SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission file number 33-5014
FIRST SUNAMERICA LIFE INSURANCE COMPANY
---------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 06-0992729
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
733 Third Avenue, 4th Floor, New York, New York 10017
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (800)272-3007
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock on
August 13, 1996 was as follows:
Common Stock, par value $10,000 per share, 300 shares outstanding
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
Part I - Financial Information
Balance Sheet as of
June 30, 1996 and September 30, 1995 3 - 4
Income Statement for the
three months and nine months ended
June 30, 1996 and 1995 5
Statement of Cash Flows for the
nine months ended June 30, 1996 and 1995 6 - 7
Notes to Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 18
Part II - Other Information 19
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET
(Unaudited)
June 30, September 30,
1996 1995
-------------- --------------
ASSETS
Investments:
Cash and short-term investments $ 6,756,000 $ 6,382,000
Bonds and notes:
Available for sale, at fair value
(amortized cost: June 1996,
$128,844,000; September 1995,
$109,217,000) 127,186,000 107,771,000
Held for investment, at amortized cost
(fair value: September 1995,
$2,289,000) --- 2,297,000
Mortgage loans 3,100,000 4,733,000
Common stocks, at fair value (cost:
June 1996, $0; September 1995,
$112,000) 45,000 35,000
-------------- --------------
Total investments 137,087,000 121,218,000
Variable annuity assets 55,409,000 32,760,000
Receivable from brokers for sales of
securities --- 815,000
Accrued investment income 1,341,000 928,000
Deferred acquisition costs 9,977,000 6,491,000
Income taxes currently receivable 311,000 ---
Other assets 870,000 945,000
-------------- --------------
TOTAL ASSETS $ 204,995,000 $ 163,157,000
============== ==============
3
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET (Continued)
(Unaudited)
June 30, September 30,
1996 1995
-------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 125,069,000 $ 106,332,000
Payable to brokers for purchases of
securities 879,000 ---
Income taxes currently payable --- 23,000
Other liabilities 734,000 1,980,000
-------------- --------------
Total reserves, payables
and accrued liabilities 126,682,000 108,335,000
-------------- --------------
Variable annuity liabilities 55,409,000 32,760,000
-------------- --------------
Deferred income taxes 748,000 244,000
-------------- --------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000
Additional paid-in capital 14,428,000 14,428,000
Retained earnings 5,647,000 5,250,000
Net unrealized losses on debt and
equity securities available for sale (919,000) (860,000)
-------------- --------------
Total shareholder's equity 22,156,000 21,818,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 204,995,000 $ 163,157,000
============== ==============
See notes to financial statements.
4
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
<TABLE>
INCOME STATEMENT
For the three months and nine months ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Nine Months
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income $ 2,580,000 $ 2,243,000 $ 7,280,000 $ 5,598,000
----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts (1,819,000) (1,485,000) (5,180,000) (3,450,000)
Senior indebtedness --- (8,000) (4,000) (8,000)
----------- ----------- ----------- -----------
Total interest expense (1,819,000) (1,493,000) (5,184,000) (3,458,000)
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 761,000 750,000 2,096,000 2,140,000
----------- ----------- ----------- -----------
NET REALIZED INVESTMENT LOSSES (14,000) (925,000) (542,000) (1,199,000)
----------- ----------- ----------- -----------
VARIABLE ANNUITY FEE INCOME 188,000 103,000 459,000 292,000
----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges 96,000 34,000 172,000 140,000
General and administrative
expenses (371,000) (284,000) (1,093,000) (829,000)
Amortization of deferred
acquisition costs (125,000) (75,000) (377,000) (225,000)
Other, net (48,000) (8,000) (88,000) (17,000)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES (448,000) (333,000) (1,386,000) (931,000)
----------- ----------- ----------- -----------
PRETAX INCOME (LOSS) 487,000 (405,000) 627,000 302,000
Income tax benefit (expense) (181,000) 130,000 (230,000) (94,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 306,000 $ (275,000) $ 397,000 $ 208,000
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the nine months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 397,000 $ 208,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Interest credited to fixed annuity
contracts 5,180,000 3,450,000
Net realized investment losses 542,000 1,199,000
Accretion of net discounts
on investments (247,000) (255,000)
Amortization of goodwill 43,000 43,000
Provision for deferred income taxes 535,000 744,000
Change in:
Deferred acquisition costs (3,486,000) (2,311,000)
Income taxes receivable/payable (334,000) (917,000)
Other liabilities 117,000 66,000
Other, net (354,000) (300,000)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,393,000 1,927,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes available for sale (80,405,000) (97,306,000)
Common stock --- (112,000)
Sales of bonds and notes available for
sale 56,451,000 45,228,000
Redemptions and maturities of:
Bonds and notes available for sale 8,131,000 11,578,000
Bonds and notes held for investment --- 1,013,000
Mortgage loans 1,637,000 26,000
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (14,186,000) (39,573,000)
------------ ------------
6
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS (Continued)
For the nine months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 26,098,000 $ 47,457,000
Net exchanges to (from) the fixed accounts
of variable annuity contracts (2,731,000) 125,000
Withdrawal payments on fixed annuity
contracts (7,199,000) (12,309,000)
Claims and annuity payments on fixed
annuity contracts (2,638,000) (2,353,000)
Net receipts from (repayments of) other
short-term financings (1,363,000) 257,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,167,000 33,177,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 374,000 (4,469,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,382,000 14,785,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 6,756,000 $ 10,316,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 4,000 $ 8,000
============ ============
Income taxes paid $ 30,000 $ 267,000
============ ============
See notes to financial statements.
7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
First SunAmerica Life Insurance Company (the "Company") is an indirect wholly
owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the
Company, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the Company's financial position as of June 30, 1996, and the results
of its operations for the three months and nine months ended June 30, 1996 and
1995 and its cash flows for the nine months ended June 30, 1996 and 1995. The
results of operations for the three months and nine months ended June 30, 1996
are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements for the fiscal year ended September 30,
1995, contained in the Company's Annual Report on Form 10-K.
2. Reclassification of Securities Held for Investment
--------------------------------------------------
On December 1, 1995, the Company reassessed the appropriateness of classifying
a portion of its portfolio of bonds and notes as held for investment (the "Held
for Investment Portfolio"). This reassessment was made pursuant to the
provisions of "Special Report: A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued by
the Financial Accounting Standards Board in November 1995. As a result of its
reassessment, the Company reclassified all of its Held for Investment Portfolio
as available for sale. At December 1, 1995, the amortized cost of the Held for
Investment Portfolio aggregated $2,296,000 and its fair value was $2,353,000.
Upon reclassification, the resulting net unrealized gain of $57,000 was
credited to Net Unrealized Gains (Losses) on Debt and Equity Securities
Available for Sale in the shareholder's equity section of the balance sheet.
8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial
condition and results of operations of First SunAmerica Life Insurance Company
(the "Company") for the three months and nine months ended June 30, 1996 and
1995.
RESULTS OF OPERATIONS
NET INCOME totaled $0.3 million in the third quarter of 1996, compared
with net loss of $0.3 million in the third quarter of 1995. For the nine
months, net income amounted to $0.4 million in 1996, compared with $0.2 million
in 1995.
PRETAX INCOME totaled $0.5 million in the third quarter of 1996, compared
with a pretax loss of $0.4 million in the third quarter of 1995. The $0.9
million increase primarily resulted from a decline in net realized investment
losses. For the nine months, pretax income totaled $0.6 million in 1996 and
$0.3 million in 1995. The $0.3 million increase in the nine months of 1996
primarily resulted from reduced net realized investment losses, partially
offset by increased general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other interest-
bearing liabilities, totaled $0.8 million in the third quarters of both 1996
and 1995. These amounts represent net investment spreads of 2.22% on average
invested assets (computed on a daily basis) of $137.3 million in the third
quarter of 1996 and 2.61% on average invested assets of $114.8 million in the
third quarter of 1995. For the nine months, net investment income totaled $2.1
million in both 1996 and 1995, and represented net investment spreads of 2.14%
and 2.93%, respectively, on average invested assets of $130.7 million and $97.4
million, respectively.
Net investment spreads also include the effect of income earned on the
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $13.2 million in the third quarter of 1996, $17.2
million in the third quarter of 1995, $14.4 million in the nine months of 1996
and $17.9 million in the nine months of 1995. The difference between the
Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities was 1.65% in the third quarter of 1996, 1.69% in
the third quarter of 1995, 1.49% in the nine months of 1996 and 1.86% in the
nine months of 1995.
Investment income totaled $2.6 million in the third quarter of 1996,
compared with $2.2 million in the third quarter of 1995. For the nine months,
investment income amounted to $7.3 million in 1996, up $1.7 million from the
$5.6 million recorded in 1995. Investment income increased in 1996 as a result
of higher levels of average invested assets, offset slightly by a decline in
portfolio yields. The yield on average invested assets declined to 7.52% in
the third quarter of 1996 from 7.81% in the third quarter of 1995. For the
nine months, the yield on average invested assets decreased to 7.43% in 1996
from 7.66% in 1995. The higher yields in the 1995 periods reflected the
effects of both higher short-term interest rates and extension fee income
earned on certain bonds in the second and third quarters of 1995. Over the
9
<PAGE>
last eleven fiscal quarters, the Company's quarterly investment yields on
average invested assets have ranged from 6.28% to 7.81%; however, there can be
no assurance that the Company will achieve similar yields in future periods.
Total interest expense aggregated $1.8 million in the third quarter of
1996 and $1.5 million in the third quarter of 1995. For the nine months,
interest expense aggregated $5.2 million in 1996, compared with $3.5 million
in 1995. The average rate paid on fixed annuity contracts declined to 5.87%
in the third quarter of 1996 from 6.11% in the third quarter of 1995. For the
nine months, the average rate paid on fixed annuities was 5.94% in 1996,
compared with 5.80% in 1995. Fixed annuity contracts averaged $124.1 million
during the third quarter of 1996, compared with $97.1 million during the third
quarter of 1995. For the nine months, fixed annuity contracts averaged $116.2
million in 1996, compared with $79.3 million in 1995. The decline in average
rates paid on fixed annuities in the third quarter of 1996, compared to the
third quarter of 1995, is due to the impact of generally higher prevailing
interest rates in 1995. The slight increase in the average rates paid on fixed
annuities for the nine months of 1996 is primarily due to the impact of lower
crediting rates during the first two quarters of 1995, resulting from the lower
prevailing interest rates experienced in 1994.
The growth in average invested assets since 1995 reflects sales of the
Company's fixed annuity products (including the fixed accounts of variable
annuity products). Since June 30, 1995, fixed annuity premiums have aggregated
$30.3 million. Such premiums totaled $5.6 million in the third quarter of
1996, down from the $17.6 million in the third quarter of 1995, and $26.1
million in the nine months of 1996, down from the $47.5 million in the nine
months of 1995. These premiums include premiums for the fixed accounts of
variable annuities totaling $5.4 million, $1.6 million, $21.9 million and $2.0
million, respectively. The increase in premiums for the fixed accounts of
variable annuities in 1996 resulted primarily from increased sales of the
Company's Polaris product.
NET REALIZED INVESTMENT LOSSES totaled $14,000 in the third quarter of
1996 and $925,000 in the third quarter of 1995. These amounts represent 0.04%
and 3.22%, respectively, of average invested assets. Net realized investment
losses in the third quarter of 1996 include impairment writedowns of $95,000
applied to defaulted bonds. Therefore, net gains from sales of investments
totaled $81,000 in the third quarter of 1996, compared with net losses from
sales of investments of $925,000 in the third quarter of 1995. For the nine
months, net realized investment losses totaled $0.5 million in 1996, compared
with $1.2 million in 1995, and represent 0.55% and 1.64%, respectively, of
average invested assets. Impairment writedowns of $0.1 million, applied to
defaulted bonds, are included in 1996. Therefore, for the nine months, net
losses from sales of investments totaled $0.4 million in 1996 and $1.2 million
in 1995. There were no impairment writedowns in 1995.
Net losses from sales of investments realized in 1996 include $0.3
million of net losses ($0.1 million of net gains in the third quarter) realized
on $58.0 million of sales of bonds ($19.0 million in the third quarter), and
include $53.0 million of sales of mortgage backed securities ("MBSs") and $5.4
million of sales of non-investment-grade bonds made primarily to maximize total
return. Net losses for the nine months of 1995 are also related to sales of
bonds and MBSs that were made primarily to maximize total return.
10
<PAGE>
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees increased to
$188,000 in the third quarter of 1996 from $103,000 in the third quarter of
1995. For the nine months, variable annuity fees increased to $0.5 million in
1996 from $0.3 million in 1995. These increases reflect growth in average
variable annuity assets, principally due to increased market values and the
receipt of variable annuity premiums, partially offset by surrenders. Variable
annuity assets averaged $50.2 million during the third quarter of 1996 and
$27.8 million during the third quarter of 1995. For the nine months, variable
annuity assets averaged $41.3 million in 1996, compared with $26.6 million in
1995. Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, have aggregated $22.1 million since June
30, 1995. Variable annuity premiums totaled $8.5 million in the third quarter
of 1996, up significantly from $1.5 million in the third quarter of 1995. For
the nine months, variable annuity premiums totaled $18.5 million in 1996,
compared with $2.3 million in 1995. These increases in premiums were primarily
due to the introduction of two new variable annuity products during March and
December of 1995. The Company has encountered increased competition in the
variable annuity marketplace during recent years and anticipates that the
market will remain highly competitive for the foreseeable future.
SURRENDER CHARGES on fixed and variable annuities totaled $96,000 in the
third quarter of 1996 and $34,000 in the third quarter of 1995. For the nine
months, surrender charges totaled $172,000 in 1996 and $140,000 in 1995.
Surrender charges generally are assessed on annuity withdrawals at declining
rates during the first five to seven years of the contract. Withdrawal
payments, which include surrenders and lump-sum annuity benefits, totaled $4.3
million in the third quarter of 1996 and $2.8 million in the third quarter of
1995. Annualized, these payments represent 10.40% and 9.58%, respectively, of
average fixed and variable annuity reserves. For the nine months, withdrawal
payments totaled $9.4 million in 1996 and $13.9 million in 1995, and
annualized, represent 8.48% and 19.06%, respectively, of average fixed and
variable annuity reserves. Withdrawals include variable annuity payments from
the separate accounts totaling $1.0 million in the third quarter of 1996, $0.6
million in the third quarter of 1995, $2.2 million in the nine months of 1996
and $1.6 million in the nine months of 1995. Fixed annuity surrenders
increased to $3.3 million in the third quarter of 1996 from $2.2 million in the
third quarter of 1995 primarily due to significant growth in average fixed
annuity reserves, which were 30% higher in the third quarter of 1996 than in
the third quarter of 1995. For the nine months, fixed annuity surrenders
decreased to $7.2 million in 1996 from $12.3 million in 1995, primarily due to
unusually high surrenders in 1995 which resulted from a large block of policies
coming off surrender charge restrictions. Management anticipates that
withdrawal rates will for the foreseeable future stabilize at moderately higher
levels than the current rates, and the Company's investment portfolio has been
structured to provide sufficient liquidity for anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.4 million in the third
quarter of 1996 and $0.3 million in the third quarter of 1995. For the nine
months, general and administrative expenses totaled $1.1 million in 1996 and
$0.8 million in 1995. The $0.3 million increase in the nine months of 1996
primarily reflects expenses related to the growth of the Company's business
since June 30, 1995. General and administrative expenses remain closely
controlled through a company-wide cost containment program and represent
approximately 1% of average total assets.
11
<PAGE>
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $125,000 in the third
quarter of 1996, $75,000 in the third quarter of 1995, $377,000 in the nine
months of 1996 and $225,000 in the nine months of 1995. These increases were
primarily due to additional fixed and variable annuity sales and the subsequent
amortization of related deferred commissions and other acquisition costs.
INCOME TAX EXPENSE totaled $181,000 in the third quarter of 1996,
compared with an income tax benefit of $130,000 in the third quarter of 1995,
representing effective tax rates of 37% and 32%, respectively. For the nine
months, income tax expense totaled $230,000 in 1996 and $94,000 in 1995,
representing effective tax rates of 37% and 31%, respectively. The lower tax
rates in 1995 reflect prior period state income tax benefits.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY remained relatively unchanged at $22.2 million at
June 30, 1996 and at March 31, 1996. During the quarter ended June 30, 1996,
the Company recorded $0.3 million of net income, which was offset by the change
in the net unrealized losses on debt and equity securities available for sale
charged directly to shareholder's equity.
TOTAL ASSETS increased by $11.9 million to $205.0 million at June 30,
1996 from $193.1 million at March 31, 1996, principally due to a $10.3 million
increase in the separate accounts for variable annuities.
INVESTED ASSETS at June 30, 1996 totaled $137.1 million, compared with
$136.9 million at March 31, 1996. This $0.2 million increase primarily
resulted from sales of the fixed accounts of variable annuity contracts.
The Company manages all of its invested assets internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. Effective December
1, 1995, pursuant to guidelines issued by the Financial Accounting Standards
Board, the Company determined that all of its portfolio of bonds and notes (the
"Bond Portfolio") is available to be sold in response to changes in market
interest rates, changes in prepayment risk, the Company's need for liquidity
and other similar factors. Accordingly, the Company no longer classifies a
portion of its Bond Portfolio as held for investment.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair
value by $1.7 million at June 30, 1996 and by $1.0 million at March 31, 1996.
The net increase in unrealized losses on the Bond Portfolio since March 31,
1996 principally reflects the higher relative prevailing interest rates at June
30, 1996 and their corresponding effect on the fair value of the Bond
Portfolio.
The entire Bond Portfolio at June 30, 1996 was rated by Standard and
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff &
Phelps Credit Rating Co. ("D&P"), Fitch Investor Service, Inc. ("Fitch") or
under comparable statutory rating guidelines established by the National
Association of Insurance Commissioners ("NAIC") and implemented by either the
NAIC or the Company. At June 30, 1996, approximately $117.7 million (at
amortized cost) was rated investment grade by one or more of these agencies or
under the NAIC guidelines, including $79.1 million of U.S. government/agency
securities and mortgage-backed securities ("MBSs").
12
<PAGE>
At June 30, 1996, the Bond Portfolio included $11.1 million (fair value,
$11.2 million) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch
or the NAIC. Based on their June 30, 1996 amortized cost, these non-
investment-grade bonds accounted for 5.39% of the Company's total assets and
8.02% of its invested assets.
Non-investment-grade securities generally provide higher yields and
involve greater risks than investment-grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment-grade issuers. In addition, the trading market for
these securities is usually more limited than for investment-grade securities.
The Company intends that its holdings of such securities not exceed current
levels, but its policies may change from time to time, including in connection
with any possible acquisition. The Company had no material concentrations of
non-investment-grade securities at June 30, 1996.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 1996:
13
<PAGE>
<TABLE>
RATED BONDS BY RATING CLASSIFICATION
(dollars in thousands)
<CAPTION>
Issues not rated by S&P/Moody's/
Issues Rated by S&P/Moody's/D&P/Fitch D&P/Fitch, By NAIC Category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[D&P]/{Fitch} Amortized fair category Amortized fair Amortized invested fair
category(1) cost value (2) cost value cost assets(3) value
- --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $ 70,636 $ 69,331 1 $ 25,752 $ 25,836 $ 96,388 69.49% $ 95,167
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 18,218 17,730 2 3,113 3,084 21,331 15.38 20,814
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} -- -- 3 -- -- -- -- --
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 9,388 9,636 4 1,087 1,109 10,475 7.55 10,745
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 650 460 5 -- -- 650 0.47 460
C1 to D
[DD]
{D} -- -- 6 -- -- -- -- --
---------- ---------- ---------- ---------- ----------- -----------
TOTAL RATED ISSUES $ 98,892 $ 97,157 $ 29,952 $ 30,029 $ 128,844 $ 127,186
========== ========== ========== ========== =========== ===========
Footnotes appear on the following page.
</TABLE>
14
<PAGE>
Footnotes to the table of rated bonds by rating classification
---------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moody's
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debt's relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. D&P rates
debt securities in rating categories ranging from AAA (the highest) to
DD (in payment default). A plus (+) or minus (-) indicates the debt's
relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on
the highest of the S&P, Moody's, D&P and Fitch ratings if rated by
multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or
near default. These six categories correspond with the
S&P/Moody's/D&P/Fitch rating groups listed above, with categories 1 and
2 considered investment grade. A substantial portion of the assets in
the NAIC categories were rated by the Company based on its implementation
of NAIC rating guidelines.
(3) At amortized cost.
15
<PAGE>
MORTGAGE LOANS totaled $3.1 million at June 30, 1996 and consisted of one
multifamily residential first mortgage loan collateralized by a property
located in California. On July 1, 1996, this mortgage loan paid off in full.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed maturities that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope
of the yield curve, the spread at which fixed maturities are priced over the
yield curve and general competitive conditions within the industry. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity obligations. The Company seeks to achieve
a predictable spread between what it earns on its assets and what it pays on
its liabilities by investing principally in fixed maturities. The Company's
fixed-rate products incorporate surrender charges or other limitations on when
contracts can be surrendered for cash to encourage persistency. Approximately
94% of the Company's fixed annuity reserves had surrender penalties or other
restrictions at June 30, 1996.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. At June 30, 1996 the weighted average
life of the Company's investments was approximately 4.3 years and the duration
was approximately 2.2. Weighted average life is the average time to receipt
of all principal, incorporating the effects of scheduled amortization and
expected prepayments, weighted by book value. Duration is a common option-
adjusted measure for the price sensitivity of a fixed-income portfolio to
changes in interest rates. It is the calculation of the relative percentage
change in market value resulting from small shifts in interest rates, and
recognizes the changes in portfolio cashflows resulting from embedded options
such as prepayments and bond calls.
The Company also seeks to provide liquidity by using reverse repurchase
agreements ("Reverse Repos"), and by investing in MBSs. It also seeks to
enhance its spread income by using Reverse Repos. Reverse Repos involve a sale
of securities and an agreement to repurchase the same securities at a later
date at an agreed upon price and are generally over-collateralized. MBSs are
generally investment-grade securities collateralized by large pools of mortgage
16
<PAGE>
loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with Reverse Repos is counterparty
risk. The Company believes, however, that the counterparties to its Reverse
Repos are financially responsible and that the counterparty risk associated
with those transactions is minimal. The primary risk associated with MBSs is
that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. The carrying values of bonds
that are determined to have declines in value that are other than temporary are
reduced to net realizable value and no further accruals of interest are made.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost)
that are in default as to the payment of principal or interest, totaled $0.7
million (fair value, $0.5 million) of bonds and notes at June 30, 1996 and
constituted 0.5% of total invested assets at amortized cost. At March 31,
1996, defaulted investments totaled $0.7 million (fair value, $0.4 million),
which constituted 0.5% of total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At June 30, 1996,
approximately $49.8 million of the Company's Bond Portfolio (at amortized cost)
had an aggregate unrealized gain of $0.9 million, while approximately $79.0
million of the Bond Portfolio had an aggregate unrealized loss of $2.6 million.
In addition, the Company's investment portfolio also currently provides
approximately $1.6 million of monthly cash flow from scheduled principal and
interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
17
<PAGE>
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby
avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
REGULATION
The Company is subject to regulation and supervision by the State of New
York and the Insurance Commission of the State of New York. Insurance laws
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating
marketing and other trade practices, operating guaranty associations, licensing
agents, approving policy forms, regulating certain premium rates, regulating
insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type, valuation and
amount of investments permitted, limiting the amount of dividends that can be
paid and the size of transactions that can be consummated without first
obtaining regulatory approval and other related matters.
During the last decade, the insurance regulatory framework has been
placed under increased scrutiny by various states, the federal government and
the NAIC. Various states have considered or enacted legislation that changes,
and in many cases increases, the states' authority to regulate insurance
companies. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in the regulation of
insurance companies. In recent years, the NAIC has approved and recommended
to the states for adoption and implementation several regulatory initiatives
designed to reduce the risk of insurance company insolvencies and market
conduct violations. These initiatives include new investment reserve
requirements, risk-based capital standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. The NAIC is also
currently developing model laws to govern insurance company investments and
illustrations for annuity products. Current proposals are still being debated
and the Company is monitoring developments in this area and the effects any
changes would have on the Company.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
EXHIBITS
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
No Current Report on Form 8-K was filed during the three months ended June 30,
1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SUNAMERICA NATIONAL LIFE INSURANCE COMPANY
Date: August 13, 1996 By:/s/ SCOTT L. ROBINSON
- ----------------------- ------------------------
Scott L. Robinson
Senior Vice President, Treasurer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President, August 13, 1996
- ------------------------ Treasurer and Director ---------------
Scott L. Robinson (Principal Financial
Officer)
/s/ N. SCOTT GILLIS Senior Vice President and August 13, 1996
- ------------------------ Controller (Principal ---------------
N. Scott Gillis Accounting Officer)
20
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF FIRST SUNAMERICA LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 127,186,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 45,000
<MORTGAGE> 3,100,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 137,087,000
<CASH> 6,756,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 9,977,000
<TOTAL-ASSETS> 204,995,000
<POLICY-LOSSES> 125,069,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,000,000
0
0
<OTHER-SE> 19,156,000
<TOTAL-LIABILITY-AND-EQUITY> 204,995,000
0
<INVESTMENT-INCOME> 7,276,000
<INVESTMENT-GAINS> (542,000)
<OTHER-INCOME> 459,000
<BENEFITS> 5,180,000
<UNDERWRITING-AMORTIZATION> 377,000
<UNDERWRITING-OTHER> (84,000)
<INCOME-PRETAX> 627,000
<INCOME-TAX> 230,000
<INCOME-CONTINUING> 397,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
