SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 33-5014
FIRST SUNAMERICA LIFE INSURANCE COMPANY
Incorporated in New York 06-0992729
IRS Employer
Identification No.
733 Third Avenue, 4th Floor, New York, New York 10017
Registrant's telephone number, including area code (800) 272-3007
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the securities exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
---- ----
The number of shares outstanding of the registrants common stock on
August 14, 1997 was as follows:
Common Stock (par value $10,000.00 per share) 300 shares outstanding
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
Part I - Financial Information
Balance Sheet (Unaudited) -
June 30, 1997 and September 30, 1996 3 - 4
Income Statement (Unaudited) -
Three Months and Nine Months Ended
June 30, 1997 and 1996 5
Statement of Cash Flows (Unaudited) -
Nine Months Ended June 30, 1997 and 1996 6 - 7
Note to Financial Statements (Unaudited) - 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 18
Part II - Other Information 19
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET
(Unaudited)
<CAPTION>
June 30, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 3,926,000 $ 6,707,000
Bonds and notes available for sale,
at fair value (amortized cost:
June 1997, $183,502,000;
September 1996, $146,908,000) 184,726,000 146,401,000
Common stocks, at fair value (cost:
June 1997 and September 1996, $0) 19,000 129,000
-------------- --------------
Total investments 188,671,000 153,237,000
Variable annuity assets 134,993,000 68,901,000
Accrued investment income 2,120,000 1,462,000
Deferred acquisition costs 18,387,000 12,127,000
Income taxes currently receivable --- 299,000
Other assets 843,000 842,000
-------------- --------------
TOTAL ASSETS $ 345,014,000 $ 236,868,000
============== ==============
See accompanying note
3
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEET (Continued)
(Unaudited)
<CAPTION>
June 30, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 179,669,000 $ 140,613,000
Payable to brokers for purchases of
securities 2,033,000 1,939,000
Income tax currently payable 143,000 ---
Other liabilities 1,370,000 845,000
-------------- --------------
Total reserves, payables
and accrued liabilities 183,215,000 143,397,000
-------------- --------------
Variable annuity liabilities 134,993,000 68,901,000
-------------- --------------
Deferred income taxes 1,872,000 1,350,000
-------------- --------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000
Additional paid-in capital 14,428,000 14,428,000
Retained earnings 6,894,000 5,973,000
Net unrealized gains (losses) on debt and
equity securities available for sale 612,000 (181,000)
-------------- --------------
Total shareholder's equity 24,934,000 23,220,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 345,014,000 $
236,868,000
============== ==============
</TABLE>
See accompanying note
4
<PAGE>
<TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Nine Months
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income $ 3,259,000 $ 2,580,000 $ 9,360,000 $ 7,280,000
----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts (2,641,000) (1,819,000) (7,379,000) (5,180,000)
Senior indebtedness --- --- --- (4,000)
----------- ----------- ----------- -----------
Total interest expense (2,641,000) (1,819,000) (7,379,000) (5,184,000)
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 618,000 761,000 1,981,000
2,096,000
----------- ----------- ----------- -----------
NET REALIZED INVESTMENT GAINS
(LOSSES) (303,000) (14,000) 222,000 (542,000)
----------- ----------- ----------- -----------
VARIABLE ANNUITY FEE INCOME 455,000 188,000 1,116,000
459,000
----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges 56,000 96,000 170,000 172,000
General and administrative
expenses (436,000) (371,000) (1,106,000) (1,093,000)
Amortization of deferred
acquisition costs (198,000) (125,000) (794,000) (377,000)
Annual commissions (4,000) (5,000) (13,000) (12,000)
Other, net (27,000) (43,000) (118,000) (76,000)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES (609,000) (448,000) (1,861,000)
(1,386,000)
----------- ----------- ----------- -----------
PRETAX INCOME 161,000 487,000 1,458,000 627,000
Income tax expense (45,000) (181,000) (537,000) (230,000)
----------- ----------- ----------- -----------
NET INCOME $ 116,000 $ 306,000 $ 921,000 $ 397,000
=========== ===========
=========== ===========
See accompanying note
5
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 921,000 $ 397,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to fixed annuity
contracts 7,379,000 5,180,000
Net realized investment (gains) losses (222,000) 542,000
Amortization of net discounts
on investments (95,000) (247,000)
Amortization of goodwill 43,000 43,000
Provision for deferred income taxes 95,000 535,000
Change in:
Deferred acquisition costs (6,660,000) (3,486,000)
Income taxes receivable/payable 442,000 (334,000)
Other, net (367,000) (237,000)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,536,000 2,393,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes (80,816,000) (80,405,000)
Sales of:
Bonds and notes 34,033,000 56,451,000
Common stock 140,000 ---
Redemptions and maturities of:
Bonds and notes 10,459,000 8,131,000
Mortgage loans --- 1,637,000
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (36,184,000) (14,186,000)
------------ ------------
See accompanying note
6
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 56,419,000 $ 26,098,000
Net exchanges from the fixed accounts
of variable annuity contracts (13,294,000) (2,731,000)
Withdrawal payments on fixed annuity
contracts (9,037,000) (7,199,000)
Claims and annuity payments on fixed
annuity contracts (2,465,000) (2,638,000)
Net receipts from (repayments of) other
short-term financings 244,000 (1,363,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,867,000 12,167,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (2,781,000) 374,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,707,000 6,382,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 3,926,000 $ 6,756,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ --- $ 4,000
============ ============
Income taxes paid $ --- $ 30,000
============ ============
</TABLE>
See accompanying note
7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (continued)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
First SunAmerica Life Insurance Company (the "Company") is an indirect wholly
owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the
Company, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the Company's financial position as of June 30, 1997 and September 30,
1996, the results of its operations for the three months and nine months ended
June 30, 1997 and 1996 and its cash flows for the nine months ended June 30,
1997 and 1996. The results of operations for the three months and nine months
ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year. The accompanying unaudited financial statements
should be read in conjunction with the audited financial statements for the
fiscal year ended September 30, 1996, contained in the Company's 1996 Annual
Report on Form 10-K. Certain items have been reclassified to conform to the
current period's presentation.
8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of First SunAmerica Life Insurance Company (the "Company") for
the three months and nine months ended June 30, 1997 and 1996 follows. In
connection with, and because it desires to take advantage of, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
cautions readers regarding certain forward-looking statements contained in the
following discussion and in any other statements made by, or on behalf of, the
Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based
on historical information and which relate to future operations, strategies,
financial results, or other developments. In particular, statements using
verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future or projected levels of sales 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 upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events or
developments, some of which may be national in scope, such as general economic
conditions, changes in tax law, and changes in interest rates, some of which
may be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation, and others of
which may relate to the Company specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio, and other
factors. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company
disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $0.1 million in the third quarter of 1997 and $0.3
million in the third quarter of 1996. For the nine months, net income amounted
to $0.9 million in 1997, compared with $0.4 million in 1996.
PRETAX INCOME totaled $0.2 million in the third quarter of 1997 and $0.5
million in the third quarter of 1996. This $0.3 million decline primarily
resulted from an increase in realized investment losses. For the nine months,
pretax income totaled $1.5 million in 1997, compared with $0.6 million in 1996.
This improvement in the nine months of 1997 primarily resulted from net
realized investment gains of $0.2 million, compared to net realized investment
losses of $0.5 million in the nine months of 1996. Pretax income was also
favorably impacted by an increase in variable annuity fees, partially offset
by increased amortization of deferred acquisition costs.
9
<PAGE>
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, totaled $0.6 million
in the third quarter of 1997 and $0.8 million in the third quarter of 1996.
These amounts represent 1.35% on average invested assets (computed on a daily
basis) of $183.6 million in the third quarter of 1997 and 2.22% on average
invested assets of $137.3 million in the third quarter of 1996. For the nine
months, net investment income totaled $2.0 million in 1997 and $2.1 million in
1996, and represented 1.52% on average invested assets of $173.5 million in
1997 and 2.14% on average invested assets of $130.7 million in 1996.
Net investment spreads include the effect of income earned on the excess
of average invested assets over average interest-bearing liabilities. This
excess declined to $6.5 million in the third quarter of 1997 from $13.2 million
in the third quarter of 1996, and declined to $8.7 million in the nine months
of 1997 from $14.4 million in the nine months of 1996. The difference between
the Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities was 1.14% in the third quarter of 1997, 1.65% in
the third quarter of 1996, 1.22% in the nine months of 1997 and 1.49% in the
nine months of 1996.
Investment income totaled $3.3 million in the third quarter of 1997, up
from $2.6 million in the third quarter of 1996. For the nine months,
investment income amounted to $9.4 million in 1997, up $2.1 million from the
$7.3 million recorded in 1996. These amounts represent yields on average
invested assets of 7.10% and 7.52% in the third quarters of 1997 and 1996,
respectively, and 7.19% and 7.43% in the nine months of 1997 and 1996,
respectively. Investment income increased primarily as a result of higher
levels of average invested assets, partially offset by a decline in portfolio
yields. Investment yields were lower in 1997 primarily because of a generally
declining interest rate environment.
Total interest expense aggregated $2.6 million in the third quarter of
1997 and $1.8 million in the third quarter of 1996. For the nine months,
interest expense aggregated $7.4 million in 1997, compared with $5.2 million
in 1996. The average rate paid on fixed annuity contracts was 5.96% in the
third quarter of 1997, compared with 5.87% in the third quarter of 1996. For
the nine months, the average rate paid on fixed annuities was 5.97% in 1997 and
5.94% in 1996. Fixed annuity contracts averaged $177.1 million during the
third quarter of 1997, $124.1 million during the third quarter of 1996, $164.7
million during the nine months of 1997 and $116.2 million during the nine
months of 1996.
The growth in average invested assets in 1997 primarily reflects the
receipt of fixed-rate premiums, principally for the fixed accounts of variable
annuity products. Since June 30, 1996, fixed annuity premiums have aggregated
$75.7 million. Fixed annuity premiums totaled $10.3 million in the third
quarter of 1997, $5.6 million in the third quarter of 1996, $56.4 million in
the nine months of 1997 and $26.1 million in the nine months of 1996. These
premiums include premiums for the fixed accounts of variable annuities totaling
$9.2 million, $5.4 million, $54.9 million and $21.9 million, respectively. The
increases in premiums for the fixed accounts of variable annuities resulted
primarily from greater inflows into the one-year fixed account of the Company's
Polaris 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.
10
<PAGE>
NET REALIZED INVESTMENT GAINS/LOSSES totaled $303,000 of losses in the
third quarter of 1997, compared with $14,000 of losses in the third quarter of
1996. For the nine months, net realized investment gains/losses totaled
$222,000 of gains in 1997, compared with $542,000 of losses in 1996. The
Company sold invested assets, principally bonds and notes, aggregating $14.3
million, $19.3 million, $33.9 million and $58.4 million in the third quarters
of 1997 and 1996 and the nine months of 1997 and 1996, respectively. Net gains
and losses from sales of investments fluctuate from period to period, and
represent 0.66%, 0.04%, 0.26% and 0.83%, respectively, of average invested
assets for the third quarters of 1997 and 1996 and the nine months of 1997 and
1996.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $0.5
million in the third quarter of 1997 and $0.2 million in the third quarter of
1996. For the nine months, variable annuity fees totaled $1.1 million in 1997,
compared with $0.5 million in 1996. 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 $119.3 million during
the third quarter of 1997 and $50.2 million during the third quarter of 1996.
For the nine months, variable annuity assets averaged $98.0 million in 1997,
compared with $41.3 million in 1996. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, have
aggregated $50.0 million since June 30, 1996. Variable annuity premiums
increased to $14.1 million in the third quarter of 1997 from $8.5 million in
the third quarter of 1996. For the nine months, variable annuity premiums
totaled $40.0 million in 1997, compared with $18.5 million in 1996. Sales of
variable annuity products (which include premiums allocated to the fixed
accounts) amounted to $23.3 million, $13.9 million, $94.9 million and $40.4
million for the third quarters of 1997 and 1996 and the nine months of 1997 and
1996, respectively. These increases may be attributed, in part, to market
share gains through enhanced distribution, strong investor interest in equity
investments, as well as broad consumer demand for flexible retirement savings
products that offer a variety of fixed and variable 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 $56,000 in the
third quarter of 1997, $96,000 in the third quarter of 1996, $170,000 in the
nine months of 1997 and $172,000 in the nine months of 1996. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first five to seven years of an annuity contract. Withdrawal payments, which
include surrenders and lump-sum annuity benefits, totaled $5.8 million in the
third quarter of 1997 and $4.3 million in the third quarter of 1996. These
payments, annualized, represent 8.04% and 10.40%, respectively, of average
fixed and variable annuity reserves. For the nine months, withdrawal payments
totaled $12.9 million in 1997 and $9.4 million in 1996, and, annualized,
represent 6.79% and 8.48%, respectively, of average fixed and variable annuity
reserves. Withdrawals include variable annuity payments from the separate
accounts totaling $1.5 million in the third quarter of 1997, $1.0 million in
the third quarter of 1996, $3.9 million in the nine months of 1997 and $2.2
million in 1996. Withdrawal payments have increased in the third quarter and
the nine months of 1997, although withdrawal rates have declined, because of
the growth in fixed and variable annuity reserves. Surrender charges have
11
<PAGE>
decreased in the third quarter of 1997, while withdrawal payments have
increased, due to policies coming off surrender charge restrictions.
Management anticipates that withdrawal rates will gradually increase in future
periods.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.4 million in the third
quarters of both 1997 and 1996. For the nine months, general and
administration expenses totaled $1.1 million in both 1997 and 1996. Expenses
remain closely controlled through a company-wide cost containment program and
continue to represent approximately 1% of average total assets on an annualized
basis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $0.2 million in
the
third quarter of 1997 and $0.1 million in the third quarter of 1996. For the
nine months, such amortization totaled $0.8 million in 1997, compared with $0.4
million in 1996. The increases in amortization during 1997 were primarily due
to additional fixed and variable annuity sales and the subsequent amortization
of related deferred commissions and other acquisition costs. Such increases
are expected to continue for the foreseeable future.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in
arrears to maintain the persistency of certain of the Company's annuity
contracts. Annual commissions totaled $4,000 in the third quarter of 1997 and
$5,000 in the third quarter of 1996, $13,000 in the nine months of 1997 and
$12,000 in 1996. Based on current sales, the Company estimates that such
annual commssions will increase in future periods.
INCOME TAX EXPENSE totaled $45,000 in the third quarter of 1997 and
$181,000 in the third quarter of 1996, representing effective annualized tax
rates of 28% and 37%, respectively. For the nine months, income tax expense
totaled $537,000 in 1997 and $230,000 in 1996, representing effective
annualized tax rates of 37% in both periods. The differing tax rates in 1997
reflected changes in state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $24.9 million at June 30, 1997 from
$23.3 million at March 31, 1997, primarily as a result of a $0.6 million net
unrealized gain on debt and equity securities available for sale, versus the
$0.9 million net unrealized loss on such securities recorded at March 31, 1997,
and the $0.1 million of net income recorded in the third quarter of 1997.
TOTAL ASSETS increased by $38.5 million to $345.0 million at June 30,
1997 from $306.6 million at March 31, 1997, principally as a result of a $31.8
million increase in the separate accounts for variable annuities and an $11.3
million increase in invested assets.
INVESTED ASSETS at June 30, 1997 totaled $188.7 million, compared with
$177.4 million at March 31, 1997. This increase primarily resulted from sales
of fixed annuities and the $1.2 million net unrealized gain recorded on debt
and equity securities available for sale at June 30, 1997, versus the $1.6
million net unrealized loss recorded on such securities at March 31, 1997. The
Company manages most of its invested assets internally. The Company's general
investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company
has determined that all of its portfolio of bonds and notes (the "Bond
Portfolio") is available to be sold in response to changes in market interest
12
<PAGE>
rates, changes in relative value of 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 had an aggregate fair value that exceeded its
amortized cost by $1.2 million at June 30, 1997. At March 31, 1997, the
amortized cost exceeded the fair value of the Bond Portfolio by $1.7 million.
The net unrealized gain on the Bond Portfolio since March 31, 1997 principally
reflects the lower relative prevailing interest rates at June 30, 1997 and
their corresponding effect on the fair value of the Bond Portfolio.
At June 30, 1997, the Bond Portfolio included $177.6 million (at
amortized cost) 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 $5.9 million (at amortized cost) of bonds
rated by the Company pursuant to statutory ratings guidelines established by
the NAIC. At June 30, 1997, approximately $170.4 million (at amortized cost)
of the Bond Portfolio was investment grade, including $83.1 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At June 30, 1997, the Bond Portfolio included $13.1 million (at amortized
cost with a fair value of $13.5 million) of bonds that were not investment
grade. Based on their June 30, 1997 amortized cost, these non-investment-grade
bonds accounted for 3.8% 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 June 30, 1997. The table on the following page summarizes the Company's
rated bonds by rating classification.
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-} $ 119,088 $ 119,802 1 $ 11,421 $ 11,636 $ 130,509
69.63% $ 131,438
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 33,427 33,204 2 6,488 6,558 39,915
21.30 39,762
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} --- --- 3 --- --- --- 0.00
---
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 12,978 13,426 4 --- --- 12,978 6.92
13,426
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 100 100 5 --- --- 100 0.05
100
C1 to D
[DD]
{D} --- --- 6 --- --- --- 0.00
---
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $ 165,593 $ 166,532 $ 17,909 $ 18,194 $
183,502 $ 184,726
========== ========== ==========
========== ========== ==========
</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 $5.9 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 maturities that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope
of the yield curve, the spread at which fixed maturities are priced over the
yield curve and general economic conditions. 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 designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity obligations. The Company seeks to achieve
a predictable spread between what it earns on its assets and what it pays on
its liabilities by investing principally in fixed-rate securities. The
Company's fixed-rate products incorporate surrender charges or other
limitations in order to encourage persistency. Approximately 94% of the
Company's fixed annuity reserves had surrender penalties or other restrictions
at June 30, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its fixed annuities under a
variety of possible future interest rate scenarios. At June 30, 1997, the
weighted average life of the Company's investments was approximately five years
and the duration was approximately three. Weighted average life is the average
time to receipt of all principal, incorporating the effects of scheduled
amortization and expected prepayments, weighted by book value. Duration is a
common option-adjusted measure for the price sensitivity of a fixed-income
portfolio to changes in interest rates. It measures the approximate percentage
change in the market value of a portfolio if interest rates change by 100 basis
points, recognizing the changes in portfolio cashflows resulting from embedded
options such as prepayments and bond calls.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos"), and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-
collateralized. MBSs are generally investment-grade securities collateralized
by large pools of mortgage loans. MBSs generally pay principal and interest
monthly. The amount of principal and interest payments may fluctuate as a
result of prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with Reverse Repos is counterparty
risk. The Company believes, however, that the counterparties to its Reverse
Repos are financially responsible and that the 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.
16
<PAGE>
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. The carrying values of bonds
that are determined to have declines in value that are other than temporary are
reduced to net realizable value and no further accruals of interest are made.
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $0.1 million at June 30, 1997
(at amortized cost, with a fair value of $0.1 million). At June 30, 1997,
default investments constituted 0.1% of total invested assets. At March 31,
1997, defaulted investments totaled $0.2 million and constituted 0.1% of total
invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested
asset sales. At June 30, 1997, approximately $125.9 million of the Company's
Bond Portfolio had an aggregate unrealized gain of $2.2 million, while
approximately $57.6 million of the Bond Portfolio had an aggregate unrealized
loss of $1.0 million. Further, the Company's investment portfolio currently
provides approximately $2.0 million of monthly cash flow from scheduled
principal and interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby
avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
REGULATION
The Company is subject to regulation and supervision by the States of New
York, New Mexico and Nebraska, the states in which the Company is authorized
to transact business, and their insurance regulatory agencies. 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
17
<PAGE>
financial statements and reports, performing financial, market conduct and
other examinations, determining the reasonableness and adequacy of statutory
capital and surplus,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, 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
EXHIBITS
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
No Current Report on Form 8-K was filed during the three months ended June 30,
1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SUNAMERICA LIFE INSURANCE COMPANY
By: SCOTT L. ROBINSON
------------------------
Scott L. Robinson
Senior Vice President, Treasurer and Director
Date: August 14, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President, August 14, 1997
- ------------------------ Treasurer and Director ---------------
Scott L. Robinson (Principal Financial
Officer)
/s/ N. SCOTT GILLIS Senior Vice President and August 14, 1997
- ------------------------ Controller (Principal ---------------
N. Scott Gillis Accounting Officer)
20
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF FIRST SUNAMERICA LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 184,726,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 188,671,000
<CASH> 3,926,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 18,387,000
<TOTAL-ASSETS> 345,014,000
<POLICY-LOSSES> 179,669,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,000,000
0
0
<OTHER-SE> 21,934,000
<TOTAL-LIABILITY-AND-EQUITY> 345,014,000
0
<INVESTMENT-INCOME> 9,360,000
<INVESTMENT-GAINS> 222,000
<OTHER-INCOME> 1,116,000
<BENEFITS> 7,379,000
<UNDERWRITING-AMORTIZATION> 794,000
<UNDERWRITING-OTHER> (39,000)
<INCOME-PRETAX> 1,458,000
<INCOME-TAX> 537,000
<INCOME-CONTINUING> 921,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
