<PAGE> 1
File Nos. 2-86837
811-3859
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 30 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [ X ]
Amendment No. 23
(Check appropriate box or boxes)
VARIABLE SEPARATE ACCOUNT
(Exact Name of Registrant)
Anchor National Life Insurance Company
(Name of Depositor)
1 SunAmerica Center
Los Angeles, California 90067-6022
(Address of Depositor's Principal Offices) (Zip Code)
Depositor's Telephone Number, including Area Code
(310) 772-6000
Susan L. Harris, Esq.
Anchor National Life Insurance Company
1 SunAmerica Center
Los Angeles, California 90067-6022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
--
X on December 29, 1999 pursuant to paragraph (b) of Rule 485
--
60 days after filing pursuant to paragraph (a)(1) of Rule 485
--
on [ ] pursuant to paragraph (a)(1) of Rule 485
--
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VARIABLE SEPARATE ACCOUNT
Cross Reference Sheet
PART A - PROSPECTUS
Incorporated herein by reference to Post-Effective Amendment No. 29 under the
Securities Act of 1933 (the 33 Act) and No. 22 under the Investment Company Act
of 1940 (the 40 Act), to Registration Statement File Nos. 2-86837 and 811-3859
filed on Form N-4 on January 29, 1999.
<PAGE> 3
PART B - STATEMENT OF ADDITIONAL INFORMATION
Incorporated herein by reference to Post-Effective Amendment No. 29 under the
Securities Act of 1933 (the 33 Act) and No. 22 under the Investment Company Act
of 1940 (the 40 Act), to Registration Statement File Nos. 2-86837 and 811-3859
filed on Form N-4 on January 29, 1999.
PART C
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 4
AMERICAN PATHWAY II
PROSPECTUS
JANUARY 29, 1999
Incorporated herein by reference to Post-Effective Amendment No. 29 under
the Securities Act of 1933 (the 33 Act) and No. 22 under the Investment Company
Act of 1940 (the 40 Act), to Registration Statement File Nos. 2-86837 and
811-3859 filed on Form N-4 on January 29, 1999.
<PAGE> 5
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE SEPARATE ACCOUNT
INDIVIDUAL DEFERRED VARIABLE BENEFIT AND FIXED BENEFIT ANNUITY
FLEXIBLE PURCHASE PAYMENT - NON-PARTICIPATING CONTRACT
ANCHOR NATIONAL LIFE INSURANCE COMPANY
December 29, 1999
This Statement of Additional Information is not a prospectus,
but should be read in conjunction with the American Pathway II Prospectus, dated
December 29, 1999, as it may be supplemented, a copy of which may be obtained
without charge by writing to Anchor National Life Insurance Company, Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299, or by calling (800)
445-SUN2.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
<S> <C>
Variable Account Accumulation Provision ................................................................3
Performance Data .......................................................................................4
Taxes ..................................................................................................6
Distribution of Contracts..............................................................................10
Financial Statements...................................................................................11
</TABLE>
<PAGE> 7
VARIABLE ACCOUNT ACCUMULATION PROVISIONS
ACCUMULATION UNITS - The number of accumulation units purchased for a
contract owner ("Owner") with respect to his or her initial purchase payment is
determined by dividing the amount credited to each Variable Account by the
accumulation unit value for that Variable Account next computed following
acceptance of the application (generally the next business day after receipt of
payment by the Company). In the event that an application fails to recite all
necessary information, the Company will promptly request that the Owner furnish
further instructions and will hold the initial purchase payment in a suspense
account, without interest, for a period not exceeding five business days from
receipt of the application at the Company. If the necessary information is not
received within five business days, the Company will return the initial purchase
payment to the prospective Owner unless the prospective Owner, after being
informed of the reasons for the delay, specifically consents to the Company
retaining the initial purchase payment until the application is made complete.
The number of accumulation units purchased with respect to subsequent purchase
payments is determined by dividing the amount credited to each Variable Account
by the applicable accumulation unit value for the valuation period next
determined following receipt of the payment by the Company. The accumulation
unit value of each Variable Account varies in accordance with the investment
experience of that Variable Account, and is affected by the investment
experience of the respective Fund series, by expenses and by the deduction of
certain charges.
VALUE OF AN ACCUMULATION UNIT - The accumulation unit value of each
Variable Account was arbitrarily set at $10 when the Variable Account was
established. The value of an accumulation unit may increase or decrease from one
valuation period to the next. All Variable Accounts are valued as of the close
of general trading on the New York Stock Exchange. The value for any valuation
period is determined by multiplying the value of an accumulation unit for the
last prior valuation period by the net investment factor for that Variable
Account for the current valuation period. The value of an accumulation unit is
independently computed for each Variable Account using the net investment factor
applicable to that Variable Account.
NET INVESTMENT FACTOR - This is an index used to measure the investment
performance of a Variable Account from one valuation period to the next. For
each Variable Account, the net investment factor for a valuation period is found
by dividing (a) by (b), and reducing the result by (c):
Where (a) is:
The net asset value as of the end of the current valuation
period of a share of the series of the Fund in which the
assets of the Variable Account are invested, plus the per
share amount of any dividends and other distributions on those
shares since the end of the immediately preceding valuation
period;
Where (b) is:
The net asset value of a share of the specified series of the
Fund as of the end of the immediately preceding valuation
period;
And where (c) is:
The deduction for mortality, expense and distribution expense
risks, that shall remain constant at .00356% for each day in
the current valuation period. The maximum daily deduction for
mortality, expense risks and distribution risks is equivalent
to an annual rate of 1.30%.
To the extent that the net investment factor is less than 1, the
accumulation unit value will decrease. To the extent that the net investment
factor is greater than 1, the accumulation unit value will increase.
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PERFORMANCE DATA
Performance data for the various Variable Accounts are determined in
the manner described below.
CASH MANAGEMENT ACCOUNT
The annualized current yield and the effective yield for the Cash
Management Account for the 7 day period ended November 30, 1998 with and
without the Enhanced Death Benefit ("EDB") were as follows:
Current Yield Effective Yield
------------- ---------------
A. With EDB: 3.012% 3.057%
B. Without EDB: 3.10% 3.15%
Current yield is computed by first determining the Base Period Return
attributable to a hypothetical contract having a balance of one Accumulation
Unit at the beginning of a 7 day period using the formula:
Base Period Return = (EV - SV - CMF)/(SV)
where:
SV = value of one Accumulation Unit at the start of a 7 day period
EV = value of one Accumulation Unit at the end of the 7 day period
CMF = an allocated portion of the $30 annual Contract Maintenance
Fee, prorated for 7 days
The change in the value of the Accumulation Unit during the 7 day
period reflects the income received, minus any expenses incurred during such 7
day period. The Contract Maintenance Fee ("CMF") is first allocated among the
Fixed and Variable Accounts so that each Account's allocated portion of the
charge is proportional to the percentage of the number of Owners' accounts that
have money allocated to that investment portfolio. The portion of the CMF
allocable to the Cash Management Account is further reduced, for purposes of the
yield computation, by multiplying it by the ratio that the value of the
hypothetical contract bears to the value of an account of average size for
contracts funded by the Cash Management Account. Finally, as is done with the
other charges discussed above, the result is multiplied by the fraction 7/365 to
arrive at the portion attributable to the 7 day period.
The current yield is then obtained by annualizing the Base Period
Return:
Current Yield = (Base Period Return) x (365/7)
The Cash Management Account also quotes an "effective yield" that
differs from the current yield given above in that it takes into account the
effect of dividend reinvestment in the Cash Management Series. The effective
yield, like the current yield, is derived from the Base Period Return over a 7
day period. However, the effective yield accounts for dividend reinvestment by
compounding the current yield according to the formula:
Effective Yield = [(Base Period Return + 1)365/7 - 1].
Net investment income for yield quotation purposes will not include
either realized capital gains and losses or unrealized appreciation and
depreciation, whether reinvested or not. The yield quotations also do not
reflect any impact of premium taxes, transfer fees, or withdrawal charges.
The yields quoted should not be considered a representation of the
yield of the Cash
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Management Account in the future since the yield is not fixed. Actual yields
will depend not only on the type, quality and maturities of the investments held
by the Cash Management Account and changes in interest rates on such
investments, but also on factors such as a contract owner's account size (since
the impact of fixed dollar charges will be greater for small accounts than for
larger accounts).
Yield information may be useful in reviewing the performance of the
Cash Management Account and for providing a basis for comparison with other
investment alternatives. However, the Cash Management Account's yield
fluctuates, unlike bank deposits or other investments that typically pay a fixed
yield for a stated period of time.
ALL OTHER VARIABLE ACCOUNTS
The Variable Accounts other than the Cash Management Account compute
their performance data as "total return." The total returns of the various
Variable Accounts over the last 1, 5, and 10 year periods, and since their
inception, are shown below, both with/without an assumed complete redemption at
the end of the period.
TOTAL ANNUAL RETURN (IN PERCENT) FOR PERIODS ENDING ON
NOVEMBER 30, 1998
(RETURN WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
WITHOUT ENHANCED INCEPTION SINCE
DEATH BENEFIT DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ---------------- --------- ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Growth 2/07/84 18.54/23.54% 18.19/18.70% 18.48% 16.53%
Growth-Income 2/07/84 8.55/13.55% 16.82/17.35% 14.98% 14.94%
High-Yield Bond 2/07/84 -3.17/1.83% 6.26/7.04% 9.40% 10.71%
Cash Management N/A N/A N/A N/A
U.S. Government 11/20/85 2.11/7.11% 3.89/4.73% 7.10% 6.97%
Asset Allocation 3/31/89 2.82/7.82% 12.68/13.30% N/A 11.39%
International 5/03/90 8.04/13.04% 11.16/11.81% N/A 9.43%
<CAPTION>
WITH ENHANCED INCEPTION SINCE
DEATH BENEFIT DATE 1 YEAR INCEPTION
- ---------------- --------- ------ ---------
<S> <C> <C> <C>
Growth 2/07/84 18.43/23.43% 10.03/14.41%
Growth-Income 2/07/84 8.44/13.44% 6.40/10.81%
High-Yield Bond 2/07/84 -3.25/1.75% -2.86/1.91%
Cash Management N/A N/A
U.S. Government 11/20/85 2.00/7.00% 3.20/7.63%
Asset Allocation 3/31/89 2.72/7.72% 2.15/6.59%
International 5/03/90 7.93/12.93% -2.85/1.61%
</TABLE>
- ----------
These figures show the total return hypothetically experienced by
contracts funded through the various Variable Accounts over the time periods
shown.
Total return for a Variable Account represents a computed annual rate
of return that, when compounded annually over the time period shown and applied
to a hypothetical initial investment in a contract funded by that Variable
Account made at the beginning of the period, will produce the same contract
value at the end of the period that the hypothetical investment would have
produced over the same period. The total rate of return (T) is computed so that
it satisfies the formula:
<TABLE>
<CAPTION>
P(1+T)n = ERV
<S> <C>
where:
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of year
ERV = ending redeemable value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of the 1, 5, or 10 year periods
(or fractional portion thereof).
</TABLE>
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The total return figures given above reflect the effect of both
non-recurring and recurring charges, as discussed herein. Recurring charges are
taken into account in a manner similar to that used for the yield computations
for the Cash Management Account, described above. The applicable withdrawal
charge (if any) is deducted as of the end of the period, to reflect the effect
of the assumed complete redemption in the case of the first of the two sets of
figures given in the table for each Variable Account, tax qualification status
and time period. Because the impact of Contract Maintenance Fee on a particular
contract owner's account would generally have differed from those assumed in the
computation, due to differences between most actual allocations and the assumed
ones, as well as differences due to varying account sizes, the total return
experienced by an actual account over these same time periods would generally
have been different from those given above. As with the Cash Management
Account's yield figures, total return figures are derived from historical data
and are not intended to be a projection of future performance.
TAXES
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the
"Code") governs taxation of annuities in general. An owner is not taxed on
increases in the value of a contract until distribution occurs, either in the
form of a non-annuity distribution or as income payments under the income option
elected. For a lump sum payment received as a total surrender (total
redemption), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the contract. For a payment received as a withdrawal (partial
redemption), federal tax liability is determined on a last-in, first-out basis,
meaning taxable income is withdrawn before the cost basis of the contract is
withdrawn. For contracts issued in connection with Non-qualified plans, the cost
basis is generally the Purchase Payments, while for contracts issued in
connection with Qualified plans there may be no cost basis. The taxable portion
of the lump sum payment is taxed at ordinary income tax rates. Tax penalties may
also apply.
For income payments, the taxable portion is determined by a formula
which establishes the ratio that the cost basis of the contract bears to the
total value of income payments for the term of the annuity contract. The taxable
portion is taxed at ordinary income tax rates. Owners, Annuitants and
Beneficiaries under the contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the separate account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of Qualified plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the owner. Withholding on other
types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of
any amount received
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by a covered employee from a plan qualified under Section 401(a) or 403(a) of
the Code, or from a tax-sheltered annuity qualified under Section 403(b) of the
Code (other than (1) annuity payments for the life (or life expectancy) of the
employee, or joint lives (or joint life expectancies) of the employee and his or
her designated Beneficiary, or for a specified period of ten years or more; and
(2) distributions required to be made under the Code). Failure to "roll over"
the entire amount of an eligible rollover distribution (including an amount
equal to the 20% portion of the distribution that was withheld) could have
adverse tax consequences, including the imposition of a penalty tax on premature
withdrawals, described later in this section.
Withdrawals or distributions from a contract other than eligible
rollover distributions are also subject to withholding on the estimated taxable
portion of the distribution, but the owner may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION - SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to earnings allocable to the contract prior to the receipt of
any payments under the contract. The Code contains a safe harbor provision which
provides that annuity contracts, such as your contract, meet the diversification
requirements if, as of the close of each calendar quarter, the underlying assets
meet the diversification standards for a regulated investment company, and no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
The Treasury Department has issued regulations which establish
diversification requirements for the investment portfolios underlying variable
contracts such as the contracts. The regulations amplify the diversification
requirements for variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above. Under the regulations
an investment portfolio will be deemed adequately diversified if (1) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (2) no more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (3) no more than 80% of the
value of the total assets of the portfolio is represented by any three
investments; and (4) no more than 90% of the value of the total assets of the
portfolio is represented by any four investments. For purposes of determining
whether or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
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MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to
the same contract owner by one company or its affiliates are treated as one
annuity contract for purposes of determining the tax consequences of any
distribution. Such treatment may result in adverse tax consequences including
more rapid taxation of the distributed amounts from such multiple contracts. The
Company believes that Congress intended to affect the purchase of multiple
deferred annuity contracts which may have been purchased to avoid withdrawal
income tax treatment. Owners should consult a tax adviser prior to purchasing
more than one annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their contracts.
QUALIFIED PLANS
The contracts offered by this prospectus are designed to be suitable
for use under various types of Qualified plans. Taxation of owners in each
Qualified plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued pursuant to the
plan.
Following are general descriptions of the types of Qualified plans with
which the contracts may be used. Such descriptions are not exhaustive and are
for general information purposes only. The tax rules regarding Qualified plans
are very complex and will have differing applications depending on individual
facts and circumstances. Each purchaser should obtain competent tax advice prior
to purchasing a contract issued under a Qualified plan.
Contracts issued pursuant to Qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this prospectus. Generally, contracts issued pursuant to Qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified contracts.
(a) H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to
establish Qualified plans for themselves and their employees, commonly
referred to as "H.R. 10" or "Keogh" Plans. Contributions made to the
plan for the benefit of the employees will not be included in the gross
income of the employees until distributed from the plan. The tax
consequences to owners may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all
plans on such items as: amounts of allowable
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contributions; form, manner and timing of distributions; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. Purchasers of contracts for use with an H.R. 10 Plan should
obtain competent tax advice as to the tax treatment and suitability of
such an investment.
(b) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of
"tax-sheltered annuities" by public schools and certain charitable,
education and scientific organizations described in Section 501(c)(3)
of the Code. These qualifying employers may make contributions to the
contracts for the benefit of their employees. Such contributions are
not includible in the gross income of the employee until the employee
receives distributions from the contract. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by
the Code. Furthermore, the Code sets forth additional restrictions
governing such items as transferability, distributions,
nondiscrimination and withdrawals. Any employee should obtain competent
tax advice as to the tax treatment and suitability of such an
investment.
(c) INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to
contribute to an individual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Under applicable limitations, certain
amounts may be contributed to an IRA which will be deductible from the
individual's gross income. These IRAs are subject to limitations on
eligibility, contributions, transferability and distributions. Sales of
contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational
disclosure be given to persons desiring to establish an IRA. Purchasers
of contracts to be qualified as IRAs should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
(d) ROTH IRAS
Section 408(a) of the Code permits an individual to contribute
to an individual retirement program called a Roth IRA. Unlike
contributions to a regular IRA under Section 408(b) of the Code,
contributions to a Roth IRA are not made on a tax-deferred basis, but
distributions are tax-free if certain requirements are satisfied. Like
regular IRAs, Roth IRAs are subject to limitations on the amount that
may be contributed, those who may be eligible and the time when
distributions may commence without tax penalty. Certain persons may be
eligible to convert a regular IRA into a Roth IRA, and the taxes on the
resulting income may be spread over four years if the conversion occurs
before January 1, 1999. If and when the contracts are made available
for use with Roth IRAs, they may be subject to special requirements
imposed by the Internal Revenue Service ("IRS"). Purchasers of the
contracts for this purpose will be provided with such supplementary
information as may be required by the IRS or other appropriate agency.
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(e) CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate
employers to establish various types of retirement plans for employees.
These retirement plans may permit the purchase of the contracts to
provide benefits under the plan. Contributions to the plan for the
benefit of employees will not be includible in the gross income of the
employee until distributed from the plan. The tax consequences to
owners may vary depending upon the particular plan design. However, the
Code places limitations on all plans on such items as amount of
allowable contributions; form, manner and timing of distributions;
vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. Purchasers of contracts for use with
corporate pension or profit sharing plans should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
(f) DEFERRED COMPENSATION PLANS - SECTION 457
Under Section 457 of the Code, governmental and certain other
tax-exempt employers may establish, for the benefit of their employees,
deferred compensation plans which may invest in annuity contracts. The
Code, as in the case of Qualified plans, establishes limitations and
restrictions on eligibility, contributions and distributions. Under
these plans, contributions made for the benefit of the employees will
not be includible in the employees' gross income until distributed from
the plan. However, under a 457 plan all the plan assets shall remain
solely the property of the employer, subject only to the claims of the
employer's general creditors until such time as made available to an
owner or a Beneficiary. As of January 1, 1999, all 457 plans of state
and local governments must hold assets and income in trust (or
custodial accounts or an annuity contract) for the exclusive benefit of
participants and their Beneficiaries.
DISTRIBUTION OF CONTRACTS
Effective as of January 28, 1994, SunAmerica Capital Services, Inc.,
located at 733 Third Avenue, 4th Floor, New York, New York 10017, serves as the
distributor of the Contracts pursuant to a distribution agreement (the
"Distribution Agreement"). Prior to this date SunAmerica Securities, Inc. and
Royal Alliance Associates, Inc., both affiliates of SunAmerica Capital Services
and located at 2201 East Camelback Road, Phoenix, Arizona 85016 and 733 Third
Avenue, 4th Floor, New York, New York 10017, respectively, served as
co-distributors of the Contract. SunAmerica Capital Services, Inc., SunAmerica
Securities, Inc. and Royal Alliance Associates, Inc. are each an indirect
wholly-owned subsidiary of SunAmerica Inc., and each is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended, and is a
member of the National Association of Securities Dealers, Inc.
For the year ended November 30, 1998, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services was
$274,049. For the year ended November 30, 1997, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services,
Inc. was $401,597. For the year ended November 30, 1996, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services was
$504,981. Of these amounts, $32,886, $48,363 and $55,739 in 1998, 1997, and
1996, respectively, were retained by SunAmerica Capital Services, Inc.
Contracts are offered on a continuous basis.
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FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of September
30, 1998 and 1997 and for each of the three years in the period ended September
30, 1998 are presented in this Statement of Additional Information. Effective
October 1, 1999, the Company changed its fiscal year end from September 30, to
December 31. Reflecting this change, also included in this Statement of
Additional Information is the Company's audited Transition Report as of and for
the three months ended December 31, 1998. The financial statements of the
Company should be considered only as bearing on the ability of the Company to
meet its obligation under the contracts. The financial statements of the
Separate Account (Portion Relating to PATHWAY Variable Annuity) as of November
30, 1998 and for each of the two years in the period ended November 30, 1998,
also are included in this Statement of Additional Information.
PricewaterhouseCoopers LLP, 400 South Hope Street, Los Angeles,
California 90071, serves as the independent accountants for the Separate Account
and the Company. The financial statements referred to above included in this
Statement of Additional Information have been so included in reliance on the
reports of Pricewaterhouse Coopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries (the "Company")at September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
-14-
<PAGE> 17
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments........................ $ 333,735,000 $ 113,580,000
Bonds, notes and redeemable preferred stocks available
for sale, at fair value (amortized cost: 1998,
$1,934,863,000; 1997, $1,942,485,000)............... 1,954,754,000 1,986,194,000
Mortgage loans......................................... 391,448,000 339,530,000
Common stocks available for sale, at fair value (cost:
1998, $115,000; 1997, $271,000)..................... 169,000 1,275,000
Real estate............................................ 24,000,000 24,000,000
Other invested assets.................................. 30,636,000 143,722,000
--------------- ---------------
Total investments...................................... 2,734,742,000 2,608,301,000
--------------- ---------------
Variable annuity assets held in separate accounts........ 11,133,569,000 9,343,200,000
Accrued investment income................................ 26,408,000 21,759,000
Deferred acquisition costs............................... 539,850,000 536,155,000
Income taxes currently receivable........................ 5,869,000 --
Other assets............................................. 85,926,000 61,524,000
--------------- ---------------
TOTAL ASSETS............................................. $14,526,364,000 $12,570,939,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts................... $ 2,189,272,000 $ 2,098,803,000
Reserves for guaranteed investment contracts........... 282,267,000 295,175,000
Payable to brokers for purchases of securities......... 27,053,000 263,000
Income taxes currently payable......................... -- 32,265,000
Other liabilities...................................... 106,594,000 122,728,000
--------------- ---------------
Total reserves, payables and accrued
liabilities.......................................... 2,605,186,000 2,549,234,000
--------------- ---------------
Variable annuity liabilities related to separate
accounts............................................... 11,133,569,000 9,343,200,000
--------------- ---------------
Subordinated notes payable to Parent..................... 39,182,000 36,240,000
--------------- ---------------
Deferred income taxes.................................... 95,758,000 67,047,000
--------------- ---------------
Shareholder's equity:
Common Stock........................................... 3,511,000 3,511,000
Additional paid-in capital............................. 308,674,000 308,674,000
Retained earnings...................................... 332,069,000 244,628,000
Net unrealized gains on debt and equity securities
available for sale.................................. 8,415,000 18,405,000
--------------- ---------------
Total shareholder's equity............................. 652,669,000 575,218,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............... $14,526,364,000 $12,570,939,000
=============== ===============
</TABLE>
See accompanying notes.
-15-
<PAGE> 18
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Investment income.......................... $ 221,966,000 $ 210,759,000 $ 164,631,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts.................. (112,695,000) (109,217,000) (82,690,000)
Guaranteed investment contracts.......... (17,787,000) (22,650,000) (19,974,000)
Senior indebtedness...................... (1,498,000) (2,549,000) (2,568,000)
Subordinated notes payable to Parent....... (3,114,000) (3,142,000) (2,556,000)
------------- ------------- -------------
Total interest expense..................... (135,094,000) (137,558,000) (107,788,000)
------------- ------------- -------------
NET INVESTMENT INCOME...................... 86,872,000 73,201,000 56,843,000
------------- ------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES)................................. 19,482,000 (17,394,000) (13,355,000)
------------- ------------- -------------
Fee income:
Variable annuity fees.................... 200,867,000 139,492,000 103,970,000
Net retained commissions................. 48,561,000 39,143,000 31,548,000
Asset management fees.................... 29,592,000 25,764,000 25,413,000
Surrender charges........................ 7,404,000 5,529,000 5,184,000
Other fees............................... 3,938,000 3,218,000 3,390,000
------------- ------------- -------------
TOTAL FEE INCOME........................... 290,362,000 213,146,000 169,505,000
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES................................. (96,102,000) (98,802,000) (81,552,000)
------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS........................ (72,713,000) (66,879,000) (57,520,000)
------------- ------------- -------------
ANNUAL COMMISSIONS......................... (18,209,000) (8,977,000) (4,613,000)
------------- ------------- -------------
PRETAX INCOME.............................. 209,692,000 94,295,000 69,308,000
Income tax expense......................... (71,051,000) (31,169,000) (24,252,000)
------------- ------------- -------------
NET INCOME................................. $ 138,641,000 $ 63,126,000 $ 45,056,000
============= ============= =============
</TABLE>
See accompanying notes.
-16-
<PAGE> 19
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 138,641,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts............................... 112,695,000 109,217,000 82,690,000
Guaranteed investment contracts....................... 17,787,000 22,650,000 19,974,000
Net realized investment (gains) losses.................. (19,482,000) 17,394,000 13,355,000
Amortization (accretion) of net premiums (discounts) on
investments........................................... 447,000 (18,576,000) (8,976,000)
Amortization of goodwill................................ 1,422,000 1,187,000 1,169,000
Provision for deferred income taxes..................... 34,087,000 (16,024,000) (3,351,000)
Change in:
Accrued investment income............................... (4,649,000) (2,084,000) (5,483,000)
Deferred acquisition costs.............................. (160,926,000) (113,145,000) (60,941,000)
Other assets............................................ (19,374,000) (14,598,000) (8,000,000)
Income taxes currently payable.......................... (38,134,000) 10,779,000 5,766,000
Other liabilities....................................... (2,248,000) 14,187,000 5,474,000
Other, net................................................ (5,599,000) 418,000 (129,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 54,667,000 74,531,000 86,604,000
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts................................. 1,512,994,000 1,097,937,000 741,774,000
Guaranteed investment contracts......................... 5,619,000 55,000,000 134,967,000
Net exchanges from the fixed accounts of variable annuity
contracts............................................... (1,303,790,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts................................. (191,690,000) (242,589,000) (263,614,000)
Guaranteed investment contracts......................... (36,313,000) (198,062,000) (16,492,000)
Claims and annuity payments on fixed annuity contracts.... (40,589,000) (35,731,000) (31,107,000)
Net receipts from (repayments of) other short-term
financings.............................................. (10,944,000) 34,239,000 (119,712,000)
Net receipts from a modified coinsurance transaction...... 166,631,000 -- --
Capital contributions received............................ -- 28,411,000 27,387,000
Dividends paid............................................ (51,200,000) (25,500,000) (29,400,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 50,718,000 93,338,000 207,098,000
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks............ $(1,970,502,000) $(2,566,211,000) $(1,937,890,000)
Mortgage loans.......................................... (131,386,000) (266,771,000) (15,000,000)
Other investments, excluding short-term investments..... -- (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable preferred stocks............ 1,602,079,000 2,299,063,000 1,241,928,000
Real estate............................................. -- -- 900,000
Other investments, excluding short-term investments..... 42,458,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks............ 424,393,000 376,847,000 288,969,000
Mortgage loans.......................................... 80,515,000 25,920,000 11,324,000
Other investments, excluding short-term investments..... 67,213,000 23,940,000 20,749,000
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ 114,770,000 (176,347,000) (420,853,000)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... 220,155,000 (8,478,000) (127,151,000)
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD...... 113,580,000 122,058,000 249,209,000
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD............ $ 333,735,000 $ 113,580,000 $ 122,058,000
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............................. $ 3,912,000 $ 7,032,000 $ 5,982,000
=============== =============== ===============
Net income taxes paid..................................... $ 74,932,000 $ 36,420,000 $ 22,031,000
=============== =============== ===============
</TABLE>
See accompanying notes
-17-
<PAGE> 20
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica Inc. (the "Parent"). The Company is an
Arizona-domiciled life insurance company and conducts its business through three
segments: annuity operations, asset management operations and broker-dealer
operations. Annuity operations include the sale and administration of fixed and
variable annuities and guaranteed investment contracts. Asset management
operations, which includes the sale and management of mutual funds, is conducted
by SunAmerica Asset Management Corp. Broker-dealer operations include the sale
of securities and financial services products, and are conducted by Royal
Alliance Associates, Inc.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level of
sales of the Company's financial products is influenced by many factors,
including general market rates of interest, strength, weakness and volatility of
equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets managed in mutual funds
and held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of the Company and all of its wholly owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with the 1998 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholder's equity.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in limited partnerships, which are
accounted for by using the cost method of accounting; separate account
investments; leveraged leases; policy loans, which are carried at unpaid
balances; and collateralized mortgage obligation residuals.
-18-
<PAGE> 21
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of the
investments.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or received
on interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Investment Income or Interest
Expense in the income statement. Initially, Swap Agreements are designated as
hedges and, therefore, are not marked to market. However, when a hedged
asset/liability is sold or repaid before the related Swap Agreement matures, the
Swap Agreement is marked to market and any gain/loss is classified with any
gain/loss realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting change in
fair value is included in Investment Income in the income statement. When a Swap
Agreement that is designated as a hedge is terminated before its contractual
maturity, any resulting gain/loss is credited/charged to the carrying value of
the asset/liability that it hedged and is treated as a premium/discount for the
remaining life of the asset/liability.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Costs incurred to sell mutual funds are also deferred
and amortized over the estimated lives of the funds obtained. Deferred
acquisition costs ("DAC") consist of commissions and other costs that vary with,
and are primarily related to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to DAC equal to the change in amortization
that would have been recorded if such securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. The change
in this adjustment, net of tax, is included with the change in net unrealized
gains/losses on debt and equity securities available for sale that is credited
or charged directly to shareholder's equity. DAC have been decreased by
$7,000,000 at September 30, 1998 and $16,400,000 at September 30, 1997 for this
adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives administrative fees for managing the
funds and other fees for assuming mortality and certain expense risks. Such fees
are included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $23,339,000 at September 30, 1998, is
amortized by using the straight-line method over periods averaging 25 years and
is included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and guaranteed investment contracts are accounted for as
investment-type contracts in accordance with Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," and are recorded at accumulated value (premiums received, plus
accrued interest, less withdrawals and assessed fees).
-19-
<PAGE> 22
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEE INCOME: Variable annuity fees, asset management fees and surrender
charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade date basis.
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income tax assets
and liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and liabilities using
enacted income tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130 is
effective for the Company as of October 1, 1998 and is not included in these
financial statements.
SFAS 131 establishes standards for the disclosure of information about the
Company's operating segments. SFAS 131 is effective for the year ending
September 30, 1999 and is not included in these financial statements.
Implementation of SFAS 130 and SFAS 131 will not have an impact on the
Company's results of operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 is effective for the Company as of October 1, 1999 and is
not included in these financial statements. The Company has not completed its
analysis of the effect of SFAS 133, but management believes that it will not
have a material impact on the Company's results of operations, financial
condition or liquidity.
-20-
<PAGE> 23
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government....... $ 84,377,000 $ 88,239,000
Mortgage-backed securities....................... 569,613,000 584,007,000
Securities of public utilities................... 108,431,000 106,065,000
Corporate bonds and notes........................ 883,890,000 884,209,000
Redeemable preferred stocks...................... 6,125,000 6,888,000
Other debt securities............................ 282,427,000 285,346,000
-------------- --------------
Total.................................... $1,934,863,000 $1,954,754,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States Government....... $ 18,496,000 $ 18,962,000
Mortgage-backed securities....................... 636,018,000 649,196,000
Securities of public utilities................... 22,792,000 22,893,000
Corporate bonds and notes........................ 984,573,000 1,012,559,000
Redeemable preferred stocks...................... 6,125,000 6,681,000
Other debt securities............................ 274,481,000 275,903,000
-------------- --------------
Total.................................... $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1998, follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less............................ $ 19,124,000 $ 19,319,000
Due after one year through five years.............. 313,396,000 318,943,000
Due after five years through ten years............. 744,740,000 750,286,000
Due after ten years................................ 287,990,000 282,199,000
Mortgage-backed securities......................... 569,613,000 584,007,000
-------------- --------------
Total.................................... $1,934,863,000 $1,954,754,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
-21-
<PAGE> 24
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- ------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government........... $ 3,862,000 $ --
Mortgage-backed securities........................... 15,103,000 (709,000)
Securities of public utilities....................... 2,420,000 (4,786,000)
Corporate bonds and notes............................ 31,795,000 (31,476,000)
Redeemable preferred stocks.......................... 763,000 --
Other debt securities................................ 5,235,000 (2,316,000)
----------- ------------
Total........................................ $59,178,000 $(39,287,000)
=========== ============
AT SEPTEMBER 30, 1997:
Securities of the United States Government........... $ 498,000 $ (32,000)
Mortgage-backed securities........................... 14,998,000 (1,820,000)
Securities of public utilities....................... 141,000 (40,000)
Corporate bonds and notes............................ 28,691,000 (705,000)
Redeemable preferred stocks.......................... 556,000 --
Other debt securities................................ 1,569,000 (147,000)
----------- ------------
Total........................................ $46,453,000 $ (2,744,000)
=========== ============
</TABLE>
Gross unrealized gains on equity securities available for sale aggregated
$54,000 and $1,004,000 at September 30, 1998 and 1997, respectively. There were
no unrealized losses at September 30, 1998 and 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE PREFERRED
STOCKS:
Realized gains....................... $28,086,000 $ 22,179,000 $ 14,532,000
Realized losses...................... (4,627,000) (25,310,000) (10,432,000)
COMMON STOCKS:
Realized gains....................... 337,000 4,002,000 511,000
Realized losses...................... -- (312,000) (3,151,000)
OTHER INVESTMENTS:
Realized gains....................... 8,824,000 2,450,000 1,135,000
IMPAIRMENT WRITEDOWNS.................. (13,138,000) (20,403,000) (15,950,000)
----------- ------------ ------------
Total net realized investment
gains and losses........... $19,482,000 $(17,394,000) $(13,355,000)
=========== ============ ============
</TABLE>
-22-
<PAGE> 25
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Short-term investments................ $ 12,524,000 $ 11,780,000 $ 10,647,000
Bonds, notes and redeemable preferred
stocks.............................. 156,140,000 163,038,000 140,387,000
Mortgage loans........................ 29,996,000 17,632,000 8,701,000
Common stocks......................... 34,000 16,000 8,000
Real estate........................... (467,000) (296,000) (196,000)
Cost-method partnerships.............. 24,311,000 6,725,000 4,073,000
Other invested assets................. (572,000) 11,864,000 1,011,000
------------ ------------ ------------
Total investment income..... $221,966,000 $210,759,000 $164,631,000
============ ============ ============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $1,910,000
for the year ended September 30, 1998, $2,050,000 for the year ended September
30, 1997, and $1,737,000 for the year ended September 30, 1996, and are included
in General and Administrative Expenses in the income statement.
At September 30, 1998, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
At September 30, 1998, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 21% of the aggregate
carrying value of the portfolio secured by properties located in California and
approximately 14% by properties located in New York. No more than 8% of the
portfolio was secured by properties in any other single state.
At September 30, 1998, bonds, notes and redeemable preferred stocks
included $167,564,000 of bonds and notes not rated investment grade. The Company
had no material concentrations of non-investment-grade assets at September 30,
1998.
At September 30, 1998, the carrying value of investments in default as to
the payment of principal or interest was $917,000, all of which were mortgage
loans. Such nonperforming investments had an estimated fair value equal to their
carrying value.
As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments. At September 30,
1998, the Company had one outstanding Swap Agreement with a notional principal
amount of $21,538,000, which matures in December 2024. The net interest paid
amounted to $278,000 and $125,000 for the years ended September 30, 1998 and
1997, respectively, and is included in Interest Expense on Guaranteed Investment
Contracts in the income statement.
At September 30, 1998, $5,154,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
-23-
<PAGE> 26
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its real estate investments and
other invested assets except for cost-method partnerships) and liabilities or
the value of anticipated future business. The Company does not plan to sell most
of its assets or settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based
principally on independent pricing services, broker quotes and other independent
information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for
by using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life contracts are assigned a fair value equal to current net surrender
value. Annuitized contracts are valued based on the present value of future cash
flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of a hedging Swap Agreement, determined from independent
broker quotes.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent
net transactions of a short-term nature for which the carrying value is
considered a reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of
contracts in the accumulation phase are based on net surrender values. Fair
values of contracts in the payout phase are based on the present value of future
cash flows at assumed investment rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the
quoted market prices for similar issues.
-24-
<PAGE> 27
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 30, 1998 and 1997, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
--------------- ---------------
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments........................ $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable preferred stocks........... 1,954,754,000 1,954,754,000
Mortgage loans......................................... 391,448,000 415,981,000
Common stocks.......................................... 169,000 169,000
Cost-method partnerships............................... 4,403,000 12,744,000
Variable annuity assets held in separate accounts...... 11,133,569,000 11,133,569,000
LIABILITIES:
Reserves for fixed annuity contracts................... 2,189,272,000 2,116,874,000
Reserves for guaranteed investment contracts........... 282,267,000 282,267,000
Payable to brokers for purchases of securities......... 27,053,000 27,053,000
Variable annuity liabilities related to separate
accounts............................................ 11,133,569,000 10,696,607,000
Subordinated notes payable to Parent................... 39,182,000 40,550,000
=============== ===============
1997:
ASSETS:
Cash and short-term investments........................ $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable preferred stocks........... 1,986,194,000 1,986,194,000
Mortgage loans......................................... 339,530,000 354,495,000
Common stocks.......................................... 1,275,000 1,275,000
Cost-method partnerships............................... 46,880,000 84,186,000
Variable annuity assets held in separate accounts...... 9,343,200,000 9,343,200,000
LIABILITIES:
Reserves for fixed annuity contracts................... 2,098,803,000 2,026,258,000
Reserves for guaranteed investment contracts........... 295,175,000 295,175,000
Payable to brokers for purchases of securities......... 263,000 263,000
Variable annuity liabilities related to separate
accounts............................................ 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent................... 36,240,000 37,393,000
=============== ===============
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes and accrued interest payable to Parent totaled
$39,182,000 at interest rates ranging from 8.5% to 9% at September 30, 1998, and
require principal payments of $23,060,000 in 1999, $5,400,000 in 2000 and
$10,000,000 in 2001.
6. REINSURANCE
On August 11, 1998, the Company entered into a modified coinsurance
transaction, approved by the Arizona Department of Insurance, which involves the
ceding of approximately $5,000,000,000 of variable annuities to ANLIC Insurance
Company (Cayman), a Cayman Islands stock life insurance company, effective
December 31, 1997. As a part of this transaction, the Company received cash
amounting to approximately $188,700,000, and recorded a corresponding reduction
of DAC related to the coinsured annuities.
-25-
<PAGE> 28
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REINSURANCE (CONTINUED)
As payments are made to the reinsurer, the reduction of DAC is relieved.
The net reduction in DAC at September 30, 1998 was $166,631,000. Certain
expenses related to this transaction are being charged directly to DAC
amortization in the income statement. The net effect of this transaction in the
income statement is not material.
7. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided
liquidity support for certain short-term securities of two municipalities by
agreeing to purchase such securities in the event there is no other buyer in the
short-term marketplace. In return the Company receives a fee. The maximum
liability under these guarantees is $242,600,000. Management does not anticipate
any material future losses with respect to these liquidity support facilities.
An additional $51,000,000 has been committed to investments in the process of
being funded or to be available in the case of certain natural disasters, for
which the Company receives a fee.
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further liabilities and
costs will not have a material adverse impact upon the Company's financial
position or results of operations.
-26-
<PAGE> 29
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At September 30, 1998 and 1997, 3,511 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances.................. $308,674,000 $280,263,000 $252,876,000
Capital contributions received...... -- 28,411,000 27,387,000
------------ ------------ ------------
Ending balances.................. $308,674,000 $308,674,000 $280,263,000
============ ============ ============
RETAINED EARNINGS:
Beginning balances.................. $244,628,000 $207,002,000 $191,346,000
Net income.......................... 138,641,000 63,126,000 45,056,000
Dividend paid....................... (51,200,000) (25,500,000) (29,400,000)
------------ ------------ ------------
Ending balances.................. $332,069,000 $244,628,000 $207,002,000
============ ============ ============
NET UNREALIZED GAINS (LOSSES) ON
DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balances............... $ 18,405,000 $ (5,521,000) $ (5,673,000)
Change in net unrealized gains
(losses) on debt securities
available for sale............. (23,818,000) 57,463,000 (2,904,000)
Change in net unrealized gains
(losses) on equity securities
available for sale............. (950,000) (55,000) 3,538,000
Change in adjustment to deferred
acquisition costs.............. 9,400,000 (20,600,000) (400,000)
Tax effects of net changes....... 5,378,000 (12,882,000) (82,000)
------------ ------------ ------------
Ending balances................ $ 8,415,000 $ 18,405,000 $ (5,521,000)
============ ============ ============
</TABLE>
Dividends that the Company may pay to its shareholder in any year without
prior approval of the Arizona Department of Insurance are limited by statute.
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior approval
of the Insurance Commissioner is limited to the lesser of either 10% of the
preceding year's statutory surplus or the preceding year's statutory net gain
from operations. Dividends in the amounts of $51,200,000, $25,500,000 and
$29,400,000 were paid on June 4, 1998, April 1, 1997 and March 18, 1996,
respectively.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1998 was $64,125,000. The statutory net income for the year ended
December 31, 1997 was $74,407,000, and the statutory net income for the year
ended December 31, 1996 was $27,928,000. The Company's statutory capital and
surplus was $537,542,000 at September 30, 1998, $567,979,000 at December 31,
1997 and $311,176,000 at December 31, 1996.
-27-
<PAGE> 30
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ------------ ------------
<S> <C> <C> <C>
1998:
Currently payable................... $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred............................ (550,000) 34,637,000 34,087,000
------------ ------------ ------------
Total income tax expense.... $ 3,671,000 $ 67,380,000 $ 71,051,000
============ ============ ============
1997:
Currently payable................... $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred............................ (2,258,000) (13,766,000) (16,024,000)
------------ ------------ ------------
Total income tax expense.... $ (5,893,000) $ 37,062,000 $ 31,169,000
============ ============ ============
1996:
Currently payable................... $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred............................ (10,347,000) 6,996,000 (3,351,000)
------------ ------------ ------------
Total income tax expense.... $ (4,593,000) $ 28,845,000 $ 24,252,000
============ ============ ============
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Amount computed at statutory rate........ $73,392,000 $33,003,000 $24,258,000
Increases (decreases) resulting from:
Amortization of differences between
book and tax bases of net assets
acquired............................ 460,000 666,000 464,000
State income taxes, net of federal tax
benefit............................. 5,530,000 1,950,000 2,070,000
Dividends-received deduction........... (7,254,000) (4,270,000) (2,357,000)
Tax credits............................ (1,296,000) (318,000) (257,000)
Other, net............................. 219,000 138,000 74,000
----------- ----------- -----------
Total income tax expense....... $71,051,000 $31,169,000 $24,252,000
=========== =========== ===========
</TABLE>
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at September 30, 1998. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
-28-
<PAGE> 31
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments....................................... $ 17,643,000 $ 13,160,000
Deferred acquisition costs........................ 223,392,000 154,949,000
State income taxes................................ 2,873,000 1,777,000
Other liabilities................................. 144,000 --
Net unrealized gains on debt and equity securities
available for sale............................. 4,531,000 9,910,000
------------- -------------
Total deferred tax liabilities............ 248,583,000 179,796,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves........................... (149,915,000) (108,090,000)
Guaranty fund assessments......................... (2,910,000) (2,707,000)
Other assets...................................... -- (1,952,000)
------------- -------------
Total deferred tax assets................. (152,825,000) (112,749,000)
------------- -------------
DEFERRED INCOME TAXES............................... $ 95,758,000 $ 67,047,000
============= =============
</TABLE>
10. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp. and Spelman & Co. Inc. Commissions paid to these broker-dealers
totaled $32,946,000 in 1998, $25,492,000 in 1997, and $16,906,000 in 1996. These
broker-dealers, when combined with the Company's wholly owned broker-dealer,
represent a significant portion of the Company's business, amounting to
approximately 33.6%, 36.1%, and 38.3% of premiums in 1998, 1997, and 1996,
respectively. The Company also sells its products through unaffiliated
broker-dealers, the largest two of which represented approximately 17.3% and
8.4% of premiums in 1998, 19.2% and 10.1% in 1997, and 19.7% and 10.2% in 1996,
respectively.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, whose purpose
is to provide services to the Company and its affiliates. Amounts paid for such
services totaled $84,975,000 for the year ended September 30, 1998, $86,116,000
for the year ended September 30, 1997 and $65,351,000 for the year ended
September 30, 1996. The marketing component of such costs during these periods
amounted to $39,482,000, $31,968,000 and $17,442,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of such costs are included in General and Administrative Expenses in
the income statement.
The Parent made a capital contribution of $28,411,000 in December 1996 to
the Company, through the Company's direct parent, in exchange for the
termination of its guaranty with respect to certain real estate owned in
Arizona. Accordingly, the Company reduced the carrying value of this real estate
to estimated fair value to reflect the termination of the guaranty.
During the year ended September 30, 1998, the Company sold various invested
assets to the Parent for cash equal to their current market value of
$64,431,000. The Company recorded a net gain aggregating $16,388,000 on such
transactions.
-29-
<PAGE> 32
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY MATTERS (CONTINUED)
During the year ended September 30, 1998, the Company purchased certain
invested assets from the Parent, SunAmerica Life Insurance Company and
CalAmerica Life Insurance Company for cash equal to their current market value,
which aggregated $20,666,000, $10,468,000 and $61,000, respectively.
During the year ended September 30, 1997, the Company sold various invested
assets to SunAmerica Life Insurance Company and to CalAmerica Life Insurance
Company for cash equal to their current market value of $15,776,000 and $15,000,
respectively. The Company recorded a net gain aggregating $276,000 on such
transactions.
During the year ended September 30, 1997, the Company purchased certain
invested assets from SunAmerica Life Insurance Company and CalAmerica Life
Insurance Company for cash equal to their current market value of $8,717,000 and
$284,000, respectively.
During the year ended September 30, 1996, the Company sold various invested
assets to the Parent and to SunAmerica Life Insurance Company for cash equal to
their current market value of $274,000 and $47,321,000, respectively. The
Company recorded a net loss aggregating $3,000 on such transactions.
During the year ended September 30, 1996, the Company purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal to their
current market value, which aggregated $28,379,000.
11. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX TOTAL
REVENUES EXPENSE INCOME ASSETS
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
1998:
Annuity operations......... $443,407,000 $60,731,000 $178,120,000 $14,366,018,000
Broker-dealer operations... 47,363,000 1,770,000 22,401,000 55,870,000
Asset management
operations.............. 41,040,000 14,780,000 9,171,000 104,476,000
------------ ----------- ------------ ---------------
Total.............. $531,810,000 $77,281,000 $209,692,000 $14,526,364,000
============ =========== ============ ===============
1997:
Annuity operations......... $332,845,000 $55,675,000 $ 74,792,000 $12,438,021,000
Broker-dealer operations... 38,005,000 689,000 16,705,000 51,400,000
Asset management
operations.............. 35,661,000 16,357,000 2,798,000 81,518,000
------------ ----------- ------------ ---------------
Total.............. $406,511,000 $72,721,000 $ 94,295,000 $12,570,939,000
============ =========== ============ ===============
1996:
Annuity operations......... $256,681,000 $43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer operations... 31,053,000 449,000 13,033,000 37,355,000
Asset management
operations.............. 33,047,000 18,295,000 2,448,000 74,410,000
------------ ----------- ------------ ---------------
Total.............. $320,781,000 $62,718,000 $ 69,308,000 $ 9,204,535,000
============ =========== ============ ===============
</TABLE>
-30-
<PAGE> 33
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
On July 15, 1998, the Company entered into a definitive agreement to
acquire the individual life business and the individual and group annuity
business of MBL Life Assurance Corporation ("MBL Life") via a 100% coinsurance
transaction for approximately $130,000,000 in cash. The transaction will include
approximately $2,000,000,000 of universal life reserves and $3,000,000,000 of
fixed annuity reserves. The Company plans to reinsure a large portion of the
mortality risk associated with the acquired block of universal life business.
Completion of this acquisition is expected by the end of calendar year 1998 and
is subject to customary conditions and required approvals. Included in this
block of business is approximately $250,000,000 of individual life business and
$500,000,000 of group annuity business whose contract owners are residents of
New York State ("the New York Business"). Approximately six months subsequent to
completion of the transaction, the New York Business will be acquired by the
Company's New York affiliate, First SunAmerica Life Insurance Company, and the
remainder of the business will be acquired by the Company via assumption
reinsurance agreements between MBL Life and the respective companies, which will
supersede the coinsurance agreement. The $130,000,000 purchase price will be
allocated between the Company and its affiliate based on their respective
assumed life insurance reserves.
On August 20, 1998, the Parent announced that it has entered into a
definite agreement to merge with and into American International Group, Inc.
("AIG"). Under the terms of the agreement, each share of the Parent's common
stock (including Nontransferable Class B) will be exchanged for 0.855 shares of
AIG's common stock. The transaction will be treated as a pooling of interests
for accounting purposes and will be a tax-free reorganization. The transaction
was approved by both the Parent's and AIG's shareholders on November 18, 1998,
and, subject to various regulatory approvals, will be completed in late 1998 or
early 1999.
-31-
<PAGE> 34
Report of Independent Accountants
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and comprehensive income and cash flows present
fairly, in all material respects, the financial position of Anchor National Life
Insurance Company and its subsidiaries (the "Company") at December 31, 1998,
September 30, 1998 and 1997, and the results of their operations and their cash
flows for the three months ended December 31, 1998 and for each of the three
fiscal years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
November 19, 1999
3
<PAGE> 35
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At September 30,
December 31, ------------------------------------
1998 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 3,303,454,000 $ 333,735,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
December 1998, $4,252,740,000;
September 1998, $1,934,863,000;
September 1997, $1,942,485,000) 4,248,840,000 1,954,754,000 1,986,194,000
Mortgage loans 388,780,000 391,448,000 339,530,000
Policy loans 320,688,000 11,197,000 10,948,000
Common stocks available for sale,
at fair value (cost: December 1998,
$1,409,000; September 1998, $115,000;
September 1997, $271,000) 1,419,000 169,000 1,275,000
Partnerships 4,577,000 4,403,000 46,880,000
Real estate 24,000,000 24,000,000 24,000,000
Other invested assets 15,185,000 15,036,000 85,894,000
--------------- --------------- ---------------
Total investments 8,306,943,000 2,734,742,000 2,608,301,000
Variable annuity assets held in separate
accounts 13,767,213,000 11,133,569,000 9,343,200,000
Accrued investment income 73,441,000 26,408,000 21,759,000
Deferred acquisition costs 866,053,000 539,850,000 536,155,000
Income taxes currently receivable -- 5,869,000 --
Receivable from brokers for sales of
securities 22,826,000 23,904,000 2,290,000
Other assets 109,857,000 85,926,000 61,524,000
--------------- --------------- ---------------
TOTAL ASSETS $23,146,333,000 $14,550,268,000 $12,573,229,000
=============== =============== ===============
</TABLE>
See accompanying notes
4
<PAGE> 36
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
At September 30,
December 31, --------------------------------------
1998 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 5,500,157,000 $ 2,189,272,000 $ 2,098,803,000
Reserves for universal life insurance
contracts 2,339,194,000 -- --
Reserves for guaranteed investment
contracts 306,461,000 282,267,000 295,175,000
Payable to brokers for purchases of
securities -- 50,957,000 2,553,000
Income taxes currently payable 11,123,000 -- 32,265,000
Other liabilities 160,020,000 106,594,000 122,728,000
---------------- ---------------- ----------------
Total reserves, payables
and accrued liabilities 8,316,955,000 2,629,090,000 2,551,524,000
---------------- ---------------- ----------------
Variable annuity liabilities related to
separate accounts 13,767,213,000 11,133,569,000 9,343,200,000
---------------- ---------------- ----------------
Subordinated notes payable to affiliates 209,367,000 39,182,000 36,240,000
---------------- ---------------- ----------------
Deferred income taxes 105,772,000 95,758,000 67,047,000
---------------- ---------------- ----------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000 3,511,000
Additional paid-in capital 378,674,000 308,674,000 308,674,000
Retained earnings 366,460,000 332,069,000 244,628,000
Accumulated other comprehensive
income (loss) (1,619,000) 8,415,000 18,405,000
---------------- ---------------- ----------------
Total shareholder's equity 747,026,000 652,669,000 575,218,000
---------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 23,146,333,000 $ 14,550,268,000 $ 12,573,229,000
================ ================ ================
</TABLE>
See accompanying notes
5
<PAGE> 37
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment income $ 54,278,000 $ 221,966,000 $ 210,759,000 $ 164,631,000
------------- ------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (22,828,000) (112,695,000) (109,217,000) (82,690,000)
Guaranteed investment
contracts (3,980,000) (17,787,000) (22,650,000) (19,974,000)
Senior indebtedness (34,000) (1,498,000) (2,549,000) (2,568,000)
Subordinated notes payable to
affiliates (471,000) (3,114,000) (3,142,000) (2,556,000)
------------- ------------- ------------- -------------
Total interest expense (27,313,000) (135,094,000) (137,558,000) (107,788,000)
------------- ------------- ------------- -------------
NET INVESTMENT INCOME 26,965,000 86,872,000 73,201,000 56,843,000
------------- ------------- ------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES) 271,000 19,482,000 (17,394,000) (13,355,000)
------------- ------------- ------------- -------------
Fee income:
Variable annuity fees 58,806,000 200,867,000 139,492,000 103,970,000
Net retained commissions 11,479,000 48,561,000 39,143,000 31,548,000
Asset management fees 8,068,000 29,592,000 25,764,000 25,413,000
Surrender charges 3,239,000 7,404,000 5,529,000 5,184,000
Other fees 1,738,000 3,938,000 3,218,000 3,390,000
------------- ------------- ------------- -------------
TOTAL FEE INCOME 83,330,000 290,362,000 213,146,000 169,505,000
------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES (22,375,000) (96,102,000) (98,802,000) (81,552,000)
------------- ------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (27,070,000) (72,713,000) (66,879,000) (57,520,000)
------------- ------------- ------------- -------------
ANNUAL COMMISSIONS (6,624,000) (18,209,000) (8,977,000) (4,613,000)
------------- ------------- ------------- -------------
PRETAX INCOME 54,497,000 209,692,000 94,295,000 69,308,000
Income tax expense (20,106,000) (71,051,000) (31,169,000) (24,252,000)
------------- ------------- ------------- -------------
NET INCOME 34,391,000 138,641,000 63,126,000 45,056,000
------------- ------------- ------------- -------------
Other comprehensive income, net
of tax:
Net unrealized gains on bonds and
notes available for sale:
Net unrealized gains
identified in the current
period (10,249,000) (4,027,000) 16,605,000 (11,265,000)
Less reclassification
Adjustment for net
realized gains included
in net income 215,000 (5,963,000) 7,321,000 11,417,000
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) (10,034,000) (9,990,000) 23,926,000 152,000
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME $ 24,357,000 $ 128,651,000 $ 87,052,000 $ 45,208,000
============= ============= ============= =============
</TABLE>
See accompanying notes
6
<PAGE> 38
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 34,391,000 $ 138,641,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 22,828,000 112,695,000 109,217,000 82,690,000
Guaranteed investment
contracts 3,980,000 17,787,000 22,650,000 19,974,000
Net realized investment losses
(gains) (271,000) (19,482,000) 17,394,000 13,355,000
Amortization (accretion) of
net premiums (discounts)
on investments (1,199,000) 447,000 (18,576,000) (8,976,000)
Amortization of goodwill 356,000 1,422,000 1,187,000 1,169,000
Provision for deferred income
taxes 15,945,000 34,087,000 (16,024,000) (3,351,000)
Change in:
Accrued investment income (1,512,000) (4,649,000) (2,084,000) (5,483,000)
Deferred acquisition costs (34,328,000) (160,926,000) (113,145,000) (60,941,000)
Other assets (21,070,000) (19,374,000) (14,598,000) (8,000,000)
Income taxes currently payable 16,992,000 (38,134,000) 10,779,000 5,766,000
Other liabilities 5,617,000 (2,248,000) 14,187,000 5,474,000
Other, net 5,510,000 (5,599,000) 418,000 (129,000)
--------------- --------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 47,239,000 54,667,000 74,531,000 86,604,000
--------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks (392,515,000) (1,970,502,000) (2,566,211,000) (1,937,890,000)
Mortgage loans (4,962,000) (131,386,000) (266,771,000) (15,000,000)
Other investments, excluding
short-term investments (1,992,000) -- (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable
Preferred stocks 265,039,000 1,602,079,000 2,299,063,000 1,241,928,000
Real estate -- -- -- 900,000
Other investments, excluding
short-term investments 142,000 42,458,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks 37,290,000 424,393,000 376,847,000 288,969,000
Mortgage loans 7,699,000 80,515,000 25,920,000 11,324,000
Other investments, excluding
short-term investments 853,000 67,213,000 23,940,000 20,749,000
Cash and short-term investments
acquired in coinsurance
transaction with MBL Life
Assurance Corporation 3,083,211,000 -- -- --
--------------- --------------- --------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 2,994,765,000 114,770,000 (176,347,000) (420,853,000)
--------------- --------------- --------------- ---------------
</TABLE>
7
<PAGE> 39
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $ 351,616,000 $ 1,512,994,000 $ 1,097,937,000 $ 741,774,000
Guaranteed investment
contracts -- 5,619,000 55,000,000 134,967,000
Net exchanges from the fixed
accounts of variable annuity
contracts (448,762,000) (1,303,790,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts (41,554,000) (191,690,000) (242,589,000) (263,614,000)
Guaranteed investment
contracts (3,797,000) (36,313,000) (198,062,000) (16,492,000)
Claims and annuity payments
on fixed annuity contracts (9,333,000) (40,589,000) (35,731,000) (31,107,000)
Net receipts from (repayments
of) other short-term
financings 9,545,000 (10,944,000) 34,239,000 (119,712,000)
Net receipt/(payment) related to
a modified coinsurance
transaction (170,436,000) 166,631,000 -- --
Receipts from issuance of
subordinated note payable
to affiliate 170,436,000 -- -- --
Capital contribution received 70,000,000 -- 28,411,000 27,387,000
Dividends paid -- (51,200,000) (25,500,000) (29,400,000)
--------------- --------------- --------------- ---------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (72,285,000) 50,718,000 93,338,000 207,098,000
--------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 2,969,719,000 220,155,000 (8,478,000) (127,151,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 333,735,000 113,580,000 122,058,000 249,209,000
--------------- --------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 3,303,454,000 $ 333,735,000 $ 113,580,000 $ 122,058,000
=============== =============== =============== ===============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid on indebtedness $ 536,000 $ 3,912,000 $ 7,032,000 $ 5,982,000
=============== =============== =============== ===============
Net income taxes paid (refunded) $ (12,302,000) $ 74,932,000 $ 36,420,000 $ 22,031,000
=============== =============== =============== ===============
</TABLE>
See accompanying notes
8
<PAGE> 40
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is an
Arizona-domiciled life insurance company and conducts its business
through three segments: annuity operations, asset management operations
and broker-dealer operations. Annuity operations include the sale and
administration of fixed and variable annuities and guaranteed
investment contracts. Asset management operations, which include the
sale and management of mutual funds, is conducted by SunAmerica Asset
Management Corp. Broker-dealer operations include the sale of
securities and financial services products, and are conducted by Royal
Alliance Associates, Inc.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the
federal government, and policies of state and other regulatory
authorities. The level of sales of the Company's financial products is
influenced by many factors, including general market rates of interest,
strength, weakness and volatility of equity markets, and terms and
conditions of competing financial products. The Company is exposed to
the typical risks normally associated with a portfolio of fixed-income
securities, namely interest rate, option, liquidity and credit risk.
The Company controls its exposure to these risks by, among other
things, closely monitoring and matching the duration of its assets and
liabilities, monitoring and limiting prepayment and extension risk in
its portfolio, maintaining a large percentage of its portfolio in
highly liquid securities, and engaging in a disciplined process of
underwriting, reviewing and monitoring credit risk. The Company also is
exposed to market risk, as market volatility may result in reduced fee
income in the case of assets managed in mutual funds and held in
separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: At December 31, 1998, the Company was a wholly
owned indirect subsidiary of SunAmerica Inc. On January 1, 1999,
SunAmerica Inc. merged with and into American International Group, Inc.
("AIG") in a tax-free reorganization that has been treated as a pooling
of interests for accounting purposes. Thus, SunAmerica Inc. ceased to
exist on that date. However, on the date of merger, substantially all
of the net assets of SunAmerica Inc. were contributed to a newly formed
subsidiary of AIG named SunAmerica Inc. ("SunAmerica").
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and include
the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated
in consolidation. Certain items have been reclassified to conform to
the current period's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from
those estimates.
9
<PAGE> 41
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and
short-term bank participations. All such investments are carried at
cost plus accrued interest, which approximates fair value, have
maturities of three months or less and are considered cash equivalents
for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and
common stocks are carried at aggregate fair value and changes in
unrealized gains or losses, net of tax, are credited or charged
directly to shareholder's equity. Bonds, notes and redeemable preferred
stocks are reduced to estimated net realizable value when necessary for
declines in value considered to be other than temporary. Estimates of
net realizable value are subjective and actual realization will be
dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of
provisions for estimated losses. Policy loans are carried at unpaid
balances. Limited partnerships are accounted for by the cost method of
accounting. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in separate account
investments, leveraged leases, and collateralized mortgage obligation
residuals.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific
cost identification method. Premiums and discounts on investments are
amortized to investment income by using the interest method over the
contractual lives of the investments.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or
received on interest rate swap agreements ("Swap Agreements") entered
into to reduce the impact of changes in interest rates is recognized
over the lives of the agreements, and such differential is classified
as Investment Income or Interest Expense in the income statement.
Initially, Swap Agreements are designated as hedges and, therefore, are
not marked to market. However, when a hedged asset/liability is sold or
repaid before the related Swap Agreement matures, the Swap Agreement is
marked to market and any gain/loss is classified with any gain/loss
realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting
change in fair value is included in Investment Income in the income
statement. When a Swap Agreement that is designated as a hedge is
terminated before its contractual maturity, any resulting gain/loss is
credited/charged to the carrying value of the asset/liability that it
hedged and is treated as a premium/discount for the remaining life of
the asset/liability.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated
gross profits to be realized over the estimated lives of the annuity
contracts. Estimated gross profits are composed of net interest income,
net realized investment gains and losses, variable annuity fees,
surrender charges and direct administrative expenses. Costs incurred to
sell mutual funds are also deferred and amortized over the
10
<PAGE> 42
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
estimated lives of the funds obtained. Deferred acquisition costs
("DAC") consist of commissions and other costs that vary with, and are
primarily related to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at
aggregate fair value, an adjustment is made to DAC equal to the change
in amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. The change in this adjustment, net of
tax, is included with the change in accumulated other comprehensive
income/(loss) that is credited or charged directly to shareholder's
equity. DAC has been increased by $1,400,000 at December 31, 1998,
decreased by $7,000,000 at September 30, 1998, and decreased by
$16,400,000 at September 30, 1997 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated
in separate accounts. The Company receives administrative fees for
managing the funds and other fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fees in the
income statement.
GOODWILL: Goodwill, amounting to $22,983,000 at December 31, 1998, is
amortized by using the straight-line method over periods averaging 25
years and is included in Other Assets in the balance sheet. Goodwill is
evaluated for impairment when events or changes in economic conditions
indicate that the carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and guaranteed investment contracts are accounted for as
investment-type contracts in accordance with Statement of Financial
Accounting Standards No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," and are recorded at
accumulated value (premiums received, plus accrued interest, less
withdrawals and assessed fees).
FEE INCOME: Variable annuity fees, asset management fees and surrender
charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade date basis.
INCOME TAXES: The Company is included in the consolidated federal
income tax return of the Parent and files as a "life insurance company"
under the provisions of the Internal Revenue Code of 1986. Income taxes
have been calculated as if the Company filed a separate return.
Deferred income tax assets and liabilities are recognized based on the
difference between financial statement carrying amounts and income tax
bases of assets and liabilities using enacted income tax rates and
laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131").
11
<PAGE> 43
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
SFAS 130 is effective for the Company as of October 1, 1998 and is
included in these financial statements.
SFAS 131 establishes standards for the disclosure of information about
the Company's operating segments. SFAS 131 is effective for the year
ending December 31, 1999 and is not included in these financial
statements.
Implementation of SFAS 131 will not have an impact on the Company's
results of operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 addresses the accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 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.
3. FISCAL YEAR CHANGE
Effective December 31, 1998, the Company changed its fiscal year end
from September 30 to December 31. Accordingly, the consolidated
financial statements include the results of operations and cash flows
for the three-month transition period ended December 31, 1998. Such
results are not necessarily indicative of operations for a full year.
The consolidated financial statements as of and for the three months
ended December 31, 1998 were originally filed as the Company's
unaudited Transition Report on Form 10-Q.
Results for the comparable prior year period are summarized below.
Three Months Ended
December 31, 1997
------------------
Investment income 59,855,000
Net investment income 26,482,000
Net realized investment gains 20,935,000
Total fee income 63,984,000
Pretax income 67,654,000
Net income 44,348,000
==========
12
<PAGE> 44
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale by major category
follow:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 6,033,000 $ 6,272,000
Mortgage-backed securities 546,790,000 553,990,000
Securities of public utilities 208,074,000 205,119,000
Corporate bonds and notes 2,624,330,000 2,616,073,000
Redeemable preferred stocks 6,125,000 7,507,000
Other debt securities 861,388,000 859,879,000
-------------- --------------
Total $4,252,740,000 $4,248,840,000
============== ==============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 84,377,000 $ 88,239,000
Mortgage-backed securities 569,613,000 584,007,000
Securities of public utilities 108,431,000 106,065,000
Corporate bonds and notes 883,890,000 884,209,000
Redeemable preferred stocks 6,125,000 6,888,000
Other debt securities 282,427,000 285,346,000
-------------- --------------
Total $1,934,863,000 $1,954,754,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 18,496,000 $ 18,962,000
Mortgage-backed securities 636,018,000 649,196,000
Securities of public utilities 22,792,000 22,893,000
Corporate bonds and notes 984,573,000 1,012,559,000
Redeemable preferred stocks 6,125,000 6,681,000
Other debt securities 274,481,000 275,903,000
-------------- --------------
Total $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
13
<PAGE> 45
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale by contractual maturity,
as of December 31, 1998, follow:
<TABLE>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less $ 918,639,000 $ 918,419,000
Due after one year through
five years 1,547,743,000 1,546,798,000
Due after five years through
ten years 815,959,000 816,689,000
Due after ten years 423,609,000 412,944,000
Mortgage-backed securities 546,790,000 553,990,000
-------------- --------------
Total $4,252,740,000 $4,248,840,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
14
<PAGE> 46
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (continued)
Gross unrealized gains and losses on bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gains Losses
------------ ------------
<S> <C> <C>
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 239,000 $ --
Mortgage-backed securities 9,398,000 (2,198,000)
Securities of public utilities 926,000 (3,881,000)
Corporate bonds and notes 22,227,000 (30,484,000)
Redeemable preferred stocks 1,382,000 --
Other debt securities 2,024,000 (3,533,000)
------------ ------------
Total $ 36,196,000 $(40,096,000)
============ ============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 3,862,000 $ --
Mortgage-backed securities 15,103,000 (709,000)
Securities of public utilities 2,420,000 (4,786,000)
Corporate bonds and notes 31,795,000 (31,476,000)
Redeemable preferred stocks 763,000 --
Other debt securities 5,235,000 (2,316,000)
------------ ------------
Total $ 59,178,000 $(39,287,000)
============ ============
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 498,000 $ (32,000)
Mortgage-backed securities 14,998,000 (1,820,000)
Securities of public utilities 141,000 (40,000)
Corporate bonds and notes 28,691,000 (705,000)
Redeemable preferred stocks 556,000 --
Other debt securities 1,569,000 (147,000)
------------ ------------
Total $ 46,453,000 $ (2,744,000)
============ ============
</TABLE>
Gross unrealized gains on equity securities available for sale
aggregated $10,000, $54,000, and $1,004,000 at December 31, 1998,
September 30, 1998, and September 30, 1997, respectively. There were no
unrealized losses at December 31, 1998, September 30, 1998, or
September 30, 1997.
15
<PAGE> 47
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
Gross realized investment gains and losses on sales of investments are
as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended --------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BONDS, NOTES AND
REDEEMABLE PREFERRED
STOCKS:
Realized gains $ 6,669,000 $ 28,086,000 $ 22,179,000 $ 14,532,000
Realized losses (5,324,000) (4,627,000) (25,310,000) (10,432,000)
COMMON STOCKS:
Realized gains 12,000 337,000 4,002,000 511,000
Realized losses (9,000) -- (312,000) (3,151,000)
OTHER INVESTMENTS:
Realized gains 573,000 8,824,000 2,450,000 1,135,000
IMPAIRMENT WRITEDOWNS (1,650,000) (13,138,000) (20,403,000) (15,950,000)
------------ ------------ ------------ ------------
Total net realized
investment gains
and losses $ 271,000 $ 19,482,000 $(17,394,000) $(13,355,000)
============ ============ ============ ============
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended --------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Short-term investments $ 4,649,000 $ 12,524,000 $ 11,780,000 $ 10,647,000
Bonds, notes and
redeemable preferred
stocks 39,660,000 156,140,000 163,038,000 140,387,000
Mortgage loans 7,904,000 29,996,000 17,632,000 8,701,000
Common stocks -- 34,000 16,000 8,000
Real estate 13,000 (467,000) (296,000) (196,000)
Cost-method partnerships 352,000 24,311,000 6,725,000 4,073,000
Other invested assets 1,700,000 (572,000) 11,864,000 1,011,000
------------- ------------- ------------- -------------
Total investment income $ 54,278,000 $ 221,966,000 $ 210,759,000 $ 164,631,000
============= ============= ============= =============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$500,000 for the three months ended December 31, 1998, $1,910,000 for
the year ended September 30, 1998, $2,050,000 for the year ended
September 30, 1997, and $1,737,000 for the year ended September 30,
1996, and are included in General and Administrative Expenses in the
income statement.
16
<PAGE> 48
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
At December 31, 1998, the following investments exceeded 10% of the
Company's consolidated shareholder's equity of $74,703,000:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
General Motors Acceptance Corporation 188,908,000 188,953,000
Export Development Corporation 114,895,000 114,895,000
Morgan Stanley Dean Witter 111,838,000 111,837,000
Lucent Technologies Inc. 89,901,000 89,901,000
Duke Energy Corporation 89,896,000 89,896,000
International Lease Finance Corp. 84,965,000 84,965,000
Ford Motor Corporation 79,973,000 79,976,000
Gannet Company 79,869,000 79,869,000
Exxon Asset Management Co. 78,935,000 78,935,000
General Electric Capital Corp. 78,008,000 78,008,000
Merrill Lynch & Company 75,040,000 75,042,000
Koch Industries 74,939,000 74,939,000
Government of Canada 74,928,000 74,927,000
-------------- --------------
Total $1,222,095,000 $1,222,143,000
============== ==============
</TABLE>
At December 31, 1998, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 20% of the
aggregate carrying value of the portfolio secured by properties located
in California and approximately 14% by properties located in New York.
No more than 8% of the portfolio was secured by properties in any other
single state.
At December 31, 1998, bonds, notes and redeemable preferred stocks
included $241,769,000 of bonds and notes not rated investment grade.
The Company had no material concentrations of non-investment-grade
assets at December 31, 1998.
At December 31, 1998, the carrying value of investments in default as
to the payment of principal or interest was $3,168,000, composed of
$2,500,000 of bonds and $668,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $1,918,000.
As a component of its asset and liability management strategy, the
Company utilizes Swap Agreements to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for
example, variable-rate payments exchanged for fixed-rate payments)
based on an underlying principal balance (notional principal) to hedge
against interest rate changes. The Company typically utilizes Swap
Agreements to create a hedge that effectively converts floating-rate
assets and liabilities to fixed-rate instruments. At December 31, 1998,
the Company had one outstanding Swap Agreement with a notional
principal amount of $21,538,000, which matures in December 2024. The
net interest paid amounted to $54,000 for the three months ended
December 31, 1998, $278,000 for the year ended September 30, 1998, and
$125,000 for the year ended September 30, 1997, and is included in
Interest Expense on Guaranteed Investment Contracts in the income
statement. There were no outstanding Swap Agreements at September 30,
1996.
17
<PAGE> 49
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
At December 31, 1998, $5,305,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The disclosures do not address the value of the Company's
recognized and unrecognized nonfinancial assets (including its real
estate investments and other invested assets except for cost-method
partnerships) and liabilities or the value of anticipated future
business. The Company does not plan to sell most of its assets or
settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Selling expenses
and potential taxes are not included. The estimated fair value amounts
were determined using available market information, current pricing
information and various valuation methodologies. If quoted market
prices were not readily available for a financial instrument,
management determined an estimated fair value. Accordingly, the
estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market
transaction.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based
principally on independent pricing services, broker quotes and other
independent information.
MORTGAGE LOANS: Fair values are primarily determined by discounting
future cash flows to the present at current market rates, using
expected prepayment rates.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted
for by using the cost method is based upon the fair value of the net
assets of the partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity
assets are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized
18
<PAGE> 50
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
contracts are valued based on the present value of future cash flows at
current pricing rates.
RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and
single premium life contracts are assigned a fair value equal to
current net surrender value.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on
the present value of future cash flows at current pricing rates and is
net of the estimated fair value of a hedging Swap Agreement, determined
from independent broker quotes.
RECEIVABLE FROM/PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which
the carrying value is considered a reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values
of contracts in the accumulation phase are based on net surrender
values. Fair values of contracts in the payout phase are based on the
present value of future cash flows at assumed investment rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on
the quoted market prices for similar issues.
19
<PAGE> 51
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments at
December 31, 1998, September 30, 1998 and 1997, compared with their
respective carrying values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
--------------- ---------------
<S> <C> <C>
DECEMBER 31, 1998:
ASSETS:
Cash and short-term investments $ 3,303,454,000 $ 3,303,454,000
Bonds, notes and redeemable
preferred stocks 4,248,840,000 4,248,840,000
Mortgage loans 388,780,000 411,230,000
Common stocks 1,419,000 1,419,000
Cost-method partnerships 4,577,000 12,802,000
Variable annuity assets held in
separate accounts 13,767,213,000 13,767,213,000
Receivable from brokers for sales
of securities 22,826,000 22,826,000
LIABILITIES:
Reserves for fixed annuity contracts 5,500,157,000 5,437,045,000
Reserves for universal life
insurance contracts 2,339,194,000 2,339,061,000
Reserves for guaranteed investment
contracts 306,461,000 306,461,000
Variable annuity liabilities related
to separate accounts 13,767,213,000 13,287,434,000
Subordinated notes payable to Parent 209,367,000 210,587,000
=============== ===============
SEPTEMBER 30, 1998:
ASSETS:
Cash and short-term investments $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks 1,954,754,000 1,954,754,000
Mortgage loans 391,448,000 415,981,000
Common stocks 169,000 169,000
Cost-method partnerships 4,403,000 12,744,000
Variable annuity assets held in
separate accounts 11,133,569,000 11,133,569,000
Receivable from brokers for sales
of securities 23,904,000 23,904,000
LIABILITIES:
Reserves for fixed annuity contracts 2,189,272,000 2,116,874,000
Reserves for guaranteed investment
contracts 282,267,000 282,267,000
Payable to brokers for purchases
of securities 50,957,000 50,957,000
Variable annuity liabilities related
to separate accounts 11,133,569,000 10,696,607,000
Subordinated notes payable to Parent 39,182,000 40,550,000
=============== ===============
</TABLE>
20
<PAGE> 52
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
SEPTEMBER 30, 1997:
ASSETS:
Cash and short-term investments $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks 1,986,194,000 1,986,194,000
Mortgage loans 339,530,000 354,495,000
Common stocks 1,275,000 1,275,000
Cost-method partnerships 46,880,000 84,186,000
Variable annuity assets held in
separate accounts 9,343,200,000 9,343,200,000
Receivable from brokers for sales
of securities 2,290,000 2,290,000
LIABILITIES:
Reserves for fixed annuity contracts 2,098,803,000 2,026,258,000
Reserves for guaranteed investment
contracts 295,175,000 295,175,000
Payable to brokers for purchases
of securities 2,553,000 2,553,000
Variable annuity liabilities related
to separate accounts 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent 36,240,000 37,393,000
============== ==============
</TABLE>
6. SUBORDINATED NOTES PAYABLE TO PARENT
On December 30, 1998, the Company received cash totaling $170,436,000
in exchange for issuance of a surplus note (the "Note") payable to its
immediate parent, SunAmerica Life Insurance Company (the "Parent"),
which Note has been included in Subordinated Notes Payable to
Affiliates in the accompanying consolidated balance sheet. Interest on
this note accrues at a rate of 7%.
Subordinated notes and accrued interest payable to affiliates totaled
$209,367,000 at interest rates ranging from 7% to 9% at December 31,
1998, and require principal payments of $23,060,000 in 1999, $5,400,000
in 2000, $10,000,000 in 2001 and $170,436,000 thereafter. On June 30,
1999, the Parent cancelled the Note and funds received were
reclassified to Additional Paid-in Capital.
7. REINSURANCE
On August 11, 1998, the Company entered into a modified coinsurance
transaction, approved by the Arizona Department of Insurance, which
involved the ceding of approximately $5,000,000,000 of variable
annuities to ANLIC Insurance Company (Cayman), a Cayman Islands stock
life insurance company, effective December 31, 1997. As a part of this
transaction, the Company received cash amounting to approximately
$188,700,000, and recorded a corresponding reduction of DAC related to
the coinsured annuities. As payments were made to the reinsurer, the
reduction of DAC was relieved. Certain expenses related to this
transaction were charged directly to DAC amortization in the income
statement. The net effect of this transaction in the income statement
is not material.
21
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. REINSURANCE (Continued)
On December 31, 1998, the Company recaptured this business. As part of
this recapture, the Company paid cash of $170,436,000 and recorded an
increase in DAC of $167,202,000 with the balance of $3,234,000 being
recorded as DAC amortization in the income statement.
On December 31, 1998, the Company acquired the individual life business
and the individual and group annuity business of MBL Life Assurance
Corporation ("MBL Life"), via a 100% coinsurance transaction, for a
cash purchase price of $128,420,000. As part of this transaction, the
Company acquired assets having an aggregate fair value of
$5,718,227,000, composed primarily of invested assets totaling
$5,715,010,000. Liabilities assumed in this acquisition totaled
$5,831,266,000, including $3,460,503,000 of fixed annuity reserves,
$2,308,742,000 of universal life reserves and $24,011,000 of guaranteed
investment contract reserves. Reserves for universal life contracts are
based on fund value. The excess of the purchase price over the fair
value of net assets received amounted to $113,039,000 and is included
in Deferred Acquisition Costs in the accompanying consolidated balance
sheet.
This business was assumed from MBL life subject to existing reinsurance
ceded agreements. At December 31, 1998, the maximum retention on any
single life was $2,000,000, and a total credit of $5,057,000 was taken
against the life insurance reserves, representing predominantly yearly
renewable term reinsurance. In order to limit even further the exposure
to loss on any single insured and to recover an additional portion of
the benefits paid over such limits, the Company entered into a
reinsurance treaty effective January 1, 1999 under which the Company
retains no more than $100,000 of risk on any one insured life. With
respect to these coinsurance agreements, the Company could become
liable for all obligations of the reinsured policies if the reinsurers
were to become unable to meet the obligations assumed under the
respective reinsurance agreements.
Included in the block of business acquired from MBL Life is
approximately $250,000,000 of individual life business and $500,000,000
of group annuity business whose contract owners are residents of New
York State ("the New York Business"). Approximately six months
subsequent to completion of the transaction, the New York Business will
be acquired by the Company's New York affiliate, First SunAmerica Life
Insurance Company ("FSA"), via an assumption reinsurance agreement, and
the remainder of the business will be acquired by the Company via an
assumption reinsurance agreement with MBL Life, which will supersede
the coinsurance agreement. The $128,420,000 purchase price will be
allocated between the Company and its affiliate based on the estimated
future gross profits of the two blocks of business.
8. CONTINGENT LIABILITIES
The Company has entered into two agreements in which it has provided
liquidity support for certain short-term securities of municipalities
by agreeing to purchase such securities in the event there is no other
buyer in the short-term marketplace. In return the Company receives a
fee. The maximum liability under these guarantees at December 31,
22
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CONTINGENT LIABILITIES (Continued)
1998 is $210,000,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities. An
additional $60,000,000 has been committed to investments in the process
of being funded or to be available in the case of certain natural
disasters, for which the Company receives a fee.
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based
on reports of counsel, management believes that provisions made for
potential losses relating to such litigation are adequate and any
further liabilities and costs will not have a material adverse impact
upon the Company's financial position, results of operations or cash
flows.
23
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At December 31, 1998 and September 30, 1998, 3,511 shares
were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances $ 308,674,000 $ 308,674,000 $ 280,263,000 $ 252,876,000
Capital contributions
received 70,000,000 -- 28,411,000 27,387,000
------------- ------------- ------------- -------------
Ending balances $ 378,674,000 $ 308,674,000 $ 308,674,000 $ 280,263,000
============= ============= ============= =============
RETAINED EARNINGS:
Beginning balances $ 332,069,000 $ 244,628,000 $ 207,002,000 $ 191,346,000
Net income 34,391,000 138,641,000 63,126,000 45,056,000
Dividend paid -- (51,200,000) (25,500,000) (29,400,000)
------------- ------------- ------------- -------------
Ending balances $ 366,460,000 $ 332,069,000 $ 244,628,000 $ 207,002,000
============= ============= ============= =============
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS):
Beginning balances $ 8,415,000 $ 18,405,000 $ (5,521,000) $ (5,673,000)
Change in net
unrealized gains
(losses) on debt
securities
available for sale (23,791,000) (23,818,000) 57,463,000 (2,904,000)
Change in net
unrealized gains
(losses) on equity
securities
available for sale (44,000) (950,000) (55,000) 3,538,000
Change in adjustment
to deferred
acquisition costs 8,400,000 9,400,000 (20,600,000) (400,000)
Tax effects of net
changes 5,401,000 5,378,000 (12,882,000) (82,000)
------------- ------------- ------------- -------------
Ending balances $ (1,619,000) $ 8,415,000 $ 18,405,000 $ (5,521,000)
============= ============= ============= =============
</TABLE>
24
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SHAREHOLDER'S EQUITY (Continued)
Dividends that the Company may pay to its shareholder in any year
without prior approval of the Arizona Department of Insurance are
limited by statute. The maximum amount of dividends which can be paid
to shareholders of insurance companies domiciled in the state of
Arizona without obtaining the prior approval of the Insurance
Commissioner is limited to the lesser of either 10% of the preceding
year's statutory surplus or the preceding year's statutory net gain
from operations. Dividends in the amounts of $51,200,000, $25,500,000
and $29,400,000 were paid on June 4, 1998, April 1, 1997 and March 18,
1996, respectively. No dividends were paid in the three months ended
December 31, 1998.
Under statutory accounting principles utilized in filings with
insurance regulatory authorities, the Company's net loss for the year
ended December 31, 1998 was $98,766,000. The statutory net income for
the year ended December 31, 1997 totaled $74,407,000, and the statutory
net income for the year ended December 31, 1996 was $27,928,000. The
Company's statutory capital and surplus totaled $443,394,000 at
December 31, 1998, $537,542,000 at September 30, 1998, $567,979,000 at
December 31, 1997 and $311,176,000 at December 31, 1996.
10. INCOME TAXES
The components of the provisions for federal income taxes on pretax
income consist of the following:
<TABLE>
<CAPTION>
Net Realized
Investment
Gains (Losses) Operations Total
-------------- ------------ ------------
<S> <C> <C> <C>
Three months ended December 31, 1998:
Currently payable $ 740,000 $ 3,421,000 $ 4,161,000
Deferred (620,000) 16,565,000 15,945,000
------------ ------------ ------------
Total income tax expense $ 120,000 $ 19,986,000 $ 20,106,000
============ ============ ============
Year ended September 30, 1998:
Currently payable $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred (550,000) 34,637,000 34,087,000
------------ ------------ ------------
Total income tax expense $ 3,671,000 $ 67,380,000 $ 71,051,000
============ ============ ============
Year ended September 30, 1997:
Currently payable $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred (2,258,000) (13,766,000) (16,024,000)
------------ ------------ ------------
Total income tax expense $ (5,893,000) $ 37,062,000 $ 31,169,000
============ ============ ============
Year ended September 30, 1996:
Currently payable $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred (10,347,000) 6,996,000 (3,351,000)
------------ ------------ ------------
Total income tax expense $ (4,593,000) $ 28,845,000 $ 24,252,000
============ ============ ============
</TABLE>
25
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
Income taxes computed at the United States federal income tax rate of
35% and income taxes provided differ as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended ---------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Amount computed at
statutory rate $ 19,074,000 $ 73,392,000 $ 33,003,000 $ 24,258,000
Increases (decreases)
resulting from:
Amortization of
differences between
book and tax bases
of net assets
acquired 146,000 460,000 666,000 464,000
State income taxes,
net of federal tax
benefit 1,183,000 5,530,000 1,950,000 2,070,000
Dividends-received
deduction (345,000) (7,254,000) (4,270,000) (2,357,000)
Tax credits (1,296,000) (318,000) (257,000)
Other, net 48,000 219,000 138,000 74,000
------------ ------------ ------------ ------------
Total income tax
expense $ 20,106,000 $ 71,051,000 $ 31,169,000 $ 24,252,000
============ ============ ============ ============
</TABLE>
For United States federal income tax purposes, certain amounts from
life insurance operations are accumulated in a memorandum
policyholders' surplus account and are taxed only when distributed to
shareholders or when such account exceeds prescribed limits. The
accumulated policyholders' surplus was $14,300,000 at December 31,
1998. The Company does not anticipate any transactions which would
cause any part of this surplus to be taxable.
26
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
reporting purposes. The significant components of the liability for
Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
At September 30,
December 31, ---------------------------------
1998 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ 18,174,000 $ 17,643,000 $ 13,160,000
Deferred acquisition costs 222,943,000 223,392,000 154,949,000
State income taxes 3,143,000 2,873,000 1,777,000
Other liabilities 13,906,000 144,000 --
Net unrealized gains on debt
and equity securities
available for sale -- 4,531,000 9,910,000
------------- ------------- -------------
Total deferred tax
liabilities 258,166,000 248,583,000 179,796,000
------------- ------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (148,587,000) (149,915,000) (108,090,000)
Guaranty fund assessments (2,935,000) (2,910,000) (2,707,000)
Other assets -- -- (1,952,000)
Net unrealized losses on
debt and equity securities
available for sale (872,000) -- --
------------- ------------- -------------
Total deferred tax assets (152,394,000) (152,825,000) (112,749,000)
------------- ------------- -------------
Deferred income taxes $ 105,772,000 $ 95,758,000 $ 67,047,000
============= ============= =============
</TABLE>
11. ADOPTION OF NEW ACCOUNTING STANDARD
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income. The adoption of SFAS 130 did not have an
impact on the Company's results of operations, financial condition or
liquidity. Comprehensive income amounts for the prior year are
disclosed to conform to the current year's presentation.
27
<PAGE> 59
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. ADOPTION OF NEW ACCOUNTING STANDARD (Continued)
The before tax, after tax, and tax benefit (expense) amounts for each
component of the increase or decrease in unrealized losses or gains on
debt and equity securities available for sale for both the current and
prior periods are summarized below:
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------ ------------ ------------
<S> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31,
1998:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $(24,345,000) $ 8,521,000 $(15,824,000)
Increase in deferred acquisition
cost adjustment identified in
the current period 8,579,000 (3,004,000) 5,575,000
------------ ------------ ------------
Subtotal (15,766,000) 5,517,000 (10,249,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income 510,000 (179,000) 331,000
Related change in deferred
acquisition costs (179,000) 63,000 (116,000)
------------ ------------ ------------
Total reclassification
adjustment 331,000 (116,000) 215,000
------------ ------------ ------------
Total other comprehensive loss $(15,435,000) $ 5,401,000 $(10,034,000)
============ ============ ============
YEAR ENDED SEPTEMBER 30, 1998:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $(10,281,000) $ 3,598,000 $ (6,683,000)
Decrease in deferred acquisition
cost adjustment identified in
the current period 4,086,000 (1,430,000) 2,656,000
------------ ------------ ------------
Subtotal (6,195,000) 2,168,000 (4,027,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income (14,487,000) 5,070,000 (9,417,000)
Related change in deferred
acquisition costs 5,314,000 (1,860,000) 3,454,000
------------ ------------ ------------
Total reclassification
adjustment (9,173,000) 3,210,000 (5,963,000)
------------ ------------ ------------
Total other comprehensive loss $(15,368,000) $ 5,378,000 $ (9,990,000)
============ ============ ============
</TABLE>
28
<PAGE> 60
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ADOPTION OF NEW ACCOUNTING STANDARD (Continued)
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------ ------------ ------------
<S> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,1997:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $ 40,575,000 $(14,201,000) $ 26,374,000
Increase in deferred acquisition
cost adjustment identified in
the current period (15,031,000) 5,262,000 (9,769,000)
------------ ------------ ------------
Subtotal 25,544,000 (8,939,000) 16,605,000
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income 16,832,000 (5,891,000) 10,941,000
Related change in deferred
acquisition costs (5,569,000) 1,949,000 (3,620,000)
------------ ------------ ------------
Total reclassification
adjustment 11,263,000 (3,942,000) 7,321,000
------------ ------------ ------------
Total other comprehensive
income $ 36,807,000 $(12,881,000) $ 23,926,000
============ ============ ============
YEAR ENDED SEPTEMBER 30, 1996:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $(26,189,000) $ 9,166,000 $(17,023,000)
Decrease in deferred acquisition
cost adjustment identified in
the current period 8,858,000 (3,100,000) 5,758,000
------------ ------------ ------------
Subtotal (17,331,000) 6,066,000 (11,265,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income 26,823,000 (9,388,000) 17,435,000
Related change in deferred
acquisition costs (9,258,000) 3,240,000 (6,018,000)
------------ ------------ ------------
Total reclassification
adjustment 17,565,000 (6,148,000) 11,417,000
------------ ------------ ------------
Total other comprehensive
income $ 234,000 $ (82,000) $ 152,000
============ ============ ============
</TABLE>
29
<PAGE> 61
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies: SunAmerica
Securities, Inc.; Advantage Capital Corp.; Financial Services Corp.;
Sentra Securities Corp.; and Spelman & Co. Inc. Commissions paid to
these broker-dealers totaled $6,977,000 in the three months ended
December 31, 1998, and $32,946,000, $25,492,000, and $16,906,000 in the
years ended September 30, 1998, 1997 and 1996, respectively. These
broker-dealers, when combined with the Company's wholly owned
broker-dealer, represent a significant portion of the Company's
business, amounting to approximately 35.6%, 33.6%, 36.1%, and 38.3% of
premiums in the three months ended December 31, 1998, and the years
ended September 30, 1998, 1997, and 1996, respectively. The Company
also sells its products through unaffiliated broker-dealers, the
largest two of which represented approximately 14.7% and 9.4% of
premiums in the three months ended December 31, 1998, 17.3% and 8.4% of
premiums in the year ended September 30, 1998, 19.2% and 10.1% in the
year ended September 30, 1997, and 19.7% and 10.2% in the year ended
September 30, 1996, respectively.
The Company purchases administrative, investment management,
accounting, marketing and data processing services from SunAmerica
Financial, whose purpose is to provide services to the Company and its
affiliates. Amounts paid for such services totaled $21,593,000 for the
three months ended December 31, 1998, $84,975,000 for the year ended
September 30, 1998, $86,116,000 for the year ended September 30, 1997
and $65,351,000 for the year ended September 30, 1996. The marketing
component of such costs during these periods amounted to $9,906,000,
$39,482,000, $31,968,000 and $17,442,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of such costs are included in General and Administrative
Expenses in the income statement.
At December 31, 1998, the Company held bonds with a fair value of
$84,965,000 which were issued by its affiliate, International Lease
Finance Corp. The amortized cost of these bonds is equal to the fair
value.
For the three months ended December 31, 1998, the Company made no
purchases or sales of invested assets to the Parent or its affiliates.
During the year ended September 30, 1998, the Company sold various
invested assets to the Parent for cash equal to their current market
value of $64,431,000. The Company recorded a net gain aggregating
$16,388,000 on such transactions.
During the year ended September 30, 1998, the Company purchased certain
invested assets from the Parent, SunAmerica Life Insurance Company and
CalAmerica Life Insurance Company for cash equal to their current
market value, which aggregated $20,666,000, $10,468,000 and $61,000,
respectively.
During the year ended September 30, 1997, the Company sold various
invested assets to SunAmerica Life Insurance Company and to CalAmerica
Life Insurance Company for cash equal to their current market value of
$15,776,000 and $15,000, respectively. The Company recorded a net gain
aggregating $276,000 on such transactions.
30
<PAGE> 62
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. RELATED-PARTY MATTERS (Continued)
During the year ended September 30, 1997, the Company purchased certain
invested assets from SunAmerica Life Insurance Company and CalAmerica
Life Insurance Company for cash equal to their current market value of
$8,717,000 and $284,000, respectively.
During the year ended September 30, 1996, the Company sold various
invested assets to the Parent and to SunAmerica Life Insurance Company
for cash equal to their current market value of $274,000 and
$47,321,000, respectively. The Company recorded a net loss aggregating
$3,000 on such transactions.
During the year ended September 30, 1996, the Company purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal
to their current market value, which aggregated $28,379,000.
13. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
Total
depreciation
and
Total amortization Pretax Total
revenues expense income assets
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
DECEMBER 31, 1998:
Annuity operations $103,626,000 $23,236,000 $ 45,962,000 $22,982,323,000
Broker-dealer
operations 11,279,000 561,000 4,444,000 59,537,000
Asset management
operations 22,974,000 4,204,000 4,091,000 104,473,000
------------ ----------- ------------ ---------------
Total $137,879,000 $28,001,000 $ 54,497,000 $23,146,333,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1998:
Annuity operations $443,407,000 $60,731,000 $178,120,000 $14,389,922,000
Broker-dealer
operations 47,363,000 1,770,000 22,401,000 55,870,000
Asset management
operations 41,040,000 14,780,000 9,171,000 104,476,000
------------ ----------- ------------ ---------------
Total $531,810,000 $77,281,000 $209,692,000 $14,550,268,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1997:
Annuity operations $332,845,000 $55,675,000 $ 74,792,000 $12,440,311,000
Broker-dealer
operations 38,005,000 689,000 16,705,000 51,400,000
Asset management
operations 35,661,000 16,357,000 2,798,000 81,518,000
------------ ----------- ------------ ---------------
Total $406,511,000 $72,721,000 $ 94,295,000 $12,573,229,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1996:
Annuity operations $256,681,000 $43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer
operations 31,053,000 449,000 13,033,000 37,355,000
Asset management
operations 33,047,000 18,295,000 2,448,000 74,410,000
------------ ----------- ------------ ---------------
Total $320,781,000 $62,718,000 $ 69,308,000 $ 9,204,535,000
============ =========== ============ ===============
</TABLE>
31
<PAGE> 63
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SUBSEQUENT EVENTS
On June 30, 1999, the Parent cancelled the $170,436,000 Note and funds
received were reclassified to Additional Paid-in Capital. Also on June
30, 1999, the Parent forgave the total interest earned on the Note of
$4,971,000.
On July 1, 1999, the New York Business acquired from MBL Life was
transferred to FSA via an assumption reinsurance agreement and the
remainder of the business converted to assumption reinsurance, which
superseded the coinsurance arrangement. As part of this transfer,
invested assets equal to $675,303,000, life reserves equal to
$282,947,000, group pension reserves equal to $404,318,000, and other
net assets of $11,962,000 were transferred to FSA. The $128,420,000
purchase price was allocated between the Company and FSA based on the
estimated future gross profits of the two blocks of business. The
portion allocated to FSA was $10,000,000.
As of August 1, 1999, the Company ceded $6,444,871,000 billion of
variable annuity liabilities through a modified coinsurance transaction
to ANLIC Insurance Company (Hawaii). As part of this transaction, the
Company received $150,000,000 on September 9, 1999, which was credited
to Deferred Amortization Costs in the balance sheet to eliminate the
unamortized costs previously deferred with respect to the ceded
business.
On September 9, 1999, the Company paid $170,500,000 to its Parent as a
return of capital. On September 14, 1999, the Parent contributed
additional capital of $54,250,000 to the Company.
32
<PAGE> 64
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
NOVEMBER 30, 1998
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
January 27, 1999
To the Board of Directors of Anchor National Life Insurance Company
and the Contractholders of its separate account,
Variable Separate Account (Portion Relating to the PATHWAY Variable Annuity)
In our opinion, the accompanying statement of net assets, including the schedule
of portfolio investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of each of the Variable Accounts constituting Variable Separate Account
(Portion Relating to the PATHWAY Variable Annuity), a separate account of Anchor
National Life Insurance Company (the "Separate Account") at November 30, 1998,
the results of their operations for the year then ended, and the changes in
their net assets for the two years then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Separate Account's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at November 30, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
<PAGE> 66
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
November 30, 1998
<TABLE>
<CAPTION>
Asset
Growth International Growth-Income Allocation High-Yield
Series Series Series Series Bond Series
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor Pathway Fund,
at market value $ 829,918,874 $ 192,294,449 $ 911,935,533 $ 134,069,402 $ 99,007,208
Liabilities 0 0 0 0 0
-------------- -------------- -------------- -------------- --------------
Net Assets $ 829,918,874 $ 192,294,449 $ 911,935,533 $ 134,069,402 $ 99,007,208
============== ============== ============== ============== ==============
Series Without Enhanced Death Benefit:
Net Assets $ 806,054,402 $ 186,294,920 $ 884,580,735 $ 130,728,844 $ 96,027,722
Accumulation units outstanding 8,319,936 8,516,932 11,186,457 4,580,246 2,110,231
Unit value of accumulation units $ 96.88 $ 21.87 $ 79.08 $ 28.54 $ 45.51
Series With Enhanced Death Benefit:
Net Assets $ 23,864,472 $ 5,999,529 $ 27,354,798 $ 3,340,558 $ 2,979,486
Accumulation units outstanding 246,591 274,584 346,306 117,171 65,544
Unit value of accumulation units $ 96.78 $ 21.85 $ 78.99 $ 28.51 $ 45.46
</TABLE>
<TABLE>
<CAPTION>
U.S.
Government
AAA-Rated Cash
Securities Management
Series Series TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Assets:
Investments in Anchor Pathway Fund,
at market value $ 79,621,006 $ 63,760,446 $2,310,606,918
Liabilities 0 0 0
-------------- -------------- --------------
Net Assets $ 79,621,006 $ 63,760,446 $2,310,606,918
============== ============== ==============
Series Without Enhanced Death Benefit:
Net Assets $ 77,798,690 $ 61,835,159
Accumulation units outstanding 3,209,061 3,221,525
Unit value of accumulation units $ 24.24 $ 19.19
Series With Enhanced Death Benefit:
Net Assets $ 1,822,316 $ 1,925,287
Accumulation units outstanding 75,252 100,393
Unit value of accumulation units $ 24.22 $ 19.18
</TABLE>
See accompanying notes to financial statements.
Page 1
<PAGE> 67
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
SCHEDULE OF PORTFOLIO INVESTMENTS
November 30, 1998
<TABLE>
<CAPTION>
Market Value
Variable Accounts Shares Per Share Market Value Cost
- -------------------------------- ------------ ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Growth Series 18,308,616 $ 45.33 $ 829,918,874 $ 648,339,558
International Series 13,644,224 14.09 192,294,449 186,084,262
Growth-Income Series 26,019,306 35.05 911,935,533 703,471,372
Asset Allocation Series 8,737,669 15.34 134,069,402 115,237,815
High-Yield Bond Series 7,714,224 12.83 99,007,208 101,694,598
U.S. Government/
AAA-Rated Securities Series 7,195,273 11.07 79,621,006 81,511,002
Cash Management Series 5,787,557 11.02 63,760,446 63,423,758
--------------- ---------------
$ 2,310,606,918 $ 1,899,762,365
=============== ===============
</TABLE>
See accompanying notes to financial statements.
Page 2
<PAGE> 68
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
November 30, 1998
<TABLE>
<CAPTION>
Asset High-Yield
Growth International Growth-Income Allocation Bond
Series Series Series Series Series
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends and capital
gains distributions $ 151,495,000 $ 57,955,000 $ 183,823,000 $ 23,690,000 $ 13,750,000
------------- ------------- ------------- ------------- -------------
Total investment income 151,495,000 57,955,000 183,823,000 23,690,000 13,750,000
------------- ------------- ------------- ------------- -------------
Expenses:
Mortality risk charge (6,489,850) (1,701,570) (7,560,779) (1,167,476) (892,561)
Expense risk charge (2,839,309) (744,437) (3,307,841) (510,771) (390,495)
Distribution expense charge (1,216,847) (319,044) (1,417,646) (218,902) (167,355)
Enhanced Death Benefit (12,392) (3,297) (15,144) (1,962) (1,521)
------------- ------------- ------------- ------------- -------------
Total expenses (10,558,398) (2,768,348) (12,301,410) (1,899,111) (1,451,932)
------------- ------------- ------------- ------------- -------------
Net investment income 140,936,602 55,186,652 171,521,590 21,790,889 12,298,068
------------- ------------- ------------- ------------- -------------
Net realized gains (losses)
from securities transactions:
Proceeds from shares sold 196,398,300 74,840,450 204,642,198 40,692,382 44,349,363
Cost of shares sold (160,297,672) (68,069,953) (156,600,915) (34,377,847) (45,071,644)
------------- ------------- ------------- ------------- -------------
Net realized gains (losses)
from securities
transactions 36,100,628 6,770,497 48,041,283 6,314,535 (722,281)
------------- ------------- ------------- ------------- -------------
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 185,732,647 41,362,085 307,525,535 35,776,827 6,092,361
End of period 181,579,316 6,210,187 208,464,161 18,831,587 (2,687,390)
------------- ------------- ------------- ------------- -------------
Change in net unrealized appreciation
(depreciation) of investments (4,153,331) (35,151,898) (99,061,374) (16,945,240) (8,779,751)
------------- ------------- ------------- ------------- -------------
Increase in net assets from operations $ 172,883,899 $ 26,805,251 $ 120,501,499 $ 11,160,184 $ 2,796,036
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
U.S.
Government
AAA-Rated Cash
Securities Management
Series Series TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Investment income:
Dividends and capital
gains distributions $ 6,410,000 $ 3,995,000 $ 441,118,000
------------- ------------- -------------
Total investment income 6,410,000 3,995,000 441,118,000
------------- ------------- -------------
Expenses:
Mortality risk charge (627,474) (558,762) (18,998,472)
Expense risk charge (274,520) (244,459) (8,311,832)
Distribution expense charge (117,651) (104,768) (3,562,213)
Enhanced Death Benefit (882) (1,395) (36,593)
------------- ------------- -------------
Total expenses (1,020,527) (909,384) (30,909,110)
------------- ------------- -------------
Net investment income 5,389,473 3,085,616 410,208,890
------------- ------------- -------------
Net realized gains (losses)
from securities transactions:
Proceeds from shares sold 29,081,492 114,649,954 704,654,139
Cost of shares sold (30,442,063) (115,009,300) (609,869,394)
------------- ------------- -------------
Net realized gains (losses)
from securities
transactions (1,360,571) (359,346) 94,784,745
------------- ------------- -------------
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (3,265,700) 540,920 573,764,675
End of period (1,889,996) 336,688 410,844,553
------------- ------------- -------------
Change in net unrealized appreciation
(depreciation) of investments 1,375,704 (204,232) (162,920,122)
------------- ------------- -------------
Increase in net assets from operations $ 5,404,606 $ 2,522,038 $ 342,073,513
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
Page 3
<PAGE> 69
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
November 30, 1998
<TABLE>
<CAPTION>
Asset
Growth International Growth-Income Allocation
Series Series Series Series
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 140,936,602 $ 55,186,652 $ 171,521,590 $ 21,790,889
Net realized gains (losses)
from securities
transactions 36,100,628 6,770,497 48,041,283 6,314,535
Change in net unrealized appreciation
(depreciation) of investments (4,153,331) (35,151,898) (99,061,374) (16,945,240)
--------------- --------------- --------------- ---------------
Increase in net assets from operations 172,883,899 26,805,251 120,501,499 11,160,184
--------------- --------------- --------------- ---------------
From capital transactions without
enhanced death benefit:
Net proceeds from units sold 11,310,144 3,843,803 13,409,149 2,037,565
Cost of units redeemed (136,909,441) (44,436,282) (149,042,375) (32,041,051)
Net transfers (38,843,723) (23,032,791) (47,914,350) (5,598,877)
--------------- --------------- --------------- ---------------
Decrease in net assets (164,443,020) (63,625,270) (183,547,576) (35,602,363)
--------------- --------------- --------------- ---------------
From capital transactions with
enhanced death benefit:
Net proceeds from units sold 60,352 12,582 86,117 48,439
Cost of units redeemed (2,262,899) (658,863) (1,708,249) (554,229)
Net transfers 22,440,174 6,419,902 26,173,576 3,571,081
--------------- --------------- --------------- ---------------
Increase in net assets 20,237,627 5,773,621 24,551,444 3,065,291
--------------- --------------- --------------- ---------------
Total decrease in net assets from
capital transactions (144,205,393) (57,851,649) (158,996,132) (32,537,072)
Increase (decrease) in net assets 28,678,506 (31,046,398) (38,494,633) (21,376,888)
Net assets at beginning of period 801,240,368 223,340,847 950,430,166 155,446,290
--------------- --------------- --------------- ---------------
Net assets at end of period $ 829,918,874 $ 192,294,449 $ 911,935,533 $ 134,069,402
=============== =============== =============== ===============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Series without enhanced death benefit:
Units sold 129,681 183,727 177,384 73,780
Units redeemed (1,575,198) (2,089,593) (1,984,051) (1,157,060)
Units transferred (439,113) (1,139,794) (638,965) (206,053)
--------------- --------------- --------------- ---------------
Decrease in units outstanding (1,884,630) (3,045,660) (2,445,632) (1,289,333)
Beginning units 10,204,566 11,562,592 13,632,089 5,869,579
--------------- --------------- --------------- ---------------
Ending units 8,319,936 8,516,932 11,186,457 4,580,246
=============== =============== =============== ===============
Series with enhanced death benefit:
Units sold 733 591 1,180 1,604
Units redeemed (25,136) (30,359) (22,792) (19,293)
Units transferred 256,158 295,902 348,315 128,582
--------------- --------------- --------------- ---------------
Increase in units outstanding 231,755 266,134 326,703 110,893
Beginning units 14,836 8,450 19,603 6,278
--------------- --------------- --------------- ---------------
Ending units 246,591 274,584 346,306 117,171
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
U.S.
Government
AAA-Rated Cash
High-Yield Bond Securities Management
Series Series Series TOTAL
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 12,298,068 $ 5,389,473 $ 3,085,616 $ 410,208,890
Net realized gains (losses)
from securities
transactions (722,281) (1,360,571) (359,346) 94,784,745
Change in net unrealized appreciation
(depreciation) of investments (8,779,751) 1,375,704 (204,232) (162,920,122)
--------------- --------------- --------------- ---------------
Increase in net assets from operations 2,796,036 5,404,606 2,522,038 342,073,513
--------------- --------------- --------------- ---------------
From capital transactions without
enhanced death benefit:
Net proceeds from units sold 1,562,604 945,018 922,605 34,030,888
Cost of units redeemed (22,720,142) (18,518,179) (44,573,172) (448,240,642)
Net transfers (4,224,512) 8,495,231 33,786,324 (77,332,698)
--------------- --------------- --------------- ---------------
Decrease in net assets (25,382,050) (9,077,930) (9,864,243) (491,542,452)
--------------- --------------- --------------- ---------------
From capital transactions with
enhanced death benefit:
Net proceeds from units sold 75 1,887 7,924 217,376
Cost of units redeemed (307,333) (80,126) (931,892) (6,503,591)
Net transfers 3,229,001 1,763,618 2,800,630 66,397,982
--------------- --------------- --------------- ---------------
Increase in net assets 2,921,743 1,685,379 1,876,662 60,111,767
--------------- --------------- --------------- ---------------
Total decrease in net assets from
capital transactions (22,460,307) (7,392,551) (7,987,581) (431,430,685)
Increase (decrease) in net assets (19,664,271) (1,987,945) (5,465,543) (89,357,172)
Net assets at beginning of period 118,671,479 81,608,951 69,225,989 2,399,964,090
--------------- --------------- --------------- ---------------
Net assets at end of period $ 99,007,208 $ 79,621,006 $ 63,760,446 $ 2,310,606,918
=============== =============== =============== ===============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Series without enhanced death benefit:
Units sold 34,384 40,919 49,397
Units redeemed (498,009) (794,063) (2,358,982)
Units transferred (82,677) 355,501 1,792,405
--------------- --------------- ---------------
Decrease in units outstanding (546,302) (397,643) (517,180)
Beginning units 2,656,533 3,606,704 3,738,705
--------------- --------------- ---------------
Ending units 2,110,231 3,209,061 3,221,525
=============== =============== ===============
Series with enhanced death benefit:
Units sold 2 80 424
Units redeemed (6,835) (3,422) (49,216)
Units transferred 71,015 75,343 149,185
--------------- --------------- ---------------
Increase in units outstanding 64,182 72,001 100,393
Beginning units 1,362 3,251 0
--------------- --------------- ---------------
Ending units 65,544 75,252 100,393
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
Page 4
<PAGE> 70
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
November 30, 1997
<TABLE>
<CAPTION>
Asset
Growth International Growth-Income Allocation
Series Series Series Series
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 111,957,150 $ 18,330,783 $ 130,421,946 $ 18,615,614
Net realized gains (losses)
from securities
transactions 43,107,341 20,574,133 54,929,245 5,567,562
Change in net unrealized appreciation
(depreciation) of investments 1,682,989 (9,876,762) 6,928,013 (826,010)
--------------- --------------- --------------- ---------------
Increase in net assets from operations 156,747,480 29,028,154 192,279,204 23,357,166
--------------- --------------- --------------- ---------------
From capital transactions without
enhanced death benefit:
Net proceeds from units sold 12,831,407 5,880,570 13,922,416 2,166,878
Cost of units redeemed (161,360,779) (59,337,362) (173,358,230) (28,179,699)
Net transfers (21,309,594) (1,541,401) (3,107,592) 4,876,445
--------------- --------------- --------------- ---------------
Decrease in net assets (169,838,966) (54,998,193) (162,543,406) (21,136,376)
--------------- --------------- --------------- ---------------
From capital transactions with
enhanced death benefit:
Net proceeds from units sold 194 167 193 16
Cost of units redeemed (39,316) (12,846) (671) (36,585)
Net transfers 1,206,650 179,794 1,338,774 201,741
--------------- --------------- --------------- ---------------
Increase in net assets 1,167,528 167,115 1,338,296 165,172
--------------- --------------- --------------- ---------------
Total increase (decrease)
in net assets from
capital transactions (168,671,438) (54,831,078) (161,205,110) (20,971,204)
Increase (decrease) in net assets (11,923,958) (25,802,924) 31,074,094 2,385,962
Net assets at beginning of period 813,164,326 249,143,771 919,356,072 153,060,328
--------------- --------------- --------------- ---------------
Net assets at end of period $ 801,240,368 $ 223,340,847 $ 950,430,166 $ 155,446,290
=============== =============== =============== ===============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Series without enhanced death benefit:
Units sold 186,747 314,590 225,903 90,801
Units redeemed (2,297,524) (3,095,729) (2,777,907) (1,154,224)
Units transferred (358,032) (66,255) (59,649) 201,853
--------------- --------------- --------------- ---------------
Decrease in units outstanding (2,468,809) (2,847,394) (2,611,653) (861,570)
Beginning units 12,673,375 14,409,986 16,243,742 6,731,149
--------------- --------------- --------------- ---------------
Ending units 10,204,566 11,562,592 13,632,089 5,869,579
=============== =============== =============== ===============
Series with enhanced death benefit:
Units sold 2 8 3 1
Units redeemed (529) (660) (11) (1,439)
Units transferred 15,363 9,102 19,611 7,716
--------------- --------------- --------------- ---------------
Increase in units outstanding 14,836 8,450 19,603 6,278
Beginning units 0 0 0 0
--------------- --------------- --------------- ---------------
Ending units 14,836 8,450 19,603 6,278
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
U.S.
Government
AAA-Rated Cash
High-Yield Bond Securities Management
Series Series Series TOTAL
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 11,039,186 $ 7,249,379 $ 3,791,919 $ 301,405,977
Net realized gains (losses)
from securities
transactions 842,548 (2,010,842) (841,224) 122,168,763
Change in net unrealized appreciation
(depreciation) of investments 1,464,999 (1,481,956) (27,049) (2,135,776)
--------------- --------------- --------------- ---------------
Increase in net assets from operations 13,346,733 3,756,581 2,923,646 421,438,964
--------------- --------------- --------------- ---------------
From capital transactions without
enhanced death benefit:
Net proceeds from units sold 1,877,609 790,626 1,788,824 39,258,330
Cost of units redeemed (28,666,386) (25,107,597) (53,717,792) (529,727,845)
Net transfers 715,689 (6,755,159) 28,995,302 1,873,690
--------------- --------------- --------------- ---------------
Decrease in net assets (26,073,088) (31,072,130) (22,933,666) (488,595,825)
--------------- --------------- --------------- ---------------
From capital transactions with
enhanced death benefit:
Net proceeds from units sold 15 15 0 600
Cost of units redeemed (34) (25,968) 0 (115,420)
Net transfers 60,737 98,108 0 3,085,804
--------------- --------------- --------------- ---------------
Increase in net assets 60,718 72,155 0 2,970,984
--------------- --------------- --------------- ---------------
Total increase (decrease)
in net assets from
capital transactions (26,012,370) (30,999,975) (22,933,666) (485,624,841)
Increase (decrease) in net assets (12,665,637) (27,243,394) (20,010,020) (64,185,877)
Net assets at beginning of period 131,337,116 108,852,345 89,236,009 2,464,149,967
--------------- --------------- --------------- ---------------
Net assets at end of period $ 118,671,479 $ 81,608,951 $ 69,225,989 $ 2,399,964,090
=============== =============== =============== ===============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Series without enhanced death benefit:
Units sold 45,079 37,070 100,054
Units redeemed (680,389) (1,160,448) (2,957,589)
Units transferred 17,385 (314,634) 1,603,072
--------------- --------------- ---------------
Decrease in units outstanding (617,925) (1,438,012) (1,254,463)
Beginning units 3,274,458 5,044,716 4,993,168
--------------- --------------- ---------------
Ending units 2,656,533 3,606,704 3,738,705
=============== =============== ===============
Series with enhanced death benefit:
Units sold 0 1 0
Units redeemed (1) (1,154) 0
Units transferred 1,363 4,404 0
--------------- --------------- ---------------
Increase in units outstanding 1,362 3,251 0
Beginning units 0 0 0
--------------- --------------- ---------------
Ending units 1,362 3,251 0
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
Page 5
<PAGE> 71
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Separate Account (Portion Relating to the PATHWAY Variable
Annuity) of Anchor National Life Insurance Company (the "Separate
Account") is a segregated investment account of Anchor National Life
Insurance Company (the "Company"). The Company is an indirect, wholly
owned subsidiary of SunAmerica Inc. The Separate Account is
registered as a segregated unit investment trust pursuant to the
provisions of the Investment Company Act of 1940, as amended.
The Separate Account is composed of seven variable series (the
"Variable Accounts"). Each of the Variable Accounts is invested
solely in shares of a designated series of the Anchor Pathway Fund
(the "Fund"). The Fund is a diversified, open-end, affiliated
investment company, which retains an investment advisor to assist in
the investment activities of the Fund. The contractholder may elect
to have payments allocated to a guaranteed-interest fund of the
Company (the "General Account"), which is not a part of the Separate
Account. If no election is made, all payments are allocated to the
Cash Management Series of the Separate Account. The financial
statements include balances allocated by the contractholder to the
seven Variable Accounts and do not include balances allocated to the
General Account.
The investment objectives and policies of the seven series of the
Fund are summarized below:
The GROWTH SERIES seeks growth of capital. This portfolio invests
primarily in common stocks or securities with common stock
characteristics.
The INTERNATIONAL SERIES seeks long-term growth of capital. This
portfolio invests in securities of issuers domiciled outside the
United States.
The GROWTH-INCOME SERIES seeks growth of capital and income. This
portfolio invests primarily in securities which demonstrate the
potential for appreciation and/or dividends.
1
<PAGE> 72
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The ASSET ALLOCATION SERIES seeks high total return (including income
and capital gains) consistent with preservation of capital over the
long term. This portfolio invests in a diversified selection of
common stocks and other equity-type securities (such as convertible
bonds and preferred stocks), bonds and other intermediate and
long-term fixed-income securities and money market instruments (debt
securities maturing in one year or less) in any combination.
The HIGH-YIELD BOND SERIES seeks a high level of current income and
secondarily seeks capital appreciation. This portfolio invests
primarily in intermediate and long-term corporate obligations, with
emphasis on higher-yielding, higher-risk, lower-rated or unrated
securities.
The U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES seeks a high level of
current income consistent with prudent investment risk and
preservation of capital. This portfolio invests primarily in a
combination of (i) securities guaranteed by the U.S. Government and
(ii) other debt securities rated AAA by Standard & Poor's Corporation
or Aaa by Moody's Investors Service, Inc. or that have not received a
rating but are determined to be of comparable quality by the
investment advisor.
The CASH MANAGEMENT SERIES seeks high current yield while preserving
capital. This portfolio invests in a diversified selection of money
market instruments.
Purchases and sales of shares of the series of the Fund are valued at
the net asset values of the shares on the date the shares are
purchased or sold. Dividends and capital gains distributions are
recorded when received. Realized gains and losses on the sale of
investments in the Fund are recognized at the date of sale and are
determined on an average cost basis.
In October 1997, the Company began to offer an enhanced death benefit
to existing and new policyholders. Choice of this benefit results in
a 0.10% increase in the Mortality Risk Charge (Note 2), and therefore
in slightly reduced accumulation unit values. The two accumulation
unit values for each Variable Account are computed daily based on the
total net assets applicable to policies with and without the enhanced
death benefit, respectively. The accumulation unit values, the
transactions, the number of units and the separate account assets
related to policies with and without the enhanced death benefit are
shown separately in the financial statements.
2
<PAGE> 73
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS
Charges and deductions are applied against the current value of the
Separate Account and are paid as follows:
CONTINGENT DEFERRED SALES CHARGE: The contract value may be withdrawn
at any time during the accumulation period. There is a free
withdrawal amount for the first withdrawal during a contract year
after the first contract year. The free withdrawal amount equals 10%
of the total of purchase payments made more than one year prior to
the date of withdrawal. Should a withdrawal exceed the free
withdrawal amount, a contingent deferred sales charge of 5% is
imposed on the excess for the first five contract years and paid to
the Company.
The withdrawal charge is deducted from the remaining contract value
so that the actual reduction in contract value as a result of the
withdrawal will be greater than the withdrawal amount requested and
paid. For purposes of determining the withdrawal charge, withdrawals
will be allocated to the oldest purchase payments first so that all
withdrawals are allocated to purchase payments to which that the
lowest (if any) withdrawal charge will apply.
CONTRACT ADMINISTRATION CHARGE: An annual contract administration
charge of $30 is charged against each contract, which reimburses the
Company for expenses incurred in establishing and maintaining records
relating to a contract. The contract administration charge will be
assessed on each anniversary of the issue date of the contract prior
to the date when annuity payments begin. In the event that a total
surrender of contract value is made, the entire charge will be
assessed as of the date of surrender.
TRANSFER FEE: A transfer fee of $25 ($10 in Pennsylvania and
Texas) is assessed on each transfer of funds
in excess of fifteen transactions within a contract year.
PREMIUM TAXES: Premium taxes or other taxes payable to a state or
other governmental entity will be charged against the contract
values. Some states assess premium taxes at the time purchase
payments are made; others assess premium taxes at the time annuity
payments begin. The Company currently intends to deduct premium taxes
at the time of surrender, upon death of the contractholder or upon
annuitization; however, it reserves the right to deduct premium taxes
when incurred. Premium taxes generally range from 0% to 3.5%.
3
<PAGE> 74
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS (continued)
MORTALITY RISK CHARGE: The Company deducts a mortality risk charge,
which equals an annual rate of 0.80% of the net asset value of each
series, computed on a daily basis. The mortality risk charge is
compensation for the mortality risks assumed by the Company from its
contractual obligations to make annuity payments after the contract
has annuitized for the life of the annuitant and to provide a death
benefit if the contractholder dies prior to the date annuity payments
begin. If the contractholder elects the optional enhanced guaranteed
minimum death benefit, the mortality risk premium will equal an
annual rate of 0.90% of the net asset value of each series, computed
on a daily basis.
EXPENSE RISK CHARGE: The Company deducts an expense risk charge,
which equals an annual rate of 0.35% of the net asset value of each
series, computed on a daily basis. The expense risk charge is
compensation for the risk assumed by the Company that the cost of
administering the contracts will exceed the amount received from the
contract administration charge.
DISTRIBUTION EXPENSE CHARGE: The Company deducts a distribution
expense charge at an annual rate of 0.15% of the net asset value of
each series, computed on a daily basis. The distribution expense
charge is designed to compensate the Company for assuming a
distribution expense risk due to the guarantee that the contingent
deferred sales charge stated in the Contract will not be increased.
SEPARATE ACCOUNT INCOME TAXES: The Company currently does not
maintain a provision for taxes, but has reserved the right to
establish such a provision for taxes in the future if it determines,
in its sole discretion, that it will incur a tax as a result of the
operation of the Separate Account.
4
<PAGE> 75
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT IN ANCHOR PATHWAY FUND
The aggregate cost of the Fund's shares acquired and the aggregate
proceeds from shares sold during the year ended November 30, 1998
consist of the following:
<TABLE>
<CAPTION>
Cost of Shares Proceeds from
Variable Accounts Acquired Shares Sold
--------------------------- --------------- --------------
<S> <C> <C>
Growth Series $ 193,129,509 $ 196,398,300
International Series 72,175,453 74,840,450
Growth-Income Series 217,167,656 204,642,198
Asset Allocation Series 29,946,198 40,692,382
High-Yield Bond Series 34,187,124 44,349,363
U.S. Government/AAA-Rated
Securities Series 27,078,414 29,081,492
Cash Management Series 109,747,988 114,649,954
=============== ==============
</TABLE>
5
<PAGE> 76
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. FEDERAL INCOME TAXES
The Company qualifies for federal income tax treatment granted to
life insurance companies under subchapter L of the Internal Revenue
Service Code (the "Code"). The operations of the Separate Account are
part of the total operations of the Company and are not taxed
separately. The Separate Account is not treated as a regulated
investment company under the Code.
6
<PAGE> 77
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
- ----------------------------------------------
(a) Financial Statements
- ---------------------------
The following financial statements are included in Part B of the
Registration Statement:
Consolidated Financial Statements of Anchor National Life
Insurance Company for the fiscal year ended September 30, 1998
Audited Transition Report of Anchor National Life Insurance
Company as of and for the three months ended December 31, 1998.
Financial Statements of Variable Separate Account (Portion
Relating to the PATHWAY Variable Annuity) for the fiscal year
ended November 30, 1998
(b) Exhibits
- ----------------
<TABLE>
<S> <C> <C>
(1) Resolutions Establishing Separate Account...... ***
(2) Custody Agreements............................. **
(3) (a) Distribution Contract...................... ***
(b) Selling Agreement.......................... ***
(4) Variable Annuity Contract...................... ***
(5) Application for Contract....................... ***
(6) Depositor - Corporate Documents
(a) Certificate of Incorporation............... ***
(b) By-Laws.................................... ***
(7) Reinsurance Contract........................... **
(8) Fund Participation Agreement................... ***
(9) Opinion of Counsel............................. ***
Consent of Counsel............................. ***
(10) Consent of Independent Accountants............. *
(11) Financial Statements Omitted from Item 23...... **
(12) Initial Capitalization Agreement............... **
(13) Performance Computations....................... **
(14) Diagram and Listing of All Persons Directly
or Indirectly Controlled By or Under Common
Control with Anchor National Life Insurance
Company, the Depositor of Registrant........... *
(15) Powers of Attorney............................. ****
(27) Financial Data Schedules....................... **
</TABLE>
* Filed Herewith
** Not Applicable
*** Filed on January 29, 1998, Post-Effective Amendments 27 and 20 to this
Registration Statement
**** Filed on January 27, 1997, Post-Effective Amendment 26 and 19 to this
Registration Statement
Item 25. Directors and Officers of the Depositor
- -------------------------------------------------
The officers and directors of Anchor National Life Insurance
Company are listed below. Their principal business address is 1 SunAmerica
Center, Los Angeles, California 90067-6022, unless otherwise noted.
Name Position
- ---- --------
Eli Broad Chairman, President and
Chief Executive Officer
Jay S. Wintrob Director and Executive
Vice President
Peter McMillan Director
James R. Belardi Director and Senior Vice President
Jana W. Greer Director and Senior Vice President
Susan L. Harris Director, Senior Vice President
and Secretary
<PAGE> 78
Scott L. Robinson Director and Senior Vice President
N. Scott Gillis Senior Vice President and
Controller
Edwin R. Raquel Senior Vice President and Chief
Actuary
Mark H. Gamsin Director and Senior Vice President
Scott H. Richland Vice President
J. Franklin Grey Vice President
Edward P. Nolan* Vice President
Greg Outcalt Vice President
P. Daniel Demko, Jr. Vice President
Kevin J. Hart Vice President
David Bechtel Vice President and Treasurer
- ------------------
* 88 Bradley Road, P.O. Box 4005, Woodbridge, Connecticut 06525
Item 26. Persons Controlled By or Under Common Control With Depositor or
- -------------------------------------------------------------------------
Registrant
- ----------
The Registrant is a separate account of Anchor National Life
Insurance Company (Depositor). For a complete listing and diagram of all persons
directly or indirectly controlled by or under common control with the Depositor
or Registrant, see Exhibit 14 of the Initial Registration Statement of Variable
Annuity Account Seven and Anchor National Life Insurance Company, (File Nos.
333-65965 and 811-09003)(N-4) and (333-65953)(S-1), which is incorporated herein
by reference. As of January 4, 1999, Anchor National became an indirect
wholly-owned subsidiary of American International Group, Inc. ("AIG"). An
organizational chart for AIG can be found in Form 10-K, SEC file number
001-08787 filed March 31, 1999.
Item 27. Number of Contract Owners
- ------------------------------------
As of December 31, 1998, the number of Contracts funded by the
Variable Separate Account was 38,366, of which 18,795 were owners of Qualified
Contracts and 19,571 were owners of Non-Qualified Contracts.
Item 28. Indemnification
- -------------------------
None.
Item 29. Principal Underwriter
- --------------------------------
SunAmerica Capital Services, Inc. serves as distributor to the
Registrant.
SunAmerica Capital Services, Inc. also acts as the principal underwriter
to the following:
- Presidential Variable Account One
- FS Variable Separate Account
- Variable Annuity Account One
- FS Variable Annuity Account One
- Variable Annuity Account Four
- Variable Annuity Account Five
- Variable Annuity Account Seven
- SunAmerica Income Funds
- SunAmerica Equity Funds
- SunAmerica Money Market Funds, Inc.
- Style Select Series, Inc.
- SunAmerica Strategic Investment Series, Inc.
Its principal business address is 733 Third Avenue, 4th Floor,
New York, New York 10017. The following are the directors and officers of
SunAmerica Capital Services, Inc.
<TABLE>
<CAPTION>
Name Position with Distributor
---- -------------------------
<S> <C>
J. Steven Neamtz Director and President
Robert M. Zakem Director, Executive Vice
President, General Counsel
and Assistant Secretary
Peter Harbeck Director
James Nichols Vice President
Susan L. Harris Secretary
Debbie Potash-Turner Controller
Net
Distribution Compensation
</TABLE>
<PAGE> 79
<TABLE>
Name of Discounts and on Redemption Brokerage
Distributor Commissions Annuitization Commission Commissions*
- ------------ -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
SunAmerica None None None None
Capital
Services, Inc.
</TABLE>
- ------------------
* Distribution fee is paid by Anchor National Life Insurance Company.
<PAGE> 80
Item 30. Location of Accounts and Records
- --------------------------------------------
Anchor National Life Insurance Company, the Depositor for the
Registrant, is located at 1 SunAmerica Center, Los Angeles, California
90067-6022. SunAmerica Capital Services, Inc., the distributor of the Contracts,
is located at 733 Third Avenue, 4th Floor, New York, New York 10017. Each
maintains those accounts and records required to be maintained by it pursuant to
Section 31(a) of the Investment Company Act and the rules promulgated
thereunder.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02100, maintains certain accounts and records pursuant to the
instructions of the Registrant.
Item 31. Management Services
- -----------------------------
Not Applicable.
Item 32. Undertakings
- ----------------------
Registrant undertakes to (1) file post-effective amendments to
this Registration Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are never more than
16 months old for so long as payments under the variable annuity Contracts may
be accepted; (2) include either (A) as part of any application to purchase a
Contract offered by the prospectus forming a part of the Registration Statement,
a space that an applicant can check to request a Statement of Additional
Information, or (B) a postcard or similar written communication affixed to or
included in the Prospectus that the Applicant can remove to send for a Statement
of Additional Information; and (3) deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-4 promptly upon written or oral request.
Item 33. Representation
- ------------------------
a) The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been
complied with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including
the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of (1) the
restrictions on redemption imposed by Section 403(b)(11),
<PAGE> 81
and (2) other investment alternatives available under the employer's
Section 403(b) arrangement to which the participant may elect to
transfer his contract value.
b) REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF
1940: The Company and Registrant represent that the fees and charges to be
deducted under the variable annuity contract described in the prospectus
contained in this registration statement are, in the aggregate, reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed in connection with the contract.
<PAGE> 82
SIGNATURES
As required by the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements
of Securities Act Rule 485 for effectiveness of this Registration Statement
and has caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf, in the City of Los Angeles, and the State of
California, on this 14th day of December, 1999.
VARIABLE SEPARATE ACCOUNT
(Registrant)
By: ANCHOR NATIONAL LIFE INSURANCE COMPANY
(Depositor)
By: /S/ JAY S. WINTROB
----------------------------------------
Jay S. Wintrob
Executive Vice President
By: ANCHOR NATIONAL LIFE INSURANCE COMPANY
(Depositor, on behalf of itself and
Registrant)
By: /S/ JAY S. WINTROB
----------------------------------------
Jay S. Wintrob
Executive Vice President
As required by the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed by the following persons
in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
ELI BROAD* President, Chief
- ------------------------ Executive Officer and
Eli Broad Chairman of the Board
(Principal Executive
Officer)
SCOTT L. ROBINSON* Senior Vice President
- ------------------------ and Director
Scott L. Robinson (Principal Financial
Officer)
N. SCOTT GILLIS* Senior Vice President
- ------------------------ and Controller
N. Scott Gillis (Principal Accounting
Officer)
JAMES R. BELARDI* Director
- ------------------------
</TABLE>
<PAGE> 83
<TABLE>
<S> <C> <C>
James R. Belardi
JANA W. GREER* Director
- ------------------------
Jana W. Greer
/S/ SUSAN L. HARRIS Director December 14, 1999
- ------------------------
Susan L. Harris
PETER MCMILLAN* Director
- ------------------------
Peter McMillan
JAY S. WINTROB* Director
- ------------------------
Jay S. Wintrob
</TABLE>
* By: /S/ SUSAN L. HARRIS Attorney-in-Fact
----------------------
Susan L. Harris
Date: December 14, 1999
** KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints SUSAN L. HARRIS AND CHRISTINE A. NIXON or
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
as fully to all intents as he might or could do in person, including
specifically, but without limiting the generality of foregoing, to (i) take any
action to comply with any rules, regulations or requirements of the Securities
and Exchange Commission under the federal securities laws; (ii) make
application for and secure any exemptions from the federal securities laws;
(iii) register additional annuity contracts under the federal securities laws,
if registration is deemed necessary. The undersigned hereby ratifies and
confirms all that said attorneys-in-fact and agents or any of them, or their
substitutes, shall do or cause to be done by virtue thereof.
**/s/ MARC H. GAMSIN Director December 14, 1999
- ------------------------
Marc H. Gamsin
<PAGE> 84
EXHIBIT INDEX
Exhibit Description
- ------- -----------
Exhibit 10 Consent of Independent Accountants
Exhibit 14 Diagram and Listing of All Persons Directly or
Indirectly Controlled By or Under Common Control with
Anchor National Life Insurance Company, the Depositor of
Registrant.
<PAGE> 1
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-4 for Variable
Separate Account (Portion Relating to the PATHWAY Variable Annuity) of Anchor
National Life Insurance Company of our report dated November 19, 1999 and
November 9, 1998, relating to the financial statements of Anchor National Life
Insurance Company, and of our report dated January 27, 1999, relating to the
financial statements of Variable Separate Account (Portion Relating to the
PATHWAY Variable Annuity), which appear in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Financial Statements" in such
Statement of Additional Information.
PricewaterhouseCoopers LLP
Los Angeles, California
December 15, 1999
<PAGE> 1
EXHIBIT 14
DIAGRAM AND LISTING OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH ANCHOR NATIONAL LIFE
INSURANCE COMPANY, THE DEPOSITOR OF REGISTRANT
The Registrant is a separate account of Anchor National Life
Insurance Company (Depositor). For a complete listing and diagram of all persons
directly or indirectly controlled by or under common control with the Depositor
or Registrant, see Exhibit 14 of the Initial Registration Statement of Variable
Annuity Account Seven and Anchor National Life Insurance Company, (File Nos.
333-65965 and 811-09003)(N-4) and (333-65953)(S-1), which is incorporated herein
by reference. As of January 4, 1999, Anchor National became an indirect
wholly-owned subsidiary of American International Group, Inc. ("AIG"). An
organizational chart for AIG can be found in Form 10-K, SEC file number
001-08787 filed March 31, 1999.
