
a pro forma basis, assuming the Acquisition had been consummated on January 1,
1998, the yield on related average invested assets would have been 6.55% in
1998. The decrease in yield in 1999 also reflects decreased partnership income.
Partnership income decreased to $3.2 million (a yield of 50.62% on related
average assets of $25.4 million) in 1999, from $7.1 million (a yield of 199.51%
on related average assets of $14.3 million) in 1998. Partnership income is
based upon cash distributions received from limited partnerships, the operations
of which the Company does not influence. Consequently, such income is not
predictable and there can be no assurance that the Company will realize
comparable levels of such income in the future.
Total interest expense equaled $104.6 million in 1999, compared with $32.3
million in 1998. The average rate paid on all interest-bearing liabilities was
4.99% in 1999, compared with 5.33% in 1998. Interest-bearing liabilities
averaged $8.39 billion during 1999 and $2.42 billion during 1998. On a pro
forma basis, assuming the Acquisition had been consummated on January 1, 1998,
the average rate paid on all interest-bearing liabilities would have been 5.23%
in 1998 and interest-bearing liabilities would have averaged $8.22 billion. The
decrease in the overall rate paid in 1999 results primarily from the DAC
deferral of the excess of certain promotional interest rates offered on the
fixed portion of the Company's newer products over the ongoing crediting rates.
Without such capitalization of interest, the rate in 1999 would have been 5.24%.
The increase in average invested assets since 1998 primarily reflects the
impact of the Acquisition. In addition, average invested assets in 1999 reflect
increased sales of the fixed account options of the Company's variable annuity
products ("Fixed Annuity Premiums"), and renewal premiums on its universal life
products acquired in the Acquisition, partially offset by net exchanges from
fixed accounts into the separate accounts of variable annuity contracts. Since
March 31, 1998, Fixed Annuity Premiums have
12
<PAGE>
aggregated $1.65 billion. Fixed Annuity Premiums totaled $397.6 million in 1999
and $367.9 million in 1998 and are largely premiums for the fixed accounts of
variable annuities. Such premiums have increased principally because of greater
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. On an annualized basis, these
premium amounts represent 29% and 70%, respectively, of the fixed annuity
reserve balances at the beginning of the respective periods. The decrease in
1999 Fixed Annuity Premiums when expressed as a percentage of fixed annuity
reserves at December 31, 1998 results from the impact of the Acquisition.
There were no guaranteed investment contract ("GIC") premiums in 1999 or
1998. GIC surrenders and maturities totaled $5.1 million in 1999 and $4.2
million in 1998. 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 are
purchased by banks for their long-term portfolios or state and local
governmental entities either prohibit withdrawals or permit scheduled book value
withdrawals subject to 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 $0.9 million in 1999, compared with
$2.3 million in 1998. Net realized investment gains in 1999 include impairment
writedowns of $0.6 million in 1999, compared with $1.5 million in 1998. Thus,
net gains from sales and redemptions of investments totaled $1.5 million in
1999, compared with $3.8 million in 1998.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $1.21 billion in 1999 and $485.9 million in 1998. Sales of
investments result from the active management of the Company's investment
portfolio, including assets received as part of the Acquisition. Because
redemptions of investments are generally involuntary and sales of investments
are made in both rising and falling interest rate environments, net gains and
losses from sales and redemptions of investments fluctuate from period to
period, and represent 0.07% and 0.60% of average invested assets in 1999 and
1998, 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 provisions applied to bonds in 1999 and
1998. On an annualized basis, impairment writedowns represent 0.03% and 0.24%
of average invested assets in 1999 and 1998, respectively. For the eighteen
fiscal quarters beginning October 1, 1994, impairment writedowns as a percentage
of average invested assets have ranged up to 3.06% and have averaged 0.50%.
Such writedowns are based upon estimates of the net realizable value of the
applicable assets. Actual realization will be dependent upon future events.
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<PAGE>
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $66.9 million
in 1999 and $47.3 million in 1998. The increased fees in 1999 reflect growth in
average variable annuity assets, principally due to 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, and
increased market values. On an annualized basis, variable annuity fees
represent 1.9% and 1.8%, respectively, of average variable annuity assets in
1999 and 1998. Variable annuity assets averaged $14.32 billion during 1999 and
$10.24 billion during 1998. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, aggregated $1.83
billion since March 31, 1998. Variable annuity premiums totaled $484.5 million
and $412.6 million in 1999 and 1998, respectively. On an annualized basis,
these amounts represent 14% and 17%, respectively, 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 $881.3 million
and $780.4 million in 1999 and 1998, respectively. Variable Annuity Product
Sales primarily reflect sales of the Company's flagship variable annuity,
Polaris. Polaris is a multimanager variable annuity that offers investors a
choice of 27 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 consumer demand for flexible retirement
savings products that offer a variety of equity, fixed income and guaranteed
fixed account investment choices.
The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time, Federal
initiatives are proposed which could affect the taxation of variable annuities
and annuities generally (See "Regulation").
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiary, after deducting the substantial portion of such commissions that is
passed on to registered representatives. Net retained commissions totaled $13.0
million in 1999 and $12.2 million in 1998. Broker-dealer sales (mainly sales of
general securities, mutual funds and annuities) totaled $3.48 billion in 1999
and $4.30 billion in 1998. The increase in net retained commissions and the
decrease in sales principally reflect changes in sales mix.
SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $4.4 million in 1999 (including $1.0 million attributable
to the Acquisition) and $1.9 million in 1998. Surrender charges generally are
assessed on withdrawals at declining rates during the first seven years of a
contract. Withdrawal payments totaled $417.4 million in 1999 (including $96.8
million attributable to the Acquisition), compared with $300.5 million in 1998.
These payments represent 7.7% (6.8% attributable to the Acquisition) and 9.8%,
respectively, of average fixed and variable annuity and universal life reserves.
Withdrawals include variable annuity withdrawals from the separate accounts
totaling $298.2 million in 1999 (8.4% of average variable annuity reserves) and
$248.5 million (9.8% of average variable annuity reserves) in 1998. Consistent
with the assumptions used in connection with the Acquisition, management
anticipates that the level of withdrawal payments will reflect higher relative
withdrawal rates in the near future because of higher surrenders on the acquired
annuity business. Excluding the effects of the Acquisition, withdrawal payments
represent 8.0% of related average fixed and variable annuity reserves.
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<PAGE>
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 $9.3 million on
average assets managed of $3.67 billion in 1999 and $7.1 million on average
assets managed of $2.79 billion in 1998. Asset management fees are not
necessarily proportionate to average assets managed, principally due to changes
in product mix. Sales of mutual funds, excluding sales of money market
accounts, have aggregated $1.00 billion since March 31, 1998. Mutual fund sales
totaled $295.7 million in 1999 and $193.9 million in 1998. The increase in
sales principally resulted from increased sales of the Company's "Style Select
Series" product and the introduction in June 1998 of the "Dogs" of Wall Street
fund. The "Style Select Series" is a group of mutual funds that are each
managed by three industry-recognized fund managers. The "Dogs" of Wall Street
fund contains 30 large capitalization value stocks that are selected by strict
criteria. Sales of these products totaled $207.3 million in 1999, compared with
$134.5 million in 1998, primarily reflecting the addition of five new Style
Select funds, which more than doubled the number of Style Select funds to nine.
Redemptions of mutual funds, excluding redemptions of money market accounts,
amounted to $140.7 million in 1999 and $108.9 million in 1998, which,
annualized, represent 15.4% and 15.6%, respectively, of average mutual fund
assets.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $35.4 million in 1999 and $24.5
million in 1998. The increase in 1999 over 1998 reflects the increased costs
related to the business acquired in the Acquisition. 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 $27.6 million (including
$4.5 million attributable to the Acquisition) in 1999, compared with $18.4
million in 1998. The increase in amortization was also 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 $9.1 million in 1999,
compared with $4.1 million in 1998. The increase in annual commissions reflects
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 55% 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 $21.0 million in 1999, compared with $16.5
million in 1998, representing effective annualized tax rates of 36% and 35%,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by 2.3% to $764.4 million at March 31, 1999
from $747.0 million at December 31, 1998, due to $37.2 million of net income
recorded in 1999, partially offset by a $19.8 million increase in accumulated
other comprehensive loss.
INVESTED ASSETS at March 31, 1999 totaled $8.23 billion, compared with
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<PAGE>
$8.31 billion at December 31, 1998. The Company manages most of its invested
assets internally. The Company's general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has determined that all of its portfolio of
bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available
to be sold in response to changes in market interest rates, changes in relative
value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Company's need
for liquidity and other similar factors.
THE BOND PORTFOLIO, which constituted 72% of the Company's total investment
portfolio at March 31, 1999, had an amortized cost that was $56.6 million
greater than its aggregate fair value at March 31, 1999, compared with an excess
of $3.9 million at December 31, 1998. The net unrealized losses on the Bond
Portfolio in 1999 principally reflect the higher prevailing interest rates at
March 31, 1999 and the corresponding effect on the fair value of the Bond
Portfolio.
At March 31, 1999, the Bond Portfolio (excluding $4.5 million of redeemable
preferred stocks) included $5.63 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 $277.3 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At March 31, 1999, approximately $5.62 billion of the Bond Portfolio was
investment grade, including $1.58 billion of U.S. government/agency securities
and mortgage-backed securities ("MBSs").
At March 31, 1999, the Bond Portfolio included $285.4 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 1.2%
of the Company's total assets and 3.5% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
March 31, 1999.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1999.
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<PAGE>
<TABLE>
<CAPTION>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
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-} $4,331,966 $4,312,567 1 $ 366,805 $ 365,379 $4,698,771 $4,677,946 56.86%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 773,290 761,561 2 183,934 181,308 957,308 942,869 11.46
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 52,237 49,852 3 8,164 8,000 60,401 57,852 0.70
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 214,290 204,320 4 24,331 16,930 238,621 221,250 2.69
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} --- --- 5 7,875 6,243 7,875 6,243 0.08
CI to D
[DD]
{D} --- --- 6 98 98 98 98 ---
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $5,371,783 $5,328,300 $ 591,207 $ 577,958 $5,962,990 $5,906,268
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
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<PAGE>
Footnotes to the table of rated bonds by rating classification
-----------------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default) A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Moody's rates debt securities in rating
categories ranging from Aaa (the highest) to C (extremely poor prospects of ever
attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debt's relative standing within the
rating category. A security rated Baa3 or higher is considered investment
grade. DCR rates debt securities in rating categories ranging from AAA (the
highest) to DD (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on the
highest of the S&P, Moody's, DCR and Fitch ratings if rated by multiple
agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for
nondefaulted bonds plus one category, 6, for bonds in or near default. These
six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed
above, with categories 1 and 2 considered investment grade. The NAIC categories
include $277.3 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
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<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $502.8 million at March 31, 1999. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At March
31, 1999, Secured Loans consisted of $180.8 million of publicly traded
securities and $322.0 million of privately traded securities. These Secured
Loans are composed of loans to 84 borrowers spanning 18 industries, with 24% of
these assets concentrated in utilities and 12% of these assets concentrated in
financial institutions. No other industry concentration constituted more than
6% of these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory rating guidelines established by the NAIC.
MORTGAGE LOANS aggregated $500.4 million at March 31, 1999 and consisted of
132 commercial first mortgage loans with an average loan balance of
approximately $3.8 million, collateralized by properties located in 29 states.
Approximately 32% of this portfolio was office, 17% was multifamily residential,
12% was manufactured housing, 10% was industrial, 9% was hotels and 20% was
other types. At March 31, 1999, approximately 29% and 10% of this portfolio
were secured by properties located in California and New York, respectively, and
no more than 9% of this portfolio was secured by properties located in any other
single state. At March 31, 1999, there were eight mortgage loans with
outstanding balances of $10 million or more, which loans collectively aggregated
approximately 25% of this portfolio. At March 31, 1999, approximately 34% of
the mortgage loan portfolio consisted of loans with balloon payments due before
April 1, 2002. During 1999 and 1998, loans delinquent by more than 90 days,
foreclosed loans and restructured loans have not been significant in relation to
the total mortgage loan portfolio.
At March 31, 1999, approximately 21% 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
multi family loans and its strict underwriting standards, the Company believes
that it has prudently managed the risk attributable to its mortgage loan
portfolio while maintaining attractive yields.
PARTNERSHIP INVESTMENTS totaled $54.4 million at March 31, 1999,
constituting investments in eleven separate partnerships with an average size of
approximately $4.9 million. These partnerships are accounted for by using the
cost method of accounting and are managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including approximately 475 separate issuers. The
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<PAGE>
risks generally associated with partnerships include those related to their
underlying investments (i.e. equity securities and debt securities), plus a
level of illiquidity, which is mitigated, to some extent by the existence of
contractual termination provisions.
OTHER INVESTED ASSETS aggregated $121.8 million at March 31, 1999, compared
with $15.2 million at December 31, 1998. Other Invested Assets includes $106.6
million of seed money for mutual funds used as investment vehicles for the
Company's variable annuity separate accounts and $15.2 million of collateralized
bond obligations and collateralized mortgage obligation residuals.
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 88% of the
Company's fixed annuity, universal life and GIC reserves had surrender penalties
or other restrictions at March 31, 1999. At June 30, 1999, this percentage will
decline substantially due to the release of surrender restrictions on
approximately $5 billion of reserves acquired in the acquisition from MBL Life.
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 March 31, 1999, these assets had an aggregate
fair value of $7.72 billion with a duration of 3.3. The Company's fixed-rate
liabilities include fixed annuity, GIC and universal life reserves and
subordinated notes. At March 31, 1999, these liabilities had an aggregate fair
value (determined by discounting future contractual cash flows by related market
rates of interest) of $7.83 billion with a duration of 3.1. The Company's
potential exposure due to a relative 10% increase in prevailing interest rates
from their March 31, 1999 levels is a loss of approximately $6.5 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
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<PAGE>
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, universal life and GIC products, allocating its available cash flow
amongst its various investment portfolio sectors and maintaining sufficient
levels of liquidity. Because the calculation of duration involves estimation
and incorporates assumptions, potential changes in portfolio value indicated by
the portfolio's duration will likely be different from the actual changes
experienced under given interest rate scenarios, and the differences may be
material.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements ("Swap Agreements") to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate changes.
The Company typically utilizes Swap Agreements to create a hedge that
effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At March 31, 1999, 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.
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<PAGE>
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying value of such investments at least
quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrower's recent financial performance, news reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral. For investments in partnerships, management reviews
the financial statements and other information provided by the general partners.
The carrying values of bonds 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 $4.6 million ($3.9 million of
mortgage loans and $0.7 million of bonds) at March 31, 1999, and constituted
less than 0.1% of total invested assets. At December 31, 1998, defaulted
investments totaled $0.7 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 March 31, 1999, approximately $2.32 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $25.8 million, while approximately
$3.59 billion of the Bond Portfolio had an aggregate unrealized loss of $82.3
million. In addition, the Company's investment portfolio currently provides
approximately $64.6 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
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<PAGE>
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.
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, SunAmerica recorded a $15.0
million provision for estimated programming costs to make necessary repairs of
certain specific noncompliant systems, of which $6.2 million was allocated to
the Company. In addition, SunAmerica is making expenditures which it expects
will ultimately total $12.3 million to replace certain other specific
noncompliant systems. Of these expenditures, approximately $5.0 million will be
allocated to the Company and 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 were substantially completed by the end of calendar
1998. Testing of both the repaired and replacement systems is expected to be
substantially completed by July 31, 1999. However, the Company will continue to
test all of its computer systems and applications throughout 1999 to ensure
continued compliance.
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.
Because the Company's year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
developed a comprehensive year 2000 contingency plan. The Company closely
monitors the progression of its plan for compliance, and if necessary, would
devote additional resources to assure the timely completion of its year 2000
plan. If the Company determines that its business is at material risk of
disruption due to the year 2000 issue or anticipates that its year 2000
conversion will not be completed in a timely fashion, the Company will work to
enhance its contingency plans.
The discussion above contains certain forward-looking statements. The
costs of the year 2000 conversion, date which the Company has set to
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<PAGE>
complete such conversion and possible risks associated with the year 2000 issue
are based on the Company's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from the
Company's expectations. Such uncertainties include, among others, the success
of the Company in identifying systems and applications that are not year 2000
compliant, the nature and amount of programming required to upgrade or replace
each of the affected systems and applications, the availability of qualified
personnel, consultants and other resources, and the success of the year 2000
conversion efforts of others.
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,
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, among other things,
product design, product reserving standards and illustrations for annuity
products. Current proposals are still being debated and the Company is
monitoring developments in this area and the effects any changes would have on
the Company.
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 Corp., a subsidiary of the Company, is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940. The mutual funds that it markets are subject to
24
<PAGE>
regulation under the Investment Company Act of 1940. SunAmerica Asset
Management Corp. and the mutual funds are subject to regulation and examination
by the SEC. In addition, variable annuities and the related separate accounts
of the Company are subject to regulation by the SEC under the Securities Act of
1933 and the Investment Company Act of 1940.
The Company's broker-dealer subsidiary, Royal Alliance Associates, Inc., is
subject to regulation and supervision by the states in which it transacts
business, as well as by the SEC and the National Association of Securities -
Dealers ("NASD"). The SEC and the NASD have broad administrative and
supervisory powers relative to all aspects of business and may examine the
subsidiary's business and accounts at any time. 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
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 the 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 these proposals have a small likelihood of
being enacted, because they would discourage retirement savings and there is
strong public and industry opposition to them.
25
<PAGE>
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 Discussion and
Analysis of Financial Condition and Results of Operations on pages 20 and 21
herein.
26
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
OTHER INFORMATION
Item 1. Legal Proceedings
------------------
Not applicable.
Item 2. Changes in Securities
-----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
----------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
------------------------------------------------------------
Not applicable.
Item 5. Other Information
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------
EXHIBITS
Exhibit
No. Description
- ----- -----------
10(a) Subordinated Loan Agreement for Equity Capital, dated March 12,
1999, between the Company's subsidiary, SunAmerica Capital Services, Inc., and
SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.5% notes
due April 30, 2002.
27 Financial Data Schedule.
REPORTS ON FORM 8-K
On January 14, 1999, the Company filed a current report on Form 8-K announcing
its acquisition of a block of business from MBL Life Assurance Corporation.
On January 15, 1999, the Company filed a current report on Form 8-K announcing
the merger of its ultimate parent, SunAmerica Inc., with American International
Group, Inc.
On March 12, 1999, the Company filed an amendment to the Form 8-K in connection
with its acquisition of a block of business from MBL Life Assurance Corporation.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Date: May 14, 1998 By:/s/SCOTT L. ROBINSON
- --------------------- ----------------------
Scott L. Robinson
Senior Vice President and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President and May 14, 1999
- ------------------------- --------------
Scott L. Robinson Director (Principal
Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and May 14, 1999
- ----------------------- --------------
N. Scott Gillis Controller (Principal
Accounting Officer)
28
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ----- -----------
10(a) Subordinated Loan Agreement for Equity Capital, dated March 12,
1999, between the Company's subsidiary, SunAmerica Capital Services, Inc., and
SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.5% notes
due April 30, 2002.
27 Financial Data Schedule
29
<PAGE>
<TABLE> <S> <C>
<CAPTION>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT INCOME FOR ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM
10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 5,910,805,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,326,000
<MORTGAGE> 500,424,000
<REAL-ESTATE> 24,000,000
<TOTAL-INVEST> 8,226,892,000
<CASH> 1,294,949,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 940,794,000
<TOTAL-ASSETS> 24,305,687,000
<POLICY-LOSSES> 8,076,822,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 209,803,000
<COMMON> 3,511,000
0
0
<OTHER-SE> 760,903,000
<TOTAL-LIABILITY-AND-EQUITY> 24,305,687,000
0
<INVESTMENT-INCOME> 125,631,000
<INVESTMENT-GAINS> 884,000
<OTHER-INCOME> 103,683,000
<BENEFITS> 99,894,000
<UNDERWRITING-AMORTIZATION> 27,604,000
<UNDERWRITING-OTHER> 9,088,000
<INCOME-PRETAX> 58,197,000
<INCOME-TAX> 21,009,000
<INCOME-CONTINUING> 37,188,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,188,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
EXHIBIT 10(a)
NASD
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
SL-5
AGREEMENT BETWEEN:
Lender SunAmerica Inc.
(Name)
1 SunAmerica Center,
1999 Avenue of the Stars, 38th Floor
(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: NASD
RECEIVED: March 26, 1999
NASD Form SL-5
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
AGREEMENT DATED March 12, 1999 to be
effective March 19, 1999 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
April 30, 2002 (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 of
the Broker-Dealer under this Agreement with respect to the
payment of principal and interest shall be and are
subordinate in right of payment and subject to the prior
payments or provision for payment in full of all claims of
all other present and future creditors of the Broker-Dealer
arising out of any matter occurring prior to the date on
which the related Payment Obligation (as defined herein)
matures consistent with the provisions of 17 CFR 240.15c3-1
and 240.15c3-1d, 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.
I. PERMISSIVE PREPAYMENTS (OPTIONAL)
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.
* Interest to be paid quarterly from the effective date of
this Agreement.
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 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.
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.
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.
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 12th day of March, 1999.
SunAmerica Capital services, Inc.
(Name of Broker-Dealer)
By: /s/ Debbi Potash-Turner L.S.
(Authorized Person)
By: /s/ SunAmerica, Inc. L.S.
(Lender)
By: /s/ James R. Belardi L.S.
Executive Vice President
FOR NASD USE ONLY
ACCEPTED BY: /s/ Deborah Davis
(Name)
Assistant Director
(Title)
EFFECTIVE DATE: 3/31/99
LOAN NUMBER: 10-E-SLA-10957
<PAGE>
SUBORDINATED LOAN AGREEMENT
LOAN 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: Lender is an intermediate holding company
of Broker-Dealer and continues to monitor the fiscal
status and 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: March 12, 1999
/s/ James R. Belardi L.S.
(Lender)
Executive Vice President
CERTIFICATE OF SECRETARY
I, Susan L. Harris, the duly appointed, qualified
and acting Secretary of SunAmerica Inc., a Delaware
corporation (the "Corporation"), do hereby certify that
the following is a atrue and correct copy of the resolutions
duly adoopted by the Executive Committee of the Board of
Directors of the Corporation, effective March 10, 1999, and
that such resolutions are in full force and effect as of the
date hereof:
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
12th day of March, 1999.
/s/ Susan L. Harris
SUSAN L. HARRIS
[SEAL]