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 June 30, 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 AUGUST
15, 2000 WAS AS FOLLOWS:
Common Stock (par value $1,000 per share) 3,511 shares outstanding
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
<S> <C>
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
June 30, 2000 and December 31, 1999 . . . . . . . . . . 3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) - Three Months and Six Months Ended
June 30, 2000 and 1999. . . . . . . . . . . . . . . . . 5-6
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2000 and 1999 . . . . . . . . 7-8
Notes to Consolidated Financial Statements (Unaudited). 9-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13-28
Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . 29
Part II - Other Information . . . . . . . . . . . . . . . . . 30
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments. . . . . . . . . . . . . . $ 365,597,000 $ 462,915,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
June 2000, $4,066,917,000;
December 1999, $4,155,728,000) . . . . . . . . . . . . . 3,826,556,000 3,953,169,000
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . 674,396,000 674,679,000
Policy loans . . . . . . . . . . . . . . . . . . . . . . . 247,052,000 260,066,000
Separate account seed money. . . . . . . . . . . . . . . . 116,335,000 144,231,000
Partnerships . . . . . . . . . . . . . . . . . . . . . . . 3,216,000 4,009,000
Real estate. . . . . . . . . . . . . . . . . . . . . . . . 24,000,000 24,000,000
Other invested assets. . . . . . . . . . . . . . . . . . . 19,201,000 31,632,000
--------------- ---------------
Total investments. . . . . . . . . . . . . . . . . . . . . 5,276,353,000 5,554,701,000
Variable annuity assets held in separate
accounts . . . . . . . . . . . . . . . . . . . . . . . . . 21,611,694,000 19,949,145,000
Accrued investment income. . . . . . . . . . . . . . . . . . 57,180,000 60,584,000
Deferred acquisition costs . . . . . . . . . . . . . . . . . 1,187,870,000 1,089,979,000
Receivable from brokers for sales of
securities --- 54,760,000
Income taxes currently receivable 7,119,000 ---
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 36,964,000 53,445,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 115,315,000 111,880,000
--------------- ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $28,292,495,000 $26,874,494,000
=============== ===============
See accompanying notes to consolidated financial statements
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3
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
June 30, December 31,
2000 1999
--------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts. . . . . . . . . . . $ 2,857,688,000 $ 3,254,895,000
Reserves for universal life insurance
contracts . . . . . . . . . . . . . . . . . . . . . . . 1,884,315,000 1,978,332,000
Reserves for guaranteed investment
contracts . . . . . . . . . . . . . . . . . . . . . . . 560,635,000 305,570,000
Payable to brokers for purchases of
securities --- 139,000
Income taxes currently payable --- 23,490,000
Modified coinsurance deposit liability. . . . . . . . . . 117,381,000 140,757,000
Other liabilities . . . . . . . . . . . . . . . . . . . . 258,597,000 249,224,000
---------------- ----------------
Total reserves, payables
and accrued liabilities . . . . . . . . . . . . . . . . 5,678,616,000 5,952,407,000
Variable annuity liabilities related to
separate accounts . . . . . . . . . . . . . . . . . . . . 21,611,694,000 19,949,145,000
---------------- ----------------
Subordinated notes payable to affiliates. . . . . . . . . . 53,514,000 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 . . . . . . . . . . . . . . . . . . . . 588,170,000 551,158,000
Accumulated other comprehensive loss. . . . . . . . . . . (136,020,000) (112,553,000)
---------------- ----------------
Total shareholder's equity. . . . . . . . . . . . . . . . 948,671,000 935,126,000
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. . . . . . . . . $28,292,495,000 $26,874,494,000
================ ================
See accompanying notes to consolidated financial statements
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4
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and six months ended June 30, 2000 and 1999
(Unaudited)
Three Months Six Months
----------------------------- -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Investment income . . . . . . . . . . . . . . . . . . . . . $ 98,941,000 $ 143,535,000 $ 206,228,000 $ 273,892,000
------------- -------------- -------------- --------------
Interest expense on:
Fixed annuity contracts . . . . . . . . . . . . . . . . . (33,298,000) (69,053,000) (71,018,000) (133,618,000)
Universal life insurance
contracts . . . . . . . . . . . . . . . . . . . . . . . (19,842,000) (30,018,000) (43,598,000) (60,189,000)
Guaranteed investment contracts . . . . . . . . . . . . . (9,116,000) (4,608,000) (14,384,000) (9,766,000)
Senior indebtedness --- --- --- (198,000)
Subordinated notes payable to
affiliates. . . . . . . . . . . . . . . . . . . . . . . (1,108,000) 1,684,000 (1,909,000) (1,769,000)
------------- -------------- -------------- --------------
Total interest expense. . . . . . . . . . . . . . . . . . (63,364,000) (101,995,000) (130,909,000) (205,540,000)
------------- -------------- -------------- --------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . 35,577,000 41,540,000 75,319,000 68,352,000
------------- -------------- -------------- --------------
NET REALIZED INVESTMENT LOSSES. . . . . . . . . . . . . . . (3,639,000) (7,688,000) (5,408,000) (6,804,000)
------------- -------------- -------------- --------------
Fee income:
Variable annuity fees . . . . . . . . . . . . . . . . . . 99,397,000 74,319,000 196,016,000 141,264,000
Net retained commissions. . . . . . . . . . . . . . . . . 14,914,000 13,235,000 28,072,000 26,192,000
Asset management fees . . . . . . . . . . . . . . . . . . 17,750,000 10,385,000 34,818,000 19,664,000
Universal life insurance fees . . . . . . . . . . . . . . 1,969,000 11,577,000 6,740,000 20,750,000
Surrender charges . . . . . . . . . . . . . . . . . . . . 5,744,000 4,324,000 10,769,000 8,703,000
Other fees. . . . . . . . . . . . . . . . . . . . . . . . 2,135,000 2,991,000 4,897,000 3,941,000
------------- -------------- -------------- --------------
TOTAL FEE INCOME. . . . . . . . . . . . . . . . . . . . . . 141,909,000 116,831,000 281,312,000 220,514,000
------------- -------------- -------------- --------------
GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . . (42,971,000) (41,486,000) (84,233,000) (77,976,000)
------------- -------------- -------------- --------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS . . . . . . . . . . . . . . . . . . . . (36,397,000) (28,272,000) (74,329,000) (55,876,000)
------------- -------------- -------------- --------------
ANNUAL COMMISSIONS. . . . . . . . . . . . . . . . . . . . . (11,352,000) (9,070,000) (26,796,000) (18,158,000)
------------- -------------- -------------- --------------
PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . 83,127,000 71,855,000 165,865,000 130,052,000
------------- -------------- -------------- --------------
Income tax expense. . . . . . . . . . . . . . . . . . . . . (30,559,000) (25,891,000) (59,853,000) (46,900,000)
------------- -------------- -------------- --------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 52,568,000 45,964,000 106,012,000 83,152,000
------------- -------------- -------------- --------------
See accompanying notes to consolidated financial statements
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5
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)
For the three months and six months ended June 30, 2000 and 1999
(Unaudited)
Three Months Six Months
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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 $7,493,000 and
$25,113,000 for the second
quarter of 2000 and 1999,
respectively, and $14,253,000
and $35,767,000 for the six months
of 2000 and 1999, respectively). . . . . . . . . . . . . . (13,916,000) (46,639,000) (26,470,000) (66,421,000)
Less reclassification adjustment
for net realized losses
included in net income (net
of income tax expense of
$1,099,000 and $1,262,000 for
the second quarter of 2000
and 1999, respectively, and
$1,617,000 and $1,253,000 for
the six months of 2000 and 1999,
respectively . . . . . . . . . . . . . . . . . . . . . . 2,041,000 2,344,000 3,003,000 2,326,000
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE LOSS . . . . . . . . . . . . . . . . . (11,875,000) (44,295,000) (23,467,000) (64,095,000)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . $ 40,693,000 $ 1,669,000 $ 82,545,000 $ 19,057,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements
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6
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 106,012,000 $ 83,152,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts . . . . . . . . . . . . . . . 71,018,000 133,618,000
Universal life insurance contracts. . . . . . . . . . 43,598,000 60,189,000
Guaranteed investment contracts . . . . . . . . . . . 14,384,000 9,766,000
Net realized investment losses. . . . . . . . . . . . . 5,408,000 6,804,000
Accretion of net discounts on
investments . . . . . . . . . . . . . . . . . . . . . (5,964,000) (2,707,000)
Universal life insurance fees . . . . . . . . . . . . . (6,740,000) (20,750,000)
Amortization of goodwill. . . . . . . . . . . . . . . . 727,000 714,000
Provision for deferred income taxes . . . . . . . . . . 29,116,000 (51,032,000)
Change in:
Accrued investment income . . . . . . . . . . . . . . . . 3,404,000 (10,496,000)
Deferred acquisition costs. . . . . . . . . . . . . . . . (96,191,000) (109,219,000)
Other assets. . . . . . . . . . . . . . . . . . . . . . . (3,309,000) 6,647,000
Income taxes currently payable. . . . . . . . . . . . . . (30,609,000) 910,000
Other liabilities . . . . . . . . . . . . . . . . . . . . 47,422,000 73,204,000
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . 9,245,000 9,162,000
-------------- ----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . 187,521,000 189,962,000
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks. . . . . . . . . . . . . . . . . . . . . . . . . (430,682,000) (3,661,629,000)
Mortgage loans. . . . . . . . . . . . . . . . . . . . . . (46,831,000) (250,751,000)
Other investments, excluding short-term
investments . . . . . . . . . . . . . . . . . . . . . . (18,350,000) (162,212,000)
Sales of:
Bonds, notes and redeemable preferred
stocks. . . . . . . . . . . . . . . . . . . . . . . . . 330,321,000 1,564,138,000
Other investments, excluding short-term
investments . . . . . . . . . . . . . . . . . . . . . . 793,000 6,705,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks. . . . . . . . . . . . . . . . . . . . . . . . . 240,882,000 590,792,000
Mortgage loans. . . . . . . . . . . . . . . . . . . . . . 47,968,000 20,531,000
Other investments, excluding short-term
investments . . . . . . . . . . . . . . . . . . . . . . 74,304,000 18,099,000
Short-term investments transferred from
First SunAmerica Life Insurance Company
in assumption reinsurance transaction
with MBL Life Assurance Corporation 16,741,000 ---
-------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . 215,146,000 (1,874,327,000)
-------------- ----------------
See accompanying notes to consolidated financial statements
</TABLE>
7
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts . . . . . . . . $ 852,080,000 $ 1,004,138,000
Universal life insurance contracts. . . 29,515,000 38,025,000
Guaranteed investment contracts 250,000,000 ---
Net exchanges from the fixed accounts
of variable annuity contracts . . . . . (1,087,093,000) (818,916,000)
Withdrawal payments on:
Fixed annuity contracts . . . . . . . . (228,382,000) (389,215,000)
Universal life insurance contracts. . . (62,731,000) (38,877,000)
Guaranteed investment contracts . . . . (8,246,000) (9,374,000)
Claims and annuity payments on:
Fixed annuity contracts . . . . . . . . (33,303,000) (49,984,000)
Universal life insurance contracts. . . (80,357,000) (58,199,000)
Net repayments of other short-term
financings. . . . . . . . . . . . . . . (54,790,000) (4,516,000)
Net payment related to a modified
coinsurance transaction (23,376,000) ---
Net receipt from issuances of subordinated
notes payable to affiliate 15,698,000 ---
Dividend paid to Parent (69,000,000) ---
---------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES . . (499,985,000) (326,918,000)
---------------- ----------------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . (97,318,000) (2,011,283,000)
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 . . . . . . . . . . . . . $ 365,597,000 $ 1,292,171,000
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness . . . . . . $ 1,211,000 $ 833,000
================ ================
Net income taxes paid . . . . . . . . . . $ 61,325,000 $ 74,499,000
================ ================
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See accompanying notes to consolidated financial statements
8
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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 June 30, 2000 and December 31, 1999, the
results of its consolidated operations for the three months and six months ended
June 30, 2000 and 1999 and its consolidated cash flows for the six months ended
June 30, 2000 and 1999. The results of operations for the three months and six
months ended June 30, 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.
9
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 JUNE 30,
2000:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . $180,860,000 $21,350,000 $11,604,000 $213,814,000
Intersegment revenue --- 20,705,000 2,692,000 23,397,000
------------- ------------ ------------ -------------
Total revenue . . . . $180,860,000 $42,055,000 $14,296,000 $237,211,000
============= ============ ============ =============
Pretax income . . . . $52,558,000 $24,082,000 $ 6,487,000 $ 83,127,000
Income tax expense. . (17,696,000) (9,940,000) (2,923,000) (30,559,000)
------------- ------------ ------------ -------------
Net income. . . . . . $34,862,000 $14,142,000 $ 3,564,000 $ 52,568,000
============= ============ ============ =============
</TABLE>
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . $210,900,000 $13,811,000 $10,500,000 $235,211,000
Intersegment revenue --- 15,245,000 2,222,000 17,467,000
------------- ------------ ------------ -------------
Total revenue . . . . $210,900,000 $29,056,000 $12,722,000 $252,678,000
============= ============ ============ =============
Pretax income . . . . $ 49,403,000 $16,849,000 $ 5,603,000 $ 71,855,000
Income tax expense. . (16,424,000) (6,774,000) (2,693,000) (25,891,000)
------------- ------------ ------------ -------------
Net income. . . . . . $ 32,979,000 $10,075,000 $ 2,910,000 $ 45,964,000
============= ============ ============ =============
</TABLE>
10
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SEGMENT INFORMATION (Continued)
--------------------
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<CAPTION>
Asset Broker-
Annuity Management Dealer
Operations Operations Operations Total
------------ ------------ ----------- ------------
SIX MONTHS ENDED JUNE 30,
2000:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . $371,615,000 $ 42,613,000 $21,670,000 $435,898,000
Intersegment revenue --- 40,873,000 5,361,000 46,234,000
------------- ------------- ------------ -------------
Total revenue . . . . $371,615,000 $ 83,486,000 $27,031,000 $482,132,000
============= ============= ============ =============
Pretax income . . . . $104,391,000 $ 49,855,000 $11,619,000 $165,865,000
Income tax expense. . (33,654,000) (20,812,000) (5,387,000) (59,853,000)
------------- ------------- ------------ -------------
Net income. . . . . . $ 70,737,000 $ 29,043,000 $ 6,232,000 $106,012,000
============= ============= ============ =============
</TABLE>
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<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999:
<S> <C> <C> <C> <C>
Revenue from external
customers . . . . . $408,095,000 $ 25,291,000 $21,314,000 $454,700,000
Intersegment revenue --- 28,891,000 4,011,000 32,902,000
------------- ------------- ------------ -------------
Total revenue . . . . $408,095,000 $ 54,182,000 $25,325,000 $487,602,000
============= ============= ============ =============
Pretax income . . . . $ 87,643,000 $ 31,277,000 $11,132,000 $130,052,000
Income tax expense. . (28,441,000) (13,116,000) (5,343,000) (46,900,000)
------------- ------------- ------------ -------------
Net income. . . . . . $ 59,202,000 $ 18,161,000 $ 5,789,000 $ 83,152,000
============= ============= ============ =============
</TABLE>
3. SUBORDINATED NOTES PAYABLE TO AFFILIATES
--------------------------------------------
At December 31, 1998, Subordinated Notes Payable to Affiliates included a
surplus note (the "Note") payable to its immediate parent, SunAmerica Life
Insurance Company (the "Parent"), for $170,436,000. On June 30, 1999, the
Parent cancelled the Note and funds received were reclassified to Additional
Paid-in Capital in the consolidated balance sheet. Also on June 30, 1999, the
Parent forgave the total interest earned on the Note of $4,971,000, of which
$2,983,000 was included in Interest Expense on Subordinated Notes Payable to
Affiliates in the consolidated income statement in the quarter ended March 31,
1999. Accordingly, the accompanying consolidated income statement reflects a
$2,983,000 reduction in Interest Expense on Subordinated Notes Payable to
Affiliates in the quarter ended June 30, 1999.
11
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. CONTINGENT LIABILITIES
-----------------------
The Company has entered into three 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 June 30, 2000
is approximately $300,000,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities.
5. 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.
12
<PAGE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Anchor National Life Insurance Company and its wholly owned
subsidiaries (the "Company") for the three months and six months ended June 30,
2000 and June 30, 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 any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings or profitability of the
Company's activities.
Forward-looking statements are necessarily based 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 $52.6 million in the second quarter of 2000, compared
with $46.0 million in the second quarter of 1999. For the six months, net
income amounted to $106.0 million in 2000, compared with $83.2 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"). On June 30, 1999, the Company ceded the portion of this
business consisting of New York policies to its affiliate, First SunAmerica Life
Insurance Company. The results of operations for the three months and six
months ended June 30, 2000 and June 30, 1999 include the impact of the
Acquisition.
13
<PAGE>
PRETAX INCOME totaled $83.1 million in the second quarter of 2000 and $71.9
million in the second quarter of 1999. For the six months, pretax income
totaled $165.9 million in 2000, compared with $130.1 million in 1999. The 27.5%
improvement in 2000 over 1999 primarily resulted from increased fee income and
decreased net realized investment losses, partially offset by increased
amortization of deferred acquisition costs ("DAC") and increased annual
commissions.
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 $35.6 million in the second quarter of
2000, down from $41.5 million in the second quarter of 1999. These amounts
equal 2.58% on average invested assets (computed on a daily basis) of $5.51
billion in the second quarter of 2000 and 2.03% on average invested assets of
$8.19 billion in the second quarter of 1999. The decrease in net investment
income in the second quarter of 2000 is principally due to a decline in average
assets, as fixed annuity policies acquired in the Acquisition have mostly
surrendered or rolled over to a variable product of the Company since 1999. For
the six months, net investment income increased to $75.3 million in 2000 from
$68.4 million in 1999, representing 2.71% of average invested assets of $5.55
billion in 2000 and 1.66% of average invested assets of $8.25 billion in 1999.
The improvement in 2000 net investment yields over the 1999 amounts reflects
redeployment of the assets received in the Acquisition into higher yielding
investment categories.
Net investment spreads include the effect of income earned or interest paid
on the difference between average invested assets and average interest-bearing
liabilities. In the second quarter, average invested assets exceeded average
interest-bearing liabilities by $173.6 million in 2000, compared with $148.4
million 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 2.43% in the second quarter of 2000 and 1.94% in the second
quarter of 1999. For the six months, average invested assets exceeded average
interest-bearing liabilities by $217.8 million in 2000, compared with $118.1
million in 1999. The Spread Difference was 2.52% in 2000 and 1.59% in 1999.
Investment income (and the related yields on average invested assets)
totaled $98.9 million (7.18%) in the second quarter of 2000, $143.5 million
(7.01%) in the second quarter of 1999, $206.2 million (7.43%) in the six months
of 2000 and $273.9 million (6.64%) in the six months of 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
primarily to redeployment of the assets received in the Acquisition into higher
yielding investment categories.
Total interest expense equaled $63.4 million in the second quarter of 2000
and $102.0 million in the second quarter of 1999. For the six months, interest
expense aggregated $130.9 million in 2000, compared with $205.5 million in 1999.
The average rate paid on all interest-bearing liabilities was 4.75% in the
second quarter of 2000, compared with 5.07% in the second quarter of 1999. For
the six months, the average rate paid on all interest-bearing liabilities was
4.91% for 2000 and 5.05% for 1999. Interest-bearing liabilities averaged $5.34
billion during the second quarter of 2000, $8.05
14
<PAGE>
billion during the second quarter of 1999, $5.34 billion during the six months
of 2000 and $8.13 billion during the six months of 1999. The decrease in
interest expense and interest-bearing liabilities in the second quarter and six
months ended June 30, 2000 reflect the decline 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 June 30, 1999, Fixed Annuity Premiums and UL Premiums have
aggregated $1.94 billion. Fixed Annuity Premiums and UL Premiums totaled $486.6
million in the second quarter of 2000, $626.5 million in the second quarter of
1999, $881.6 million in the six months of 2000 and $1.04 billion in the six
months of 1999 and are largely premiums for the fixed accounts of variable
annuities. On an annualized basis, these premiums represent 40%, 32%, 34% and
27%, respectively, of the related reserve balances at the beginning of the
respective periods.
Guaranteed investment contract ("GIC") premiums totaled $100.0 million in
the second quarter of 2000 and $250.0 million in the six months of 2000. There
were no GIC premiums in 1999. GIC surrenders and maturities totaled $4.2
million in the second quarters of 2000 and 1999, $8.2 million in the six months
of 2000 and $9.4 million in the six months of 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 $3.6 million in the second quarter
of 2000, compared with $7.7 million in the second quarter of 1999 and include
impairment writedowns of $5.8 million and $1.4 million, respectively. For the
six months, net realized investment losses totaled $5.4 million in 2000,
compared with $6.8 million in 1999 and include impairment writedowns of $8.4
million and $2.0 million, respectively. Thus, net gains from sales and
redemptions of investments totaled $2.2 million and $3.0 million in the second
quarter and six months of 2000, respectively, compared to net losses from sales
and redemptions of investments of $6.3 million and $4.8 million in the second
quarter and six months of 1999, respectively.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $212.5 million in the second quarter of 2000, $972.7
15
<PAGE>
million in the second quarter of 1999, $621.5 million in the six months of
2000 and $2.18 billion in the six months of 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, on an
annualized basis, 0.16%, 0.31%, 0.11% and 0.12% of average invested assets in
the second quarter of 2000, the second quarter of 1999, the six months of 2000
and the six months of 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 0.42%, 0.07%, 0.30% and
0.05% of related average invested assets in the second quarter of 2000, the
second quarter of 1999, the six months of 2000 and the six months of 1999,
respectively. For the twenty quarters beginning July 1, 1995, impairment
writedowns as an annualized percentage of average invested assets have ranged up
to 3.06% and have averaged 0.49%. 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 $99.4 million
in the second quarter of 2000 and $74.3 million in the second quarter of 1999.
For the six months, variable annuity fees totaled $196.0 million in 2000,
compared with $141.3 million in 1999. The increased fees in 2000 compared to
1999 reflect growth in average variable annuity assets, principally due to
increased market values, the receipt of variable annuity premiums and net
exchanges into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. On an annualized basis, variable
annuity fees represent 1.9% of average variable annuity assets in all periods
presented. Variable annuity assets averaged $21.00 billion during the second
quarter of 2000 and $15.71 billion during the second quarter of 1999. For the
six months, variable annuity assets averaged $20.71 billion in 2000, compared
with $15.03 billion in 1999. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, have aggregated
$1.73 billion since June 30, 1999. Variable annuity premiums totaled $498.0
million and $464.9 million in the second quarters of 2000 and 1999,
respectively. For the six months, variable annuity premiums totaled $972.3
million in 2000, compared with $949.4 million in 1999. On an annualized basis,
these amounts represent 9%, 12%, 10% and 14% of variable annuity reserves at the
beginning of the respective periods. Transfers from the fixed accounts of the
Company's variable annuity products to the separate accounts (see "Decline in
Average Invested Assets") are not classified in variable annuity premiums (in
accordance with generally accepted accounting principles). Accordingly, changes
in variable annuity premiums are not necessarily indicative of the ultimate
allocation by customers among fixed and variable account options of
16
<PAGE>
the Company's variable annuity products.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $970.0 million,
$1.03 billion, $1.83 billion and $1.91 billion in the second quarters of 2000
and 1999 and six months of 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 $14.9
million in the second quarter of 2000 and $13.2 million in the second quarter of
1999. For the six months, net retained commissions amounted to $28.1 million
and $26.2 million in 2000 and 1999, respectively. Broker-dealer sales (mainly
sales of general securities, mutual funds and annuities) totaled $3.73 billion
in the second quarter of 2000, $3.67 billion in the second quarter of 1999,
$6.61 billion in the six months of 2000 and $7.15 billion in the six months of
1999. The increase in net retained commissions concurrent with the decrease in
sales for the six months 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., the Company's registered investment
advisor. Such fees totaled $17.8 million on average assets managed of $6.33
billion in the second quarter of 2000 and $10.4 million on average assets
managed of $3.99 billion in the second quarter of 1999. For the six months,
asset management fees totaled $34.8 million on average assets managed of $6.18
billion in 2000, compared with $19.7 million on average assets managed of $3.83
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 $2.39
billion since June 30, 1999. Mutual fund sales totaled $727.2 million in the
second quarter of 2000, compared to $354.3 million in the second quarter of
1999. For the six months, mutual fund sales amounted to $1.56 billion in 2000,
compared with $650.0 million in 1999. The increases in sales in 2000
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 $562.6 million in the second
quarter of 2000, $195.6 million in the second quarter of 1999, $1.19 billion
17
<PAGE>
in the six months of 2000 and $938.5 million in the six months of 1999.
Redemptions of mutual funds, excluding redemptions of money market accounts,
amounted to $185.7 million in the second quarter of 2000, $142.7 million in the
second quarter of 1999, $405.8 million in the six months of 2000 and $283.5
million in the six months of 1999, which, annualized, represent 13.5%, 17.9%,
15.3% and 18.4%, 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 consist of mortality charges, up-front fees
earned on premiums received and administrative fees, net of the excess mortality
expense on these contracts. The Company does not actively market universal life
insurance contracts. Universal life insurance fees amounted to $2.0 million and
$11.6 million in the second quarters of 2000 and 1999, respectively. For the
six months, universal life insurance fees totaled $6.7 million in 2000 and $20.8
million in 1999. Such fees annualized represent 0.41%, 1.99%, 0.70% and 1.78%
of average reserves for universal life insurance contracts in the respective
periods. The decreases in fees in 2000 result principally from the ceding to an
affiliate on July 1, 1999 of approximately 12.2% of the universal life reserves
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 $5.7 million in the second quarter of 2000 and $4.3
million in the second quarter of 1999. For the six months, such surrender
charges totaled $10.8 million in 2000 and $8.7 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 $532.3 million in 2000, compared with
$454.6 million in 1999. For the six months, withdrawal payments totaled $1.19
billion in 2000 and $872.7 million in 1999. Annualized, these payments, when
expressed as a percentage of average fixed and variable annuity and universal
life reserves, represent 8.4%, 7.9%, 9.4% and 7.8% for the second quarters of
2000 and 1999 and six months of 2000 and 1999, respectively. Withdrawals
include variable annuity withdrawals from the separate accounts totaling $408.9
million (7.8% of average variable annuity reserves), $305.0 million (7.8% of
average variable annuity reserves), $903.9 million (8.8% of average variable
annuity reserves) and $604.0. million (8.1% of average variable annuity
reserves) in the second quarters of 2000 and 1999 and the six months of 2000 and
1999, respectively. Management anticipates that withdrawal rates will gradually
increase for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $43.0 million in the second
quarter of 2000 and $41.5 million in the second quarter of 1999. For the six
months, general and administrative expenses totaled $84.2 million in 2000 and
$78.0 million in 1999. The increases in 2000 over 1999 principally reflect
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.
18
<PAGE>
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $36.4 million in the
second quarter of 2000, compared with $28.3 million in the second quarter of
1999. For the six months, such amortization totaled $74.3 million in 2000 and
$55.9 million in 1999. The increases in amortization during 2000 were primarily
due to additional fixed and variable annuity and mutual fund sales and the
subsequent amortization of related deferred commissions and other direct selling
costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears
to maintain the persistency of certain of the Company's variable annuity
contracts. Substantially all of the Company's currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. Annual commissions totaled $11.4 million in the
second quarter of 2000, compared with $9.1 million in the second quarter of
1999. For the six months, annual commissions amounted to $26.8 million in 2000
and $18.2 million in 1999. The increases in annual commissions in 2000 reflect
increased sales of annuities that offer this commission option and gradual
expiration of the initial fifteen-month periods before such payments begin. The
Company estimates that approximately 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.
INCOME TAX EXPENSE totaled $30.6 million in the second quarter of 2000,
$25.9 million in the second quarter of 1999, $59.9 million in the six months of
2000 and $46.9 million in the six months of 1999. Such amounts represent
effective annualized tax rates of 37%, 36%, 36% and 36%, respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $948.7 million at June 30, 2000 from
$935.1 million at December 31, 1999, due to $106.0 million of net income
recorded in 2000, partially offset by a dividend of $69.0 million paid to the
Parent and a $23.4 million increase in accumulated other comprehensive loss.
INVESTED ASSETS at June 30, 2000 totaled $5.28 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 73% of the Company's total investment
portfolio at June 30, 2000, had an amortized cost that was $240.4 million
greater than its aggregate fair value at June 30, 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 increase
in prevailing interest rates and the corresponding effect on
19
<PAGE>
the fair value of the Bond Portfolio at June 30, 2000.
At June 30, 2000, the Bond Portfolio (excluding $1.4 million of redeemable
preferred stocks) included $3.79 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 $32.6 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by
the NAIC. At June 30, 2000, approximately $3.50 billion of the Bond Portfolio
was investment grade, including $1.53 billion of U.S. government/agency
securities and mortgage-backed securities ("MBSs").
At June 30, 2000, the Bond Portfolio included $329.6 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 1.2%
of the Company's total assets and 6.2% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
June 30, 2000.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 2000.
20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
Issues not rated by S&P/Moody's/
Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total
------------------------------------------- --------------------------------- -----------------------------------
S&P/(Moody's) Estimated NAIC Estimated Estimated Percent of
[DCR] {Fitch} Amortized fair category Amortized fair Amortized fair invested
category (1) cost value (2) cost value cost value assets
------------------- ---------- ---------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} . . . $2,778,444 $2,628,227 1 $ 255,315 $ 253,789 $3,033,759 $2,882,016 54.62%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 508,926 477,901 2 140,264 135,696 649,190 613,597 11.63
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 68,831 61,000 3 --- --- 68,831 61,000 1.16
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 236,961 210,450 4 40,155 37,944 277,116 248,394 4.71
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}. . . 25,433 10,693 5 10,732 9,310 36,165 20,003 0.38
CI to D
[DD]
{D} --- --- 6 481 171 481 171 0.00
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $3,618,595 $3,388,271 $ 446,947 $ 436,910 $4,065,542 $3,825,181
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
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<PAGE>
Footnotes to the table of Rated Bonds by Rating Classification
-----------------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Moody's rates debt securities in rating
categories ranging from Aaa (the highest) to C (extremely poor prospects of ever
attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debt's relative standing within the
rating category. A security rated Baa3 or higher is considered investment
grade. DCR rates debt securities in rating categories ranging from AAA (the
highest) to DD (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on the
highest of the S&P, Moody's, DCR and Fitch ratings if rated by multiple
agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for
nondefaulted bonds plus one category, 6, for bonds in or near default. These
six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed
above, with categories 1 and 2 considered investment grade. The NAIC categories
include $32.6 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
22
<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $334.4 million at June 30, 2000. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At June
30, 2000, Secured Loans consisted of $71.1 million of publicly traded securities
and $263.3 million of privately traded securities. These Secured Loans are
composed of loans to 55 borrowers spanning 15 industries, with 17% of these
assets concentrated in utilities and 7% concentrated in financial institutions.
No other industry concentration constituted more than 5% of these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory rating guidelines established by the NAIC.
MORTGAGE LOANS aggregated $674.4 million at June 30, 2000 and consisted of
125 commercial first mortgage loans with an average loan balance of
approximately $5.4 million, collateralized by properties located in 29 states.
Approximately 36% of this portfolio was office, 17% was multifamily residential,
11% was manufactured housing, 10% was hotels, 9% was industrial, 5% was retail
and 12% was other types. At June 30, 2000, approximately 38% and 10% 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 June 30, 2000, there were 14 mortgage
loans with outstanding balances of $10 million or more, which loans collectively
aggregated approximately 41% of this portfolio. At June 30, 2000, approximately
30% of the mortgage loan portfolio consisted of loans with balloon payments due
before July 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 June 30, 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 seasoned nature of the Company's mortgage loan portfolio and its strict
underwriting standards, the Company believes that it has prudently managed the
risk attributable to its mortgage loan portfolio while maintaining attractive
yields.
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PARTNERSHIP INVESTMENTS totaled $3.2 million at June 30, 2000, constituting
investments in 5 separate partnerships with an average size of approximately
$0.6 million. These partnerships are accounted for by using the cost method of
accounting and are managed by independent money managers that invest in a broad
selection of equity and fixed-income securities, currently including
approximately 7 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 $116.3 million at June 30, 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 $19.2 million at June 30, 2000, compared
with $31.6 million at December 31, 1999, and consist of collateralized bond
obligations and other 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 45% of the Company's fixed annuity, universal life and GIC
reserves had surrender penalties or other restrictions at June 30, 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 June 30, 2000, these assets had an aggregate
fair value of $5.19 billion with a duration of 3.1. The Company's fixed-rate
liabilities include fixed annuity, GIC and universal life reserves and
subordinated notes. At June 30, 2000, these liabilities had an aggregate fair
value (determined by discounting future contractual cash flows by
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related market rates of interest) of $4.77 billion with a duration of 4.1. The
Company's potential exposure due to a relative 10% decrease in prevailing
interest rates from their June 30, 2000 levels is a loss of approximately $21.0
million, representing the increase in the fair value of its fixed-rate
liabilities that is not offset by an increase in the fair value of its
fixed-rate assets. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity, 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 June 30, 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
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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 $2.8 million ($0.6 million of
mortgage loans and $2.2 million of bonds) at June 30, 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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Reverse Repo capacity on invested assets and, if required, proceeds from
invested asset sales. At June 30, 2000, approximately $2.97 billion of the
Company's Bond Portfolio had an aggregate unrealized loss of $256.9 million,
while approximately $853.8 million of the Bond Portfolio had an aggregate
unrealized gain of $16.5 million. In addition, the Company's investment
portfolio currently provides approximately $53.5 million of monthly cash flow
from scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Company's annuity and GIC products have been
more than sufficient in amount to satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities and
GICs. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
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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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 June 30, 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 also 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.
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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 24 to 26
herein.
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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
----- -----------
27 Financial Data Schedule.
REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed during the three months ended
June 30, 2000.
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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: August 15, 2000 /s/ N. SCOTT GILLIS
------------------------ ----------------------
N. Scott Gillis
Senior Vice President
(Principal Financial Officer)
Date: August 15, 2000 /s/ MAURICE S. HEBERT
------------------------ ------------------------
Maurice S. Hebert
Vice President and Controller
(Principal Accounting Officer)
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ANCHOR NATIONAL LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
----- -----------
27 Financial Data Schedule
32
