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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended September 30, 1997
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 19, 1997 WAS AS FOLLOWS:
Common Stock (par value $10,000 per share) 300 shares outstanding
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
First SunAmerica Life Insurance Company (the "Company") is an indirect
wholly owned subsidiary of SunAmerica Inc. (the "Parent"), a financial services
company specializing in retirement savings and investment products. At
September 30, 1997, the Company owned $382.9 million of assets.
The Company is incorporated in New York and 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 2,000 employees, approximately 600 of whom perform
services for the Company as well as for certain of its affiliates.
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.
Benefiting from continued strong 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 operations on the
sale of annuities.
The Company's four affiliated broker-dealers comprise the largest network
of independent registered representatives in the nation and the fourth-largest
securities sales force, based on industry data. Its affiliated broker-dealers
accounted for approximately half of the Company's total annuity sales in
fiscal 1997. The Company also distributes its products and services through
an extensive network of independent broker-dealers, full-service securities
firms, independent general insurance agents and major financial institutions.
The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance its marketing efforts. Its use of optical disk imaging and artificial
intelligence has substantially eliminated the more traditional paper-intensive
life insurance processing procedures, reducing annuity processing and servicing
costs and improving customer service. The Company is also implementing
technology to interface with its affiliated broker-dealers, which will enable
the Company to more effectively market its products and help the affiliated
financial professionals to better serve their clients.
In recent years, the Company and its affiliates have enhanced its
marketing efforts and expanded its offerings of variable annuities, resulting
in significantly increased fee income. The Company's variable annuity business
entails no portfolio credit risk and requires significantly less capital
support than its fixed-rate business, which generates net investment income.
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LIFE INSURANCE OPERATIONS
Founded in 1978, the Company is licensed in the states of New York, New
Mexico and Nebraska and 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.
In addition to distributing its annuity products through its four
affiliated broker-dealers, the Company distributes its products through over
200 other independent broker-dealers, full-service securities firms and
financial institutions as well as through independent general insurance agents.
In total, more than 7,500 independent sales representatives are licensed to
sell the Company's annuity products.
FIXED ANNUITIES
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, many (approximately 36% at September 30, 1997) 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, among other
factors. 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 size of a new single premium fixed
annuity contract sold by the Company in 1997 was approximately $39,000.
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
restrictions in order to encourage persistency. Approximately 93% of the
Company's fixed annuity reserves had surrender penalties or other restrictions
at September 30, 1997.
VARIABLE ANNUITIES
The variable annuity products of the Company 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 from
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 similar to those offered by fixed annuities, but differ in that the
contractholder's rate of return is generally dependent upon the investment
performance of the particular equity, fixed-income, money market or asset
allocation fund(s) selected by the contractholder. Because the investment risk
is borne by the customer in all but the fixed-rate account options, these
products require significantly less capital support than fixed annuities. At
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September 30, 1997, the Company's variable product reserves were $260.3
million, $171.5 million of which were in the separate accounts. The Company's
variable annuity products incorporate surrender charges to encourage
persistency. At September 30, 1997, 98% of the Company's variable annuity
reserves held in the separate account were subject to surrender penalties. The
Company's variable annuity products also generally limit the number of
transfers made in a specified period between account options without the
assessment of a fee. The average size of a new variable annuity contract sold
by the Company in 1997 was approximately $49,000.
INVESTMENT OPERATIONS
The Company believes that its fixed-rate liabilities should be backed by
a portfolio principally composed of fixed-rate investments that generate
predictable rates of return. The Company does not have a specific target rate
of return. Instead, its rates of return vary over time depending on the
current interest rate environment, the slope of the yield curve, the spread at
which fixed-rate investments are priced over the yield curve, and general
economic conditions. The Company manages most of its invested assets
internally. Its portfolio strategy is constructed with a view to achieve
adequate risk-adjusted returns consistent with its investment objectives of
effective asset-liability matching, liquidity and safety.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its fixed-
rate products and conducting its investment operations to closely match the
duration of the fixed-rate assets to that of its fixed-rate liabilities. The
Company's fixed-rate assets include cash and short-term investments, and bonds
and notes. At September 30, 1997, these assets had an aggregate fair value of
$190.2 million with a duration of 3.3. At September 30, 1997, the Company's
fixed annuity liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $171.8 million with a duration of 3.6. For the years ended September 30,
1997, 1996 and 1995, the Company's yields on average invested assets were
7.22%, 7.40% and 7.59%, respectively; its average rates paid on fixed annuity
contracts were 5.97%, 5.93% and 5.90%, respectively; and it realized net
investment spreads of 1.52%, 2.08% and 2.70%, respectively, on average invested
assets. Net realized investment gains and losses were 0.25%, 0.27% and 1.31%
of average invested assets in 1997, 1996 and 1995, respectively.
The Company's general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of its portfolio of bonds and
notes (the "Bond Portfolio") is available to be sold in response to changes in
market interest rates, changes in relative value of asset sectors and
individual securities, changes in prepayment risk, changes in credit quality
outlook for certain securities, the Company's need for liquidity and other
similar factors.
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The following table summarizes the Company's investment portfolio at
September 30, 1997:
SUMMARY OF INVESTMENTS
Percent
Amortized of
cost portfolio
------------ ---------
(In thousands)
Cash and short-term investments $ 1,689 0.9%
U.S. Government securities 11,073 5.9
Mortgage-backed securities 69,355 37.2
Other bonds and notes 104,281 56.0
------------ ---------
Total investments $ 186,398 100.00 %
============ =========
At September 30, 1997, the Bond Portfolio (at amortized cost) included
$179.8 million of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's,
Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Services, L.P.
("Fitch"), the National Association of Insurance Commissioners ("NAIC") and $4.9
million of bonds rated by the Company pursuant to statutory ratings guidelines
established by the NAIC. At September 30, 1997, approximately $171.6 million of
the Bond Portfolio was investment grade, including $79.6 million of U.S.
government/agency securities and mortgage-backed securities.
At September 30, 1997, the Bond Portfolio included $13.1 million (at
amortized cost, with a fair value of $14.0 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these non-
investment-grade bonds accounted for 3.4% of the Company's total assets and 7.0%
of its invested assets.
At September 30, 1997, there were no investments in default as to the
payment of principal or interest.
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 insurance
regulatory agencies of the States of New York, New Mexico and Nebraska, the
states in which the Company is authorized to transact business. State
insurance laws establish supervisory agencies with broad administrative and
supervisory powers. Principal among these powers are 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
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financial statements and reports, performing financial, market conduct and
other examinations, determining the reasonableness and adequacy of statutory
capital and surplus, defining acceptable accounting principles, regulating the
type, valuation and amount of investments permitted, and limiting the amount
of dividends that can be paid and the size of transactions that can be
consummated without first obtaining regulatory approval.
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 or allowing combinations between insurance companies, banks
and other entities. 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, codification of insurance accounting principles,
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.
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 95% of total net annuity premiums written. Net annuity premiums
written among the top 100 companies range from less than $100 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, net return after fees, 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 executive offices and its principal office are in leased
premises at 733 Third Avenue, New York, New York 10017. The Company, through
an affiliate, also leases office space in Los Angeles, Woodland Hills and
Torrance, California.
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
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further liabilities and
costs will not have a material adverse impact upon the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fiscal year 1997 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. Certain items
have been reclassified to conform to the current year's presentation.
<CAPTION>
Years ended September 30,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(In thousands)
RESULTS OF OPERATIONS
Net investment income $ 2,692 $ 2,798 $ 2,784 $ 1,892 $ 1,161
Net realized investment gains (losses) 360 (539) (1,348) 445 1,932
Fee income 2,016 911 606 749 284
General and administrative expenses (1,842) (1,480) (1,004) (1,319) (1,408)
Amortization of deferred acquisition costs (1,158) (500) (300) --- (220)
Annual commissions (18) (19) (33) (30) (44)
------- ------- ------- ------- -------
Pretax income 2,050 1,171 705 1,737 1,705
Income tax expense (927) (448) (182) (655) (829)
------- ------- ------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 1,123 723 523 1,082 876
Cumulative effect of change in accounting
for income taxes --- --- --- (725) ---
------- ------- ------- ------- -------
NET INCOME $ 1,123 $ 723 $ 523 $ 357 $ 876
======= ======= ======= ======= =======
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ITEM 6. SELECTED FINANCIAL DATA (continued)
<CAPTION>
At September 30,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands)
FINANCIAL POSITION
Investments $ 190,241 $ 153,237 $ 121,218 $ 78,928 $ 85,130
Variable annuity assets 171,475 68,901 32,760 26,390 24,695
Deferred acquisition costs 18,094 12,127 6,491 5,651 2,540
Deferred income taxes --- --- --- 886 1,031
Other assets 3,040 2,603 2,688 2,282 3,876
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 382,850 $ 236,868 $ 163,157 $ 114,137 $ 117,272
========= ========= ========= ========= =========
Reserves for fixed annuity contracts $ 180,805 $ 140,613 $ 106,332 $ 66,881 $ 68,228
Variable annuity liabilities 171,475 68,901 32,760 26,390 24,695
Other reserves, payables and accrued
liabilities 3,272 2,784 2,003 1,051 1,220
Deferred income taxes 1,836 1,350 244 --- ---
Shareholder's equity 25,462 23,220 21,818 19,815 23,129
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $ 382,850 $ 236,868 $ 163,157 $ 114,137 $ 117,272
========= ========= ========= ========= =========
</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, 1997 follows. In connection
with the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, the Company cautions readers regarding certain forward-looking
statements contained in this report and in any other statements made by, or on
behalf of, the Company, whether or not in future filings with the Securities
and Exchange Commission (the "SEC"). Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using verbs
such as "expect," "anticipate," "believe" or words of similar import generally
involve forward-looking statements. Without limiting the foregoing, forward-
looking statements include statements which represent the Company's beliefs
concerning future levels of sales and redemptions of the Company's products,
investment spreads and yields, or the earnings and profitability of the
Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such
as credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $1.1 million in 1997, compared with $0.7 million in
1996 and $0.5 million in 1995.
PRETAX INCOME totaled $2.1 million in 1997, $1.2 million in 1996 and $0.7
million in 1995. The 75.0% improvement in 1997 over 1996 primarily resulted
from net realized investment gains of $0.4 million, compared to net realized
investment losses of $0.5 million in 1996. Pretax income was also favorably
impacted by an increase in fee income, partially offset by increased
amortization of deferred acquisition costs and increased general and
administrative expenses. The 66.1% improvement in 1996 over 1995 primarily
resulted from a decline in net realized investment losses, partially offset by
increased general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, totaled $2.7 million
in 1997 and $2.8 million in each of 1996 and 1995. These amounts equal 1.52%
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on average invested assets (computed on a daily basis) of $176.9 million in
1997, 2.08% on average invested assets of $134.5 million in 1996 and 2.70% on
average invested assets of $103.2 million in 1995.
Net investment spreads include the effect of income earned on the excess
of average invested assets over average interest-bearing liabilities. This
excess amounted to $8.0 million in 1997, $13.8 million in 1996 and $17.6
million in 1995. The difference between the Company's yield on average
invested assets and the rate paid on average interest-bearing liabilities (the
"Spread Difference") was 1.25% in 1997, 1.47% in 1996 and 1.69% in 1995.
Investment income (and the related yields on average invested assets)
totaled $12.8 million (7.22%) in 1997, compared with $10.0 million (7.40%) in
1996 and $7.8 million (7.59%) in 1995. Investment income increased primarily
as a result of higher levels of average invested assets, partially offset by
a 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. Decreasing investment yields since 1995 were primarily due to
a generally declining interest rate environment.
Total interest expense equalled $10.1 million in 1997, $7.2 million in
1996 and $5.0 million in 1995. The average rate paid on fixed annuity
contracts was 5.97% in 1997, 5.93% in 1996 and 5.90% in 1995. Fixed annuity
contracts averaged $168.9 million during 1997, compared with $120.6 million
during 1996 and $85.5 million during 1995.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the sales
of the Company's fixed-rate products, consisting of fixed annuity premiums
(including those for the fixed accounts of variable annuity products). Fixed
annuity premiums totaled $70.8 million in 1997, compared with $45.4 million in
1996 and $51.7 million in 1995. These premiums include premiums for the fixed
accounts of variable annuities totaling $68.9 million, $41.2 million and $2.9
million, respectively, which have increased primarily because of increased
sales of the Company's Polaris product and greater inflows into the one-year
fixed account of that product. The Company has observed that many purchasers
of its variable annuity contracts allocate new premiums to the one-year fixed
account and concurrently elect the option to dollar cost average into one or
more variable funds. Accordingly, the Company anticipates that it will see a
large portion of these premiums transferred into the variable funds.
NET REALIZED INVESTMENT GAINS/LOSSES totaled $0.4 million of gains in
1997, compared to $0.5 million of losses in 1996 and $1.3 million of losses in
1995. Net realized investment losses include impairment writedowns of $0.1
million in both 1997 and 1996. Therefore, net gains from sales of investments
totaled $0.5 million in 1997 and net losses from sales of investments totaled
$0.4 million in 1996. There were no impairment writedowns in 1995.
The Company sold invested assets, principally bonds and notes,
aggregating $48.7 million, $80.0 million and $57.7 million in 1997, 1996 and
1995, respectively. Sales of investments result from the active management of
the Company's investment portfolio. Because sales of investments are made in
both rising and falling interest rate environments, net gains and losses from
sales of investments fluctuate from period to period, and represent 0.25%,
0.27% and 1.31% of average invested assets for 1997, 1996 and 1995,
respectively. Active portfolio management involves the ongoing evaluation of
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assets sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Company's active portfolio management is to maximize total
returns on the investment portfolio, taking into account credit and interest-
rate risk.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $1.7 million
in 1997, $0.7 million in 1996 and $0.4 million in 1995. These increased fees
reflect growth in average variable annuity assets, principally due to the
receipt of variable annuity premiums, increased market values and net
exchanges into the separate accounts from the fixed accounts of variable
annuity contracts, partially offset by surrenders. Variable annuity assets
averaged $111.8 million during 1997, $46.2 million during 1996 and $27.8
million during 1995. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, totaled $56.3
million in 1997, $28.6 million in 1996 and $5.9 million in 1995. Sales of
variable annuity products (which include premiums allocated to the fixed
accounts) ("Variable Annuity Product Sales") amounted to $125.2 million, $69.8
million and $8.8 million in 1997, 1996 and 1995, respectively. Increases in
Variable Annuity Product Sales are due, in part, to market share gains through
enhanced distribution efforts and growing consumer demand for flexible
retirement savings products that offer a variety of equity, fixed income and
guaranteed fixed account investment choices. 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 $304,000 in
1997, compared with $221,000 in 1996 and $194,000 in 1995. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first seven years of an annuity contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $20.6 million in 1997,
compared with $12.7 million in 1996 and $17.7 million in 1995. These payments
represent 7.58%, 8.06% and 16.93%, respectively, of average fixed and variable
annuity reserves. Withdrawals include variable annuity withdrawals from the
separate accounts totaling $5.3 million in 1997, $2.8 million in 1996 and $3.6
million in 1995. Higher withdrawal payments in 1997 are due to the significant
growth in the Company's annuity reserves. Higher withdrawals in 1995 compared
to 1996 are due to policies coming off surrender charge restrictions.
Management anticipates that withdrawal rates will gradually increase in future
periods.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.8 million in 1997,
compared with $1.5 million in 1996 and $1.0 million in 1995. General and
administrative expenses remain closely controlled through a company-wide cost
containment program and continue to represent less than 1% of average total
assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $1.2 million in 1997,
compared with $0.5 million in 1996 and $0.3 million in 1995. The increases in
amortization during the three-year period were primarily due to additional
fixed and variable annuity sales and the subsequent amortization of related
deferred commissions and other direct selling costs.
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ANNUAL COMMISSIONS represent renewal commissions paid quarterly in
arrears to maintain the persistency of certain of the Company's annuity
contracts. Annual commissions totaled $18,000 in 1997, $19,000 in 1996 and
$33,000 in 1995. Based on current sales, the Company estimates that such
annual commissions will increase in future periods.
INCOME TAX EXPENSE totaled $0.9 million in 1997, compared with $0.4
million in 1996 and $0.2 million in 1995, representing effective tax rates of
45% in 1997, 38% in 1996 and 26% in 1995. The differing tax rates for the
three year period reflect changes in state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 9.7% to $25.5 million at September 30,
1997 from $23.2 million at September 30, 1996, primarily due to $1.1 million
of net income recorded in 1997 and $0.9 million of net unrealized gains on debt
and equity securities available for sale (credited directly to shareholder's
equity), versus $0.2 million of net unrealized losses on such securities
recorded at September 30, 1996.
INVESTED ASSETS at year end totaled $190.2 million in 1997, compared with
$153.2 million at year-end 1996. This 24.1% increase primarily resulted from
sales of fixed annuities.
The Company manages most of its invested assets internally. The
Company's general investment philosophy is to hold fixed-rate assets for
long-term investment. Thus, it does not have a trading portfolio. However,
the Company has determined that all of its portfolio of bonds and notes (the
"Bond Portfolio") is available to be sold in response to changes in market
interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which comprises 99% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $3.8 million at September 30, 1997. At September 30, 1996,
the amortized cost exceeded the fair value of the Bond Portfolio by $0.5
million. The net unrealized gains on the Bond Portfolio since September 30,
1996 principally reflect the lower prevailing interest rates at September 30,
1997 and the corresponding effect on the fair value of the Bond Portfolio.
At September 30, 1997, the Bond Portfolio (at amortized cost) included
$179.8 million of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's
Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch
Investors Service, L.P. ("Fitch") or the National Association of Insurance
Commissioners ("NAIC"), and $4.9 million of bonds rated by the Company pursuant
to statutory ratings guidelines established by the NAIC. At September 30,
1997, approximately $171.6 million of the Bond Portfolio was investment grade,
including $79.6 million of U.S. government/agency securities and mortgage-
backed securities ("MBSs").
12
<PAGE>
At September 30, 1997, the Bond Portfolio included $13.1 million (at
amortized cost with a fair value of $14.0 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these non-
investment-grade bonds accounted for 3.4% of the Company's total assets and
7.0% of its invested assets.
Non-investment-grade securities generally provide higher yields and
involve greater risks than investment-grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment-grade issuers. In addition, the trading market for
these securities is usually more limited than for investment-grade securities.
The Company had no material concentrations of non-investment-grade securities
at September 30, 1997. The following table summarizes the Company's rated
bonds by rating classification as of September 30, 1997.
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/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-} $ 117,169 $ 119,254 1 $ 10,891 $ 10,983 $ 128,060 68.70% $ 130,237
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 37,101 37,544 2 6,466 6,783 43,567 23.37 44,327
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 993 1,022 3 0 0 993 0.53 1,022
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 12,089 12,947 4 0 0 12,089 6.49 12,947
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 0 0 5 0 0 0 0.00 0
C1 to D
[DD]
{D} 0 0 6 0 0 0 0.00 0
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $ 167,352 $ 170,767 $ 17,357 $ 17,766 $ 184,709 $ 188,533
========== ========== ========== ========== ========== ==========
</TABLE>
Footnotes appear on the following page.
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. DCR rates
debt securities in rating categories ranging from AAA (the highest) to
DD (in payment default). A plus (+) or minus (-) indicates the debt's
relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Issues are categorized based on
the highest of the S&P, Moody's, DCR and Fitch ratings if rated by
multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or
near default. These six categories correspond with the
S&P/Moody's/DCR/Fitch rating groups listed above, with categories 1 and
2 considered investment grade. The NAIC categories include $4.9 million
(at amortized cost) of assets that 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-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed rate investments are priced
over the yield curve, and general economic conditions. Its portfolio strategy
is constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges
or other restrictions in order to encourage persistency. Approximately 93%
of the Company's fixed annuity reserves had surrender penalties or other
restrictions at September 30, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its fixed-
rate products and conducting its investment operations to closely match the
duration of the fixed-rate assets to that of its fixed-rate liabilities. The
Company's fixed-rate assets include cash and short-term investments, and bonds
and notes. At September 30, 1997, these assets had an aggregate fair value of
$190.2 million with a duration of 3.3. At September 30, 1997, the Company's
fixed annuity liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $171.8 million with a duration of 3.6. The Company's potential exposure due
to a relative 10% increase in interest rates prevalent at September 30, 1997
is immaterial.
Duration is a common option-adjusted measure for the price sensitivity
of a fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes experienced under
given interest rate scenarios, and the differences may be material.
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
16
<PAGE>
of mortgage loans. MBSs generally pay principal and interest monthly. The
amount of principal and interest payments may fluctuate as a result of
prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos 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. As part of its decision to purchase an MBS, the
Company assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is
purchased, the Company monitors its actual prepayment experience monthly to
reassess the relative attractiveness of the security with the intent to
maximize total return.
INVESTED ASSETS EVALUATION 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 values of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of any collateral,
compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. 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, were $0.2 million at September 30,
1996 and constituted 0.1% of total invested assets. There were no defaulted
investments at September 30, 1997.
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, 1997, approximately $163.3 million of the Company's
Bond Portfolio had an aggregate unrealized gain of $4.0 million, while
approximately $21.4 million of the Bond Portfolio had an aggregate unrealized
loss of $0.2 million. In addition, the Company's investment portfolio
currently provides approximately $1.9 million of monthly cash flow from
scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Company's annuity products have been
sufficient in amount to satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
17
<PAGE>
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.
18
<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 22, 1997 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* 64 Chairman 1987 Cofounded SAI
Chief Executive 1994 in 1957
Officer and
President of
the Company
Chairman, Chief 1976
Executive Officer
and President of 1986
SunAmerica Inc.
("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* 40 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman of 1995
SAI
James R. Belardi* 40 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* 45 Senior Vice 1991 (Joined SAI in 1974)
President of the
Company and SAI
Peter McMillan, III* 40 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.
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>
Scott L. Robinson* 51 Senior Vice 1991 (Joined SAI in 1978)
President and
Treasurer of
the Company
Senior Vice
President and
Controller of SAI
James W. Rowan* 35 Senior Vice 1996 Vice President 1993-1995
President Assistant to the 1992
of the Company Chairman
Senior Vice 1995 Senior Vice President, 1986-1992
President of SAI Security Pacific Corp.
Lorin M. Fife* 44 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* 40 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 44 Senior Vice 1994 Vice President and 1989-1994
President and Controller, SunAmerica
Controller of the Life Companies ("SLC")
Company (Joined SAI in 1985)
Vice President of 1997
SAI
Edwin R. Reoliquio 40 Senior Vice 1995 Vice President and 1990-1995
President and Actuary, SLC
Chief Actuary
of the Company
- --------------------------------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
20
<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 33 Senior Vice 1996 Vice President, SLC 1995-1996
President of Director, Product
the Company Development, SLC
Manager, Business 1994-1995
Development, SLC
Actuary, Milliman 1993-1994
and Robertson
Consultant, Chalke 1992-1993
Inc.
Scott H. Richland 35 Vice President 1994 Vice President and 1995-1997
Senior Vice 1997 Treasurer of SAI
President and Vice President and 1994-1995
Treasurer of SAI Asst. Treasurer of
SAI
Asst. Treasurer of 1993-1994
SAI
Director, SunAmerica 1990-1993
Investments, Inc.
(Joined SAI in 1990)
David W. Ferguson 44 Director 1987 Partner, Davis Polk 1980 to
& Wardwell present
Thomas A. Harnett 73 Director 1987 Partner, Lane & 1989 to
Mitterdorf, LLP present
Margery K. Neale 38 Director 1996 Partner, Shereff, 1990 to
Friedman, Hoffman present
& Goodman, LLP
Lester Pollack 64 Director 1987 Chief Executive 1986 to
Officer, Centre present
Partners, L.P.
Managing Partner, 1986 to
Lazard Freres & Co. present
Senior Managing 1988 to
Director, Corporate present
Advisors, L.P.
Richard D. Rohr 71 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>
21
<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 1997:
Name of Individual or Capacities In Which Allocated Cash
Number in Group Served Compensation
--------------------- ------------------------- --------------
Eli Broad Chairman, Chief Executive $ 8,700
Officer and President
Joseph M. Tumbler Executive Vice President 5,438
Jay S. Wintrob Executive Vice President 5,438
James R. Belardi Senior Vice President 2,538
Jana Waring Greer Senior Vice President 4,812
All Executive Officers as
a Group (14) $46,308
=========
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
December 15, 1997, Mr. Broad was the beneficial owner of 10,706,006 shares of
Common Stock (5.68% of the class outstanding) and 13,740,441 shares of Class
B Common Stock (84.40% of the class outstanding). Of the Common Stock,
1,063,773 shares represent restricted shares granted under the Company's
employee stock plans as to which Mr. Broad has no investment power; and
6,949,512 shares represent employee stock options held by Mr. Broad which are
or will become exercisable on or before February 15, 1998 and as to which he
has no voting or investment power. Of the Class B Stock, 12,684,210 shares are
held directly by Mr. Broad and 1,056,231 shares are registered in the name of
a corporation as to which Mr. Broad exercises sole voting and dispositive
powers. At December 15, 1997, all directors and officers as a group
beneficially owned 14,338,041 shares of Common Stock (7.64% of the class
outstanding) and 13,740,441 shares of Class B Common Stock (84.40% of the class
outstanding). All share numbers reflect a 3-for-2 Stock split paid in the form
of a stock dividend on August 29, 1997 to holders of record on August 20, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
22
<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) Agreement and Plan of Merger and Amended and Restated Certificate
of Incorporation.
3(b) 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, 1997.
23
<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 22, 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:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C> <C>
/s/ ELI BROAD Chairman, Chief Executive December 22, 1997
- ------------------------------ Officer and President -----------------
Eli Broad (Principal Executive Officer)
/s/ SCOTT L. ROBINSON Senior Vice President, December 22 , 1997
- ------------------------------ Treasurer and Director -----------------
Scott L. Robinson (Principal Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and December 22, 1997
- ------------------------------ Controller (Principal -----------------
N. Scott Gillis Accounting Officer)
/s/ JAY S. WINTROB Executive Vice President December 22, 1997
- ------------------------------ and Director -----------------
Jay S. Wintrob
/s/ JAMES R. BELARDI Senior Vice President December 22, 1997
- ------------------------------ and Director -----------------
James R. Belardi
/s/ LORIN M. FIFE Senior Vice President, December 22, 1997
- ------------------------------ General Counsel, Assistant -----------------
Lorin M. Fife Secretary and Director
/s/ JANA W. GREER Senior Vice President December 22, 1997
- ------------------------------ and Director -----------------
Jana W. Greer
/s/ SUSAN L. HARRIS Senior Vice President, December 22, 1997
- ------------------------------ Secretary and Director -----------------
Susan L. Harris
/s/ JAMES W. ROWAN Senior Vice President December 22, 1997
- ------------------------------ and Director -----------------
James W. Rowan
<PAGE>
<CAPTION>
Signature Title Date
--------- ----- ----
/s/ EDWIN R. REOLIQUIO Senior Vice President December 22, 1997
- ------------------------------ and Chief Actuary -----------------
Edwin R. Reoliquio
/s/ PETER McMILLAN Director December 22, 1997
- ------------------------------ -----------------
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, 1997 and 1996 F-3
Income Statement for the years ended
September 30, 1997, 1996 and 1995 F-4
Statement of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 F-5 through
F-6
Notes to Financial Statements F-7 through
F-21
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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997, 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.
Price Waterhouse LLP
Los Angeles, California
November 7, 1997
F-2
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<CAPTION>
September 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 1,689,000 $ 6,707,000
Bonds and notes:
Available for sale, at fair value
(amortized cost: 1997, $184,709,000;
1996, $146,908,000) 188,533,000 146,401,000
Common stocks, at fair value
(cost: 1997 and 1996, $0) 19,000 129,000
------------- -------------
Total investments 190,241,000 153,237,000
Variable annuity assets 171,475,000 68,901,000
Accrued investment income 2,179,000 1,462,000
Deferred acquisition costs 18,094,000 12,127,000
Income taxes currently receivable --- 299,000
Other assets 861,000 842,000
------------- -------------
TOTAL ASSETS $ 382,850,000 $ 236,868,000
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 180,805,000 $ 140,613,000
Payable to brokers for purchases of securities 1,010,000 1,939,000
Income taxes currently payable 540,000 ---
Other liabilities 1,722,000 845,000
------------- -------------
Total reserves, payables and
accrued liabilities 184,077,000 143,397,000
------------- -------------
Variable annuity liabilities 171,475,000 68,901,000
------------- -------------
Deferred income taxes 1,836,000 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 7,096,000 5,973,000
Net unrealized gains (losses) on debt and
equity securities available for sale 938,000 (181,000)
------------- -------------
Total shareholder's equity 25,462,000 23,220,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 382,850,000 $ 236,868,000
============= =============
</TABLE>
See accompanying notes
F-3
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<CAPTION>
Years ended September 30,
-------------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Investment income $ 12,781,000 $ 9,957,000 $ 7,834,000
------------- ------------ ------------
Interest expense on:
Fixed annuity contracts (10,089,000) (7,155,000) (5,042,000)
Senior indebtedness --- (4,000) (8,000)
------------- ------------ ------------
Total interest expense (10,089,000) (7,159,000) (5,050,000)
------------- ------------ ------------
NET INVESTMENT INCOME 2,692,000 2,798,000 2,784,000
------------- ------------ ------------
NET REALIZED INVESTMENT
GAINS (LOSSES) 360,000 (539,000) (1,348,000)
------------- ------------ ------------
Fee income:
Variable annuity fees 1,712,000 690,000 412,000
Surrender charges 304,000 221,000 194,000
------------- ------------ ------------
TOTAL FEE INCOME 2,016,000 911,000 606,000
------------- ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES (1,842,000) (1,480,000) (1,004,000)
------------- ------------ ------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (1,158,000) (500,000) (300,000)
------------- ------------ -------------
ANNUAL COMMISSIONS (18,000) (19,000) (33,000)
------------- ------------ ------------
PRETAX INCOME 2,050,000 1,171,000 705,000
Income tax expense (927,000) (448,000) (182,000)
------------- ------------ ------------
NET INCOME $ 1,123,000 $ 723,000 $ 523,000
============= ============ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<CAPTION>
Years ended September 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,123,000 $ 723,000 $ 523,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Interest credited to fixed annuity
contracts 10,089,000 7,155,000 5,042,000
Net realized investment
(gains) losses (360,000) 539,000 1,348,000
Accretion of net discounts on
investments (97,000) (343,000) (394,000)
Amortization of goodwill 57,000 58,000 58,000
Provision for deferred income taxes (116,000) 740,000 333,000
Change in:
Deferred acquisition costs (8,467,000) (5,736,000) (2,740,000)
Income taxes receivable/payable 839,000 (322,000) (418,000)
Other, net (382,000) (254,000) (323,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,686,000 2,560,000 3,429,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes (101,287,000) (124,681,000) (125,130,000)
Common stock --- --- (112,000)
Sales of:
Bonds and notes 49,018,000 80,440,000 55,553,000
Common stock 140,000 --- ---
Redemptions and maturities of:
Bonds and notes 13,856,000 11,514,000 21,369,000
Mortgage loans --- 4,736,000 35,000
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (38,273,000) (27,991,000) (48,285,000)
------------ ------------ ------------
</TABLE>
F-5
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
<CAPTION>
Years ended September 30,
--------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 70,812,000 $45,417,000 $ 51,681,000
Net exchanges from the fixed
accounts of variable annuity contracts (22,346,000) (4,719,000) (87,000)
Withdrawal payments on fixed annuity
contracts (15,310,000) (9,850,000) (14,131,000)
Claims and annuity payments on fixed
annuity contracts (3,176,000) (3,752,000) (2,974,000)
Net receipts from (repayments of)
other short-term financings 589,000 (1,340,000) 1,964,000
------------ ----------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 30,569,000 25,756,000 36,453,000
------------ ----------- ------------
NET INCREASE/(DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (5,018,000) 325,000 (8,403,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,707,000 6,382,000 14,785,000
------------ ----------- ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 1,689,000 $ 6,707,000 $ 6,382,000
============ =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ --- $ 4,000 $ 8,000
============ =========== ============
Net income taxes paid $ 203,000 $ 30,000 $ 254,000
============ =========== ============
</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 risk. The Company controls its
exposure to these risks by, among other things, closely monitoring and
matching the duration of its assets and liabilities, monitoring and
limiting prepayment and extension risk in its portfolio, maintaining a
large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and
monitoring credit risk. The Company also is exposed to market risk, as
market volatility may result in reduced fee income in the case of assets
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 prior period amounts have been
reclassified to conform with the 1997 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from those
estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and
short-term bank participations. All such investments are carried at cost
plus accrued interest, which approximates fair value, have maturities of
three months or less and are considered cash equivalents for purposes of
reporting cash flows.
F-7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
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.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and
direct administrative expenses. 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
decreased by $2,400,000 at September 30, 1997 and increased by $100,000 at
September 30, 1996 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 fees for assuming mortality and
certain expense risks. Such fees are included in Variable Annuity Fees in
the income statement.
F-8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOODWILL: Goodwill, amounting to $763,000 at September 30, 1997, is
amortized by using the straight-line method over a period of 25 years and
is included in Other Assets in the balance sheet. Goodwill is evaluated
for impairment when events or changes in economic conditions indicate that
the carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts are accounted for as investment-type contracts in accordance
with Statement of Financial Accounting Standards No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments," and are
recorded at accumulated value (premiums received, plus accrued interest,
less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees and surrender charges are recorded in
income as earned.
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-9
<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 by major category follow:
Estimated
Amortized fair
cost value
------------- -------------
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 11,073,000 $ 11,224,000
Mortgage-backed securities 69,355,000 70,677,000
Securities of public utilities 4,426,000 4,496,000
Corporate bonds and notes 78,372,000 80,405,000
Other debt securities 21,483,000 21,731,000
------------- -------------
Total available for sale $ 184,709,000 $ 188,533,000
============= =============
AT SEPTEMBER 30, 1996:
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
============= =============
F-10
<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, 1997, follow:
Estimated
Amortized fair
cost value
------------- -------------
Due in one year or less $ 250,000 $ 251,000
Due after one year through five years 23,461,000 23,749,000
Due after five years through ten years 54,161,000 55,688,000
Due after ten years 37,482,000 38,168,000
Mortgage-backed securities 69,355,000 70,677,000
------------- -------------
Total available for sale $ 184,709,000 $ 188,533,000
============= =============
Actual maturities of bonds and notes will differ from those shown above
due to prepayments and redemptions.
F-11
<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 by
major category follow:
Gross Gross
unrealized unrealized
gains losses
----------- ------------
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 151,000 $ ---
Mortgage-backed securities 1,393,000 (71,000)
Securities of public utilities 70,000 ---
Corporate bonds and notes 2,132,000 (99,000)
Other debt securities 256,000 (8,000)
----------- ------------
Total available for sale $ 4,002,000 $ (178,000)
=========== ============
AT SEPTEMBER 30, 1996:
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, 1997, gross unrealized gains on equity securities
available for sale aggregated $19,000 and there were no unrealized
losses. At September 30, 1996, gross unrealized gains on equity
securities available for sale aggregated $129,000 and there were no
unrealized losses.
F-12
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
Gross realized investment gains and losses on sales of investments are as
follows:
<CAPTION>
Years ended September 30,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
BONDS AND NOTES:
Realized gains $ 1,163,000 $ 1,039,000 $ 423,000
Realized losses (863,000) (1,295,000) (1,771,000)
COMMON STOCKS:
Realized gains/losses 140,000 (112,000) ---
IMPAIRMENT WRITEDOWNS (80,000) (171,000) ---
----------- ----------- -----------
Total net realized
investment gains/losses $ 360,000 $ (539,000) $(1,348,000)
=========== =========== ===========
The sources and related amounts of investment income are as follows:
Years ended September 30,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
Short-term investments $ 234,000 $ 390,000 $ 1,045,000
Bonds and notes 12,547,000 9,186,000 6,291,000
Mortgage loans --- 381,000 498,000
----------- ----------- -----------
Total investment income $12,781,000 $ 9,957,000 $ 7,834,000
=========== =========== ===========
Expenses incurred to manage the investment portfolio amounted to $99,000
for the year ended September 30, 1997, $121,000 for the year ended
September 30, 1996, and $125,000 for the year ended September 30, 1995 and
are included in General and Administrative Expenses in the income
statement.
</TABLE>
F-13
<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, 1997
are as follows:
Bonds and notes:
Lockheed Martin Corp. $ 4,078,000
Nabisco Inc. 4,061,000
PacificCorp 3,033,000
===========
At September 30, 1997, bonds and notes included $13,082,000 (fair value of
$13,969,000) of bonds and notes not rated investment grade. The Company
had no material concentrations of non-investment-grade assets at
September 30, 1997.
At September 30, 1997, there were no investments in default as to the
payment of principal or interest.
At September 30, 1997, $518,000 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 and liabilities or the value of
anticipated future business. The Company does not plan to sell most of
its assets or settle most of its liabilities at these estimated fair
values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Selling expenses and
potential taxes are not included. The estimated fair value amounts were
determined using available market information, current pricing information
and various valuation methodologies. If quoted market prices were not
readily available for a financial instrument, management determined an
estimated fair value. Accordingly, the estimates may not be indicative of
the amounts the financial instruments could be exchanged for in a current
or future market transaction.
F-14
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the
market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized
contracts are valued based on the present value of future cash flows at
current pricing rates.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent
net transactions of a short-term nature for which the carrying value is
considered a reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES: 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-15
<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, 1997 and 1996, compared with their respective carrying
values, are as follows:
<CAPTION>
Carrying Fair
value value
------------ -------------
<S> <C> <C>
1997:
ASSETS:
Cash and short-term investments $ 1,689,000 $ 1,689,000
Bonds and notes 188,533,000 188,533,000
Common stocks 19,000 19,000
Variable annuity assets 171,475,000 171,475,000
LIABILITIES:
Reserves for fixed annuity
contracts 180,805,000 171,809,000
Payable to brokers for purchases
of securities 1,010,000 1,010,000
Variable annuity liabilities 171,475,000 163,045,000
============ =============
1996:
ASSETS:
Cash and short-term investments $ 6,707,000 $ 6,707,000
Bonds and notes 146,401,000 146,401,000
Common stocks 129,000 129,000
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
============ =============
5. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further
liabilities and costs will not have a material adverse impact upon the
Company's financial position or results of operations.
F-16
<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, 1997 and 1996, 300 shares were
outstanding.
Changes in shareholder's equity are as follows:
<CAPTION>
Years ended September 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance $ 5,973,000 $ 5,250,000 $ 4,727,000
Net income 1,123,000 723,000 523,000
------------ ------------ ------------
Ending balance $ 7,096,000 $ 5,973,000 $ 5,250,000
============ ============ ============
NET UNREALIZED GAINS/LOSSES
ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance $ (181,000) $ (860,000) $ (2,340,000)
Change in net unrealized
gains/losses on debt
securities available
for sale 4,331,000 939,000 4,254,000
Change in net unrealized
gains/losses on equity
securities available
for sale (110,000) 206,000 (77,000)
Change in adjustment to
deferred acquisition costs (2,500,000) (100,000) (1,900,000)
Tax effect of net changes (602,000) (366,000) (797,000)
------------ ------------ ------------
Ending balance $ 938,000 $ (181,000) $ (860,000)
============ ============ ============
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 1997, 1996 or 1995.
F-17
<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, 1997 was $7,000. The statutory net loss for the year ended
December 31, 1996 was $450,000 and the statutory net loss for the year
ended December 31, 1995 was $2,083,000. The Company's statutory capital
and surplus was $12,696,000 at September 30, 1997, $13,126,000 at
December 31, 1996 and $13,862,000 at December 31, 1995.
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>
1997:
Currently payable $ 88,000 $ 955,000 $ 1,043,000
Deferred 60,000 (176,000) (116,000)
-------------- ------------ -------------
Total income tax expense $ 148,000 $ 779,000 $ 927,000
============== ============ =============
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
============== ============ =============
F-18
<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,
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Amount computed at statutory rate $ 718,000 $ 410,000 $ 247,000
Increases (decreases) resulting from:
Amortization of differences
between book and tax bases of
net assets acquired 20,000 20,000 20,000
State income taxes, net
of federal tax benefit 200,000 25,000 (86,000)
Other, net (11,000) (7,000) 1,000
--------- --------- ---------
Total income tax expense $ 927,000 $ 448,000 $ 182,000
========= ========= =========
F-19
<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,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ 153,000 $ 225,000
Deferred acquisition costs 6,191,000 3,902,000
Net unrealized gains on debt
and equity securities
available for sale 505,000 ---
Other liabilities 75,000 84,000
------------- -------------
Total deferred tax liabilities 6,924,000 4,211,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (4,898,000) (2,582,000)
State income taxes (79,000) (79,000)
Net unrealized losses on debt
and equity securities
available for sale --- (97,000)
Other assets (111,000) (103,000)
------------- -------------
Total deferred tax assets (5,088,000) (2,861,000)
------------- -------------
Deferred income taxes $ 1,836,000 $ 1,350,000
============= =============
</TABLE>
F-20
<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 57.1%, 57.9% and 31.2% of
premiums in 1997, 1996 and 1995, respectively. Commissions paid to these
broker-dealers totaled $4,486,000 in 1997, $2,646,000 in 1996, and
$761,000 in 1995. No single unaffiliated broker-dealer was responsible
for more than 13% of total sales in the years ended September 30, 1997,
1996, and 1995.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996
and $113,000 for the year ended September 30, 1995. The Company paid no
such charges in the year ended September 30, 1997.
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 $2,454,000 for the year ended September 30,
1997, $2,097,000 for the year ended September 30, 1996 and $722,000 for
the year ended September 30, 1995. Such amounts are included in General
and Administrative Expenses in the income statement.
9. SUBSEQUENT EVENTS
On October 31, 1997, the Company merged with John Alden Life Insurance
Company of New York, an affiliate, which had approximately $1,375,000,000
of annuity reserves at September 30, 1997.
F-21
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
3(a) Agreement and Plan of Merger and Amended and Restated Certificate of
Incorporation.
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-K FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 188,533,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 190,241,000
<CASH> 1,689,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 18,094,000
<TOTAL-ASSETS> 382,850,000
<POLICY-LOSSES> 180,805,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,000,000
0
0
<OTHER-SE> 22,462,000
<TOTAL-LIABILITY-AND-EQUITY> 382,850,000
0
<INVESTMENT-INCOME> 12,781,000
<INVESTMENT-GAINS> 360,000
<OTHER-INCOME> 2,016,000
<BENEFITS> 10,089,000
<UNDERWRITING-AMORTIZATION> 1,158,000
<UNDERWRITING-OTHER> 18,000
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Short Certificate
State of New York
Insurance Department
It is hereby certified that the annexed copy of the Agreement and
Plan of Merger of JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK, of
Montebello, New York, into FIRST SUNAMERICA LIFE INSURANCE COMPANY,
of New York, New York (surviving corporation), effective October 31,
1997, approved by this Department November 5, 1997, pursuant to
Section 7105 of the New York Insurance Law
has been compared with the original on file in this Department and
that it is a correct transcript therefrom and of the whole of said
original.
(SEAL) In Witness Whereof, I have hereunto set
my hand and affixed the official seal of
this Department at the City of Albany,
this 5th day of November 1997.
/s/ Peter J. Molinaro
-----------------------------
Special Deputy Superintendent
AGREEMENT AND PLAN OF MERGER
of
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK
and FIRST SUNAMERICA LIFE INSURANCE COMPANY
Into FIRST SUNAMERICA LIFE INSURANCE COMPANY
--------------------------------------------
The following plan of merger has been approved by the Board of
Directors of JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK by
unanimous written consent of its Board of Directors dated June 1,
1997. The plan of merger has been approved by the Board of Directors
of FIRST SUNAMERICA LIFE INSURANCE COMPANY, by unanimous written
consent of its Board of Directors dated June 1, 1997.
1. (a) The name of each constituent corporation to the merger
is JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK, formerly
known as American Accident and Health Insurance Company, and
FIRST SUNAMERICA LIFE INSURANCE COMPANY, formerly known as
The Capitol Life Insurance Company of New York.
(b) The name of the surviving corporation is FIRST
SUNAMERICA LIFE INSURANCE COMPANY.
2. (a) JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK has
outstanding 360,000 shares of common stock, par value $20 per
share.
(b) FIRST SUNAMERICA LIFE INSURANCE COMPANY has outstanding
300 shares of common stock, par value $10,000 per share.
(c) The number of shares mentioned above is not subject to
change prior to the effective date of the merger.
3. The terms and conditions of the merger are as follows:
The charter of FIRST SUNAMERICA LIFE INSURANCE COMPANY, a
constituent corporation, shall be amended and restated in the form
attached hereto and shall be the charter of the surviving corporation
and the by-laws of FIRST SUNAMERICA LIFE INSURANCE COMPANy as in
effect immediately prior to the time the merger becomes effective
shall be the by-laws of the surviving corporation.
The first annual meeting of the shareholders of the surviving
corporation held after the effective date of this merger shall be the
next annual meeting provided by the by-laws of FIRST SUNAMERICA LIFE
INSURANCE COMPANY, one of the constituent corporations.
All persons who, on the date the merger becomes effective, are
the executive or administrative officers of FIRST SUNAMERICA LIFE
INSURANCE COMPANY, one of the constituent corporations, shall be and
remain like officers of the surviving corporation, until the board
of directors of the surviving corporation elects their respective
successors, and the firm approved by the shareholders of FIRST
SUNAMERICA LIFE INSURANCE COMPANY as its auditors for 1997 shall be
the auditors of the surviving corporation for 1997.
The surviving corporation, FIRST SUNAMERICA LIFE INSURANCE
COMPANY, shall pay all expenses of carrying this plan of merger into
effect and of accomplishing the merger. When the merger shall become
effective, the separate existence of JOHN ALDEN LIFE INSURANCE
COMPANY OF NEW YORK shall cease and said corporation shall be merged
into the surviving corporation, which shall possess all the rights,
privileges, powers and franchises of a public as well as of a private
nature and be subject to all the restrictions, disabilities, and
duties of each of the corporations that are parties to this
agreement. The surviving corporation shall be vested with the
rights, privileges, powers, and franchise of each of the constituent
corporations; all property, real, personal, and mixed; all debts due
to each of the corporations on whatever account; as well as for share
subscriptions and all other things in action or belonging to each of
the corporations.
The title to any real estate, whether by deed or otherwise,
vested in any of the corporation shall not revert or be in any way
impaired by reason of this merger, provided that all rights of
creditors and all liens upon the property of any of the corporations
shall be preserved unimpaired, and all debts, liabilities, and duties
of JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK shall attach to the
surviving corporation, and may be enforced against it to the same
extent as if those debts, liabilities, and duties had been incurred
or contracted by it.
If at any time the surviving corporation shall consider or be
advised that any further assignments or assurances in law or any
things are necessary or desirable to vest in the surviving
corporation the title to any property or rights of JOHN ALDEN LIFE
INSURANCE COMPANY OF NEW YORK, the proper officers and directors of
JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK shall execute and make
all proper assignments and assurances and do all things necessary to
vest title in such property or rights in the surviving corporation,
and otherwise to carry out the purposes of this plan of merger.
4. The manner and basis of conversion of the shares of the
constituent corporation are as follows:
(a) immediately upon effectiveness of the Merger, the
outstanding $20 par value shares of common stock of JOHN ALDEN LIFE
INSURANCE COMPANY OF NEW YORK are to be canceled and retired and will
cease to exist and the value thereof, as well as the paid in and
contributed surplus, are to be contributed to the paid in and
contributed surplus of the surviving corporation; and
(b) the outstanding $10,000 par value shares of common stock
of FIRST SUNAMERICA LIFE INSURANCE COMPANY will constitute all of the
outstanding shares of the surviving corporation.
5. Notwithstanding authorization by shareholders of both
corporations, at any time prior to the filing of this Agreement and
Plan of Merger with each of the office of the clerk of New York
County and the office of the clerk of Rockland County, this Agreement
and Plan of merger may be abandoned either (1) by mutual consent of
the constituent corporation, or (2) by the board of directors of
either corporation, if such board shall, in its exclusive discretion,
determine that to proceed with the merger would be inadvisable for
any reason.
6. The effective date of this Agreement and Plan of Merger shall
be 11:59 p.m. Eastern Standard Time on October 31, 1997, provided
that FIRST SUNAMERICA LIFE INSURANCE COMPANY has caused the merger
to be consummated by filing in the office of the clerk of New York
County and the office of the clerk of Rockland County a copy of this
Agreement and Plan of Merger with the approval of the New York
Superintendent of Insurance endorsed thereon no later than November
30, 1997.
<PAGE>
Date: October 27, 1997
JOHN ALDEN LIFE INSURANCE
COMPANY OF NEW YORK
/s/ Eli Broad
--------------------------
Name: Eli Broad
Title: President
ATTEST:
/s/ Susan L. Harris
- ------------------------
Name: Susan L. Harris
Title: Secretary (SEAL)
FIRST SUNAMERICA LIFE
INSURANCE COMPANY
/s/ Eli Broad
-----------------------
Name: Eli Broad
Title: President
ATTEST:
/s/ Susan L. Harris
- ---------------------
Name: Susan L. Harris (SEAL)
Title: Secretary
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
FIRST: The name of this corporation is FIRST SUNAMERICA LIFE
INSURANCE COMPANY (the "Corporation"). The Corporation
was formed under the name The Capitol Life Insurance
Company of New York.
SECOND: The original certificate of incorporation of the
Corporation was filed with the office of the
Superintendent of Insurance of the State of New York
on December 5, 1978.
THIRD: The certificate of incorporation of the Corporation is
hereby amended and restated in full as follows:
Section 1. The name of the Corporation shall be
FIRST SUNAMERICA LIFE INSURANCE COMPANY.
Section 2. The principal office of the Corporation shall
be located in the county and state of New York.
Section 3. The kinds of insurance to be transacted by the
Corporation shall be:
(a) "Life insurance," meaning every insurance upon the
lives of human beings, and every insurance appertaining thereto,
including the granting of endowment benefits, additional benefits in
the event of death by accident, additional benefits to safeguard the
contract from lapse, accelerated payments of part or all of the death
benefit, or a special surrender value upon diagnosis (A) of terminal
illness defined as a life expectancy of twelve months or less or (B)
of a medical condition requiring extraordinary medical care or
treatment regardless of life expectancy, or provide a special
surrender value upon total and permanent disability of the insured,
and optional modes of settlement of proceeds. "Life insurance" also
includes additional benefits to safeguard the contract against lapse
in the event of unemployment of the insured. Amounts paid to the
Corporation for life insurance and proceeds applied under optional
mode of settlement or under dividend options may be allocated by the
Corporation to one or more separate accounts pursuant to Section 4240
of the Insurance Law.
(b) "Annuities," meaning all agreements to make periodical
payments for a period certain or where the making or continuance of
all or of some of a series of such payments, or the amount of any
such payment depends upon the continuance of human life, except
payments made under the authority of the preceding sub-paragraph.
Amounts paid to the Corporation to provide annuities and proceeds
applied under optional modes of settlement or under dividend options
may be allocated by the Corporation to one or more separate accounts
pursuant to Section 4240 of the New York Insurance Law.
(c) "Accident and health insurance," meaning (a) insurance
against death or personal injury by accident or by any specified kind
or kinds of accident and insurance against sickness, ailment or
bodily injury, including insurance providing disability benefits
pursuant to article nine of the worker's compensation law, except as
specified in subparagraph (b) following; and (b) non-cancellable
disability insurance, meaning insurance against disability resulting
from sickness, ailment or bodily injury (but excluding insurance
solely against accidental injury), under any contract which does not
give the insurer the option to cancel or otherwise terminate the
contract at or after one year from its effective date or renewal
date.
and such other insurance or other business as a stock like insurance
company now is or hereafter may be permitted to transact under the
Insurance Law of the State of New York or any other law applicable
and for which the Corporation shall have the required capital and
surplus.
Section 4. The mode and manner in which the corporate powers
of the Corporation shall be exercised are through a Board of
Directors and through such officers and agents as such Board shall
empower.
Section 5. The number of directors of the Corporation shall
be not more than nineteen (19) and in no case shall the number of
directors be less than thirteen (13), the number thereof to be
determined as provided in the by-laws.
Each director shall be at least eighteen years of age and at all
times a majority of the directors of the Corporation shall be
citizens and residents of the United States, and at least three shall
be resident of the State of New York.
Section 6. The annual meeting of the stockholders of the
Corporation shall be held on the fourth Tuesday or June of each year
for the purpose of electing directors and for the transaction of such
other business as may properly be brought before the meeting. At
such annual meeting the directors shall be elected for the ensuing
year, the directors to take office immediately upon election and to
hold office until the next annual meeting, and until their successors
are elected and qualify. Whenever any vacancy shall occur in the
Board of Directors, by death, resignation or otherwise, the remaining
members of the Board, at a meeting called for that purpose or at any
regular meeting, shall elect a director or directors to fill the
vacancy or vacancies then existing and each director so elected shall
hold office for the unexpired term of the director whose place he has
taken.
The officers of the Corporation shall be elected annually by the
Board of Directors of the Corporation at the meeting of the Board
held immediately following the annual meeting of the Stockholders and
shall hold office at the pleasure of the Board of Directors. A
vacancy in any office resulting from death, resignation or from any
other cause shall be filled by the Board of Directors at any meeting
of the Board.
Section 7. The Board of Directors shall have power to make
by-laws of the corporation and to amend the same in whole or in part.
Section 8. The duration of the corporate existence of the
Corporation shall be perpetual.
Section 9. The amount of the capital of the Corporation shall
be $3,000,000 to consist of 300 shares of a par value of $10,000 per
share.
Section 10. No director shall be personally liable to the
Corporation or any of its shareholders for damages for any breach of
duty as a director; provided, however, that the foregoing provisions
shall not eliminate or limit (i) the liability of a director if a
judgment or other final adjudication adverse to him or her
establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or any violation of the Insurance Law
of the State of New York or a knowing violation of any other law or
that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled or that his or
her acts violated Section 719 of the Business Corporation Law of the
State of new York; or (ii) the liability of a director for any act
or omission prior to the adoption of this Section 10 by the
shareholders of the Corporation.
FOURTH: The foregoing amendment and restatement of the
Certificate of Incorporation of the Corporation was
authorized by resolution of the Board of Directors of
the Corporation, followed by the written consent of the
holder of all of the outstanding shares of the
Corporation entitled to vote on said amendment and
restatement.
IN WITNESS WHEREOF, we have subscribed this document on the date
set forth below and do hereby affirm, under penalties of perjury,
that the statements contained herein have been examined by us and are
true and correct.
Dated: October 27, 1997
FIRST SUNAMERICA LIFE INSURANCE
COMPANY
By: /s/ Eli Broad
---------------------------
Name: Eli Broad
Title: President
By: /s/ Susan L. Harris
--------------------------
Name: Susan L. Harris
Title: Secretary
