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
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 MAY 13,
1999 WAS AS FOLLOWS:
Common Stock (par value $10,000.00 per share) 300 shares outstanding
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
---------
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Part I - Financial Information
Balance Sheet (Unaudited) -
March 31, 1999 and December 31, 1998 3
Statement of Income and Comprehensive Income (Unaudited) -
Three Months Ended March 31, 1999 and 1998 4
Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998 5-6
Notes to Financial Statements (Unaudited) 7-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-21
Quantitative and Qualitative Disclosures About Market
Risk 22
Part II - Other Information 23
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
(Unaudited)
March 31, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 41,209,000 $ 18,466,000
Bonds and notes available for sale,
at fair value (amortized cost:
March 1999, $1,251,853,000
December 1998, $1,293,637,000) 1,249,158,000 1,313,390,000
Mortgage loans 197,383,000 176,737,000
Other invested assets 5,404,000 6,539,000
--------------- --------------
Total investments 1,493,154,000 1,515,132,000
Variable annuity assets held in separate
accounts 375,439,000 344,619,000
Accrued investment income 19,375,000 18,169,000
Deferred acquisition costs 112,217,000 96,918,000
Receivable from brokers for sales of
securities 81,000 30,597,000
Other assets 2,180,000 2,247,000
--------------- --------------
TOTAL ASSETS $2,002,446,000 $2,007,682,000
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $1,413,206,000 $1,432,558,000
Income taxes currently payable 12,410,000 10,144,000
Payable to brokers for purchases
of securities 60,000 19,806,000
Other liabilities 13,191,000 12,088,000
--------------- --------------
Total reserves, payables
and accrued liabilities 1,438,867,000 1,474,596,000
--------------- --------------
Variable annuity liabilities related
to separate accounts 375,439,000 344,619,000
--------------- --------------
Deferred income taxes 2,340,000 3,792,000
--------------- --------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000
Additional paid-in capital 144,428,000 144,428,000
Retained earnings 38,558,000 34,737,000
Accumulated other comprehensive income (186,000) 2,510,000
--------------- --------------
Total shareholder's equity 185,800,000 184,675,000
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,002,446,000 $2,007,682,000
=============== ==============
</TABLE>
See accompanying notes
3
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
------------- -------------
<S> <C> <C>
Investment income $ 28,047,000 $ 29,569,000
Interest expense on fixed annuity contracts (17,533,000) (20,315,000)
------------- -------------
NET INVESTMENT INCOME 10,514,000 9,254,000
------------- -------------
NET REALIZED INVESTMENT GAINS 153,000 395,000
------------- -------------
Fee income:
Variable annuity fees 1,369,000 821,000
Surrender charges 643,000 1,138,000
------------- -------------
TOTAL FEE INCOME 2,012,000 1,959,000
------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES (1,010,000) (1,086,000)
------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (5,100,000) (4,194,000)
------------- -------------
ANNUAL COMMISSIONS (82,000) (27,000)
------------- -------------
PRETAX INCOME 6,487,000 6,301,000
Income tax expense (2,666,000) (2,614,000)
------------- -------------
NET INCOME 3,821,000 3,687,000
Other comprehensive income (loss), net of tax:
Net unrealized gains on bonds and notes
available for sale:
Net unrealized gains (losses) on bonds
and notes available for sale identified
in the current period (1,253,000) 3,766,000
Less reclassification adjustment for
net realized gains included in net
income (1,443,000) (2,890,000)
------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) (2,696,000) 876,000
------------- -------------
COMPREHENSIVE INCOME $ 1,125,000 $ 4,563,000
============= =============
</TABLE>
See accompanying notes
4
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,821,000 $ 3,687,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to fixed annuity
contracts 17,533,000 20,315,000
Net realized investment gains (153,000) (395,000)
Accretion of net discounts on
investments (725,000) (293,000)
Amortization of goodwill 15,000 14,000
Provision for deferred income taxes --- (1,799,000)
Change in:
Deferred acquisition costs 3,001,000 1,193,000
Income taxes currently payable 2,266,000 793,000
Other, net (205,000) ______256,000
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,553,000 _ 23,771,000
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes (124,947,000) (180,469,000)
Mortgage loans (31,000,000) (30,354,000)
Sales of:
Bonds and notes 158,107,000 168,987,000
Other investments, excluding short-term
investments 915,000 ---
Redemptions and maturities of:
Bonds and notes 19,999,000 14,548,000
Mortgage loans 10,463,000 8,652,000
Other investments, excluding short-term
investments 384,000 ---
-------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 33,921,000 (18,636,000)
-------------- ---------------
</TABLE>
See accompanying notes
5
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts $ 16,178,000 $ 33,066,000
Net exchanges from the fixed accounts
of variable annuity contracts (9,995,000) (12,929,000)
Withdrawal payments on fixed annuity
contracts (36,618,000) (65,153,000)
Claims and annuity payments on fixed
annuity contracts (6,620,000) (6,945,000)
Net receipts from (repayments of)
other short-term financings 324,000 (2,040,000)
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES (36,731,000) (54,001,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 22,743,000 (48,866,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 18,466,000 71,060,000
------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 41,209,000 $ 22,194,000
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Net income taxes paid $ 1,600,000 $ 3,619,000
============= =============
</TABLE>
See accompanying notes
6
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
-----------------------
At December 31, 1998, First SunAmerica Life Insurance Company (the
"Company") was an indirect wholly owned subsidiary of SunAmerica Inc. On January
1, 1999, SunAmerica Inc. merged with and into American International Group, Inc.
("AIG") in a tax-free reorganization that has been treated as a pooling of
interests for accounting purposes. Thus, SunAmerica Inc. ceased to exist on that
date. However, on the date of merger, substantially all of the net assets of
SunAmerica Inc. were contributed to a newly formed subsidiary of AIG named
SunAmerica Inc. ("SunAmerica").
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 March 31, 1999 and
December 31, 1998, and the results of its operations and its cash flows for the
three months ended March 31, 1999 and 1998. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of the results
to be expected for the full year.
The Company has changed its fiscal year end from September 30 to December 31.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements for the fiscal year ended September 30,
1998, contained in the Company's Annual Report on Form 10-K, and the unaudited
financial statements as of and for the three months ended December 31, 1998,
contained in the Company's Transition Report on Form 10-Q. Certain items have
been reclassified to conform to the current period's presentation.
2. Reinsurance
-----------
On December 31, 1998, Anchor National Life Insurance Company ("ANLIC"), an
affiliate of the Company, acquired the individual life business and the
individual and group annuity business of MBL Life Assurance Corporation ("MBL
Life"), via a 100% coinsurance transaction, for a cash purchase price of
$128,420,000. As part of this transaction, the affiliate acquired assets having
an aggregate fair value of $5,718,227,000, composed primarily of invested assets
totaling $5,715,010,000. Liabilities assumed in this acquisition totaled
$5,831,266,000, including $3,413,827,000 of fixed annuity reserves,
$2,317,365,000 of universal life reserves and $70,687,000 of guaranteed
investment contract reserves. Reserves for universal life contracts are based
on fund value.
This business was assumed from MBL life subject to existing reinsurance
ceded agreements. At December 31, 1998, the maximum retention on any single
life was $2 million, and a total credit of $5,057,000 was taken against the life
insurance reserves, representing predominantly yearly renewable term
reinsurance. In order to limit even further the exposure to loss on any single
insured and to recover an additional portion of the benefits paid over such
limits, ANLIC entered into a reinsurance treaty effective January 1, 1999 under
which the affiliate retains no more than $100,000 of risk on any one insured
life. With respect to these coinsurance agreements, ANLIC could become liable
for all obligations of the reinsured policies if the reinsurers were to become
unable to meet the obligations assumed under the respective reinsurance
agreements.
7
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Reinsurance (continued)
-----------
Included in the block of business acquired by ANLIC from MBL Life is
approximately $250,000,000 of individual life business and $590,000,000 of group
annuity business whose contract owners are residents of New York State ("the New
York Business"). Approximately six months subsequent to completion of the
transaction, the New York Business will be acquired by the Company, via an
assumption reinsurance agreement, and the remainder of the business will be
acquired by ANLIC via an assumption reinsurance agreement with MBL Life, which
will supersede the coinsurance agreement. The $128,420,000 purchase price will
be allocated between the Company and ANLIC based on their respective assumed
reserves.
3. Adoption of New Accounting Standard
---------------------------------------
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
which requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
adoption of SFAS 130 did not have an impact on the Company's results of
operations, financial condition or liquidity. Comprehensive income amounts for
the prior year are disclosed to conform to the current year's presentation. Net
unrealized gains on bonds and notes available for sale decreased by $2,696,000
during the three months ended March 31, 1999, and increased by $876,000 during
the three months ended March 31, 1998.
8
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Adoption of New Accounting Standard (continued)
---------------------------------------
The before tax, after tax, and tax benefit (expense) amounts for each component
of the increase (decrease) in unrealized gains on bonds and notes available for
sale for both the current and prior periods are summarized below:
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<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ---------- -------------
Three months ended March 31,
1999:
<S> <C> <C> <C>
Net unrealized losses on bonds
and notes available for sale
identified in the current
period $(17,750,000) $ 4,602,000 $(13,148,000)
Increase in Deferred Acquisition
Cost adjustment identified in
the current period 18,300,000 (6,405,000) 11,895,000
------------- ------------ -------------
550,000 (1,803,000) (1,253,000)
Reclassification adjustment for
net realized gains included
in net income 2,220,000 (777,000) 1,443,000
------------- ------------ -------------
Total decrease in net
unrealized gains
on bonds and notes
available for sale $ (1,670,000) $(1,026,000) $ (2,696,000)
============= ============ =============
Three months ended March 31,
1998:
Net unrealized gains on bonds
and notes available for sale
identified in the current
period $ 5,698,000 $(1,477,000) $ 4,221,000
Decrease in Deferred Acquisition
Cost adjustment identified in
the current period (700,000) 245,000 (455,000)
------------- ------------ -------------
4,998,000 (1,232,000) 3,766,000
Reclassification adjustment for
net realized gains included
in net income 4,446,000 (1,556,000) 2,890,000
------------- ------------ -------------
Total increase in net
unrealized gains on
bonds and notes
available for sale $ 552,000 $ 324,000 $ 876,000
============= ============ =============
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9
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company (the "Company") for the
three months ended March 31, 1999 ("1999") and March 31, 1998 ("1998") follows.
The Company has changed its fiscal year end to December 31. Accordingly, the
quarter ended December 31, 1998 was a transition period.
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 or 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 $3.8 million in 1999, compared with $3.7 million in
1998.
PRETAX INCOME totaled $6.5 million in 1999, compared with $6.3 million in
1998. The slight increase resulted primarily from higher net investment income
and variable annuity fees, which were partially offset by lower surrender
charges and increased amortization of deferred acquisition costs.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $10.5 million in 1999 from $9.3
million in 1998. These amounts represent 2.82% on average invested assets
(computed on a daily basis) of $1.49 billion in 1999 and 2.36% on average
invested assets of $1.57 billion in 1998.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities.
10
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This excess amounted to $71.2 million in 1999 and $50.1 million in 1998. The
difference between the Company's yield on average invested assets and the rate
paid on average interest-bearing liabilities (the "Spread Difference") was 2.58%
in 1999 and 2.19% in 1998.
Investment income (and the related yields on average invested assets)
totaled $28.0 million (7.52%) in 1999, compared with $29.6 million (7.55%) in
1998. Investment yields were slightly lower in 1999 primarily because of a
generally declining interest rate environment.
Total interest expense equaled $17.5 million in 1999 and $20.3 million in
1998. The average rate paid on all interest-bearing liabilities was 4.94% in
1999, compared with 5.36% in 1998. Interest-bearing liabilities averaged $1.42
billion in 1999 and $1.52 billion in 1998. The decrease in the average rate
paid on interest-bearing liabilities primarily resulted from a reduction in the
average crediting rate on the Company's closed block of fixed annuities due to a
generally declining interest rate environment.
The modest decline in average invested assets in 1999 reflects a similar
modest decline in average interest-bearing liabilities, which results from the
combined effect of decreased sales of the Company's fixed rate products and net
exchanges from fixed accounts into the separate accounts of variable annuity
contracts. Fixed annuity premiums totaled $16.2 million in 1999, compared with
$33.1 million in 1998 and are largely premiums for the fixed accounts of
variable annuity products. These amounts represent 5% and 9% of the fixed
annuity reserve balances at the beginning of the respective periods.
NET REALIZED INVESTMENT GAINS totaled $0.2 million in 1999, compared to
$0.4 million in 1998. Net realized investment gains in 1999 include impairment
writedowns of $0.6 million. There were no impairment writedowns in 1998. Thus,
net gains from sales and redemptions of investments totaled $0.8 million in 1999
and $0.4 million in 1998.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $158.6 million and $192.6 million in 1999 and 1998, respectively.
Sales of investments result from the active management of the Company's
investment portfolio. Because redemptions of investments are generally
involuntary and sales of investments are made in both rising and falling
interest rate environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 0.21% and 0.10% of
average invested assets in 1999 and 1998, respectively. Active portfolio
management involves the ongoing evaluation of asset 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, option, liquidity and interest-rate risk.
Impairment writedowns include provisions applied to bonds in 1999 which, on
an annualized basis, represent 0.17% of average invested assets. Such writedowns
are based upon estimates of the net realizable value of the applicable assets.
Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $1.4 million
in 1999 and $0.8 million in 1998. These increased fees reflect growth in
average variable annuity assets, principally due to 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 $358.1 million during 1999 and
$215.0 million during 1998. Variable annuity
11
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premiums, which exclude premiums allocated to the fixed accounts of variable
annuity products, aggregated $12.2 million in 1999, and $19.1 million in 1998.
These amounts represent 14% and 39% of variable annuity reserves at the
beginning of the respective periods.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $26.3 million and
$38.0 million in 1999 and in 1998, respectively, and primarily reflect sales of
the Company's flagship variable annuity, Polaris. Polaris is a multimanager
variable annuity that offers investors a choice of 26 variable funds and 6
guaranteed fixed-rate funds. Variable sales have decreased primarily as a
result of regulatory changes in the State of New York relating to non-taxable
policy exchange requirements. Additionally, industry sales of variable
annuities have slowed as investors paused to re-evaluate their investment
decisions in light of volatile markets. The Company believes that fluctuating
market conditions increase the value of financial planning services and make the
flexibility and security of variable annuities even more attractive.
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. Also, from time to time, Federal
initiatives are proposed which could affect the taxation of variable annuities
and annuities generally (See "Regulation").
SURRENDER CHARGES on fixed and variable annuities totaled $0.6 million in
1999 and $1.1 million in 1998. 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 $41.9 million in 1999, compared with $69.7 million in
1998. These payments represent 9.8% and 16.4%, respectively, of the aggregate
of average fixed and variable annuity reserves. Withdrawals include variable
annuity payments from the separate accounts totaling $5.2 million (5.9% of
average variable annuity reserves) in 1999 and $4.6 million (8.5% of average
variable annuity reserves) in 1998. The decrease in fixed annuity withdrawals
principally resulted from the high withdrawals in the prior year on the acquired
annuity business and from regulatory changes in the State of New York relating
to non-taxable policy exchange requirements. Management anticipates that
withdrawal rates will remain relatively stable for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.0 million in 1999 and $1.1
million in 1998. 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 $5.1 million in 1999,
compared with $4.2 million in 1998. The increase in amortization primarily
reflects the additional Variable Annuity Product Sales and the subsequent
amortization of related deferred commissions and other direct selling costs.
ANNUAL COMMISSIONS represent renewal commissions, including those paid
quarterly in arrears to maintain the persistency of certain of the Company's
fixed and variable annuity contracts. Annual commissions totaled $82,000 in
1999 and $27,000 in 1998.
INCOME TAX EXPENSE totaled $2.7 million in 1999 and $2.6 million in 1998,
representing an effective annualized tax rate of 41% for each period.
12
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FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $185.8 million at March 31, 1999 from
$184.7 million at December 31, 1998, primarily due to the $3.8 million of net
income recorded in 1999, offset by the $2.7 million decrease in accumulated
other comprehensive income.
INVESTED ASSETS at March 31, 1999 totaled $1.49 billion and $1.52 billion
at December 31, 1998. 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, and the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which constitutes 84% of the Company's total investment
portfolio, had an aggregate fair value that was below its amortized cost by $2.7
million at March 31, 1999, compared with an excess of $19.8 million at December
31, 1998.
At March 31, 1998, the Bond Portfolio included $1.23 billion 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 $23.8
million of bonds rated by the Company pursuant to statutory ratings guidelines
established by the NAIC. At March 31, 1999, approximately $1.16 billion of the
Bond Portfolio was investment grade, including $516.4 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At March 31, 1999, the Bond Portfolio included $87.4 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 4.4%
of the Company's total assets and 5.9% 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
March 31, 1999.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 1999.
13
<PAGE>
<TABLE>
<CAPTION>
RATED BONDS BY RATING CLASSIFICATION
(dollars in thousands)
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 Estimated Percent of
[DCR] {Fitch} Amortized fair category Amortized fair Amortized fair invested
category (1) cost value (2) cost value cost value assets
- ------------------- ---------- ---------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $ 876,106 $ 884,103 1 $ 77,534 $ 77,752 $ 953,640 $ 961,855 64.42%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 165,437 165,682 2 34,392 34,270 199,829 199,952 13.39
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 4,294 4,233 3 2,393 2,292 6,687 6,525 0.44
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 83,614 75,199 4 5,586 4,715 89,200 79,914 5.35
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 0 0 5 2,497 913 2,497 913 0.06
CI to D
[DD]
{D} 0 0 6 0 0 0 0 0.00
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES $1,129,451 $1,129,217 $ 122,402 $ 119,942 $1,251,853 $1,249,159
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
14
<PAGE>
Footnotes to the table of Rated Bonds by Rating Classification
- -----------------------------------------------------------------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates the
debt's relative standing within the rating category. A security rated BBB- or
higher is considered investment grade. Moody's rates debt securities in rating
categories ranging from Aaa (the highest) to C (extremely poor prospects of ever
attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debt's relative standing within the
rating category. A security rated Baa3 or higher is considered investment
grade. 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 $23.8 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
15
<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $109.4 million at March 31, 1999. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At March
31, 1999, Secured Loans consisted of $32.9 million of publicly traded securities
and $76.5 million of privately traded securities. These Secured Loans are
composed of loans to 59 borrowers spanning 14 industries, with 23% of these
assets concentrated in utilities and 9% concentrated in food. No other industry
concentration constituted more than 6% of these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $197.4 million at March 31, 1999 and consisted of
169 commercial first mortgage loans with an average loan balance of
approximately $1.2 million, collateralized by properties located in 34 states
and the District of Columbia. Approximately 38% of this portfolio was office,
30% was retail, 13% was industrial, 12% was multifamily residential and 7% was
other types. At March 31, 1999, approximately 26% of this portfolio was secured
by properties located in California, approximately 14% by properties located in
New York, and approximately 10% by properties located in Michigan and no more
than 6% of this portfolio was secured by properties located in any other single
state. At March 31, 1999, one mortgage loan had an outstanding balance of $10
million or more, which represented approximately 5% of this portfolio, and
approximately 36% of the mortgage loan portfolio consisted of loans with balloon
payments due before April 1, 2002. During 1999 and 1998, loans delinquent by
more than 90 days, foreclosed loans and restructured loans have not been
significant in relation to the total mortgage loan portfolio.
At March 31, 1999, approximately 69% of the mortgage loans were seasoned
loans underwritten to the Company's standards and purchased at or near par from
other financial institutions. Such loans generally have higher average interest
rates than loans that could be originated today. The balance of the mortgage
loan portfolio has been originated by the Company under strict underwriting
standards. Commercial mortgage loans on properties such as offices, hotels and
shopping centers generally represent a higher level of risk than do mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans and the more immediate effects
of general economic conditions on these commercial property types. However, due
to the seasoned nature of the Company's mortgage loan portfolio and its strict
underwriting standards, the Company believes that it has prudently managed the
risk attributable to its mortgage loan portfolio while maintaining attractive
yields.
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
16
<PAGE>
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 84% of the Company's fixed annuity
reserves had surrender penalties or other restrictions at March 31, 1999.
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; bonds and notes;
and mortgage loans. At March 31, 1999, these assets had an aggregate fair value
of $1.49 billion with a duration of 3.8. The Company's fixed rate liabilities
are its fixed annuity contracts. At March 31, 1999, these liabilities had an
aggregate fair value (determined by discounting future contractual cash flows by
related market rates of interest) of $1.43 billion with a duration of 3.5. The
Company's potential exposure due to a relative 10% increase in prevailing
interest rates from their March 31, 1999 levels is a loss of $3.7 million in
fair value of its fixed-rate assets that is not offset by a decrease in the fair
value of its fixed-rate liabilities. Because the Company actively manages its
assets and liabilities and has strategies in place to minimize its exposure to
loss as interest rate changes occur, it expects that actual losses would be less
than the estimated potential loss.
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 market value of a 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 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. It is the
17
<PAGE>
Company's policy that these agreements are entered into with counterparties who
have a debt rating of A/A2 or better from both S&P and Moody's. The Company
continually monitors its credit exposure with respect to those agreements. 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 is routinely conducted by the Company.
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.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral.
The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment on mortgage loans are based on losses expected by management to be
realized on transfers of mortgage loans to real estate, on the disposition and
settlement of mortgage loans and on mortgage loans that management believes may
not be collectible in full. Accrual of interest is suspended when principal and
interest payments on mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $2.8 million at March 31, 1999 and
constituted 0.2% of total invested assets. At December 31, 1998 defaulted
investments totaled $2.4 million and constituted 0.2% 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 March 31, 1999, approximately $729.8 million of the Company's Bond
Portfolio had an aggregate unrealized gain of $22.4 million, while approximately
$519.3 million of the Bond Portfolio had an aggregate unrealized loss of $25.1
million. In addition, the Company's investment portfolio currently provides
approximately $14.5 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sales
of the Company's annuity products have been more than 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
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
18
<PAGE>
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.
YEAR 2000
The Company relies significantly on computer systems and applications in
its daily operations. Many of these systems are not presently year 2000
compliant, which means that because they have historically used only two digits
to identify the year in a date, they will fail to distinguish dates in the
"2000s" from dates in the "1900s." The Company's business, financial condition
and results of operations could be materially and adversely affected by the
failure of the Company's systems and applications (and those operated by third
parties interfacing with the Company's systems and applications) to properly
operate or manage these dates.
SunAmerica has a coordinated plan to repair or replace these noncompliant
systems and to obtain similar assurances from third parties interfacing with the
Company's systems and applications. In fiscal 1997, SunAmerica recorded a $15.0
million provision for estimated programming costs to make necessary repairs of
certain specific noncompliant systems. In addition, SunAmerica is making
expenditures, which it expects will ultimately total $12.3 million, to replace
certain other specific noncompliant systems, which expenditures will be
capitalized as software costs and amortized over future periods. The entire
cost of these changes will be borne by the Company's affiliates. Both phases of
the project are currently proceeding in accordance with the plan and were
substantially completed by the end of calendar 1998. Testing of both the
repaired and replacement systems is expected to be completed by July 31, 1999.
However, the Company will continue to test its computer systems and applications
throughout 1999 to ensure continued compliance.
In addition, the Company has distributed a year 2000 questionnaire to
certain of its significant suppliers, distributors, financial institutions,
lessors and others with which it does business to evaluate their year 2000
compliance plans and state of readiness and to determine the extent to which the
Company's systems and applications may be affected by the failure of others to
remediate their own year 2000 issues. To date, however, the Company has
received only preliminary feedback from such parties and has not independently
confirmed any information received from other parties with respect to the year
2000 issues. Therefore, there can be no assurance that such other parties will
complete their year 2000 conversions in a timely fashion or will not suffer a
year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.
Because the Company's year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
developed a comprehensive year 2000 contingency plan. The Company closely
monitors the progression of its plan for compliance, and if necessary, would
devote additional resources to assure the timely completion of its year 2000
plan. If the Company determines that its business is at
19
<PAGE>
material risk of disruption due to the year 2000 issue or anticipates that its
year 2000 conversion will not be completed in a timely fashion, the Company will
work to enhance its contingency plans.
The discussion above contains certain forward-looking statements. The
costs of the year 2000 conversion, date which the Company has set to complete
such conversion and possible risks associated with the year 2000 issue are based
on the Company's current estimates and are subject to various uncertainties that
could cause the actual results to differ materially from the Company's
expectations. Such uncertainties include, among others, the success of the
Company in identifying systems and applications that are not year 2000
compliant, the nature and amount of programming required to upgrade or replace
each of the affected systems and applications, the availability of qualified
personnel, consultants and other resources, and the success of the year 2000
conversion efforts of others.
REGULATION
The Company is subject to regulation and supervision by 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 company holding systems,
establishing reserve and valuation requirements, prescribing the form and
content of required 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 developed several model laws and
regulations designed to reduce the risk of insurance company insolvencies and
market conduct violations. These initiatives include investment reserve
requirements, risk-based capital ("RBC") 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 and regulations relating to product design,
product reserving standards 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.
The RBC standards consist of formulas which establish capital requirements
relating to insurance, business, assets and interest rate risks, and which help
to identify companies which are under-capitalized and require specific
regulatory actions in the event an insurer's RBC falls below specified levels.
The Company has more than enough statutory capital to meet the NAIC's RBC
requirements as of the most recent calendar year-end. The state of New York, in
which the Company is domiciled, has adopted these RBC standards and the Company
is in compliance with such laws. Further, for
20
<PAGE>
statutory reporting purposes, the annuity reserves of the Company are calculated
in accordance with statutory requirements and are adequate under current
cash-flow testing models.
From time to time, Federal initiatives are proposed that could affect the
Company's business. Such initiatives include employee benefit plan regulations
and tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance and other investment products. Proposals made in recent
years to limit the tax deferral of annuities or otherwise modify the tax rules
related to the treatment of annuities have not been enacted. While certain of
the proposals, if implemented, could have an adverse effect on the Company's
sales of affected products, and, consequently, on its results of operations, the
Company believes such proposals have a small likelihood of being enacted,
because they would discourage a retirement savings and there is strong public
and industry opposition to them.
21
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 16 and 17
herein.
22
<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
- ----- -----------
2(a) Purchase and Sale Agreement, dated as of July 15, 1998, by and among
the Company, SunAmerica Inc. ("SAI"), Anchor National Life Insurance Company and
MBL Life Assurance Corporation, is incorporated herein by reference to Exhibit
2(e) to SAI's 1998 Annual Report on Form 10-K, filed December 21, 1998.
3(a) Agreement and Plan of Merger and Amended and Restated Certificate of
Incorporation are incorporated herein by reference to Exhibit 3(a) of the
Company's 1997 Annual Report on Form 10-K, filed December 23, 1997.
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
On January 15, 1999, the Company filed a current report on Form 8-K concerning
the merger of its ultimate Parent, SunAmerica Inc., with American International
Group, Inc.
23
<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
Date: May 14, 1999 By:/s/SCOTT L. ROBINSON
- --------------------- ----------------------
Scott L. Robinson
Senior Vice President and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ SCOTT L. ROBINSON Senior Vice President and May 14, 1999
- ------------------------- --------------
Scott L. Robinson Director (Principal
Financial Officer)
/s/ N. SCOTT GILLIS Senior Vice President and May 14, 1999
- ----------------------- --------------
N. Scott Gillis Controller (Principal
Accounting Officer)
24
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ----- -----------
27 Financial Data Schedule.
25
<TABLE> <S> <C>
<CAPTION>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND COMPREHENSIVE INCOME OF FIRST SUNAMERICA LIFE
INSURANCE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,249,158,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 197,383,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,493,154,000
<CASH> 41,209,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 112,217,000
<TOTAL-ASSETS> 2,002,446,000
<POLICY-LOSSES> 1,413,206,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,000,000
0
0
<OTHER-SE> 182,800,000
<TOTAL-LIABILITY-AND-EQUITY> 2,002,446,000
0
<INVESTMENT-INCOME> 28,047,000
<INVESTMENT-GAINS> 153,000
<OTHER-INCOME> 2,012,000
<BENEFITS> 17,533,000
<UNDERWRITING-AMORTIZATION> 5,100,000
<UNDERWRITING-OTHER> 82,000
<INCOME-PRETAX> 6,487,000
<INCOME-TAX> 2,666,000
<INCOME-CONTINUING> 3,821,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,821,000
<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>
