<PAGE> 1
File Nos. 33-81472
811-8626
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 7 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [ X ]
Amendment No. 8
(Check appropriate box or boxes)
VARIABLE ANNUITY ACCOUNT TWO
(Exact Name of Registrant)
Anchor National Life Insurance Company
(Name of Depositor)
1 SunAmerica Center
Los Angeles, California 90067-6022
(Address of Depositor's Principal Offices) (Zip Code)
Depositor's Telephone Number, including Area Code
(310) 772-6000
Susan L. Harris, Esq.
Anchor National Life Insurance Company
1 SunAmerica Center
Los Angeles, California 90067-6022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
---
X on December 29, 1999 pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a)(1) of Rule 485
---
on [ ] pursuant to paragraph (a)(1) of Rule 485
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<PAGE> 2
VARIABLE ANNUITY ACCOUNT TWO
Cross Reference Sheet
PART A - PROSPECTUS
Item Number in Form N-4 Caption
- ----------------------- -------
1. Cover Page............................. Cover Page
2. Definitions............................ Definitions
3. Synopsis............................... Fee Tables; Examples
4. Condensed Financial Information........ Appendix D -- Condensed
Financial Information-
Accumulation Unit Values
5. General Description of Registrant,
Depositor and Portfolio Companies... Description of the
Company, the Separate
Account and the General
Account; Variable Portfolio
Options; Additional
Information About the
Company
6. Deductions............................. Contract Charges
7. General Description of
Variable Annuity Contracts............. Description of the Contracts;
Income Phase; Purchases,
Withdrawals and Contract Value
8. Annuity Period......................... Income Phase
9. Death Benefit.......................... Description of the
Contracts; Income Phase
10. Purchases and Contract Value........... Purchases, Withdrawals
and Contract Value
11. Redemptions............................ Purchases, Withdrawals
and Contract Value
12. Taxes.................................. Taxes
13. Legal Proceedings...................... Legal Proceedings
14. Table of Contents of Statement
of Additional Information.............. Additional Information
About the Separate
Account
<PAGE> 3
PART B - STATEMENT OF ADDITIONAL INFORMATION
Certain information required in part B of the Registration Statement has
been included within the Prospectus forming part of this Registration Statement;
the following cross-references suffixed with a "P" are made by reference to the
captions in the Prospectus.
Item Number in Form N-4 Caption
- ----------------------- -------
15. Cover Page............................. Cover Page
16. Table of Contents...................... Table of Contents
17. General Information and History........ Description of the
Company, the Separate
Account and the General
Account(P); Variable
Portfolio Options(P);
Additional Information
About the Company(P)
18. Services............................... Contract Charges(P);
Custodian(P); Financial
Statements
19. Purchase of Securities Being Offered... Purchases, Withdrawals
and Contract Value(P)
20. Underwriters........................... Purchases, Withdrawals
and Contract Value(P);
Distribution of Contracts
21. Calculation of Performance Data........ Performance Data
22. Annuity Payments....................... Income Phase(P);
Annuity Unit Values;
Income Payments
23. Financial Statements................... Depositor: Financial
Statements;
Registrant: Financial
Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 4
VISTA CAPITAL ADVANTAGE
PROSPECTUS
DECEMBER 29, 1999
FLEXIBLE PAYMENT GROUP DEFERRED ANNUITY CONTRACTS
ISSUED BY
ANCHOR NATIONAL LIFE INSURANCE COMPANY
IN CONNECTION WITH
VARIABLE ANNUITY ACCOUNT TWO
The annuity has 11 investment choices - 5 fixed account options and 6
variable investment portfolios listed below. The 5 fixed account options include
market value adjustment fixed accounts for specified periods of 1, 3, 5, 7 and
10 years. Each of the 6 variable investment portfolios invest solely in the
shares of one of the following currently available underlying Funds of Mutual
Fund Variable Annuity Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
Additional Underlying Funds may be made available in the future.
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the Vista Capital
Advantage Variable Annuity.
To learn more about the annuity offered by this prospectus, you can
obtain a copy of the Statement of Additional Information ("SAI") dated December
29, 1999. The SAI has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this prospectus. The Table of
Contents of the SAI appears on page 29 of this prospectus. For a free copy of
the SAI, call us at (800) 445-SUN2 or write to us at our Annuity Service Center,
P.O. Box 54299, Los Angeles, California 90054-0299.
In addition, the SEC maintains a website (http://www.sec.gov) that
contains the SAI, materials incorporated by reference and other information
filed electronically with the SEC by Anchor National.
ANNUITIES INVOLVE RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AND ARE
NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THEY ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
Anchor National's Annual Report on Form 10-K for the year ended September
30, 1998, and its quarterly report on Form 10-Q for the quarters ended December
31, 1998, March 31, 1999, June 30, 1999 and September 30, 1999 are incorporated
herein by reference. In addition, Anchor National filed three reports on Form
8-K on January 14 and 15 and March 12, 1999. These reports are also incorporated
herein by reference.
All documents or reports filed by Anchor National under Section 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") after the effective date of this prospectus are also
incorporated by reference. Statements contained in this prospectus and
subsequently filed documents which are incorporated by reference or deemed to be
incorporated by reference are deemed to modify or supersede documents
incorporated herein by reference.
Anchor National files its Exchange Act documents and reports, including its
annual and quarterly reports on Form 10-K and Form 10-Q, electronically pursuant
to EDGAR under CIK No. 0000006342.
Anchor National is subject to the informational requirements of the
Securities and Exchange Act of 1934 (as amended). We file reports and other
information with the SEC to meet those requirements. You can inspect and copy
this information at SEC public facilities at the following locations:
WASHINGTON, DISTRICT OF COLUMBIA
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
CHICAGO, ILLINOIS
500 West Madison Street
Chicago, IL 60661
NEW YORK, NEW YORK
7 World Trade Center, 13th Fl.
New York, NY 10048
To obtain copies by mail contact the Washington, D.C. location. After you
pay the fees as prescribed by the rules and regulations of the SEC, the required
documents are mailed.
Registration statements under the Securities Act of 1933, as amended,
related to the contracts offered by this prospectus are on file with the SEC.
This prospectus does not contain all of the information contained in the
registration statements and exhibits. For further information regarding the
separate account, Anchor National and its general account, the Variable
Portfolios and the contract, please refer to the registration statements and
exhibits.
The SEC also maintains a website (http://www.sec.gov) that contains the
SAI, materials incorporated by reference and other information filed
electronically with the SEC by Anchor National.
Anchor National will provide without charge to each person to whom this
prospectus is delivered, upon written or oral request, a copy of the above
documents incorporated by reference. Requests for these documents should be
directed to Anchor National's Annuity Service Center, as follows:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
Telephone Number: (800) 445-SUN2
2
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SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
- --------------------------------------------------------------------------------
Indemnification for liabilities arising under the Securities Act of 1933
(the "Act") is provided to Anchor National's officers, directors and controlling
persons. The SEC has advised that it believes such indemnification is against
public policy under the Act and unenforceable. If a claim for indemnification
against such liabilities (other than for Anchor National's payment of expenses
incurred or paid by its directors, officers or controlling persons in the
successful defense of any legal action) is asserted by a director, officer or
controlling person of Anchor National in connection with the securities
registered under this prospectus, Anchor National will submit to a court with
jurisdiction to determine whether the indemnification is against public policy
under the Act. Anchor National will be governed by final judgment of the issue.
However, if in the opinion of Anchor National's counsel, this issue has been
determined by controlling precedent, Anchor National will not submit the issue
to a court for determination.
3
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM ----
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION........................................... 3
DEFINITIONS................................................. 5
SUMMARY..................................................... 6
FEE TABLES.................................................. 9
EXAMPLES.................................................... 10
PERFORMANCE DATA............................................ 11
DESCRIPTION OF ANCHOR NATIONAL, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT........................................... 11
Anchor National Life Insurance Company................. 11
Separate Account....................................... 12
General Account........................................ 12
VARIABLE PORTFOLIO OPTIONS.................................. 12
Voting Rights.......................................... 13
Substitution of Securities............................. 13
FIXED ACCOUNT OPTIONS....................................... 14
Fixed Accounts......................................... 14
Market Value Adjustment ("MVA")........................ 14
CONTRACT CHARGES............................................ 14
Insurance Charges...................................... 15
Withdrawal Charges..................................... 15
Investment Charges..................................... 15
Contract Maintenance Fee............................... 15
Transfer Fee........................................... 15
Premium Tax............................................ 16
Income Taxes........................................... 16
Reduction or Elimination of Charges and Expenses, and
Additional Amounts Credited........................... 16
Free Withdrawal Amount................................. 16
Nursing Home Waiver.................................... 17
DESCRIPTION OF THE CONTRACTS................................ 17
Summary................................................ 17
Ownership.............................................. 17
Annuitant.............................................. 17
Modification of the Contract........................... 17
Assignment............................................. 17
Death Benefit.......................................... 18
PURCHASES, WITHDRAWALS AND CONTRACT VALUE................... 19
Purchase Payments...................................... 19
Allocation of Purchase Payments........................ 19
Accumulation Units..................................... 19
Free Look.............................................. 20
Transfers During the Accumulation Phase................ 20
Automatic Dollar Cost Averaging Program................ 21
Asset Allocation Rebalancing........................... 22
Principal Advantage Program............................ 22
Withdrawals............................................ 22
Systematic Withdrawal Program.......................... 23
Minimum Contract Value................................. 23
INCOME PHASE................................................ 23
Annuity Date........................................... 23
Income Options......................................... 24
Transfers During the Income Phase...................... 25
Deferment of Payments.................................. 25
TAXES....................................................... 25
Annuity Contracts in General........................... 25
Tax Treatment of Distributions -- Non-qualified
Contracts............................................. 26
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
ITEM ----
<S> <C>
Tax Treatment of Distributions -- Qualified Contracts....... 26
Minimum Distributions.................................. 26
Diversification........................................ 26
ADMINISTRATION.............................................. 27
Year 2000.............................................. 27
Distribution of Contracts.............................. 28
CUSTODIAN................................................... 28
LEGAL PROCEEDINGS........................................... 28
REGISTRATION STATEMENT...................................... 29
INDEPENDENT ACCOUNTANTS..................................... 29
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.... 29
APPENDIX A -- MARKET VALUE ADJUSTMENT ("MVA")............... A-1
APPENDIX B -- WITHDRAWALS AND WITHDRAWAL CHARGES............ B-1
APPENDIX C -- PREMIUM TAXES................................. C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION............... D-1
</TABLE>
All financial representatives or agents that sell the contracts offered by this
prospectus are required to deliver a prospectus.
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DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PHASE -- The period during which you invest money in your contract.
ACCUMULATION UNIT -- A unit of measurement which we use to calculate the value
of the variable portion of your contract during the Accumulation Phase.
ANNUITANT(S) -- The person(s) on whose life (lives) we base income payments.
ANNUITY DATE -- The date on which income payments begin, as selected by you.
ANNUITY UNIT(S) -- A measurement we use to calculate the amount of income
payments you receive from the variable portion of your contract during the
Income Phase.
BENEFICIARY -- The person designated to receive any benefits under the contract
if you or the Annuitant dies.
INCOME PHASE -- The period during which we make income payments to you.
IRS -- The Internal Revenue Service.
NON-QUALIFIED (CONTRACT) -- A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account ("IRA").
PURCHASE PAYMENTS -- The money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it.
QUALIFIED (CONTRACT) -- A contract purchased with pre-tax dollars. These
contracts are generally purchased under a pension plan, specially sponsored
program or IRA.
TRUST -- Mutual Fund Variable Annuity Trust, an open-end management investment
company.
UNDERLYING FUND(S) -- The underlying series of the Trust in which the Variable
Portfolios invest.
VARIABLE PORTFOLIO(S) -- The variable investment options available under the
contract. Each Variable Portfolio has its own investment objective and is
invested in the underlying investments of the Trust.
5
<PAGE> 9
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SUMMARY
- --------------------------------------------------------------------------------
This summary sets forth some of the more important points that you should
know and consider before purchasing the Vista Variable Annuity. The remainder of
the prospectus discusses the topics in more detail. We urge you to read it
carefully and retain it, and the prospectus for the Trust, for future reference.
WHAT IS AN ANNUITY CONTRACT?
An annuity is a contract between you and an insurance company. You are the
owner of the contract. The contract provides three main benefits:
- Tax Deferral: This means that you do not pay taxes on your earnings from
the annuity until you withdraw them.
- Death Benefit: If you die during the Accumulation Phase, the insurance
company pays a death benefit to your Beneficiary.
- Guaranteed Income: If elected, you receive a stream of income for your
lifetime, or another available period you select.
Tax-qualified retirement plans (e.g., IRAs, 401(k) or 403(b) plans) defer
payment of taxes on earnings until withdrawal. If you are considering funding a
tax-qualified retirement plan with an annuity, you should know that an annuity
does not provide any additional tax deferral treatment of earnings beyond the
treatment provided by the tax-qualified retirement plan itself. However,
annuities do provide other features and benefits which may be valuable to you.
You should fully discuss this decision with your financial representative.
The Vista Variable Annuity is a contract between you and Anchor National
(the Company, Us, We). It is designed to help you invest on a tax deferred basis
and meet long-term financial goals, such as retirement funding.
Like most annuities, this contract has an Accumulation Phase and an Income
Phase. During the Accumulation Phase, you invest money in your contract. Your
earnings are based on the investment performance of the Variable Portfolios you
allocate money to and/or the interest rate earned on fixed account options.
During the Income Phase, you will receive income payments from your annuity.
Your payments may be fixed in dollar amount, may vary with investment
performance of the Variable Portfolios or be a combination of both. Among other
factors, the amount of money you are able to accumulate in your contract during
the Accumulation Phase will determine the amount of your payments during the
Income Phase.
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
A fixed annuity earns interest at a fixed rate guaranteed by the insurance
company. A variable annuity typically provides a fixed account option but also
provides Variable Portfolios. The Variable Portfolios are similar to a mutual
fund, but are only available through the purchase of an annuity. Most
significantly, you as the contract owner bear the entire investment risk with
respect to any Purchase Payments allocated to the Variable Portfolios of an
annuity. This means that the value of your contract will go up and down,
depending on the performance of the Variable Portfolios.
Vista Variable Annuity is a variable annuity with five fixed account
options and six Variable Portfolios.
6
<PAGE> 10
WHAT ARE THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT?
You may allocate money to the following Variable Portfolios of the Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
You may also allocate money to the fixed account options for periods of 1,
3, 5, 7 and 10 years. We call these time periods guarantee periods. Anchor
National guarantees the interest rate credited to money in a fixed account
option. The interest rate offered for different guarantee periods may differ
from time to time, but we will never credit less than a 3% annual effective
rate. Additionally, if you allocate money to a fixed account option and withdraw
all or part of it prior to the end of the guarantee period, you may incur an
adjustment to the value of your contract called a market value adjustment (a
"MVA"). A MVA can decrease or increase the value of your contract.
During the Accumulation Phase, you may transfer among the Variable
Portfolios and/or the fixed account options. Fifteen free transfers are
permitted per contract year. After that, we assess a transfer fee. A MVA may
also apply in the case of a transfer from a fixed account option.
HOW MAY I ACCESS MY MONEY?
During the Accumulation Phase, earnings may be withdrawn at any time
without incurring a withdrawal charge. After the first contract year, your first
withdrawal each contract year will be free of a withdrawal charge if it does not
exceed the greater of: (1) earnings in your contract or (2) 10% of your Purchase
Payments still subject to a withdrawal charge which have been in your contract
for at least a year and not previously withdrawn. You will not get the benefit
of a free withdrawal amount upon a full surrender of your contract.
Withdrawals in excess of these limits may be assessed a withdrawal charge.
Generally, withdrawals may be made from your contract in the amount of $1,000 or
more. You may request withdrawals in writing or by establishing systematic
withdrawals. Under systematic withdrawals, the minimum withdrawal amount is
$250.
There are no withdrawal charges on that portion of your money invested for
seven years or more. Of course, upon a withdrawal you may have to pay income
tax. A 10% IRS penalty tax may also apply if you are under age 59 1/2.
Additionally, we do not assess withdrawal charges upon payment of a death
benefit or when you switch to the Income Phase.
CAN I EXAMINE THE CONTRACT?
You may cancel your contract within ten days after receiving it (or longer
if required by state law). We call this a "free look." To cancel, you must mail
the contract along with your free look request to our Annuity Service Center at
P.O. Box 54299, Los Angeles, California 90054-0299. We will refund the value of
your contract (unless otherwise required by state law). Its value may be more or
less than the money you initially invested.
Certain states require us to return your Purchase Payments upon a free look
request. Additionally, all contracts issued as an IRA require the full return of
Purchase Payments upon a free look.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
Each year, we deduct a $30 contract maintenance fee from your contract. We
also deduct insurance charges which equal 1.40% annually of the average daily
value of your contract allocated to the Variable Portfolios. The insurance
charges include: mortality and expense risk, 1.25%, and distribution expense,
.15%. There are no insurance charges deducted from amounts allocated to the
fixed account options.
7
<PAGE> 11
As with other professionally managed investments, there are also investment
charges imposed on contracts with money allocated to the Variable Portfolios,
which are estimated to range from .55% to 1.10%.
If you take money out in excess of the amount allowed for in your contract,
you may be assessed a withdrawal charge which is a percentage of the Purchase
Payments you withdraw. The percentage declines with each year the money is in
the contract as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8+
- ---------------------------------------------------------------------------------------------
WITHDRAWAL
CHARGE 6% 6% 5% 5% 4% 3% 2% 0%
- ---------------------------------------------------------------------------------------------
</TABLE>
Each year, you are allowed to make 15 transfers without charge. After your
first 15 free transfers, a $25 transfer fee ($10 in Pennsylvania and Texas) will
apply to each subsequent transfer.
In a limited number of states, you may also be assessed a state premium tax
of up to 3.5% depending upon the state.
WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT?
If you die during the Accumulation Phase of your contract, your Beneficiary
will receive a death benefit.
If you were less than age 70 when your contract was issued, the death
benefit is the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals (and any fees or charges
applicable to such withdrawals); or
3. the maximum anniversary value on any contract anniversary preceding your
death. The anniversary value equals the value of your contract on a
contract anniversary plus any Purchase Payments and less any withdrawals
(and any fees or charges applicable to such withdrawals) since that
contract anniversary.
If you were age 70 or older when your contract was issued, the death
benefit will equal the value of your contract at the time we receive
satisfactory proof of death.
WHAT ARE THE AVAILABLE INCOME OPTIONS UNDER THE CONTRACT?
You can select from one of five income options:
(1) payments for your lifetime;
(2) payments for your lifetime and your survivor's lifetime;
(3) payments for your lifetime and your survivor's lifetime, but for not
less than 10 years;
(4) payments for your lifetime, but for not less than 10 or 20 years; and
(5) payments for a specified period of 3 to 30 years.
You will also need to decide when your income payments begin and if you
want your income payments to fluctuate with investment performance or remain
constant. Once you begin receiving income payments, you cannot change your
income option.
If your contract is part of a Non-qualified retirement plan (one that is
established with after-tax dollars), payments during the Income Phase are
considered partly a return of your original investment. The "original
investment" part of each payment is not taxable as income. For contracts which
are part of a Qualified retirement plan using before-tax dollars, the entire
payment is taxable as income.
8
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FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
YEAR
<S> <C>
One......................................................... 6%
Two.................................................. 6%
Three................................................ 5%
Four................................................. 5%
Five................................................. 4%
Six.................................................. 3%
Seven................................................ 2%
Eight and later...................................... 0%
ANNUAL CONTRACT MAINTENANCE FEE............................. $30
TRANSFER FEE................................................ $25*
(No transfer fee applies to the first 15 transfers in a
contract year.)
</TABLE>
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* $10 in Texas and Pennsylvania.
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE....................................... 0.90%
EXPENSE RISK CHARGE......................................... 0.35%
DISTRIBUTION EXPENSE CHARGE................................. 0.15%
----
TOTAL EXPENSE CHARGE................................. 1.40%
====
</TABLE>
ANNUAL TRUST EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER REIMBURSEMENT OR WAIVER OF EXPENSES
FOR THE TRUST'S
FISCAL YEAR ENDED AUGUST 31, 1999):
<TABLE>
<CAPTION>
TOTAL ANNUAL
ADVISORY FEE ADMINISTRATION FEE OTHER EXPENSES EXPENSES*
--------------------- --------------------- -------------- ------------
<S> <C> <C> <C> <C>
International Equity................ .00% .00% 1.10% 1.10%
Capital Growth...................... .00% .00% .90% .90%
Growth and Income................... .15% .00% .75% .90%
Asset Allocation.................... .00% .00% .85% .85%
U.S. Government Income.............. .00% .00% .80% .80%
Money Market........................ .00% .00% .55% .55%
</TABLE>
- ---------------
* Absent fee waivers or reimbursement of expenses by the adviser, you would have
incurred the following expenses during the last fiscal year: International
Equity [3.0]%; Capital Growth [1.7]%; Growth and Income [1.35]%; Asset
Allocation [2.0]%; U.S. Government Income [2.0]%; and Money Market [2.5]%.
THE ABOVE EXPENSES WERE PROVIDED BY THE TRUST. THE COMPANY HAS NOT
VERIFIED THE ACCURACY OF THE INFORMATION.
9
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EXAMPLES
- --------------------------------------------------------------------------------
You will pay the following expenses on a $1,000 investment in each Variable
Portfolio, assuming a 5% annual return on assets, and:
(a) You surrender the contract at the end of the stated time period;
(b) You do not surrender the contract.*
<TABLE>
<CAPTION>
TIME PERIODS
----------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
International Equity......................... (a) $86 $130 $176 $289
(b) $26 $ 80 $136 $289
Capital Growth............................... (a) $84 $124 $166 $269
(b) $24 $ 74 $126 $269
Growth and Income............................ (a) $84 $124 $166 $269
(b) $24 $ 74 $126 $269
Asset Allocation............................. (a) $83 $122 $163 $264
(b) $23 $ 72 $123 $264
U.S. Government Income....................... (a) $83 $121 $161 $259
(b) $23 $ 71 $121 $259
Money Market................................. (a) $80 $113 $148 $234
(b) $20 $ 63 $108 $234
</TABLE>
- ---------------
* We do not currently assess a surrender charge upon annuitization.
EXPLANATION OF FEE TABLES AND EXAMPLES
1. The purpose of the Fee Tables is to show you the various expenses you would
incur directly and indirectly by investing in the contract.
2. For the Underlying Funds the adviser, The Chase Manhattan Bank, has
voluntarily agreed to waive fees or reimburse certain expenses, to keep
annual operating expenses at the levels indicated under "Annual Trust
Expenses" on the prior page. The adviser also may voluntarily waive or
reimburse additional amounts to increase an Underlying Fund's investment
return. All waivers and/or reimbursements may be terminated at any time.
Furthermore, the adviser may recoup any waivers or reimbursements within two
years after such waivers or reimbursements are granted, provided that the
Underlying Fund is able to make such payment and remain in compliance with
the foregoing expense limitations.
3. The Examples assume that no transfer fees were imposed. Although premium
taxes may apply in certain states, they are not reflected in the Examples.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE HISTORICAL ACCUMULATION UNIT VALUES ARE CONTAINED IN APPENDIX
D -- CONDENSED FINANCIAL INFORMATION.
10
<PAGE> 14
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PERFORMANCE DATA
- --------------------------------------------------------------------------------
We advertise the Money Market Portfolio's "yield" and "effective yield."
Both figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Money Market Portfolio refers to the net
income generated for a contract funded by an investment in the Money Market
Portfolio over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Money Market Portfolio is assumed to
be reinvested at the end of each seven-day period. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. Neither the yield nor the effective yield takes into
consideration the effect of any capital changes that might have occurred during
the seven-day period, nor do they reflect the impact of premium taxes or any
withdrawal charges. The impact of other recurring charges on both yield figures
is, however, reflected in them to the same extent it would affect the yield (or
effective yield) for a contract of average size.
In addition, the separate account may advertise "total return" data for its
other Variable Portfolios. Like the yield figures described above, total return
figures are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Variable Portfolio made at the beginning of the period,
will produce the same contract value at the end of the period that the
hypothetical investment would have produced over the same period (assuming a
complete redemption of the contract at the end of the period). Recurring
contract charges are reflected in the total return figures in the same manner as
they are reflected in the yield data for contracts funded through the Money
Market Portfolio. The effect of applicable withdrawal charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
The separate account may also advertise an annualized 30-day (or one month)
yield figure for Variable Portfolios other than the Money Market Portfolio.
These yield figures are based upon the actual performance of the Variable
Portfolio over a 30-day (or one month) period ending on a date specified in the
advertisement. Like the total return data described above, the 30-day (or one
month) yield data will reflect the effect of all recurring contract charges (but
will not reflect any withdrawal charges or premium taxes). The yield figure is
derived from net investment gain (or loss) over the period expressed as a
fraction of the investment's value at the end of the period.
More detailed information on the computation of advertised performance data
for the separate account is contained in the SAI.
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DESCRIPTION OF ANCHOR NATIONAL, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
ANCHOR NATIONAL LIFE INSURANCE COMPANY
Anchor National issues the Vista Capital Advantage Variable Annuity. When
you purchase a Vista Capital Advantage Variable Annuity, a contract exists
between you and Anchor National. Anchor National is a stock life insurance
company organized under the laws of the state of Arizona. Its principal place of
business is 1 SunAmerica Center, Los Angeles, California 90067. We conduct life
insurance and annuity business in the District of Columbia and all states except
New York. Anchor National is an indirect wholly-owned subsidiary of American
International Group, Inc. ("AIG"), a Delaware corporation.
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<PAGE> 15
Anchor National and its affiliates, SunAmerica Life Insurance Company,
First SunAmerica Life Insurance Company, CalAmerica Life Insurance Company,
SunAmerica National Life Insurance Company, SunAmerica Asset Management Corp.,
Resources Trust Company and the SunAmerica Financial Network, Inc.
broker-dealers, specialize in retirement savings and investment products and
services. Business focuses include fixed and variable annuities, mutual funds,
premium finance, broker-dealer services and trust administration services.
Anchor National may advertise the rating and other information assigned to
it by independent industry ratings organizations. Some of those organizations
are A.M. Best Company ("A.M. Best"), Moody's Investor's Service ("Moody's"),
Standard & Poor's Insurance Rating Services ("S&P"), and Duff & Phelps. A.M.
Best's and Moody's ratings reflect their current opinion of Anchor National's
financial strength and performance in comparison to others in the life and
health insurance industry. S&P's and Duff & Phelps' ratings measure the ability
of an insurance company to meet its obligations under insurance policies it
issues. These two ratings do not measure the insurer's ability to meet non-
policy obligations. These ratings do not relate to the performance of the
Variable Portfolios.
SEPARATE ACCOUNT
Anchor National originally established Variable Annuity Account Two (the
"separate account") on May 24, 1994. The separate account is registered with the
SEC as a unit investment trust under the Investment Company Act of 1940, as
amended. Anchor National owns the assets of the separate account. However, the
assets in the separate account are not chargeable with liabilities arising out
of any other business conducted by Anchor National. Income, gains, and losses
(realized and unrealized), resulting from assets in the separate account are
credited to or charged against the separate account without regard to other
income, gains, or losses of Anchor National.
GENERAL ACCOUNT
Money allocated to the fixed account options goes into Anchor National's
general account. The general account consists of all of Anchor National's assets
other than assets attributable to a separate account. All of the assets in the
general account are chargeable with the claims of any Anchor National contract
holders as well as all of its creditors. The general account funds are invested
as permitted under state insurance laws.
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VARIABLE PORTFOLIO OPTIONS
- --------------------------------------------------------------------------------
The contract currently offers six variable investment Variable Portfolios.
These Variable Portfolios invest in shares of the Trust. These Variable
Portfolios operate similarly to a mutual fund but are only available through the
purchase of this annuity contract. The Underlying Funds are:
<TABLE>
<S> <C>
- INTERNATIONAL EQUITY - ASSET ALLOCATION
- CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- GROWTH AND INCOME - MONEY MARKET
</TABLE>
The Chase Manhattan Bank ("Chase" or the "Adviser") acts as investment
adviser, administrator and custodian for the Trust. Chase Asset Management, Inc.
("CAM") is the investment subadviser to each of the Variable Portfolios except
the International Equity Portfolio. Chase Asset Management (London) Limited, an
English corporation ("CAM London") is the investment subadviser to the
International Equity Portfolio. As investment adviser to the Underlying Funds,
Chase makes investment decisions subject to policies set by the Board of
Trustees of the Trust. As administrator of the Underlying Funds, Chase provides
certain services including coordinating relationships with independent
contractors and agents; preparing and filing of certain documents; preparing
financial statements; arranging for the maintenance of books and records; and
providing office facilities. Certain of these services have been delegated to
Vista Fund Distributors, Inc.
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<PAGE> 16
("VFD") which serves as sub-administrator to the Underlying Funds. As custodian
for the Underlying Funds, Chase's responsibilities include safeguarding and
controlling the Underlying Funds' cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest on
investments, maintaining books of original entry and other required books and
accounts, and calculating daily net asset values.
The Underlying Funds' investment objectives are as follows:
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation and
income by investing primarily in a portfolio of marketable equity securities of
issuers located throughout the world.
CAPITAL GROWTH PORTFOLIO seeks long-term capital appreciation. This
Variable Portfolio invests primarily in common stocks which are widely
diversified by industry and company.
GROWTH AND INCOME PORTFOLIO seeks growth of capital and income by investing
primarily in common stocks and other securities which demonstrate the potential
for appreciation and/or dividends.
ASSET ALLOCATION PORTFOLIO seeks high total return (including income and
capital gains) by investing in a diversified portfolio of equity and debt
securities, including common stocks, convertible securities and government and
corporate fixed-income obligations. The Adviser considers both the opportunity
for gain and the risk of loss in making investments, and may alter the
percentages of assets invested in equity and fixed income securities, depending
on the judgment of the Adviser as to general market and economic conditions,
trends and yields and interest rates and changes in fiscal and monetary
policies.
U.S. GOVERNMENT INCOME PORTFOLIO seeks relatively high current income,
liquidity and security of principal. This Variable Portfolio invests in
obligations issued, guaranteed or insured by the U.S. Government, its agencies
or instrumentalities. Neither the United States nor any of its agencies insures
or guarantees the market value of shares of this Variable Portfolio.
MONEY MARKET PORTFOLIO seeks high current income while preserving capital
by investing in a diversified selection of money market investments.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. You bear the complete investment risk for Purchase
Payments allocated to a Variable Portfolio. Contract values will fluctuate in
accordance with the investment performance of the Variable Portfolio(s).
Additionally, contract fees and charges reduce investment return.
You should read the prospectus for the trust carefully. The prospectus
contains detailed information about the underlying funds, including more
detailed information about each underlying funds' investment objective and risk
factors.
VOTING RIGHTS
Anchor National is the legal owner of the Trust's shares. However, when an
Underlying Fund solicits proxies in conjunction with a vote of shareholders, we
must obtain your instructions on how to vote those shares. We vote all of the
shares we own in proportion to your instructions. Should we determine that we
are no longer required to comply with these rules, we will vote the shares in
our own right.
SUBSTITUTION OF SECURITIES
If Underlying Funds become unavailable for investment, we may be required
to substitute shares of another Underlying Fund. We will seek prior approval of
the SEC and give you notice before substituting shares.
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<PAGE> 17
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
FIXED ACCOUNTS
The contract also offers fixed account options for periods of 1, 3, 5, 7 or
10 years. We call these time periods guarantee periods. All of these fixed
account options pay interest at rates set and guaranteed by Anchor National.
Interest rates may differ from time to time and are set at our sole discretion.
We will never credit less than a 3% annual effective rate to any of the fixed
account options. The interest rate offered for new Purchase Payments may differ
from interest rates offered for subsequent Purchase Payments and money already
in the fixed account options. In addition, different guarantee periods offer
different interest rates. Once established, the rates for specified payments do
not change during the specified period.
When a guarantee period ends, you may leave your money in the same
guarantee period. You may also reallocate your money to another fixed account
option or to the Variable Portfolios. If you want to reallocate your money you
must contact us within 30 days after the end of the current guarantee period and
instruct us how to reallocate the money. If we do not hear from you, we will
keep your money in the same guarantee period where it will earn the renewal
interest rate applicable at that time.
MARKET VALUE ADJUSTMENT ("MVA")
If you take money out of the fixed account options before the end of the
guarantee period, we make an adjustment to your contract (the "MVA"). The MVA
reflects any difference in the interest rate environment between the time you
place your money in the fixed account option and the time when you withdraw that
money. This adjustment can increase or decrease your contract value. You have 30
days after the end of each guarantee period to reallocate your funds without
incurring any MVA.
We calculate the MVA by doing a comparison between current rates and the
rate being credited to you in the fixed account option. For the current rate we
use a rate being offered by us for a guarantee period that is equal to the time
remaining in the guarantee period from which you seek withdrawal. If we are not
currently offering a guarantee period for that period of time, we determine an
applicable rate by using a formula to arrive at a number between the interest
rates currently offered for the two closest periods available.
Generally, if interest rates drop between the time you put your money into
the fixed account options and the time you take it out, we credit a positive
adjustment to your contract. Conversely, if interest rates increase during the
same period, we post a negative adjustment to your contract.
Where the MVA is negative, we deduct the adjustment from any money
remaining in the fixed account option. If there is not enough money in the fixed
account option to meet the negative deduction, we deduct the remainder from your
withdrawal. Where the MVA is positive, we add the adjustment to your withdrawal
amount.
APPENDIX A shows how to calculate the MVA.
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CONTRACT CHARGES
- --------------------------------------------------------------------------------
There are charges and expenses associated with your contract. These charges
and expenses reduce your investment return. We will not increase the contract
maintenance fee or the insurance and withdrawal charges under your contract.
However, the investment charges under your contract may increase or decrease.
Some states may require that we charge less than the amounts described below.
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<PAGE> 18
INSURANCE CHARGES
We deduct insurance charges of 1.40% annually of the average daily value of
your contract allocated to the Variable Portfolios. These charges are deducted
on a pro-rata basis from the value of your contract allocated to the Variable
Portfolios. There are no insurance charges deducted against amounts allocated to
the fixed account options.
The insurance charge compensates us for the mortality and expense risks and
the costs of contract distribution we assume. If these charges do not cover all
expenses, we will pay the difference. Likewise, if these charges exceed our
expenses, we will keep the difference.
WITHDRAWAL CHARGES
The contract provides a free withdrawal amount every year. (SEE CONTRACT
CHARGES, FREE WITHDRAWAL AMOUNT, PAGE 16.) Additionally, earnings in your
contract may be withdrawn free of withdrawal charges. If you take money out in
excess of the free withdrawal amount, you may incur a withdrawal charge.
We apply a withdrawal charge against each Purchase Payment you put into the
contract. After a Purchase Payment has been in the contract for seven complete
years, no withdrawal charge applies to that Purchase Payment. The withdrawal
charge equals a percentage of the Purchase Payment you take out of the contract.
The withdrawal charge percentage declines each year a Purchase Payment is in the
contract, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WITHDRAWAL CHARGE 6% 6% 5% 5% 4% 3% 2% 0%
- ------------------------------------------------------------------------------------------------------
</TABLE>
When calculating the withdrawal charge, we treat withdrawals as coming
first from the Purchase Payments that have been in your contract the longest.
However, for tax purposes, your withdrawals are considered earnings first, then
Purchase Payments.
Whenever possible, we deduct the withdrawal charge from the money remaining
in your contract. If you withdraw all of your contract value, applicable
withdrawal charges are deducted from the amount withdrawn.
We do not assess a withdrawal charge for money withdrawn to pay a death
benefit or to begin the Income Phase of your contract. Withdrawals made prior to
age 59 1/2 may result in a 10% IRS penalty tax. SEE TAXES, PAGE 25.
APPENDIX B provides more information on withdrawals and the withdrawal
charge.
INVESTMENT CHARGES
Charges are deducted from your Variable Portfolios for the advisory and
other expenses of the Underlying Funds. THE FEE TABLES LOCATED AT PAGE 9
illustrate these charges and expenses. For more detailed information on these
investment charges, refer to the attached prospectus for the Trust.
CONTRACT MAINTENANCE FEE
During the Accumulation Phase, we subtract a contract maintenance fee from
your account once per contract year. This charge compensates us for the cost of
contract administration. We deduct the $30 contract maintenance fee on a
pro-rata basis from your account value on your contract anniversary. If you
withdraw your entire contract value, the fee is deducted from that withdrawal.
TRANSFER FEE
The contract currently provides for 15 free transfers between investment
options each contract year. After that, a charge of $25 applies to each
additional transfer in any one contract year ($10 in Pennsylvania and Texas).
SEE TRANSFERS DURING THE ACCUMULATION PHASE, PAGE 20.
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<PAGE> 19
PREMIUM TAX
Certain states charge us a tax on the premiums you pay into the contract.
We deduct from your contract these premium tax charges. Currently, we deduct the
charge for premium taxes when you take a full withdrawal or begin the Income
Phase of the contract. In the future, we may assess this deduction at the time
you put Purchase Payment(s) into the contract or upon payment of a death
benefit.
APPENDIX C provides more information about premium taxes.
INCOME TAXES
We do not currently deduct income taxes from your contract. We reserve the
right to do so in the future.
REDUCTION OR ELIMINATION OF CHARGES AND EXPENSES, AND ADDITIONAL AMOUNTS
CREDITED
Sometimes sales of the contracts to groups of similarly situated
individuals may lower our administrative and/or sales expenses. We reserve the
right to reduce or waive certain charges and expenses when this type of sale
occurs. In addition, we may also credit additional interest to policies sold to
such groups. We determine which groups are eligible for such treatment. Some of
the criteria used to make a determination are: size of the group; amount of
expected Purchase Payments; relationship existing between us and prospective
purchaser; nature of the purchase; length of time a group of contracts is
expected to remain active; purpose of the purchase and whether that purpose
increases the likelihood that our expenses will be reduced; and/or any other
factors that we believe indicate that administrative and/or sales expenses may
be reduced.
We may make such a determination regarding sales to our employees, our
affiliates' employees and employees of currently contracted broker-dealers, our
registered representatives and immediate family members of all of those
described.
We reserve the right to change or modify any such determination or the
treatment applied to a particular group, at any time.
FREE WITHDRAWAL AMOUNT
Your contract provides for a free withdrawal amount. Purchase Payments that
are no longer subject to a withdrawal charge and not previously withdrawn, plus
earnings, may be withdrawn without penalty.
After the first full contract year, the contract provides for a free
withdrawal amount on your first withdrawal of the contract year. The free
withdrawal amount is the greater of (1) earnings in your contract and (2) 10% of
your total Purchase Payments invested for at least one year and not yet
withdrawn. Total Purchase Payments are equal to your total Purchase Payments
invested in the contract less any Purchase Payments withdrawn upon which a
surrender charge was paid and the amount of the surrender charge. Additionally,
once a Purchase Payment is no longer subject to withdrawal charges, it is no
longer included when determining total Purchase Payments.
Upon a full surrender of your contract, to the extent you previously
withdraw Purchase Payments free of a withdrawal charge under the free withdrawal
provision, we will recoup the full withdrawal charge on such amounts, as if that
money was still invested in the contract on the date of surrender.
We will waive the withdrawal charge upon payment of a death benefit. Where
legally permitted, the withdrawal charge may be eliminated when a contract is
issued to an officer, director or employee of the Company or its affiliates.
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<PAGE> 20
NURSING HOME WAIVER
If your contract was issued with the appropriate rider and you are confined
to a nursing home for 60 days or longer, we may waive the withdrawal charge
and/or the MVA on certain withdrawals prior to the Annuity Date (not available
in Texas). The waiver applies only to withdrawals made while you are in a
nursing home or within 90 days after you leave the nursing home. Your rider
prohibits use of this waiver during the first 90 days after purchase. In
addition, the confinement period for which you seek the waiver must begin after
you purchase your contract.
In order to use this waiver, you must submit with your withdrawal request,
the following documents: (1) a doctor's note recommending admittance to a
nursing home; (2) an admittance form which shows the type of facility you
entered; and (3) a bill from the nursing home which shows that you met the 60
day confinement requirement.
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DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
This contract works in two stages, the Accumulation Phase and the Income
Phase. Your contract is in the Accumulation Phase while you make payments into
the contract. The Income Phase begins when you request that we begin making
payments to you out of the money accumulated in your contract.
OWNERSHIP
The Vista Variable Annuity is a Flexible Payment Group Deferred Annuity
Contract. Anchor National issues a group contract to a contract holder for the
benefit of the participants in the group. As a participant in the group, you
will receive a certificate which evidences your ownership. As used in this
prospectus, the term contract refers to your certificate. In some states, a
Flexible Payment Individual Modified Guaranteed and Variable Deferred Annuity
Contract is available instead. Such a contract is identical to the contract
described in this prospectus, with the exception that we issue it directly to
the owner.
ANNUITANT
The annuitant is the person on whose life we base income payments. You may
change the Annuitant at any time before the Annuity Date. You may also designate
a second person on whose life, together with the annuitant, income payments
depend. If the annuitant dies before the Annuity Date, you must notify us and
select a new annuitant.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive a provision of the contract. Any change or waiver must be in
writing. We reserve the right to modify the terms of the contract as necessary
to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Non-qualified plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. We will not be bound by any assignment until written notice is
received by us at our Annuity Service Center. We are not responsible for the
validity, tax or other legal consequences of any assignment. An assignment will
not affect any payments we may make or actions we may take before we receive
notice of the assignment.
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If the contract is issued pursuant to a Qualified plan (or a Non-qualified
plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, YOU SHOULD CONSULT A
COMPETENT TAX ADVISER SHOULD YOU WISH TO ASSIGN YOUR CONTRACT.
DEATH BENEFIT
If you die during the Accumulation Phase of your contract, we pay a death
benefit to your Beneficiary.
If you were less than age 70 when your contract was issued, the death
benefit is equal to the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals (and any fees or charges
applicable to such withdrawals); or
3. the maximum anniversary value on any contract anniversary preceding your
death. The anniversary value equals the value of your contract on a
contract anniversary plus any Purchase Payments and less any withdrawals
(and any fees or charges applicable to such withdrawals) since that
contract anniversary.
If you were age 70 or older when your contract was issued, the death
benefit will equal the value of your contract at the time we receive
satisfactory proof of death.
We do not pay the death benefit if you die after you switch to the Income
Phase. However, if you die during the Income Phase, your Beneficiary receives
any remaining guaranteed income payments in accordance with the income option
you selected. (SEE INCOME PHASE, INCOME OPTIONS, PAGE 24.)
You name your Beneficiary. You may change the Beneficiary at any time,
unless you previously made an irrevocable Beneficiary designation.
We pay the death benefit when we receive satisfactory proof of death. We
consider the following satisfactory proof of death:
1. a certified copy of the death certificate; or
2. a certified copy of a decree of a court of competent jurisdiction as to
the finding of death; or
3. a written statement by a medical doctor who attended the deceased at the
time of death; or
4. any other proof satisfactory to us.
We may require additional proof before we pay the death benefit.
The death benefit payment must begin immediately upon receipt of all
necessary documents. In any event, the death benefit must be paid within 5 years
of the date of death unless the Beneficiary elects to have it payable in the
form of an income option. If the Beneficiary elects an income option, it must be
paid over the Beneficiary's lifetime or for a period not extending beyond the
Beneficiary's life expectancy. Payments must begin within one year of the date
of your death. If a Beneficiary does not elect a specific form of pay out within
60 days of our receipt of proof of death, we pay a lump sum death benefit to the
Beneficiary.
If the Beneficiary is the spouse of a deceased owner, he or she can elect
to continue the contract at the then current value. If the Beneficiary/spouse
continues the contract, we do not pay a death benefit to him or her.
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<PAGE> 22
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy a contract. Any
additional money you give us to invest in the contract after purchase is a
subsequent Purchase Payment.
This chart shows the minimum initial and subsequent Purchase Payments
permitted under your contract. These amounts depend upon whether your contract
is Qualified or Non-qualified for tax purposes. SEE TAXES, PAGE 25.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------
MINIMUM
MINIMUM INITIAL SUBSEQUENT
PURCHASE PAYMENT PURCHASE PAYMENT
- --------------------------------------------------------------------
Qualified $2,000 $250
- --------------------------------------------------------------------
Non-Qualified $5,000 $250
- --------------------------------------------------------------------
</TABLE>
Prior Company approval is required to accept Purchase Payments greater than
$1,500,000. Also, the optional automatic payment plan allows you to make
subsequent Purchase Payments of as little as $20.
We may refuse any Purchase Payment. In general, Anchor National will not
issue a Qualified contract to anyone who is age 70 1/2 or older, unless it is
shown that the minimum distribution required by the IRS is being made. In
addition, we may not issue a contract to anyone over age 85.
ALLOCATION OF PURCHASE PAYMENTS
We invest your Purchase Payments in the fixed and variable investment
options according to your instructions. If we receive a Purchase Payment without
allocation instructions, we invest the money according to your last allocation
instructions. SEE VARIABLE PORTFOLIO OPTIONS, PAGE 12 AND FIXED ACCOUNT OPTIONS,
PAGE 14.
In order to issue your contract, we must receive your completed
application, Purchase Payment allocation instructions and any other required
paperwork at our principal place of business. We allocate your initial purchase
payment within two days of receiving it. If we do not have complete information
necessary to issue your contract, we will contact you. If we do not have the
information necessary to issue your contract within 5 business days we will:
- Send your money back to you, or;
- Ask your permission to keep your money until we get the information
necessary to issue the contract.
ACCUMULATION UNITS
When you allocate a Purchase Payment to the Variable Portfolios, we credit
your contract with Accumulation Units of the separate account. We base the
number of Accumulation Units you receive on the unit value of the Variable
Portfolio as of the day we receive your money if we receive it before 1 p.m.
Pacific Standard Time, or on the next business day's unit value if we receive
your money after 1 p.m. Pacific Standard Time. The value of an Accumulation Unit
will go up and down based on the performance of the Variable Portfolios.
We calculate the value of an Accumulation Unit each day that the New York
Stock Exchange ("NYSE") is open as follows:
1. We determine the total value of money invested in a particular Variable
Portfolio;
2. We subtract from that amount all applicable contract charges; and
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<PAGE> 23
3. We divide this amount by the number of outstanding Accumulation Units.
We determine the number of Accumulation Units credited to your contract by
dividing the Purchase Payment by the Accumulation Unit value for the specific
Variable Portfolio.
EXAMPLE:
We receive a $25,000 Purchase Payment from you on Wednesday. You allocate
the money to the Asset Allocation Portfolio. The value of an Accumulation
Unit for the Asset Allocation Portfolio is $11.10 when the NYSE closes on
Wednesday. Your Purchase Payment of $25,000 is then divided by $11.10 and
we credit your contract on Wednesday night with 2252.52 Accumulation Units
of the Asset Allocation Portfolio.
Performance of the Variable Portfolios and the charges and expenses under
your contract affect Accumulation Unit values. These factors cause the value of
your contract to go up and down.
FREE LOOK
You may cancel your contract within ten days after receiving it (or longer
if required by state law). Anchor National calls this a "free look." To cancel,
you must mail the contract along with your free look request to the Annuity
Service Center at P.O. Box 54299, Los Angeles, California 90054-0299. We will
refund the value of your contract on the day we receive your request. The amount
refunded to you may be more or less than the amount you originally invested.
Certain states require us to return your Purchase Payments upon a free look
request. Additionally, all contracts issued as an IRA require the full return of
Purchase Payments upon a free look.
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase you may transfer funds between the Variable
Portfolios and/or the fixed account options. You must transfer at least $100. If
less than $100 will remain in any Variable Portfolio after a transfer, that
amount must be transferred as well.
You may request transfers of your account value between the Variable
Portfolios and/or the fixed account options in writing or by telephone. We
currently allow 15 free transfers per contract per year. A charge of $25 ($10 in
Pennsylvania and Texas) for each additional transfer in any contract year
applies after the first 15 transfers. Transfers resulting from your
participation in the DCA program count against your 15 free transfers per
contract year. However, transfers resulting from your participation in the
automatic asset rebalancing program do not count against your 15 free transfers.
We accept transfer requests by telephone unless you specify not to on your
contract application. Additionally, in the future you may be able to execute
transfers or other financial transactions over the internet. When receiving
instructions over the telephone, we follow appropriate procedures to provide
reasonable assurance that the transactions executed are genuine. Thus, we are
not responsible for any claim, loss or expense from any error resulting from
instructions received over the telephone.
Upon implementation of internet account transfers we will have appropriate
procedures in place to provide reasonable assurance that the transactions
executed are genuine. Thus, Anchor National would not be responsible for any
claim, loss or expense from any error resulting from instructions received over
the internet. If we fail to follow any procedures, we may be liable for any
losses due to unauthorized or fraudulent instructions.
We may limit the number of transfers in any contract year or refuse any
transfer request for you or others invested in the contract if we believe that
excessive trading or a specific transfer request or group transfer requests may
have a detrimental effect on unit values or the share prices of the Underlying
Funds.
Where permitted by law, we may accept your authorization for a third party
to make transfers for you subject to certain rules. We reserve the right to
suspend or cancel such acceptance at any time and
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<PAGE> 24
will notify you accordingly. Additionally, we may restrict the investment
options available for transfers during any period in which such third party acts
for you. We will notify such third party beforehand regarding any restrictions.
However, we will not enforce these restrictions if we are satisfied that:
- such third party has been appointed by a court of competent jurisdiction
to act on your behalf; or
- such third party is a trustee/fiduciary for you or appointed by you to
act on your behalf for all your financial affairs.
We may provide administrative or other support services to independent
third parties you authorize to make transfers on your behalf. We do not
currently charge extra for providing these support services. This includes, but
is not limited to, transfers between investment options in accordance with
market timing strategies. Such independent third parties may or may not be
appointed with us for the sale of annuities. However, WE DO NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE. WE TAKE NO
RESPONSIBILITY FOR THE INVESTMENT ALLOCATION AND TRANSFERS TRANSACTED ON YOUR
BEHALF BY SUCH THIRD PARTIES OR FOR ANY INVESTMENT ALLOCATION RECOMMENDATIONS
MADE BY SUCH PARTIES.
For information regarding transfers during the Income Phase, SEE INCOME
PHASE, TRANSFERS DURING THE INCOME PHASE, PAGE 25.
We reserve the right to modify, suspend, waive or terminate these transfer
provisions at any time.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging ("DCA") program allows you to invest gradually in
the Variable Portfolios. Under the program you systematically transfer a set
dollar amount or percentage of portfolio value from the Money Market Portfolio,
U.S. Government Income Portfolio or the 1-year fixed account option (source
accounts) to any other Variable Portfolio. Transfers may be monthly, quarterly,
semiannually or annually. You may change the frequency at any time by notifying
us in writing. The minimum transfer amount under the DCA program is $100,
regardless of the source account.
The DCA program is designed to lessen the impact of market fluctuations on
your investment. However, we cannot ensure that you will make a profit. When you
elect the DCA program, you are continuously investing in securities regardless
of fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
We reserve the right to modify, suspend or terminate this program at any
time.
EXAMPLE:
Assume that you want to gradually move $750 each quarter from the Money
Market Portfolio to the Growth and Income Portfolio over six quarters. You
set up dollar cost averaging and purchase Accumulation Units at the
following hypothetical values:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
ACCUMULATION UNITS
QUARTER UNIT VALUE PURCHASED
- -----------------------------------------------------------
<S> <C> <C>
1 $ 7.50 100
2 $ 5.00 150
3 $10.00 75
4 $ 7.50 100
5 $ 5.00 150
6 $ 7.50 100
- -----------------------------------------------------------
</TABLE>
In this example, you paid an average price of only $6.67 per Accumulation
Unit over six quarters, while the average market price actually was $7.08.
By investing an equal amount of money each month, you automatically buy
more Accumulation Units when the market price is low and fewer Accumulation
Units when the market price is high. This example is for illustrative
purposes only.
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<PAGE> 25
ASSET ALLOCATION REBALANCING
Earnings in your contract may cause the percentage of your investment in
each investment option to differ from your original allocations. The automatic
asset rebalancing program addresses this situation. At your election, we
periodically rebalance your investments to return your allocations to their
original percentages.
Asset rebalancing may involve shifting a portion of your money out of an
investment option with a higher return into an investment option with a lower
return. You request quarterly, semiannual or annual rebalancing. Transfers made
as a result of rebalancing do not count against your 15 free transfers for the
contract year.
We reserve the right to modify, suspend or terminate this program at any
time.
EXAMPLE:
Assume that you want your initial Purchase Payment split between two
Variable Portfolios. You want 50% in the U.S. Government Income Portfolio
and 50% in the Capital Growth Portfolio. Over the next calendar quarter,
the U.S. Government Income Portfolio outperforms the Capital Growth
Portfolio. At the end of the calendar quarter, the U.S. Government Income
Portfolio now represents 60% of your holdings because it has increased in
value and the Capital Growth Portfolio represents 40% of your holdings. If
you had chosen quarterly rebalancing, on the last day of that quarter,
Anchor National would sell some of your units in the U.S. Government Income
Portfolio to bring its holdings back to 50% and use the money to buy more
units in the Capital Growth Portfolio to increase those holdings to 50%.
PRINCIPAL ADVANTAGE PROGRAM
The principal advantage program allows you to invest in one or more
Variable Portfolios without putting your principal at direct risk. The program
accomplishes this by allocating your investment strategically between the fixed
investment options and Variable Portfolios. You decide how much you want to
invest and approximately when you want a return of principal. Anchor National
calculates how much of your Purchase Payment needs to be allocated to the
particular fixed investment option to ensure that it grows to an amount equal to
your total principal invested under this program. The remaining principal is
invested in the Variable Portfolio(s) of your choice.
Anchor National reserves the right to modify, suspend or terminate this
program at any time.
EXAMPLE:
Assume that you want to allocate a portion of your initial Purchase Payment
of $100,000 to the fixed investment option. You want the amount allocated
to the fixed investment option to grow to $100,000 in 7 years. If the
7-year fixed investment option is offering a 5% interest rate, Anchor
National allocates $71,069 to the 7-year fixed investment option to ensure
that this amount will grow to $100,000 at the end of the 7-year period. The
remaining $28,931 may be allocated among the Variable Portfolios, as
determined by you, to provide opportunity for greater growth.
WITHDRAWALS
You can access money in your contract in two ways:
- by making a partial or total withdrawal, and/or;
- by receiving income payments during the Income Phase. (SEE INCOME PHASE,
PAGE 23.)
Generally, we deduct a withdrawal charge applicable to any total or partial
withdrawal and a MVA against withdrawals from the 3, 5, 7 or 10 year fixed
account options. If you withdraw your entire contract value, a deduction for
premium taxes and the contract maintenance fee also occurs. (SEE CONTRACT
CHARGES, WITHDRAWAL CHARGE, PAGE 15.)
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<PAGE> 26
Under certain Qualified plans, access to the money in your contract may be
restricted. Additionally, withdrawals made prior to age 59 1/2 may result in a
10% IRS penalty tax. (SEE TAXES, PAGE 25.)
Under most circumstances, the partial withdrawal minimum is $1,000. We
require that the value left in any investment option be at least $100 after the
withdrawal. You must send a written withdrawal request. Unless you provide
different instructions, partial withdrawals will be made pro rata from each
Variable Portfolio and the fixed account option in which your contract is
invested.
We may be required to suspend or postpone the payment of a withdrawal for
any period of time when: (1) the NYSE is closed (other than customary weekend
and holiday closings); (2) trading with the NYSE is restricted; (3) an emergency
exists such that disposal of or determination of the value of shares of the
Variable Portfolios is not reasonably practicable; (4) the SEC, by order, so
permits for the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from
a fixed account option. Such deferrals are limited to no longer than six months.
SYSTEMATIC WITHDRAWAL PROGRAM
During the Accumulation Phase, you may elect to receive periodic income
payments under the systematic withdrawal program. Under the program, you may
choose to take monthly, quarterly, semiannual or annual payments from your
contract. Electronic transfer of these funds to your bank account is available.
The minimum amount of each withdrawal is $250. There must be at least $100
remaining in each Variable Portfolio after a withdrawal from your contract at
all times. Withdrawals may be subject to a withdrawal charge, a MVA and
taxation, and a 10% IRS penalty tax may apply if you are under age 59 1/2. There
is no additional charge for participating in this program.
The program is not available to everyone. Please check with our Annuity
Service Center, which can provide the necessary enrollment forms. Anchor
National reserves the right to modify, suspend or terminate this program at any
time.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if both of the
following occur: (1) your contract is less than $500 as a result of withdrawals;
and (2) you have not made any Purchase Payments during the past three years. We
will provide you with sixty days written notice. At the end of the notice
period, we will distribute the contract value to you.
- --------------------------------------------------------------------------------
INCOME PHASE
- --------------------------------------------------------------------------------
ANNUITY DATE
During the Income Phase, we use the money accumulated in your contract to
make regular income payments to you. You may switch to the Income Phase any time
after your 2nd contract anniversary. You select the month and year in which you
want income payments to begin. The first day of that month is the Annuity Date.
You may change your Annuity Date, so long as you do so at least seven days
before the income payments are scheduled to begin. Once you begin receiving
income payments, you cannot change your income option. Except as indicated under
Option 5 below, once you begin receiving income payments, you cannot otherwise
access your money through a withdrawal or surrender.
Income payments must begin on or before your 90th birthday or on your tenth
contract anniversary, whichever occurs later. If you do not choose an Annuity
Date, your income payments will automatically begin on this date. Certain states
may require your income payments to start earlier.
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<PAGE> 27
If the Annuity Date is past your 85th birthday, your contract could lose
its status as an annuity under Federal tax laws. This may cause you to incur
adverse tax consequences.
In addition, most Qualified contracts require you to take minimum
distributions after you reach age 70 1/2. (SEE TAXES, PAGE 25.)
INCOME OPTIONS
Currently, this contract offers five income options. If you elect to
receive income payments but do not select an option, your income payments will
be made in accordance with option 4 for a period of 10 years. For income
payments based on joint lives, we pay according to option 3.
We base our calculation of income payments on the life of the Annuitant and
the annuity rates set forth in your contract. As the contract owner, you may
change the Annuitant at any time prior to the Annuity Date. You must notify us
if the Annuitant dies before the Annuity Date and designate a new Annuitant.
OPTION 1 -- LIFE INCOME ANNUITY
This option provides income payments for the life of the Annuitant. Income
payments stop when the Annuitant dies.
OPTION 2 -- JOINT AND SURVIVOR LIFE ANNUITY
This option provides income payments for the life of the Annuitant and for
the life of another designated person. Upon the death of either person, we will
continue to make income payments during the lifetime of the survivor. Income
payments stop whenever the survivor dies.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY WITH 10 YEARS GUARANTEED
This option is similar to option 2 above, with an additional guarantee of
payments for at least 10 years. If the Annuitant and the survivor die before all
of the guaranteed income payments have been made, the remaining payments are
made to the Beneficiary under your contract.
OPTION 4 -- LIFE ANNUITY WITH 10 OR 20 YEARS GUARANTEED
This option is similar to option 1 above. In addition, this option provides
a guarantee that income payments will be made for at least 10 or 20 years. You
select the number of years. If the Annuitant dies before all guaranteed income
payments are made, the remaining income payments go to the Beneficiary under
your contract.
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
This option provides income payments for a guaranteed period ranging from 3
to 30 years. If the Annuitant dies before all of the guaranteed income payments
are made, the remaining income payments will be made to the Beneficiary under
your contract. Additionally, if variable payments are elected under this option,
you (or the Beneficiary under the contract if the Annuitant dies prior to all
guaranteed payments being made) may redeem the contract value after the Annuity
Date. The amount available upon such redemption would be the discounted present
value of any remaining guaranteed payments.
Please read the SAI for a more detailed discussion of the income options.
You can choose income payments that are fixed, variable or both. If at the
date when income payments begin you are invested in the Variable Portfolios
only, your income payments will be variable. If your money is only in fixed
accounts at that time, your income payments will be fixed in amount. Further, if
you are invested in both the fixed and variable investment options when payments
begin your payments will be fixed and variable. If income payments are fixed,
Anchor National
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<PAGE> 28
guarantees the amount of each payment. If the income payments are variable, the
amount is not guaranteed.
We make income payments on a monthly, quarterly, semiannual or annual
basis. You instruct us to send you a check or to have the payments directly
deposited into your bank account. If state law allows, we distribute annuities
with a contract value of $5,000 or less in a lump sum. Also, if the selected
income option results in income payments of less than $50 per payment, the
frequency of your payments may be decreased, state law allowing.
If you are invested in the Variable Portfolios after the Annuity Date your
income payments vary depending on four things:
- for life options, your age when payments begin, and;
- the value of your contract in the Variable Portfolios on the Annuity
Date, and;
- the 3.5% assumed investment rate used in the annuity table for the
contract, and;
- the performance of the Variable Portfolios in which you are invested
during the time you receive income payments.
If you are invested in both the fixed account options and the Variable
Portfolios after the Annuity Date, the allocation of funds between the fixed and
variable options also impacts the amount of your income payments.
TRANSFERS DURING THE INCOME PHASE
During the Income Phase, one transfer per month is permitted between the
Variable Portfolios. No other transfers are allowed during the Income Phase.
DEFERMENT OF PAYMENTS
We may defer making fixed income payments for up to six months, or less if
required by law. Interest is credited to you during the deferral period.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: WE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT TAX ADVICE. WE CAUTION YOU TO SEEK
COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE THE TAX
STATUS OF YOUR ANNUITY. TAX LAWS CONSTANTLY CHANGE, THEREFORE WE CANNOT
GUARANTEE THAT THE INFORMATION CONTAINED HEREIN IS COMPLETE AND/OR ACCURATE.
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the
tax treatment of annuity contracts. Generally, taxes on the earnings in your
annuity contract are deferred until you take the money out. Qualified retirement
investments automatically provide tax deferral regardless of whether the
underlying contract is an annuity. Different rules apply depending on how you
take the money out and whether your contract is Qualified or Non-qualified.
If you do not purchase your contract under a pension plan, a specially
sponsored employer program or an IRA, your contract is referred to as a
Non-qualified contract. A Non-qualified contract receives different tax
treatment than a Qualified contract. In general, your cost basis in a Non-
qualified contract is equal to the Purchase Payments you put into the contract.
You have already been taxed on the cost basis in your contract.
If you purchase your contract under a pension plan, a specially sponsored
employer program or as an individual retirement account, your contract is
referred to as a Qualified contract. Examples of qualified plans are: IRAs, Roth
IRAs, Tax-Sheltered Annuities (referred to as 403(b) contracts),
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<PAGE> 29
H.R. 10 Plans (referred to as Keogh Plans) and pension and profit sharing plans,
including 401(k) plans. Typically you have not paid any tax on the Purchase
Payments used to buy your contract and therefore, you have no cost basis in your
contract.
TAX TREATMENT OF DISTRIBUTIONS -- NON-QUALIFIED CONTRACTS
If you make a withdrawal from a Non-qualified contract, the IRC treats such
a withdrawal as first coming from the earnings and then as coming from your
Purchase Payments. For income payments, any portion of each payment that is
considered a return of your Purchase Payment will not be taxed. Withdrawn
earnings are treated as income to you and are taxable. The IRC provides for a
10% penalty tax on any earnings that are withdrawn other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and you Beneficiary; (5) under an
immediate annuity; or (6) which come from Purchase Payments made prior to August
14, 1982.
TAX TREATMENT OF DISTRIBUTIONS -- QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy
a Qualified contract. Any amount of money you take out as a withdrawal or as
income payments is taxable income. The IRC further provides for a 10% penalty
tax on any withdrawal or income payment paid to you other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and your Beneficiary; (5) to the extent
such withdrawals do not exceed limitations set by the IRC for amounts paid
during the taxable year for medical care; (6) to fund higher education expenses
(as defined in IRC); (7) to fund certain first-time home purchase expenses; and,
except in the case of an IRA; (8) when you separate from service after attaining
age 55; and (9) when paid to an alternate payee pursuant to a qualified domestic
relations order.
The IRC limits the withdrawal of Purchase Payments from certain
Tax-Sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his or her job; (3) dies; (4) becomes disabled (as
defined in the IRC); or (5) experiences hardship (as defined in the IRC). In the
case of hardship, the owner can only withdraw Purchase Payments.
MINIMUM DISTRIBUTIONS
Generally, the IRS requires that you begin taking annual distributions from
Qualified annuity-contracts by April 1 of the calendar year following the later
of (1) the calendar year in which you attain age 70 1/2 or (2) the calendar year
in which you retire. We currently waive withdrawal charges on withdrawals taken
to meet minimum distribution requirements. Current operational practice is to
provide a free withdrawal of the greater of the contract's maximum penalty free
amount or the required minimum distribution amount for a particular contract
(but not both). Failure to satisfy the minimum distribution requirement may
result in a tax penalty. You should consult your tax advisor for more
information.
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity. We believe that each underlying Variable
Portfolios' management monitors the Variable Portfolios so as to comply with
these requirements. To be treated as a variable annuity for tax purposes, the
underlying investments must meet these requirements.
The diversification regulations do not provide guidance as to the
circumstances under which you, because of the degree of control you exercise
over the underlying investments, and not Anchor National, would be considered
the owner of the shares of the Variable Portfolios. It is unknown to what extent
owners are permitted to select investments, to make transfers among Variable
Portfolios or the number and type of Variable Portfolios owners may select from.
If any guidance is provided
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<PAGE> 30
which is considered a new position, then the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean you, as the owner of the
contract, could be treated as the owner of the underlying Variable Portfolios.
Due to the uncertainty in this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
We are responsible for the administrative servicing of your contract.
Please contact our Annuity Service Center at 1-800-445-SUN2, if you have any
comment, question or service request.
During the accumulation phase, you will receive confirmation of
transactions within your contract. Transactions made pursuant to contractual or
systematic agreements, such as deduction of the annual maintenance fee and
dollar cost averaging, may be confirmed quarterly. Purchase payments received
through the automatic payment plan or a salary reduction arrangement, may also
be confirmed quarterly. For all other transactions, we send confirmations
immediately.
During the accumulation and income phases, you will receive a statement of
your transactions over the past quarter and a summary of your account values.
It is your responsibility to review these documents carefully and notify us
of any inaccuracies immediately. We investigate all inquiries. To the extent
that we believe we made an error, we retroactively adjust your contract,
provided you notify us within 30 days of receiving the transaction confirmation
or quarterly statement. Any other adjustments we deem warranted are made as of
the time we receive notice of the error.
YEAR 2000
We initiated our strategy to deal with the year 2000 challenge in 1997. At
that time, many of the computer systems and applications upon which we relied in
our daily operations were not year 2000 compliant. This means that because they
historically used only two digits to identify the year in a date, they were
unable to distinguish dates in the "2000s" from dates in the "1900s." We have
incurred approximately $9.9 million of programming costs to make necessary
repairs of certain non-compliant systems. Additionally, SunAmerica Inc., our
parent company, has made capital expenditures of approximately $9.2 million on
the Company's behalf to replace certain other non-compliant systems, which will
be amortized and allocated to Anchor National over future periods. We do not
expect to incur significant additional costs because the repair or replacement
of substantially all systems was completed as of September 30, 1999. Further,
testing of both the repaired and replaced systems was substantially completed as
of September 30, 1999. Nevertheless, we will continue to test all of our
computer systems and applications throughout 1999 to ensure continued
compliance.
In addition, we distributed a year 2000 questionnaire to the third parties
with which we interact significantly. These include suppliers, distributors,
facilitators, fund managers, lessors and financial institutions. The
questionnaire is designed to enable us to evaluate these third parties' year
2000 compliance plans and state of readiness and to determine the extent to
which our systems and applications may be affected by the failure of others to
remedy their own year 2000 issues. To date, however, we have received only
inconclusive feedback from these parties and have not independently confirmed
any information received from them. Therefore, we cannot assure that these
parties will complete their year 2000 conversions in a timely fashion or will
not suffer a year 2000 business disruption that may adversely affect our
financial condition and results of operations.
Although our efforts to remedy the year 2000 issues are expected to be
complete prior to any potential disruption to our business, we are developing
several contingency plans to implement in the event that the transition to the
year 2000 becomes difficult.
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<PAGE> 31
The above discussion contains forward-looking statements. These statements
are based on our current estimates, assumptions and opinions, and are subject to
various uncertainties that could cause the results to differ materially from our
expectations. These uncertainties include, among others, costs to be incurred,
our success in identifying systems and applications that are not year 2000
compliant, the nature and amount of programming required to upgrade or replace
each of the affected systems and applications, the availability of qualified
personnel, consultants and other resources, and the success of the year 2000
conversion efforts of significant third parties.
DISTRIBUTION OF CONTRACTS
Registered representatives of broker-dealers sell the contract. Anchor
National pays commissions to these representatives for the sale of the
contracts. We do not expect the total commissions to exceed 6.5% of your
Purchase Payments. We may also pay a bonus to representatives for contracts
which stay active for a particular period of time, in addition to standard
commissions. We do not deduct commissions paid to registered representatives
directly from your Purchase Payments.
From time to time, we may pay or allow additional promotional incentives in
the form of cash or other compensation. We reserve the right to offer these
additional incentives only to certain broker-dealers that sell or are expected
to sell, certain minimum amounts of the contract, or other contracts offered by
us. Promotional incentives may change at any time.
Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York, 10178, serves as distributor of the Contracts. VFD is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is
a member of the National Association of Securities Dealers, Inc. VFD is not
affiliated with Anchor National or the Adviser to the Trust. No underwriting
fees are paid in connection with the distribution of these contracts.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, serves as
the custodian of the assets of the separate account.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending legal proceedings affecting the separate account.
Anchor National and its subsidiaries engage in various kinds of routine
litigation. In management's opinion, these matters are not of material
importance to their respective total assets nor are they material with respect
to the separate account.
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- --------------------------------------------------------------------------------
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
A registration statement has been filed with the SEC under the Securities
Act of 1933 relating to the contract. This prospectus does not contain all the
information in the registration statement as permitted by SEC regulations. The
omitted information can be obtained from the SEC's principal office in
Washington, D.C., upon payment of a prescribed fee.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Anchor National as of September
30, 1998 and 1997 and for each of the three years in the period ended September
30, 1998 included in the Statement of Additional Information. The Company
changed its fiscal year end to December 31. Reflecting this change, also
included in the Statement of Additional Information is an audited Transition
Report of the Company reflecting the final quarter of the calendar year 1998.
Financial Statements of the Separate Account are also included in the Statement
of Additional Information reflecting the fiscal year ended August 31, 1999. The
financial statements have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information concerning the operations of the separate account is
contained in a Statement of Additional Information ("SAI"), which is available
without charge upon written request addressed to us at our Annuity Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299 or by calling (800)
445-SUN2. The contents of the SAI are tabulated below.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data............................................ 1
Income Payments............................................. 3
Annuity Unit Values......................................... 3
Qualified Plans............................................. 6
Distribution of Contracts................................... 10
Financial Statements........................................ 11
</TABLE>
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<PAGE> 33
APPENDIX A
MARKET VALUE ADJUSTMENT ("MVA")
The MVA reflects the impact that changing interest rates have on the value of
money invested at a fixed interest rate. The longer the period of time remaining
in the term you initially agreed to leave your money in the fixed account
option, the greater the impact of changing interest rates. The impact of the MVA
can be either positive or negative, and is computed by multiplying the amount
withdrawn, transferred or annuitized by the following factor:
(N/12)
[(1+I/(1+J+0.005)] - 1
The MVA formula may differ in certain states
where:
I is the interest rate you are earning on the money invested in the
fixed account option;
J is the interest rate then currently available for the period of time
equal to the number of years remaining in the term you initially agreed
to leave your money in the fixed account option (fractional years are
rounded up to the next full year); and
N is the number of full months remaining in the term you initially
agreed to leave your money in the fixed account option.
EXAMPLES OF THE MVA
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to the
10-year fixed account option at a rate of 5%;
(2) You make a partial withdrawal of $4,000 when 2 1/2 years (30 months)
remain in the 10-year term you initially agreed to leave your money in
the fixed account option (N=30);
(3) The accumulated value attributable to the Purchase Payment on the date
of withdrawal is $14,168.20; and
(4) You have not made any other transfers, additional Purchase Payments, or
withdrawals.
No withdrawal charges are reflected because your Purchase Payment has been in
the contract for seven full years. If a withdrawal charge applies, it is
deducted before the MVA. The MVA is assessed on the amount withdrawn less any
withdrawal charges.
POSITIVE ADJUSTMENT
Assume that on the date of withdrawal, the interest rate in effect for a new
Purchase Payments in the 3-year fixed account option is 4%.
(N/12)
The MVA factor is = [(1+I/(1+J+0.005)] - 1
(30/12)
= [(1.05)/(1.04+.005)] - 1
(2.5)
= (1.004785) - 1
= 1.012005 - 1
= + 0.012005
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 x (+0.012005) = +$48.02
$48.02 represents the MVA that would be added to your withdrawal.
NEGATIVE ADJUSTMENT
Assume that on the date of withdrawal, the interest rate in effect for new
Purchase Payments in the 3-year fixed investment option (2 1/2 years rounded up
to the next full year) is 6%.
(N/12)
The MVA factor is = [(1+I)/(1+J+0.005)] - 1
(30/12)
= [(1.05)/(1.06+.005)] - 1
(2.5)
= (0.985915) - 1
= 0.965160 - 1
= - 0.034840
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 X (- 0.034840) = -$139.36
$139.36 represents the MVA that will be deducted from the money remaining in the
10-year fixed account option.
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<PAGE> 34
EXAMPLE OF FULL WITHDRAWAL WITH MVA AND WITHDRAWAL CHARGE
Assume the same facts as in Part 2, above, except that under assumption (2)
a complete withdrawal is requested with 4 1/2 years (54 months) remaining in the
guarantee period (i.e., N = 54). The guarantee amount on the date of withdrawal
is $12,908.13. As was the case with the Examples in Part 1, above, the earnings
may be withdrawn free of withdrawal charge, leaving the initial Purchase Payment
of $10,000 subject to the Charge. The applicable withdrawal charge is 3% or
$300.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal the current interest rate for a
new guarantee period of 5 years is 4%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(54/12)
= [(1.05)/(1.04 + .005)] -1
4.5
= (1.004785) -1
= 1.021712 -1
= +0.021712
The MVA is:
($12,908.13 - $300 - $30) X (+0.021712) = +$273.10
And the net amount available upon surrender is:
$12,908.13 - $300 + $273.10 - $30 = $12,851.23
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal the current interest rate for a
new guarantee period of 5 years is 6%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(54/12)
= [(1.05)/(1.06 + .005)] -1
4.5
= (0.985915) -1
= 0.938164 -1
= -0.061836
The withdrawal charge of $300 and the contract maintenance fee of $30
are applied first; the MVA factor is applied against the remaining
guarantee amount:
MVA = ($12,908.13 - $300 - $30) X (-0.061836) = -$777.79
The net amount available upon withdrawal is the guarantee amount
reduced by the withdrawal charge, the MVA and the contract administration
charge:
$12,908.13 - $300 - $777.79 - $30 = $11,800.35
A-2
<PAGE> 35
APPENDIX B
WITHDRAWALS AND WITHDRAWAL CHARGES
PART 1 -- SEPARATE ACCOUNT (THE MVA DOES NOT APPLY TO THE SEPARATE ACCOUNT)
These examples assume the following:
(1) The initial Purchase Payment was $10,000, allocated solely to one
Variable Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
3rd contribution year;
(3) The contract value at the time of surrender or withdrawal is
$12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Variable Portfolio ($12,000 - $10,000 = $2,000)
are not subject to the withdrawal charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to a 5% withdrawal charge applicable during the 3rd contribution
year.
(3) The amount of the withdrawal charge is .05 X $10,000 = $500.
(4) The contract administration charge is deducted from the full
surrender amount. The amount of the full surrender is
$12,000 - $500 - $30 = $11,470.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reasons as given in Steps 1 and 2 of Example A,
above, $2,000 can be withdrawn free of the withdrawal charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a withdrawal charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the withdrawal charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled withdrawal charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the withdrawal charge applicable
during the 3rd contribution year (5%).
(4) The amount of the withdrawal charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .05) = 0.95, less the amount required to complete the
partial withdrawal.
withdrawal charge = ($1,000/0.95) - $1,000
= $52.63
In this example, in order for the owner to receive the amount requested
($3,000), a gross withdrawal of $3,052.63 must be processed with $52.63
representing the withdrawal charge calculated above.
Examples C and D assume the following:
(1) The initial Purchase Payment was $20,000, allocated solely to one
Variable Portfolio;
(2) The full surrender or partial withdrawal occurs during the 3rd
contribution year;
B-1
<PAGE> 36
(3) The owner's contract value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Variable Portfolio ($21,500 - $20,000 = $1,500)
are not subject to the withdrawal charge.
(2) An additional free withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
withdrawal charge, so that
(3) The maximum partial withdrawal without withdrawal charge is the
sum of the earnings and the additional free withdrawal
($1,500 + $500 = $2,000).
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The owner's contract value after the partial withdrawal in Example C
is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the withdrawal charge
is the original $20,000 (additional free withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the withdrawal
charge).
(3) The amount of the withdrawal charge is .05 X $20,000 = $1,000.
(4) The contract administration charge is deducted from the full
surrender amount. The amount of the full surrender is
$19,500 - $1,000 - $30 = $18,470.
B-2
<PAGE> 37
APPENDIX C - PREMIUM TAXES
Premium taxes vary according to the state and are subject to change without
notice. In many states, there is no tax at all. Listed below are the current
premium tax rates in those states that assess a premium tax. For current
information, you should consult your tax adviser.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
STATE CONTRACT CONTRACT
<S> <C> <C>
========================================================================
California .50% 2.35%
- ------------------------------------------------------------------------
Kentucky 2% 2%
- ------------------------------------------------------------------------
Maine 0% 2%
- ------------------------------------------------------------------------
Nevada 0% 3.5%
- ------------------------------------------------------------------------
South Dakota 0% 1.25%
- ------------------------------------------------------------------------
West Virginia 1% 1%
- ------------------------------------------------------------------------
Wyoming 0% 1%
========================================================================
</TABLE>
C-1
<PAGE> 38
APPENDIX D
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
PORTFOLIOS 8/31/96 8/31/97 8/31/98 8/31/99
---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
International Equity
Beginning AUV......................... $ 10.81 $ 10.92 $ 11.67 $ 11.22
Ending AUV............................ $ 10.92 $ 11.67 $ 11.22 $ 13.83
Ending Number of AUs.................. 87,008 133,652 177,422 138,949
Capital Growth
Beginning AUV......................... $ 11.82 $ 13.95 $ 17.51 $ 14.43
Ending AUV............................ $ 13.95 $ 17.51 $ 14.43 $ 18.58
Ending Number of AUs.................. 232,242 289,931 346,507 270,686
Growth and Income
Beginning AUV......................... $ 11.40 $ 13.07 $ 17.47 $ 16.29
Ending AUV............................ $ 13.07 $ 17.47 $ 16.29 $ 19.47
Ending Number of AUs.................. 227,688 340,235 421,494 310,897
Asset Allocation
Beginning AUV......................... 10.96 $ 12.00 $ 14.49 $ 14.30
Ending AUV............................ $ 12.00 $ 14.49 $ 14.30 $ 15.76
Ending Number of AUs.................. 40,986 76,458 94,030 90,646
U.S. Government Income
Beginning AUV......................... $ 10.67 $ 10.79 $ 11.50 $ 12.61
Ending AUV............................ $ 10.79 $ 11.50 $ 12.61 $ 12.28
Ending Number of AUs.................. 22,094 37,216 75,003 72,653
Money Market
Beginning AUV......................... $ 10.10 $ 10.47 $ 10.84 $ 11.22
Ending AUV............................ $ 10.47 $ 10.84 $ 11.22 $ 11.58
Ending Number of AUs.................. 13,593 163,778 22,868 31,391
</TABLE>
- ---------------
AUV -- Accumulation Unit Value
AU -- Accumulation Units
D-1
<PAGE> 39
- --------------------------------------------------------------------------------
Please forward a copy (without charge) of the Statement of Additional
Information concerning Vista Capital Advantage issued by Anchor National
Life Insurance Company to:
(Please print or type and fill in all information.)
---------------------------------------------------------------------
Name
---------------------------------------------------------------------
Address
---------------------------------------------------------------------
City/State/Zip
Date: ------------------ Signed: --------------------------------
Return to: Anchor National Life Insurance Company, Annuity Service Center,
P.O. Box 52499, Los Angeles, California 90054-0299
- --------------------------------------------------------------------------------
<PAGE> 40
STATEMENT OF ADDITIONAL INFORMATION
VISTA CAPITAL ADVANTAGE
FIXED AND VARIABLE GROUP DEFERRED ANNUITY CONTRACTS
VARIABLE ANNUITY ACCOUNT TWO
DEPOSITOR: ANCHOR NATIONAL LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus; it should be read
with the prospectus dated December 29, 1999, relating to the annuity contracts
described above, a copy of which may be obtained without charge by written
request addressed to:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS
DECEMBER 29, 1999
VCA-SAI (12/99)
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data ............................................................................ 1
Income Payments ............................................................................ 3
Annuity Unit Values ........................................................................ 3
Taxes ....................................................................................... 6
Distribution of Contracts ................................................................. 10
Financial Statements ........................................................................ 11
</TABLE>
<PAGE> 42
PERFORMANCE DATA
Performance data for the various Variable Portfolios are computed in the
manner described below.
MONEY MARKET PORTFOLIO
The annualized current yield and the effective yield for the Money Market
Portfolio for the 7-day period ended August 31, 1999 were 3.09% and 3.14%,
respectively.
Current yield is computed by first determining the Base Period Return
attributable to a hypothetical contract having a balance of one Accumulation
Unit at the beginning of a 7 day period using the formula:
Base Period Return = (EV-SV-CMF)/(SV)
where:
SV = value of one Accumulation Unit at the start of a 7 day period
EV = value of one Accumulation Unit at the end of the 7 day period
CMF = an allocated portion of the $30 annual contract maintenance fee,
prorated for 7 days
The change in value of an Accumulation Unit during the 7 day period
reflects the income received, minus any expenses accrued, during such 7 day
period. The contract maintenance fee is first allocated among the Variable
Portfolios and the General Account so that each Variable Portfolio's allocated
portion of the charge is proportional to the percentage of the number of Owners'
accounts that have money allocated to that Variable Portfolio. The portion of
the charge allocable to the Money Market Portfolio is further reduced, for
purposes of the yield computation, by multiplying it by the ratio that the value
of the hypothetical contract bears to the value of an account of average size
for contracts funded by the Money Market Portfolio. Finally, the result is
multiplied by the fraction 7/365 to arrive at the portion attributable to the 7
day period.
The current yield is then obtained by annualizing the Base Period Return:
Current Yield = (Base Period Return) x (365/7)
The Money Market Portfolio also quotes an "effective yield" that differs
from the current yield given above in that it takes into account the effect of
dividend reinvestment in the Underlying Fund. The effective yield, like the
current yield, is derived from the Base Period Return over a 7 day period.
However, the effective yield accounts for dividend reinvestment by compounding
the current yield according to the formula:
365/7
Effective Yield = [(Base Period Return + 1) - 1]
The yield quotations also do not reflect any impact of premium taxes,
transfer fees, or Withdrawal Charges.
The yield quoted should not be considered a representation of the yield of
the Money Market Portfolio in the future since the yield is not fixed. Actual
yields will depend not only on the
1
<PAGE> 43
type, quality and maturities of the investments held by the Underlying Fund and
changes in interest rates on such investments, but also on factors such as a
Owner's account size (since the impact of fixed dollar charges will be greater
for small accounts than for larger accounts).
Yield information may be useful in reviewing the performance of the Money
Market Portfolio and for providing a basis for comparison with other investment
alternatives. However, the Money Market Portfolio's yield fluctuates, unlike
bank deposits or other investments that typically pay a fixed yield for a stated
period of time.
OTHER VARIABLE PORTFOLIOS
The Variable Portfolios of the Separate Account other than the Money Market
Portfolio compute their performance data as "total return".
The total returns of the various Variable Portfolios for periods of 1 and 3
years, and since each Variable Portfolio's inception date, are shown below, both
with and without an assumed complete redemption at the end of the period.
TOTAL ANNUAL RETURN (IN PERCENT) FOR PERIOD ENDED ON
AUGUST 31, 1999 (WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
VARIABLE PORTFOLIO 1 YEAR 3 YEAR SINCE INCEPTION
------------------ ----------- ----------- ---------------
<S> <C> <C> <C>
International Equity* 17.14/23.14 6.64/8.09 7.06/7.76
Capital Growth* 22.64/28.64 8.58/9.97 14.27/14.83
Growth and Income* 13.47/19.47 12.87/14.16 15.58/16.12
Asset Allocation* 4.13/10.13 8.02/9.43 9.99/10.63
U.S. Government** -8.63/-2.63 2.75/4.30 2.36/3.25
</TABLE>
- -----------------
* Inception date is March 13, 1995
** Inception date is July 13, 1995
Total return for a Variable Portfolio represents a single computed annual
rate of return that, when compounded annually over a specified time period (one,
five, and ten years, or since inception) and applied to a hypothetical initial
investment in a contract funded by that Variable Portfolio made at the beginning
of the period, will produce the same value at the end of the period that the
hypothetical investment would have produced over the same period. The total rate
of return (T) is computed so that it satisfies the formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5, or 10 year period as of the end of the
period (or fractional portion thereof).
The total return figures reflect the effect of both nonrecurring and
recurring charges, as discussed herein. Recurring charges are taken into account
in a manner similar to that used for the
2
<PAGE> 44
yield computations for the Money Market Portfolio, described above. The
applicable Withdrawal Charge (if any) is deducted as of the end of the period,
to reflect the effect of the assumed complete redemption. Because the impact of
the Contract Maintenance Fee on a particular Owner's account will generally
differ from that assumed in the computation, due to differences between most
actual allocations and the assumed one, as well as differences due to varying
account sizes, the total return experienced by an actual Variable Portfolio over
the same time periods would generally have been different from those produced by
the computation. As with the Money Market Portfolio yield figures, total return
figures are derived from historical data and are not intended to be a projection
of future performance.
INCOME PAYMENTS
INITIAL MONTHLY INCOME PAYMENTS
The initial income payment is determined by applying separately that
portion of the contract value allocated to the fixed account option and the
Variable Portfolio(s), less any premium tax, to the annuity table specified in
the contract for fixed and variable income payments. Those tables are based on a
set amount per $1,000 of proceeds applied. The appropriate rate must be
determined by the sex (except where, as in the case of certain Qualified
contracts and other employer-sponsored retirement plans, such classification is
not permitted) and age of the annuitant and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly income payment. In the case of a variable annuity, that amount
is divided by the value of an Annuity Unit as of the Annuity Date to establish
the number of Annuity Units representing each variable income payment. The
number of Annuity Units determined for the first variable income payment remains
constant for the second and subsequent monthly variable income payments,
assuming that no reallocation of contract values is made.
SUBSEQUENT MONTHLY INCOME PAYMENTS
For fixed income payments, the amount of the second and each subsequent
monthly income payment is the same as that determined above for the first
monthly payment.
For variable income payments, the amount of the second and each subsequent
monthly income payment is determined by multiplying the number of Annuity Units,
as determined in connection with the calculation of the initial monthly payment,
above, by the Annuity Unit value as of the day preceding the date on which each
income payment is due.
ANNUITY UNIT VALUES
The value of an Annuity Unit is determined independently for each Variable
Portfolio.
The annuity tables contained in the contract are based on a 3.5% per annum
assumed investment rate. If the actual net investment rate experienced by a
Variable Portfolio exceeds 3.5%, variable income payments derived from
allocations to that Variable Portfolio will increase over time. Conversely, if
the actual rate is less than 3.5%, variable income payments will decrease over
time. If the net investment rate equals 3.5%, the variable income payments will
remain constant. If a higher assumed investment rate had been used, the initial
monthly payment would be higher, but
3
<PAGE> 45
the actual net investment rate would also have to be higher in order for income
payments to increase (or not to decrease).
The payee receives the value of a fixed number of Annuity Units each month.
The value of a fixed number of Annuity Units will reflect the investment
performance of the Variable Portfolios elected, and the amount of each income
payment will vary accordingly.
For each Variable Portfolio, the value of an Annuity Unit is determined by
multiplying the Annuity Unit value for the preceding month by the net investment
factor for the month for which the Annuity Unit value is being calculated. The
result is then multiplied by a second factor which offsets the effect of the
assumed net investment rate of 3.5% per annum that is assumed in the annuity
tables contained in the contract.
NET INVESTMENT FACTOR
The net investment factor ("NIF") is an index applied to measure the net
investment performance of a Variable Portfolio from one month to the next. The
NIF may be greater or less than or equal to one; therefore, the value of an
Annuity Unit may increase, decrease or remain the same.
The NIF for any Variable Portfolio for a certain month is determined by
dividing (a) by (b) where:
(a) is the Accumulation Unit value of the Variable Portfolio determined as
of the end of that month, and
(b) is the Accumulation Unit value of the Variable Portfolio determined as
of the end of the preceding month.
The NIF for a Variable Portfolio for a given month is a measure of the net
investment performance of the Variable Portfolio from the end of the prior month
to the end of the given month. A NIF of 1.000 results in no change; a NIF
greater than 1.000 results in an increase; and a NIF less than 1.000 results in
a decrease. The NIF is increased (or decreased) in accordance with the increases
(or decreases, respectively) in the value of a share of the underlying fund in
which the Variable Portfolio invests; it is also reduced by separate account
asset charges that are included in the Accumulation Unit Value.
ILLUSTRATIVE EXAMPLE
Assume that one share of a given Variable Portfolio had an Accumulation
Unit value of $11.46 as of the close of the New York Stock Exchange ("NYSE") on
the last business day in September and that its Accumulation Unit value had been
$11.44 at the close of the NYSE on the last business day of the previous month.
The NIF for the month of September is:
NIF = ($11.46/$11.44)
= 1.00174825
ILLUSTRATIVE EXAMPLE
The change in Annuity Unit value for a Variable Portfolio from one month to
the next is determined in part by multiplying the Annuity Unit value at the
prior month end by the NIF for that Variable Portfolio for the new month. In
addition, however, the result of that computation must
4
<PAGE> 46
also be multiplied by an additional factor that takes into account, and
neutralizes, the assumed investment rate of 3.5 percent per annum upon which the
income payment tables are based. For example, if the net investment rate for a
Variable Portfolio (reflected in the NIF) were equal to the assumed investment
rate, the variable income payments should remain constant (i.e., the Annuity
Unit value should not change). The monthly factor that neutralizes the assumed
investment rate of 3.5 percent per annum is:
(1/12)
1/[(1.035) ] = 0.99713732
In the example given above, if the Annuity Unit value for the Portfolio was
$10.103523 on the last business day in August, the Annuity Unit value on the
last business day in September would have been:
$10.103523 x 1.00174825 x 0.99713732 = $10.092213
To determine the initial payment, the initial annuity payment for variable
annuitization is calculated based on our mortality expectations and an assumed
interest rate (AIR) of 3.5%. Thus the initial variable annuity payment is the
same as the initial payment for a fixed interest payout annuity calculated at an
effective rate of 3.5%.
The Net Investment Factor (NIF) measures the performance of the funds that
are the basis for the amount of future annuity payments. This performance is
compared to the AIR, and if the growth in the NIF is the same as the AIR rate
the payment remains the same as the prior month. If the rate of growth of the
NIF is different than the AIR, then the payment is changed proportionately to
the ratio (1+NIF) / (1+AIR), calculated on a monthly basis. If the NIF is
greater than the AIR, then this proportion is greater than one and payments are
decreased. If the NIF is less than the AIR, then this proportion is less than
one and payments are decreased.
VARIABLE INCOME PAYMENTS
ILLUSTRATIVE EXAMPLE
Assume that a male owner, P, owns a contract in connection with which P has
allocated all of his contract value to a single Variable Portfolio. P is also
the sole annuitant and, at age 60, has elected to begin the income phase of his
contract under Option 4, with 12 years of guaranteed payments. As of the last
valuation preceding the Annuity Date, P's Account was credited with 7543.2456
Accumulation Units, each having a value of $15.432655, (i.e., P's account value
is equal to 7543.2456 x $15.432655 = $116,412.31). Assume also that the Annuity
Unit value for the Portfolio on that same date is $13.256932, and that the
Annuity Unit value on the day immediately prior to the second income payment
date is $13.327695.
P's first variable income payment is determined from the annuity rate
tables in P's contract, using the information assumed above. From the tables,
which supply monthly income payments for each $1,000 of applied contract value,
P's first variable income payment is determined by multiplying the monthly
installment of $5.42 (Option 4 tables, male Annuitant age 60 at the Annuity
Date) by the result of dividing P's account value by $1,000:
First Payment = $5.42 x ($116,412.31/$1,000) = $630.95
The number of P's Annuity Units (which will be fixed; i.e., it will not
change unless he transfers his Account to another Account) is also determined at
this time and is equal to the amount
5
<PAGE> 47
of the first variable income payment divided by the value of an Annuity Unit on
the day immediately prior to annuitization:
Annuity Units = $630.95/$13.256932 = 47.593968
P's second variable income payment is determined by multiplying the number
of Annuity Units by the Annuity Unit value as of the day immediately prior to
the second payment due date:
Second Payment = 47.593968 x $13.327695 = $634.32
The third and subsequent variable income payments are computed in a manner
similar to the second variable income payment.
Note that the amount of the first variable income payment depends on the
contract value in the relevant Variable Portfolio on the Annuity Date and thus
reflects the investment performance of the Variable Portfolio net of fees and
charges during the income phase. The amount of that payment determines the
number of Annuity Units, which will remain constant during the Annuity Phase
(assuming no transfers from the Variable Portfolio). The net investment
performance of the Variable Portfolio during the Annuity Phase is reflected in
continuing changes during this phase in the Annuity Unit value, which determines
the amounts of the second and subsequent variable income payments.
TAXES
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. An owner is not taxed on increases in
the value of a contract until distribution occurs, either in the form of a
non-annuity distribution or as income payments under the income option elected.
For a lump sum payment received as a total surrender (total redemption), the
recipient is taxed on the portion of the payment that exceeds the cost basis of
the contract. For a payment received as a withdrawal (partial redemption),
federal tax liability is determined on a last-in, first-out basis, meaning
taxable income is withdrawn before the cost basis of the contract is withdrawn.
For contracts issued in connection with Nonqualified plans, the cost basis is
generally the Purchase Payments, while for contracts issued in connection with
Qualified plans there may be no cost basis. The taxable portion of the lump sum
payment is taxed at ordinary income tax rates. Tax penalties may also apply.
For income payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the contract bears to the total
value of income payments for the term of the annuity contract. The taxable
portion is taxed at ordinary income tax rates. Owners, Annuitants and
Beneficiaries under the contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the separate account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of Qualified plans, 20% of the
6
<PAGE> 48
distribution must be withheld, unless the payee elects to have the distribution
"rolled over" to another eligible plan in a direct "trustee to trustee"
transfer. This requirement is mandatory and cannot be waived by the owner.
Withholding on other types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) income payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated Beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the owner may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION - SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to earnings allocable to the contract prior to the receipt of
any payments under the contract. The Code contains a safe harbor provision which
provides that annuity contracts, such as your contract, meet the diversification
requirements if, as of the close of each calendar quarter, the underlying assets
meet the diversification standards for a regulated investment company, and no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
The Treasury Department has issued regulations which establish
diversification requirements for the investment portfolios underlying variable
contracts such as the contracts. The regulations amplify the diversification
requirements for variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above. Under the regulations
an investment portfolio will be deemed adequately diversified if (1) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (2) no more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (3) no more than 80% of the
value of the total assets of the portfolio is represented by any three
investments; and (4) no more than 90% of the value of the total assets of the
portfolio is represented by any four investments. For purposes of determining
whether or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
7
<PAGE> 49
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company or its affiliates are treated as one annuity
contract for purposes of determining the tax consequences of any distribution.
Such treatment may result in adverse tax consequences including more rapid
taxation of the distributed amounts from such multiple contracts. The Company
believes that Congress intended to affect the purchase of multiple deferred
annuity contracts which may have been purchased to avoid withdrawal income tax
treatment. Owners should consult a tax adviser prior to purchasing more than one
annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their contracts.
QUALIFIED PLANS
The contracts offered by this prospectus are designed to be suitable for
use under various types of Qualified plans. Taxation of owners in each Qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued pursuant to the
plan.
Following are general descriptions of the types of Qualified plans with
which the contracts may be used. Such descriptions are not exhaustive and are
for general information purposes only. The tax rules regarding Qualified plans
are very complex and will have differing applications depending on individual
facts and circumstances. Each purchaser should obtain competent tax advice prior
to purchasing a contract issued under a Qualified plan.
Contracts issued pursuant to Qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this prospectus. Generally, contracts issued pursuant to Qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified contracts.
(a) H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish
Qualified plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" Plans. Contributions made to the plan for the benefit
of the employees will not be included in the gross income of the employees
until distributed from the plan. The tax consequences to owners may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all plans on such items as: amounts of
allowable contributions; form, manner and timing of distributions; vesting
and nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. . Purchasers of contracts for use with an H.R. 10 Plan should
obtain competent tax advice as to the tax treatment and suitability of such
an investment.
8
<PAGE> 50
(b) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, education and
scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to the contracts for the
benefit of their employees. Such contributions are not includible in the
gross income of the employee until the employee receives distributions from
the contract. The amount of contributions to the tax-sheltered annuity is
limited to certain maximums imposed by the Code. Furthermore, the Code sets
forth additional restrictions governing such items as transferability,
distributions, nondiscrimination and withdrawals. Any employee should
obtain competent tax advice as to the tax treatment and suitability of such
an investment.
(c) INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed
to an IRA which will be deductible from the individual's gross income.
These IRAs are subject to limitations on eligibility, contributions,
transferability and distributions. Sales of contracts for use with IRAs are
subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure be given to persons
desiring to establish an IRA. Purchasers of contracts to be qualified as
IRAs should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
(d) ROTH IRAS
Section 408(a) of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408(b) of the Code, contributions to a Roth IRA
are not made on a tax-deferred basis, but distributions are tax-free if
certain requirements are satisfied. Like regular IRAs, Roth IRAs are
subject to limitations on the amount that may be contributed, those who may
be eligible and the time when distributions may commence without tax
penalty. Certain persons may be eligible to convert a regular IRA into a
Roth IRA, and the taxes on the resulting income may be spread over four
years if the conversion occurs before January 1, 1999. If and when the
contracts are made available for use with Roth IRAs, they may be subject to
special requirements imposed by the Internal Revenue Service ("IRS").
Purchasers of the contracts for this purpose will be provided with such
supplementary information as may be required by the IRS or other
appropriate agency.
(e) CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to
establish various types of retirement plans for employees. These retirement
plans may permit the purchase of the contracts to provide benefits under
the plan. Contributions to the plan for the benefit of employees will not
be includible in the gross income of the employee until distributed from
the plan. The tax consequences to owners may vary depending upon the
particular plan design. However, the Code places limitations on all plans
on such items as amount of allowable contributions; form, manner and timing
of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment
of distributions, withdrawals and surrenders.
9
<PAGE> 51
(f) DEFERRED COMPENSATION PLANS - SECTION 457
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish, for the benefit of their employees, deferred
compensation plans which may invest in annuity contracts. The Code, as in
the case of Qualified plans, establishes limitations and restrictions on
eligibility, contributions and distributions. Under these plans,
contributions made for the benefit of the employees will not be includible
in the employees' gross income until distributed from the plan. However,
under a 457 plan all the plan assets shall remain solely the property of
the employer, subject only to the claims of the employer's general
creditors until such time as made available to an owner or a Beneficiary.
Purchasers of contracts for use with corporate pension or profit sharing
plans should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
DISTRIBUTION OF CONTRACTS
Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York 10178, serves as the principal underwriter of the contracts. VFD
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, and is a member of the National Association of Securities Dealers, Inc.
and is not affiliated with the Company.
VFD has entered into sales agreements with other broker/dealers to solicit
applications for the contracts through registered representatives who are
licensed to sell securities and variable insurance products. These agreements
provide that applications for the contracts may be solicited by registered
representatives of the broker/dealers appointed by the Company to sell its
variable annuities. Such broker/dealers will receive compensation as described
in the prospectus. For the years ended August 31, 1999, 1998, 1997 and 1996, no
commissions were paid to VFD as principal underwriter of the contracts.
Contracts are offered on a continuous basis.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of September 30,
1998 and 1997 and for each of the three years in the period ended September 30,
1998 are presented in this Statement of Additional Information. The Company
changed its fiscal year end to December 31. Reflecting this change, also
included in this Statement of Additional Information is an audited Transition
Report of the Company as of and for the three month period ending December 31,
1998. The consolidated financial statements of the Company should be considered
only as bearing on the ability of the Company to meet its obligation under the
fixed portion of the Contracts. The financial statements of Variable Annuity
Account Two as of August 31, 1999 and for each of the two years in the period
ended August 31, 1999, are included in this Statement of Additional Information.
PricewaterhouseCoopers LLP, 400 South Hope Street, Los Angeles, California
90071, serves as the independent accountants for the Separate Account and the
Company. The financial statements referred to above have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
10
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries (the "Company")at September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
-14-
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments........................ $ 333,735,000 $ 113,580,000
Bonds, notes and redeemable preferred stocks available
for sale, at fair value (amortized cost: 1998,
$1,934,863,000; 1997, $1,942,485,000)............... 1,954,754,000 1,986,194,000
Mortgage loans......................................... 391,448,000 339,530,000
Common stocks available for sale, at fair value (cost:
1998, $115,000; 1997, $271,000)..................... 169,000 1,275,000
Real estate............................................ 24,000,000 24,000,000
Other invested assets.................................. 30,636,000 143,722,000
--------------- ---------------
Total investments...................................... 2,734,742,000 2,608,301,000
--------------- ---------------
Variable annuity assets held in separate accounts........ 11,133,569,000 9,343,200,000
Accrued investment income................................ 26,408,000 21,759,000
Deferred acquisition costs............................... 539,850,000 536,155,000
Income taxes currently receivable........................ 5,869,000 --
Other assets............................................. 85,926,000 61,524,000
--------------- ---------------
TOTAL ASSETS............................................. $14,526,364,000 $12,570,939,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts................... $ 2,189,272,000 $ 2,098,803,000
Reserves for guaranteed investment contracts........... 282,267,000 295,175,000
Payable to brokers for purchases of securities......... 27,053,000 263,000
Income taxes currently payable......................... -- 32,265,000
Other liabilities...................................... 106,594,000 122,728,000
--------------- ---------------
Total reserves, payables and accrued
liabilities.......................................... 2,605,186,000 2,549,234,000
--------------- ---------------
Variable annuity liabilities related to separate
accounts............................................... 11,133,569,000 9,343,200,000
--------------- ---------------
Subordinated notes payable to Parent..................... 39,182,000 36,240,000
--------------- ---------------
Deferred income taxes.................................... 95,758,000 67,047,000
--------------- ---------------
Shareholder's equity:
Common Stock........................................... 3,511,000 3,511,000
Additional paid-in capital............................. 308,674,000 308,674,000
Retained earnings...................................... 332,069,000 244,628,000
Net unrealized gains on debt and equity securities
available for sale.................................. 8,415,000 18,405,000
--------------- ---------------
Total shareholder's equity............................. 652,669,000 575,218,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............... $14,526,364,000 $12,570,939,000
=============== ===============
</TABLE>
See accompanying notes.
-15-
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Investment income.......................... $ 221,966,000 $ 210,759,000 $ 164,631,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts.................. (112,695,000) (109,217,000) (82,690,000)
Guaranteed investment contracts.......... (17,787,000) (22,650,000) (19,974,000)
Senior indebtedness...................... (1,498,000) (2,549,000) (2,568,000)
Subordinated notes payable to Parent....... (3,114,000) (3,142,000) (2,556,000)
------------- ------------- -------------
Total interest expense..................... (135,094,000) (137,558,000) (107,788,000)
------------- ------------- -------------
NET INVESTMENT INCOME...................... 86,872,000 73,201,000 56,843,000
------------- ------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES)................................. 19,482,000 (17,394,000) (13,355,000)
------------- ------------- -------------
Fee income:
Variable annuity fees.................... 200,867,000 139,492,000 103,970,000
Net retained commissions................. 48,561,000 39,143,000 31,548,000
Asset management fees.................... 29,592,000 25,764,000 25,413,000
Surrender charges........................ 7,404,000 5,529,000 5,184,000
Other fees............................... 3,938,000 3,218,000 3,390,000
------------- ------------- -------------
TOTAL FEE INCOME........................... 290,362,000 213,146,000 169,505,000
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES................................. (96,102,000) (98,802,000) (81,552,000)
------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS........................ (72,713,000) (66,879,000) (57,520,000)
------------- ------------- -------------
ANNUAL COMMISSIONS......................... (18,209,000) (8,977,000) (4,613,000)
------------- ------------- -------------
PRETAX INCOME.............................. 209,692,000 94,295,000 69,308,000
Income tax expense......................... (71,051,000) (31,169,000) (24,252,000)
------------- ------------- -------------
NET INCOME................................. $ 138,641,000 $ 63,126,000 $ 45,056,000
============= ============= =============
</TABLE>
See accompanying notes.
-16-
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 138,641,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts............................... 112,695,000 109,217,000 82,690,000
Guaranteed investment contracts....................... 17,787,000 22,650,000 19,974,000
Net realized investment (gains) losses.................. (19,482,000) 17,394,000 13,355,000
Amortization (accretion) of net premiums (discounts) on
investments........................................... 447,000 (18,576,000) (8,976,000)
Amortization of goodwill................................ 1,422,000 1,187,000 1,169,000
Provision for deferred income taxes..................... 34,087,000 (16,024,000) (3,351,000)
Change in:
Accrued investment income............................... (4,649,000) (2,084,000) (5,483,000)
Deferred acquisition costs.............................. (160,926,000) (113,145,000) (60,941,000)
Other assets............................................ (19,374,000) (14,598,000) (8,000,000)
Income taxes currently payable.......................... (38,134,000) 10,779,000 5,766,000
Other liabilities....................................... (2,248,000) 14,187,000 5,474,000
Other, net................................................ (5,599,000) 418,000 (129,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 54,667,000 74,531,000 86,604,000
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts................................. 1,512,994,000 1,097,937,000 741,774,000
Guaranteed investment contracts......................... 5,619,000 55,000,000 134,967,000
Net exchanges from the fixed accounts of variable annuity
contracts............................................... (1,303,790,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts................................. (191,690,000) (242,589,000) (263,614,000)
Guaranteed investment contracts......................... (36,313,000) (198,062,000) (16,492,000)
Claims and annuity payments on fixed annuity contracts.... (40,589,000) (35,731,000) (31,107,000)
Net receipts from (repayments of) other short-term
financings.............................................. (10,944,000) 34,239,000 (119,712,000)
Net receipts from a modified coinsurance transaction...... 166,631,000 -- --
Capital contributions received............................ -- 28,411,000 27,387,000
Dividends paid............................................ (51,200,000) (25,500,000) (29,400,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 50,718,000 93,338,000 207,098,000
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks............ $(1,970,502,000) $(2,566,211,000) $(1,937,890,000)
Mortgage loans.......................................... (131,386,000) (266,771,000) (15,000,000)
Other investments, excluding short-term investments..... -- (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable preferred stocks............ 1,602,079,000 2,299,063,000 1,241,928,000
Real estate............................................. -- -- 900,000
Other investments, excluding short-term investments..... 42,458,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks............ 424,393,000 376,847,000 288,969,000
Mortgage loans.......................................... 80,515,000 25,920,000 11,324,000
Other investments, excluding short-term investments..... 67,213,000 23,940,000 20,749,000
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ 114,770,000 (176,347,000) (420,853,000)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... 220,155,000 (8,478,000) (127,151,000)
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD...... 113,580,000 122,058,000 249,209,000
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD............ $ 333,735,000 $ 113,580,000 $ 122,058,000
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............................. $ 3,912,000 $ 7,032,000 $ 5,982,000
=============== =============== ===============
Net income taxes paid..................................... $ 74,932,000 $ 36,420,000 $ 22,031,000
=============== =============== ===============
</TABLE>
See accompanying notes
-17-
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica Inc. (the "Parent"). The Company is an
Arizona-domiciled life insurance company and conducts its business through three
segments: annuity operations, asset management operations and broker-dealer
operations. Annuity operations include the sale and administration of fixed and
variable annuities and guaranteed investment contracts. Asset management
operations, which includes the sale and management of mutual funds, is conducted
by SunAmerica Asset Management Corp. Broker-dealer operations include the sale
of securities and financial services products, and are conducted by Royal
Alliance Associates, Inc.
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, 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 managed in mutual funds
and held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of the Company and all of its wholly owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with the 1998 presentation.
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.
INVESTMENTS: 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, notes and redeemable preferred stocks available for sale and common
stocks 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, notes and redeemable preferred stocks 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. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in limited partnerships, which are
accounted for by using the cost method of accounting; separate account
investments; leveraged leases; policy loans, which are carried at unpaid
balances; and collateralized mortgage obligation residuals.
-18-
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the 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.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or received
on interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Investment Income or Interest
Expense in the income statement. Initially, Swap Agreements are designated as
hedges and, therefore, are not marked to market. However, when a hedged
asset/liability is sold or repaid before the related Swap Agreement matures, the
Swap Agreement is marked to market and any gain/loss is classified with any
gain/loss realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting change in
fair value is included in Investment Income in the income statement. When a Swap
Agreement that is designated as a hedge is terminated before its contractual
maturity, any resulting gain/loss is credited/charged to the carrying value of
the asset/liability that it hedged and is treated as a premium/discount for the
remaining life of the asset/liability.
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. Costs incurred to sell mutual funds are also deferred
and amortized over the estimated lives of the funds obtained. Deferred
acquisition costs ("DAC") 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 DAC 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/losses on debt and equity securities available for sale that is credited
or charged directly to shareholder's equity. DAC have been decreased by
$7,000,000 at September 30, 1998 and $16,400,000 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, amounting to $23,339,000 at September 30, 1998, is
amortized by using the straight-line method over periods averaging 25 years and
is included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and guaranteed investment 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).
-19-
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEE INCOME: Variable annuity fees, asset management fees and surrender
charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade date basis.
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred 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 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130 is
effective for the Company as of October 1, 1998 and is not included in these
financial statements.
SFAS 131 establishes standards for the disclosure of information about the
Company's operating segments. SFAS 131 is effective for the year ending
September 30, 1999 and is not included in these financial statements.
Implementation of SFAS 130 and SFAS 131 will not have an impact on the
Company's results of operations, financial condition or liquidity.
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 is effective for the Company as of October 1, 1999 and is
not included in these 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.
-20-
<PAGE> 59
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government....... $ 84,377,000 $ 88,239,000
Mortgage-backed securities....................... 569,613,000 584,007,000
Securities of public utilities................... 108,431,000 106,065,000
Corporate bonds and notes........................ 883,890,000 884,209,000
Redeemable preferred stocks...................... 6,125,000 6,888,000
Other debt securities............................ 282,427,000 285,346,000
-------------- --------------
Total.................................... $1,934,863,000 $1,954,754,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States Government....... $ 18,496,000 $ 18,962,000
Mortgage-backed securities....................... 636,018,000 649,196,000
Securities of public utilities................... 22,792,000 22,893,000
Corporate bonds and notes........................ 984,573,000 1,012,559,000
Redeemable preferred stocks...................... 6,125,000 6,681,000
Other debt securities............................ 274,481,000 275,903,000
-------------- --------------
Total.................................... $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1998, follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less............................ $ 19,124,000 $ 19,319,000
Due after one year through five years.............. 313,396,000 318,943,000
Due after five years through ten years............. 744,740,000 750,286,000
Due after ten years................................ 287,990,000 282,199,000
Mortgage-backed securities......................... 569,613,000 584,007,000
-------------- --------------
Total.................................... $1,934,863,000 $1,954,754,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
-21-
<PAGE> 60
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- ------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government........... $ 3,862,000 $ --
Mortgage-backed securities........................... 15,103,000 (709,000)
Securities of public utilities....................... 2,420,000 (4,786,000)
Corporate bonds and notes............................ 31,795,000 (31,476,000)
Redeemable preferred stocks.......................... 763,000 --
Other debt securities................................ 5,235,000 (2,316,000)
----------- ------------
Total........................................ $59,178,000 $(39,287,000)
=========== ============
AT SEPTEMBER 30, 1997:
Securities of the United States Government........... $ 498,000 $ (32,000)
Mortgage-backed securities........................... 14,998,000 (1,820,000)
Securities of public utilities....................... 141,000 (40,000)
Corporate bonds and notes............................ 28,691,000 (705,000)
Redeemable preferred stocks.......................... 556,000 --
Other debt securities................................ 1,569,000 (147,000)
----------- ------------
Total........................................ $46,453,000 $ (2,744,000)
=========== ============
</TABLE>
Gross unrealized gains on equity securities available for sale aggregated
$54,000 and $1,004,000 at September 30, 1998 and 1997, respectively. There were
no unrealized losses at September 30, 1998 and 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE PREFERRED
STOCKS:
Realized gains....................... $28,086,000 $ 22,179,000 $ 14,532,000
Realized losses...................... (4,627,000) (25,310,000) (10,432,000)
COMMON STOCKS:
Realized gains....................... 337,000 4,002,000 511,000
Realized losses...................... -- (312,000) (3,151,000)
OTHER INVESTMENTS:
Realized gains....................... 8,824,000 2,450,000 1,135,000
IMPAIRMENT WRITEDOWNS.................. (13,138,000) (20,403,000) (15,950,000)
----------- ------------ ------------
Total net realized investment
gains and losses........... $19,482,000 $(17,394,000) $(13,355,000)
=========== ============ ============
</TABLE>
-22-
<PAGE> 61
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Short-term investments................ $ 12,524,000 $ 11,780,000 $ 10,647,000
Bonds, notes and redeemable preferred
stocks.............................. 156,140,000 163,038,000 140,387,000
Mortgage loans........................ 29,996,000 17,632,000 8,701,000
Common stocks......................... 34,000 16,000 8,000
Real estate........................... (467,000) (296,000) (196,000)
Cost-method partnerships.............. 24,311,000 6,725,000 4,073,000
Other invested assets................. (572,000) 11,864,000 1,011,000
------------ ------------ ------------
Total investment income..... $221,966,000 $210,759,000 $164,631,000
============ ============ ============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $1,910,000
for the year ended September 30, 1998, $2,050,000 for the year ended September
30, 1997, and $1,737,000 for the year ended September 30, 1996, and are included
in General and Administrative Expenses in the income statement.
At September 30, 1998, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
At September 30, 1998, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 21% of the aggregate
carrying value of the portfolio secured by properties located in California and
approximately 14% by properties located in New York. No more than 8% of the
portfolio was secured by properties in any other single state.
At September 30, 1998, bonds, notes and redeemable preferred stocks
included $167,564,000 of bonds and notes not rated investment grade. The Company
had no material concentrations of non-investment-grade assets at September 30,
1998.
At September 30, 1998, the carrying value of investments in default as to
the payment of principal or interest was $917,000, all of which were mortgage
loans. Such nonperforming investments had an estimated fair value equal to their
carrying value.
As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments. At September 30,
1998, the Company had one outstanding Swap Agreement with a notional principal
amount of $21,538,000, which matures in December 2024. The net interest paid
amounted to $278,000 and $125,000 for the years ended September 30, 1998 and
1997, respectively, and is included in Interest Expense on Guaranteed Investment
Contracts in the income statement.
At September 30, 1998, $5,154,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
-23-
<PAGE> 62
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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 real estate investments and
other invested assets except for cost-method partnerships) 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, NOTES AND REDEEMABLE PREFERRED STOCKS: 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.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for
by using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life 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.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of a hedging Swap Agreement, determined from independent
broker quotes.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent
net transactions of a short-term nature for which the carrying value is
considered a reasonable estimate of fair 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.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the
quoted market prices for similar issues.
-24-
<PAGE> 63
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 30, 1998 and 1997, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
--------------- ---------------
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments........................ $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable preferred stocks........... 1,954,754,000 1,954,754,000
Mortgage loans......................................... 391,448,000 415,981,000
Common stocks.......................................... 169,000 169,000
Cost-method partnerships............................... 4,403,000 12,744,000
Variable annuity assets held in separate accounts...... 11,133,569,000 11,133,569,000
LIABILITIES:
Reserves for fixed annuity contracts................... 2,189,272,000 2,116,874,000
Reserves for guaranteed investment contracts........... 282,267,000 282,267,000
Payable to brokers for purchases of securities......... 27,053,000 27,053,000
Variable annuity liabilities related to separate
accounts............................................ 11,133,569,000 10,696,607,000
Subordinated notes payable to Parent................... 39,182,000 40,550,000
=============== ===============
1997:
ASSETS:
Cash and short-term investments........................ $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable preferred stocks........... 1,986,194,000 1,986,194,000
Mortgage loans......................................... 339,530,000 354,495,000
Common stocks.......................................... 1,275,000 1,275,000
Cost-method partnerships............................... 46,880,000 84,186,000
Variable annuity assets held in separate accounts...... 9,343,200,000 9,343,200,000
LIABILITIES:
Reserves for fixed annuity contracts................... 2,098,803,000 2,026,258,000
Reserves for guaranteed investment contracts........... 295,175,000 295,175,000
Payable to brokers for purchases of securities......... 263,000 263,000
Variable annuity liabilities related to separate
accounts............................................ 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent................... 36,240,000 37,393,000
=============== ===============
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes and accrued interest payable to Parent totaled
$39,182,000 at interest rates ranging from 8.5% to 9% at September 30, 1998, and
require principal payments of $23,060,000 in 1999, $5,400,000 in 2000 and
$10,000,000 in 2001.
6. REINSURANCE
On August 11, 1998, the Company entered into a modified coinsurance
transaction, approved by the Arizona Department of Insurance, which involves the
ceding of approximately $5,000,000,000 of variable annuities to ANLIC Insurance
Company (Cayman), a Cayman Islands stock life insurance company, effective
December 31, 1997. As a part of this transaction, the Company received cash
amounting to approximately $188,700,000, and recorded a corresponding reduction
of DAC related to the coinsured annuities.
-25-
<PAGE> 64
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REINSURANCE (CONTINUED)
As payments are made to the reinsurer, the reduction of DAC is relieved.
The net reduction in DAC at September 30, 1998 was $166,631,000. Certain
expenses related to this transaction are being charged directly to DAC
amortization in the income statement. The net effect of this transaction in the
income statement is not material.
7. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided
liquidity support for certain short-term securities of two municipalities by
agreeing to purchase such securities in the event there is no other buyer in the
short-term marketplace. In return the Company receives a fee. The maximum
liability under these guarantees is $242,600,000. Management does not anticipate
any material future losses with respect to these liquidity support facilities.
An additional $51,000,000 has been committed to investments in the process of
being funded or to be available in the case of certain natural disasters, for
which the Company receives a fee.
The Company is involved in various kinds of litigation common to its
businesses. 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 or results of operations.
-26-
<PAGE> 65
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At September 30, 1998 and 1997, 3,511 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances.................. $308,674,000 $280,263,000 $252,876,000
Capital contributions received...... -- 28,411,000 27,387,000
------------ ------------ ------------
Ending balances.................. $308,674,000 $308,674,000 $280,263,000
============ ============ ============
RETAINED EARNINGS:
Beginning balances.................. $244,628,000 $207,002,000 $191,346,000
Net income.......................... 138,641,000 63,126,000 45,056,000
Dividend paid....................... (51,200,000) (25,500,000) (29,400,000)
------------ ------------ ------------
Ending balances.................. $332,069,000 $244,628,000 $207,002,000
============ ============ ============
NET UNREALIZED GAINS (LOSSES) ON
DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balances............... $ 18,405,000 $ (5,521,000) $ (5,673,000)
Change in net unrealized gains
(losses) on debt securities
available for sale............. (23,818,000) 57,463,000 (2,904,000)
Change in net unrealized gains
(losses) on equity securities
available for sale............. (950,000) (55,000) 3,538,000
Change in adjustment to deferred
acquisition costs.............. 9,400,000 (20,600,000) (400,000)
Tax effects of net changes....... 5,378,000 (12,882,000) (82,000)
------------ ------------ ------------
Ending balances................ $ 8,415,000 $ 18,405,000 $ (5,521,000)
============ ============ ============
</TABLE>
Dividends that the Company may pay to its shareholder in any year without
prior approval of the Arizona Department of Insurance are limited by statute.
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior approval
of the Insurance Commissioner is limited to the lesser of either 10% of the
preceding year's statutory surplus or the preceding year's statutory net gain
from operations. Dividends in the amounts of $51,200,000, $25,500,000 and
$29,400,000 were paid on June 4, 1998, April 1, 1997 and March 18, 1996,
respectively.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1998 was $64,125,000. The statutory net income for the year ended
December 31, 1997 was $74,407,000, and the statutory net income for the year
ended December 31, 1996 was $27,928,000. The Company's statutory capital and
surplus was $537,542,000 at September 30, 1998, $567,979,000 at December 31,
1997 and $311,176,000 at December 31, 1996.
-27-
<PAGE> 66
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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>
1998:
Currently payable................... $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred............................ (550,000) 34,637,000 34,087,000
------------ ------------ ------------
Total income tax expense.... $ 3,671,000 $ 67,380,000 $ 71,051,000
============ ============ ============
1997:
Currently payable................... $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred............................ (2,258,000) (13,766,000) (16,024,000)
------------ ------------ ------------
Total income tax expense.... $ (5,893,000) $ 37,062,000 $ 31,169,000
============ ============ ============
1996:
Currently payable................... $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred............................ (10,347,000) 6,996,000 (3,351,000)
------------ ------------ ------------
Total income tax expense.... $ (4,593,000) $ 28,845,000 $ 24,252,000
============ ============ ============
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Amount computed at statutory rate........ $73,392,000 $33,003,000 $24,258,000
Increases (decreases) resulting from:
Amortization of differences between
book and tax bases of net assets
acquired............................ 460,000 666,000 464,000
State income taxes, net of federal tax
benefit............................. 5,530,000 1,950,000 2,070,000
Dividends-received deduction........... (7,254,000) (4,270,000) (2,357,000)
Tax credits............................ (1,296,000) (318,000) (257,000)
Other, net............................. 219,000 138,000 74,000
----------- ----------- -----------
Total income tax expense....... $71,051,000 $31,169,000 $24,252,000
=========== =========== ===========
</TABLE>
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at September 30, 1998. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
-28-
<PAGE> 67
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments....................................... $ 17,643,000 $ 13,160,000
Deferred acquisition costs........................ 223,392,000 154,949,000
State income taxes................................ 2,873,000 1,777,000
Other liabilities................................. 144,000 --
Net unrealized gains on debt and equity securities
available for sale............................. 4,531,000 9,910,000
------------- -------------
Total deferred tax liabilities............ 248,583,000 179,796,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves........................... (149,915,000) (108,090,000)
Guaranty fund assessments......................... (2,910,000) (2,707,000)
Other assets...................................... -- (1,952,000)
------------- -------------
Total deferred tax assets................. (152,825,000) (112,749,000)
------------- -------------
DEFERRED INCOME TAXES............................... $ 95,758,000 $ 67,047,000
============= =============
</TABLE>
10. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp. and Spelman & Co. Inc. Commissions paid to these broker-dealers
totaled $32,946,000 in 1998, $25,492,000 in 1997, and $16,906,000 in 1996. These
broker-dealers, when combined with the Company's wholly owned broker-dealer,
represent a significant portion of the Company's business, amounting to
approximately 33.6%, 36.1%, and 38.3% of premiums in 1998, 1997, and 1996,
respectively. The Company also sells its products through unaffiliated
broker-dealers, the largest two of which represented approximately 17.3% and
8.4% of premiums in 1998, 19.2% and 10.1% in 1997, and 19.7% and 10.2% in 1996,
respectively.
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 $84,975,000 for the year ended September 30, 1998, $86,116,000
for the year ended September 30, 1997 and $65,351,000 for the year ended
September 30, 1996. The marketing component of such costs during these periods
amounted to $39,482,000, $31,968,000 and $17,442,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of such costs are included in General and Administrative Expenses in
the income statement.
The Parent made a capital contribution of $28,411,000 in December 1996 to
the Company, through the Company's direct parent, in exchange for the
termination of its guaranty with respect to certain real estate owned in
Arizona. Accordingly, the Company reduced the carrying value of this real estate
to estimated fair value to reflect the termination of the guaranty.
During the year ended September 30, 1998, the Company sold various invested
assets to the Parent for cash equal to their current market value of
$64,431,000. The Company recorded a net gain aggregating $16,388,000 on such
transactions.
-29-
<PAGE> 68
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY MATTERS (CONTINUED)
During the year ended September 30, 1998, the Company purchased certain
invested assets from the Parent, SunAmerica Life Insurance Company and
CalAmerica Life Insurance Company for cash equal to their current market value,
which aggregated $20,666,000, $10,468,000 and $61,000, respectively.
During the year ended September 30, 1997, the Company sold various invested
assets to SunAmerica Life Insurance Company and to CalAmerica Life Insurance
Company for cash equal to their current market value of $15,776,000 and $15,000,
respectively. The Company recorded a net gain aggregating $276,000 on such
transactions.
During the year ended September 30, 1997, the Company purchased certain
invested assets from SunAmerica Life Insurance Company and CalAmerica Life
Insurance Company for cash equal to their current market value of $8,717,000 and
$284,000, respectively.
During the year ended September 30, 1996, the Company sold various invested
assets to the Parent and to SunAmerica Life Insurance Company for cash equal to
their current market value of $274,000 and $47,321,000, respectively. The
Company recorded a net loss aggregating $3,000 on such transactions.
During the year ended September 30, 1996, the Company purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal to their
current market value, which aggregated $28,379,000.
11. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX TOTAL
REVENUES EXPENSE INCOME ASSETS
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
1998:
Annuity operations......... $443,407,000 $60,731,000 $178,120,000 $14,366,018,000
Broker-dealer operations... 47,363,000 1,770,000 22,401,000 55,870,000
Asset management
operations.............. 41,040,000 14,780,000 9,171,000 104,476,000
------------ ----------- ------------ ---------------
Total.............. $531,810,000 $77,281,000 $209,692,000 $14,526,364,000
============ =========== ============ ===============
1997:
Annuity operations......... $332,845,000 $55,675,000 $ 74,792,000 $12,438,021,000
Broker-dealer operations... 38,005,000 689,000 16,705,000 51,400,000
Asset management
operations.............. 35,661,000 16,357,000 2,798,000 81,518,000
------------ ----------- ------------ ---------------
Total.............. $406,511,000 $72,721,000 $ 94,295,000 $12,570,939,000
============ =========== ============ ===============
1996:
Annuity operations......... $256,681,000 $43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer operations... 31,053,000 449,000 13,033,000 37,355,000
Asset management
operations.............. 33,047,000 18,295,000 2,448,000 74,410,000
------------ ----------- ------------ ---------------
Total.............. $320,781,000 $62,718,000 $ 69,308,000 $ 9,204,535,000
============ =========== ============ ===============
</TABLE>
-30-
<PAGE> 69
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
On July 15, 1998, the Company entered into a definitive agreement to
acquire the individual life business and the individual and group annuity
business of MBL Life Assurance Corporation ("MBL Life") via a 100% coinsurance
transaction for approximately $130,000,000 in cash. The transaction will include
approximately $2,000,000,000 of universal life reserves and $3,000,000,000 of
fixed annuity reserves. The Company plans to reinsure a large portion of the
mortality risk associated with the acquired block of universal life business.
Completion of this acquisition is expected by the end of calendar year 1998 and
is subject to customary conditions and required approvals. Included in this
block of business is approximately $250,000,000 of individual life business and
$500,000,000 of group annuity business whose contract owners are residents of
New York State ("the New York Business"). Approximately six months subsequent to
completion of the transaction, the New York Business will be acquired by the
Company's New York affiliate, First SunAmerica Life Insurance Company, and the
remainder of the business will be acquired by the Company via assumption
reinsurance agreements between MBL Life and the respective companies, which will
supersede the coinsurance agreement. The $130,000,000 purchase price will be
allocated between the Company and its affiliate based on their respective
assumed life insurance reserves.
On August 20, 1998, the Parent announced that it has entered into a
definite agreement to merge with and into American International Group, Inc.
("AIG"). Under the terms of the agreement, each share of the Parent's common
stock (including Nontransferable Class B) will be exchanged for 0.855 shares of
AIG's common stock. The transaction will be treated as a pooling of interests
for accounting purposes and will be a tax-free reorganization. The transaction
was approved by both the Parent's and AIG's shareholders on November 18, 1998,
and, subject to various regulatory approvals, will be completed in late 1998 or
early 1999.
-31-
<PAGE> 70
Report of Independent Accountants
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and comprehensive income and cash flows present
fairly, in all material respects, the financial position of Anchor National Life
Insurance Company and its subsidiaries (the "Company") at December 31, 1998,
September 30, 1998 and 1997, and the results of their operations and their cash
flows for the three months ended December 31, 1998 and for each of the three
fiscal years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
November 19, 1999
3
<PAGE> 71
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At September 30,
December 31, ------------------------------------
1998 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 3,303,454,000 $ 333,735,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
December 1998, $4,252,740,000;
September 1998, $1,934,863,000;
September 1997, $1,942,485,000) 4,248,840,000 1,954,754,000 1,986,194,000
Mortgage loans 388,780,000 391,448,000 339,530,000
Policy loans 320,688,000 11,197,000 10,948,000
Common stocks available for sale,
at fair value (cost: December 1998,
$1,409,000; September 1998, $115,000;
September 1997, $271,000) 1,419,000 169,000 1,275,000
Partnerships 4,577,000 4,403,000 46,880,000
Real estate 24,000,000 24,000,000 24,000,000
Other invested assets 15,185,000 15,036,000 85,894,000
--------------- --------------- ---------------
Total investments 8,306,943,000 2,734,742,000 2,608,301,000
Variable annuity assets held in separate
accounts 13,767,213,000 11,133,569,000 9,343,200,000
Accrued investment income 73,441,000 26,408,000 21,759,000
Deferred acquisition costs 866,053,000 539,850,000 536,155,000
Income taxes currently receivable -- 5,869,000 --
Receivable from brokers for sales of
securities 22,826,000 23,904,000 2,290,000
Other assets 109,857,000 85,926,000 61,524,000
--------------- --------------- ---------------
TOTAL ASSETS $23,146,333,000 $14,550,268,000 $12,573,229,000
=============== =============== ===============
</TABLE>
See accompanying notes
4
<PAGE> 72
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
At September 30,
December 31, --------------------------------------
1998 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 5,500,157,000 $ 2,189,272,000 $ 2,098,803,000
Reserves for universal life insurance
contracts 2,339,194,000 -- --
Reserves for guaranteed investment
contracts 306,461,000 282,267,000 295,175,000
Payable to brokers for purchases of
securities -- 50,957,000 2,553,000
Income taxes currently payable 11,123,000 -- 32,265,000
Other liabilities 160,020,000 106,594,000 122,728,000
---------------- ---------------- ----------------
Total reserves, payables
and accrued liabilities 8,316,955,000 2,629,090,000 2,551,524,000
---------------- ---------------- ----------------
Variable annuity liabilities related to
separate accounts 13,767,213,000 11,133,569,000 9,343,200,000
---------------- ---------------- ----------------
Subordinated notes payable to affiliates 209,367,000 39,182,000 36,240,000
---------------- ---------------- ----------------
Deferred income taxes 105,772,000 95,758,000 67,047,000
---------------- ---------------- ----------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000 3,511,000
Additional paid-in capital 378,674,000 308,674,000 308,674,000
Retained earnings 366,460,000 332,069,000 244,628,000
Accumulated other comprehensive
income (loss) (1,619,000) 8,415,000 18,405,000
---------------- ---------------- ----------------
Total shareholder's equity 747,026,000 652,669,000 575,218,000
---------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 23,146,333,000 $ 14,550,268,000 $ 12,573,229,000
================ ================ ================
</TABLE>
See accompanying notes
5
<PAGE> 73
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment income $ 54,278,000 $ 221,966,000 $ 210,759,000 $ 164,631,000
------------- ------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (22,828,000) (112,695,000) (109,217,000) (82,690,000)
Guaranteed investment
contracts (3,980,000) (17,787,000) (22,650,000) (19,974,000)
Senior indebtedness (34,000) (1,498,000) (2,549,000) (2,568,000)
Subordinated notes payable to
affiliates (471,000) (3,114,000) (3,142,000) (2,556,000)
------------- ------------- ------------- -------------
Total interest expense (27,313,000) (135,094,000) (137,558,000) (107,788,000)
------------- ------------- ------------- -------------
NET INVESTMENT INCOME 26,965,000 86,872,000 73,201,000 56,843,000
------------- ------------- ------------- -------------
NET REALIZED INVESTMENT GAINS
(LOSSES) 271,000 19,482,000 (17,394,000) (13,355,000)
------------- ------------- ------------- -------------
Fee income:
Variable annuity fees 58,806,000 200,867,000 139,492,000 103,970,000
Net retained commissions 11,479,000 48,561,000 39,143,000 31,548,000
Asset management fees 8,068,000 29,592,000 25,764,000 25,413,000
Surrender charges 3,239,000 7,404,000 5,529,000 5,184,000
Other fees 1,738,000 3,938,000 3,218,000 3,390,000
------------- ------------- ------------- -------------
TOTAL FEE INCOME 83,330,000 290,362,000 213,146,000 169,505,000
------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES (22,375,000) (96,102,000) (98,802,000) (81,552,000)
------------- ------------- ------------- -------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (27,070,000) (72,713,000) (66,879,000) (57,520,000)
------------- ------------- ------------- -------------
ANNUAL COMMISSIONS (6,624,000) (18,209,000) (8,977,000) (4,613,000)
------------- ------------- ------------- -------------
PRETAX INCOME 54,497,000 209,692,000 94,295,000 69,308,000
Income tax expense (20,106,000) (71,051,000) (31,169,000) (24,252,000)
------------- ------------- ------------- -------------
NET INCOME 34,391,000 138,641,000 63,126,000 45,056,000
------------- ------------- ------------- -------------
Other comprehensive income, net
of tax:
Net unrealized gains on bonds and
notes available for sale:
Net unrealized gains
identified in the current
period (10,249,000) (4,027,000) 16,605,000 (11,265,000)
Less reclassification
Adjustment for net
realized gains included
in net income 215,000 (5,963,000) 7,321,000 11,417,000
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) (10,034,000) (9,990,000) 23,926,000 152,000
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME $ 24,357,000 $ 128,651,000 $ 87,052,000 $ 45,208,000
============= ============= ============= =============
</TABLE>
See accompanying notes
6
<PAGE> 74
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 34,391,000 $ 138,641,000 $ 63,126,000 $ 45,056,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 22,828,000 112,695,000 109,217,000 82,690,000
Guaranteed investment
contracts 3,980,000 17,787,000 22,650,000 19,974,000
Net realized investment losses
(gains) (271,000) (19,482,000) 17,394,000 13,355,000
Amortization (accretion) of
net premiums (discounts)
on investments (1,199,000) 447,000 (18,576,000) (8,976,000)
Amortization of goodwill 356,000 1,422,000 1,187,000 1,169,000
Provision for deferred income
taxes 15,945,000 34,087,000 (16,024,000) (3,351,000)
Change in:
Accrued investment income (1,512,000) (4,649,000) (2,084,000) (5,483,000)
Deferred acquisition costs (34,328,000) (160,926,000) (113,145,000) (60,941,000)
Other assets (21,070,000) (19,374,000) (14,598,000) (8,000,000)
Income taxes currently payable 16,992,000 (38,134,000) 10,779,000 5,766,000
Other liabilities 5,617,000 (2,248,000) 14,187,000 5,474,000
Other, net 5,510,000 (5,599,000) 418,000 (129,000)
--------------- --------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 47,239,000 54,667,000 74,531,000 86,604,000
--------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks (392,515,000) (1,970,502,000) (2,566,211,000) (1,937,890,000)
Mortgage loans (4,962,000) (131,386,000) (266,771,000) (15,000,000)
Other investments, excluding
short-term investments (1,992,000) -- (75,556,000) (36,770,000)
Sales of:
Bonds, notes and redeemable
Preferred stocks 265,039,000 1,602,079,000 2,299,063,000 1,241,928,000
Real estate -- -- -- 900,000
Other investments, excluding
short-term investments 142,000 42,458,000 6,421,000 4,937,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks 37,290,000 424,393,000 376,847,000 288,969,000
Mortgage loans 7,699,000 80,515,000 25,920,000 11,324,000
Other investments, excluding
short-term investments 853,000 67,213,000 23,940,000 20,749,000
Cash and short-term investments
acquired in coinsurance
transaction with MBL Life
Assurance Corporation 3,083,211,000 -- -- --
--------------- --------------- --------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 2,994,765,000 114,770,000 (176,347,000) (420,853,000)
--------------- --------------- --------------- ---------------
</TABLE>
7
<PAGE> 75
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $ 351,616,000 $ 1,512,994,000 $ 1,097,937,000 $ 741,774,000
Guaranteed investment
contracts -- 5,619,000 55,000,000 134,967,000
Net exchanges from the fixed
accounts of variable annuity
contracts (448,762,000) (1,303,790,000) (620,367,000) (236,705,000)
Withdrawal payments on:
Fixed annuity contracts (41,554,000) (191,690,000) (242,589,000) (263,614,000)
Guaranteed investment
contracts (3,797,000) (36,313,000) (198,062,000) (16,492,000)
Claims and annuity payments
on fixed annuity contracts (9,333,000) (40,589,000) (35,731,000) (31,107,000)
Net receipts from (repayments
of) other short-term
financings 9,545,000 (10,944,000) 34,239,000 (119,712,000)
Net receipt/(payment) related to
a modified coinsurance
transaction (170,436,000) 166,631,000 -- --
Receipts from issuance of
subordinated note payable
to affiliate 170,436,000 -- -- --
Capital contribution received 70,000,000 -- 28,411,000 27,387,000
Dividends paid -- (51,200,000) (25,500,000) (29,400,000)
--------------- --------------- --------------- ---------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (72,285,000) 50,718,000 93,338,000 207,098,000
--------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 2,969,719,000 220,155,000 (8,478,000) (127,151,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 333,735,000 113,580,000 122,058,000 249,209,000
--------------- --------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 3,303,454,000 $ 333,735,000 $ 113,580,000 $ 122,058,000
=============== =============== =============== ===============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid on indebtedness $ 536,000 $ 3,912,000 $ 7,032,000 $ 5,982,000
=============== =============== =============== ===============
Net income taxes paid (refunded) $ (12,302,000) $ 74,932,000 $ 36,420,000 $ 22,031,000
=============== =============== =============== ===============
</TABLE>
See accompanying notes
8
<PAGE> 76
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is an
Arizona-domiciled life insurance company and conducts its business
through three segments: annuity operations, asset management operations
and broker-dealer operations. Annuity operations include the sale and
administration of fixed and variable annuities and guaranteed
investment contracts. Asset management operations, which include the
sale and management of mutual funds, is conducted by SunAmerica Asset
Management Corp. Broker-dealer operations include the sale of
securities and financial services products, and are conducted by Royal
Alliance Associates, Inc.
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,
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 managed in mutual funds and held in
separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: At December 31, 1998, the Company was a wholly
owned indirect subsidiary of SunAmerica Inc. On January 1, 1999,
SunAmerica Inc. merged with and into American International Group, Inc.
("AIG") in a tax-free reorganization that has been treated as a pooling
of interests for accounting purposes. Thus, SunAmerica Inc. ceased to
exist on that date. However, on the date of merger, substantially all
of the net assets of SunAmerica Inc. were contributed to a newly formed
subsidiary of AIG named SunAmerica Inc. ("SunAmerica").
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and include
the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated
in consolidation. Certain items have been reclassified to conform to
the current period's presentation.
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.
9
<PAGE> 77
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS: 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, notes and redeemable preferred stocks available for sale and
common stocks 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, notes and redeemable preferred
stocks 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. Policy loans are carried at unpaid
balances. Limited partnerships are accounted for by the cost method of
accounting. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in separate account
investments, leveraged leases, and collateralized mortgage obligation
residuals.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the 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.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or
received on interest rate swap agreements ("Swap Agreements") entered
into to reduce the impact of changes in interest rates is recognized
over the lives of the agreements, and such differential is classified
as Investment Income or Interest Expense in the income statement.
Initially, Swap Agreements are designated as hedges and, therefore, are
not marked to market. However, when a hedged asset/liability is sold or
repaid before the related Swap Agreement matures, the Swap Agreement is
marked to market and any gain/loss is classified with any gain/loss
realized on the disposition of the hedged asset/liability.
Subsequently, the Swap Agreement is marked to market and the resulting
change in fair value is included in Investment Income in the income
statement. When a Swap Agreement that is designated as a hedge is
terminated before its contractual maturity, any resulting gain/loss is
credited/charged to the carrying value of the asset/liability that it
hedged and is treated as a premium/discount for the remaining life of
the asset/liability.
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. Costs incurred to
sell mutual funds are also deferred and amortized over the
10
<PAGE> 78
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
estimated lives of the funds obtained. Deferred acquisition costs
("DAC") 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 DAC 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 accumulated other comprehensive
income/(loss) that is credited or charged directly to shareholder's
equity. DAC has been increased by $1,400,000 at December 31, 1998,
decreased by $7,000,000 at September 30, 1998, and decreased by
$16,400,000 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, amounting to $22,983,000 at December 31, 1998, is
amortized by using the straight-line method over periods averaging 25
years and is included in Other Assets in the balance sheet. Goodwill is
evaluated for impairment when events or changes in economic conditions
indicate that the carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and guaranteed investment 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, asset management fees and surrender
charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade date basis.
INCOME TAXES: The Company is included in the consolidated federal
income tax return of the Parent and files as a "life insurance company"
under the provisions of the Internal Revenue Code of 1986. Income taxes
have been calculated as if the Company filed a separate return.
Deferred 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 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131").
11
<PAGE> 79
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
SFAS 130 is effective for the Company as of October 1, 1998 and is
included in these financial statements.
SFAS 131 establishes standards for the disclosure of information about
the Company's operating segments. SFAS 131 is effective for the year
ending December 31, 1999 and is not included in these financial
statements.
Implementation of SFAS 131 will not have an impact on the Company's
results of operations, financial condition or liquidity.
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.
3. FISCAL YEAR CHANGE
Effective December 31, 1998, the Company changed its fiscal year end
from September 30 to December 31. Accordingly, the consolidated
financial statements include the results of operations and cash flows
for the three-month transition period ended December 31, 1998. Such
results are not necessarily indicative of operations for a full year.
The consolidated 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 the comparable prior year period are summarized below.
Three Months Ended
December 31, 1997
------------------
Investment income 59,855,000
Net investment income 26,482,000
Net realized investment gains 20,935,000
Total fee income 63,984,000
Pretax income 67,654,000
Net income 44,348,000
==========
12
<PAGE> 80
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale by major category
follow:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 6,033,000 $ 6,272,000
Mortgage-backed securities 546,790,000 553,990,000
Securities of public utilities 208,074,000 205,119,000
Corporate bonds and notes 2,624,330,000 2,616,073,000
Redeemable preferred stocks 6,125,000 7,507,000
Other debt securities 861,388,000 859,879,000
-------------- --------------
Total $4,252,740,000 $4,248,840,000
============== ==============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 84,377,000 $ 88,239,000
Mortgage-backed securities 569,613,000 584,007,000
Securities of public utilities 108,431,000 106,065,000
Corporate bonds and notes 883,890,000 884,209,000
Redeemable preferred stocks 6,125,000 6,888,000
Other debt securities 282,427,000 285,346,000
-------------- --------------
Total $1,934,863,000 $1,954,754,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 18,496,000 $ 18,962,000
Mortgage-backed securities 636,018,000 649,196,000
Securities of public utilities 22,792,000 22,893,000
Corporate bonds and notes 984,573,000 1,012,559,000
Redeemable preferred stocks 6,125,000 6,681,000
Other debt securities 274,481,000 275,903,000
-------------- --------------
Total $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
13
<PAGE> 81
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale by contractual maturity,
as of December 31, 1998, follow:
<TABLE>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less $ 918,639,000 $ 918,419,000
Due after one year through
five years 1,547,743,000 1,546,798,000
Due after five years through
ten years 815,959,000 816,689,000
Due after ten years 423,609,000 412,944,000
Mortgage-backed securities 546,790,000 553,990,000
-------------- --------------
Total $4,252,740,000 $4,248,840,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
14
<PAGE> 82
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (continued)
Gross unrealized gains and losses on bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gains Losses
------------ ------------
<S> <C> <C>
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 239,000 $ --
Mortgage-backed securities 9,398,000 (2,198,000)
Securities of public utilities 926,000 (3,881,000)
Corporate bonds and notes 22,227,000 (30,484,000)
Redeemable preferred stocks 1,382,000 --
Other debt securities 2,024,000 (3,533,000)
------------ ------------
Total $ 36,196,000 $(40,096,000)
============ ============
AT SEPTEMBER 30, 1998:
Securities of the United States
Government $ 3,862,000 $ --
Mortgage-backed securities 15,103,000 (709,000)
Securities of public utilities 2,420,000 (4,786,000)
Corporate bonds and notes 31,795,000 (31,476,000)
Redeemable preferred stocks 763,000 --
Other debt securities 5,235,000 (2,316,000)
------------ ------------
Total $ 59,178,000 $(39,287,000)
============ ============
AT SEPTEMBER 30, 1997:
Securities of the United States
Government $ 498,000 $ (32,000)
Mortgage-backed securities 14,998,000 (1,820,000)
Securities of public utilities 141,000 (40,000)
Corporate bonds and notes 28,691,000 (705,000)
Redeemable preferred stocks 556,000 --
Other debt securities 1,569,000 (147,000)
------------ ------------
Total $ 46,453,000 $ (2,744,000)
============ ============
</TABLE>
Gross unrealized gains on equity securities available for sale
aggregated $10,000, $54,000, and $1,004,000 at December 31, 1998,
September 30, 1998, and September 30, 1997, respectively. There were no
unrealized losses at December 31, 1998, September 30, 1998, or
September 30, 1997.
15
<PAGE> 83
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
Gross realized investment gains and losses on sales of investments are
as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended --------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BONDS, NOTES AND
REDEEMABLE PREFERRED
STOCKS:
Realized gains $ 6,669,000 $ 28,086,000 $ 22,179,000 $ 14,532,000
Realized losses (5,324,000) (4,627,000) (25,310,000) (10,432,000)
COMMON STOCKS:
Realized gains 12,000 337,000 4,002,000 511,000
Realized losses (9,000) -- (312,000) (3,151,000)
OTHER INVESTMENTS:
Realized gains 573,000 8,824,000 2,450,000 1,135,000
IMPAIRMENT WRITEDOWNS (1,650,000) (13,138,000) (20,403,000) (15,950,000)
------------ ------------ ------------ ------------
Total net realized
investment gains
and losses $ 271,000 $ 19,482,000 $(17,394,000) $(13,355,000)
============ ============ ============ ============
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended --------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Short-term investments $ 4,649,000 $ 12,524,000 $ 11,780,000 $ 10,647,000
Bonds, notes and
redeemable preferred
stocks 39,660,000 156,140,000 163,038,000 140,387,000
Mortgage loans 7,904,000 29,996,000 17,632,000 8,701,000
Common stocks -- 34,000 16,000 8,000
Real estate 13,000 (467,000) (296,000) (196,000)
Cost-method partnerships 352,000 24,311,000 6,725,000 4,073,000
Other invested assets 1,700,000 (572,000) 11,864,000 1,011,000
------------- ------------- ------------- -------------
Total investment income $ 54,278,000 $ 221,966,000 $ 210,759,000 $ 164,631,000
============= ============= ============= =============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$500,000 for the three months ended December 31, 1998, $1,910,000 for
the year ended September 30, 1998, $2,050,000 for the year ended
September 30, 1997, and $1,737,000 for the year ended September 30,
1996, and are included in General and Administrative Expenses in the
income statement.
16
<PAGE> 84
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
At December 31, 1998, the following investments exceeded 10% of the
Company's consolidated shareholder's equity of $74,703,000:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
General Motors Acceptance Corporation 188,908,000 188,953,000
Export Development Corporation 114,895,000 114,895,000
Morgan Stanley Dean Witter 111,838,000 111,837,000
Lucent Technologies Inc. 89,901,000 89,901,000
Duke Energy Corporation 89,896,000 89,896,000
International Lease Finance Corp. 84,965,000 84,965,000
Ford Motor Corporation 79,973,000 79,976,000
Gannet Company 79,869,000 79,869,000
Exxon Asset Management Co. 78,935,000 78,935,000
General Electric Capital Corp. 78,008,000 78,008,000
Merrill Lynch & Company 75,040,000 75,042,000
Koch Industries 74,939,000 74,939,000
Government of Canada 74,928,000 74,927,000
-------------- --------------
Total $1,222,095,000 $1,222,143,000
============== ==============
</TABLE>
At December 31, 1998, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 20% of the
aggregate carrying value of the portfolio secured by properties located
in California and approximately 14% by properties located in New York.
No more than 8% of the portfolio was secured by properties in any other
single state.
At December 31, 1998, bonds, notes and redeemable preferred stocks
included $241,769,000 of bonds and notes not rated investment grade.
The Company had no material concentrations of non-investment-grade
assets at December 31, 1998.
At December 31, 1998, the carrying value of investments in default as
to the payment of principal or interest was $3,168,000, composed of
$2,500,000 of bonds and $668,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $1,918,000.
As a component of its asset and liability management strategy, the
Company utilizes Swap Agreements to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for
example, variable-rate payments exchanged for fixed-rate payments)
based on an underlying principal balance (notional principal) to hedge
against interest rate changes. The Company typically utilizes Swap
Agreements to create a hedge that effectively converts floating-rate
assets and liabilities to fixed-rate instruments. At December 31, 1998,
the Company had one outstanding Swap Agreement with a notional
principal amount of $21,538,000, which matures in December 2024. The
net interest paid amounted to $54,000 for the three months ended
December 31, 1998, $278,000 for the year ended September 30, 1998, and
$125,000 for the year ended September 30, 1997, and is included in
Interest Expense on Guaranteed Investment Contracts in the income
statement. There were no outstanding Swap Agreements at September 30,
1996.
17
<PAGE> 85
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
At December 31, 1998, $5,305,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
5. 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 real
estate investments and other invested assets except for cost-method
partnerships) 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, NOTES AND REDEEMABLE PREFERRED STOCKS: 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.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted
for by using the cost method is based upon the fair value of the net
assets of the partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity
assets are carried at the market value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized
18
<PAGE> 86
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
contracts are valued based on the present value of future cash flows at
current pricing rates.
RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and
single premium life contracts are assigned a fair value equal to
current net surrender value.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on
the present value of future cash flows at current pricing rates and is
net of the estimated fair value of a hedging Swap Agreement, determined
from independent broker quotes.
RECEIVABLE FROM/PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which
the carrying value is considered a reasonable estimate of fair 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.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on
the quoted market prices for similar issues.
19
<PAGE> 87
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments at
December 31, 1998, September 30, 1998 and 1997, compared with their
respective carrying values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
--------------- ---------------
<S> <C> <C>
DECEMBER 31, 1998:
ASSETS:
Cash and short-term investments $ 3,303,454,000 $ 3,303,454,000
Bonds, notes and redeemable
preferred stocks 4,248,840,000 4,248,840,000
Mortgage loans 388,780,000 411,230,000
Common stocks 1,419,000 1,419,000
Cost-method partnerships 4,577,000 12,802,000
Variable annuity assets held in
separate accounts 13,767,213,000 13,767,213,000
Receivable from brokers for sales
of securities 22,826,000 22,826,000
LIABILITIES:
Reserves for fixed annuity contracts 5,500,157,000 5,437,045,000
Reserves for universal life
insurance contracts 2,339,194,000 2,339,061,000
Reserves for guaranteed investment
contracts 306,461,000 306,461,000
Variable annuity liabilities related
to separate accounts 13,767,213,000 13,287,434,000
Subordinated notes payable to Parent 209,367,000 210,587,000
=============== ===============
SEPTEMBER 30, 1998:
ASSETS:
Cash and short-term investments $ 333,735,000 $ 333,735,000
Bonds, notes and redeemable
preferred stocks 1,954,754,000 1,954,754,000
Mortgage loans 391,448,000 415,981,000
Common stocks 169,000 169,000
Cost-method partnerships 4,403,000 12,744,000
Variable annuity assets held in
separate accounts 11,133,569,000 11,133,569,000
Receivable from brokers for sales
of securities 23,904,000 23,904,000
LIABILITIES:
Reserves for fixed annuity contracts 2,189,272,000 2,116,874,000
Reserves for guaranteed investment
contracts 282,267,000 282,267,000
Payable to brokers for purchases
of securities 50,957,000 50,957,000
Variable annuity liabilities related
to separate accounts 11,133,569,000 10,696,607,000
Subordinated notes payable to Parent 39,182,000 40,550,000
=============== ===============
</TABLE>
20
<PAGE> 88
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
SEPTEMBER 30, 1997:
ASSETS:
Cash and short-term investments $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable
preferred stocks 1,986,194,000 1,986,194,000
Mortgage loans 339,530,000 354,495,000
Common stocks 1,275,000 1,275,000
Cost-method partnerships 46,880,000 84,186,000
Variable annuity assets held in
separate accounts 9,343,200,000 9,343,200,000
Receivable from brokers for sales
of securities 2,290,000 2,290,000
LIABILITIES:
Reserves for fixed annuity contracts 2,098,803,000 2,026,258,000
Reserves for guaranteed investment
contracts 295,175,000 295,175,000
Payable to brokers for purchases
of securities 2,553,000 2,553,000
Variable annuity liabilities related
to separate accounts 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent 36,240,000 37,393,000
============== ==============
</TABLE>
6. SUBORDINATED NOTES PAYABLE TO PARENT
On December 30, 1998, the Company received cash totaling $170,436,000
in exchange for issuance of a surplus note (the "Note") payable to its
immediate parent, SunAmerica Life Insurance Company (the "Parent"),
which Note has been included in Subordinated Notes Payable to
Affiliates in the accompanying consolidated balance sheet. Interest on
this note accrues at a rate of 7%.
Subordinated notes and accrued interest payable to affiliates totaled
$209,367,000 at interest rates ranging from 7% to 9% at December 31,
1998, and require principal payments of $23,060,000 in 1999, $5,400,000
in 2000, $10,000,000 in 2001 and $170,436,000 thereafter. On June 30,
1999, the Parent cancelled the Note and funds received were
reclassified to Additional Paid-in Capital.
7. REINSURANCE
On August 11, 1998, the Company entered into a modified coinsurance
transaction, approved by the Arizona Department of Insurance, which
involved the ceding of approximately $5,000,000,000 of variable
annuities to ANLIC Insurance Company (Cayman), a Cayman Islands stock
life insurance company, effective December 31, 1997. As a part of this
transaction, the Company received cash amounting to approximately
$188,700,000, and recorded a corresponding reduction of DAC related to
the coinsured annuities. As payments were made to the reinsurer, the
reduction of DAC was relieved. Certain expenses related to this
transaction were charged directly to DAC amortization in the income
statement. The net effect of this transaction in the income statement
is not material.
21
<PAGE> 89
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. REINSURANCE (Continued)
On December 31, 1998, the Company recaptured this business. As part of
this recapture, the Company paid cash of $170,436,000 and recorded an
increase in DAC of $167,202,000 with the balance of $3,234,000 being
recorded as DAC amortization in the income statement.
On December 31, 1998, the Company acquired the individual life business
and the individual and group annuity business of MBL Life Assurance
Corporation ("MBL Life"), via a 100% coinsurance transaction, for a
cash purchase price of $128,420,000. As part of this transaction, the
Company 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. Reserves for universal life contracts are
based on fund value. The excess of the purchase price over the fair
value of net assets received amounted to $113,039,000 and is included
in Deferred Acquisition Costs in the accompanying consolidated balance
sheet.
This business was assumed from MBL life subject to existing reinsurance
ceded agreements. At December 31, 1998, the maximum retention on any
single life was $2,000,000, and a total credit of $5,057,000 was taken
against the life insurance reserves, representing predominantly yearly
renewable term reinsurance. In order to limit even further the exposure
to loss on any single insured and to recover an additional portion of
the benefits paid over such limits, 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. 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.
Included in the block of business acquired from MBL Life is
approximately $250,000,000 of individual life business and $500,000,000
of group annuity business whose contract owners are residents of New
York State ("the New York Business"). Approximately six months
subsequent to completion of the transaction, the New York Business will
be acquired by the Company's New York affiliate, First SunAmerica Life
Insurance Company ("FSA"), via an assumption reinsurance agreement, and
the remainder of the business will be acquired by the Company via an
assumption reinsurance agreement with MBL Life, which will supersede
the coinsurance agreement. The $128,420,000 purchase price will be
allocated between the Company and its affiliate based on the estimated
future gross profits of the two blocks of business.
8. CONTINGENT LIABILITIES
The Company has entered into two agreements in which it has provided
liquidity support for certain short-term securities of municipalities
by agreeing to purchase such securities in the event there is no other
buyer in the short-term marketplace. In return the Company receives a
fee. The maximum liability under these guarantees at December 31,
22
<PAGE> 90
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CONTINGENT LIABILITIES (Continued)
1998 is $210,000,000. Management does not anticipate any material
future losses with respect to these liquidity support facilities. An
additional $60,000,000 has been committed to investments in the process
of being funded or to be available in the case of certain natural
disasters, for which the Company receives a fee.
The Company is involved in various kinds of litigation common to its
businesses. 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.
23
<PAGE> 91
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At December 31, 1998 and September 30, 1998, 3,511 shares
were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
Three Months Ended -----------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances $ 308,674,000 $ 308,674,000 $ 280,263,000 $ 252,876,000
Capital contributions
received 70,000,000 -- 28,411,000 27,387,000
------------- ------------- ------------- -------------
Ending balances $ 378,674,000 $ 308,674,000 $ 308,674,000 $ 280,263,000
============= ============= ============= =============
RETAINED EARNINGS:
Beginning balances $ 332,069,000 $ 244,628,000 $ 207,002,000 $ 191,346,000
Net income 34,391,000 138,641,000 63,126,000 45,056,000
Dividend paid -- (51,200,000) (25,500,000) (29,400,000)
------------- ------------- ------------- -------------
Ending balances $ 366,460,000 $ 332,069,000 $ 244,628,000 $ 207,002,000
============= ============= ============= =============
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS):
Beginning balances $ 8,415,000 $ 18,405,000 $ (5,521,000) $ (5,673,000)
Change in net
unrealized gains
(losses) on debt
securities
available for sale (23,791,000) (23,818,000) 57,463,000 (2,904,000)
Change in net
unrealized gains
(losses) on equity
securities
available for sale (44,000) (950,000) (55,000) 3,538,000
Change in adjustment
to deferred
acquisition costs 8,400,000 9,400,000 (20,600,000) (400,000)
Tax effects of net
changes 5,401,000 5,378,000 (12,882,000) (82,000)
------------- ------------- ------------- -------------
Ending balances $ (1,619,000) $ 8,415,000 $ 18,405,000 $ (5,521,000)
============= ============= ============= =============
</TABLE>
24
<PAGE> 92
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SHAREHOLDER'S EQUITY (Continued)
Dividends that the Company may pay to its shareholder in any year
without prior approval of the Arizona Department of Insurance are
limited by statute. The maximum amount of dividends which can be paid
to shareholders of insurance companies domiciled in the state of
Arizona without obtaining the prior approval of the Insurance
Commissioner is limited to the lesser of either 10% of the preceding
year's statutory surplus or the preceding year's statutory net gain
from operations. Dividends in the amounts of $51,200,000, $25,500,000
and $29,400,000 were paid on June 4, 1998, April 1, 1997 and March 18,
1996, respectively. No dividends were paid in the three months ended
December 31, 1998.
Under statutory accounting principles utilized in filings with
insurance regulatory authorities, the Company's net loss for the year
ended December 31, 1998 was $98,766,000. The statutory net income for
the year ended December 31, 1997 totaled $74,407,000, and the statutory
net income for the year ended December 31, 1996 was $27,928,000. The
Company's statutory capital and surplus totaled $443,394,000 at
December 31, 1998, $537,542,000 at September 30, 1998, $567,979,000 at
December 31, 1997 and $311,176,000 at December 31, 1996.
10. 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>
Three months ended December 31, 1998:
Currently payable $ 740,000 $ 3,421,000 $ 4,161,000
Deferred (620,000) 16,565,000 15,945,000
------------ ------------ ------------
Total income tax expense $ 120,000 $ 19,986,000 $ 20,106,000
============ ============ ============
Year ended September 30, 1998:
Currently payable $ 4,221,000 $ 32,743,000 $ 36,964,000
Deferred (550,000) 34,637,000 34,087,000
------------ ------------ ------------
Total income tax expense $ 3,671,000 $ 67,380,000 $ 71,051,000
============ ============ ============
Year ended September 30, 1997:
Currently payable $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred (2,258,000) (13,766,000) (16,024,000)
------------ ------------ ------------
Total income tax expense $ (5,893,000) $ 37,062,000 $ 31,169,000
============ ============ ============
Year ended September 30, 1996:
Currently payable $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred (10,347,000) 6,996,000 (3,351,000)
------------ ------------ ------------
Total income tax expense $ (4,593,000) $ 28,845,000 $ 24,252,000
============ ============ ============
</TABLE>
25
<PAGE> 93
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. 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>
Years Ended September 30,
Three Months Ended ---------------------------------------------------
December 31, 1998 1998 1997 1996
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Amount computed at
statutory rate $ 19,074,000 $ 73,392,000 $ 33,003,000 $ 24,258,000
Increases (decreases)
resulting from:
Amortization of
differences between
book and tax bases
of net assets
acquired 146,000 460,000 666,000 464,000
State income taxes,
net of federal tax
benefit 1,183,000 5,530,000 1,950,000 2,070,000
Dividends-received
deduction (345,000) (7,254,000) (4,270,000) (2,357,000)
Tax credits (1,296,000) (318,000) (257,000)
Other, net 48,000 219,000 138,000 74,000
------------ ------------ ------------ ------------
Total income tax
expense $ 20,106,000 $ 71,051,000 $ 31,169,000 $ 24,252,000
============ ============ ============ ============
</TABLE>
For United States federal income tax purposes, certain amounts from
life insurance operations are accumulated in a memorandum
policyholders' surplus account and are taxed only when distributed to
shareholders or when such account exceeds prescribed limits. The
accumulated policyholders' surplus was $14,300,000 at December 31,
1998. The Company does not anticipate any transactions which would
cause any part of this surplus to be taxable.
26
<PAGE> 94
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. 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 liability for
Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
At September 30,
December 31, ---------------------------------
1998 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ 18,174,000 $ 17,643,000 $ 13,160,000
Deferred acquisition costs 222,943,000 223,392,000 154,949,000
State income taxes 3,143,000 2,873,000 1,777,000
Other liabilities 13,906,000 144,000 --
Net unrealized gains on debt
and equity securities
available for sale -- 4,531,000 9,910,000
------------- ------------- -------------
Total deferred tax
liabilities 258,166,000 248,583,000 179,796,000
------------- ------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (148,587,000) (149,915,000) (108,090,000)
Guaranty fund assessments (2,935,000) (2,910,000) (2,707,000)
Other assets -- -- (1,952,000)
Net unrealized losses on
debt and equity securities
available for sale (872,000) -- --
------------- ------------- -------------
Total deferred tax assets (152,394,000) (152,825,000) (112,749,000)
------------- ------------- -------------
Deferred income taxes $ 105,772,000 $ 95,758,000 $ 67,047,000
============= ============= =============
</TABLE>
11. ADOPTION OF NEW ACCOUNTING STANDARD
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income. The adoption of SFAS 130 did not have an
impact on the Company's results of operations, financial condition or
liquidity. Comprehensive income amounts for the prior year are
disclosed to conform to the current year's presentation.
27
<PAGE> 95
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. ADOPTION OF NEW ACCOUNTING STANDARD (Continued)
The before tax, after tax, and tax benefit (expense) amounts for each
component of the increase or decrease in unrealized losses or gains 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
------------ ------------ ------------
<S> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31,
1998:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $(24,345,000) $ 8,521,000 $(15,824,000)
Increase in deferred acquisition
cost adjustment identified in
the current period 8,579,000 (3,004,000) 5,575,000
------------ ------------ ------------
Subtotal (15,766,000) 5,517,000 (10,249,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income 510,000 (179,000) 331,000
Related change in deferred
acquisition costs (179,000) 63,000 (116,000)
------------ ------------ ------------
Total reclassification
adjustment 331,000 (116,000) 215,000
------------ ------------ ------------
Total other comprehensive loss $(15,435,000) $ 5,401,000 $(10,034,000)
============ ============ ============
YEAR ENDED SEPTEMBER 30, 1998:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $(10,281,000) $ 3,598,000 $ (6,683,000)
Decrease in deferred acquisition
cost adjustment identified in
the current period 4,086,000 (1,430,000) 2,656,000
------------ ------------ ------------
Subtotal (6,195,000) 2,168,000 (4,027,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income (14,487,000) 5,070,000 (9,417,000)
Related change in deferred
acquisition costs 5,314,000 (1,860,000) 3,454,000
------------ ------------ ------------
Total reclassification
adjustment (9,173,000) 3,210,000 (5,963,000)
------------ ------------ ------------
Total other comprehensive loss $(15,368,000) $ 5,378,000 $ (9,990,000)
============ ============ ============
</TABLE>
28
<PAGE> 96
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ADOPTION OF NEW ACCOUNTING STANDARD (Continued)
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------ ------------ ------------
<S> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,1997:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $ 40,575,000 $(14,201,000) $ 26,374,000
Increase in deferred acquisition
cost adjustment identified in
the current period (15,031,000) 5,262,000 (9,769,000)
------------ ------------ ------------
Subtotal 25,544,000 (8,939,000) 16,605,000
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income 16,832,000 (5,891,000) 10,941,000
Related change in deferred
acquisition costs (5,569,000) 1,949,000 (3,620,000)
------------ ------------ ------------
Total reclassification
adjustment 11,263,000 (3,942,000) 7,321,000
------------ ------------ ------------
Total other comprehensive
income $ 36,807,000 $(12,881,000) $ 23,926,000
============ ============ ============
YEAR ENDED SEPTEMBER 30, 1996:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $(26,189,000) $ 9,166,000 $(17,023,000)
Decrease in deferred acquisition
cost adjustment identified in
the current period 8,858,000 (3,100,000) 5,758,000
------------ ------------ ------------
Subtotal (17,331,000) 6,066,000 (11,265,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income 26,823,000 (9,388,000) 17,435,000
Related change in deferred
acquisition costs (9,258,000) 3,240,000 (6,018,000)
------------ ------------ ------------
Total reclassification
adjustment 17,565,000 (6,148,000) 11,417,000
------------ ------------ ------------
Total other comprehensive
income $ 234,000 $ (82,000) $ 152,000
============ ============ ============
</TABLE>
29
<PAGE> 97
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED-PARTY MATTERS
The Company pays commissions to five affiliated companies: SunAmerica
Securities, Inc.; Advantage Capital Corp.; Financial Services Corp.;
Sentra Securities Corp.; and Spelman & Co. Inc. Commissions paid to
these broker-dealers totaled $6,977,000 in the three months ended
December 31, 1998, and $32,946,000, $25,492,000, and $16,906,000 in the
years ended September 30, 1998, 1997 and 1996, respectively. These
broker-dealers, when combined with the Company's wholly owned
broker-dealer, represent a significant portion of the Company's
business, amounting to approximately 35.6%, 33.6%, 36.1%, and 38.3% of
premiums in the three months ended December 31, 1998, and the years
ended September 30, 1998, 1997, and 1996, respectively. The Company
also sells its products through unaffiliated broker-dealers, the
largest two of which represented approximately 14.7% and 9.4% of
premiums in the three months ended December 31, 1998, 17.3% and 8.4% of
premiums in the year ended September 30, 1998, 19.2% and 10.1% in the
year ended September 30, 1997, and 19.7% and 10.2% in the year ended
September 30, 1996, respectively.
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 $21,593,000 for the
three months ended December 31, 1998, $84,975,000 for the year ended
September 30, 1998, $86,116,000 for the year ended September 30, 1997
and $65,351,000 for the year ended September 30, 1996. The marketing
component of such costs during these periods amounted to $9,906,000,
$39,482,000, $31,968,000 and $17,442,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of such costs are included in General and Administrative
Expenses in the income statement.
At December 31, 1998, the Company held bonds with a fair value of
$84,965,000 which were issued by its affiliate, International Lease
Finance Corp. The amortized cost of these bonds is equal to the fair
value.
For the three months ended December 31, 1998, the Company made no
purchases or sales of invested assets to the Parent or its affiliates.
During the year ended September 30, 1998, the Company sold various
invested assets to the Parent for cash equal to their current market
value of $64,431,000. The Company recorded a net gain aggregating
$16,388,000 on such transactions.
During the year ended September 30, 1998, the Company purchased certain
invested assets from the Parent, SunAmerica Life Insurance Company and
CalAmerica Life Insurance Company for cash equal to their current
market value, which aggregated $20,666,000, $10,468,000 and $61,000,
respectively.
During the year ended September 30, 1997, the Company sold various
invested assets to SunAmerica Life Insurance Company and to CalAmerica
Life Insurance Company for cash equal to their current market value of
$15,776,000 and $15,000, respectively. The Company recorded a net gain
aggregating $276,000 on such transactions.
30
<PAGE> 98
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. RELATED-PARTY MATTERS (Continued)
During the year ended September 30, 1997, the Company purchased certain
invested assets from SunAmerica Life Insurance Company and CalAmerica
Life Insurance Company for cash equal to their current market value of
$8,717,000 and $284,000, respectively.
During the year ended September 30, 1996, the Company sold various
invested assets to the Parent and to SunAmerica Life Insurance Company
for cash equal to their current market value of $274,000 and
$47,321,000, respectively. The Company recorded a net loss aggregating
$3,000 on such transactions.
During the year ended September 30, 1996, the Company purchased certain
invested assets from SunAmerica Life Insurance Company for cash equal
to their current market value, which aggregated $28,379,000.
13. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
Total
depreciation
and
Total amortization Pretax Total
revenues expense income assets
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
DECEMBER 31, 1998:
Annuity operations $103,626,000 $23,236,000 $ 45,962,000 $22,982,323,000
Broker-dealer
operations 11,279,000 561,000 4,444,000 59,537,000
Asset management
operations 22,974,000 4,204,000 4,091,000 104,473,000
------------ ----------- ------------ ---------------
Total $137,879,000 $28,001,000 $ 54,497,000 $23,146,333,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1998:
Annuity operations $443,407,000 $60,731,000 $178,120,000 $14,389,922,000
Broker-dealer
operations 47,363,000 1,770,000 22,401,000 55,870,000
Asset management
operations 41,040,000 14,780,000 9,171,000 104,476,000
------------ ----------- ------------ ---------------
Total $531,810,000 $77,281,000 $209,692,000 $14,550,268,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1997:
Annuity operations $332,845,000 $55,675,000 $ 74,792,000 $12,440,311,000
Broker-dealer
operations 38,005,000 689,000 16,705,000 51,400,000
Asset management
operations 35,661,000 16,357,000 2,798,000 81,518,000
------------ ----------- ------------ ---------------
Total $406,511,000 $72,721,000 $ 94,295,000 $12,573,229,000
============ =========== ============ ===============
YEAR ENDED
SEPTEMBER 30, 1996:
Annuity operations $256,681,000 $43,974,000 $ 53,827,000 $ 9,092,770,000
Broker-dealer
operations 31,053,000 449,000 13,033,000 37,355,000
Asset management
operations 33,047,000 18,295,000 2,448,000 74,410,000
------------ ----------- ------------ ---------------
Total $320,781,000 $62,718,000 $ 69,308,000 $ 9,204,535,000
============ =========== ============ ===============
</TABLE>
31
<PAGE> 99
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SUBSEQUENT EVENTS
On June 30, 1999, the Parent cancelled the $170,436,000 Note and funds
received were reclassified to Additional Paid-in Capital. Also on June
30, 1999, the Parent forgave the total interest earned on the Note of
$4,971,000.
On July 1, 1999, the New York Business acquired from MBL Life was
transferred to FSA via an assumption reinsurance agreement and the
remainder of the business converted to assumption reinsurance, which
superseded the coinsurance arrangement. As part of this transfer,
invested assets equal to $675,303,000, life reserves equal to
$282,947,000, group pension reserves equal to $404,318,000, and other
net assets of $11,962,000 were transferred to FSA. The $128,420,000
purchase price was allocated between the Company and FSA based on the
estimated future gross profits of the two blocks of business. The
portion allocated to FSA was $10,000,000.
As of August 1, 1999, the Company ceded $6,444,871,000 billion of
variable annuity liabilities through a modified coinsurance transaction
to ANLIC Insurance Company (Hawaii). As part of this transaction, the
Company received $150,000,000 on September 9, 1999, which was credited
to Deferred Amortization Costs in the balance sheet to eliminate the
unamortized costs previously deferred with respect to the ceded
business.
On September 9, 1999, the Company paid $170,500,000 to its Parent as a
return of capital. On September 14, 1999, the Parent contributed
additional capital of $54,250,000 to the Company.
32
<PAGE> 100
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
AUGUST 31, 1999
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Anchor National Life Insurance Company
and the Contractholders of its separate account, Variable Annuity Account Two
In our opinion, the accompanying statement of net assets, including the schedule
of portfolio investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of each of the Variable Accounts constituting Variable Annuity Account
Two, a separate account of Anchor National Life Insurance Company (the "Separate
Account") at August 31, 1999, the results of their operations for the year then
ended, and the changes in their net assets for each of the two years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Separate Account's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards 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, which included confirmation of securities at August
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
December 9, 1999
<PAGE> 102
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
August 31, 1999
<TABLE>
<CAPTION>
U.S.
International Capital Growth and Asset Government Money
Equity Growth Income Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments in Mutual Fund
Variable Annuity Trust
at market value $ 1,921,906 $ 5,031,016 $ 6,055,784 $ 1,429,328 $ 892,537 $ 363,614 $15,694,185
Liabilities 0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------
Net Assets $ 1,921,906 $ 5,031,016 $ 6,055,784 $ 1,429,328 $ 892,537 $ 363,614 $15,694,185
===============================================================================================
Accumulation units outstanding 138,949 270,686 310,897 90,646 72,653 31,391
===================================================================================
Unit value of accumulation units $ 13.83 $ 18.58 $ 19.47 $ 15.76 $ 12.28 $ 11.58
===================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 103
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
SCHEDULE OF PORTFOLIO INVESTMENTS
August 31, 1999
<TABLE>
<CAPTION>
Market Value Market
Variable Accounts Shares Per Share Value Cost
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Equity Portfolio 169,199 $ 11.36 $ 1,921,906 $ 1,784,660
Capital Growth Portfolio 365,955 13.75 5,031,016 5,030,770
Growth and Income Portfolio 479,289 12.63 6,055,784 6,366,951
Asset Allocation Portfolio 133,333 10.72 1,429,328 1,501,925
U.S. Government Income Portfolio 93,864 9.51 892,537 908,830
Money Market Portfolio 363,614 1.00 363,614 363,614
----------------------------------
$ 15,694,185 $ 15,956,750
==================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 104
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
August 31, 1999
<TABLE>
<CAPTION>
U.S.
International Capital Growth and Asset Government Money
Equity Growth Income Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends and capital
gains distribution $ 109,871 $ 550,150 $ 1,126,387 $ 159,355 $ 39,795 $ 19,187 $ 2,004,745
--------------------------------------------------------------------------------------------------
Total investment income 109,871 550,150 1,126,387 159,355 39,795 19,187 2,004,745
--------------------------------------------------------------------------------------------------
Expenses:
Mortality risk charge (17,179) (47,280) (62,133) (13,783) (7,788) (3,793) (151,956)
Expense risk charge (6,681) (18,387) (24,163) (5,360) (3,029) (1,475) (59,095)
Distribution expense
charge (2,863) (7,880) (10,356) (2,297) (1,298) (632) (25,326)
--------------------------------------------------------------------------------------------------
Total expenses (26,723) (73,547) (96,652) (21,440) (12,115) (5,900) (236,377)
--------------------------------------------------------------------------------------------------
Net investment income 83,148 476,603 1,029,735 137,915 27,680 13,287 1,768,368
--------------------------------------------------------------------------------------------------
Net realized gains (losses)
from securities transactions:
Proceeds from shares sold 728,105 1,800,241 2,688,981 276,692 472,996 1,687,884 7,654,899
Cost of shares sold (769,527) (1,910,203) (2,696,562) (283,878) (459,387) (1,687,884) (7,807,441)
--------------------------------------------------------------------------------------------------
Net realized gains (losses)
from securities transactions (41,422) (109,962) (7,581) (7,186) 13,609 0 (152,542)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (204,927) (943,196) (556,501) (79,375) 47,807 0 (1,736,192)
End of period 137,246 246 (311,167) (72,597) (16,293) 0 (262,565)
--------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
of investments 342,173 943,442 245,334 6,778 (64,100) 0 1,473,627
--------------------------------------------------------------------------------------------------
Increase (decrease) in net
assets from operations $ 383,899 $ 1,310,083 $ 1,267,488 $ 137,507 $ (22,811) $ 13,287 $ 3,089,453
==================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 105
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
August 31, 1999
<TABLE>
<CAPTION>
U.S.
International Capital Growth and Asset Government Money
Equity Growth Income Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
From operations:
Net investment income $ 83,148 $ 476,603 $ 1,029,735 $ 137,915 $ 27,680 $ 13,287 $ 1,768,368
Net realized gains
(losses) from securities
transactions (41,422) (109,962) (7,581) (7,186) 13,609 0 (152,542)
Change in net unrealized
appreciation/depreciation
of investments 342,173 943,442 245,334 6,778 (64,100) 0 1,473,627
----------------------------------------------------------------------------------------------
Increase (decrease) in
net assets from
operations 383,899 1,310,083 1,267,488 137,507 (22,811) 13,287 3,089,453
----------------------------------------------------------------------------------------------
From capital transactions:
Net proceeds from units
sold 11,994 113,099 107,064 43,021 101,287 11,110 387,575
Cost of units redeemed (382,192) (1,263,095) (1,838,571) (241,480) (134,601) (1,121,429) (4,981,368)
Net transfers (83,217) (130,757) (347,666) 145,834 3,099 1,203,967 791,260
----------------------------------------------------------------------------------------------
Increase (decrease) in
net assets from
capital transactions (453,415) (1,280,753) (2,079,173) (52,625) (30,215) 93,648 (3,802,533)
----------------------------------------------------------------------------------------------
Increase (decrease) in net
assets (69,516) 29,330 (811,685) 84,882 (53,026) 106,935 (713,080)
Net assets at beginning of
period 1,991,422 5,001,686 6,867,469 1,344,446 945,563 256,679 16,407,265
----------------------------------------------------------------------------------------------
Net assets at end of period $1,921,906 $ 5,031,016 $ 6,055,784 $1,429,328 $ 892,537 $ 363,614 $15,694,185
==============================================================================================
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Units sold 1,015 6,611 5,558 2,822 7,935 997
Units redeemed (31,118) (72,963) (95,498) (14,882) (10,652) (99,023)
Units transferred (8,370) (9,469) (20,657) 8,676 367 106,549
----------------------------------------------------------------------------------
Increase (decrease) in units
outstanding (38,473) (75,821) (110,597) (3,384) (2,350) 8,523
Beginning units 177,422 346,507 421,494 94,030 75,003 22,868
----------------------------------------------------------------------------------
Ending units 138,949 270,686 310,897 90,646 72,653 31,391
==================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 106
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
August 31, 1999
<TABLE>
<CAPTION>
U.S.
International Capital Growth and Asset Government Money
Equity Growth Income Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
From operations:
Net investment income $ 75,015 $ 488,938 $ 908,171 $ 96,099 $ 15,142 $ 15,122
Net realized gains
from securities
transactions 1,260 77,325 82,037 10,342 741 0
Change in net unrealized
appreciation/depreciation
of investments (163,080) (1,646,410) (1,527,403) (143,025) 52,258 0
---------------------------------------------------------------------------------------
Increase (decrease) in
net assets from
operations (86,805) (1,080,147) (537,195) (36,584) 68,141 15,122
---------------------------------------------------------------------------------------
From capital transactions:
Net proceeds from units sold 163,701 778,433 1,019,506 184,677 30,064 107,125
Cost of units redeemed (87,019) (423,553) (515,701) (49,716) (28,171) (8,226)
Net transfers 442,390 649,760 956,234 137,864 447,475 (1,631,939)
---------------------------------------------------------------------------------------
Increase (decrease) in net
assets from capital
transactions 519,072 1,004,640 1,460,039 272,825 449,368 (1,533,040)
---------------------------------------------------------------------------------------
Increase (decrease) in net assets 432,267 (75,507) 922,844 236,241 517,509 (1,517,918)
Net assets at beginning of period 1,559,155 5,077,193 5,944,625 1,108,205 428,054 1,774,597
---------------------------------------------------------------------------------------
Net assets at end of period $ 1,991,422 $ 5,001,686 $ 6,867,469 $1,344,446 $ 945,563 $ 256,679
=======================================================================================
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Units sold 13,390 41,554 53,437 11,761 2,459 9,648
Units redeemed (7,007) (22,361) (26,727) (3,215) (2,338) (742)
Units transferred 37,387 37,383 54,549 9,026 37,666 (149,816)
----------------------------------------------------------------------------------------
Increase (decrease) in units
outstanding 43,770 56,576 81,259 17,572 37,787 (140,910)
Beginning units 133,652 289,931 340,235 76,458 37,216 163,778
----------------------------------------------------------------------------------------
Ending units 177,422 346,507 421,494 94,030 75,003 22,868
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------------
<S> <C>
INCREASE (DECREASE) IN
NET ASSETS:
From operations:
Net investment income $ 1,598,487
Net realized gains
from securities
transactions 171,705
Change in net unrealized
appreciation/depreciation
of investments (3,427,660)
---------------
Increase (decrease) in
net assets from
operations (1,657,468)
---------------
From capital transactions:
Net proceeds from units sold 2,283,506
Cost of units redeemed (1,112,386)
Net transfers 1,001,784
---------------
Increase (decrease) in net
assets from capital
transactions 2,172,904
---------------
Increase (decrease) in net assets 515,436
Net assets at beginning of period 15,891,829
---------------
Net assets at end of period $ 16,407,265
===============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Units sold
Units redeemed
Units transferred
Increase (decrease) in units
outstanding
Beginning units
Ending units
</TABLE>
See accompanying notes to financial statements.
<PAGE> 107
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Annuity Account Two of Anchor National Life Insurance Company
(the "Separate Account") is a segregated investment account of Anchor
National Life Insurance Company (the "Company"). The Company is an
indirect wholly owned subsidiary of SunAmerica Inc. Effective January
1, 1999, SunAmerica Inc. merged with and into American International
Group, Inc. in a tax-free reorganization that has been treated as a
pooling of interests for accounting purposes. Immediately prior to the
merger, SunAmerica Inc. transferred substantially all of its net assets
to its wholly owned subsidiary SunAmerica Holdings, Inc., a Delaware
Corporation. On January 4, 1999, SunAmerica Holdings, Inc. changed its
name to SunAmerica Inc. The Separate Account is registered as a
segregated unit investment trust pursuant to the provisions of the
Investment Company Act of 1940, as amended.
The Separate Account is composed of six variable investment portfolios
(the "Variable Accounts"). Each of the Variable Accounts is invested
solely in the shares of a designated portfolio of the Mutual Fund
Variable Annuity Trust (the "Trust"). The Trust is a diversified,
open-end investment company, which retains an investment adviser to
assist in the investment activities of the Trust. The participant may
elect to have investments allocated to any of five guaranteed-interest
funds of the Company (the "General Account"), which are not part of the
Separate Account. The financial statements include balances allocated
by the participant to the six Variable Accounts and do not include
balances allocated to the General Account.
The Variable Accounts became initially available for sale on March 1,
1995. The inception dates for the six individual funds were as follows:
March 13, 1995 for the International Equity, Capital Growth, Growth and
Income and Asset Allocation funds; June 2, 1995 for the Money Market
fund; and July 13, 1995 for the U.S.
Government Income fund.
The investment objectives and policies of the six portfolios of the
Trust are summarized below:
The INTERNATIONAL EQUITY PORTFOLIO seeks total return on assets from
long-term growth of capital and from income. This portfolio invests
primarily in a broad selection of marketable equity securities of
established foreign companies and foreign subsidiaries of U.S.
companies participating in foreign economies.
The CAPITAL GROWTH PORTFOLIO seeks long-term capital growth. This
portfolio invests in a diversified selection of common stocks of
domestic and foreign issuers with small to medium capitalizations.
1
<PAGE> 108
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
The GROWTH AND INCOME PORTFOLIO seeks long-term capital appreciation
and dividend income. This portfolio invests primarily in a broad
selection of domestic and foreign common stocks, particularly stocks
that are judged to be undervalued by the market.
The ASSET ALLOCATION PORTFOLIO seeks maximum total return through a
combination of long-term growth of capital and current income. This
portfolio invests in a diversified selection of equity and debt
securities, including common stocks, convertible securities and
government and corporate fixed-income obligations, whose relative
proportions may be altered from time to time, depending on the judgment
of the adviser.
The U.S. GOVERNMENT INCOME PORTFOLIO seeks monthly dividends and
protection of the value of an investor's investment. This portfolio
invests at least 65% of its assets in debt obligations that are backed
by the U.S.
government.
The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
preservation of capital and maintenance of liquidity through
investments in U.S. dollar denominated commercial paper, obligations of
foreign governments, obligations issued or guaranteed by U.S. banks,
and securities issued by the U.S. government, its agencies or its
instrumentalities, and repurchase agreements.
Purchases and sales of shares of the portfolios of the Trust are valued
at the net asset values of the shares on the date the shares are
purchased or sold. Dividends and capital gains distributions are
recorded when received. Realized gains and losses on the sale of
investments in the Trust are recognized at the date of sale and are
determined on an average cost basis.
Accumulation unit values are computed daily based on the total net
assets of the Variable Accounts.
2. CHARGES AND DEDUCTIONS
Charges and deductions are applied against the current value of the
Separate Account and are paid as follows:
2
<PAGE> 109
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
CHARGES AND DEDUCTIONS (continued)
WITHDRAWAL CHARGE: The contract value may be withdrawn at any time
during the accumulation period. Purchase payments that are no longer
subject to the withdrawal charge and not previously withdrawn and
earnings in the contract may be withdrawn free of withdrawal charges at
any time. In addition, there is a free withdrawal amount for the first
withdrawal during a contract year after the first contract year. The
free withdrawal amount is the greater of earnings in the contract or
10% of the purchase payments made more than one year prior to the date
of withdrawal that remain subject to the withdrawal charge and that
have not previously been withdrawn. Should a withdrawal exceed the free
withdrawal amount, a withdrawal charge, in certain circumstances, is
imposed and paid to the Company.
Withdrawal charges vary in amount depending upon the number of years
since the purchase payment being withdrawn was made. The withdrawal
charge is deducted from the remaining contract value so that the actual
reduction in contract value as a result of the withdrawal will be
greater than the withdrawal amount requested and paid. For purposes of
determining the withdrawal charge, withdrawals will be allocated first
to investment income, if any (which may generally be withdrawn free of
a withdrawal charge), and then to purchase payments on a first-in,
first-out basis so that all withdrawals are allocated to purchase
payments to which the lowest (if any) withdrawal charge applies.
Any amount withdrawn which exceeds a free withdrawal may be subject to
a withdrawal charge in accordance with the withdrawal charge table
shown below:
Years since Purchase Applicable Withdrawal
Payment Charge Percentage
-------------------- ---------------------
First 6%
Second 6%
Third 5%
Fourth 5%
Fifth 4%
Sixth 3%
Seventh 2%
Eighth and beyond 0%
3
<PAGE> 110
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
CHARGES AND DEDUCTIONS (continued)
CONTRACT ADMINISTRATION CHARGE: An annual contract administration
charge of $30 is charged against each contract, which reimburses the
Company for expenses incurred in establishing and maintaining records
relating to a contract. The contract administration charge will be
assessed on each anniversary of the issue date of the contract prior to
the date when annuity payments begin. In the event that a total
surrender of contract value is made, the charge will be assessed as of
the date of surrender without proration.
TRANSFER FEE: A transfer fee of $25 ($10 in Pennsylvania and Texas) is
assessed on each transfer of funds in excess of fifteen transactions
within a contract year.
PREMIUM TAXES: Premium taxes or other taxes payable to a state or other
governmental entity will be charged against the contract values. Some
states assess premium taxes at the time purchase payments are made;
others assess premium taxes at the time annuity payments begin. The
Company currently intends to deduct premium taxes at the time of
surrender, upon death of the participant or upon annuitization;
however, it reserves the right to deduct any premium taxes when
incurred. Premium taxes generally range from 0% to 3.5%.
MORTALITY AND EXPENSE RISK CHARGE: The Company deducts mortality and
expense risk charges, which total to an annual rate of 1.25% of the net
asset value of each portfolio, computed on a daily basis. The mortality
risk charge is compensation for the mortality risks assumed by the
Company from its contractual obligations to make annuity payments after
the contract has annuitized for the life of the annuitant, to waive the
withdrawal charge in the event of the death of the participant and to
provide a death benefit if the participant dies prior to the date
annuity payments begin. The expense risk charge is compensation for the
risk assumed by the Company that the cost of administering the
contracts will exceed the amount received from the contract
administration charge.
DISTRIBUTION EXPENSE CHARGE: The Company deducts a distribution expense
charge at an annual rate of 0.15% of the net asset value of each
portfolio, computed on a daily basis. The distribution expense charge
is designed to compensate the Company for assuming the risk that the
cost of distributing the contracts will exceed the revenues from the
withdrawal charge.
4
<PAGE> 111
VARIABLE ANNUITY ACCOUNT TWO
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
CHARGES AND DEDUCTIONS (continued)
SEPARATE ACCOUNT INCOME TAXES: The Company currently does not maintain
a provision for taxes, but has reserved the right to establish such a
provision for taxes in the future if it determines, in its sole
discretion, that it will incur a tax as a result of the operation of
the Separate Account.
3. INVESTMENT IN MUTUAL FUND VARIABLE ANNUITY TRUST
The aggregate cost of the Trust's shares acquired and the aggregate
proceeds from shares sold during the year ended August 31, 1999 consist
of the following:
<TABLE>
<CAPTION>
Cost of Shares Proceeds from
Variable Account Acquired Shares Sold
-------------------------------------------- ------------------- -------------------
<S> <C> <C>
International Equity Portfolio $ 357,838 $ 728,105
Capital Growth Portfolio 996,091 1,800,241
Growth & Income Portfolio 1,639,543 2,688,981
Asset Allocation Portfolio 361,982 276,692
U.S. Government Income Portfolio 470,461 472,996
Money Market Portfolio 1,794,819 1,687,884
</TABLE>
4. FEDERAL INCOME TAXES
The Company qualifies for federal income tax treatment granted to life
insurance companies under subchapter L of the Internal Revenue Service
Code (the "Code"). The operations of the Separate Account are part of
the total operations of the Company and are not taxed separately. The
Separate Account is not treated as a regulated investment company under
the Code.
5
<PAGE> 112
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
- ----------------------------------------------
(a) Financial Statements
- ---------------------------
The following financial statements are included in Part B of the
Registration Statement:
Consolidated Financial Statements of Anchor National Life
Insurance Company for the fiscal year ended September 30, 1998
Transition Report for Anchor National Life Insurance Company
covering period from October 1, 1998 -- December 31, 1998.
Financial Statements of Variable Annuity Account Two (Portion
relating to the Vista Capital Advantage Variable Annuity) for the
fiscal year ended August 31, 1999.
(b) Exhibits
- ----------------
(1) Resolutions Establishing Separate Account...... ***
(2) Custody Agreements............................. **
(3) (a) Form of Distribution Contract.............. ***
(b) Selling Agreement.......................... ***
(4) Variable Annuity Contract...................... ***
(5) Application for Contract....................... *****
(6) Depositor - Corporate Documents
(a) Certificate of Incorporation........... *****
(b) By-Laws................................ *****
(7) Reinsurance Contract........................... **
(8) Fund Participation Agreement................... *****
(9) Opinion of Counsel............................. ***
Consent of Counsel............................. *****
(10) Consent of Independent Accountants............. *
(11) Financial Statements Omitted from Item 23...... **
(12) Initial Capitalization Agreement............... **
(13) Performance Computations....................... **
(14) Diagram and Listing of All Persons Directly
or Indirectly Controlled By or Under Common
Control with Anchor National Life Insurance
Company, the Depositor of Registrant........... ******
(15) Powers of Attorney............................. ****
* Filed Herewith
** Not Applicable
*** Filed as part of the Initial Registration Statement
to this Registration Statement.
**** Filed on 12/20/96, Post-Effective Amendments 2
and 4 to this Registration Statement.
***** Filed on 12/24/97, Post-Effective Amendments 3 and 5
to this Registration Statement.
****** Filed on October 21, 1999, Post-Effective Amendments 6 and 7 to
this Registration Statement
Item 25. Directors and Officers of the Depositor
- -------------------------------------------------
The officers and directors of Anchor National Life Insurance Company
are listed below. Their principal business address is 1 SunAmerica Center, Los
Angeles, California 90067-6022, unless otherwise noted.
Name Position
- ---- --------
Eli Broad Chairman, President and
Chief Executive Officer
Jay S. Wintrob Director and Executive Vice President
Peter McMillan Director
James R. Belardi Director and Senior Vice President
Susan L. Harris Director, Senior Vice President
and Secretary
Marc Gamsin Director and Senior Vice President
Jana W. Greer Director and Senior Vice President
Scott L. Robinson Director and Senior Vice President
N. Scott Gillis Senior Vice President and Controller
<PAGE> 113
Edwin R. Raquel Senior Vice President and Chief Actuary
Scott H. Richland Vice President
Edward P. Nolan* Vice President
Greg Outcalt Vice President
David Bechtel Vice President and Treasurer
P. Daniel Demko Vice President
Kevin J. Hart Vice President
- ------------------
* 88 Bradley Road, P.O. Box 4005, Woodbridge, Connecticut 06525
Item 26. Persons Controlled By or Under Common Control With Depositor or
- -------------------------------------------------------------------------
Registrant
- ----------
The Registrant is a separate account of Anchor National Life Insurance
Company (Depositor). For a complete listing and diagram of all persons directly
or indirectly controlled by or under common control with the Depositor or
Registrant, see Exhibit 14 of the Initial Registration Statement of Variable
Annuity Account Seven and Anchor National Life Insurance Company (File Nos.
333-65965 and 811-09003)(N-4) and (333-65953)(S-1), which is incorporated
herein by reference. As of January 4, 1999, Anchor National became an indirect
wholly-owned subsidiary of American International Group, Inc. ("AIG"). An
organizational chart for AIG can be found in Form 10-K, SEC file number
001-08787 filed March 31, 1999.
Item 27. Number of Contract Owners
- ------------------------------------
As of August 31, 1999, there were [119] owners of Qualified Contracts and [235]
owners of Non-Qualified Contracts.
Item 28. Indemnification
- -------------------------
None.
Item 29. Principal Underwriter
- --------------------------------
Vista Fund Distributors, Inc. serves as distributor to the Registrant.
Its principal business address is One Chase Manhattan Plaza, New York, New York
10081. The following are the directors and officers of Vista Fund Distributors,
Inc.
Name Position with Distributor
---- -------------------------
Lynn J. Mangum Chairman
Richard Baxt President
Lee W. Schultheis Senior Vice President
William J. Tomko Senior Vice President
Michael Burns Vice President/Compliance
Kevin Dell Secretary
Robert Tuch Assistant Secretary
Dennis R. Sheehan Executive Vice President/Treasurer
Net Distribution Compensation on
Name of Discounts and Redemption or Brokerage
Distributor Commissions Annuitization Commissions Commissions*
- ----------- ------------- ------------- ----------- -----------
Vista Fund None None None None
Distributors,
Inc.
- --------------------
*Distribution fee is paid by Anchor National Life Insurance Company.
<PAGE> 114
Item 30. Location of Accounts and Records
- --------------------------------------------
Anchor National Life Insurance Company, the Depositor for the
Registrant, is located at 1 SunAmerica Center, Los Angeles, California 90067-
6022. Vista Fund Distributors, Inc., the distributor of the Contracts, is
located at 101 Park Avenue, New York, New York 10178. Each maintains those
accounts and records required to be maintained by it pursuant to Section 31(a)
of the Investment Company Act and the rules promulgated thereunder.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02100, maintains certain accounts and records pursuant to the
instructions of the Registrant.
Item 31. Management Services
- -----------------------------
Not Applicable.
Item 32. Undertakings
- ----------------------
Registrant undertakes to (1) file post-effective amendments to this
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the variable annuity Contracts may be
accepted; (2) include either (A) as part of any application to purchase a
Contract offered by the prospectus forming a part of the Registration Statement,
a space that an applicant can check to request a Statement of Additional
Information, or (B) a postcard or similar written communication affixed to or
included in the Prospectus that the Applicant can remove to send for a Statement
of Additional Information; and (3) deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-4 promptly upon written or oral request.
Item 33. Representation
- ------------------------
a) The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including
the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection
with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to
which the participant may elect to transfer his contract value.
b) REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF
1940: The Company represents that the fees and charges to be deducted under the
variable annuity contract described in the prospectus contained in this
registration statement are, in the aggregate, reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
in connection with the contract.
<PAGE> 115
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant certifies that it meets the Securities Act Rule 485 for
effectiveness of this Registration Statement and has caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf, in the City
of Los Angeles, and the State of California, on this 22nd day of December, 1999.
VARIABLE ANNUITY ACCOUNT TWO
(Registrant)
By: ANCHOR NATIONAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ JAY S. WINTROB
----------------------------------------
Jay S. Wintrob
Executive Vice President
By: ANCHOR NATIONAL LIFE INSURANCE COMPANY
(Depositor, on behalf of itself and Registrant)
By: /s/ JAY S. WINTROB
----------------------------------------
Jay S. Wintrob
Executive Vice President
As required by the Securities Act of 1933, this Post-Effective Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
ELI BROAD* President, Chief
- -------------------- Executive Officer and
Eli Broad Chairman of the Board
(Principal Executive
Officer)
SCOTT L. ROBINSON* Senior Vice President
- -------------------- and Director
Scott L. Robinson (Principal Financial
Officer)
SCOTT GILLIS* Senior Vice President
- -------------------- and Controller
N. Scott Gillis (Principal Accounting
Officer)
JAMES R. BELARDI* Director
- --------------------
James R. Belardi
JANA W. GREER* Director
- --------------------
Jana W. Greer
/s/ SUSAN L. HARRIS Director December 22, 1999
- --------------------
Susan L. Harris
PETER MCMILLAN* Director
- --------------------
Peter McMillan
JAY S. WINTROB* Director
- --------------------
Jay S. Wintrob
<PAGE> 116
* By: /s/ SUSAN L. HARRIS Attorney-in-Fact
---------------------
Susan L. Harris
Date: December 22, 1999
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
(10) Consent of Independent Accountants
</TABLE>
<PAGE> 1
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-4 for Variable
Annuity Account Two of Anchor National Life Insurance Company of our report
dated November 19, 1999 and November 9, 1998, relating to the financial
statements of Anchor National Life Insurance Company, and of our report dated
December 9, 1999, relating to the financial statements of Variable Annuity
Account Two, which appear in such Statement of Additional Information, and to
the incorporation by reference of our report into the Prospectus which
constitutes part of this Registration Statement. We also consent to the
incorporation by reference in such Prospectus of our report dated March 11,
1999, relating to the statement of assets acquired and liabilities assumed in
the MBL Life Assurance Corporation transaction at December 31, 1998, appearing
on page 8 of Anchor National Life Insurance Company's Current Report on Form
8-K/A dated March 12, 1999. We also consent to the reference to us under the
heading "Financial Statements" in such Statement of Additional Information.
PricewaterhouseCoopers LLP
Los Angeles, California
December 22, 1999
