SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
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
FEBRUARY 12, 1999 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares outstanding
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
<S> <C>
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
December 31, 1998 and September 30, 1998 3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) - Three Months Ended December 31,
1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended December 31, 1998 and 1997 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, September 30,
1998 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 3,303,454,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
December 1998, $4,252,740,000;
September 1998, $1,934,863,000) 4,248,840,000 1,954,754,000
Mortgage loans 388,780,000 391,448,000
Policy loans 320,688,000 11,197,000
Common stocks available for sale,
at fair value (cost: December 1998,
$1,409,000; September 1998, $115,000) 1,419,000 169,000
Real estate 24,000,000 24,000,000
Other invested assets 19,762,000 19,439,000
--------------- ---------------
Total investments 8,306,943,000 2,734,742,000
Variable annuity assets held in separate
accounts 13,767,213,000 11,133,569,000
Accrued investment income 73,441,000 26,408,000
Deferred acquisition costs 866,053,000 539,850,000
Income taxes currently receivable --- 5,869,000
Receivable from brokers for sales of
securities 22,826,000 23,904,000
Other assets 109,857,000 85,926,000
--------------- ---------------
TOTAL ASSETS $23,146,333,000 $14,550,268,000
=============== ===============
See accompanying notes
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
December 31, September 30,
1998 1998
---------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 5,485,272,000 $ 2,189,272,000
Reserves for universal life insurance
contracts 2,317,365,000 ---
Reserves for guaranteed investment
contracts 353,137,000 282,267,000
Payable to brokers for purchases of
securities --- 50,957,000
Income taxes currently payable 11,123,000 ---
Other liabilities 150,058,000 106,594,000
---------------- ---------------
Total reserves, payables
and accrued liabilities 8,316,955,000 2,629,090,000
---------------- ---------------
Variable annuity liabilities related to
separate accounts 13,767,213,000 11,133,569,000
---------------- ---------------
Subordinated notes payable to affiliates 209,367,000 39,182,000
---------------- ---------------
Deferred income taxes 105,772,000 95,758,000
---------------- ---------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 378,674,000 308,674,000
Retained earnings 366,460,000 332,069,000
Accumulated other comprehensive
income (loss) (1,619,000) 8,415,000
---------------- ---------------
Total shareholder's equity 747,026,000 652,669,000
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $23,146,333,000 $14,550,268,000
================ ===============
See accompanying notes
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 31, 1998 and 1997
(Unaudited)
1998 1997
------------- -------------
<S> <C> <C>
Investment income $ 54,278,000 $ 59,855,000
------------- -------------
Interest expense on:
Fixed annuity contracts (22,828,000) (27,821,000)
Guaranteed investment contracts (3,980,000) (4,550,000)
Senior indebtedness (34,000) (193,000)
Subordinated notes payable to affiliates (471,000) (809,000)
------------- -------------
Total interest expense (27,313,000) (33,373,000)
------------- -------------
NET INVESTMENT INCOME 26,965,000 26,482,000
------------- -------------
NET REALIZED INVESTMENT GAINS 271,000 20,935,000
------------- -------------
Fee income:
Variable annuity fees 58,806,000 44,364,000
Net retained commissions 11,479,000 10,461,000
Asset management fees 8,068,000 6,903,000
Surrender charges 3,239,000 1,289,000
Other fees 1,738,000 967,000
------------- -------------
TOTAL FEE INCOME 83,330,000 63,984,000
------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES (22,375,000) (23,019,000)
------------- -------------
AMORTIZATION OF DEFERRED ACQUISITION COSTS (27,070,000) (17,202,000)
------------- -------------
ANNUAL COMMISSIONS (6,624,000) (3,526,000)
------------- -------------
PRETAX INCOME 54,497,000 67,654,000
Income tax expense (20,106,000) (23,306,000)
------------- -------------
NET INCOME 34,391,000 44,348,000
Other comprehensive income, net of tax:
Net unrealized gains on bonds and notes
available for sale:
Net unrealized gains identified in the
current period (8,920,000) 15,841,000
Less reclassification adjustment for
net realized gains included in net
income (1,114,000) (16,591,000)
------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) (10,034,000) (750,000)
------------- -------------
COMPREHENSIVE INCOME $ 24,357,000 $ 43,598,000
============= =============
See accompanying notes
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended December 31, 1998 and 1997
(Unaudited)
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,391,000 $ 44,348,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 22,828,000 27,821,000
Guaranteed investment contracts 3,980,000 4,550,000
Net realized investment gains (271,000) (20,935,000)
Amortization (accretion) of net premiums
(discounts) on investments (1,199,000) 1,966,000
Amortization of goodwill 356,000 293,000
Provision for deferred income taxes 15,417,000 1,682,000
Change in:
Accrued investment income (1,512,000) (1,569,000)
Deferred acquisition costs (37,562,000) (28,376,000)
Other assets (21,070,000) (10,320,000)
Income taxes currently payable 16,992,000 20,953,000
Other liabilities 4,278,000 (4,036,000)
Other, net 6,038,000 126,000
--------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 42,666,000 36,503,000
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (392,515,000) (456,172,000)
Mortgage loans (4,962,000) ---
Other investments, excluding short-term
investments (1,992,000) ---
Sales of:
Bonds, notes and redeemable preferred
stocks 265,039,000 288,402,000
Other investments, excluding short-term
investments 142,000 43,135,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 37,290,000 214,105,000
Mortgage loans 7,699,000 5,996,000
Other investments, excluding short-term
investments 853,000 67,475,000
Cash and short-term investments acquired
in coinsurance transaction with
MBL Life Assurance Corporation 3,083,211,000 ---
--------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,994,765,000 162,941,000
--------------- --------------
See accompanying notes
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended December 31, 1998 and 1997
(Unaudited)
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $ 352,955,000 $ 261,968,000
Guaranteed investment contracts --- 5,619,000
Net exchanges from the fixed
accounts of variable annuity contracts (448,762,000) (242,466,000)
Withdrawal payments on:
Fixed annuity contracts (41,554,000) (49,414,000)
Guaranteed investment contracts (3,797,000) (4,131,000)
Claims and annuity payments on fixed
annuity contracts (9,333,000) (8,876,000)
Net receipts from (repayments of) other
short-term financings 9,545,000 (11,548,000)
Net payment for recapture of a
modified coinsurance transaction (167,202,000) ---
Receipts from issuance of subordinated
note payable to affiliate 170,436,000 ---
Capital contribution received 70,000,000 ---
--------------- --------------
NET CASH USED BY FINANCING ACTIVITIES (67,712,000) (48,848,000)
--------------- --------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 2,969,719,000 150,596,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 333,735,000 113,580,000
--------------- --------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $3,303,454,000 $ 264,176,000
=============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 536,000 $ 318,000
=============== ==============
Net income taxes paid $ 1,335,000 $ 794,000
=============== ==============
See accompanying notes
</TABLE>
7
<PAGE>
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 December 31, 1998 and September 30, 1998, and the results of its
consolidated operations and its consolidated cash flows for the three months
ended December 31, 1998 and 1997. The results of operations for the three
months ended December 31, 1998 are not necessarily indicative of the results to
be expected for the full year. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements for the fiscal year ended September 30, 1998, contained in
the Company's Annual Report on Form 10-K. 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. Reserves for universal life contracts are based
on fund value. 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.
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 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. 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.
8
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Reinsurance (continued)
-----------
Included in the block of business acquired from MBL Life is approximately
$250,000,000 of individual life business and $500,000,000 of group annuity
business whose contract owners are residents of New York State ("the New York
Business"). Approximately six months subsequent to completion of the
transaction, the New York Business will be acquired by the Company's New York
affiliate, First SunAmerica Life Insurance Company, 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.
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 disclosed to conform to the current year's presentation. Net
unrealized losses on bonds and notes available for sale increased by $10,034,000
during the three months ended December 31, 1998, and increased by $750,000
during the three months ended December 31, 1997.
9
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Adoption of New Accounting Standard (continued)
---------------------------------------
The before tax, after tax, and tax (expense) benefit amounts for each component
of the (decrease) increase in unrealized gains on bonds and notes available for
sale for both the current and prior periods are summarized below:
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ---------- --------------
Three months ended December 31,
1998:
<S> <C> <C> <C>
Net unrealized losses on bonds
and notes available for sale
identified in the current
period $(22,123,000) $ 7,743,000 $(14,380,000)
Increase in Deferred Acquisition
Cost adjustment identified in
the current period 8,400,000 (2,940,000) 5,460,000
------------- ------------ -------------
(13,723,000) 4,803,000 (8,920,000)
Reclassification adjustment for
net realized gains included
in net income (1,713,000) 599,000 (1,114,000)
------------- ------------ -------------
Total decrease in net
unrealized gains on bonds
and notes available for
sale $(15,436,000) $ 5,402,000 $(10,034,000)
============= ============ =============
Three months ended December 31,
1997:
Net unrealized gains on bonds
and notes available for sale
identified in the current
period $ 23,973,000 $(8,391,000) $ 15,582,000
Increase in Deferred Acquisition
Cost adjustment identified in
the current period 400,000 (141,000) 259,000
------------- ------------ -------------
24,373,000 (8,532,000) 15,841,000
Reclassification adjustment for
net realized gains included
in net income (25,524,000) 8,933,000 (16,591,000)
------------- ------------ -------------
Total increase in net
unrealized gains on
bonds and notes
available for sale $ (1,151,000) $ 401,000 $ (750,000)
============= ============ =============
</TABLE>
10
<PAGE>
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 December 31, 1998 ("1998") and December 31, 1997 ("1997")
follows. The Company is in the process of changing its fiscal year end to
December 31. Accordingly, the quarter ended December 31, 1998 is 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 $34.4 million in 1998, compared with $44.3 million in
1997.
PRETAX INCOME totaled $54.5 million in 1998 and $67.7 million in 1997. The
19.4% decrease primarily resulted from reduced net realized investment gains and
increased amortization of deferred acquisition costs ("DAC"), which were
partially offset by increased fee income.
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 $27.0 million in 1998 and $26.5 million in
1997. These amounts equal 4.09% on average invested assets (computed on a daily
basis) of $2.64 billion in 1998 and 4.22% on average invested assets of $2.51
billion in 1997.
Net investment spreads include the effect of income earned on the
11
<PAGE>
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $196.3 million in 1998 and $72.6 million in 1997. The
difference between the Company's yield on average invested assets and the rate
paid on average interest-bearing liabilities (the "Spread Difference") was 3.76%
in 1998 and 4.06% in 1997.
Investment income (and the related yields on average invested assets)
totaled $54.3 million (8.23%) in 1998, compared with $59.9 million (9.54%) in
1997. The declines in investment income and the related yield in 1998 reflect
primarily unusually high partnership income in 1997.
Partnership income decreased to $0.5 million (a yield of 43.70% on related
average assets of $4.4 million) in 1998, compared with $15.2 million (a yield of
400.95% on related average assets of $15.1 million) in 1997. Partnership income
is based upon cash distributions received from limited partnerships, the
operations of which the Company does not influence. Consequently, such income is
not predictable and there can be no assurance that the Company will realize
comparable levels of such income in the future.
Total interest expense equaled $27.3 million in 1998 and $33.4 million in
1997. The average rate paid on all interest-bearing liabilities was 4.48% in
1998, compared with 5.48% in 1997. Interest-bearing liabilities averaged $2.44
billion during both 1998 and 1997. The decrease in the overall rates paid
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 1998 would have been 5.63%.
The increase in average invested assets in 1998 reflects the net effect of
increased sales of the Company's fixed rate products and net exchanges from
fixed accounts into the separate accounts of variable annuity contracts. Fixed
annuity premiums totaled $351.6 million in 1998, compared with $262.0 million in
1997, and are largely premiums for the fixed accounts of variable annuities.
These amounts represent 64% and 50% of the fixed annuity reserve balances at the
beginning of the respective periods. The premiums for the fixed accounts of
variable annuities have increased primarily because of increased sales of the
Company's variable annuity products and greater inflows into the one-year fixed
account and the new six-month fixed account of these products, which are used
for dollar cost averaging into the variable accounts. Accordingly, the Company
anticipates that it will see a large portion of these premiums transferred into
the variable funds.
There were no guaranteed investment contract ("GIC") premiums in 1998 and
$5.6 million in 1997. GIC surrenders and maturities totaled $3.8 million in
1998 and $4.1 million in 1997. 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 $0.3 million in 1998, compared with
$20.9 million in 1997. Net realized investment gains in 1998 include
12
<PAGE>
impairment writedowns of $1.6 million in 1998. There were no impairment
writedowns in 1997. Thus, net gains from sales and redemptions of investments
totaled $1.9 million in 1998, compared to net losses of $3.0 in 1997.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $307.9 million and $310.3 million in 1998 and 1997, respectively.
Sales of investments result from the active management of the Company's
investment portfolio. Because redemptions of investments are generally
involuntary and sales of investments are made in both rising and falling
interest rate environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 0.07% and 0.83% of
average invested assets for 1998 and 1997, 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 $1.6 million of provisions applied to
partnerships during 1998. There were no impairment writedowns in 1997.
Impairment writedowns represent 0.06% of average invested assets in 1998. For
the seventeen fiscal quarters beginning October 1, 1994, impairment writedowns
as a percentage of average invested assets have ranged up to 3.06% and have
averaged 0.60%. Such writedowns are based upon estimates of the net realizable
value of the applicable assets. Actual realization will be dependent upon
future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $58.8 million
in 1998 and $44.4 million in 1997. These increased fees reflect growth in
average variable annuity assets due to increased market values, the receipt of
variable annuity premiums, and net exchanges into the separate accounts from the
fixed accounts of variable annuity contracts, partially offset by surrenders.
On an annualized basis, variable annuity fees represent 1.9% of average variable
annuity assets in both 1998 and 1997. Variable annuity assets averaged $12.31
billion during 1998 and $9.40 billion during 1997. Variable annuity premiums,
which exclude premiums allocated to the fixed accounts of variable annuity
products, aggregated $1.76 billion since December 31, 1997. Variable annuity
premiums totaled $364.3 million and $422.1 million in 1998 and 1997,
respectively. These amounts represent 13% and 18% of variable annuity reserves
at the beginning of the respective periods.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $715.9 million
and $684.0 million in 1998 and 1997, respectively, and primarily reflect sales
of the Company's flagship variable annuity, Polaris. Polaris is a multimanager
variable annuity that offers investors a choice of 26 variable funds and 7
guaranteed fixed-rate funds. Increases in Variable Annuity Product Sales are
due, in part, to market share gains through enhanced distribution efforts and
consumer demand for flexible retirement savings products that offer a variety of
equity, fixed income and guaranteed fixed account investment choices,
particularly in light of the recent volatile markets.
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
13
<PAGE>
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 $11.5
million in 1998 and $10.5 million in 1997. Broker-dealer sales (mainly sales of
general securities, mutual funds and annuities) totaled $2.81 billion in 1998
and $3.83 billion in 1997. This decrease is primarily due to the recent market
volatility. Fluctuations in net retained commissions may not be proportionate
to fluctuations in sales primarily due to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $3.2 million in
1998 and $1.3 million in 1997. Surrender charges generally are assessed on
annuity withdrawals at declining rates during the first seven years of an
annuity contract. Withdrawal payments, which include surrenders and lump-sum
annuity benefits, totaled $313.4 million in 1998, compared with $268.5 million
in 1997. These payments represent 8.8% and 9.4%, respectively, of average fixed
and variable annuity reserves. Withdrawals include variable annuity withdrawals
from the separate accounts totaling $272.0 million in 1998 (8.9% of average
variable annuity reserves) and $219.1 million (9.4% of average variable annuity
reserves) in 1997. Management anticipates that withdrawal rates will remain
relatively stable for the foreseeable future.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $8.1 million on
average assets managed of $3.17 billion in 1998 and $6.9 million on average
assets managed of $2.69 billion in 1997. Asset management fees are not
proportionate to average assets managed, principally due to changes in product
mix. Sales of mutual funds, excluding sales of money market accounts,
aggregated $211.7 million in 1998 and $165.8 million in 1997. 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 which are each
managed by three industry-recognized fund managers. The "Dogs" of Wall Street
fund contains 30 large capitalization value stocks which are selected by strict
criteria. Sales of these products totaled $147.9 million in 1998, compared with
$110.2 million in 1997, reflecting primarily 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 $119.4 million in 1998 and $92.0 million in 1997, which represent
3.74%, and 3.42%, respectively, of average mutual fund assets.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $22.4 million in 1998 and $23.0
million in 1997. General and administrative expenses remain closely controlled
through a company-wide cost containment program and continue to represent less
than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $27.1 million in 1998,
compared with $17.2 million in 1997. The increase in amortization was primarily
due to $6.4 million of amortization relating to the costs of a reinsurance
transaction terminated on December 31, 1998, as well as to the 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
14
<PAGE>
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 $6.6 million in 1998 and
$3.5 million in 1997. 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 $20.1 million in 1998, compared with $23.3
million in 1997, representing effective annualized tax rates of 37% and 34%,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 14.5% to $747.0 million at December 31, 1998
from $652.7 million at September 30, 1998, primarily due to a $70.0 million
capital contribution, as well as $34.4 million of net income recorded in 1998,
which was partially offset by a $10.0 million increase in accumulated other
comprehensive loss.
INVESTED ASSETS at December 31, 1998 totaled $8.31 billion, compared with
$2.73 billion at September 30, 1998. This significant increase in invested
assets is due to the coinsurance of a $5.6 billion block of annuity and life
insurance policies from MBL Life Assurance Corporation ("MBL Life") on December
31, 1998, as described in Note 2. 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 constitutes 51% of the Company's total investment
portfolio, had an aggregate fair value that was less than its amortized cost by
$3.9 million at December 31, 1998, compared with an excess of $19.9 million at
September 30, 1998. The decline in the unrealized gain of the Bond Portfolio in
1998 was due to changes in the market value of portions of the
non-investment-grade portfolio.
At December 31, 1998, the Bond Portfolio (excluding $7.5 million of
redeemable preferred stocks) included $4.17 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 $78.1 million of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At December 31, 1998, approximately $4.00 billion of the Bond
Portfolio was investment grade, including $560.2 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At December 31, 1998, the Bond Portfolio included $241.8 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
1.0% of the Company's total assets and 2.9% of its invested assets.
15
<PAGE>
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
December 31, 1998.
The table on the following page summarizes the Company's rated bonds by
rating classification as of December 31, 1998.
16
<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-} $2,976,284 $2,986,867 1 $ 187,151 $ 195,090 $3,163,435 $3,182,057 38.31%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 689,694 682,035 2 136,502 135,472 826,196 817,507 9.84
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 57,190 55,063 3 10,173 9,922 67,363 64,985 0.78
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 165,193 157,885 4 21,829 17,502 187,022 175,387 2.11
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} --- --- 5 --- 48 --- 48 ---
CI to D
[DD]
{D} --- --- 6 2,599 1,349 2,599 1,349 0.02
---------- ---------- ---------- ---------- ---------- ---------- -----------
TOTAL RATED ISSUES $3,888,361 $3,881,850 $ 358,254 $ 359,383 $4,246,615 $4,241,333
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
17
<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 $78.1 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
18
<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $449.7 million at December 31, 1998. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
December 31, 1998, Secured Loans consisted of $317.2 million of publicly traded
securities and $132.5 million of privately traded securities. These Secured
Loans are composed of loans to 85 borrowers spanning 20 industries, with 25% of
these assets concentrated in utilities and 15% of these assets concentrated in
financial institutions. No other industry concentration constituted more than
5% 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 $388.8 million at December 31, 1998 and consisted
of 131 commercial first mortgage loans with an average loan balance of
approximately $3.0 million, collateralized by properties located in 29 states.
Approximately 22% of this portfolio was multifamily residential, 16% was office,
14% was manufactured housing, 13% was industrial, 12% was hotels and 23% was
other types. At December 31, 1998, approximately 20% and 14% of this portfolio
were secured by properties located in California and New York, respectively, and
no more than 8% of this portfolio was secured by properties located in any other
single state. At December 31, 1998, there were three mortgage loans with
outstanding balances of $10 million or more, which loans collectively aggregated
approximately 11% of this portfolio. At December 31, 1998, approximately 24% of
the mortgage loan portfolio consisted of loans with balloon payments due before
January 1, 2002. During 1998 and 1997, loans delinquent by more than 90 days,
foreclosed loans and restructured loans have not been significant in relation to
the total mortgage loan portfolio.
At December 31, 1998, approximately 29% 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.
POLICY LOANS aggregated $320.7 million at December 31, 1998, compared to
$11.2 million at September 30, 1998. This increase was due to loans assumed on
the business coinsured from MBL Life.
OTHER INVESTED ASSETS aggregated $19.8 million at December 31, 1998,
including $15.2 million of collateralized bond obligations and
19
<PAGE>
collateralized mortgage obligation residuals and $4.6 million of investments in
limited partnerships. The Company's limited partnership interests, accounted
for by using the cost method of accounting, are invested primarily in a
combination of debt and equity securities.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed-rate investments are priced
over the yield curve, and general economic conditions. Its portfolio strategy
is constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 76% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at December 31, 1998.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; mortgage loans; and investments in limited
partnerships that invest primarily in fixed-rate securities and are accounted
for by using the cost method. At December 31, 1998, these assets had an
aggregate fair value of $8.32 billion with a duration of 1.7. The Company's
fixed-rate liabilities include fixed annuities, universal life reserves,
subordinated notes other than the surplus note and GICs. At December 31,1998,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $8.13 billion
with a duration of 2.0. The Company's potential exposure due to a relative 10%
decrease in prevailing interest rates from their December 31, 1998 levels is a
loss of approximately $12.6 million, representing the increase in the fair value
of its fixed-rate liabilities that is not offset by an increase in the fair
value of its fixed-rate assets. Because the Company actively manages its assets
and liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity and GIC products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by
20
<PAGE>
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 December 31, 1998, the Company had one outstanding Swap
Agreement with a notional principal amount of $21.5 million. This agreement
matures in December 2024.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount
of principal and interest payments may fluctuate as a result of prepayments of
the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is
minimal. It is the Company's policy that these agreements are entered into with
counterparties who have a debt rating of A/A2 or better from both S&P and
Moody's. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Company's Swap Agreements typically hedge
variable-rate assets or liabilities, and interest rate fluctuations that
adversely affect the net cash received or paid under the terms of a Swap
Agreement would be offset by increased interest income earned on the
variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of its
decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the security's projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual prepayment
experience monthly to reassess the relative attractiveness of the security with
the intent to maximize total return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying 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
21
<PAGE>
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 $0.7 million of mortgage loans at
December 31, 1998, and constituted less than 0.1% of total invested assets. At
September 30, 1998, defaulted investments totaled $0.9 million of mortgage
loans, and constituted less than 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At December 31, 1998, approximately $3.51 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $36.2 million, while approximately
$738.0 million of the Bond Portfolio had an aggregate unrealized loss of $40.1
million. In addition, the Company's investment portfolio currently provides
approximately $52.1 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity and GIC products have been more than sufficient in amount
to satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities and
GICs. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
YEAR 2000
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems are not presently year 2000
22
<PAGE>
compliant, which means that because they have historically used only two digits
to identify the year in a date, they will fail to distinguish dates in the
"2000s" from dates in the "1900s." The Company's business, financial condition
and results of operations could be materially and adversely affected by the
failure of the Company's systems and applications (and those operated by third
parties interfacing with the Company's systems and applications) to properly
operate or manage these dates.
The Company has a coordinated plan to repair or replace these noncompliant
systems and to obtain similar assurances from third parties interfacing with the
Company's systems and applications. In fiscal 1997, the Company's parent
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. Management is making expenditures which
it expects will ultimately total $5.0 million to replace certain other specific
noncompliant systems, which expenditures will be capitalized as software costs
and amortized over future periods. Both phases of the project are currently
proceeding in accordance with the plan and were substantially completed by the
end of calendar 1998. Testing of both the repaired and replacement systems is
being conducted during calendar 1999.
In addition, the Company has distributed a year 2000 questionnaire to
certain of its significant suppliers, distributors, financial institutions,
lessors and others with which it does business to evaluate their year 2000
compliance plans and state of readiness and to determine the extent to which the
Company's systems and applications may be affected by the failure of others to
remediate their own year 2000 issues. To date, however, the Company has
received only preliminary feedback from such parties and has not independently
confirmed any information received from other parties with respect to the year
2000 issues. Therefore, there can be no assurance that such other parties will
complete their year 2000 conversions in a timely fashion or will not suffer a
year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.
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 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.
23
<PAGE>
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 mount of
investments permitted, and limiting the amount of dividends that can be paid and
the size of transactions that can be consummated without first obtaining
regulatory approval.
During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has developed several model laws and
regulations designed to reduce the risk of insurance company insolvencies and
market conduct violations. These initiatives include investment reserve
requirements, risk-based capital ("RBC") standards, codification of insurance
accounting principles, new investment standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. The NAIC is also
currently developing model laws or regulations relating to product design,
product reserving standards and illustrations 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 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
24
<PAGE>
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
- ------ -----------
27 Financial Data Schedule.
REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the three months ended December
31, 1998. However, on January 14, 1999, the Company filed a current report on
Form 8-K concerning its acquisition of a block of business from MBL Life
Assurance Corporation, and on January 15, 1999, the Company filed a current
report on Form 8-K concerning the merger of its ultimate Parent, SunAmerica
Inc., with American International Group, Inc.
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: February 16, 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 February 16, 1999
- ------------------------- -----------------
Scott L. Robinson Director (Principal
Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and February 16, 1999
- ----------------------- ------------------
N. Scott Gillis Controller (Principal
Accounting Officer)
28
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------ -----------
27 Financial Data Schedule
29
<TABLE> <S> <C>
<CAPTION>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 4,248,840,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,419,000
<MORTGAGE> 388,780,000
<REAL-ESTATE> 24,000,000
<TOTAL-INVEST> 8,306,943,000
<CASH> 3,303,454,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 866,053,000
<TOTAL-ASSETS> 23,146,333,000
<POLICY-LOSSES> 8,155,774,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 209,367,000
<COMMON> 3,511,000
0
0
<OTHER-SE> 743,515,000
<TOTAL-LIABILITY-AND-EQUITY> 23,146,333,000
0
<INVESTMENT-INCOME> 53,773,000
<INVESTMENT-GAINS> 271,000
<OTHER-INCOME> 83,330,000
<BENEFITS> 26,808,000
<UNDERWRITING-AMORTIZATION> 27,070,000
<UNDERWRITING-OTHER> 6,624,000
<INCOME-PRETAX> 54,497,000
<INCOME-TAX> 20,106,000
<INCOME-CONTINUING> 34,391,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,391,000
<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>
