SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number 33-85014
FIRST SUNAMERICA LIFE INSURANCE COMPANY
Incorporated in New York 06-0992729
IRS employer
identification No.
733 Third Avenue, 4th Floor, New York, New York 10017
Registrant's telephone number, including area code (800) 272-3007
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. X
---
The number of shares outstanding of the registrant's common stock on
December 20, 1996 was as follows:
Common Stock (par value $10,000.00 per share) 300 shares outstanding
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
First SunAmerica Life Insurance Company (the "Company"), an indirect
wholly owned subsidiary of SunAmerica Inc. (the "Parent"), is a stock life
insurance company organized under the laws of New York. At September 30, 1996,
the Company owned $236.9 million of assets.
The Company maintains its principal offices at 733 Third Avenue, 4th
Floor, New York, New York 10017, telephone (800) 272-3007. The Company has no
employees; however, employees of the Parent and its other subsidiaries perform
various services for the Company. The Parent has approximately 1,600
employees, approximately 600 of whom perform services for the Company as well
as for certain of its affiliates.
Founded in 1978 and licensed in the states of New York and Nebraska, the
Company issues a portfolio of single premium fixed and flexible premium
variable annuities. It has an "A+" (Superior) rating from industry analyst
A.M. Best Company.
The Company believes that demographic trends have produced strong
consumer demand for long-term, investment-oriented products. According to U.S.
Census Bureau projections, the number of individuals ages 45 to 64 will grow
from 46 million to 60 million during the 1990s, making this age group the
fastest-growing segment of the U.S. population. Between 1985 and 1995, annual
industry premiums from annuities increased from $53 billion to $159 billion.
Focusing its operations on this expanding market, the Company specializes
in the sale of tax-deferred long-term savings products. The Company markets
fixed annuities and fee-generating variable annuities, which are distributed
through the independent registered representatives of affiliated broker-dealers
and through other broker-dealers, banks and other financial institutions.
As consumer demand for investment-oriented products has grown, the
Company has broadened the array of fee income producing products it offers and
has in recent years significantly increased its fee income. Over the last
several years, the Company has enhanced its marketing of variable annuities,
which entail no portfolio credit risk and require significantly less capital
support than its fixed-rate business, which generates net investment income.
Benefitting from continued strong demographic growth of the retirement
savings market, industry sales of tax-deferred savings products have
represented, for a number of years, a significantly larger source of new
premiums for the U.S. life insurance industry than have traditional life
insurance products. Recognizing the growth potential of this market, the
Company focuses its life insurance operations on the sale of annuities.
Because of its focus on annuity products, which generally have more
contractholder transactions than traditional life insurance products, the
Company utilizes computer-driven systems that employ optical disk imaging and
artificial intelligence, in lieu of paper-intensive life insurance processing
procedures. During 1995 the Company relocated its service support center from
New York, New York to Los Angeles, California to consolidate operations with
its affiliated life insurance companies. The Company believes its service
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support center and associated cost structure to be among the most competitive
in the industry.
The Company markets its fixed and variable annuities through the
following distribution channels: (i) independent registered representatives of
SunAmerica Securities, Inc., Royal Alliance Associates, Inc. and Advantage
Capital Corp., which are indirect wholly owned subsidiaries of the Parent;
(ii) approximately 122 other securities firms and financial institutions; and
(iii) independent general insurance agents who specialize in selling fixed
annuities and other single premium products. In addition, in June 1994, the
Company entered into an exclusive agreement with The Chase Manhattan Bank, N.A.
("Chase") to develop variable annuity products for sale in the state of New
York whose underlying funds are managed by Chase. Sales of the first such
product commenced in December, 1995. The institution has the right to make
these private label variable annuities available through its numerous retail
branch networks and distribution channels within New York. In addition, this
new variable annuity product is also available through a number of the broker-
dealer and financial planning organizations that currently offer other
investment products managed by Chase.
The Company offers single premium and flexible premium deferred annuities
that provide one-, three-, five-, seven-, or ten-year fixed interest rate
guarantees. Although the Company's contracts remain in force an average of
seven to ten years, a majority (approximately 55% at September 30, 1996)
reprice annually at discretionary rates determined by the Company. In
repricing, the Company takes into account yield characteristics of its
investment portfolio, annuity surrender assumptions and competitive industry
pricing. Its fixed-rate annuity products offer many of the same features as
conventional certificates of deposit from financial institutions, giving
investors a choice of interest period and yield as well as additional
advantages particularly applicable to retirement planning, such as tax-deferred
accumulation and flexible payout options(including the option of payout over
the life of the annuitant). The average new single premium fixed annuity
contract sold by the Company amounted to approximately $39,000 in 1996.
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-rate securities. The
Company's fixed-rate products incorporate surrender charges or other
limitations on when contracts can be surrendered for cash to encourage
persistency. Approximately 96% of the Company's fixed annuity reserves had
surrender penalties or other restrictions at September 30, 1996.
The Company's variable annuity products offer investors a broad spectrum
of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income through
the sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features and surrender charges similar to
those offered by fixed annuities, but differ in that the annuity holder's rate
of return is generally dependent upon the investment performance of the
particular equity, fixed-income, money market or asset allocation fund selected
by the contractholder. Because the investment risk is borne by the customer
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in all but the fixed-rate account options, these products require significantly
less capital support than fixed annuities. The average new variable annuity
contract sold by the Company amounted to approximately $47,000 in 1996.
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. The Company manages all of its invested assets
internally. Its portfolio strategy is designed to achieve adequate
risk-adjusted returns consistent with its investment objectives of effective
asset-liability matching, liquidity and safety.
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.
For the years ended September 30, 1996, 1995 and 1994, the Company's
yields on average invested assets were 7.40%, 7.59% and 6.54%, respectively,
before net realized investment gains and losses, and it realized net investment
spreads of 2.08%, 2.70% and 2.24%, respectively, on average invested assets.
At September 30, 1996, the weighted average life of the Company's investments
was approximately 4.3 years and the duration was approximately 2.3. 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
shifts in interest rates, and recognizes the changes in portfolio cashflows
resulting from embedded options such as prepayments and bond calls.
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.
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<TABLE>
The following table summarizes the Company's investment portfolio at
September 30, 1996:
SUMMARY OF INVESTMENTS
<CAPTION>
Percent
Amortized of
cost portfolio
------------ ---------
<S> <C> <C>
(In thousands)
Fixed maturities:
Cash and short-term investments $ 6,707 4.4 %
U.S. Government securities 9,631 6.2
Mortgage-backed securities 75,846 49.4
Other bonds and notes 61,431 40.0
------------ ---------
Total investments $ 153,615 100.00 %
============ =========
All of the Bond Portfolio at September 30, 1996 was rated by Standard &
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps
Credit Rating Co. ("D&P"), Fitch Investor Services, 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 September 30, 1996, approximately $137.0 million (at amortized cost)
of the Bond Portfolio was rated investment grade by one or more of these agencies
or by the Company or the NAIC, including $85.5 million of U.S. Government/agency
securities and mortgage-backed securities ("MBSs").
At September 30, 1996, the Bond Portfolio included $9.9 million (fair
value, $10.4 million) of bonds not rated investment grade by S&P, Moody's, D&P,
Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these non-
investment-grade bonds accounted for 4.2% of the Company's total assets and 6.4%
of its invested assets.
At September 30, 1996, the amortized cost of all investments in default as
to the payment of principal or interest totaled $0.2 million (fair value, $0.2
million), which constituted 0.1% of total invested assets at amortized cost.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
and Liquidity."
REGULATION
The Company is subject to regulation and supervision by the states of New
York and Nebraska and their insurance departments. State 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
</TABLE>
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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 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 relating to product design 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.
COMPETITION
The business conducted by the Company is highly competitive. The Company
competes with other life insurers, and also competes for customers' funds with
a variety of investment products offered by financial services companies other
than life insurance companies, such as banks, investment advisors, mutual fund
companies and other financial institutions. Within the U.S. life insurance
industry, the 100 largest writers of individual and group annuities account for
approximately 97% of total net premiums written. Net annuity premiums written
among the top 100 companies range from less than $200 million to more than $9
billion annually. The Company itself is not among the largest writers of
annuities; however, the combined SunAmerica life companies rank in the top
quartile of this group. Certain of these companies and other life insurers
with which the Company competes are significantly larger and have available to
them much greater financial and other resources. The Company believes the
primary competitive factors among life insurance companies for
investment-oriented insurance products such as annuities include product
flexibility, product pricing, innovation in product design, the claims-paying
ability rating and the name recognition of the issuing company, the
availability of distribution channels and service rendered to the customer
before and after a contract is issued. Other factors affecting the annuity
business include the benefits (including before-tax and after-tax investment
returns) and guarantees provided to the customer and the commissions paid.
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ITEM 2. PROPERTIES
The Company's principal office is in leased premises at 733 Third Avenue,
New York, New York 10017. The Company, through an affiliate, also leases
office space in Los Angeles, California and Torrance, California, which are
utilized for certain policy administration, recordkeeping and data processing
functions.
The Company believes that such properties, including the equipment
located therein, are suitable and adequate to meet the requirements of its
business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various kinds of litigation
common to its business. When the Company becomes involved in litigation, cases
are typically in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses relating
to such litigation would be adequate and any further liabilities and costs
would not have a material adverse impact upon the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fiscal year 1996 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Not applicable.
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in conjunction with the
financial statements and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which are included elsewhere herein.
<CAPTION>
Years ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(In thousands)
RESULTS OF OPERATIONS
Net investment income $ 2,798 $ 2,784 $ 1,892 $ 1,161 $ 2,368
Net realized investment gains (losses) (539) (1,348) 445 1,932 3,489
Variable annuity fee income 690 412 382 240 40
General and administrative expenses (1,404) (1,088) (1,040) (1,066) (1,224)
Amortization of deferred
acquisition costs (500) (300) --- (220) (2,356)
Other income and expenses, net 126 245 58 (342) 561
------- ------- ------- ------- -------
Pretax income 1,171 705 1,737 1,705 2,878
Income tax expense (448) (182) (655) (829) (1,210)
------- ------- ------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 723 523 1,082 876 1,668
Cumulative effect of change in accounting
for income taxes --- --- (725) --- ---
------- ------- ------- ------- -------
NET INCOME $ 723 $ 523 $ 357 $ 876 $ 1,668
======= ======= ======= ======= =======
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ITEM 6. SELECTED FINANCIAL DATA (continued)
<CAPTION>
At September 30,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands)
FINANCIAL POSITION
Investments $ 153,237 $ 121,218 $ 78,928 $ 85,130 $ 111,353
Variable annuity assets 68,901 32,760 26,390 24,695 8,836
Deferred acquisition costs 12,127 6,491 5,651 2,540 1,297
Deferred income taxes --- --- 886 1,031 835
Other assets 2,603 2,688 2,282 3,876 1,527
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 236,868 $ 163,157 $ 114,137 $ 117,272 $ 123,848
========= ========= ========= ========= =========
Reserves for fixed annuity contracts $ 140,613 $ 106,332 $ 66,881 $ 68,228 $ 59,400
Variable annuity liabilities 68,901 32,760 26,390 24,695 8,836
Other reserves, payables and accrued
liabilities 2,784 2,003 1,051 1,220 34,690
Deferred income taxes 1,350 244 --- --- ---
Shareholder's equity 23,220 21,818 19,815 23,129 20,922
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $ 236,868 $ 163,157 $ 114,137 $ 117,272 $ 123,848
========= ========= ========= ========= =========
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of First SunAmerica Life Insurance Company (the "Company") for
the three years in the period ended September 30, 1996 follows. In connection
with, and because it desires to take advantage of, the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Company cautions
readers regarding certain forward-looking statements contained in the following
discussion and elsewhere in this report and in any other statements made by,
or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission ("SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe"
or words of similar import generally involve forward-looking statements.
Without limiting the foregoing, forward-looking statements include statements
contained in this report which represent the Company's beliefs concerning
future or projected levels of sales of the Company's products, investment
spreads or yields, or the earnings or profitability of the Company's
activities.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events or
developments, some of which may be national in scope, such as general economic
conditions and interest rates, some of which may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation, and others of which may relate to the Company
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio, and other factors. Investors are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company with the SEC. The Company disclaims any obligation to update forward-
looking information.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $0.7 million in 1996, compared with $0.5 million in 1995 and $1.1
million in 1994. The cumulative effect of the change in accounting for income
taxes resulting from the 1994 implementation of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a
nonrecurring non-cash charge of $0.7 million. Accordingly, net income amounted
to $0.4 million in 1994.
PRETAX INCOME totaled $1.2 million in 1996, $0.7 million in 1995 and $1.7
million in 1994. The $0.5 million increase in 1996 over 1995 primarily
resulted from a decline in net realized investment losses, partially offset by
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increased general and administrative expenses. The $1.0 million decline in
1995 over 1994 primarily resulted from net realized investment losses incurred,
partially offset by an increase in net investment income.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other interest-
bearing liabilities, totaled $2.8 million in each of 1996 and 1995, compared
with $1.9 million in 1994. These amounts represent 2.08% on average invested
assets (computed on a daily basis) of $134.5 million in 1996, 2.70% on average
invested assets of $103.2 million in 1995 and 2.24% on average invested assets
of $84.5 million in 1994.
Net investment income also includes the effect of income earned on the
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $13.8 million in 1996, $17.6 million in 1995 and $17.4
million in 1994. The difference between the Company's yield on average
invested assets and the rate paid on average interest-bearing liabilities was
1.47% in 1996, 1.69% in 1995 and 1.13% in 1994.
Investment income and the related yield on average invested assets
totaled $10.0 million and 7.40% in 1996, compared with $7.8 million and 7.59%
in 1995 and $5.5 million and 6.54% in 1994. Investment income increased
primarily as a result of higher levels of average invested assets, offset in
1996 by a slight decline in portfolio yields. The higher yield in 1995
reflected the effects of both higher short-term interest rates and extension
fee income earned on certain bonds.
Total interest expense aggregated $7.2 million in 1996, $5.0 million in
1995 and $3.6 million in 1994. The average rate paid on fixed annuity
contracts was 5.93% in 1996, 5.90% in 1995 and 5.41% in 1994. Fixed annuity
contracts averaged $120.6 million in 1996, $85.5 million in 1995 and $67.2
million in 1994. The increase in the average rate paid on fixed annuities
during 1996 and 1995 from that paid during 1994 primarily resulted from
increased average crediting rates on the Company's new fixed annuity contracts
relative to those issued in 1994 to maintain a generally competitive market
rate in a higher interest rate environment.
The growth in average invested assets since 1994 reflects sales of the
Company's fixed-rate products (including the fixed accounts of variable annuity
products). Fixed annuity premiums totaled $45.4 million in 1996, $51.7 million
in 1995 and $7.8 million in 1994. These premiums include premiums for the
fixed accounts of variable annuities totaling $41.2 million, $2.9 million and
$0.5 million, respectively. The increased premiums for the fixed accounts of
variable annuities in 1996 resulted primarily from greater inflows into the
one-year fixed account of the Company's Polaris variable annuity product.
NET REALIZED INVESTMENT LOSSES totaled $0.5 million in 1996 and $1.3
million in 1995, compared to net realized investment gains of $0.4 million in
1994, and represent 0.40%, 1.31% and 0.53%, respectively, of average invested
assets. Net realized investment losses include impairment writedowns of $0.1
million in 1996, which were applied to defaulted bonds. Therefore, net losses
from sales of investments totaled $0.4 million in 1996. There were no
impairment writedowns for 1995 and 1994.
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Net losses from sales of investments in 1996 include $0.3 million of net
losses realized on $80.0 million of sales of bonds. Net losses on sales of
investments in 1995 include $1.2 million of net losses realized on $46.3
million of sales of mortgage-backed securities ("MBSs"). Net gains on sales
of investments in 1994 were also related to sales of MBSs. Sales of
investments are generally made to maximize total return.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $0.7
million in 1996 and $0.4 million in both 1995 and 1994. The increase in
variable annuity fees in 1996 reflects the growth in average variable annuity
assets, principally due to the receipt of variable annuity premiums and
increased market values, partially offset by surrenders. Variable annuity
assets averaged $46.2 million during 1996, $27.8 million during 1995 and $26.1
million during 1994. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, totaled $28.6
million in 1996, $5.9 million in 1995 and $5.7 million in 1994. The increase
in premiums in 1996 was due to the introduction of two new products during
March and December 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 $221,000 in
1996, $194,000 in 1995 and $367,000 in 1994. 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 $12.7 million in 1996, $17.7 million in 1995
and $12.9 million in 1994. These payments represent 8.1%, 16.9% and 15.0%,
respectively, of average fixed and variable annuity reserves. Withdrawals
include variable annuity payments from the separate accounts totaling $2.8
million in 1996, $3.6 million in 1995 and $2.4 million in 1994, and represent
6.2%, 12.9% and 9.3%, respectively, of average variable annuity liabilities.
Variable annuity withdrawal rates declined in 1996 principally as a result of
significant growth in the variable annuity separate accounts, while the
increase in 1995 was primarily due to the maturing of an older block of
business. Fixed annuity surrenders totaled $9.9 million in 1996, $14.1 million
in 1995 and $10.5 million in 1994. Fixed annuity surrenders decreased in 1996
primarily due to unusually high surrenders in 1995, which resulted from a block
of policies coming off surrender charge restrictions. Management anticipates
that withdrawal rates will stabilize for the foreseeable future at moderately
higher levels than the current rates.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.4 million in 1996,
compared with $1.1 million in 1995 and $1.0 million in 1994. General and
administrative expenses remain closely controlled through a company-wide cost
containment program and represent approximately 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased to $0.5 million in
1996 from $0.3 million in 1995. There was no amortization in 1994. These
increases in amortization were primarily due to additional fixed and variable
annuity sales and the subsequent amortization of related deferred commissions
and other acquisition costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in
arrears to maintain the persistency of certain of the Company's annuity
contracts. Annual commissions totaled $19,000 in 1996, $33,000 in 1995 and
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$30,000 in 1994. Based on current sales, the Company estimates that such
annual commissions will increase in future periods.
INCOME TAX EXPENSE totaled $0.4 million in 1996, $0.2 million in 1995 and
$0.7 million in 1994, representing effective tax rates of 38% in 1996, 26% in
1995 and 38% in 1994. The lower tax rate in 1995 reflects a prior period state
income tax benefit.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $1.4 million to $23.2 million at
September 30, 1996 from $21.8 million at September 30, 1995, primarily as a
result of the $0.7 million of net income recorded and a $0.7 million reduction
of net unrealized losses on debt and equity securities available for sale
charged directly to shareholder's equity.
TOTAL ASSETS increased by $73.7 million to $236.9 million at September
30, 1996 from $163.2 million at September 30, 1995, principally due to a $36.1
million increase in the separate accounts for variable annuities and a $32.0
million increase in invested assets.
INVESTED ASSETS at year end totaled $153.2 million in 1996, compared with
$121.2 million in 1995. This $32.0 million increase primarily resulted from
sales of the fixed accounts of variable annuities.
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 $0.5 million at September 30, 1996, compared with $1.5 million at
September 30, 1995 (including net unrealized losses of $1.4 million on the
portion of the portfolio that was designated as available for sale at September
30, 1995). The net decrease in unrealized losses on the Bond Portfolio since
September 30, 1995 principally reflects improvement in the fair value of
certain segments of the Bond Portfolio since September 30, 1995 despite the
higher relative prevailing interest rates at September 30, 1996.
All of the Bond Portfolio at September 30, 1996 was rated by Standard &
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff and
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 September 30, 1996, approximately $137.0 million of
the Bond Portfolio (at amortized cost) was rated investment grade by one or
more of these agencies or by the Company or the NAIC, pursuant to applicable
NAIC guidelines, including $85.5 million of U.S. government/agency securities
and MBSs.
12
<PAGE>
At September 30, 1996, the Bond Portfolio included $9.9 million (fair
value, $10.4 million) of bonds not rated investment grade by S&P, Moody's, D&P,
Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these
non-investment-grade bonds accounted for 4.2% of the Company's total assets and
6.4% of 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 the proportion of its portfolio in 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 September 30, 1996.
The table on the following page summarizes the Company's rated bonds by
rating classification as of September 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-} $ 113,246 $ 112,839 1 $ 3,404 $ 3,404 $ 116,650 75.94% $ 116,243
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 17,176 16,572 2 3,187 3,178 20,363 13.26 19,750
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 1,810 1,974 3 0 0 1,810 1.18 1,974
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 6,817 7,108 4 1,088 1,176 7,905 5.15 8,284
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 180 150 5 0 0 180 0.12 150
C1 to D
[DD]
{D} 0 0 6 0 0 0 0.00 0
---------- ---------- ---------- ---------- ---------- ----------
Total rated issues $ 139,229 $ 138,643 $ 7,679 $ 7,758 $ 146,908 $ 146,401
========== ========== ========== ========== ========== ==========
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 pursuant to applicable NAIC
rating guidelines.
(3) At amortized cost.
15
<PAGE>
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-rate securities. The
Company's fixed-rate products incorporate surrender charges or other
limitations on when contracts can be surrendered for cash to encourage
persistency. Approximately 96% of the Company's fixed annuity reserves had
surrender penalties or other restrictions at September 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 September 30, 1996, the weighted
average life of the Company's investments was approximately 4.3 years and the
duration was approximately 2.3.
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
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
16
<PAGE>
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 $0.2
million (fair value, $0.2 million) of bonds and notes at September 30, 1996 and
constituted 0.1% of total invested assets at amortized cost. At September 30,
1995, the defaulted investments totaled $0.7 million (fair value, $0.5
million), which constituted 0.6% of total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1996, approximately $81.0 million of the Company's
Bond Portfolio had an aggregate unrealized gain of $1.3 million, while
approximately $65.9 million of the Bond Portfolio had an aggregate unrealized
loss of $1.8 million. In addition, the Company's investment portfolio
currently provides approximately $1.7 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements begin on page F-3. Reference is made
to the Index to Financial Statements on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
<TABLE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of First SunAmerica Life Insurance
Company (the "Company") as of December 20, 1996 are listed below, together with
information as to their ages, dates of election and principal business
occupation during the last five years (if other than their present business
occupation).
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Eli Broad* 63 Chairman, Chief 1994 Cofounded SunAmerica
Executive Officer Inc. ("SAI") in 1957
and President of
the Company
Chairman, Chief 1986
Executive Officer
and President of
SAI
Joseph M. Tumbler* 48 Executive Vice 1996 President and Chief 1989-1995
President of the Executive Officer,
Company Providian Capital
Vice Chairman of Management
SAI
Jay S. Wintrob* 39 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman of 1995
SAI
James R. Belardi* 39 Senior Vice 1992 Vice President and 1989-1992
President of the Treasurer (Joined SAI
Company in 1986)
Executive Vice 1995
President of SAI
Jana Waring Greer* 44 Senior Vice 1991 (Joined SAI in 1974)
President of the
Company and SAI
Peter McMillan, III* 39 Executive Vice 1994 Senior Vice President, 1989-1994
President and SunAmerica Investments,
Chief Investment Inc.
Officer of
SunAmerica
Investments, Inc.
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
18
<PAGE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Scott L. Robinson* 50 Senior Vice 1991 (Joined SAI in 1978)
President and
Treasurer of
the Company
Senior Vice
President and
Controller of SAI
James W. Rowan* 34 Senior Vice 1996 Vice President 1993-1995
President Assistant to the 1992
of the Company Chairman
and SAI Senior Vice President, 1986-1992
Security Pacific Corp.
Lorin M. Fife* 43 Senior Vice 1994 Vice President and 1994-1995
President, General Counsel-
General Counsel Regulatory Affairs
and Assistant of SAI
Secretary of the Vice President and 1989-1994
Company Associate General
Senior Vice 1995 Counsel of SAI
President and (Joined SAI in 1989)
General Counsel-
Regulatory Affairs
of SAI
Susan L. Harris* 39 Senior Vice 1994 Vice President, 1994-1995
President and General Counsel-
Secretary of the Corporate Affairs
Company and Secretary of SAI
Senior Vice 1995 Vice President, 1989-1994
President and Associate General
General Counsel- Counsel and Secretary
Corporate Affairs of SAI (Joined SAI in
and Secretary of 1985)
SAI
N. Scott Gillis 43 Senior Vice 1994 Vice President and 1989-1994
President and Controller, SunAmerica
Controller of the Life Companies
Company (Joined SAI in 1985)
Edwin R. Reoliquio 39 Senior Vice 1995 Vice President and 1990-1995
President and Actuary, SunAmerica
Chief Actuary Life Companies
of the Company
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
19
<PAGE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position(s) Last Five Years** From-To
- ------------- --- ----------- ----------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Victor E. Akin 32 Senior Vice 1996 Vice President, 1995-1996
President of SunAmerica Life
the Company Companies (SLC)
Director, SLC 1994-1995
Manager, SLC 1993-1994
Actuary, Milliman 1992-1993
and Robertson
Consultant, Chalke 1991-1992
Inc.
David W. Ferguson 43 Director 1987 Partner, Davis Polk 1980 to
& Wardwell present
Thomas A. Harnett 72 Director 1987 Partner, Lane & 1989 to
Mitterdorf, LLP present
Margery K. Neale 37 Director 1996 Partner, Shereff, 1990 to
Friedman, Hoffman present
& Goodman, LLP
Lester Pollack 63 Director 1987 Chief Executive 1986 to
Officer, Centre present
Partners, L.P.
General Partner, 1986 to
Lazard Freres & Co. present
Senior Managing 1988 to
Director, Corporate present
Partners, L.P.
Richard D. Rohr 70 Director 1987 Partner, Bodman, 1958 to
Longley & Dahling present
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
</TABLE>
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each
individual's time devoted to his or her duties as an executive officer of the
Company.
The following table shows the cash compensation paid or earned, based on
these allocations, to the chief executive officer and top four executive
officers of the Company whose allocated compensation exceeds $100,000 and to
all executive officers of the Company as a group for services rendered in all
capacities in the Company during 1996:
Name of Individual or Capacities In Which Allocated Cash
Number in Group Served Compensation
--------------------- ------------------------- --------------
Eli Broad Chairman, Chief Executive $10,380
Officer and President
Joseph M. Tumbler Executive Vice President 6,488
Jay S. Wintrob Executive Vice President 6,488
James R. Belardi Senior Vice President 2,955
Jana Waring Greer Senior Vice President 7,342
All Executive Officers as
a Group (12) $49,731
=========
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly-owned subsidiary of SunAmerica Inc. Except
for Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned
by any director does not exceed one percent of the class outstanding. At
November 30, 1996, Mr. Broad was the beneficial owner of 5,930,156 shares of
Common Stock (approximately 5.3% of the class outstanding) and 9,160,294 shares
of Class B Common Stock (approximately 84.4% of the class outstanding). Of the
Common Stock, 715,872 shares represent restricted shares granted under the
Company's employee stock plans as to which Mr. Broad has no investment power;
and 3,605,700 shares represent employee stock options held by Mr. Broad which
are or will become exercisable on or before February 28, 1997 and as to which
he has no voting or investment power. Of the Class B Stock, 8,456,140 shares
are held directly by Mr. Broad and 704,154 shares are registered in the name
of a corporation as to which Mr. Broad exercises sole voting and dispositive
powers. At November 30, 1996, all directors and officers as a group
beneficially owned 9,197,722 shares of Common Stock (approximately 8.1% of the
class outstanding) and 9,160,294 shares of Class B Common Stock (approximately
84.4% of the class outstanding).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
21
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
Reference is made to the index set forth on page F-1 of this report.
Exhibits
Exhibit
No Description
- -------
3(a) Declaration of Intent and Charter, dated November, 1978, is
incorporated herein by reference to Exhibit 3(a) of the Company's
annual report on Form 10-K, dated December 8, 1995.
3(b) Certificate of Amendment of Charter, dated February 1, 1988, is
incorporated herein by reference to Exhibit 3(a) of the Company's
annual report on Form 10-K, dated December 8, 1995.
3(c) Certificate of Amendment of Charter, dated January 26, 1989, is
incorporated herein by reference to Exhibit 3(a) of the Company's
annual report on Form 10-K, dated December 8, 1995.
3(d) Certificate of Amendment of Charter, dated March 1, 1989, is
incorporated herein by reference to Exhibit 3(a) of the Company's
annual report on Form 10-K, dated December 8, 1995.
3(e) Certificate of Amendment of Charter, dated January 1, 1996, is
incorporated herein by reference to Exhibit 3(a) of the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1996,
dated May 14, 1996.
3(f) Bylaws, dated December 20, 1978, are incorporated herein by
reference to Exhibit 3(e) of the Company's annual report on Form
10-K, dated December 8, 1995.
3(g) Bylaws, as amended January 1, 1996, are incorporated herein by
reference to Exhibit 3(b) of the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1996, dated May 14, 1996.
27 Financial Data Schedule
Reports on Form 8-K
No current report on Form 8-K was filed during the three months ended September
30, 1996.
22
<PAGE>
<TABLE>
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 LIFE INSURANCE COMPANY
By/s/ SCOTT L. ROBINSON
--------------------------------------
Scott L. Robinson
Senior Vice President, Treasurer and Director
December 20, 1996
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:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C> <C>
/s/ ELI BROAD Chairman, Chief Executive December 20, 1996
- ------------------------------ Officer and President -----------------
Eli Broad (Principal Executive Officer)
/s/ SCOTT L. ROBINSON Senior Vice President, December 20 , 1996
- ------------------------------ Treasurer and Director -----------------
Scott L. Robinson (Principal Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and December 20, 1996
- ------------------------------ Controller (Principal -----------------
N. Scott Gillis Accounting Officer)
/s/ JOSEPH M. TUMBLER Executive Vice President December 20, 1996
- ------------------------------ and Director -----------------
Joseph M. Tumbler
/s/ JAY S. WINTROB Executive Vice President December 20, 1996
- ------------------------------ and Director -----------------
Jay S. Wintrob
/s/ JAMES R. BELARDI Senior Vice President December 20, 1996
- ------------------------------ and Director -----------------
James R. Belardi
/s/ LORIN M. FIFE Senior Vice President, December 20, 1996
- ------------------------------ General Counsel, Assistant -----------------
Lorin M. Fife Secretary and Director
/s/ JANA W. GREER Senior Vice President December 20, 1996
- ------------------------------ and Director -----------------
Jana W. Greer
/s/ SUSAN L. HARRIS Senior Vice President, December 20, 1996
- ------------------------------ Secretary and Director -----------------
Susan L. Harris
/s/ JAMES W. ROWAN Senior Vice President December 20, 1996
- ------------------------------ and director -----------------
James W. Rowan
<PAGE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C> <C>
/s/ EDWIN R. REOLIQUIO Senior Vice President December 20, 1996
- ------------------------------ and Chief Actuary -----------------
Edwin R. Reoliquio
/s/ PETER McMILLAN Director December 20, 1996
- ------------------------------ -----------------
Peter McMillan
</TABLE>
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Accountants F-2
Balance Sheet as of September 30, 1996 and 1995 F-3
Income Statement for the years ended
September 30, 1996, 1995 and 1994 F-4
Statement of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 F-5 through
F-6
Notes to Financial Statements F-7 through
F-22
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income statement
and statement of cash flows present fairly, in all material respects, the
financial position of First SunAmerica Life Insurance Company at September 30,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996, 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.
As discussed in Note 2, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 8, 1996
F-2
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<CAPTION>
September 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 6,707,000 $ 6,382,000
Bonds and notes:
Available for sale, at fair value
(amortized cost: 1996, $146,908,000;
1995, $109,217,000) 146,401,000 107,771,000
Held for investment, at amortized cost
(fair value: 1995, $2,289,000) --- 2,297,000
Mortgage loans --- 4,733,000
Common stocks, at fair value
(cost: 1996, $0; 1995, $112,000) 129,000 35,000
------------- -------------
Total investments 153,237,000 121,218,000
Variable annuity assets 68,901,000 32,760,000
Receivable from brokers for sales of securities --- 815,000
Accrued investment income 1,462,000 928,000
Deferred acquisition costs 12,127,000 6,491,000
Income taxes currently receivable 299,000 ---
Other assets 842,000 945,000
------------- -------------
TOTAL ASSETS $ 236,868,000 $ 163,157,000
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 140,613,000 $ 106,332,000
Payable to brokers for purchases of securities 1,939,000 ---
Income taxes currently payable --- 23,000
Other liabilities 845,000 1,980,000
------------- -------------
Total reserves, payables and
accrued liabilities 143,397,000 108,335,000
------------- -------------
Variable annuity liabilities 68,901,000 32,760,000
------------- -------------
Deferred income taxes 1,350,000 244,000
------------- -------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000
Additional paid-in capital 14,428,000 14,428,000
Retained earnings 5,973,000 5,250,000
Net unrealized losses on debt and
equity securities available for sale (181,000) (860,000)
------------- -------------
Total shareholder's equity 23,220,000 21,818,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 236,868,000 $ 163,157,000
============= =============
</TABLE>
See accompanying notes
F-3
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<CAPTION>
Years ended September 30,
-------------------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Investment income $ 9,957,000 $ 7,834,000 $ 5,527,000
------------- ------------ ------------
Interest expense on:
Fixed annuity contracts (7,155,000) (5,042,000) (3,635,000)
Senior indebtedness (4,000) (8,000) ---
------------- ------------ ------------
Total interest expense (7,159,000) (5,050,000) (3,635,000)
------------- ------------ ------------
NET INVESTMENT INCOME 2,798,000 2,784,000 1,892,000
------------- ------------ ------------
NET REALIZED INVESTMENT
GAINS (LOSSES) (539,000) (1,348,000) 445,000
------------- ------------ ------------
VARIABLE ANNUITY FEE INCOME 690,000 412,000 382,000
------------- ------------ ------------
Other income and expenses:
Surrender charges 221,000 194,000 367,000
General and administrative
expenses (1,404,000) (1,088,000) (1,040,000)
Amortization of deferred
acquisition costs (500,000) (300,000) ---
Annual commissions (19,000) (33,000) (30,000)
Other, net (76,000) 84,000 (279,000)
------------ ----------- ------------
TOTAL OTHER INCOME AND EXPENSES (1,778,000) (1,143,000) (982,000)
------------ ----------- ------------
PRETAX INCOME 1,171,000 705,000 1,737,000
Income tax expense (448,000) (182,000) (655,000)
------------ ----------- ------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES 723,000 523,000 1,082,000
Cumulative effect of change in
accounting for income taxes --- --- (725,000)
------------ ------------ ------------
NET INCOME $ 723,000 $ 523,000 $ 357,000
============ ============ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<CAPTION>
Years ended September 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 723,000 $ 523,000 $ 357,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Interest credited to fixed annuity
contracts 7,155,000 5,042,000 3,635,000
Net realized investment (gains)
losses 539,000 1,348,000 (445,000)
Accretion of net discounts on
investments (343,000) (394,000) (24,000)
Amortization of goodwill 58,000 58,000 58,000
Provision for deferred income taxes 740,000 333,000 1,388,000
Cumulative effect of change in
accounting for income taxes --- --- 725,000
Change in:
Deferred acquisition costs (5,736,000) (2,740,000) (1,011,000)
Income taxes receivable/payable (322,000) (418,000) (555,000)
Other, net (254,000) (323,000) (115,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,560,000 3,429,000 4,013,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes (124,681,000) (125,130,000) (68,582,000)
Common stock --- (112,000) ---
Sales of bonds and notes 80,440,000 55,553,000 50,708,000
Redemptions and maturities of:
Bonds and notes 11,514,000 21,369,000 5,791,000
Mortgage loans 4,736,000 35,000 31,000
------------ ------------ ------------
Net cash used by investing activities (27,991,000) (48,285,000) (12,052,000)
------------ ------------ ------------
</TABLE>
F-5
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
<CAPTION>
Years ended September 30,
--------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 45,417,000 $51,681,000 $ 7,840,000
Net exchanges to (from) the fixed
accounts of variable annuity contracts (4,719,000) (87,000) 572,000
Withdrawal payments on fixed annuity
contracts (9,850,000)(14,131,000) (10,504,000)
Claims and annuity payments on fixed
annuity contracts (3,752,000) (2,974,000) (3,194,000)
Net receipts from (repayments of)
other short-term financings (1,340,000) 1,964,000 (145,000)
------------ ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 25,756,000 36,453,000 (5,431,000)
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 325,000 (8,403,000) (13,470,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,382,000 14,785,000 28,255,000
------------ ----------- ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 6,707,000 $ 6,382,000 $ 14,785,000
============ =========== ============
Supplemental cash flow information:
Interest paid on indebtedness $ 4,000 $ 8,000 $ ---
============ =========== ============
Net income taxes paid (recovered) $ 30,000 $ 254,000 $ (178,000)
============ =========== ============
</TABLE>
See accompanying notes
F-6
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (The "Company") is a New York -
domiciled life insurance company engaged primarily in the business of
writing fixed and variable annuity contracts in the state of New York.
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; strengths, weaknesses
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 risks. 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
held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles and
include the accounts of the Company, an indirect wholly owned subsidiary
of SunAmerica Inc. (the "Parent"). Certain 1995 and 1994 amounts have
been reclassified to conform with the 1996 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.
RECENTLY ISSUED ACCOUNTING STANDARDS: Effective October 1, 1993, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Accordingly, the
cumulative effect of this change in accounting for income taxes was
recorded on October 1, 1993 to increase the liability for Deferred Income
Taxes by $725,000.
F-7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO 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 and notes 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 and
notes held for investment (the "Held for Investment Portfolio") are
carried at amortized cost. On December 1, 1995, the Company reassessed
the appropriateness of classifying a portion of its portfolio of bonds and
notes as held for investment. 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 $2,352,000. Upon reclassification, the resulting
net unrealized gain of $56,000 was credited to Net Unrealized Losses on
Debt and Equity Securities Available for Sale in the shareholder's equity
section of the balance sheet.
Bonds and notes 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.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are
amortized to investment income using the interest method over the
contractual lives of the investments.
F-8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in
relation to the present value of estimated gross profits, which are
composed of net interest income, net realized investment gains and losses,
variable annuity fees, surrender charges and direct administrative
expenses. Deferred acquisition costs 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 deferred acquisition costs 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 or losses on
debt and equity securities available for sale that is credited or charged
directly to shareholder's equity. Deferred Acquisition Costs have been
increased by $100,000 at September 30, 1996, and by $200,000 at September
30, 1995 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 Fee Income in the
income statement.
GOODWILL: Goodwill, amounting to $821,000 at September 30, 1996, is
amortized by using the straight-line method over a period of 25 years and
is included in Other Assets in the balance sheet.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
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).
VARIABLE ANNUITY FEE INCOME: Variable annuity fees are recorded in income
as earned.
F-9
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
F-10
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale and held for investment by major category follow:
Estimated
Amortized fair
cost value
------------- -------------
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 9,631,000 $ 9,562,000
Mortgage-backed securities 75,846,000 75,607,000
Securities of public utilities 1,032,000 971,000
Corporate bonds and notes 41,545,000 41,722,000
Other debt securities 18,854,000 18,539,000
------------- -------------
Total available for sale $ 146,908,000 $ 146,401,000
============= =============
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 37,693,000 $ 37,759,000
Mortgage-backed securities 60,558,000 60,367,000
Corporate bonds and notes 10,966,000 9,645,000
------------- -------------
Total available for sale $ 109,217,000 $ 107,771,000
============= =============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 2,297,000 $ 2,289,000
============= =============
F-11
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of bonds and notes available
for sale by contractual maturity, as of September 30, 1996, follow:
Estimated
Amortized fair
cost value
------------- -------------
AVAILABLE FOR SALE:
Due in one year or less $ --- $ ---
Due after one year through five years 5,660,000 5,687,000
Due after five years through ten years 35,833,000 35,841,000
Due after ten years 29,569,000 29,266,000
Mortgage-backed securities 75,846,000 75,607,000
------------- -------------
Total available for sale $ 146,908,000 $ 146,401,000
============= =============
Actual maturities of bonds and notes will differ from those shown above
due to prepayments and redemptions.
F-12
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
Gross unrealized gains and losses on bonds and notes available for sale
and held for investment by major category follow:
Gross Gross
unrealized unrealized
gains losses
----------- ------------
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 55,000 $ (124,000)
Mortgage-backed securities 515,000 (754,000)
Securities of public utilities --- (61,000)
Corporate bonds and notes 749,000 (572,000)
Other debt securities 3,000 (318,000)
----------- ------------
Total available for sale $ 1,322,000 $ (1,829,000)
=========== ============
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 263,000 $ (197,000)
Mortgage-backed securities 257,000 (448,000)
Corporate bonds and notes 102,000 (1,423,000)
----------- ------------
Total available for sale $ 622,000 $ (2,068,000)
=========== ============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 22,000 $ (30,000)
=========== ============
At September 30, 1996, gross unrealized gains on equity securities
aggregated $129,000 and there were no unrealized losses. At September 30,
1995, gross unrealized gains aggregated $35,000 and gross unrealized
losses on equity securities aggregated $112,000.
F-13
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
Gross realized investment gains and losses on sales of all types of
investments are as follows:
<CAPTION>
Years ended September 30,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
BONDS AND NOTES AVAILABLE
FOR SALE:
Realized gains $ 1,039,000 $ 423,000 $ 644,000
Realized losses (1,295,000) (1,771,000) (199,000)
EQUITIES:
Realized losses (112,000) --- ---
IMPAIRMENT WRITEDOWNS (171,000) --- ---
----------- ----------- -----------
Total net realized
investment gains/losses $ (539,000) $(1,348,000) $ 445,000
=========== =========== ===========
The sources and related amounts of investment income are as follows:
Years ended September 30,
--------------------------------------
1996 1995 1994
----------- ------------ -----------
Short-term investments $ 390,000 $ 1,045,000 $ 685,000
Bonds and notes 9,186,000 6,291,000 4,341,000
Mortgage loans 381,000 498,000 501,000
----------- ------------ -----------
Total investment income $ 9,957,000 $ 7,834,000 $ 5,527,000
=========== ============ ===========
Expenses incurred to manage the investment portfolio amounted to $121,000
for the year ended September 30, 1996, $125,000 for the year ended
September 30, 1995, and $102,000 for the year ended September 30, 1994 and
are included in General and Administrative Expenses in the income
statement.
</TABLE>
F-14
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The carrying values of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity at September 30, 1996
are as follows:
Bonds and notes:
Lockheed Martin Corp. $ 4,063,000
Nabisco Inc. 3,901,000
PacificCorp 3,021,000
===========
At September 30, 1996, bonds and notes included $9,895,000 (fair value,
$10,408,000) of bonds and notes not rated investment grade either Standard
& Poor's Corporation, Moody's Investors Service, Duff and Phelps Credit
Rating Co., Fitch Investor Service, Inc. or under National Association of
Insurance Commissioners' guidelines. The Company had no material
concentrations of non-investment-grade assets at September 30, 1996.
At September 30, 1996, the amortized cost of investments in default as to
the payment of principal or interest was $180,000 and the fair value was
$150,000, all of which are unsecured non-investment-grade bonds.
At September 30, 1996, $408,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
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 equity investments) 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
F-15
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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 AND NOTES: 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.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the
market value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (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.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity 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.
VARIABLE ANNUITY LIABILITIES: 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.
F-16
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at
September 30, 1996 and 1995, compared with their respective carrying
values, are as follows:
<CAPTION>
Carrying Fair
value value
------------ -------------
<S> <C> <C>
1996:
ASSETS:
Cash and short-term investments $ 6,707,000 $ 6,707,000
Bonds and notes 146,401,000 146,401,000
Variable annuity assets 68,901,000 68,901,000
LIABILITIES:
Reserves for fixed annuity
contracts 140,613,000 134,479,000
Payable to brokers for purchases
of securities 1,939,000 1,939,000
Variable annuity liabilities 68,901,000 65,546,000
============ =============
1995:
ASSETS:
Cash and short-term investments $ 6,382,000 $ 6,382,000
Bonds and notes 110,068,000 110,060,000
Mortgage loans 4,733,000 4,733,000
Receivable from brokers for
sales of securities 815,000 815,000
Variable annuity assets 32,760,000 32,760,000
LIABILITIES:
Reserves for fixed annuity
contracts 106,332,000 102,782,000
Variable annuity liabilities 32,760,000 31,740,000
============ =============
5. CONTINGENT LIABILITIES
From time to time, the Company is involved in various kinds of litigation
common to its business. When the Company becomes involved in litigation,
cases are typically in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses
relating to such litigation would be adequate and any further liabilities
and costs would not have a material adverse impact upon the Company's
financial position or results of operations.
F-17
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
6. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1996, 1995 and 1994, 300 shares are
outstanding.
Changes in shareholder's equity are as follows:
<CAPTION>
Years ended September 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance $ 5,250,000 $ 4,727,000 $ 4,370,000
Net income 723,000 523,000 357,000
------------ ------------ ------------
Ending balance $ 5,973,000 $ 5,250,000 $ 4,727,000
============ ============ ============
NET UNREALIZED LOSSES
ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance $ (860,000)$ (2,340,000) $ 1,331,000
Change in net unrealized
gains/losses on debt
securities available
for sale 939,000 4,254,000 (7,621,000)
Change in net unrealized
gains/losses on equity
securities available
for sale 206,000 (77,000) (118,000)
Change in adjustment to
deferred acquisition costs (100,000) (1,900,000) 2,100,000
Tax effect of net changes (366,000) (797,000) 1,968,000
------------ ------------ ------------
Ending balance $ (181,000)$ (860,000) $ (2,340,000)
============ ============ ============
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the
domestic insurer's intention to declare such dividend and the amount have
been filed with the Superintendent of Insurance not less than 30 days in
advance of such proposed declaration, or if the Superintendent disapproves
the distribution of the dividend within the 30-day period. No dividends
were paid in fiscal years 1996, 1995 or 1994.
F-18
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
6. SHAREHOLDER'S EQUITY (continued)
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1996 was $191,000. The statutory net loss for the year
ended December 31, 1995 was $2,083,000 and the statutory net gain for the
year ended December 31, 1994 was $726,000. The Company's statutory
capital and surplus was $13,975,000 at September 30, 1996, $13,862,000 at
December 31, 1995 and $16,122,000 at December 31, 1994.
7. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<CAPTION>
Net realized
investment
gains (losses) Operations Total
-------------- ------------ -------------
<S> <C> <C> <C>
1996:
Currently payable $ (121,000) $ (171,000) $ (292,000)
Deferred (105,000) 845,000 740,000
-------------- ------------ -------------
Total income tax expense $ (226,000) $ 674,000 $ 448,000
============== ============ =============
1995:
Currently payable $ (592,000) $ 441,000 $ (151,000)
Deferred (28,000) 361,000 333,000
-------------- ------------ -------------
Total income tax expense $ (620,000) $ 802,000 $ 182,000
============== ============ =============
1994:
Currently payable $ 121,000 $ (854,000) $ (733,000)
Deferred 65,000 1,323,000 1,388,000
-------------- ------------ -------------
Total income tax expense $ 186,000 $ 469,000 $ 655,000
============== ============ =============
F-19
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
7. INCOME TAXES (continued)
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<CAPTION>
Years ended September 30,
--------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Amount computed at statutory rate $ 410,000 $ 247,000 $ 608,000
Increases (decreases) resulting from:
Amortization of differences
between book and tax bases of
net assets acquired 20,000 20,000 10,000
State income taxes, net
of federal tax benefit 25,000 (86,000) 36,000
Other, net (7,000) 1,000 1,000
--------- --------- ---------
Total income tax expense $ 448,000 $ 182,000 $ 655,000
========= ========= =========
F-20
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
7. 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:
<CAPTION>
September 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Investments $ 225,000 $ 142,000
Deferred acquisition costs 3,902,000 1,703,000
Other liabilities 84,000 66,000
------------- -------------
Total deferred tax liabilities 4,211,000 1,911,000
------------- -------------
Deferred tax assets:
Contractholder reserves (2,582,000) (1,125,000)
State income taxes (79,000) (79,000)
Net unrealized losses on certain
debt and equity securities (97,000) (463,000)
Other assets (103,000) ---
------------- -------------
Total deferred tax assets (2,861,000) (1,667,000)
------------- -------------
Deferred income taxes $ 1,350,000 $ 244,000
============= =============
</TABLE>
F-21
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
8. RELATED PARTY MATTERS
The Company pays commissions to three affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp. and Royal Alliance Associates,
Inc. These broker-dealers represent a significant portion of the
Company's business, amounting to approximately 44.1%, 14.8% and 26.5% of
premiums in 1996, 1995 and 1994, respectively. Commissions paid to these
broker-dealers totaled $2,646,000 in 1996, $761,000 in 1995, and $326,000
in 1994.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996,
$113,000 for the year ended September 30, 1995 and $122,000 for the year
ended September 30, 1994.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc.,
whose purpose is to provide services to the SunAmerica companies. Amounts
paid for such services totaled $2,097,000 for the year ended September 30,
1996, $722,000 for the year ended September 30, 1995 and $706,000 for the
year ended September 30, 1994.
F-22
<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 ANCHOR NATIONAL LIFE
INSURANCE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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0
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