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, 2000
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 11,
2000 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, 2000 and December 31, 1999 . . . . . . . . . . . 3
Statement of Income and Comprehensive Income (Unaudited)-
Three Months Ended March 31, 2000 and 1999 . . . . . . . . 4
Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 2000 and 1999 . . . . . . . . 5-6
Notes to Financial Statements (Unaudited). . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 8-20
Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Part II - Other Information. . . . . . . . . . . . . . . . . . . 22
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
(Unaudited)
March 31, December 31,
2000 1999
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ASSETS
Investments:
Cash and short-term investments. . . . . . $ 50,708,000 $ 29,350,000
Bonds and notes available for sale,
at fair value (amortized cost:
March 2000, $1,485,661,000
December 1999, $1,587,116,000) . . . . . 1,411,658,000 1,522,921,000
Mortgage loans . . . . . . . . . . . . . . 208,564,000 211,867,000
Other invested assets. . . . . . . . . . . 41,588,000 42,604,000
--------------- ---------------
Total investments. . . . . . . . . . . . . 1,712,518,000 1,806,742,000
Variable annuity assets held in separate
accounts . . . . . . . . . . . . . . . . . 612,091,000 558,605,000
Accrued investment income. . . . . . . . . . 20,484,000 24,076,000
Deferred acquisition costs . . . . . . . . . 134,943,000 137,637,000
Current income taxes . . . . . . . . . . . . 7,454,000 6,638,000
Deferred income taxes. . . . . . . . . . . . 20,063,000 18,275,000
Other assets . . . . . . . . . . . . . . . . 3,124,000 3,539,000
--------------- ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . $2,510,677,000 $2,555,512,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts . . . $1,445,716,000 $1,523,641,000
Reserves for universal life insurance
contracts. . . . . . . . . . . . . . . . 274,113,000 277,250,000
Other liabilities. . . . . . . . . . . . . 19,670,000 34,776,000
--------------- ---------------
Total reserves, payable and accrued
liabilities. . . . . . . . . . . . . . . 1,739,499,000 1,835,667,000
--------------- ---------------
Variable annuity liabilities related to
separate accounts. . . . . . . . . . . . . 612,091,000 558,605,000
--------------- ---------------
Shareholder's equity:
Common Stock . . . . . . . . . . . . . . . 3,000,000 3,000,000
Additional paid-in capital . . . . . . . . 144,428,000 144,428,000
Retained earnings. . . . . . . . . . . . . 46,956,000 42,409,000
Accumulated other comprehensive loss . . . (35,297,000) (28,597,000)
--------------- ---------------
Total shareholder's equity . . . . . . . . 159,087,000 161,240,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . $2,510,677,000 $2,555,512,000
=============== ===============
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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, 2000 and 1999
(Unaudited)
2000 1999
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Investment income . . . . . . . . . . . . . . $ 33,330,000 $ 28,047,000
------------- -------------
Interest expense on:
Fixed annuity contracts . . . . . . . . . . (18,305,000) (17,533,000)
Universal life insurance contracts (3,132,000) ---
------------- -------------
Total interest expense. . . . . . . . . . . (21,437,000) (17,533,000)
------------- -------------
NET INVESTMENT INCOME . . . . . . . . . . . . 11,893,000 10,514,000
------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES). . . . . . . . . . . . . . . . . . (1,513,000) 153,000
------------- -------------
Fee income:
Variable annuity fees . . . . . . . . . . . 2,204,000 1,369,000
Universal life insurance fees 500,000 ---
Surrender charges . . . . . . . . . . . . . 772,000 643,000
------------- -------------
TOTAL FEE INCOME. . . . . . . . . . . . . . . 3,476,000 2,012,000
------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES . . . . . (1,448,000) (1,010,000)
------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS . . . . . . . . . . . . . (4,809,000) (5,100,000)
------------- -------------
ANNUAL COMMISSIONS. . . . . . . . . . . . . . (173,000) (82,000)
------------- -------------
PRETAX INCOME . . . . . . . . . . . . . . . . 7,426,000 6,487,000
Income tax expense. . . . . . . . . . . . . . (2,879,000) (2,666,000)
------------- -------------
NET INCOME. . . . . . . . . . . . . . . . . . 4,547,000 3,821,000
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Net unrealized losses on debt and equity
securities available for sale identified
in the current period (net of income tax
benefit of $3,971,000 for 2000 and
$1,435,000 for 1999). . . . . . . . . . . (7,375,000) (2,666,000)
Less reclassification adjustment for net
realized losses (gains) included in net
income (net of income tax expense of
$363,000 for 2000 and income tax benefit
of $17,000 for 1999). . . . . . . . . . . 675,000 (30,000)
------------- -------------
OTHER COMPREHENSIVE LOSS. . . . . . . . . . (6,700,000) (2,696,000)
------------- -------------
COMPREHENSIVE INCOME (LOSS) . . . . . . . . . $ (2,153,000) $ 1,125,000
============= =============
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See accompanying notes
4
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . $ 4,547,000 $ 3,821,000
Adjustments to reconcile net income to get
cash provided by operating activities:
Interested credited to:
Fixed annuity contracts. . . . . . . . 18,305,000 17,533,000
Universal life insurance contracts 3,132,000 ---
Net realized investment losses (gains) 1,513,000 (153,000)
Accretion of net discounts on
investments. . . . . . . . . . . . . (999,000) (725,000)
Amortization of goodwill --- 15,000
Provision for deferred income taxes 1,820,000 ---
Change in:
Accrued investment income. . . . . . . . . 3,592,000 (1,206,000)
Deferred acquisition costs . . . . . . . . 2,194,000 3,001,000
Income taxes currently payable . . . . . . (816,000) 2,266,000
Other liabilities. . . . . . . . . . . . . (7,158,000) 2,679,000
Other, net . . . . . . . . . . . . . . . . . 1,653,000 (102,000)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . 27,783,000 27,129,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of:
Bonds and notes. . . . . . . . . . . . . . (7,986,000) (124,947,000)
Mortgage loans . . . . . . . . . . . . . . (26,000) (31,000,000)
Sales of:
Bonds and notes. . . . . . . . . . . . . . 83,497,000 158,107,000
Other investments, excluding short-term
investments. . . . . . . . . . . . . . . 485,000 915,000
Redemptions and maturities of:
Bonds and notes. . . . . . . . . . . . . . 25,214,000 19,999,000
Mortgage loans . . . . . . . . . . . . . . 3,460,000 10,463,000
Other investments, excluding short-term
investments. . . . . . . . . . . . . . . 617,000 384,000
------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . 105,261,000 33,921,000
------------- --------------
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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, 2000 and 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts . . . . . . . $ 6,841,000 $ 16,178,000
Universal life insurance contracts 2,382,000 ---
Net exchanges from the fixed accounts
of variable annuity contracts . . . (13,524,000) (9,995,000)
Withdrawal payments on:
Fixed annuity contracts . . . . . . . (76,762,000) (36,618,000)
Universal life insurance contracts (8,217,000) ---
Claims and annuity payments on fixed
annuity contracts . . . . . . . . . (14,458,000) (6,620,000)
Net receipts from other short-term
financings. . . . . . . . . . . . . . (7,948,000) (1,252,000)
-------------- -------------
NET CASH USED BY FINANCING ACTIVITIES . (111,686,000) (38,307,000)
-------------- -------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . 21,358,000 22,743,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD . . . . . . . . . 29,350,000 18,466,000
-------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD . . . . . . . . . . . . $ 50,708,000 $ 41,209,000
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Net income taxes paid . . . . . . . . . $ 1,875,000 $ 1,600,000
============== =============
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See accompanying notes
6
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
-----------------------
First SunAmerica Life Insurance Company (the "Company") is an indirect
wholly owned subsidiary of American International Group, Inc. ("AIG"), an
international insurance and financial services holding company. The Company is a
New York-domiciled life insurance company engaged primarily in the business of
selling and administering fixed and variable annuities and universal life
contracts in the State of New York.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of March 31, 2000 and December 31, 1999, the results of
its operations and its cash flows for the three months ended March 31, 2000 and
1999. The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, contained in the Company's 1999 Annual Report on Form 10-K. The
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. Certain
items have been reclassified to conform to the current period's presentation.
2. RECENTLY ISSUED ACCOUNTING STANDARD
--------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 was postponed by SFAS 137, and now will be effective for
the Company as of January 1, 2001. Therefore, it is not included in the
accompanying financial statements. The Company has not completed its analysis
of the effect of SFAS 133, but management believes that it will not have a
material impact on the Company's results of operations, financial condition or
liquidity.
7
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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, 2000 ("2000") and March 31, 1999 ("1999") follows.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings 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 $4.5 million in 2000, compared with $3.8 million in
1999. On July 1, 1999, the Company acquired the New York individual life and
individual and group annuity business of MBL Life Assurance Corporation (the
"Acquisition"). The Acquisition was accounted for under the purchase method of
accounting, and, therefore results of operations include those of the
Acquisition only from its date of acquisition. Consequently, the operating
results for 2000 and 1999 are not comparable. On a pro forma basis, using the
historical financial information of the acquired business and assuming that the
Acquisition had been consummated on January 1, 1999, the beginning of the
prior-year period discussed herein, net income would
8
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have been $4.1 million for the three months ended March 31, 1999.
PRETAX INCOME totaled $7.4 million in 2000 and $6.5 million in 1999. The
12.6% improvement in 2000 over 1999 resulted primarily from an increase in net
investment income, increased variable annuity and universal life insurance fees
and decreased deferred acquisition costs, offset slightly by increased realized
losses and general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $11.9 million in 2000 from $10.5
million in 1999. These amounts equal 2.61% on average invested assets (computed
on a daily basis) of $1.83 billion in 2000 and 2.82% on average invested assets
of $1.49 billion in 1999. On a pro forma basis, assuming the Acquisition had
been consummated on January 1, 1999, net investment income on related average
invested assets would have been 1.98% in 1999. The improvement in 2000 net
investment yields over both actual and pro forma 1999 amounts reflects the
redeployment of lower yielding assets received in the Acquisition into higher
yielding investment categories.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. Average
invested assets exceeded average interest-bearing liabilities by $66.7 million
in 2000 and $71.2 million in 1999. The difference between the Company's yield
on average invested assets and the rate paid on average interest-bearing
liabilities (the "Spread Difference") was 2.42% in 2000 and 2.58% in 1999. On a
pro forma basis, assuming the Acquisition had been consummated on January 1,
1999, the spread difference would have been 1.86% in 1999, reflecting primarily
the effect of the lower yielding assets received in the Acquisition. The
invested assets associated with the Acquisition included high-grade corporate,
government and government/agency bonds, which are generally lower yielding than
a significant portion of the invested assets that comprise the remainder of the
Company's portfolio.
Investment income (and the related yield on average invested assets)
totaled $33.3 million (7.30%) in 2000 and $28.0 million (7.52%) in 1999. The
decrease in the investment yield in 2000 as compared with 1999 principally
reflect the effects of lower yielding assets received in the Acquisition. On a
pro forma basis, assuming the Acquisition had been consummated on January 1,
1999, the yield on related average invested assets would have been 6.87% in
1999.
Total interest expense equaled $21.4 million in 2000, compared with $17.5
million in 1999. The average rate paid on all interest-bearing liabilities was
4.88% in 2000 compared with 4.94% in 1999. Interest-bearing liabilities
averaged $1.76 billion in 2000 and $1.42 billion in 1999. On a pro forma basis,
assuming the Acquisition had been consummated on January 1, 1999, the average
rate paid on all interest-bearing liabilities would have been 5.01% and
interest-bearing liabilities would have averaged $2.26 billion in 1999. The
decrease in the overall rates paid in 2000 results primarily from the continued
reduction of crediting rates on certain closed blocks of business and the
effects of the Acquisition.
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GROWTH IN AVERAGE INVESTED ASSETS largely resulted from the impact of the
Acquisition, from which the Company acquired $678.3 million of invested assets.
Changes in average invested assets also reflect sales of fixed annuities and the
fixed account options of the Company's variable annuity products ("Fixed Annuity
Premiums"), and renewal premiums on its universal life product ("UL Premiums")
acquired in the Acquisition, partially offset by net exchanges from fixed
accounts to the separate accounts of variable annuity contracts. Fixed Annuity
Premiums and UL Premiums totaled $9.2 million in 2000 and $16.2 million in 1999
and are largely premiums for the fixed accounts of variable annuities. Such
premiums have decreased, in part, as a result of regulatory changes in the state
of New York relating to non-taxable policy exchange requirements. On an
annualized basis, these premiums represent 2% and 5%, respectively, of the
related reserve balances at the beginning of the respective periods.
NET REALIZED INVESTMENT LOSSES totaled $1.5 million in 2000, compared with
net realized investment gains of $0.2 million in 1999. Net realized investment
losses in 2000 include impairment writedowns of $1.2 million and net realized
investment gains in 1999 include impairment writedowns of $0.6 million. Thus,
net losses from sales and redemptions of investments totaled $0.3 million in
2000, compared to net gains from sales and redemptions of investments of $0.8
million in 1999.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $85.5 million in 2000 and $158.6 million in 1999. Sales of
investments result from the active management of the Company's investment
portfolio, including assets received as part of the Acquisition. 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 0.06% and 0.21% of average invested assets in 2000 and
1999, 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 2000 and 1999.
On an annualized basis, impairment writedowns represent 0.27% and 0.17% of
related average invested assets for 2000 and 1999, respectively. For the twenty
quarters beginning April 1, 1995, impairment writedowns as a percent of average
invested assets have ranged up to 0.86% and have averaged 0.16%. 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 $2.2 million
in 2000 and $1.4 million in 1999. The increased fees in 2000 reflect growth in
average variable annuity assets, principally due to increased market values, net
exchanges into the separate accounts from the fixed accounts of variable
annuity contracts and the receipt of variable
10
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annuity premiums, partially offset by surrenders. On an annualized basis,
variable annuity fees represent 1.5% of average variable annuity assets in 2000
and 1999. Variable annuity assets averaged $574.0 million during 2000 and
$358.1 during 1999, respectively. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, totaled
$9.9 million and $12.2 million in 2000 and 1999, respectively. On an annualized
basis, these amounts represent 7% and 14%, respectively of variable annuity
reserves at the beginning of the respective periods. Transfers from the fixed
accounts of the Company's variable annuity products to the separate accounts
(see "Growth in Average Invested Assets") are not classified in variable annuity
premiums (in accordance with generally accepted accounting principles).
Accordingly, changes in variable annuity premiums are not necessarily indicative
of the ultimate allocation by customers among fixed and variable account options
of the Company's variable annuity products.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $17.0 million and
$26.3 million in 2000 and 1999, respectively. Variable annuity product sales
primarily reflect sales of the Company's flagship variable annuity line,
Polaris. Polaris is a multimanager variable annuity that offer investors a
choice of more than 25 variable funds and a number of guaranteed fixed-rate
funds. Variable Annuity Product Sales have decreased in 2000, principally as a
result of regulatory changes in the State of New York relating to non-taxable
policy exchange requirements.
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 that could affect the taxation of variable annuities
and annuities generally (See "Regulation").
UNIVERSAL LIFE INSURANCE FEES result from the acquisition of universal life
insurance contract reserves and the ongoing receipt of renewal premiums on such
contracts, and comprise mortality charges, up-front fees earned on premiums
received and administrative fees on such contracts. Universal life insurance
fees amounted to $0.4 million in the first three months of 2000. Such fees
annualized represent 0.7% of average reserves for universal life insurance
contracts for 2000. Since the Acquisition occurred on July 1, 1999, there were
no such fees earned in 1999.
SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $0.8 million in 2000 and $0.6 million in 1999. Surrender
charges generally are assessed on withdrawals at declining rates during the
first seven years of a contract. Withdrawal payments, which include surrenders
and lump-sum annuity benefits, totaled $93.2 million in 2000 (including $21.7
million attributable to the Acquisition) compared to $41.9 million in 1999.
Annualized, these payments represent 16.4% (3.8% attributable to the
Acquisition) and 9.8% for 2000 and 1999, respectively, of averaged fixed and
variable annuity and universal life reserves. Excluding the effects of the
Acquisition, withdrawal payments represent 14.6% of related average fixed and
variable annuity reserves in 2000. The increase in withdrawal rates in 2000 as
compared to 1999 is due primarily to increased surrenders on certain closed
blocks of business.
11
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Withdrawals include variable annuity payments from the separate accounts
totaling $8.2 million (5.8% of average variable annuity reserves) and $5.9
million (6.6% of average variable annuity reserves) in 2000 and 1999,
respectively. Consistent with the assumptions used in connection with the
Acquisition, management anticipates that the level of withdrawal payments will
reflect higher relative withdrawal rates in the near future because of higher
surrenders on the acquired business.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.4 million in 2000 and $1.0
million in 1999. The increase in 2000 over 1999 principally reflects increased
costs related to the business acquired in the Acquisition, and expenses related
to servicing the Company's growing block of variable annuity policies. 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 $4.8 million (including
$0.1 million attributable to the Acquisition), in 2000, compared with $5.1
million in 1999.
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 $173,000 in
2000 and $82,000 in 1999.
INCOME TAX EXPENSE totaled $2.9 million in 2000, compared with $2.7 million
in 1999, representing effective annualized tax rates of 39% and 41%,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY decreased to $159.1 million at March 31, 2000 from
$161.2 million at December 31, 1999, primarily due to a $6.7 million increase in
accumulated other comprehensive loss offset by $4.5 million of net income
recorded in 2000.
INVESTED ASSETS at March 31, 2000 totaled $1.71 billion compared with $1.81
billion at December 31, 1999. The Company manages most of its invested assets
internally. The Company's general investment philosophy is to hold fixed-rate
assets for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of its portfolio of bonds and notes
(the "Bond Portfolio") is available to be sold in response to changes in market
interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which constituted 82% of the Company's total investment
portfolio at March 31, 2000, had an amortized cost that was $74.0 million
greater than its aggregate fair value at March 31, 2000 and $64.2 million
greater than its aggregated fair value at December 31, 1999. The net unrealized
losses on the Bond Portfolio in 2000 principally reflect the recent increases in
prevailing interest rates and the corresponding effect on the fair value of the
Bond Portfolio at March 31, 2000.
12
<PAGE>
At March 31, 2000 the Bond Portfolio included $1.39 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 $17.4
million of bonds rated by the Company pursuant to statutory ratings guidelines
established by the NAIC. At March 31, 2000, approximately $1.28 billion of the
Bond Portfolio was investment grade, including $573.1 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At March 31, 2000, the Bond Portfolio included $126.7 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 5.0%
of the Company's total assets and 7.1% 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 issuer concentrations of non-investment-grade securities
at March 31, 2000.
The table on the following page summarizes the Company's rated bonds by
rating classification as of March 31, 2000.
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-
(A11 to A3)
[AAA to A-]
{AAA to A-} . . . $1,032,296 $ 994,474 1 $ 49,810 $ 48,778 $1,082,106 $1,043,252 58.40%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 174,144 166,929 2 76,112 74,756 250,256 241,685 13.53
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 22,819 15,991 3 --- --- 22,819 15,991 0.90
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 115,649 99,805 4 8,419 7,881 124,068 107,686 6.03
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 6,400 3,032 5 --- --- 6,400 3,032 0.17
CI to D
[DD]
{D} --- --- 6 12 12 12 12
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $1,351,308 $1,280,231 $ 134,353 $ 131,427 $1,485,661 $1,411,658
========== ========== ========== ========== ========== ==========
<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 $17.4 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 $95.1 million at March 31, 2000. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At March
31, 2000, Secured Loans consisted of $63.7 million of privately traded
securities and $31.4 million of publicly traded securities. These Secured Loans
are composed of loans to borrowers spanning 10 industries, with 27% of these
assets concentrated in utilities and 7% concentrated in technology. No other
industry concentration constituted more than 5% 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 $208.6 million at March 31, 2000 and consisted of
145 commercial first mortgage loans with an average loan balance of
approximately $1.4 million, collateralized by properties located in 32 states.
Approximately 41% of this portfolio was office, 25% was retail, 12% was
industrial, 11% was multifamily residential and 11% was other types. At March
31, 2000, approximately 34% of this portfolio was secured by properties located
in California, approximately 11% by properties located in New York and Michigan
and no more than 5% of this portfolio was secured by properties located in any
other single state. At March 31, 2000, one mortgage loan had an outstanding
balance of $10.0 million or more, which represented approximately 5% of this
portfolio, and approximately 35% of the mortgage loan portfolio consisted of
loans with balloon payments due before April 1, 2003. During 2000 and 1999,
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, 2000, approximately 55% 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 utilized, the Company believes that it has prudently
managed the risk attributable to its mortgage loan portfolio while maintaining
attractive yields.
16
<PAGE>
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed-rate investments are priced
over the yield curve, default rates, and general economic conditions. Its
portfolio strategy is constructed with a view to achieve adequate risk-adjusted
returns consistent with its investment objectives of effective asset-liability
matching, liquidity and safety. The Company's fixed-rate products incorporate
surrender charges or other restrictions in order to encourage persistency.
Approximately 81% of the Company's fixed annuity and universal life reserves had
surrender penalties or other restrictions at March 31, 2000.
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, 2000, these assets had an aggregate fair value
of $1.68 billion with a duration of 3.8. The Company's fixed-rate liabilities
are its fixed annuity and universal life insurance contracts. At March 31,
2000, these liabilities had an aggregate fair value (determined by discounting
future contractual cash flows by related market rates of interest) of $1.58
billion with a duration of 3.6. The Company's potential exposure due to a
relative 10% increase in prevailing interest rates from their March 31, 2000
levels is a loss of approximately $3.6 million, representing an increase in the
fair value of its fixed-rate liabilities that is not offset by an increase in
the fair value of its fixed-rate assets. 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 the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes
17
<PAGE>
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 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 these 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
18
<PAGE>
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 $5.2 million at March 31, 2000 and
constituted 0.3% of total invested assets. At December 31, 1999 defaulted
investments totaled $1.8 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 March 31, 2000, approximately $1.21 billion of the Company's Bond
Portfolio had an aggregate unrealized loss of $77.1 million, while approximately
$199.2 million of the Bond Portfolio had an aggregate unrealized gain of $3.1
million. In addition, the Company's investment portfolio currently provides
approximately $17.6 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
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, in common with other insurers, is subject to regulation and
supervision by the states and by other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally has
its source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to approval
of policy forms and rates, the standards of solvency that must be met and
maintained, including risk based capital measurements, the licensing of insurers
and their agents, the nature of and limitations on investments, restrictions
on the size of risks which may be
19
<PAGE>
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders.
Risk based capital ("RBC") standards are designed to measure the adequacy
of an insurer's statutory capital and surplus in relation to the risks inherent
in its business. The RBC standards consist of formulas that establish capital
requirements relating to insurance, business, asset and interest rate risks.
The standards are intended to help identify companies which are
under-capitalized and require specific regulatory actions in the event an
insurer's RBC is deficient. The RBC formula develops a risk adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the target
level of statutory surplus varies not only as a result of the insurer's size,
but also on the risk profile of the insurer's operations. The statutory capital
and surplus of the Company exceeded its RBC requirements by a considerable
margin as of March 31, 2000.
Federal legislation has been recently enacted allowing combinations between
insurance companies, banks and other entities. It is not yet known what effect
this legislation will have on insurance companies. In addition, from time to
time, Federal initiatives are proposed that could affect the Company's
businesses. 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 such
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 these proposals have a small likelihood of being enacted,
because they would discourage retirement savings and there is strong public and
industry opposition to them.
20
<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 19 and 20
herein.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
------------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------------
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
REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the first
quarter ended March 31, 2000.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SUNAMERICA LIFE INSURANCE COMPANY
-------------------------------------------
Registrant
Date: May 12, 2000 /s/ N. SCOTT GILLIS
- --------------------- ----------------------
N. Scott Gillis
Senior Vice President
(Principal Financial
Officer)
Date: May 12, 2000 /s/ MAURICE S. HEBERT
- --------------------- ------------------------
Maurice S. Hebert
Vice President and
Controller (Principal
Accounting Officer)
23
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
- ----- -----------
27 Financial Data Schedule.
24
<TABLE> <S> <C>
<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 QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 1411658000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 208564000
<REAL-ESTATE> 0
<TOTAL-INVEST> 1712518000
<CASH> 50708000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 134943000
<TOTAL-ASSETS> 2510677000
<POLICY-LOSSES> 1719829000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3000000
<OTHER-SE> 156087000
<TOTAL-LIABILITY-AND-EQUITY> 2510677000
0
<INVESTMENT-INCOME> 33330000
<INVESTMENT-GAINS> (1513000)
<OTHER-INCOME> 3476000
<BENEFITS> 21437000
<UNDERWRITING-AMORTIZATION> 4809000
<UNDERWRITING-OTHER> 173000
<INCOME-PRETAX> 7426000
<INCOME-TAX> 2879000
<INCOME-CONTINUING> 4547000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4547000
<EPS-BASIC> 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>
