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 ended March 31, 2000
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
11, 2000 WAS 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, 2000 and December 31, 1999 . . . . . . . . . 3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) - Three Months Ended March 31,
2000 and 1999. . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 2000 and 1999 . . . . . . 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 11-24
Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . 25
Part II - Other Information . . . . . . . . . . . . . . . . 26
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
2000 1999
--------------- ---------------
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ASSETS
Investments:
Cash and short-term investments . . . . $ 617,187,000 $ 462,915,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
March 2000, $3,866,645,000;
December 1999, $4,155,728,000). . . . 3,645,252,000 3,953,169,000
Mortgage loans. . . . . . . . . . . . . 678,908,000 674,679,000
Policy loans. . . . . . . . . . . . . . 253,706,000 260,066,000
Separate account seed money . . . . . . 140,846,000 144,231,000
Partnerships. . . . . . . . . . . . . . 4,010,000 4,009,000
Real estate . . . . . . . . . . . . . . 24,000,000 24,000,000
Other invested assets . . . . . . . . . 24,072,000 31,632,000
--------------- ---------------
Total investments . . . . . . . . . . . 5,387,981,000 5,554,701,000
Variable annuity assets held in separate
accounts. . . . . . . . . . . . . . . . 21,744,036,000 19,949,145,000
Accrued investment income . . . . . . . . 57,379,000 60,584,000
Deferred acquisition costs. . . . . . . . 1,132,683,000 1,089,979,000
Receivable from brokers for sales of
securities --- 54,760,000
Deferred income taxes . . . . . . . . . . 44,305,000 53,445,000
Other assets. . . . . . . . . . . . . . . 110,989,000 111,880,000
--------------- ---------------
TOTAL ASSETS. . . . . . . . . . . . . . . $28,477,373,000 $26,874,494,000
=============== ===============
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See accompanying notes
3
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
March 31, December 31,
2000 1999
---------------- ----------------
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LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts. . . $ 2,909,529,000 $ 3,254,895,000
Reserves for universal life insurance
contracts . . . . . . . . . . . . . . . 1,940,158,000 1,978,332,000
Reserves for guaranteed investment
contracts . . . . . . . . . . . . . . . 455,667,000 305,570,000
Payable to brokers for purchases of
securities. . . . . . . . . . . . . . . 5,139,000 139,000
Income taxes currently payable. . . . . . 26,316,000 23,490,000
Modified coinsurance deposit liability. . 135,060,000 140,757,000
Other liabilities . . . . . . . . . . . . 300,129,000 249,224,000
---------------- ----------------
Total reserves, payables and accrued
liabilities . . . . . . . . . . . . . . 5,771,998,000 5,952,407,000
---------------- ----------------
Variable annuity liabilities related to
separate accounts . . . . . . . . . . . . 21,744,036,000 19,949,145,000
---------------- ----------------
Subordinated notes payable to affiliates. . 53,361,000 37,816,000
---------------- ----------------
Shareholder's equity:
Common Stock. . . . . . . . . . . . . . . 3,511,000 3,511,000
Additional paid-in capital. . . . . . . . 493,010,000 493,010,000
Retained earnings . . . . . . . . . . . . 535,602,000 551,158,000
Accumulated other comprehensive loss. . . (124,145,000) (112,553,000)
---------------- ----------------
Total shareholder's equity. . . . . . . . 907,978,000 935,126,000
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. $28,477,373,000 $26,874,494,000
================ ================
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See accompanying notes
4
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------- --------------
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Investment income . . . . . . . . . . . . . . $107,287,000 $ 130,357,000
------------- --------------
Interest expense on:
Fixed annuity contracts . . . . . . . . . . (37,720,000) (64,565,000)
Universal life insurance contracts. . . . . (23,756,000) (30,171,000)
Guaranteed investment contracts . . . . . . (5,268,000) (5,158,000)
Senior indebtedness --- (1,273,000)
Subordinated notes payable to affiliates. . (801,000) (3,453,000)
------------- --------------
Total interest expense. . . . . . . . . . . (67,545,000) (104,620,000)
------------- --------------
NET INVESTMENT INCOME . . . . . . . . . . . . 39,742,000 25,737,000
------------- --------------
NET REALIZED INVESTMENT GAINS (LOSSES). . . . (1,769,000) 884,000
------------- --------------
Fee income:
Variable annuity fees . . . . . . . . . . . 96,619,000 66,945,000
Net retained commissions. . . . . . . . . . 13,158,000 12,957,000
Asset management fees . . . . . . . . . . . 17,068,000 9,279,000
Universal life insurance fees . . . . . . . 4,503,000 6,377,000
Surrender charges . . . . . . . . . . . . . 5,025,000 4,379,000
Other fees. . . . . . . . . . . . . . . . . 3,030,000 3,746,000
------------- --------------
TOTAL FEE INCOME. . . . . . . . . . . . . . . 139,403,000 103,683,000
------------- --------------
GENERAL AND ADMINISTRATIVE EXPENSES . . . . . (41,262,000) (35,415,000)
------------- --------------
AMORTIZATION OF DEFERRED ACQUISITION COSTS. . (37,932,000) (27,604,000)
------------- --------------
ANNUAL COMMISSIONS. . . . . . . . . . . . . . (15,444,000) (9,088,000)
------------- --------------
PRETAX INCOME . . . . . . . . . . . . . . . . 82,738,000 58,197,000
Income tax expense. . . . . . . . . . . . . . (29,294,000) (21,009,000)
------------- --------------
NET INCOME. . . . . . . . . . . . . . . . . . 53,444,000 37,188,000
------------- --------------
OTHER COMPREHENSIVE LOSS, NET OF TAX
Net unrealized losses on debt and equity
securities available for sale identified
in the current period (net of income tax
benefit of $6,767,000 for 2000 and
$10,583,000 for 1999) . . . . . . . . . . (12,568,000) (19,652,000)
Less reclassification adjustment for net
realized losses (gains) included in net
income (net of income tax expense of
$525,000 for 2000 and income tax benefit
of $80,000 for 1999). . . . . . . . . . . 976,000 (148,000)
------------- --------------
OTHER COMPREHENSIVE LOSS. . . . . . . . . . (11,592,000) (19,800,000)
------------- --------------
COMPREHENSIVE INCOME. . . . . . . . . . . . . $ 41,852,000 $ 17,388,000
============= ==============
</TABLE>
See accompanying notes
5
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------- ----------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . $ 53,444,000 $ 37,188,000
Adjustment to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts. . . . . . . 37,720,000 64,565,000
Universal life insurance contracts . 23,756,000 30,171,000
Guaranteed investment contracts. . . 5,268,000 5,158,000
Net realized investment losses (gains) 1,769,000 (884,000)
Accretion (amortization) of net
discounts (premiums) on investments. (7,925,000) 3,847,000
Universal life insurance fees. . . . . (4,503,000) (6,377,000)
Amortization of goodwill . . . . . . . 363,000 358,000
Provision for deferred income taxes. . 15,382,000 (54,403,000)
Change in:
Accrued investment income. . . . . . . . 3,205,000 (20,074,000)
Deferred acquisition costs . . . . . . . (41,704,000) (54,741,000)
Other assets . . . . . . . . . . . . . . 528,000 12,511,000
Income taxes currently payable . . . . . 2,826,000 12,169,000
Other liabilities. . . . . . . . . . . . 59,243,000 46,622,000
Other, net . . . . . . . . . . . . . . . . (5,729,000) (4,869,000)
------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. 143,643,000 71,241,000
------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks . . . . . . . . . . . . . . . . (81,207,000) (2,862,010,000)
Mortgage loans . . . . . . . . . . . . . (10,055,000) (121,189,000)
Other investments, excluding short-term
investments. . . . . . . . . . . . . . (20,301,000) (155,761,000)
Sales of:
Bonds, notes and redeemable preferred
stocks . . . . . . . . . . . . . . . . 308,909,000 1,080,439,000
Other investments, excluding short-term
investments --- 1,519,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks . . . . . . . . . . . . . . . . 119,052,000 125,032,000
Mortgage loans . . . . . . . . . . . . . 6,241,000 9,767,000
Other investments, excluding short-term
investments. . . . . . . . . . . . . . 45,435,000 5,683,000
------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES . . . . . . . . . . . . . . . 368,074,000 (1,916,520,000)
------------- ----------------
</TABLE>
See accompanying notes
6
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
-------------- ----------------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts . . . . . . . . . . $ 379,940,000 $ 397,623,000
Universal life insurance contracts. . . . . 15,013,000 18,003,000
Guaranteed investment contracts 150,000,000 ---
Net exchanges from the fixed accounts
of variable annuity contracts . . . . . . . (599,675,000) (414,402,000)
Withdrawal payments on:
Fixed annuity contracts . . . . . . . . . . (141,545,000) (103,126,000)
Universal life insurance contracts. . . . . (26,258,000) (16,351,000)
Guaranteed investment contracts . . . . . . (4,009,000) (5,143,000)
Claims and annuity payments on:
Fixed annuity contracts . . . . . . . . . . (18,240,000) (16,221,000)
Universal life insurance contracts. . . . . (45,181,000) (18,019,000)
Net repayments of other short-term financings (8,338,000) (5,590,000)
Net payment related to a modified
coinsurance transaction (5,697,000) ---
Net receipt from issuances of subordinated
notes payable to affiliates 15,545,000 ---
Dividends paid (69,000,000) ---
-------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES . . . . (357,445,000) (163,226,000)
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS. . . . . . . . . . . 154,272,000 (2,008,505,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD . . . . . . . . . . . . 462,915,000 3,303,454,000
-------------- ----------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD . . . . . . . . . . . . . . . $ 617,187,000 $ 1,294,949,000
============== ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness . . . . . . . . $ 256,000 $ 1,709,000
============== ================
Net income taxes paid . . . . . . . . . . . . $ 11,093,000 $ 67,099,000
============== ================
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See accompanying notes
7
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
-----------------------
Anchor National Life Insurance Company, including its wholly owned subsidiaries
(the "Company") is an indirect wholly owned subsidiary of American International
Group, Inc. ("AIG"), an international insurance and financial services holding
company. The Company is engaged in the business of writing fixed and variable
annuities directed to the market for tax-deferred, long-term savings products
and guaranteed interest contracts ("GICs") directed to the institutional
marketplace. Its subsidiaries are engaged in the broker-dealer and asset
management businesses.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the Company's
consolidated financial position as of March 31, 2000 and December 31, 1999, the
results of its consolidated operations and its consolidated cash flows for the
three months ended March 31, 2000 and 1999. The results of operations for the
three months ended March 31, 2000 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 year ended December 31, 1999, contained in the
Company's 1999 Annual Report on Form 10-K. Certain items have been reclassified
to conform to the current period's presentation.
8
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2. SEGMENT INFORMATION
--------------------
Following is selected information pertaining to the Company's business
segments.
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Asset Broker-
Annuity Management Dealer
Operations Operations Operations Total
------------- ----------- ----------- ----------
THREE MONTHS ENDED MARCH 31,
2000:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . 190,755,000 21,263,000 10,066,000 222,084,000
Intersegment revenue --- 20,168,000 2,669,000 22,837,000
------------- ------------- ------------ -------------
Total revenue . . . . 190,755,000 41,431,000 12,735,000 244,921,000
============= ============= ============ =============
Pretax income . . . . 51,833,000 25,773,000 5,132,000 82,738,000
Income tax expense. . (15,958,000) (10,872,000) (2,464,000) (29,294,000)
------------- ------------- ------------ -------------
Net income. . . . . . $ 35,875,000 $ 14,901,000 $ 2,668,000 $ 53,444,000
============= ============= ============ =============
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THREE MONTHS ENDED MARCH 31,
1999:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . 197,195,000 11,480,000 10,814,000 219,489,000
Intersegment revenue --- 13,646,000 1,789,000 15,435,000
------------- ------------ ------------ -------------
Total revenue . . . . 197,195,000 25,126,000 12,603,000 234,924,000
============= ============ ============ =============
Pretax income . . . . 38,240,000 14,428,000 5,529,000 58,197,000
Income tax expense. . (12,017,000) (6,342,000) (2,650,000) (21,009,000)
------------- ------------ ------------ -------------
Net income. . . . . . $ 26,223,000 $ 8,086,000 $ 2,879,000 $ 37,188,000
============= ============ ============ =============
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9
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3. CONTINGENT LIABILITIES
-----------------------
The Company has entered into four agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. The maximum liability under these guarantees at March 31, 2000
is approximately $210,100,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities.
4. RECENTLY ISSUED ACCOUNTING STANDARD
--------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 was postponed by SFAS 137, and now will be effective for
the Company as of January 1, 2001. Therefore, it is not included in the
accompanying financial statements. The Company has not completed its analysis
of the effect of SFAS 133, but management believes that it will not have a
material impact on the Company's results of operations, financial condition or
liquidity.
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 and its wholly owned
subsidiaries (the "Company") for the three months ended March 31, 2000 ("2000")
and 1999 ("1999") follows.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in 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 on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $53.4 million in 2000, compared with $37.2 million in
1999. 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 results of operations for 2000 and 1999 include the
impact of the Acquisition.
PRETAX INCOME totaled $82.7 million in 2000, compared with $58.2 million in
1999. The 42.2% improvement in 2000 over 1999 primarily resulted from increased
fee income and net investment income, partially offset by increased amortization
of deferred acquisition costs ("DAC") and increased annual commissions.
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 $39.7 million in 2000 and $25.7 million in
1999. These amounts equal 2.84% on average invested assets (computed on a daily
basis) of $5.60 billion in 2000 and 1.24% on average invested assets of $8.31
billion in 1999. Net investment income has increased primarily because of the
redeployment of the assets received in the Acquisition into higher yielding
investment categories.
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 invested assets exceeded average interest-bearing
liabilities by $254.3 million in 2000, compared with a $79.4 million deficit of
average interest-bearing liabilities over average invested assets in 1999. The
difference between the Company's yield on average invested assets and the rate
paid on average interest-bearing liabilities (the "Spread Difference") was 2.61%
in 2000 and 1.28% in 1999.
Investment income (and the related yields on average invested assets)
totaled $107.3 million (7.67%) in 2000 and $130.4 million (6.27%) in 1999. The
decrease in investment income in 2000 compared to 1999 resulted primarily from
the surrender or rollover into a variable product of most of the fixed annuities
received in the Acquisition. The increase in the yield in 2000 compared to 1999
is due to primarily to the redeployment of the assets received in the
Acquisition into higher yielding investment categories.
Partnership income decreased to $1.9 million (a yield of 142.83% on related
average assets of $5.4 million) in 2000, from $3.2 million (a yield of 50.62% on
related average assets of $25.4 million) in 1999. 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 $67.5 million in 2000, compared with $104.6
million in 1999. The average rate paid on all interest-bearing liabilities was
5.06% in 2000, compared with 4.99% in 1999. Interest-bearing liabilities
averaged $5.34 billion during 2000 and $8.39 billion during 1999. The decrease
in interest expense and interest-bearing liabilities in 2000 reflect the
decrease in fixed annuity liabilities related to the Acquisition.
DECLINE IN AVERAGE INVESTED ASSETS reflects primarily the surrenders and
rollovers to variable products of the fixed annuity liabilities related to the
Acquisition. Changes in average invested assets also reflect sales of fixed
annuities and the fixed account options of the Company's variable annuity
products ("Fixed Annuity Premiums"), and renewal premiums on its universal life
product ("UL Premiums") acquired in the Acquisition, partially offset by net
exchanges from fixed accounts into the separate accounts of variable annuity
contracts. Since March 31, 1999, Fixed Annuity Premiums and UL Premiums have
aggregated $2.08 billion. Fixed Annuity Premiums and UL Premiums totaled $395.0
million in 2000 and $415.6 million in 1999 and are largely premiums for the
fixed accounts of variable annuities. On an annualized basis, these premiums
represent 30% and 21%,
12
<PAGE>
respectively, of the related reserve balances at the beginning of 2000 and 1999.
Guaranteed investment contract ("GIC") premiums totaled $150.0 million in
2000. There were no GIC premiums in 1999. GIC surrenders and maturities
totaled $4.0 million in 2000 and $5.1 million in 1999. 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 LOSSES totaled $1.8 million in 2000, compared to
net realized investment gains of $0.9 million in 1999. Net realized investment
losses in 2000 include impairment writedowns of $2.6 million in 2000, compared
with $0.6 million in 1999. Thus, net gains from sales and redemptions of
investments totaled $0.8 million in 2000, compared with $1.5 million in 1999.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $409.0 million in 2000 and $1.21 billion in 1999. 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 0.06% and 0.07% of average invested assets in 2000 and
1999, 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 2000 and 1999.
On an annualized basis, impairment writedowns represent 0.05%, and 0.03% of
average invested assets in 2000 and 1999, respectively. For the twenty quarters
beginning April 1, 1995, impairment writedowns as a percentage of average
invested assets have ranged up to 3.06% and have averaged 0.47%. 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 $96.6 million
in 2000 and $66.9 million in 1999. The increased fees in 2000 reflect growth
in average variable annuity assets, principally due to
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<PAGE>
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 2000 and 1999.
Variable annuity assets averaged $20.43 billion during 2000 and $14.32 billion
during 1999. Variable annuity premiums, which exclude premiums allocated to the
fixed accounts of variable annuity products, have aggregated $1.69 billion since
March 31, 1999. Variable annuity premiums totaled $474.4 million and $484.5
million in 2000 and 1999, respectively. On an annualized basis, these amounts
represent 10%, and 14%, 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 $857.8 million
and $881.3 million in 2000 and 1999, respectively. Variable Annuity Product
Sales primarily reflect sales of the Company's flagship variable annuity line,
Polaris. Polaris is a multimanager variable annuity that offers investors a
choice of more than 25 variable funds and a number of guaranteed fixed-rate
funds.
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 that 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 $13.2
million in 2000 and $13.0 million in 1999. Broker-dealer sales (mainly sales of
general securities, mutual funds and annuities) totaled $2.88 billion in 2000
and $3.48 billion in 1999. The increase in net retained commissions concurrent
with the decrease in sales principally reflect changes in sales mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $17.1 million on
average assets managed of $6.03 billion in 2000 and $9.3 million on average
assets managed of $3.67 billion in 1999. 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 $2.02 billion since March 31, 1999. Mutual fund sales
totaled $836.9 million in 2000 and $295.7 million in 1999. The increase in
sales principally resulted from increased sales of the Company's "Style Select
Series" product. The "Style Select Series" is a group of mutual funds that are
each managed by three industry-recognized fund managers. In 1999, the number of
portfolios in the "Style Select Series" increased by one "Focus Portfolio" to
ten. The Focus Portfolios utilize three leading independent money managers,
each of whom manages one-third of the portfolio by choosing ten favorite stocks.
Sales of the "Style Select Series" products totaled $629.8 million in 2000,
compared with $166.6 million in 1999. Redemptions of mutual funds, excluding
redemptions of money market accounts, amounted to $220.1 million in 2000 and
$140.7 million
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<PAGE>
in 1999, which, annualized, represent 17.1% and 19.2%, respectively, of average
related mutual fund assets.
UNIVERSAL LIFE INSURANCE FEES result from the universal life insurance
contract reserves acquired in the Acquisition and the ongoing receipt of renewal
premiums on such contracts, and comprise mortality charges, up-front fees earned
on premiums received and administrative fees, net of the excess mortality
expense on these contracts. Universal life insurance fees amounted to $4.5
million in 2000 and $6.4 million in 1999. Such fees annualized represent 0.94%
and 1.09% of average reserves for universal life insurance contracts for 2000
and 1999, respectively. The decrease in fees in 2000 results from surrenders of
universal life insurance contracts received in the Acquisition and from a
decrease in the cost of insurance charges as of June 30, 1999.
SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $5.0 million in 2000 and $4.4 million in 1999. Surrender
charges generally are assessed on withdrawals at declining rates during the
first seven years of a contract. Withdrawal payments, which include surrenders
and lump-sum annuity benefits, totaled $657.5 million in 2000, compared with
$417.4 million in 1999. Annualized, these payments represent 10.5% and 7.7%,
respectively, of average fixed and variable annuity and universal life reserves.
Withdrawals include variable annuity withdrawals from the separate accounts
totaling $495.0 million in 2000 (9.7% of average variable annuity reserves) and
$298.2 million (8.4% of average variable annuity reserves) in 1999. Management
anticipates that withdrawal rates will gradually increase for the foreseeable
future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $41.3 million in 2000, compared
with $35.4 million in 1999. The increases in 2000 over 1999 principally reflect
the increased costs related to the business acquired in the Acquisition and
expenses related to servicing the Company's growing blocks of variable annuity
policies and mutual funds. 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 $37.9 million in 2000,
compared with $27.6 million in 1999. The increase in amortization was primarily
due to additional fixed and variable annuity and mutual fund sales and the
subsequent amortization of related deferred commissions and other direct selling
costs.
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 $15.4 million in 2000,
compared with $9.1 million in 1999. 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 58% 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.
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<PAGE>
INCOME TAX EXPENSE totaled $29.3 million in 2000, compared with $21.0
million in 1999, representing effective annualized tax rates of 35% and 36%,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY decreased to $908.0 million at March 31, 2000 from
$935.1 million at December 31, 1999, due to dividends of $69 million paid to the
Parent and an $11.6 million increase in accumulated other comprehensive loss,
partially offset by $53.4 million of net income recorded in 2000.
INVESTED ASSETS at March 31, 2000 totaled $5.39 billion, compared with
$5.55 billion at December 31, 1999. 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 68% of the Company's total investment
portfolio, had an amortized cost that was $221.4 million greater than its
aggregate fair value at March 31, 2000 and $202.6 million greater than its
aggregate fair value at December 31, 1999. The net unrealized losses on the
Bond Portfolio in 2000 principally reflect the recent increases in prevailing
interest rates and the corresponding effect on the fair value of the Bond
Portfolio at March 31, 2000.
At March 31, 2000, the Bond Portfolio (excluding $4.4 million of redeemable
preferred stocks) included $3.55 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 $88.3 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At March 31, 2000, approximately $3.29 billion of the Bond Portfolio was
investment grade, including $1.42 billion of U.S. government/agency securities
and mortgage-backed securities ("MBSs").
At March 31, 2000, the Bond Portfolio included $353.7 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 1.2%
of the Company's total assets and 6.6% 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 issuer concentrations of non-investment-grade securities
at March 31, 2000.
The table on the following page summarizes the Company's rated bonds by
rating classifications as of March 31, 2000.
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<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-
(A11 to A3)
[AAA to A-]
{AAA to A-} . . . $2,590,790 $2,453,342 1 $ 224,531 $ 219,679 $2,815,321 $2,673,021 49.70%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 453,852 429,180 2 190,893 184,945 644,745 614,125 11.42
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}. . . 74,741 66,869 3 0 0 74,741 66,869 1.24
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 281,309 252,614 4 16,964 15,770 298,273 268,384 4.99
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}. . . 18,314 8,538 5 10,731 8,830 29,045 17,368 0.32
CI to D
[DD]
{D} . . . . . . . 0 0 6 144 1,110 144 1,110 0.02
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $3,419,006 $3,210,543 $ 443,263 $ 430,334 $3,862,269 $3,640,877
========== ========== ========== ========== ========== ==========
<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, rating 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 $88.3 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 $340.7 million at March 31, 2000. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At March
31, 2000, Secured Loans consisted of $57.0 million of publicly traded securities
and $283.7 million of privately traded securities. These Secured Loans are
composed of loans to 61 borrowers spanning 15 industries, with 10% of these
assets concentrated in utilities and 9% concentrated in financial institutions.
No other industry concentration constituted more than 8% 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 $678.9 million at March 31, 2000 and consisted of
132 commercial first mortgage loans with an average loan balance of
approximately $5.1 million, collateralized by properties located in 29 states.
Approximately 36% of this portfolio was office, 17% was multifamily residential,
11% was hotels, 10% was manufactured housing, 9% was industrial, 5% was retail
and 12% was other types. At March 31, 2000, 36% and 11% 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 March 31, 2000, there were 16 mortgage loans with outstanding
balances of $10 million or more, which collectively aggregated approximately 43%
of this portfolio. At March 31, 2000, approximately 30% of the mortgage loan
portfolio consisted of loans with balloon payments due before April 1, 2003.
During 2000 and 1999, 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, 2000, approximately 12% 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 strict underwriting standards utilized, the Company believes that it has
prudently managed by risk attributable to its mortgage loan portfolio while
maintaining attractive yields.
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<PAGE>
PARTNERSHIP INVESTMENTS totaled $4.0 million at March 31, 2000,
constituting investments in 6 separate partnerships with an average size of
approximately $0.7 million. These partnerships are accounted for by 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 8
separate issuers. The 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.
SEPARATE ACCOUNT SEED MONEY totaled $140.8 million at March 31, 2000,
compared to $144.2 million at December 31, 1999, which consists of seed money
for mutual funds used as investment vehicles for the Company's variable annuity
separate accounts and for SunAmerica Asset Management's mutual funds.
OTHER INVESTED ASSETS aggregated $24.1 million at March 31, 2000, compared
with $31.6 million at December 31, 1999, and consist of collateralized bond
obligations and mutual fund investments.
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, default rates 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 47% of the Company's fixed annuity, universal life and GIC
reserves had surrender penalties or other restrictions at March 31, 2000.
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, 2000, these assets had an aggregate
fair value of $4.88 billion with a duration of 3.2. The Company's fixed-rate
liabilities include fixed annuity, GIC and universal life reserves and
subordinated notes. At March 31, 2000, these liabilities had an aggregate fair
value (determined by discounting future contractual cash flows by
20
<PAGE>
related market rates of interest) of $4.54 billion with a duration of 4.2. The
Company's potential exposure due to a relative 10% decrease in prevailing
interest rates from their March 31, 2000 levels is a loss of approximately $21.6
million, representing an 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, 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, 2000, 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
21
<PAGE>
agreements are entered into with counterparties who have a debt rating of A/A2
or better from both S&P and Moody's. The Company continually monitors its
credit exposure with respect to these agreements. In addition to counterparty
risk, Swap Agreements also have interest rate risk. However, the Company's Swap
Agreements typically hedge variable-rate assets or liabilities, and interest
rate fluctuations that adversely affect the net cash received or paid under the
terms of a Swap Agreement would be offset by increased interest income earned on
the variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of its
decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the security's projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual prepayment
experience monthly to reassess the relative attractiveness of the security with
the intent to maximize total return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrower's recent financial performance, news reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral. For investments in partnerships, management reviews
the financial statements and other information provided by the general partners.
The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment on mortgage loans are based on losses expected by management to be
realized on transfers of mortgage loans to real estate, on the disposition and
settlement of mortgage loans and on mortgage loans that management believes may
not be collectible in full. Accrual of interest is suspended when principal and
interest payments on mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $1.1 million ($0.7 million of
mortgage loans and $0.4 million of bonds) at March 31, 2000, and constituted
less than 0.1% of total invested assets. At December 31, 1999, defaulted
investments totaled $0.9 million ($0.7 million of mortgage loans and $0.2
million of bonds), 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,
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<PAGE>
Reverse Repo capacity on invested assets and, if required, proceeds from
invested asset sales. At March 31, 2000, approximately $3.18 billion of the
Bond Portfolio had an aggregate unrealized loss of $236.3 million, while
approximately $464.4 million of the Company's Bond Portfolio had an aggregate
unrealized gain of $14.9 million. In addition, the Company's investment
portfolio currently provides approximately $47.6 million of monthly cash flow
from scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Company's annuity and GIC products have been
more than sufficient in amount to satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities and
GICs. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
REGULATION
The Company, in common with other insurers, is subject to regulation and
supervision by the states and other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally has
its source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to approval
of policy forms and rates, the standards of solvency that must be met and
maintained, including risk based capital measurements, the licensing of insurers
and their agents, the nature of and limitations on investments, restrictions on
the size of risks which may be insured under a single policy, deposits of
securities for the benefit of policyholders, methods of accounting, periodic
examinations of the affairs of insurance companies, the form and content of
reports of financial condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the
protection of policyholders rather than security holders.
Risk-based capital ("RBC") standards are designed to measure the adequacy
of an insurer's statutory capital and surplus in relation to the risks inherent
in its business. The RBC standards consist of formulas that establish capital
requirements relating to insurance, business, asset and interest rate risks.
The standards are intended to help identify companies which are
under-capitalized and require specific regulatory actions in the
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<PAGE>
event an insurer's RBC is deficient. The RBC formula develops a risk- adjusted
target level of adjusted statutory capital and surplus by applying certain
factors to various asset, premium and reserve items. Higher factors are applied
to more risky items and lower factors are applied to less risky items. Thus,
the target level of statutory surplus varies not only as a result of the
insurer's size, but also on the risk profile of the insurer's operations. The
statutory capital and surplus of the Company exceeded its RBC requirements by a
considerable margin as of March 31, 2000.
Federal legislation has been recently enacted allowing combinations between
insurance companies, banks and other entities. It is not yet known what effect
this legislation will have on insurance companies. In addition, 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 such
proposals, if implemented, could have an adverse effect on the Company's sales
of affected products, and, consequently, on its results of operations, the
Company believes 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.
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 subsidiaries are subject to regulation and
supervision by the states in which they transact 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 each 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.
24
<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.
25
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
OTHER INFORMATION
Item 1. Legal Proceedings
------------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------------
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 17, 2000,
between the Company's subsidiary, SunAmerica Capital Services, Inc., and
SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.75% notes
due April 30, 2003.
10(b) Subordinated Loan Agreement for Equity Capital, dated February 21,
2000, 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 March 31, 2003.
27 Financial Data Schedule
REPORTS FOR FORM 8-K
There were no current reports on Form 8-K filed during the three months ended
March 31, 2000.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
------------------------------------------
Registrant
Date: May 12, 2000 /s/ N. SCOTT GILLIS
- --------------------- ----------------------
N. Scott Gillis
Senior Vice President
(Principal Financial
Officer)
Date: May 12, 2000 /s/ MAURICE S. HEBERT
- --------------------- ------------------------
Maurice S. Hebert
Vice President and
Controller (Principal
Accounting Officer)
27
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ----- -----------
10(a) Subordinated Loan Agreement for Equity Capital, dated March 17, 2000,
between the Company's subsidiary, SunAmerica Capital Services, Inc., and
SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.75% notes
due April 30, 2003.
10(b) Subordinated Loan Agreement for Equity Capital, dated February 21,
2000, 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 March 31, 2003.
27 Financial Data Schedule
28
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
Broker-Dealer: SunAmerica Capital Services Inc.
(Name)
733 Third Avenue
(Street Address)
New York New York 10017
(City) (State) (Zip)
NASD ID NO: 13158
Date Filed: March 17, 2000
NASD ________________
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
AGREEMENT DATED March, 16,2000 to be effective March 17, 2000 between
SunAmerica, Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the
"Broker-Dealer").
In consideration of the sum of $14,400,000 and subject to the terms and
conditions hereinafter set forth, the Broker-Dealer promises to pay to the
Lender or assigns on April 30, 2003 (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 afore described sum and
interest thereon payable at the rate of 8.75% 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 only upon receipt of the
prior written approval of the NASD, but in no event may any prepayment be made
before the expiration of one year from the date this Agreement Became effective.
No prepayment shall be made if, after 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
2
<PAGE>
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
3
<PAGE>
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-
4
<PAGE>
Dealer (other than such agreements which qualify as equity under paragraph (d)
of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this
term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of
90 days, or for such longer period which the Commission may upon application of
the Broker-Dealer grant in the public interest or for the protection of
investors.
VI. BROKER-DEALERS REGISTERED WITH CFTC
If the Broker-Dealer is a futures commission merchant or introductory
broker as that term is defined in the Commodity Exchange Act, the Organization
agrees, consistent with the requirements of Section 1.17(h) of the regulations
of the CFTC (17 CFR 1.17(h)), that:
(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.
(c) Whenever the Broker-Dealer receives written notice of acceleration of
maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall
promptly give written notice thereof to the CFTC at the address above stated
and/or to the DSRO.
VII. 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
5
<PAGE>
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.
6
<PAGE>
IN WITNESS WHEREOF the parties have set their hands and seal this 16th day
of March, 2000.
SunAmerica Capital Services, Inc.
Broker-Dealer
(SEAL)
By: /s/ Debbi Potash-Turner
Title: Chief Financial Officer
SunAmerica Inc.
Lender
(SEAL)
By: /s/ James R. Belardi
Title Executive Vice President
FOR NASD USE ONLY
ACCEPTED BY:
Name
Title
EFFECTIVE DATE:
LOAN NUMBER:
7
<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 continuously to monitor the
fiscal status and reports of the Broker-Dealer.
6. If the 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/or operational problems since the last
certified audit which required reporting pursuant to SEC Rule 17a-11. (If no
such reporting was required, state "none") ________________________.
(c) Balance sheet and statement of ownership equity dated
_________________________________________.
(d) Most recent computation of net capital and aggregate indebtedness
or aggregate debit items dated _________________, reflecting a net capital of
$________________ and a ratio of _______________.
(e) Debt/equity ratio as of ______________ of ________________.
(f) Other disclosures: __________________________
Dated: August 9, 1999
SunAmerica Inc.
Lender
By: /s/ James R. Belardi
Executive Vice President
8
<PAGE>
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 true and correct copy of the resolutions duly adopted by
the Executive Committee of the Board of Directors of the Corporation, effective
March 16, 2000, 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 broker-dealer subsidiaries registered with
the Securities and Exchange Commission and members of the National Association
of Securities Dealers, Inc., which include, but not limited to, SunAmerica
Capital Services, Inc., Advantage Capital Corporation, SunAmerica Securities,
Inc., Royal Alliance Associates, Inc., Sentra Securities Corporation, Spelman &
Co., Inc. and FSC Securities Corporation and in conjunction with such review,
intends to provide 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, which authorization shall
supercede any prior authorization;
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 Seventy Five Million Dollars ($75,000,000) and
such authority shall supercede any prior authorization, 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 22nd day of March, 2000.
/s/ Susan L. Harris
SUSAN L. HARRIS
[SEAL]
9
<PAGE>
OFFICER'S CERTIFICATE
I, James R. Belardi, Executive Vice President of SunAmerica Inc., a
Delaware corporation (this "Corporation"), do hereby certify that the
$14,400,000 subordinated loan made by this Corporation to SunAmerica Capital
Services, Inc., effective March 17, 2000 does not cause the aggregate principal
amount of all outstanding loans made by this Corporation to its broker-dealer
subsidiaries to exceed $75 million.
/s/James R. Belardi
Dated: March 22, 2000 JAMES R. BELARDI
Executive Vice President
10
EXHIBIT 10(b)
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
Broker-Dealer: Capital Services Inc.
(Name)
733 Third Avenue
(Street Address)
New York New York 10017
(City) (State) (Zip)
NASD ID NO: 13158
Date Filed: February 4, 2000
NASD ________________
Received February 8, 2000
NASD Regulation, Inc.
District 10
SUBORDINATED LOAN AGREEMENT
FOR EQUITY CAPITAL
AGREEMENT DATED February 4,2000 to be effective February 21, 2000 between
SunAmerica, Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the
"Broker-Dealer").
In consideration of the sum of $6,000,000 and subject to the terms and
conditions hereinafter set forth, the Broker-Dealer promises to pay to the
Lender or assigns on March 31, 2003 (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 afore described 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 only upon receipt of the
prior written approval of the NASD, but in no event may any prepayment be made
before the expiration of one year from the date this Agreement Became effective.
No prepayment shall be made if, after 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
2
<PAGE>
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
3
<PAGE>
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-
4
<PAGE>
Dealer (other than such agreements which qualify as equity under paragraph (d)
of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this
term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of
90 days, or for such longer period which the Commission may upon application of
the Broker-Dealer grant in the public interest or for the protection of
investors.
VI. BROKER-DEALERS REGISTERED WITH CFTC
If the Broker-Dealer is a futures commission merchant or introductory
broker as that term is defined in the Commodity Exchange Act, the Organization
agrees, consistent with the requirements of Section 1.17(h) of the regulations
of the CFTC (17 CFR 1.17(h)), that:
(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.
(c) Whenever the Broker-Dealer receives written notice of acceleration of
maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall
promptly give written notice thereof to the CFTC at the address above stated
and/or to the DSRO.
VII. 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
5
<PAGE>
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.
6
<PAGE>
IN WITNESS WHEREOF the parties have set their hands and seal this 4th day
of February, 2000.
SunAmerica Capital Services, Inc.
Broker-Dealer
(SEAL)
By: /s/ Debbi Potash-Turner
Title: Chief Financial Officer
SunAmerica Inc.
Lender
(SEAL)
By: /s/ James R. Belardi
Title Executive Vice President
FOR NASD USE ONLY
ACCEPTED BY: /s/ Gerald Dougherty
Name
Assistant Director
Title
EFFECTIVE DATE: February 21, 2000
LOAN NUMBER: 10-E-SLA-11151
7
<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 continuously to monitor the
fiscal status and reports of the Broker-Dealer.
6. If the 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/or operational problems since the last
certified audit which required reporting pursuant to SEC Rule 17a-11. (If no
such reporting was required, state "none") ________________________.
(c) Balance sheet and statement of ownership equity dated
_________________________________________.
(d) Most recent computation of net capital and aggregate indebtedness
or aggregate debit items dated _________________, reflecting a net capital of
$________________ and a ratio of _______________.
(e) Debt/equity ratio as of ______________ of ________________.
(f) Other disclosures: __________________________
Dated: February 4, 1999
SunAmerica Inc.
Lender
By: /s/ James R. Belardi
Title: Executive Vice President
8
<PAGE>
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 true and correct copy of the resolutions duly adopted 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 4th day of February, 2000.
/s/ Susan L. Harris
SUSAN L. HARRIS
[SEAL]
9
<PAGE>
OFFICER'S CERTIFICATE
I, James R. Belardi, Executive Vice President of SunAmerica Inc., a
Delaware corporation (this "Corporation"), do hereby certify that the $6,000,000
subordinated loan made by this Corporation to SunAmerica Capital Services, Inc.,
effective February 21, 2000 does not cause the aggregate principal amount of all
outstanding loans made by this Corporation to its broker-dealer subsidiaries to
exceed $50 million.
Dated: February 4, 2000
/s/James R. Belardi
JAMES R. BELARDI
Executive Vice President
10
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<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, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<MORTGAGE> 678908000
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