SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File No. 33-5014
FIRST SUNAMERICA LIFE INSURANCE COMPANY
Incorporated in New York 06-0992729
IRS Employer
Identification No.
733 Third Avenue, 4th Floor, New York, New York 10017
Registrant's telephone number, including area code: (800) 272-3007
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No ___
--
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON AUGUST
15, 2000 WAS AS FOLLOWS:
Common Stock (par value $10,000.00 per share) 300 shares outstanding
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
INDEX
Page
Number(s)
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Part I - Financial Information
Balance Sheet (Unaudited) -
June 30, 2000 and December 31, 1999. . . . . . . . . . . . 3
Statement of Income and Comprehensive Income (Unaudited)-
Three Months and Six Months Ended June 30, 2000 and 1999 . 4
Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2000 and 1999. . . . . . . . . . 5-6
Notes to Financial Statements (Unaudited). . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 8-21
Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Part II - Other Information. . . . . . . . . . . . . . . . . . . 23
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
(Unaudited)
June 30, December 31,
2000 1999
--------------- ---------------
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ASSETS
Investments:
Cash and short-term investments . . . . . $ 16,203,000 $ 29,350,000
Bonds, notes and redeemable preferred
stocks available for sale, at fair
value (amortized cost: June 2000,
$1,404,776,000; December 1999,
$1,587,116,000) 1,318,499,000 1,522,921,000
Mortgage loans. . . . . . . . . . . . . . 198,757,000 211,867,000
Other invested assets . . . . . . . . . . 40,847,000 42,604,000
--------------- ---------------
Total investments . . . . . . . . . . . . 1,574,306,000 1,806,742,000
Variable annuity assets held in separate
accounts. . . . . . . . . . . . . . . . . 609,184,000 558,605,000
Accrued investment income . . . . . . . . . 20,875,000 24,076,000
Deferred acquisition costs. . . . . . . . . 129,847,000 137,637,000
Current income taxes. . . . . . . . . . . . 10,292,000 6,638,000
Deferred income taxes . . . . . . . . . . . 21,744,000 18,275,000
Other assets. . . . . . . . . . . . . . . . 3,028,000 3,539,000
--------------- ---------------
TOTAL ASSETS. . . . . . . . . . . . . . . . $2,369,276,000 $2,555,512,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts. . . $1,334,930,000 $1,523,641,000
Reserves for universal life insurance
contracts . . . . . . . . . . . . . . . 263,978,000 277,250,000
Other liabilities . . . . . . . . . . . . 7,134,000 34,776,000
--------------- ---------------
Total reserves, payable and accrued
liabilities . . . . . . . . . . . . . . 1,606,042,000 1,835,667,000
--------------- ---------------
Variable annuity liabilities related to
separate accounts . . . . . . . . . . . . 609,184,000 558,605,000
--------------- ---------------
Shareholder's equity:
Common Stock. . . . . . . . . . . . . . . 3,000,000 3,000,000
Additional paid-in capital. . . . . . . . 144,428,000 144,428,000
Retained earnings . . . . . . . . . . . . 51,262,000 42,409,000
Accumulated other comprehensive loss. . . (44,640,000) (28,597,000)
--------------- ---------------
Total shareholder's equity. . . . . . . . 154,050,000 161,240,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. $2,369,276,000 $2,555,512,000
=============== ===============
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See accompanying notes to financial statements
3
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and six months ended June 30, 2000 and 1999
(Unaudited)
Three Months Six Months
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
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Investment income . . . . . . . . . . . . . $ 32,165,000 $ 26,359,000 $ 65,495,000 $ 54,406,000
Interest expense on:
Fixed annuity contracts . . . . . . . . . (16,164,000) (17,365,000) (34,469,000) (34,898,000)
Universal life insurance contracts (3,087,000) --- (6,219,000) ---
------------- ------------- ------------- -------------
Total interest expense. . . . . . . . . . (19,251,000) (17,365,000) (40,688,000) (34,898,000)
------------- ------------- ------------- -------------
NET INVESTMENT INCOME . . . . . . . . . . . 12,914,000 8,994,000 24,807,000 19,508,000
------------- ------------- ------------- -------------
NET REALIZED INVESTMENT LOSSES. . . . . . . (2,231,000) (730,000) (3,744,000) (577,000)
------------- ------------- ------------- -------------
Fee income:
Variable annuity fees . . . . . . . . . . 2,263,000 1,522,000 4,467,000 2,891,000
Surrender charges . . . . . . . . . . . . 1,242,000 805,000 2,014,000 1,448,000
Universal life insurance fees 110,000 --- 610,000 ---
------------- ------------- ------------- -------------
TOTAL FEE INCOME. . . . . . . . . . . . . . 3,615,000 2,327,000 7,091,000 4,339,000
------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES . . . . (1,694,000) (1,243,000) (3,142,000) (2,253,000)
------------- ------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS . . . . . . . . . . . . (4,809,000) (5,700,000) (9,618,000) (10,800,000)
------------- ------------- ------------- -------------
ANNUAL COMMISSIONS. . . . . . . . . . . . . (94,000) (86,000) (267,000) (168,000)
------------- ------------- ------------- -------------
PRETAX INCOME . . . . . . . . . . . . . . . 7,701,000 3,562,000 15,127,000 10,049,000
Income tax expense. . . . . . . . . . . . . (3,395,000) (1,489,000) (6,274,000) (4,155,000)
------------- ------------- ------------- -------------
NET INCOME. . . . . . . . . . . . . . . . . 4,306,000 2,073,000 8,853,000 5,894,000
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Net unrealized losses on debt and
equity securities available for
sale identified in the current
period (net of income tax benefit
of $5,673,000 and $1,897,000 for the
second quarter of 2000 and 1999,
respectively, and $9,601,000 and
$3,355,000 for the six months of
2000 and 1999, respectively). . . . . . (10,535,000) (3,520,000) (17,831,000) (6,231,000)
Less reclassification adjustment
for net realized losses included in
net income (net of income tax expense
of $642,000 and $29,000 for the second
quarter of 2000 and 1999, respectively
and $963,000 and $35,000 for the six
months of 2000 and 1999, respectively). 1,192,000 51,000 1,788,000 66,000
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE LOSS. . . . . . . . . (9,343,000) (3,469,000) (16,043,000) (6,165,000)
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS. . . . . . . . . . . . . $ (5,037,000) $ (1,396,000) $ (7,190,000) $ (271,000)
============= ============= ============= =============
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See accompanying notes to financial statements
4
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . $ 8,853,000 $ 5,894,000
Adjustments to reconcile net income to get
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts . . . . . . . . . 34,469,000 34,899,000
Universal life insurance contracts 6,219,000 ---
Net realized investment losses. . . . . . 3,744,000 577,000
Accretion of net discounts on
investments . . . . . . . . . . . . . . (2,090,000) (1,566,000)
Amortization of goodwill --- 29,000
Provision for deferred income taxes . . . . 5,170,000 (473,000)
Change in:
Accrued investment income . . . . . . . . . . 3,201,000 (514,000)
Deferred acquisition costs. . . . . . . . . . 5,190,000 2,487,000
Income taxes currently payable. . . . . . . . (3,654,000) 774,000
Other liabilities . . . . . . . . . . . . . . (5,568,000) 8,582,000
Other, net. . . . . . . . . . . . . . . . . . . 280,000 117,000
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . 55,814,000 50,806,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of:
Bonds, notes and redeemable preferred stocks. (10,333,000) (198,798,000)
Mortgage loans. . . . . . . . . . . . . . . . (6,352,000) (48,438,000)
Sales of:
Bonds, notes and redeemable preferred stocks. 146,538,000 207,356,000
Other investments, excluding short-term
investments . . . . . . . . . . . . . . . . 485,000 914,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks. 44,135,000 37,562,000
Mortgage loans. . . . . . . . . . . . . . . . 19,723,000 20,588,000
Other investments, excluding short-term
investments . . . . . . . . . . . . . . . . 1,358,000 430,000
Short-term investments transferred to Anchor
National Life Insurance Company in assumption
reinsurance transaction with MBL Life
Assurance Corporation (16,741,000) ---
------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES . . . 178,813,000 19,614,000
------------- --------------
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See accompanying notes to financial statements
5
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the six months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts . . . . . . $ 19,690,000 $ 34,505,000
Universal life insurance contracts 6,323,000 ---
Net exchanges from the fixed accounts
of variable annuity contracts . . . (27,782,000) (19,133,000)
Withdrawal payments on:
Fixed annuity contracts . . . . . . (177,042,000) (77,434,000)
Universal life insurance contracts (17,754,000) ---
Claims and annuity payments on fixed
annuity contracts . . . . . . . . . (29,135,000) (13,189,000)
Net payments on short-term financings (22,074,000) (195,000)
-------------- -------------
NET CASH USED BY FINANCING ACTIVITIES (247,774,000) (75,446,000)
-------------- -------------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS . . . . . . . . . . . . (13,147,000) (5,026,000)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD . . . . . . . . 29,350,000 18,466,000
-------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD . . . . . . . . . . . $ 16,203,000 $ 13,440,000
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Net income taxes paid . . . . . . . . $ 5,681,000 $ 4,833,000
============== =============
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See accompanying notes to financial statements
6
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
-----------------------
First SunAmerica Life Insurance Company (the "Company") is an indirect
wholly owned subsidiary of American International Group, Inc. ("AIG"), an
international insurance and financial services holding company. The Company is a
New York-domiciled life insurance company engaged primarily in the business of
selling and administering fixed and variable annuities and universal life
contracts in the State of New York.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of June 30, 2000 and December 31, 1999, the results of its
operations for the three months and six months ended June 30, 2000 and 1999 and
its cash flows for the six months ended June 30, 2000 and 1999. The results of
operations for the three months and six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited financial statements should be read in conjunction with
the audited financial statements for the year ended December 31, 1999, contained
in the Company's 1999 Annual Report on Form 10-K. Certain items have been
reclassified to conform to the current period's presentation.
2. RECENTLY ISSUED ACCOUNTING STANDARD
--------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 was postponed by SFAS 137, and now will be effective for
the Company as of January 1, 2001. Therefore, it is not included in the
accompanying financial statements. The Company has not completed its analysis
of the effect of SFAS 133, but management believes that it will not have a
material impact on the Company's results of operations, financial condition or
liquidity.
7
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FIRST SUNAMERICA LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company (the "Company") for the
three months and six months ended June 30, 2000 and June 30, 1999 follows.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings or profitability of the
Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $4.3 million in the second quarter of 2000, compared
with $2.1 million in the second quarter of 1999. For the six months, net income
amounted to $8.9 million in 2000 compared to $5.9 million in 1999. On July 1,
1999, the Company acquired the New York individual life and individual and group
annuity business of MBL Life Assurance Corporation (the "Acquisition"). The
Acquisition was accounted for under the purchase method of accounting, and,
therefore results of operations include those of the Acquisition only from its
date of acquisition. Consequently, the operating results for 2000 and 1999 are
not comparable. On a pro forma basis, using the historical financial
information of the acquired business
8
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and assuming that the Acquisition had been consummated on January 1, 1999, the
beginning of the prior-year periods discussed herein, net income would have been
$2.8 million and $7.3 million for the three months and six months ended June 30,
1999, respectively.
PRETAX INCOME totaled $7.7 million in the second quarter of 2000 and $3.6
million in the second quarter of 1999. For the six months, pretax income
totaled $15.1 million in 2000, compared with $10.0 million in 1999. The
significant improvements in 2000 over 1999 primarily resulted from an increase
in net investment income, increased variable annuity and universal life
insurance fees and decreased deferred acquisition costs, partially offset by
increases in net realized investment losses and general and administrative
expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $12.9 million in the second quarter
of 2000 from $9.0 million in the second quarter of 1999. These amounts equal
2.98% on average invested assets (computed on a daily basis) of $1.73 billion in
the second quarter of 2000 and 2.43% on average invested assets of $1.48 billion
in the second quarter of 1999. For the six months, net investment income
increased to $24.8 million in 2000 from $19.5 million in 1999, equaling 2.79% of
average invested assets of $1.78 billion in 2000 and 2.62% of average invested
assets of $1.49 billion in 1999. On a pro forma basis, assuming the Acquisition
had been consummated on January 1, 1999, net investment income on related
average invested assets would have been 1.72% and 1.85% in the second quarter
and six months of 1999, respectively. The improvement in 2000 net investment
yields over both actual and pro forma 1999 amounts reflects the redeployment of
lower yielding assets received in the Acquisition into higher yielding
investment categories.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. Average
invested assets exceeded average interest-bearing liabilities by $77.3 million
in the second quarter of 2000 and $78.0 million in the second quarter of 1999.
For the six months, average invested assets exceeded average interest-bearing
liabilities by $72.0 million in 2000 and $74.6 million in 1999. The difference
between the Company's yield on average invested assets and the rate paid on
average interest-bearing liabilities (the "Spread Difference") was 2.78% in the
second quarter of 2000 and 2.17% in the second quarter of 1999. For the six
months, the spread difference was 2.59% in 2000 and 2.38% in 1999. On a pro
forma basis, assuming the Acquisition had been consummated on January 1, 1999,
the spread difference would have been 1.59% and 1.72% in the second quarter and
six months of 1999, respectively, reflecting primarily the effect of the lower
yielding assets received in the Acquisition. The invested assets associated
with the Acquisition included high-grade corporate, government and
government/agency bonds, which are generally lower yielding than a significant
portion of the invested assets that comprise the remainder of the Company's
portfolio.
Investment income (and the related yield on average invested assets)
totaled $32.2 million (7.43%) in the second quarter of 2000 and $26.4
9
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million (7.12%) in the second quarter of 1999, $65.5 million (7.36%) in the six
months of 2000 and $54.4 million (7.32%) in the six months of 1999. The increase
in the investment yield in 2000 as compared with 1999 is primarily due to a
generally increasing interest rate environment. On a pro forma basis, assuming
the Acquisition had been consummated on January 1, 1999, the yield on related
average invested assets would have been 6.61% and 6.74% in the second quarter
and six months of 1999, respectively.
Total interest expense equaled $19.3 million in the second quarter of 2000,
compared with $17.4 million in the second quarter of 1999. For the six months,
interest expense aggregated $40.7 million in 2000, compared with $34.9 million
in 1999. The average rate paid on all interest-bearing liabilities was 4.65% in
the second quarter of 2000 compared with 4.95% in the second quarter of 1999.
For the six months, the average rate paid on all interest-bearing liabilities
was 4.77% for 2000 and 4.94% for 1999. Interest-bearing liabilities averaged
$1.65 billion during the second quarter of 2000, $1.40 billion during the second
quarter of 1999, $1.71 billion during the six months of 2000 and $1.41 during
the six months of 1999. On a pro forma basis, assuming the Acquisition had been
consummated on January 1, 1999, the average rate paid on all interest-bearing
liabilities would have been 5.02% in both the second quarter and six months of
1999 and interest-bearing liabilities would have averaged $2.24 billion and
$2.25 billion during the second quarter and six months of 1999, respectively.
The decrease in the overall rates paid in 2000 results primarily from the
continued reduction of crediting rates on certain closed blocks of business and
the effects of the Acquisition.
GROWTH IN AVERAGE INVESTED ASSETS for both the quarter and six months ended
June 30, 2000 largely resulted from the impact of the Acquisition, from which
the Company acquired $678.3 million of invested assets. Changes in average
invested assets also reflect sales of fixed annuities and the fixed account
options of the Company's variable annuity products ("Fixed Annuity Premiums"),
and renewal premiums on its universal life product ("UL Premiums") acquired in
the Acquisition, partially offset by net exchanges from fixed accounts to the
separate accounts of variable annuity contracts. Fixed Annuity Premiums and UL
Premiums totaled $16.8 million in the second quarter of 2000, $18.3 million in
the second quarter of 1999, $26.0 million in the six months of 2000 and $34.5 in
the six months of 1999 and are largely premiums for the fixed accounts of
variable annuities. Such premiums have decreased, in part, as a result of
regulatory changes in the state of New York relating to non-taxable policy
exchange requirements. On an annualized basis, these premiums represent 4%, 5%,
3% and 5%, respectively, of the related reserve balances at the beginning of the
respective periods.
NET REALIZED INVESTMENT LOSSES totaled $2.2 million in the second quarter
of 2000, compared with $0.7 million in the second quarter of 1999 and include
impairment writedowns of $2.2 million and $3.2 million, respectively. For the
six months, net realized investment losses amount to $3.7 million in 2000
compared with $0.6 million in 1999 and include impairment writedowns of $3.4
million and $3.8 million, respectively. Thus, net losses from sales and
redemptions of investments totaled $79,000 and $347,000 in the second
quarter and six months of 2000, respectively,
10
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compared to net gains from sales and redemptions of investments of $2.5 million
and $3.2 million in the second quarter and six months of 1999, respectively.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $99.0 million in the second quarter of 2000, $74.4 million in the
second quarter of 1999, $212.6 million in the six months of 2000 and $233.0
million in the six months of 1999. Sales of investments result from the active
management of the Company's investment portfolio, including assets received as
part of the Acquisition. Because redemptions of investments are generally
involuntary and sales of investments are made in both rising and falling
interest rate environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 0.02%, 0.66%, 0.04%
and 0.44% of average invested assets in the second quarter of 2000, the second
quarter of 1999, the six months of 2000 and the six months of 1999,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Company's active portfolio management is to maximize total returns
on the investment portfolio, taking into account credit, option, liquidity and
interest-rate risk.
Impairment writedowns represent provisions applied to bonds in 2000 and
1999. On an annualized basis, impairment writedowns represent 0.50%, 0.86%
0.38% and 0.51% of average invested assets in the second quarter of 2000, the
second quarter of 1999, the six months of 2000, and the six months of 1999,
respectively. For the twenty quarters beginning July 1, 1995, impairment
writedowns as a percent of average invested assets have ranged up to 0.86% and
have averaged 0.19%. Such writedowns are based upon estimates of the net
realizable value of the applicable assets. Actual realization will be dependent
upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $2.3 million
in the second quarter of 2000, compared with $1.5 million in the second quarter
of 1999. For the six months, variable annuity fees totaled $4.5 million in
2000, compared with $2.9 million in 1999. The increased fees in 2000 reflect
growth in average variable annuity assets, principally due to increased market
values, net exchanges into the separate accounts from the fixed accounts of
variable annuity contracts and the receipt of variable annuity premiums,
partially offset by surrenders. On an annualized basis, variable annuity fees
represent 1.5% of average variable annuity assets in both the second quarter and
six months of 2000 and 1999. Variable annuity assets averaged $589.5 million,
$394.3 million, $581.7 million and $376.2 million during the second quarters of
2000 and 1999 and the six months of 2000 and 1999, respectively. Variable
annuity premiums, which exclude premiums allocated to the fixed accounts of
variable annuity products, totaled $8.9 million and $17.2 million in the second
quarters of 2000 and 1999, and $18.9 million and $29.4 million in the six months
of 2000 and 1999, respectively. On an annualized basis, these amounts represent
6%, 18% 7% and 17%, respectively of variable annuity reserves at the beginning
of the respective periods. Transfers from the fixed accounts of the
11
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 $18.2 million and
$33.3 million in the second quarter of 2000 and 1999, respectively, and $35.2
million and $59.5 million in the six months of 2000 and 1999, respectively.
Variable annuity product sales primarily reflect sales of the Company's flagship
variable annuity line, Polaris. Polaris is a multimanager variable annuity that
offers investors a choice of more than 25 variable funds and a number of
guaranteed fixed-rate funds. Variable Annuity Product Sales have decreased in
2000, principally as a result of regulatory changes in the State of New York
relating to non-taxable policy exchange requirements.
The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time, Federal
initiatives are proposed that could affect the taxation of variable annuities
and annuities generally (See "Regulation").
UNIVERSAL LIFE INSURANCE FEES result from the universal life insurance
contract reserves acquired in the Acquisition and the ongoing receipt of renewal
premiums on such contracts, and consist of mortality charges, up-front fees
earned on premiums received and administrative fees net of excess mortality
expense on these contracts. The Company does not actively market universal life
insurance contracts. Universal life insurance fees amounted to $110,000 and
$610,000 in the second quarter and six months of 2000, respectively. Such fees
annualized represent 0.17% and 0.47% of average reserves for universal life
insurance contracts for the second quarter and six months of 2000. Since the
Acquisition occurred on July 1, 1999, no such fees were earned in 1999.
SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $1.2 million in the second quarter of 2000 and $0.8
million in the second quarter of 1999. For the six months, such surrender
charges totaled $2.0 million in 2000 compared with $1.4 million in 1999.
Surrender charges generally are assessed on withdrawals at declining rates
during the first seven years of a contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $110.4 million in the second
quarter of 2000 (including $8.0 million attributable to the Acquisition)
compared to $47.4 million in the second quarter of 1999. For the six months,
such withdrawal payments totaled $181.9 million in 2000 (including $29.7 million
attributable to the Acquisition) and $89.2 million in 1999. Annualized, when
expressed as a percentage of fixed and variable annuity and universal life
reserves, these payments represent 21.6% (1.5% attributable to the Acquisition),
10.8%, 19.0% (1.3% attributable to the Acquisition) and 10.2% for the second
quarter of 2000 and 1999 and the six months of 2000 and 1999, respectively.
12
<PAGE>
The increase in withdrawal rates in 2000 as compared to 1999 is due primarily to
increased surrenders on certain closed blocks of fixed annuity business.
Withdrawals include variable annuity payments from the separate accounts
totaling $8.6 million (5.9% of average variable annuity reserves), $6.5 million
(6.6% of average variable annuity reserves), $16.9 million (5.8% of average
variable annuity reserves) and $11.8 million (6.3% of average variable annuity
reserves) in the second quarters of 2000 and 1999 and the six months of 2000 and
1999, respectively. Management anticipates that withdrawal rates will remain
relatively stable for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.7 million in the second
quarter of 2000 and $1.2 million in 1999. For the six months, general and
administrative expenses totaled $3.1 million in 2000 and $2.3 million in 1999.
The increases in 2000 over 1999 principally reflect both increased costs related
to the business acquired in the Acquisition and expenses related to servicing
the Company's growing block of variable annuity policies. General and
administrative expenses remain closely controlled through a company-wide cost
containment program and continue to represent less than 1% of average total
assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $4.8 million in the
second quarter of 2000, compared with $5.7 million in the second quarter of
1999. For the six months, amortization of deferred acquisition costs totaled
$9.6 million in 2000 compared with $10.8 million in 1999.
ANNUAL COMMISSIONS represent renewal commissions, paid quarterly in arrears
to maintain the persistency of certain of the Company's fixed and variable
annuity contracts. Annual commissions totaled $94,000 in the second quarter of
2000 and $86,000 in the second quarter of 1999. For the six months, annual
commissions totaled $267,000 in 2000 and $168,000 in 1999.
INCOME TAX EXPENSE totaled $3.4 million in the second quarter of 2000,
compared with $1.5 million in the second quarter of 1999, representing effective
annualized tax rates of 44% and 42%, respectively. For the six months, such
expenses totaled $6.3 million in 2000 and $4.2 million in 1999, representing an
effective annualized tax rate of 41% for both 2000 and 1999.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY decreased to $154.1 million at June 30, 2000 from
$161.2 million at December 31, 1999, primarily due to a $16.0 million increase
in accumulated other comprehensive loss, partially offset by net income of $8.9
million recorded in 2000.
INVESTED ASSETS at June 30, 2000 totaled $1.57 billion compared with $1.81
billion at December 31, 1999. The Company manages most of its invested assets
internally. The Company's general investment philosophy is to hold fixed-rate
assets for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of its portfolio of bonds, notes
and redeemable preferred stocks (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
13
<PAGE>
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which constituted 84% of the Company's total investment
portfolio at June 30, 2000, had an amortized cost that was $86.3 million greater
than its aggregate fair value at June 30, 2000 and $64.2 million greater than
its aggregated fair value at December 31, 1999. The net unrealized losses on
the Bond Portfolio in 2000 principally reflect the recent increases in
prevailing interest rates and the corresponding effect on the fair value of the
Bond Portfolio at June 30, 2000.
At June 30, 2000 the Bond Portfolio (excluding $180,000 of redeemable
preferred stocks) included $1.31 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 $12.5 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by the
NAIC. At June 30, 2000, approximately $1.20 billion of the Bond Portfolio was
investment grade, including $537.7 million of U.S. government/agency securities
and mortgage-backed securities ("MBSs").
At June 30, 2000, the Bond Portfolio included $121.3 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for 5.1%
of the Company's total assets and 7.7% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material issuer concentrations of non-investment-grade securities
at June 30, 2000.
The table on the following page summarizes the Company's rated bonds by
rating classification as of June 30, 2000.
14
<PAGE>
<TABLE>
<CAPTION>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
Issues not rated by S&P/Moody's
Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total
-------------------------------------------------------------------------------------------------------------------
S&P/(Moody's) Estimated NAIC Estimated Estimated Percent of
[DCR] {Fitch} Amortized fair category Amortized fair Amortized fair invested
category (1) cost value (2) cost value cost value assets
------------------- ---------- ---------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(A11 to A3)
[AAA to A-]
{AAA to A-} . . . $ 952,888 $ 910,357 1 $ 55,086 $ 54,754 $1,007,974 $ 965,111 61.30%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}. . 202,836 194,735 2 38,897 37,155 241,733 231,890 14.73
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 13,087 9,911 3 --- --- 13,087 9,911 0.63
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}. . . . 87,871 75,996 4 22,550 20,694 110,421 96,690 6.14
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}. . . 24,201 8,345 5 5,795 5,507 29,996 13,852 0.88
CI to D
[DD]
{D} --- --- 6 1,385 865 1,385 865 0.05
---------- ---------- ---------- ---------- ---------- ----------
TOTAL RATED ISSUES. $1,280,883 $1,199,344 $ 123,713 $ 118,975 $1,404,596 $1,318,319
========== ========== ========== ========== ========== ==========
<FN>
Footnotes appear on the following page.
</TABLE>
15
<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 $12.5 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
16
<PAGE>
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $74.6 million at June 30, 2000. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At June
30, 2000, Secured Loans consisted of $56.4 million of privately traded
securities and $18.2 million of publicly traded securities. These Secured Loans
are composed of loans to borrowers spanning 9 industries, with 19% of these
assets concentrated in utilities, 8% concentrated in technology and 7%
concentrated in energy. No other industry concentration constituted more than
6% of these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company,
pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $198.8 million at June 30, 2000 and consisted of
137 commercial first mortgage loans with an average loan balance of
approximately $1.5 million, collateralized by properties located in 32 states.
Approximately 37% of this portfolio was office, 24% was retail, 15% was
industrial, 12% was multifamily residential and 12% was other types. At June
30, 2000, approximately 32% of this portfolio was secured by properties located
in California, approximately 11% by properties located in Michigan,
approximately 9% by properties located in New York and no more than 5% of this
portfolio was secured by properties located in any other single state. At June
30, 2000, one mortgage loan had an outstanding balance of $10.0 million or more,
which represented approximately 5% of this portfolio, and approximately 31% of
the mortgage loan portfolio consisted of loans with balloon payments due before
July 1, 2003. During 2000 and 1999, loans delinquent by more than 90 days,
foreclosed loans and restructured loans have not been significant in relation to
the total mortgage loan portfolio.
At June 30, 2000, approximately 55% of the mortgage loans were seasoned
loans underwritten to the Company's standards and purchased at or near par from
other financial institutions. Such loans generally have higher average interest
rates than loans that could be originated today. The balance of the mortgage
loan portfolio has been originated by the Company under strict underwriting
standards. Commercial mortgage loans on properties such as offices, hotels and
shopping centers generally represent a higher level of risk than do mortgage
loans secured by multifamily residences. This greater risk is due to several
factors, including the larger size of such loans and the more immediate effects
of general economic conditions on these commercial property types. However, due
to the seasoned nature of the Company's mortgage loan portfolio and its strict
underwriting standards utilized, the Company believes that it has prudently
managed the risk attributable to its mortgage loan portfolio while maintaining
attractive yields.
17
<PAGE>
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The
Company does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed-rate investments are priced
over the yield curve, default rates, and general economic conditions. Its
portfolio strategy is constructed with a view to achieve adequate risk-adjusted
returns consistent with its investment objectives of effective asset-liability
matching, liquidity and safety. The Company's fixed-rate products incorporate
surrender charges or other restrictions in order to encourage persistency.
Approximately 81% of the Company's fixed annuity and universal life reserves had
surrender penalties or other restrictions at June 30, 2000.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred stocks; and mortgage loans. At June 30, 2000, these assets
had an aggregate fair value of $1.57 billion with a duration of 3.8. The
Company's fixed-rate liabilities are its fixed annuity and universal life
insurance contracts. At June 30, 2000, these liabilities had an aggregate fair
value (determined by discounting future contractual cash flows by related market
rates of interest) of $1.52 billion with a duration of 3.6. The Company's
potential exposure due to a relative 10% increase in prevailing interest rates
from their June 30, 2000 levels is a loss of approximately $2.9 million,
representing an increase in the fair value of its fixed-rate liabilities that is
not offset by an increase in the fair value of its fixed-rate assets. Because
the Company actively manages its assets and liabilities and has strategies in
place to minimize its exposure to loss as interest rate changes occur, it
expects that actual losses would be less than the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity and universal life 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
18
<PAGE>
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 Company's policy that
these agreements are entered into with counterparties who have a debt rating of
A/A2 or better from both S&P and Moody's. The Company continually monitors its
credit exposure with respect to these agreements. The primary risk associated
with MBSs is that a changing interest rate environment might cause prepayment of
the underlying obligations at speeds slower or faster than anticipated at the
time of their purchase. As part of its decision to purchase an MBS, the Company
assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is purchased,
the Company monitors its actual prepayment experience monthly to reassess the
relative attractiveness of the security with the intent to maximize total
return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrower's recent financial performance, news reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral.
The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment on mortgage loans are based on losses expected by management to be
realized on transfers of mortgage loans to real estate, on the disposition and
settlement of mortgage loans and on
19
<PAGE>
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $14.4 million ($3.4 million of
mortgage loans and $11.0 million of bonds) at June 30, 2000, and constituted
0.9% of total invested assets. At December 31, 1999 defaulted investments
totaled $1.8 million of mortgage loans and constituted 0.1% of total invested
assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At June 30, 2000, approximately $1.10 billion of the Company's Bond
Portfolio had an aggregate unrealized loss of $89.8 million, while approximately
$214.0 million of the Bond Portfolio had an aggregate unrealized gain of $3.5
million. In addition, the Company's investment portfolio currently provides
approximately $16.7 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sales
of the Company's annuity products have been more than sufficient in amount to
satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, the Company believes
that a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
REGULATION
The Company, in common with other insurers, is subject to regulation and
supervision by the states and by other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally has
its source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to approval
of policy forms and rates, the standards of solvency that must be met and
maintained, including risk based capital measurements, the licensing of
insurers and their agents, the nature of and
20
<PAGE>
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 June 30, 2000.
Federal legislation has been recently enacted allowing combinations between
insurance companies, banks and other entities. It is not yet known what effect
this legislation will have on insurance companies. In addition, from time to
time, Federal initiatives are proposed that could affect the Company's
businesses. Such initiatives include employee benefit plan regulations and tax
law changes affecting the taxation of insurance companies and the tax treatment
of insurance and other investment products. Proposals made in recent years to
limit the tax deferral of annuities or otherwise modify the tax rules related to
the treatment of annuities have not been enacted. While certain of such
proposals, if implemented, could have an adverse effect on the Company's sales
of affected products, and, consequently, on its results of operations, the
Company believes these proposals have a small likelihood of being enacted,
because they would discourage retirement savings and there is strong public and
industry opposition to them.
21
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 19 and 20
herein.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
------------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
----------------------------------
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
------------------------------------------------------------
Not applicable.
Item 5. Other Information
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------
EXHIBITS
Exhibit
No. Description
----- -----------
27 Financial Data Schedule
REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the first
quarter ended June 30, 2000.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SUNAMERICA LIFE INSURANCE COMPANY
-------------------------------------------
Registrant
Date: August 15, 2000 /s/ N. SCOTT GILLIS
------------------------ ----------------------
N. Scott Gillis
Senior Vice President
(Principal Financial Officer)
Date: August 15, 2000 /s/ MAURICE S. HEBERT
------------------------ ------------------------
Maurice S. Hebert
Vice President and Controller
(Principal Accounting Officer)
24
<PAGE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
LIST OF EXHIBITS FILED
Exhibit
No. Description
----- -----------
27 Financial Data Schedule.
25
