SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 33-5014
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the securities exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
---- ----
The number of shares outstanding of the registrants common stock on
February 14, 1997 was as follows:
Common Stock (par value $10,000.00 per share) 300 shares outstanding
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
Part I - Financial Information
Balance Sheet (Unaudited) -
December 31, 1996 and September 30, 1996 3 - 4
Income Statement (Unaudited) -
Three Months Ended December 31, 1996 and 1995 5
Statement of Cash Flows (Unaudited) -
Three Months Ended December 31, 1996 and 1995 6 - 7
Note to Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 17
Part II - Other Information 18
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET
(Unaudited)
<CAPTION>
December 31, September 30,
1996 1996
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 1,628,000 $ 6,707,000
Bonds and notes available for sale,
at fair value (amortized cost:
December 1996, $170,153,000;
September 1996, $146,908,000) 170,735,000 146,401,000
Common stocks, at fair value (cost:
December 1996 and September 1996, $0) 29,000 129,000
-------------- --------------
Total investments 172,392,000 153,237,000
Variable annuity assets 85,426,000 68,901,000
Accrued investment income 1,857,000 1,462,000
Deferred acquisition costs 14,627,000 12,127,000
Income taxes currently receivable 259,000 299,000
Other assets 840,000 842,000
-------------- --------------
TOTAL ASSETS $ 275,401,000 $ 236,868,000
============== ==============
See accompanying note
3
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET (Continued)
(Unaudited)
<CAPTION>
December 31, September 30,
1996 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 162,771,000 $ 140,613,000
Payable to brokers for purchases of
securities 52,000 1,939,000
Other liabilities 1,053,000 845,000
-------------- --------------
Total reserves, payables
and accrued liabilities 163,876,000 143,397,000
-------------- --------------
Variable annuity liabilities 85,426,000 68,901,000
-------------- --------------
Deferred income taxes 1,902,000 1,350,000
-------------- --------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000
Additional paid-in capital 14,428,000 14,428,000
Retained earnings 6,437,000 5,973,000
Net unrealized gains (losses) on debt and
equity securities available for sale 332,000 (181,000)
-------------- --------------
Total shareholder's equity 24,197,000 23,220,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 275,401,000 $ 236,868,000
============== ==============
</TABLE>
See accompanying note
4
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Investment income $ 2,893,000 $ 2,338,000
Interest expense on fixed annuity contracts (2,257,000) (1,655,000)
------------- -------------
NET INVESTMENT INCOME 636,000 683,000
------------- -------------
NET REALIZED INVESTMENT GAINS (LOSSES) 459,000 (631,000)
------------- -------------
VARIABLE ANNUITY FEE INCOME 292,000 126,000
------------- -------------
Other income and expenses:
Surrender charges 56,000 30,000
General and administrative expenses (319,000) (387,000)
Amortization of deferred acquisition
costs (302,000) (126,000)
Annual commissions (4,000) (2,000)
Other, net (38,000) (38,000)
------------- -------------
TOTAL OTHER INCOME AND EXPENSES (607,000) (523,000)
------------- -------------
PRETAX INCOME (LOSS) 780,000 (345,000)
Income tax benefit (expense) (316,000) 128,000
------------- -------------
NET INCOME (LOSS) $ 464,000 $ (217,000)
============= =============
See accompanying note
5
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 464,000 $ (217,000)
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to fixed annuity
contracts 2,257,000 1,655,000
Net realized investment (gains) losses (459,000) 631,000
Accretion of net discounts on
investments (55,000) (127,000)
Amortization of goodwill 15,000 14,000
Provision for deferred income taxes 276,000 126,000
Change in:
Deferred acquisition costs (2,700,000) (745,000)
Income taxes receivable/payable 40,000 (283,000)
Other, net (192,000) (159,000)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (354,000) 895,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes (32,592,000) (19,985,000)
Sales of:
Bonds and notes 7,227,000 16,359,000
Common stock 139,000 ---
Redemptions and maturities of:
Bonds and notes 608,000 2,416,000
Mortgage loans --- 9,000
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (24,618,000) (1,201,000)
------------ ------------
See accompanying note
6
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 25,828,000 $ 5,245,000
Net exchanges from the fixed accounts
of variable annuity contracts (2,551,000) (567,000)
Withdrawal payments on fixed annuity
contracts (2,451,000) (1,387,000)
Claims and annuity payments on fixed
annuity contracts (932,000) (699,000)
Net repayments of other short-term
financings (1,000) (1,140,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,893,000 1,452,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (5,079,000) 1,146,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,707,000 6,382,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 1,628,000 $ 7,528,000
============ ============
Supplemental cash flow information:
Income taxes paid (recovered) $ --- $ (30,000)
============ ============
</TABLE>
See accompanying note
7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
First SunAmerica Life Insurance Company (the "Company") is an indirect wholly
owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the
Company, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the Company's financial position as of December 31, 1996 and
September 30, 1996, and the results of its operations for the three months
ended December 31, 1996 and 1995 and its cash flows for the three months ended
December 31, 1996 and 1995. The results of operations for the three months
ended December 31, 1996 are not necessarily indicative of the results to be
expected for the full year. The accompanying unaudited financial statements
should be read in conjunction with the audited financial statements for the
fiscal year ended September 30, 1996, contained in the Company's Annual Report
on Form 10-K. Certain items have been reclassified to conform to the current
period's presentation.
8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of First SunAmerica Life Insurance Company (the "Company") for
the three months ended December 31, 1996 ("Fiscal 1997") and December 31, 1995
("Fiscal 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 in any other
statements made by, or on behalf of, the Company, whether or not in future
filings with the Securities and Exchange Commission (the "SEC"). Forward-
looking statements are statements not based on historical information and which
relate to future operations, strategies, financial results, or other
developments. 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 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 changes in 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
NET INCOME totaled $0.5 million in Fiscal 1997, compared with a net loss
of $0.2 million in Fiscal 1996.
PRETAX INCOME totaled $0.8 million in Fiscal 1997, compared with a pretax
loss of $0.3 million in Fiscal 1996. This $1.1 million improvement primarily
resulted from an increase in net realized investment gains and variable annuity
fees, which were partially offset by increased amortization of deferred
acquisition costs.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, totaled $0.6 million
in Fiscal 1997, compared with $0.7 million in Fiscal 1996. These amounts
9
<PAGE>
represent 1.58% on average invested assets (computed on a daily basis) of
$160.5 million in Fiscal 1997 and 2.19% on average invested assets of $124.6
million in Fiscal 1996.
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 $10.8 million in Fiscal 1997 and $15.6 million in
Fiscal 1996. The difference between the Company's yield on average invested
assets and the rate paid on average interest-bearing liabilities was 1.18% in
Fiscal 1997 and 1.43% in Fiscal 1996.
Investment income and the related yields on average invested assets
totaled $2.9 million or 7.21% in Fiscal 1997 and $2.3 million or 7.50% in
Fiscal 1996. Investment income increased primarily as a result of higher
levels of average invested assets, partially offset by a decline in portfolio
yields. Investment yields were lower in Fiscal 1997 because of a generally
declining interest rate environment since early 1995.
Total interest expense aggregated $2.3 million in Fiscal 1997 and $1.7
million in Fiscal 1996. The average rate paid on fixed annuity contracts was
6.03% in Fiscal 1997 and 6.07% in Fiscal 1996. Fixed annuity contracts
averaged $149.7 million in Fiscal 1997 and $109.1 million in Fiscal 1996.
The growth in average invested assets in Fiscal 1997 reflects sales of
the Company's fixed-rate products (including the fixed accounts of variable
annuity products). Since December 31, 1995, fixed annuity premiums have
aggregated $66.0 million. Fixed annuity premiums totaled $25.8 million in
Fiscal 1997 and $5.2 million in Fiscal 1996. These premiums include premiums
for the fixed accounts of variable annuities totaling $25.7 million and $1.7
million, respectively. This increase in premiums for the fixed accounts of
variable annuities resulted primarily from greater inflows into the one-year
fixed account of the Company's Polaris variable annuity product. The Company
has observed that many purchasers of its variable annuity contracts allocate
new premiums to the one-year fixed account and concurrently sign up for the
option to dollar cost average into the variable fund. Accordingly, the Company
anticipates that it will see a large portion of these premiums transferred into
the separate accounts.
NET REALIZED INVESTMENT GAINS totaled $0.5 million in Fiscal 1997,
compared with net realized investment losses of $0.6 million in Fiscal 1996.
Such gains and losses primarily comprise net gains and losses on sales of bonds
which were 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 $0.3
million in Fiscal 1997 and $0.1 million in Fiscal 1996. The increase in
variable annuity fees in Fiscal 1997 reflects the growth in average variable
annuity assets, principally due to increased market values and the receipt of
variable annuity premiums, partially offset by surrenders. Variable annuity
assets averaged $77.6 million during Fiscal 1997 and $34.1 million during
Fiscal 1996. Variable annuity premiums, which exclude premiums allocated to
the fixed accounts of variable annuity products, have aggregated $37.7 million
since December 31, 1995. Variable annuity premiums increased to $11.4 million
in Fiscal 1997 from $2.3 million in Fiscal 1996. This increase may be
attributed, in part, to a heightened demand for equity investments, principally
as a result of generally improved market performance. The Company has
10
<PAGE>
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 $56,000 in
Fiscal 1997 and $30,000 in Fiscal 1996. Surrender charges generally are
assessed on annuity withdrawals at declining rates during the first five to
seven years of an annuity contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $3.8 million in Fiscal 1997
and $2.2 million in Fiscal 1996. These payments represent 6.95% and 6.66%,
respectively, of the aggregate of average fixed and variable annuity reserves.
Withdrawals include variable annuity payments from the separate accounts
totaling $1.3 million in Fiscal 1997 and $0.8 million in Fiscal 1996, and
represent 6.95% and 9.86% respectively, of average variable annuity
liabilities. Variable annuity withdrawal rates declined in Fiscal 1997
principally as a result of significant growth in the variable annuity separate
accounts resulting in a lower average contract age. Management anticipates
that withdrawal rates will gradually increase in the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.3 million in Fiscal 1997
and $0.4 million in Fiscal 1996. Expenses remain closely controlled through
a company-wide cost containment program and continue to represent approximately
1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $0.3 million in Fiscal
1997 and $0.1 million in Fiscal 1996, and represent for each period, on an
annualized basis, approximately 10% of the balance of deferred acquisition
costs at the beginning of each period. The increase in Fiscal 1997 was
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 $4,000 in Fiscal 1997 and $2,000 in
Fiscal 1996. Based on current sales, the Company estimates that such annual
commissions will increase in future periods.
INCOME TAX EXPENSE totaled $0.3 million in Fiscal 1997, compared with an
income tax benefit of $0.1 million in Fiscal 1996, representing effective
annualized tax rates of 41% and 37%, respectively. The lower tax rate in
Fiscal 1996 reflected higher state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $1.0 million to $24.2 million at
December 31, 1996 from $23.2 million at September 30, 1996, primarily as a
result of the $0.5 million of net income recorded in Fiscal 1997 and the $0.3
million net unrealized gain on debt and equity securities available for sale,
a $0.5 million improvement over the $0.2 million net unrealized loss recorded
at September 30, 1996.
TOTAL ASSETS increased by $38.5 million to $275.4 million at December 31,
1996 from $236.9 million at September 30, 1996, principally due to a $19.2
million increase in invested assets and a $16.5 million increase in the
separate accounts for variable annuities, primarily as a result of sales of the
Company's Polaris variable annuity product.
11
<PAGE>
INVESTED ASSETS at December 31, 1996 totaled $172.4 million, compared
with $153.2 million at September 30, 1996. This $19.2 million increase
primarily resulted from sales of fixed 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. However, the Company
has 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.
THE BOND PORTFOLIO had an aggregate fair value that exceeded its
amortized cost by $0.6 million at December 31, 1996. At September 30, 1996,
the amortized cost of the Bond Portfolio exceeded its fair value by $0.5
million. The net unrealized gain on the Bond Portfolio since September 30,
1996 principally reflects the lower relative prevailing interest rates at
December 31, 1996 and their corresponding effect on the fair value of the Bond
Portfolio.
All of the Bond Portfolio at December 31, 1996 was rated by Standard &
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch") or
under comparable statutory rating guidelines established by the National
Association of Insurance Commissioners ("NAIC") and implemented by either the
NAIC or the Company. At December 31, 1996, approximately $161.8 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 $93.9 million of U.S. government/agency securities and
mortgage-backed securities ("MBSs").
At December 31, 1996, the Bond Portfolio included $8.4 million (fair
value, $8.6 million) of bonds not rated investment grade by S&P, Moody's, DCR,
Fitch or the NAIC. Based on their December 31, 1996 amortized cost, these non-
investment-grade bonds accounted for 3.1% of the Company's total assets and
4.9% 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 invested 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 December 31,
1996. The table on the following page summarizes the Company's rated bonds by
rating classification.
12
<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/DCR/Fitch DCR/Fitch, By NAIC Category Total
- ---------------------------------------------- ----------------------------------- -----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[DCR]/{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-} $ 125,681 $ 126,106 1 $ 6,407 $ 6,592 $ 132,088 76.89% $ 132,698
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 22,454 22,103 2 7,225 7,285 29,679 17.28 29,388
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 0 0 3 0 0 0 0.00 0
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 6,618 6,718 4 1,588 1,831 8,206 4.78 8,549
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 180 100 5 0 0 180 0.10 100
C1 to D
[DD]
{D} 0 0 6 0 0 0 0.00 0
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $ 154,933 $ 155,027 $ 15,220 $ 15,708 $ 170,153 $ 170,735
========== ========== ========== ========== ========== ==========
Footnotes appear on the following page.
</TABLE>
13
<PAGE>
Footnotes to the table of Rated Bonds by Rating Classification
--------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debt's relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moody's
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debt's relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. DCR rates
debt securities in rating categories ranging from AAA (the highest) to DD
(in payment default). A plus (+) or minus (-) indicates the debt's
relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on
the highest of the S&P, Moody's, DCR and Fitch ratings if rated by
multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or near
default. These six categories correspond with the S&P/Moody's/DCR/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. 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.
14
<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 economic 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 December 31, 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 December 31, 1996 the weighted
average life of the Company's investments was approximately 4.3 years and the
duration was approximately three. 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 measures the approximate percentage
change in market value of a portfolio if interest rates change by 100 basis
points, recognizing the changes in portfolio cash flows resulting from embedded
options such as prepayments and bond calls.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos"), and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools
of mortgage loans. MBSs generally pay principal and interest monthly. The
amount of principal and interest payments may fluctuate as a result of
prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with Reverse Repos is counterparty
risk. The Company believes, however, that the counterparties to its Reverse
Repos are financially responsible and that the counter party risk associated
with those transactions is minimal. The primary risk associated with MBSs is
15
<PAGE>
that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. The carrying values of bonds
that are determined to have declines in value that are other than temporary are
reduced to net realizable value and no further accruals of interest are made.
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $0.2 million of bonds and
notes at December 31, 1996 (at amortized cost, with a fair value of $0.1
million), and constituted 0.1% of total invested assets. At September 30,
1996, defaulted investments totaled $0.2 million and constituted 0.1% of total
invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At December 31, 1996, approximately $100.8 million of the Company's
Bond Portfolio had an aggregate unrealized gain of $2.0 million, while
approximately $69.4 million of the Bond Portfolio had an aggregate unrealized
loss of $1.4 million. In addition, the Company's investment portfolio
currently provides approximately $1.9 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.
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
16
<PAGE>
marketing and other trade practices, operating guaranty associations, licensing
agents, approving policy forms, regulating certain premium rates, regulating
insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type, valuation and
amount of investments permitted, limiting the amount of dividends that can be
paid and the size of transactions that can be consummated without first
obtaining regulatory approval and other related matters.
During the last decade, the insurance regulatory framework has been
placed under increased scrutiny by various states, the federal government and
the NAIC. Various states have considered or enacted legislation that changes,
and in many cases increases, the states' authority to regulate insurance
companies. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in the regulation of
insurance companies. In recent years, the NAIC has approved and recommended
to the states for adoption and implementation several regulatory initiatives
designed to reduce the risk of insurance company insolvencies and market
conduct violations. These initiatives include investment reserve requirements,
risk-based capital standards, new investment 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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
EXHIBITS
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
No Current Report on Form 8-K was filed during the three months ended
December 31, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SUNAMERICA LIFE INSURANCE COMPANY
By: SCOTT L. ROBINSON
------------------------
Scott L. Robinson
Senior Vice President, Treasurer and Director
Date: February 14, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President, February 14, 1997
- ------------------------ Treasurer and Director -----------------
Scott L. Robinson (Principal Financial
Officer)
/s/ N. SCOTT GILLIS Senior Vice President and February 14, 1997
- ------------------------ Controller (Principal -----------------
N. Scott Gillis Accounting Officer)
19
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF FIRST SUNAMERICA LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 170,735,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 172,392,000
<CASH> 1,628,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 14,627,000
<TOTAL-ASSETS> 275,401,000
<POLICY-LOSSES> 162,771,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,000,000
0
0
<OTHER-SE> 21,197,000
<TOTAL-LIABILITY-AND-EQUITY> 275,401,000
0
<INVESTMENT-INCOME> 2,893,000
<INVESTMENT-GAINS> 459,000
<OTHER-INCOME> 292,000
<BENEFITS> 2,257,000
<UNDERWRITING-AMORTIZATION> 302,000
<UNDERWRITING-OTHER> (14,000)
<INCOME-PRETAX> 780,000
<INCOME-TAX> 316,000
<INCOME-CONTINUING> 464,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
