SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number 33-85014
FIRST SUNAMERICA LIFE INSURANCE COMPANY
Incorporated in New York 06-0992729
IRS employer
Identification No.
733 Third Avenue, 4th Floor, New York, New York 10017
Registrant's telephone number, including area code (800) 272-3007
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No ___
--
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
--
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON MARCH 29,
1999 WAS AS FOLLOWS:
Common Stock (par value $10,000 per share) 300 shares outstanding
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
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. At December 31,
1998, the Company was a wholly owned indirect subsidiary of SunAmerica Inc., a
Maryland Corporation. On January 1, 1999, SunAmerica Inc. merged with and into
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, immediately prior to 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"). At December 31, 1999, the Company held
$2.56 billion of assets.
The Company is incorporated in New York and maintains its principal offices
at 733 Third Avenue, 4th Floor, New York, New York 10017, telephone (310)
772-6000. The Company has no employees; however, employees of the Parent and
its other subsidiaries perform various services for the Company. At December 31,
1999, SunAmerica had approximately 2,500 employees, approximately 900 of whom
perform services for the Company as well as for certain of its affiliates.
The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of 45 to 64 grew
from 46 million to 60 million during the 1990s, making this age group the
fastest-growing segment of the U.S. population. Between 1988 and 1998, annual
industry premiums from fixed and variable annuities and fund deposits increased
from $103.87 billion to $229.47 billion.
Benefiting from continued strong growth of the retirement savings market,
industry sales of tax-deferred savings products have represented, for a number
of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its operations on the
sale of annuities.
The Company's six affiliated broker-dealers comprise the largest network of
independent registered representatives in the nation and the fifth-largest
securities sales force, based on industry data. Its affiliated broker-dealers
accounted for approximately one-third of the Company's total annuity sales in
fiscal 1999. The Company also distributes its products and services through an
extensive network of independent broker-dealers, full-service securities firms,
independent general insurance agents and major financial institutions.
The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance its marketing efforts. Its use of optical disk imaging and artificial
intelligence has substantially eliminated the more traditional paper-intensive
life insurance processing procedures, reducing annuity processing and servicing
costs and improving customer service. This has also enabled the Company to more
efficiently assimilate acquired business. The Company has also implemented
technology to interface with its affiliated broker-dealers, which will enable
the Company to more effectively market its products and help the affiliated
financial professionals to better service their clients.
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In recent years, the Company has enhanced its marketing efforts and
expanded its offerings of variable annuities through internal growth, resulting
in increased fee income. The Company's variable annuity business entails no
portfolio credit risk and requires significantly less capital support than its
fixed-rate business, which generates net investment income. The Company's
fixed-rate business, comprised of fixed annuities and universal life insurance
contracts, has grown significantly in recent years through acquisitions.
For the year ended December 31, 1999, the Company's net investment income
(including net realized investment losses) and fee income by primary product
line or service are as follows:
<TABLE>
<CAPTION>
NET INVESTMENT AND FEE INCOME
Primary product or
Amount Percent service
------ ------- --------------------
(In thousands)
<S> <C> <C> <C>
Net investment income
(including net realized
investment losses). . . . $ 33,509 74.0% Fixed-rate products
--------------- -----------
Fee income:
Variable annuity fees . . 6,600 14.6 Variable annuities
Universal life insurance Fixed-rate
fees. . . . . . . . . . 1,873 4.1 universal life
Surrender charges . . . . 3,296 7.3 Fixed - and variable-
--------------- -----------
rate products
Total fee income. . . . . 11,769 26.0
--------------- -----------
Total . . . . . . . . . . . $ 45,278 100.0%
=============== ===========
</TABLE>
BUSINESS COMBINATION
On March 31, 1997, SunAmerica Life Insurance Company, the direct parent of
the Company, completed the acquisition of all of the outstanding stock of John
Alden Life Insurance Company of New York ("JANY"). On October 31, 1997, JANY
was merged with and into the Company. On the date of acquisition, JANY had
assets having an aggregate fair value of $1,536,179,000, composed primarily of
invested assets totaling $1,403,807,000. Liabilities assumed in this
acquisition totaled $1,411,179,000, including $1,363,764,000 of fixed annuity
reserves. An amount equal to the excess of the purchase price over the fair
value of the net assets acquired, amounting to $103,695,000 at September 30,
1997, is included in Deferred Acquisition Costs in the balance sheet. The
acquisition was accounted for by using the purchase method of accounting and the
merger by using the pooling method from the date of acquisition through the date
of merger. The balance sheet at September 30, 1997 and the income statement and
statement of cash flows for the year ended September 30, 1997 have been restated
from those originally contained in the September 30, 1997 Annual Report on Form
10-K to include the assets and liabilities of JANY and the results of JANY's
operations and cash flows for the six-month period from April 1, 1997 through
September 30, 1997. On a pro forma (unaudited) basis, assuming the acquisition
and merger had occurred on October 1, 1996, the beginning of the earliest period
presented herein, investment income would have been $117,059,000 and net income
would have been $12,434,000 for the year ended September 30, 1997.
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ANNUITY OPERATIONS
Founded in 1978, the Company is licensed in the States of New York, New
Mexico and Nebraska and issues a portfolio of single-premium fixed and
flexible-premium variable annuities. It has a "AAA" (Extremely Strong)
financial strength rating from Standard & Poor's Corporation ("S&P") a "AAA"
(Highest) rating from Duffs Phelps Credit Rating Co. ("DCR"), an "Aaa"
(Exceptional) rating from Moody's Investors Service ("Moody's") and an "A++"
(Superior) rating from industry analyst A.M. Best Company.
In addition to distributing its variable annuity products through its six
affiliated broker-dealers, the Company distributes its products through over 600
other independent broker-dealers, full-service securities firms and financial
institutions as well as through independent general insurance agents. In total,
more than 8,500 independent sales representatives are licensed to sell the
Company's annuity products in three states.
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. ANLIC assumed reserves in this
acquisition totaling $5,793,256,000, including $3,460,503,000 of fixed annuity
contracts, $2,308,742,000 of universal life insurance contracts and $24,011,000
of guaranteed investment contracts.
Included in the block of business acquired from MBL Life were policies
whose owners are residents of New York State ("the New York Business"). On July
1, 1999, the New York Business was acquired by the Company via an assumption
reinsurance agreement. As part of this acquisition, invested assets equal to
$678,272,000, universal life reserves equal to $282,247,000, group pension
reserves equal to $406,118,000, and other net assets of $10,093,000 were assumed
by the Company. Policyholders of MBL Life annuity products were required to
transfer their funds into an existing product of the Company or one of its
affiliates by December 31, 1999 in order to receive the policy enhancements due
under the MBL Life rehabilitation agreement. Over 95% of the deferred annuity
reserves had either been transferred or surrendered by December 31, 1999.
ANNUITY OPERATIONS - VARIABLE ANNUITIES
The variable annuity products of the Company offer investors a broad
spectrum of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income through the
sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features similar to those offered by fixed
annuities, but differ in that the contractholder's rate of return is generally
dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the
contractholder. Because the investment risk is borne by the customer in all but
the fixed-rate account options, these products require significantly less
capital support than fixed annuities.
The Company's flagship variable annuity product, Polaris, is a multimanager
variable annuity that offers investors a choice of more than 25 variable funds
and a number of guaranteed fixed-rate funds. Polaris sales increased
significantly in recent years leading up to 1999 due to enhanced distribution
efforts and growing consumer demand for flexible retirement savings products
that offer a variety of equity, fixed-income and guaranteed fixed account
investment choices. The decrease in sales growth in 1999 is primarily due to
regulatory changes in the State of New York (See "Growth in Average Invested
Assets").
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At December 31, 1999, total variable product reserves were $736.1 million,
of which $558.6 million were held in separate accounts. The Company's variable
annuity products incorporate surrender charges to encourage persistency. At
December 31, 1999, 99% of the Company's variable annuity reserves held in
separate accounts were subject to surrender penalties. The Company's variable
annuity products also generally limit the number of transfers made in a
specified period between account options without the assessment of a fee. The
average size of a new variable annuity contract sold by the Company in 1999 was
approximately $65,000.
ANNUITY OPERATIONS - FIXED ANNUITIES
The Company's general account obligations are fixed-rate products,
including fixed-annuity and universal life contracts issued in prior years and
fixed-rate options of its variable annuity contracts. The Company offers
single-premium and flexible-premium deferred annuities that provide one-,
three-, five-, seven-, or ten-year fixed interest rate guarantees. The Company
also offers fixed-rate account options on its variable annuity contracts with
similar guarantees. Although the Company's contracts remain in force an average
of seven to ten years, a majority (approximately 89% at December 31, 1999)
reprice annually at discretionary rates determined by the Company. In
repricing, the Company takes into account yield characteristics of its
investment portfolio, annuity surrender assumptions and competitive industry
pricing, among other factors. Its fixed annuity products offer many of the same
features as conventional certificates of deposit from financial institutions,
giving investors a choice of interest period and yield as well as additional
advantages particularly applicable to retirement planning, such as tax-deferred
accumulation and flexible payout options (including the option of payout over
the life of the annuitant). The average size of a new single-premium fixed
annuity contract sold by the Company in 1999 was approximately $38,000.
The Company designs its fixed-rate annuity products and conducts its
investment operations in order to closely match the duration of the assets in
its investment portfolio to its fixed annuity and universal life obligations.
The Company seeks to achieve a predictable spread between what it earns on its
assets and what it pays on its liabilities by investing principally in
fixed-rate securities. The Company's fixed annuity and universal life products
incorporate surrender charges or other restrictions in order to encourage
persistency. Approximately 85% of the Company's fixed annuity reserves had
surrender penalties or other restrictions at December 31, 1999.
INVESTMENT OPERATIONS
The Company believes that its fixed-rate liabilities should be backed by a
portfolio principally composed of fixed-rate investments that generate
predictable rates of return. The Company does not have a specific target rate
of return. Instead, its rates of return vary over time depending on a variety
of factors, including 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. The Company manages
most of its invested assets internally. Its portfolio strategy is constructed
with a view to achieve adequate risk-adjusted returns consistent with its
investment objectives of effective asset-liability matching, liquidity and
safety.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable
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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 December 31,
1999, these assets had an aggregate fair value of $1.77 billion with a duration
of 3.7. At December 31, 1999, the Company's fixed annuity and universal life
liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $1.68 billion
with a duration of 3.5. For the years ended December 31, 1999, September 30,
1998 and 1997, the Company's yields on average invested assets were 7.20%, 7.56%
and 7.39%, respectively; its average rates paid on all interest-bearing
liabilities were 4.92%, 5.36% and 5.35%, respectively; it realized net
investment spreads of 2.53%, 2.37%, and 2.16%, respectively, on average invested
assets; and net realized investment gains and losses were 0.63%, 0.30% and
0.57%, respectively, of average invested assets.
The Company's general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio. However,
the Company has determined that all of its portfolio of bonds and notes (the
"Bond Portfolio") is available to be sold in response to changes in market
interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in credit quality outlook for
certain securities, and the Company's need for liquidity and other similar
factors.
The following table summarizes the Company's investment portfolio at
December 31, 1999:
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS
Percent
Carrying of
value portfolio
--------------- ----------
(In thousands)
<S> <C> <C>
Cash and short-term investments $ 29,350 1.6%
U.S. government securities. . . 1,347 0.1
Mortgage-backed securities. . . 574,247 31.8
Other bonds and notes . . . . . 947,327 52.4
Mortgage loans. . . . . . . . . 211,867 11.7
Other invested assets . . . . . 42,604 2.4
--------------- ----------
Total investments . . . . . . . $ 1,806,742 100.0%
=============== ==========
</TABLE>
At December 31, 1999, the Bond Portfolio included $1.48 billion of bonds
rated by S&P, Moody's, Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors
Services, L.P. ("Fitch"), or the National Association of Insurance Commissioners
("NAIC"), and $41.8 million of bonds rated by the Company pursuant to statutory
ratings guidelines established by the NAIC. At December 31, 1999, approximately
$1.40 billion of the Bond Portfolio was investment grade, including $575.6
million of U.S. government/agency securities and mortgage-backed securities.
At December 31, 1999, the Bond Portfolio included $123.8 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
4.8% of the Company's total assets and 6.9% of its invested assets.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $122.1 million at December 31, 1999. Secured Loans
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are senior to subordinated debt and equity, and are secured by assets of the
issuer. These Secured Loans are composed of loans to 50 borrowers spanning 14
industries, with 25% of these assets concentrated in utilities, 11% concentrated
in air transportation and 8% concentrated in food services. No other industry
constituted more than 5% of these assets.
Mortgage loans aggregated $211.9 million at December 31, 1999 and consisted
of 152 commercial first mortgage loans with an average loan balance of
approximately $1.4 million, collateralized by properties located in 33 states.
Approximately 41% of this portfolio was office, 25% was retail, 12% was
industrial, 11% was multifamily residential and 11% was other types. At
December 31, 1999, 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 December 31, 1999, the carrying value (after impairment writedowns) of
all investments in default as to the payment of principal or interest totaled
$1.8 million, which constituted 0.1% of total invested assets.
For more information concerning the Company's investments, including the
risks inherent in such investments, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
and Liquidity."
REGULATION
The Company, 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 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 December 31, 1999.
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
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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.
COMPETITION
The businesses conducted by the Company are highly competitive. The
Company competes with other life insurers, and also competes for customers'
funds with a variety of investment products offered by financial services
companies other than life insurance companies, such as banks, investment
advisors, mutual fund companies and other financial institutions. During 1998,
net annuity premiums written among the top 100 companies ranged from less than
$100 million to approximately $10 billion annually. The Company itself is not
among the largest writers of annuities; however, the combined SunAmerica life
companies ranks in the top quartile of this group. The Company believes the
primary competitive factors among life insurance companies for
investment-oriented insurance products, such as annuities, include product
flexibility, net return after fees, innovation in product design, the
claims-paying ability rating and the name recognition of the issuing company,
the availability of distribution channels and service rendered to the customer
before and after a contract is issued. Other factors affecting the annuity
business include the benefits (including before-tax and after-tax investment
returns) and guarantees provided to the customer and the commissions paid.
ITEM 2. PROPERTIES
The Company's executive offices and its principal office are in leased
premises at 733 Third Avenue, New York, New York 10017. The Company, through an
affiliate, also leases office space in Los Angeles and Woodland Hills,
California.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its business.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further liabilities and
costs will not have a material adverse impact upon the Company's financial
position, results of operations, or cash flows.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the year ended December 31, 1999 to a vote
of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in conjunction with the
financial statements and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which are included elsewhere herein.
Year Ended Three Months Ended Years Ended September 30,
----------------------------
December 31, 1999 December 31, 1998 1998 1997 1996 1995
--------------------------- ------------------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
RESULTS OF OPERATIONS
Net investment income . . . $ 44,687 $ 9,603 $ 36,763 $ 19,205 $ 2,798 $ 2,784
Net realized investment
gains (losses). . . . . . (11,178) 797 4,690 5,020 (539) (1,348)
Fee income. . . . . . . . . 11,769 1,851 7,957 3,521 911 606
General and administrative
expenses. . . . . . . . . (7,871) (1,548) (3,301) (3,222) (1,480) (1,004)
Amortization of deferred
acquisition costs . . . . (22,664) (5,046) (17,120) (10,386) (500) (300)
Annual commissions. . . . . (450) (90) (348) (195) (19) (33)
------------------- -------- --------- --------- -------- --------
Pretax income . . . . . . . 14,293 5,567 28,641 13,943 1,171 705
Income tax expense. . . . . (6,621) (2,191) (12,106) (5,090) (448) (182)
------------------- -------- --------- --------- -------- --------
NET INCOME. . . . . . . . . $ 7,672 $ 3,376 $ 16,535 $ 8,853 $ 723 $ 523
=================== ======== ========= ========= ======== ========
</TABLE>
The results of operations of the Company for 1999 are affected by acquisition of
business from MBL Life on July 1, 1999 (See Note 5 of the accompanying financial
statements).
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA (continued)
At December 31, At September 30,
---------------------- ------------------------------------------
1999 1998 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
FINANCIAL POSITION
Investments . . . . . . . . . . . $1,806,742 $1,515,132 $1,554,316 $1,690,232 $153,237 $121,218
Variable annuity assets held
in separate accounts. . . . . . 558,605 344,619 271,865 171,475 68,901 32,760
Deferred acquisition costs. . . . 137,637 96,918 87,074 96,516 12,127 6,491
Current income taxes receivable 6,638 --- --- --- --- ---
Deferred income taxes receivable 18,275 --- --- --- --- ---
Other assets. . . . . . . . . . . 27,615 51,013 28,965 26,267 2,603 2,688
---------- ---------- ---------- ---------- -------- --------
TOTAL ASSETS. . . . . . . . . . . $2,555,512 $2,007,682 $1,942,220 $1,984,490 $236,868 $163,157
========== ========== ========== ========== ======== ========
Reserves for fixed annuity
contracts . . . . . . . . . . . $1,523,641 $1,432,558 $1,460,856 $1,556,656 $140,613 $106,332
Reserves for universal life
insurance contracts 277,250 --- --- --- --- ---
Variable annuity liabilities
related to separate accounts. . 558,605 344,619 271,865 171,475 68,901 32,760
Other reserves, payables and
accrued liabilities . . . . . . 34,776 42,038 18,073 83,297 2,784 2,003
Deferred income taxes payable --- 3,792 5,371 4,984 1,350 244
Shareholder's equity. . . . . . . 161,240 $ 184,675 186,055 168,078 23,220 21,818
---------- ---------- ---------- ---------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY. . . . . . $2,555,512 $2,007,682 $1,942,220 $1,984,490 $236,868 $163,157
========== ========== ========== ========== ======== ========
</TABLE>
The financial position of the Company as of December 31, 1999 is affected by the
acquisition of business from MBL Life (See Note 5 of the accompanying financial
statements).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company (the "Company") for the
three years ended December 31, 1999, September 30, 1998 and 1997 follows.
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the three-month period 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 and profitability of
the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $7.7 million in 1999, compared with $16.5 million in
1998 and $8.9 million in 1997. On July 1, 1999, the Company acquired the New
York individual life and individual and group annuity business of MBL Life
Assurance Corporation ("MBL Life"). Since the acquisition of MBL Life was
accounted for under the purchase method of accounting, the results of operations
include those of MBL Life only from its date of acquisition. On October 31,
1997, John Alden Life Insurance Company of New York ("JANY") was merged with and
into the Company. JANY was acquired by SunAmerica Life Insurance Company, the
Company's parent, on March 31, 1997 in a transaction accounted for under the
purchase method of accounting. Therefore, the results of operations include
those of JANY only from the date of acquisition. The income statement for 1998
and 1999 include the results of JANY's operations for the full period, and the
income statement for 1997 includes JANY's operating results only for the period
of April 1, 1997 through September 30, 1997. Consequently, the operating
results for 1999, 1998 and 1997 are not comparable. On a pro forma basis, using
the historical financial information of the acquired businesses and assuming
that both the MBL Life acquisition and the JANY merger, collectively
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<PAGE>
referred to as the "Acquisitions", had been consummated on October 1, 1996, the
beginning of the prior-year periods discussed herein, net income would have been
$9.4 million, $19.9 million and $15.8 million for the year ended December 31,
1999 and the years ended September 30, 1998 and 1997, respectively.
PRETAX INCOME totaled $14.3 million in 1999, $28.6 million in 1998 and
$13.9 million in 1997 and primarily reflects the effect of the Acquisitions and
changes in net realized investment gains and losses. The decrease in 1999
resulted primarily from a decrease in net realized investment gains, increased
general and administrative expenses and increased amortization of deferred
acquisition costs which were partially offset by increased net investment income
and variable annuity and universal life insurance fees. The improvement in 1998
over 1997 resulted primarily from increased net investment income and fee
income, partially offset by increased amortization of deferred acquisition
costs.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, universal life
insurance contracts and other interest-bearing liabilities, increased to $44.7
million in 1999 from $36.8 million in 1998 and $19.2 million in 1997. These
amounts equal 2.53% on average invested assets (computed on a daily basis) of
$1.77 billion in 1999, 2.37% on average invested assets of $1.55 billion in 1998
and 2.16% on average invested assets of $887.4 million in 1997. On a pro forma
basis, assuming the Acquisitions had been consummated on October 1, 1996, net
investment income on related average invested assets would have been 1.87% in
1999, 1.71% in 1998 and 1.51% in 1997 on average invested assets of $2.59
billion, $2.37 billion and $2.41 billion, respectively. The improvement in 1999
net investment yields over these pro forma amounts reflects a redeployment of
assets received in the MBL Life 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 $89.0 million
in 1999, $47.3 million in 1998 and $21.4 million in 1997. The difference
between the Company's yield on average invested assets and the rate paid on
average interest-bearing liabilities (the "Spread Difference") was 2.28% in
1999, 2.20% in 1998 and 2.04% in 1997. On a pro forma basis, assuming the
Acquisitions had been consummated on October 1, 1996, the Spread Difference
would have been 1.73% in 1999, 1.64% in 1998 and 1.46% in 1997. The pro forma
results primarily reflect the effect of the lower yielding assets received in
the Acquisitions.
Investment income (and the related yields on average invested assets)
totaled $127.3 million (7.20%) in 1999 compared with $117.5 million (7.56%) in
1998 and $65.6 million (7.39%) in 1997. The decrease in the investment yield in
1999 as compared with 1998 and 1997 principally reflect the effects of lower
yielding assets received in the MBL Life acquisition. The invested assets
associated with the MBL Life 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. On a pro forma basis, assuming the Acquisitions had been
consummated on October 1, 1996, the yield on related average invested assets
would have been 6.72% in 1999, 6.92% in 1998 and 6.80% in 1997.
Total interest expense equaled $82.6 million in 1999, $80.7 million in 1998
and $46.4 million in 1997. The average rate paid on all interest-bearing
liabilities was 4.92% in 1999, 5.36% in 1998 and 5.35% in 1997. Interest-bearing
liabilities averaged $1.68 billion during 1999, $1.51 billion during 1998 and
$866.0 million during 1997. On a pro forma basis, assuming the Acquisitions
had been consummated on October 1, 1996, the
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<PAGE>
average rate paid on all interest-bearing liabilities would have been 4.99% in
1999, 5.28% in 1998 and 5.34% in 1997 and interest-bearing liabilities would
have averaged $2.51 billion, $2.34 billion and $2.38 billion in 1999, 1998 and
1997, respectively. The decreases in the overall rates paid in 1999 result
primarily from a generally lower interest rate environment and the continued
reduction of crediting rates on certain closed blocks of business.
GROWTH IN AVERAGE INVESTED ASSETS largely resulted from the impact of the
Acquisitions. The Company acquired $1.40 billion of invested assets associated
with the JANY merger on March 31, 1997 and $678.3 million of invested assets
associated with the MBL Life acquisition at July 1, 1999. 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 MBL Life acquisition, partially offset by net exchanges from fixed accounts
into the separate accounts of variable annuity contracts. Fixed Annuity
Premiums and UL Premiums totaled $41.0 million in 1999 compared with $130.9
million in 1998 and $131.7 million in 1997 and are largely premiums for the
fixed accounts of variable annuities. Such premiums have decreased in 1999
principally as a result of regulatory changes in the State of New York relating
to non-taxable policy exchange requirements partially offset by greater inflows
into the one-year and six-month fixed accounts of these products, which are
principally used for dollar-cost averaging into the variable accounts.
Accordingly, the Company anticipates that it will see a large portion of these
premiums transferred into the variable funds. These premiums represent 6%, 8%
and 9%, respectively, of the related reserve balances at the beginning of the
respective periods. These premiums include premiums for the fixed accounts of
variable annuities totaling $61.0 million, $77.3 million and $68.9 million in
1999, 1998 and 1997, respectively.
NET REALIZED INVESTMENT LOSSES totaled $11.2 million in 1999 compared to
net investment gains of $4.7 million in 1998 and $5.0 million in 1997. Net
realized investment gains and losses include impairment writedowns of $7.7
million in 1999, $0.4 million in 1998 and $0.1 million in 1997. Therefore, net
losses from sales and redemptions of investments totaled $3.5 million in 1999
while net gains from sales and redemptions of investments totaled $5.1 million
in 1998 and 1997.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $478.7 million, $985.1 million and $634.8 million in 1999, 1998 and
1997, respectively. Sales of investments result from the active management of
the Company's investment portfolio, including assets received as part of the
Acquisitions. 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 0.20%, 0.33% and 0.57% of average
invested assets for 1999, 1998 and 1997, 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 primarily have been applied to defaulted bonds and
mortgage loans. Impairment writedowns represent 0.44%, 0.03% and 0.01% of
related average invested assets in 1999, 1998 and 1997, respectively. For the
twenty-one fiscal quarters beginning October 1, 1994, impairment writedowns as a
percent of average invested assets have ranged up to 0.86% and have averaged
0.14%. Such writedowns are based upon estimates of the
13
<PAGE>
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 $6.6 million
in 1999, $3.6 million in 1998 and $1.7 million in 1997. These increased fees
reflect growth in average variable annuity assets, due to increased market
values, the receipt of variable annuity premiums and net exchanges into the
separate accounts from the fixed accounts of variable annuity contracts,
partially offset by surrenders. Variable annuity fees represent 1.5% of average
variable annuity assets for each of 1999, 1998 and 1997. Variable annuity
assets averaged $417.8 million during 1999, $234.1 million during 1998 and
$111.8 million during 1997. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, aggregated $66.7
million in 1999, $80.2 million in 1998 and $56.3 million in 1997. These amounts
represent 19%, 47% and 82% 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 $127.7 million,
$157.5 million and $125.2 million in 1999, 1998 and 1997, respectively, and
primarily reflect sales of the Company's flagship variable annuity, Polaris.
The Polaris products are multimanager variable annuities that offer investors a
choice of 27 variable funds and 8 guaranteed fixed-rate funds. Variable Annuity
Product Sales have decreased in 1999, 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 which 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, net of the excess mortality
expense on these contracts. Universal life insurance fees amounted to $1.9
million in 1999 and represent 1.4% of average reserves for universal life
insurance contracts for 1999. Since the MBL Life acquisition occurred on July
1, 1999, there were no such fees earned in 1998 and 1997.
SURRENDER CHARGES on fixed and variable annuity and universal life
contracts totaled $3.3 million (including $0.04 million attributable to the MBL
Life acquisition and $2.5 million attributable to the JANY merger) in 1999, $4.4
million (including $3.9 million attributable to the JANY merger) in 1998 and
$1.8 million (including $1.5 million attributable to the JANY merger) in 1997.
Surrender charges generally are assessed on annuity withdrawals at declining
rates during the first seven years of a contract. Withdrawal payments, which
include surrenders and lump-sum annuity benefits, totaled $392.4 million
(including $187.2 million attributable to the MBL Life acquisition and $167.2
million attributable to the JANY merger) in 1999, compared with $234.4 million
(including $198.3 million attributable to the JANY merger) in 1998 and $93.5
million (including $72.9 million attributable to the JANY merger) in 1997.
These payments, when expressed as
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<PAGE>
a percentage of averaged fixed and variable annuity and universal life reserves,
represent 19.0% (9.1% attributable to the MBL Life acquisition and 8.1%
attributable to the JANY merger), 14.0% (11.9% attributable to the JANY merger)
and 9.9%, respectively. Excluding the effects of the MBL Life acquisition,
withdrawal payments represent 11.3% of related average fixed and variable
annuity reserves in 1999. Withdrawals include variable annuity payments from
the separate accounts totaling $28.6 million (6.9% of average variable annuity
reserves), $12.8 million (5.5% of average variable annuity reserves) and $5.3
million (4.8% of average variable annuity reserves) in 1999, 1998 and 1997,
respectively. Consistent with the assumptions used in connection with the
Acquisitions, 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 businesses.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $7.9 million in 1999 compared
with $3.3 million in 1998 and $3.2 million in 1997. The increases in 1999 over
1998 principally reflect $1.5 million of reinsurance premiums paid and other
increased costs related to the business acquired in the MBL Life acquisition,
and expenses related to servicing the Company's growing block of variable
annuity policies. In addition, expenses in 1998 include a credit of
approximately $1.2 million relating to expense allowances on ceded reinsurance.
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 $22.7 million in 1999
(including $0.6 million attributable to the MBL Life acquisition and $14.9
million attributable to the JANY merger) compared with $17.1 million in 1998
(including $15.7 million attributable to the JANY merger) and $10.4 million
(including $9.2 million attributable to the JANY merger) in 1997. The increase
in amortization during 1999 was also due to 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 $450,000 in
1999, $348,000 in 1998 and $195,000 in 1997. These increases are primarily
attributable to the fixed annuity contracts acquired in the Acquisitions. Based
on current sales, the Company estimates that such annual commissions will
increase in future periods.
INCOME TAX EXPENSE totaled $6.6 million in 1999, compared with $12.1
million in 1998 and $5.1 million in 1997, representing effective tax rates of
46% in 1999, 42% in 1998 and 37% in 1997. The increase in the tax rates for
1999 and 1998 is due to an increase in state income taxes.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY decreased 12.7% to $161.2 million at December 31, 1999
from $184.7 million at December 31, 1998, primarily due to a $31.1 million
increase in accumulated other comprehensive loss partially offset by $7.7
million of net income recorded in 1999.
INVESTED ASSETS totaled $1.81 billion at December 31, 1999 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, the Company's
15
<PAGE>
need for liquidity and other similar factors.
THE BOND PORTFOLIO, which constituted 84% of the Company's total investment
portfolio at December 31, 1999, had an amortized cost that was $64.2 million
greater than its aggregate fair value at December 31, 1999, compared with an
aggregate fair value that exceeded its amortized cost by $19.8 million at
December 31, 1998. The net unrealized losses on the Bond Portfolio in 1999
principally reflect the recent increase in prevailing interest rates and the
corresponding effect on the fair value of the Bond Portfolio at December 31,
1999.
At December 31, 1999, the Bond Portfolio included $1.48 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 $41.8 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At December 31, 1999, approximately $1.40
billion of the Bond Portfolio was investment grade, including $575.6 million of
U.S. government/agency securities and mortgage-backed securities ("MBSs").
At December 31, 1999, the Bond Portfolio included $123.8 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
4.8% of the Company's total assets and 6.9% 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
December 31, 1999.
The table on the following page summarizes the Company's rated bonds by
rating classification as of December 31, 1999.
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<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-} . . . $1,119,598 $1,078,593 1 $ 39,619 $ 39,691 $1,159,217 $1,118,284 61.90%
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 248,279 238,421 2 43,209 42,367 291,488 280,788 15.54
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}. . . 8,841 8,875 3 - - 8,841 8,875 0.49
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 112,601 103,587 4 6,298 6,141 118,899 109,728 6.07
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}. . . 6,953 3,886 5 1,718 1,360 8,671 5,246 0.29
CI to D
[DD]
{D} . . . . . . . - - 6 - - - - -
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $1,496,272 $1,433,362 $ 90,844 $ 89,559 $1,587,116 $1,522,921
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
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<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 $41.8 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
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<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $122.1 million at December 31, 1999. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
December 31, 1999, Secured Loans consisted of $33.8 million of publicly traded
securities and $88.3 million of privately traded securities. These Secured Loans
are composed of loans to 50 borrowers spanning 13 industries, with 25% of these
assets concentrated in utilities, 11% concentrated in airlines and 8%
concentrated in food services. 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 $211.9 million at December 31, 1999 and consisted
of 152 commercial first mortgage loans with an average loan balance of
approximately $1.4 million, collateralized by properties located in 33 states.
Approximately 41% of this portfolio was office, 25% was retail, 12% was
industrial, 11% was multifamily residential and 11% was other types. At
December 31, 1999, 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 December 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 January 1, 2003. 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 December 31, 1999, 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.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed rate investments are priced
over the yield curve, and general economic conditions. Its portfolio strategy
is constructed with a view to
19
<PAGE>
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 85% of the Company's fixed annuity
reserves had surrender penalties or other restrictions at December 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 December 31, 1999, these assets had an aggregate fair
value of $1.77 billion with a duration of 3.7. At December 31, 1999, the
Company's fixed annuity liabilities had an aggregate fair value (determined by
discounting future contractual cash flows by related market rates of interest)
of $1.68 billion with a duration of 3.5. The Company's potential exposure due
to a relative 10% increase in interest rates from their December 31, 1999 levels
is a loss of $4.6 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 the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes experienced under
given interest rate scenarios, and the differences may be material.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools 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
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<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 $1.8 million, including $0.9
million of bonds and $0.9 million of mortgage loans at December 31, 1999, and
constituted 0.1% of total invested assets. At December 31, 1998, defaulted
investments totaled $3.7 million, including $2.5 million of bonds and $1.2
million of mortgage loans, 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 December 31, 1999, approximately $224.6 million of the Company's Bond
Portfolio had an aggregate unrealized gain of $4.3 million, while approximately
$1.30 billion of the Bond Portfolio had an aggregate unrealized loss of $68.5
million. In addition, the Company's investment portfolio currently provides
approximately $17.9 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity products have been 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
21
<PAGE>
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.
CONTINGENT LIABILITIES are discussed in Note 9 of the accompanying
financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 3 of the
accompanying financial statements.
YEAR 2000
The Year 2000 issue arose from computer programs written using two digits
rather than four digits to define the applicable year. This possibly could have
caused a failure of the information technology systems (IT systems) and other
equipment containing imbedded technology (non-IT systems) in the year 2000. The
Company implemented a plan to address the Year 2000 issue and to assess Year
2000 issues relating to third parties with which the Company has critical
relationships. The Company's cost to make necessary repairs had no significant
impact on its results of operations. The Company has not experienced any
business disruption from the year 2000 issue. Its IT and non-IT systems were
compliant on January 1, 2000, and there have been no problems related to any
third parties compliance.
ITEM 7A. 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 Disclosure and
Analysis of Financial Condition and Results of Operations on pages 19, 20 and
21, herein. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
<TABLE>
<CAPTION>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of First SunAmerica Life Insurance Company
(the "Company") as of March 29, 2000 are listed below, together with information as to
their ages, dates of election and principal business occupations during the last five
years (if other than their present business occupations).
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position Last Five Years** From-To
---- --- ----------- -------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Eli Broad*. . . . 66 Chairman, 1994 Co-founded SAI
Chief Executive in 1957
Officer and
President of
the Company
Chairman, Chief 1986
Executive Officer
and President of
SunAmerica Inc.
("SAI")
Thomas W. Baxter. 45 Director 1999 Partner, O'Melveny & 1991 to
Myers LLP present
Jay S. Wintrob* . 42 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman and 1998
Chief Operating
Officer of SAI
James R. Belardi* 42 Senior Vice 1992 (Joined SAI in 1986)
President of the
Company
Executive Vice 1995
President of SAI
Marc H. Gamsin* . 44 Senior Vice 1999 Executive Vice President 1998 to
President of the SunAmerica Investments, present
Company Inc. (GA)
Senior Vice 1996 Executive Vice President 1997-1998
President of SAI SunAmerica Investments,
Inc. (DE)
Partner, O'Melveny & 1976-1996
Myers, LLP
Jana W. Greer*. . 47 Senior Vice 1994 (Joined SAI in 1974)
President of the
Company
Senior Vice
President of SAI 1992
<FN>
________________________________________
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position Last Five Years** From-To
---- --- ----------- -------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Susan L. Harris* . . 42 Senior Vice 1994 Vice President, 1994-1995
President and General Counsel-
Secretary of the Corporate Affairs
Company and Secretary of SAI
Senior Vice 1995
President,
General Counsel
and Secretary of
SAI
Vicki E. Marmorstein 47 Director 1999 Partner, Latham & 1995 to
Watkins present
Partner, Coudert 1979-1995
Brothers
Margery K. Neale . . 40 Director 1996 Partner, Swidler, 1990 to
Berlin, Shereff & present
Friedman, LLP
Lester Pollack . . . 66 Director 1987 Chief Executive 1986 to
Officer, Centre present
Partners, L.P.
Managing Partner, 1986 to
Lazard Freres & Co. present
Senior Managing 1988 to
Director, Corporate present
Advisors, L.P.
Debbie Potash-Turner 40 Director 1999 Senior Vice President 1998 to
and Chief Financial present
Officer, SunAmerica
Asset Management Corp.
Vice President, Royal 1990-1998
Alliance Associates, Inc.
Richard D. Rohr. . . 73 Director 1987 Partner, Bodman, 1958 to
Longley & Dahling present
N. Scott Gillis* . . 46 Senior Vice 2000 Senior Vice President 1994-1999
President of the and Controller,
Company SunAmerica Life
Vice President 1999 Companies ("SLC")
and Controller (Joined SAI in 1985)
of SAI
Gregory M. Outcalt . 37 Senior Vice 2000 Vice President, SLC 1993-1999
President (Joined SAI in 1986)
of the Company
<FN>
________________________________________
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Other Positions and
Year Other Business
Present Assumed Experience Within
Name Age Position(s) Position Last Five Years** From-To
---- --- ----------- -------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Edwin R. Raquel. . . 42 Senior Vice 1995 Vice President and 1990-1995
President and Actuary, SLC
Chief Actuary
of the Company
David R. Bechtel . . 32 Vice President 1998 Vice President, 1996-1998
& Treasurer of 2000 Deutsche Morgan
the Company Grenfell, Inc.
Associate, 1995-1996
Vice President 1998 UBS Securities LLC
and Treasurer Associate, 1994
of SAI Wachtell Lipton Rosen
& Katz
P. Daniel Demko, Jr. 50 Vice President 1999 Executive Vice President, 1998 to
of the Company SunAmerica Retirement present
Markets, Inc.
President & Vice 1995-1998
Chairman, Global Health
Network, LLC
Owner, P. Demko Company 1992-1995
Kevin J. Hart. . . . 45 Vice President 1999 Executive Vice President, 1995 to
of the Company SunAmerica Retirement present
Markets, Inc.
National Sales Manager 1991-1995
American Skandia Life
Assurance Corporation
Stewart R. Polakov . 40 Vice President 2000 Vice President, 1997-1999
of the Company SunAmerica Financial
Director, Investment 1994-1997
Accounting of SAI
(Joined SAI in 1991)
Scott H. Richland. . 37 Vice President 1994 Senior Vice President 1997-1998
of the Company and Treasurer of SAI
Senior Vice 1997 Vice President and 1995-1997
President of SAI Treasurer of SAI
Vice President and 1994-1995
(Joined SAI in 1990)
<FN>
________________________________________
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
</TABLE>
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company. No
executive officer of the Company earned allocated cash compensation in excess of
$100,000. Eli Broad, Chairman, Chief Executive Officer and President of the
Company, earned allocated cash compensation of $65,763.
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is an indirect wholly owned subsidiary of American
International Group, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
Reference is made to the index set forth on page F-1 of this report.
EXHIBITS
Exhibit
No Description
- ----- -----------
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 September 22, 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.
4(a) Agreement and Plan of Merger and Amended and Restated Certificate of
Incorporation, filed with the State of New York, Insurance Department, effective
as of October 31, 1997. See Exhibit 3(a).
4(b) Bylaws, as amended January 1, 1996. See Exhibit 3(b).
27 Financial Data Schedule
REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the three months ended December
31, 1999.
27
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SUNAMERICA LIFE INSURANCE COMPANY
By/s/ N. SCOTT GILLIS
------------------------
N. Scott Gillis
Senior Vice President and Director
March 30, 2000
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> <C> <C>
/s/ ELI BROAD . . . . . . . . Chairman, Chief Executive March 30, 2000
- -------------------------------
Eli Broad . . . . . . . . Officer and President
(Principal Executive Officer)
/s/ N. SCOTT GILLIS . . . . . Senior Vice President and March 30, 2000
- -------------------------------
N. Scott Gillis . . . . . Director (Principal
Financial Officer)
/s/ GREGORY M. OUTCALT. . . . Senior Vice President March 30, 2000
- -------------------------------
Gregory M. Outcalt. . . . (Principal Accounting
Officer)
/s/ JAY S. WINTROB. . . . . . Executive Vice President March 30, 2000
- -------------------------------
Jay S. Wintrob. . . . . . and Director
/s/ JAMES R. BELARDI. . . . . Senior Vice President March 30, 2000
- -------------------------------
James R. Belardi. . . . . and Director
/s/ MARC H. GAMSIN. . . . . . Senior Vice President March 30, 2000
- -------------------------------
Marc H. Gamsin. . . . . . and Director
/s/ JANA W. GREER . . . . . . Senior Vice President March 30, 2000
- -------------------------------
Jana W. Greer . . . . . . and Director
/s/ SUSAN L. HARRIS . . . . . Senior Vice President, March 30, 2000
- -------------------------------
Susan L. Harris . . . . . Secretary and Director
/s/ EDWIN R. RAQUEL . . . . . Senior Vice President March 30, 2000
- -------------------------------
Edwin R. Raquel . . . . . and Chief Actuary
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Number(s)
------------
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . F-2
Balance Sheet - December 31, 1999, December 31, 1998 and
September 30, 1998. . . . . . . . . . . . . . . . . . . . . F-3
Statement of Income and Comprehensive Income - Year Ended
December 31, 1999, Three Months Ended December 31, 1998,
Years Ended September 30, 1998 and 1997 . . . . . . . . . . F-4
Statement of Cash Flows - Year Ended December 31, 1999, Three
Months Ended December 31, 1998, Years Ended September 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . F-5 to F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . F-7 to F-25
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company:
In our opinion, the accompanying balance sheet and the related statements of
income and comprehensive income and of cash flows present fairly, in all
material respects, the financial position of First SunAmerica Life Insurance
Company (the "Company") at December 31, 1999, December 31, 1998 and September
30, 1998, and the results of its operations and its cash flows for the year
ended December 31, 1999, for the three months ended December 31, 1998 and for
each of the two fiscal years in the period ended September 30, 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 2, the financial statements for the year ended September
30, 1997 have been restated to reflect the merger of John Alden Life Insurance
Company of New York ("JANY") with and into the Company. The merger was
accounted for similar to a pooling of interests. The income statement for that
year includes the operating results of JANY's for the period from April 1, 1997
(the date of acquisition of JANY by SunAmerica Life Insurance Company, the
direct parent of the Company) through September 30, 1997. We have audited the
adjustments that were applied to restate the 1997 financial statements. In our
opinion, such adjustments are appropriate and have been properly applied to the
1997 financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
January 31, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
December 31, At September 30,
----------------------------------------------
1999 1998 1998
--------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments. . . . . . $ 29,350,000 $ 18,466,000 $ 55,679,000
Bonds and notes available for sale,
at fair value (amortized cost:
December 1999, $1,587,116,000;
December 1998, $1,293,637,000;
September 1998, $1,262,703,000). . . . . 1,522,921,000 1,313,390,000 1,303,872,000
Mortgage loans . . . . . . . . . . . . . . 211,867,000 176,737,000 187,906,000
Other invested assets. . . . . . . . . . . 42,604,000 6,539,000 6,859,000
--------------- -------------- --------------
Total investments. . . . . . . . . . . . . 1,806,742,000 1,515,132,000 1,554,316,000
Variable annuity assets held in separate
accounts . . . . . . . . . . . . . . . . . 558,605,000 344,619,000 271,865,000
Accrued investment income. . . . . . . . . . 24,076,000 18,169,000 19,853,000
Deferred acquisition costs . . . . . . . . . 137,637,000 96,918,000 87,074,000
Current income taxes receivable 6,638,000 --- ---
Deferred income taxes receivable 18,275,000 --- ---
Receivable from brokers for sales of
securities --- 30,597,000 6,661,000
Other assets . . . . . . . . . . . . . . . . 3,539,000 2,247,000 2,451,000
--------------- -------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . $2,555,512,000 $2,007,682,000 $1,942,220,000
=============== ============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts . . . $1,523,641,000 $1,432,558,000 $1,460,856,000
Reserves for universal life insurance
contracts 277,250,000 --- ---
Income taxes currently payable --- 10,144,000 10,177,000
Payable to brokers for purchases
of securities. . . . . . . . . . . . . . 63,000 19,806,000 60,000
Other liabilities. . . . . . . . . . . . . 34,713,000 12,088,000 7,836,000
--------------- -------------- --------------
Total reserves, payables
and accrued liabilities. . . . . . . . . 1,835,667,000 1,474,596,000 1,478,929,000
--------------- -------------- --------------
Variable annuity liabilities related
to separate accounts . . . . . . . . . . . 558,605,000 344,619,000 271,865,000
--------------- -------------- --------------
Deferred income taxes payable --- 3,792,000 5,371,000
--------------- -------------- --------------
Shareholder's equity:
Common Stock . . . . . . . . . . . . . . . 3,000,000 3,000,000 3,000,000
Additional paid-in capital . . . . . . . . 144,428,000 144,428,000 144,428,000
Retained earnings. . . . . . . . . . . . . 42,409,000 34,737,000 31,361,000
Accumulated other comprehensive income
(loss) . . . . . . . . . . . . . . . . . (28,597,000) 2,510,000 7,266,000
--------------- -------------- --------------
Total shareholder's equity . . . . . . . . 161,240,000 184,675,000 186,055,000
--------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . $2,555,512,000 $2,007,682,000 $1,942,220,000
=============== ============== ==============
</TABLE>
See accompanying notes
F-3
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Year Ended Three Months Ended Years Ended September 30,
---------------------------
December 31, 1999 December 31, 1998 1998 1997
--------------- ------------------- ------------ -------------
<S> <C> <C> <C> <C>
Investment income. . . . . . . . . $ 127,276,000 $ 28,010,000 $117,496,000 $ 65,559,000
------------------- ------------- ------------- -------------
Interest expense on:
Fixed annuity contracts. . . . . (76,114,000) (18,406,000) (80,624,000) (45,765,000)
Universal life insurance
contracts (6,475,000) --- --- ---
Senior indebtedness --- (1,000) (109,000) (589,000)
------------------- ------------- ------------- -------------
Total interest expense . . . . . (82,589,000) (18,407,000) (80,733,000) (46,354,000)
------------------- ------------- ------------- -------------
NET INVESTMENT INCOME. . . . . . . 44,687,000 9,603,000 36,763,000 19,205,000
------------------- ------------- ------------- -------------
NET REALIZED INVESTMENT
GAINS (LOSSES) . . . . . . . . . (11,178,000) 797,000 4,690,000 5,020,000
------------------- ------------- ------------- -------------
Fee income:
Variable annuity fees. . . . . . 6,600,000 1,189,000 3,607,000 1,712,000
Universal life insurance
fees 1,873,000 --- --- ---
Surrender charges. . . . . . . . 3,296,000 662,000 4,350,000 1,809,000
------------------- ------------- ------------- -------------
TOTAL FEE INCOME . . . . . . . . . 11,769,000 1,851,000 7,957,000 3,521,000
------------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . . . . . (7,871,000) (1,548,000) (3,301,000) (3,222,000)
------------------- ------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS. . . . . . . . (22,664,000) (5,046,000) (17,120,000) (10,386,000)
------------------- ------------- ------------- -------------
ANNUAL COMMISSIONS . . . . . . . . (450,000) (90,000) (348,000) (195,000)
------------------- ------------- ------------- -------------
PRETAX INCOME. . . . . . . . . . . 14,293,000 5,567,000 28,641,000 13,943,000
Income tax expense . . . . . . . . (6,621,000) (2,191,000) (12,106,000) (5,090,000)
------------------- ------------- ------------- -------------
NET INCOME . . . . . . . . . . . . 7,672,000 3,376,000 16,535,000 8,853,000
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Net unrealized gains (losses)
on debt and equity securities
available for sale:
Net unrealized gains
(losses) on debt and
equity securities available
for sale identified in
the current period . . . . . (32,333,000) (4,094,000) 3,856,000 8,570,000
Less reclassification
adjustment for net
realized (gains) losses
included in net income . . . 1,226,000 (662,000) (2,414,000) (2,565,000)
------------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
(LOSS) . . . . . . . . . . . . . (31,107,000) (4,756,000) 1,442,000 6,005,000
------------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS). . . . $ (23,435,000) $ (1,380,000) $ 17,977,000 $ 14,858,000
=================== ============= ============= =============
</TABLE>
See accompanying notes
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
Year Ended Three Months Ended Years Ended September 30,
-----------------------------
December 31, 1999 December 31, 1998 1998 1997
------------ ------------------- -------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income. . . . . . . . . . . $ 7,672,000 $ 3,376,000, $ 16,535,000 $ 8,853,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts . 76,114,000 18,406,000 80,624,000 45,765,000
Universal life insurance
contracts 6,475,000 --- --- ---
Net realized investment
(gains)losses . . . . . . 11,178,000 (797,000) (4,690,000) (5,020,000)
Accretion of net
discounts on investments. (4,123,000) (377,000) (1,985,000) (1,070,000)
Amortization of goodwill. . 691,000 14,000 58,000 58,000
Provision for deferred
income taxes. . . . . . . (5,317,000) 981,000 (389,000) 401,000
Change in:
Accrued investment income (5,907,000) --- --- ---
Deferred acquisition costs. . 5,381,000 4,256,000 5,642,000 (4,215,000)
Income taxes receivable/
payable . . . . . . . . . . (16,782,000) (33,000) 7,941,000 2,535,000
Other liabilities 22,625,000 --- --- ---
Other, net. . . . . . . . . . (1,042,000) (1,945,000) 8,472,000 (2,289,000)
------------------- -------------- -------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES. . . . . . . . . . . 96,965,000 23,881,000 112,208,000 45,018,000
------------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of:
Bonds and notes . . . . . . . (497,462,000) (323,897,000) (761,591,000) (833,174,000)
Mortgage loans (66,338,000) --- (82,256,000) ---
Other investments, excluding
short-term investments --- --- (11,000) ---
Sales of:
Bonds and notes . . . . . . . 399,790,000 271,632,000 864,763,000 561,887,000
Mortgage loans --- --- --- 88,371,000
Other investments, excluding
short-term investments 914,000 --- 494,000 140,000
Redemptions and maturities of:
Bonds and notes . . . . . . . 73,380,000 18,231,000 81,254,000 51,600,000
Mortgage loans. . . . . . . . 31,188,000 11,253,000 24,501,000 13,535,000
Other investments, excluding
short-term investments 580,000 320,000 --- 99,000
Short-term investments received
from Anchor National Life
Insurance Company in
assumption reinsurance
transaction with MBL Life
Assurance Corporation 371,634,000 --- --- ---
------------------- -------------- -------------- --------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES. . . . . . 313,686,000 (22,461,000) 127,154,000 (117,542,000)
------------------- -------------- -------------- --------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
Year Ended Three Months Ended Years Ended September 30,
-----------------------------
December 31, 1999 December 31, 1998 1998 1997
------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Premium receipts on:
Fixed annuity contracts . . . $ 36,249,000 $ 19,411,000 $ 130,851,000 $131,711,000
Universal life insurance
contracts 4,790,000 --- --- ---
Net exchanges from the fixed
accounts of variable annuity
contracts . . . . . . . . . . (37,223,000) (9,340,000) (47,852,000) (22,346,000)
Withdrawal payments on:
Fixed annuity contracts . . . (350,019,000) (49,744,000) (221,629,000) (88,229,000)
Universal life insurance
contracts (13,781,000) --- --- ---
Claims and annuity payments on:
Fixed annuity contracts . . . (39,783,000) (7,697,000) (36,892,000) (13,774,000)
Capital contributions received --- --- --- 5,000,000
Net receipts from (repayments
of) other short-term
financings --- 8,737,000 (23,970,000) 18,659,000
Cession of non-annuity
product lines --- --- (34,776,000) ---
------------------- ------------- -------------- -------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES. . . . . . (399,767,000) (38,633,000) (234,268,000) 31,021,000
------------------- ------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS. . . 10,884,000 (37,213,000) 5,094,000 (41,503,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD. . . . . 18,466,000 55,679,000 50,585,000 6,707,000
CASH AND SHORT-TERM INVESTMENTS
OF JOHN ALDEN LIFE INSURANCE
COMPANY OF NEW YORK AT DATE OF
ACQUISITION --- --- --- 85,381,000
------------------- ------------- -------------- -------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD. . . . . . . . $ 29,350,000 $ 18,466,000 $ 55,679,000 $ 50,585,000
=================== ============= ============== =============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid on indebtedness $ --- $ 1,000 $ 109,000 $ 589,000
=================== ============= ============== =============
Net income taxes paid $ 28,720,000 $ --- $ 5,439,000 $ 2,154,000
=================== ============= ============== =============
</TABLE>
See accompanying notes
F-6
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (the "Company") is a New York-domiciled
life insurance company engaged primarily in the business of selling and
administering fixed and variable annuities and universal life contracts in the
State of New York.
The Company is an indirect wholly owned subsidiary of American International
Group, Inc. ("AIG"), an international insurance and financial services holding
company. At December 31, 1998, the Company was a wholly owned indirect
subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1, 1999,
SunAmerica Inc. merged with and into 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, immediately prior to the
date of the merger, substantially all of the net assets of SunAmerica Inc. were
contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc.,
a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name
to SunAmerica Inc. ("SunAmerica").
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level
of sales of the Company's financial products is influenced by many factors,
including general market rates of interest, the strength, weakness and
volatility of equity markets, and terms and conditions of competing financial
products. The Company is exposed to the typical risks normally associated with
a portfolio of fixed-income securities, namely interest rate, option, liquidity
and credit risk. The Company controls its exposure to these risks by, among
other things, closely monitoring and matching the duration of its assets and
liabilities, monitoring and limiting prepayment and extension risk in its
portfolio, maintaining a large percentage of its portfolio in highly liquid
securities, and engaging in a disciplined process of underwriting, reviewing and
monitoring credit risk. The Company also is exposed to market risk, as market
volatility may result in reduced fee income in the case of assets held in
separate accounts.
2. BUSINESS COMBINATION
On March 31, 1997, SunAmerica Life Insurance Company, the direct parent of the
Company, completed the acquisition of all of the outstanding stock of John Alden
Life Insurance Company of New York ("JANY"). On October 31, 1997, JANY was
merged with and into the Company. On the date of acquisition, JANY had assets
having an aggregate fair value of $1,536,179,000, composed primarily of invested
assets totaling $1,403,807,000. Liabilities assumed in this acquisition totaled
$1,411,179,000, including $1,363,764,000 of fixed annuity reserves. An amount
equal to the excess of the purchase price over the fair value of the net assets
acquired, amounting to $103,695,000 at September 30, 1997, is included in
Deferred Acquisition Costs in the balance sheet. The acquisition was accounted
for by using the purchase method of accounting and the merger by using the
pooling method from the date of acquisition through the date of merger. The
balance sheet at September 30, 1997 and the income statement and statement of
cash flows for the year ended September 30,
F-7
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
2. BUSINESS COMBINATION (Continued)
1997 have been restated from those originally contained in the September 30,
1997 Annual Report on Form 10-K to include the assets and liabilities of JANY
and the results of JANY's operations and cash flows for the six-month period
from April 1, 1997 through September 30, 1997. On a pro forma (unaudited)
basis, assuming the acquisition and merger had occurred on October 1, 1996, the
beginning of the earliest period presented herein, investment income would have
been $117,059,000 and net income would have been $12,434,000 for the year ended
September 30, 1997.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires the use of estimates and assumptions that affect the amounts reported
in the financial statements and the accompanying notes. Actual results could
differ from those estimates. Certain items have been reclassified to conform to
the current period's presentation.
Under generally accepted accounting principles, premiums collected on the
non-traditional life and annuity insurance products, such as those sold by the
Company, are not reflected as revenues in the Company's statement of earnings,
as they are recorded directly to policyholder liabilities upon receipt.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
INVESTED ASSETS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows.
Bonds and notes available for sale are carried at aggregate fair value and
changes in unrealized gains or losses, net of tax, are credited or charged
directly to shareholder's equity. Bonds and notes are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Other invested assets include real estate, which is
reduced by impairment provisions, policy loans, which are carried at unpaid
balances, and common stock, which is carried at fair value.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the
F-8
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
specific cost identification method. Premiums and discounts on investments are
amortized to investment income by using the interest method over the contractual
lives of the investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Deferred acquisition costs consist of commissions and
other costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to deferred acquisition costs equal to the change
in amortization that would have been recorded if such securities had been sold
at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been increased by $20,200,000 at December 31, 1999, and
decreased by $15,900,000 at December 31, 1998, $30,000,000 at September 30, 1998
and $31,200,000 at September 30, 1997 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives administrative fees for managing the
funds and other fees for assuming mortality and certain expense risks. Such
fees are included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill is amortized by using the straight-line method over a
period of 25 years and is included in Other Assets in the balance sheet. There
was no goodwill remaining at December 31, 1999.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and universal life insurance contracts are accounted for as
investment-type contracts in accordance with Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," and are recorded at accumulated value (premiums received, plus
accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees, universal life insurance fees and
surrender charges are recorded in income as earned.
INCOME TAXES: The Company files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Its federal income tax return
is consolidated with those of its direct parent, SunAmerica Life Insurance
Company (the "Parent"), and its affiliate, Anchor National Life Insurance
Company ("ANLIC"). Income taxes have been calculated as if the Company filed
a separate return. Deferred
F-9
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
income tax assets and liabilities are recognized based on the difference between
financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: 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.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was adopted for the year ended
December 31, 1999 and is included in Note 14 of the accompanying financial
statements.
4. FISCAL YEAR CHANGE
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the financial statements include the
results of operations for the transition period, which are not necessarily
indicative of operations for a full year. The financial statements as of and
for the three months ended December 31, 1998 were originally filed as the
Company's unaudited Transition Report on Form 10-Q.
Results for comparable prior period are summarized below.
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
------------------
<S> <C>
Investment income . . . . . . $ 29,882,000
Net investment income . . . . 8,547,000
Net realized investment gains 2,075,000
Total fee income. . . . . . . 1,653,000
Pretax income . . . . . . . . 7,193,000
Net income. . . . . . . . . . 4,274,000
==================
</TABLE>
5. ACQUISITION
On December 31, 1998, ANLIC 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,
F-10
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
5. ACQUISITION (Continued)
ANLIC 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 $3,460,503,000 of fixed
annuity reserves, $2,308,742,000 of universal life reserves and $24,011,000 of
guaranteed investment contract reserves.
Included in the block of business acquired from MBL Life were policies whose
owners are residents of the State of New York ("the New York Business"). On
July 1, 1999, the New York Business was acquired by the Company via an
assumption reinsurance agreement. As part of this acquisition, invested assets
equal to $678,272,000, universal life reserves equal to $282,247,000, group
pension reserves equal to $406,118,000, and other net assets of $10,093,000 were
assumed by the Company. On a pro forma basis, assuming the MBL Life acquisition
had been consummated on October 1, 1996, the beginning of the earliest period
presented here, investment income would have been $150,619,000, $164,183,000 and
$112,246,000 for the year ended December 31, 1999 and the years ended September
30, 1998 and 1997, respectively. Net income would have been $9,364,000,
$19,920,000 and $12,238,000 for the year ended December 31, 1999 and the years
ended September 30, 1998 and 1997, respectively.
The $128,420,000 purchase price was allocated between the Company and ANLIC
based on the estimated future gross profits of the two blocks of business. The
portion allocated to the Company was $10,000,000.
As part of the Acquisition, the Company received $34,657,000 from MBL Life to
pay policy enhancements guaranteed by the MBL Life rehabilitation agreement to
policyholders meeting certain requirements. A primary requirement was that
annuity policyholders must have converted their MBL Life policy to a policy type
currently offered by the Company or one of its affiliates by December 31, 1999.
The enhancements are to be credited in four installments on January 1, 2000,
June 30, 2001, June 30, 2002 and June 30, 2003, to eligible policies still
active on each of those dates. On December 31, 1999 the enhancement reserve for
such payments totaled $35,807,000, which includes interest credited at 6.75% on
the original reserve. Of this amount, $4,621,000 was credited to policyholders
in February 2000 for the January 1, 2000 installment.
F-11
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available for
sale by major category follow:
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
AT DECEMBER 31, 1999:
Securities of the United States
Government. . . . . . . . . . $ 1,479,000 $ 1,347,000
Mortgage-backed securities. . . 602,095,000 574,247,000
Securities of public utilities. 41,758,000 41,071,000
Corporate bonds and notes . . . 667,450,000 637,985,000
Other debt securities . . . . . 274,334,000 268,271,000
-------------- --------------
Total . . . . . . . . . . . . $1,587,116,000 $1,522,921,000
============== ==============
AT DECEMBER 31, 1998:
Securities of the United States
Government. . . . . . . . . . $ 10,230,000 $ 10,263,000
Mortgage-backed securities. . . 534,759,000 546,409,000
Securities of public utilities. 78,396,000 80,442,000
Corporate bonds and notes . . . 567,623,000 573,599,000
Other debt securities . . . . . 102,629,000 102,677,000
-------------- --------------
Total . . . . . . . . . . . . $1,293,637,000 $1,313,390,000
============== ==============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government. . . . . . . . . . $ 518,000 $ 549,000
Mortgage-backed securities. . . 454,934,000 472,557,000
Securities of public utilities. 81,525,000 84,711,000
Corporate bonds and notes . . . 658,674,000 677,717,000
Other debt securities . . . . . 67,052,000 68,338,000
-------------- --------------
Total . . . . . . . . . . . . $1,262,703,000 $1,303,872,000
============== ==============
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
The amortized cost and estimated fair value of bonds and notes available for
sale by contractual maturity, as of December 31, 1999, follow:
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less. . . . . . . . $ 47,125,000 $ 46,887,000
Due after one year through five years. 299,033,000 295,798,000
Due after five years through ten years 445,835,000 419,857,000
Due after ten years. . . . . . . . . . 193,028,000 186,133,000
Mortgage-backed securities . . . . . . 602,095,000 574,246,000
-------------- --------------
Total. . . . . . . . . . . . . . . . $1,587,116,000 $1,522,921,000
============== ==============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due to
prepayments and redemptions. Gross unrealized gains and losses on bonds and
notes available for sale by major category follow:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gains Losses
----------- -------------
<S> <C> <C>
AT DECEMBER 31, 1999:
Securities of the United States
Government. . . . . . . . . . $ 5,000 $ (137,000)
Mortgage-backed securities. . . 873,000 (28,721,000)
Securities of public utilities. 56,000 (743,000)
Corporate bonds and notes . . . 2,867,000 (32,332,000)
Other debt securities . . . . . 454,000 (6,517,000)
----------- -------------
Total . . . . . . . . . . . . $ 4,255,000 $(68,450,000)
=========== =============
AT DECEMBER 31, 1998:
Securities of the United States
Government. . . . . . . . . . $ 35,000 $ (2,000)
Mortgage-backed securities. . . 13,104,000 (1,454,000)
Securities of public utilities. 2,585,000 (539,000)
Corporate bonds and notes . . . 18,094,000 (12,118,000)
Other debt securities . . . . . 748,000 (700,000)
----------- -------------
Total . . . . . . . . . . . . $34,566,000 $(14,813,000)
=========== =============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 31,000 $ ---
Mortgage-backed securities. . . 17,733,000 (110,000)
Securities of public utilities. 3,562,000 (376,000)
Corporate bonds and notes . . . 30,219,000 (11,176,000)
Other debt securities . . . . . 1,297,000 (11,000)
----------- -------------
Total . . . . . . . . . . . . $52,842,000 $(11,673,000)
=========== =============
</TABLE>
F-13
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
Gross unrealized gains on equity securities available for sale aggregated
$9,000 at December 31, 1998 and September 30, 1998 and $19,000 at September 30,
1997. There were no gross unrealized gains or losses on equity securities
available for sale at December 31, 1999 and no gross unrealized losses at
December 31, 1998, September 30, 1998 and September 30, 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
--------------------------
December 31, 1999 December 31, 1998 1998 1997
------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C>
BONDS AND NOTES:
Realized gains . . . $ 6,040,000 $ 4,290,000 $13,067,000 $ 6,441,000
Realized losses. . . (9,688,000) (1,843,000) (7,509,000) (1,466,000)
MORTGAGE LOANS:
Realized losses --- --- (289,000) (15,000)
OTHER INVESTMENTS:
Realized gains 164,000 --- 22,000 140,000
Realized losses --- --- (209,000) ---
IMPAIRMENT WRITEDOWNS. (7,694,000) (1,650,000) (392,000) (80,000)
------------------- ------------ ------------ ------------
Total net realized
investment gains
(losses) . . . . . . $ (11,178,000) $ 797,000 $ 4,690,000 $ 5,020,000
=================== ============ ============ ============
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
--------------------------
December 31, 1999 December 31, 1998 1998 1997
------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Short-term investments. $ 4,795,000 $ 1,122,000 $ 2,340,000 $ 1,334,000
Bonds and notes . . . . 103,503,000 22,811,000 100,808,000 56,253,000
Mortgage loans. . . . . 17,139,000 3,980,000 13,901,000 7,714,000
Other invested assets . 1,839,000 97,000 447,000 258,000
------------------ ----------- ------------ -----------
Total investment income $ 127,276,000 $28,010,000 $117,496,000 $65,559,000
================== =========== ============ ===========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $1,548,000 for
the year ended December 31, 1999, $218,000 for the three months ended December
31, 1998, $814,000 for the year ended September 30, 1998 and $387,000 for the
year ended September 30, 1997 and are included in General and Administrative
Expenses in the income statement.
No investments in any one entity or its affiliates exceeded 10% of the Company's
shareholder's equity at December 31, 1999.
At December 31, 1999, mortgage loans were collateralized by properties located
in 33 states, with loans totaling approximately 34% of the aggregate carrying
value of the portfolio secured by properties located in California,
approximately 11% by properties located in New York and Michigan and no more
than 5% of the portfolio was secured by properties located in any other single
state.
At December 31, 1999, bonds and notes included $123,849,000 of bonds and
notes not rated investment grade. The Company had no material concentrations of
non-investment-grade assets at December 31, 1999.
F-14
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
At December 31, 1999, the carrying value of investments in default as to
the payment of principal or interest was $1,760,000. Such nonperforming assets
had an estimated fair value of $1,293,000.
At December 31, 1999, $519,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its other invested assets) and
liabilities or the value of anticipated future business. The Company does not
plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential
taxes are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS AND NOTES: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES:
Such obligations represent transactions of a short-term nature for which the
carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized contracts
are valued based on the present value of future cash flows at current pricing
rates.
F-15
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and single
life premium contracts are assigned a fair value equal to current net surrender
value.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of
contracts in the accumulation phase are based on net surrender values. Fair
values of contracts in the payout phase are based on the present value of future
cash flows at assumed investment rates.
The estimated fair values of the Company's financial instruments at December 31,
1999, December 31, 1998 and September 30, 1998, compared with their respective
carrying values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------- --------------
DECEMBER 31, 1999:
<S> <C> <C>
ASSETS:
Cash and short-term investments. . . $ 29,350,000 $ 29,350,000
Bonds and notes. . . . . . . . . . . 1,522,921,000 1,522,921,000
Mortgage loans . . . . . . . . . . . 211,867,000 211,197,000
Variable annuity assets held in
separate accounts. . . . . . . . . 558,605,000 558,605,000
LIABILITIES:
Reserves for fixed annuity contracts 1,523,641,000 1,458,786,000
Reserves for universal life
insurance contracts. . . . . . . . 277,250,000 261,522,000
Variable annuity liabilities related
to separate accounts . . . . . . . 558,605,000 535,282,000
Payable to brokers for purchase of
securities . . . . . . . . . . . . 63,000 63,000
============== ==============
DECEMBER 31, 1998:
ASSETS:
Cash and short-term investments. . . $ 18,466,000 $ 18,466,000
Bonds and notes. . . . . . . . . . . 1,313,390,000 1,313,390,000
Mortgage loans . . . . . . . . . . . 176,737,000 182,013,000
Variable annuity assets held in
separate accounts. . . . . . . . . 344,619,000 344,619,000
Receivable from brokers for sales
of securities. . . . . . . . . . . 30,597,000 30,597,000
LIABILITIES:
Reserves for fixed annuity contracts 1,432,558,000 1,382,574,000
Variable annuity liabilities related
to separate accounts . . . . . . . 344,619,000 328,064,000
Payable to brokers for purchase of
securities . . . . . . . . . . . . 19,806,000 19,806,000
============== ==============
</TABLE>
F-16
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
SEPTEMBER 30, 1998:
ASSETS:
Cash and short-term investments. . $ 55,679,000 $ 55,679,000
Bonds and notes. . . . . . . . . . 1,303,872,000 1,303,872,000
Mortgage loans . . . . . . . . . . 187,906,000 194,471,000
Variable annuity assets held in
separate accounts. . . . . . . . 271,865,000 271,865,000
Receivable from brokers for
sales of securities. . . . . . . 6,661,000 6,661,000
LIABILITIES:
Reserves for fixed annuity
contracts. . . . . . . . . . . . 1,460,856,000 1,406,853,000
Variable annuity liabilities
related to separate accounts . . 271,865,000 256,623,000
Payable to brokers for purchase of
securities . . . . . . . . . . . 60,000 60,000
============== ==============
</TABLE>
8. REINSURANCE
The business which was assumed from MBL Life is subject to existing reinsurance
ceded agreements. The agreements, which represent predominantly yearly
renewable term insurance, allow for maximum retention on any single life of
$2,000,000. 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, the Company entered into a reinsurance treaty effective January 1, 1999
under which the Company retains no more than $100,000 of risk on any one insured
life. At December 31, 1999, a total reserve credit of $397,000 was taken
against the life insurance reserves. With respect to these coinsurance
agreements, the Company 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. The Company monitors its credit
exposure with respect to these agreements. However, due to the high credit
ratings of the reinsurers, such risks are considered to be minimal.
9. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its business.
These cases are in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses relating
to such litigation are adequate and any further liabilities and costs will not
have a material adverse impact upon the Company's financial position, results of
operations, or cash flows.
The Company's current financial strength and counterparty credit ratings from
Standard & Poor's are based in part on a guarantee (the "Guarantee") of the
Company's insurance policy obligations by American Home Assurance Company
("American Home"), a subsidiary of AIG, and a member of an AIG intercompany
pool, and the belief that the Company is
F-17
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
9. CONTINGENT LIABILITIES (Continued)
viewed as a strategically important member of AIG. The Guarantee is
unconditional and irrevocable, and policyholders have the right to enforce the
Guarantee directly against American Home.
The Company's current financial strength rating from Moody's is based in part on
a support agreement between the Company and AIG (the "Support Agreement"),
pursuant to which AIG has agreed that AIG will cause the Company to maintain a
policyholders' surplus of not less than $1 million or such greater amount as
shall be sufficient to enable the Company to perform its obligations under any
policy issued by it. The Support Agreement also provides that if the Company
needs funds not otherwise available to it to make timely payment of its
obligations under policies issued by it, AIG will provide such funds at the
request of the Company. The Support Agreement is not a direct or indirect
guarantee by AIG to any person of any obligation of the Company. AIG may
terminate the Support Agreement with respect to outstanding obligations of the
Company only under circumstances where the Company attains, without the benefit
of the Support Agreement, a financial strength rating equivalent to that held by
the Company with the benefit of the support agreement. Policyholders have the
right to cause the Company to enforce its rights against AIG and, if the Company
fails or refuses to take timely action to enforce the Support Agreement or if
the Company defaults in any claim or payment owed to such policyholder when due,
have the right to enforce the Support Agreement directly against AIG.
American Home does not publish financial statements, although it files statutory
annual and quarterly reports with the New York State Insurance Department, where
such reports are available to the public. AIG is a reporting company under the
Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and
quarterly reports on Form 10-Q, which are available from the Securities and
Exchange Commission.
F-18
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At December 31, 1999, December 31, 1998 and September 30, 1998,
300 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
--------------------------
December 31, 1999 December 31, 1998 1998 1997
------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C>
ADDITIONAL PAID-IN
CAPITAL:
Beginning balances. . . $ 144,428,000 $144,428,000 $144,428,000 $ 14,428,000
Additional paid-in
capital acquired as
a result of the
merger with JANY --- --- --- 125,000,000
Capital contributions
received --- --- --- 5,000,000
------------------- ------------- ------------- -------------
Ending balances . . . . . $ 144,428,000 $144,428,000 $144,428,000 $144,428,000
=================== ============= ============= =============
RETAINED EARNINGS:
Beginning balances. . . $ 34,737,000 $ 31,361,000 $ 14,826,000 $ 5,973,000
Net income. . . . . . . 7,672,000 3,376,000 16,535,000 8,853,000
------------------- ------------- ------------- -------------
Ending balances . . . . . $ 42,409,000 $ 34,737,000 $ 31,361,000 $ 14,826,000
=================== ============= ============= =============
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS):
Beginning balances. . $ 2,510,000 $ 7,266,000 $ 5,824,000 $ (181,000)
Change in net
unrealized gains
(losses) on equity
securities (9,000) --- (10,000) (110,000)
Change in net
unrealized gains
(losses) on bonds
and notes available
for sale. . . . . . (83,948,000) (21,416,000) 1,028,000 40,648,000
Change in adjustment
to deferred
acquisition costs . 36,100,000 14,100,000 1,200,000 (31,300,000)
Tax effects of net
changes . . . . . . 16,750,000 2,560,000 (776,000) (3,233,000)
------------------- ------------- ------------- -------------
Ending balances . . . . . $ (28,597,000) $ 2,510,000 $ 7,266,000 $ 5,824,000
=================== ============= ============= =============
</TABLE>
F-19
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY (Continued)
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the domestic
insurer's intention to declare such dividend and the amount have been filed with
the Superintendent of Insurance not less than 30 days in advance of such
proposed declaration, or if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in the year ended
December 31, 1999, three months ended December 31, 1998 or the fiscal years
ended 1998 or 1997.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the years ended December
31, 1999, 1998 and 1997 was $14,210,000, $16,263,000 and $18,390,000,
respectively. The Company's statutory capital and surplus was $111,338,000 at
December 31, 1999, $96,474,000 at December 31, 1998 and $94,239,000 at September
30, 1998.
11. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
Net realized
Investment
Gains (Losses) Operations Total
--------------- ----------- ------------
<S> <C> <C> <C>
December 31, 1999:
Currently payable . . . . . $ 2,345,000 $ 9,593,000 $11,938,000
Deferred. . . . . . . . . . (6,772,000) 1,455,000 (5,317,000)
--------------- ----------- ------------
Total income tax expense
(benefit) . . . . . . . $ (4,427,000) $11,048,000 $ 6,621,000
=============== =========== ============
December 31, 1998:
Currently payable . . . . . $ 1,165,000 $ 45,000 $ 1,210,000
Deferred. . . . . . . . . . (595,000) 1,576,000 981,000
--------------- ----------- ------------
Total income tax expense. $ 570,000 $ 1,621,000 $ 2,191,000
=============== =========== ============
September 30, 1998:
Currently payable . . . . . $ 2,711,000 $ 9,784,000 $12,495,000
Deferred. . . . . . . . . . (515,000) 126,000 (389,000)
--------------- ----------- ------------
Total income tax expense. $ 2,196,000 $ 9,910,000 $12,106,000
=============== =========== ============
September 30, 1997:
Currently payable . . . . . $ 1,790,000 $ 2,899,000 $ 4,689,000
Deferred. . . . . . . . . . (11,000) 412,000 401,000
--------------- ----------- ------------
Total income tax expense. $ 1,779,000 $ 3,311,000 $ 5,090,000
=============== =========== ============
</TABLE>
F-20
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
--------------------------
December 31, 1999 December 31, 1998 1998 1997
------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Amount computed at
statutory rate . . . . $ 4,984,000 $1,949,000 $10,024,000 $4,880,000
Increases (decreases)
resulting from:
Amortization of
differences
between book and
tax bases of net
assets acquired. . 223,000 5,000 20,000 20,000
State income taxes,
net of federal
tax benefit. . . . 1,817,000 237,000 2,042,000 200,000
Dividend received
deduction (263,000) --- --- ---
Other, net (140,000) --- 20,000 (10,000)
------------------- ---------- ----------- -----------
Total income tax
expense. . . . . . $ 6,621,000 $2,191,000 $12,106,000 $5,090,000
=================== ========== =========== ===========
</TABLE>
F-21
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The
significant components of the (receivable) liability for Deferred Income Taxes
are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------------------
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ --- $ 1,517,000 $ 1,782,000
Deferred acquisition costs. . . . 22,643,000 29,018,000 29,505,000
Net unrealized gains on debt and
equity securities available for
sale --- 1,347,000 3,912,000
Other liabilities . . . . . . . . 44,000 46,000 46,000
------------- ------------- -------------
Total deferred tax liabilities. . 22,687,000 31,928,000 35,245,000
------------- ------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves . . . . . (18,026,000) (18,550,000) (18,535,000)
State income taxes --- (79,000) (79,000)
Net unrealized losses on debt and
equity securities available for
sale (15,398,000) --- ---
Other assets. . . . . . . . . . . (7,538,000) (9,507,000) (11,260,000)
------------- ------------- -------------
Total deferred tax assets . . . . (40,962,000) (28,136,000) (29,874,000)
------------- ------------- -------------
Deferred income taxes . . . . . . $(18,275,000) $ 3,792,000 $ 5,371,000
============= ============= =============
</TABLE>
12. COMPREHENSIVE INCOME
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.
F-22
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
12. COMPREHENSIVE INCOME (Continued)
The before tax, after tax, and tax (expense) benefit amounts for each component
of the (decrease) increase in unrealized gains or losses on debt and equity
securities available for sale for both the current and prior periods are
summarized below:
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ----------- -------------
Year ended December 31,
1999:
<S> <C> <C> <C>
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period . . . . . . . . . $(93,613,000) $ 32,765,000 $(60,848,000)
Increase in deferred acquisition
cost adjustment identified in
the current period . . . . . . 43,869,000 (15,354,000) 28,515,000
------------- ------------- -------------
Subtotal . . . . . . . . . . . . (49,744,000) 17,411,000 (32,333,000)
------------- ------------- -------------
Reclassification adjustment for:
Net realized losses included
in net income. . . . . . . . . 9,656,000 (3,380,000) 6,276,000
Related change in deferred
acquisition costs. . . . . . . (7,769,000) 2,719,000 (5,050,000)
------------- ------------- -------------
Total reclassification
adjustment . . . . . . . . . . 1,887,000 (661,000) 1,226,000
------------- ------------- -------------
Total other comprehensive loss . $(47,857,000) $ 16,750,000 $(31,107,000)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three months ended December 31,
1998:
<S> <C> <C> <C>
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period . . . . . . . . . $(17,664,000) $ 6,182,000 $(11,482,000)
Increase in deferred acquisition
cost adjustment identified in
the current period . . . . . . 11,367,000 (3,979,000) 7,388,000
------------- ------------ -------------
Subtotal . . . . . . . . . . . . (6,297,000) 2,203,000 (4,094,000)
------------- ------------ -------------
Reclassification adjustment for:
Net realized losses included
in net income. . . . . . . . . (3,752,000) 1,314,000 (2,438,000)
Related change in deferred
acquisition costs. . . . . . . 2,733,000 (957,000) 1,776,000
------------- ------------ -------------
Total reclassification
adjustment . . . . . . . . . . (1,019,000) 357,000 (662,000)
------------- ------------ -------------
Total other comprehensive loss . $ (7,316,000) $ 2,560,000 $ (4,756,000)
============= ============ =============
</TABLE>
F-23
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
12. COMPREHENSIVE INCOME (Continued)
Tax Benefit
Before Tax (Expense) Net of Tax
------------- ---------- -------------
<TABLE>
<CAPTION>
Fiscal Year ended September 30,
1998:
<S> <C> <C> <C>
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period . . . . . . . . . $ 17,664,000 $(6,182,000) $ 11,482,000
Increase in deferred acquisition
cost adjustment identified in
the current period . . . . . . (11,732,000) 4,106,000 (7,626,000)
------------- ------------ -------------
Subtotal . . . . . . . . . . . . 5,932,000 (2,076,000) 3,856,000
------------- ------------ -------------
Reclassification adjustment for:
Net realized gains included
in net income. . . . . . . . . (16,646,000) 5,826,000 (10,820,000)
Related change in deferred
acquisition costs. . . . . . 12,932,000 (4,526,000) 8,406,000
------------- ------------ -------------
Total reclassification
adjustment . . . . . . . . . . (3,714,000) 1,300,000 (2,414,000)
------------- ------------ -------------
Total other comprehensive income $ 2,218,000 $ (776,000) $ 1,442,000
============= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year ended September 30,
1997:
<S> <C> <C> <C>
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period . . . . . . . . . $ 45,904,000 $(16,066,000) $ 29,838,000
Increase in deferred acquisition
cost adjustment identified in
the current period . . . . . . (32,720,000) 11,452,000 (21,268,000)
------------- ------------- -------------
Subtotal . . . . . . . . . . . . 13,184,000 (4,614,000) 8,570,000
------------- ------------- -------------
Reclassification adjustment for:
Net realized gains included
in net income. . . . . . . . . (5,366,000) 1,878,000 (3,488,000)
Related change in deferred
acquisition costs. . . . . . . 1,420,000 (497,000) 923,000
------------- ------------- -------------
Total reclassification
adjustment . . . . . . . . . . (3,946,000) 1,381,000 (2,565,000)
------------- ------------- -------------
Total other comprehensive income $ 9,238,000 $ (3,233,00) $ 6,005,000
============= ============= =============
</TABLE>
F-24
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
13. RELATED-PARTY MATTERS
The Company pays commissions to six affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp., Spelman & Co. Inc. and Royal Alliance Associates, Inc.
Commissions paid to these broker-dealers totaled $1,976,000 in the year ended
December 31, 1999, $615,000 in the three months ended December 31, 1998,
$3,855,000 in the year ended 1998 and $4,486,000 in the year ended 1997. These
broker-dealers represent a significant portion of the Company's business,
amounting to 37.5%, 27.8%, 33.0% and 38.9% of premiums in the year ended
December 31, 1999, three months ended December 31, 1998, and the years ended
September 30, 1998 and 1997, respectively. One unaffiliated broker-dealer was
responsible for 25% of total premiums in the year ended December 31, 1999 and no
other single unaffiliated broker-dealer was responsible for more than 8% of
total premiums in the year ended December 31, 1999.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, whose purpose
is to provide services to the Company and its affiliates. Amounts paid for such
services totaled $7,959,000 for the year ended December 31, 1999, $1,631,000 for
the three months ended December 31, 1998, $3,877,000 for the year ended
September 30, 1998 and $2,454,000 for the year ended September 30, 1997. The
marketing components of such costs during these periods amounted to $2,907,000,
$630,000, $1,877,000 and $1,223,000, respectively, and are deferred and
amortized as part of Deferred Acquisition Costs. The other components of these
costs are included in General and Administrative Expenses in the income
statement.
During the year ended September 30, 1997, the Company sold one bond with a
book value of $2,072,000 to SunAmerica. The Company recorded a net gain of
$83,000 on the transaction.
F-25
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF FIRST SUNAMERICA LIFE INSURANCE COMPANY'S FORM
10-K FOR THE QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 211867000
<REAL-ESTATE> 0
<TOTAL-INVEST> 1806742000
<CASH> 29350000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 137637000
<TOTAL-ASSETS> 2555512000
<POLICY-LOSSES> 1800891000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3000000
<OTHER-SE> 158240000
<TOTAL-LIABILITY-AND-EQUITY> 2555512000
0
<INVESTMENT-INCOME> 127276000
<INVESTMENT-GAINS> (11178000)
<OTHER-INCOME> 11769000
<BENEFITS> 82589000
<UNDERWRITING-AMORTIZATION> 22664000
<UNDERWRITING-OTHER> 450000
<INCOME-PRETAX> 14293000
<INCOME-TAX> 6621000
<INCOME-CONTINUING> 7672000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7672000
<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>
