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As filed pursuant to Rule 497(c)
Registration Nos. 33-83476 and 811-8874
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PACIFICA
FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS
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ISSUED BY
ANCHOR NATIONAL LIFE INSURANCE COMPANY
IN CONNECTION WITH
VARIABLE ANNUITY ACCOUNT THREE
CORRESPONDENCE ACCOMPANIED ALL OTHER CORRESPONDENCE,
BY PAYMENTS ANNUITY SERVICE CENTER:
100 WEST WASHINGTON STREET P.O. Box 54299
PHOENIX, ARIZONA 85003 Los Angeles, California 90054-0299
Telephone Number: (800) PVA-0628
The Contracts offered by this prospectus provide for accumulation of
Contract Values and payment of annuity benefits on a variable basis. The
Contracts are available for both Qualified and Nonqualified Plans (See "Taxes,"
page 28).
Purchase Payments under the Contracts may be allocated among the Portfolios
of the Separate Account, and/or to the Company's General Account. Each of the
five Portfolios of the Separate Account described in this prospectus is invested
solely in the shares of one of the following currently available Underlying
Funds of Pacifica Variable Trust:
<TABLE>
<S> <C>
- Emerging Growth - Intermediate Bond
- Equity Value - Money Market
- Balanced
</TABLE>
Additional Underlying Funds may be made available in the future.
Purchase Payments may also be allocated to the General Account, which pays
a fixed rate of interest declared by the Company for one year from the date
amounts are allocated to it.
This prospectus concisely sets forth the information a prospective investor
ought to know before investing. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN
IT FOR YOUR FUTURE REFERENCE. Owners bear the complete investment risk for all
Purchase Payments allocated to the Separate Account.
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.
THE CONTRACTS OFFERED BY THIS PROSPECTUS INVOLVE RISK, INCLUDING LOSS OF
PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE CONTRACTS OFFERED BY THIS PROSPECTUS ARE NOT AVAILABLE IN ALL STATES.
A Statement of Additional Information about the variable portion of the
Contracts has been filed with the Commission, as part of the Registration
Statement, and is available without charge upon written or oral request to the
Company at its Annuity Service Center at the address and telephone number given
above. The Table of Contents of the Statement of Additional Information, dated
January 2, 1996, appears on page 32 of this prospectus.
This Prospectus is dated January 2, 1996.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
DEFINITIONS.......................................................................... 4
SUMMARY.............................................................................. 6
FEE TABLES........................................................................... 8
EXAMPLES............................................................................. 9
CONDENSED FINANCIAL INFORMATION-ACCUMULATION UNIT VALUES............................. 10
PERFORMANCE DATA..................................................................... 10
DESCRIPTION OF THE COMPANY AND THE SEPARATE ACCOUNT.................................. 11
Company......................................................................... 11
Separate Account................................................................ 11
GENERAL ACCOUNT...................................................................... 12
SEPARATE ACCOUNT INVESTMENTS......................................................... 13
Underlying Funds................................................................ 13
Voting Rights................................................................... 14
Substitution of Securities...................................................... 14
CONTRACT CHARGES..................................................................... 15
Mortality and Expense Risk Charge............................................... 15
Administrative Charges.......................................................... 15
Contract Administration Charge................................................ 15
Transfer Fee.................................................................. 15
Sales Charges................................................................... 16
Withdrawal Charge............................................................. 16
Distribution Expense Charge................................................... 17
Premium Taxes................................................................... 17
Deduction for Separate Account Income Taxes..................................... 17
Other Expenses.................................................................. 17
Reduction of Charges for Sales to Certain Groups................................ 17
DESCRIPTION OF THE CONTRACTS......................................................... 18
Summary......................................................................... 18
Annuitant....................................................................... 18
Modification of the Contract.................................................... 18
Assignment...................................................................... 18
Death Benefit................................................................... 19
Beneficiary..................................................................... 19
PURCHASES, WITHDRAWALS AND CONTRACT VALUE............................................ 19
Minimum Purchase Payment........................................................ 19
Automatic Payment Plan........................................................ 19
Automatic Dollar Cost Averaging Program....................................... 20
Allocation of Purchase Payments................................................. 20
Transfer During Accumulation Period............................................. 20
Separate Account Accumulation Unit Value........................................ 21
Distribution of Contracts....................................................... 21
Withdrawals (Redemptions)....................................................... 22
Systematic Withdrawal Program................................................. 23
ERISA Plans................................................................... 23
Deferment of General Account Withdrawal Payments.............................. 23
Minimum Contract Value.......................................................... 23
ANNUITY PERIOD....................................................................... 23
Annuity Date.................................................................... 23
Deferment of Payments........................................................... 24
Payments to Owner............................................................... 24
</TABLE>
2
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<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
Allocation of Annuity Payments.................................................. 24
Annuity Options................................................................. 24
Other Options................................................................... 25
Transfer During Annuity Period.................................................. 26
Death Benefit During Annuity Period............................................. 26
Annuity Payments................................................................ 26
Initial Monthly Annuity Payment............................................... 26
Subsequent Monthly Payments................................................... 26
Annuity Unit Value.............................................................. 26
Net Investment Factor......................................................... 27
ADMINISTRATION....................................................................... 27
TAXES................................................................................ 28
General......................................................................... 28
Withholding Tax on Distributions................................................ 28
Diversification -- Separate Account Investments................................. 29
Multiple Contracts.............................................................. 29
Tax Treatment of Assignments.................................................... 30
Qualified Plans................................................................. 30
Tax Treatment of Withdrawals.................................................... 31
Qualified Plans............................................................... 31
Nonqualified Plans............................................................ 32
LEGAL PROCEEDINGS.................................................................... 32
STATEMENT OF ADDITIONAL INFORMATION.................................................. 32
</TABLE>
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DEFINITIONS
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The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PERIOD -- The period between the Contract Date and the Annuity
Date; the build-up phase under the Contract.
ACCUMULATION UNIT -- A unit of measurement which the Company uses to calculate
the Contract Value under the variable portion of the Contracts during the
Accumulation Period.
ANNUITY SERVICE CENTER -- Its address and phone number are: P.O. Box 54299, Los
Angeles, California 90054-0299; (800) PVA-0628. Correspondence accompanying a
payment should be directed to 100 West Washington Street, Phoenix, Arizona
85003. The Company will notify Owners of any change in address or telephone
number.
ANNUITANT -- The natural person on whose life the annuity benefits under a
Contract are based.
ANNUITIZATION -- The process by which an Owner converts from the Accumulation
Period to the Annuity Period. Upon Annuitization, the Contract is converted from
the build-up phase to the phase during which the Owner or other payee(s) receive
periodic annuity payments.
ANNUITY DATE -- The date on which annuity payments are to begin.
ANNUITY PERIOD -- The period starting on the Annuity Date.
ANNUITY UNIT -- A unit of measurement which the Company uses to calculate the
amount of Variable Annuity payments.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under a
Contract upon the death of the Owner.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Anchor National Life Insurance Company, a California corporation.
CONTRACT(S) -- The flexible payment variable annuity contracts offered by this
prospectus.
CONTRACT DATE -- The date a Contract is issued.
CONTRACT OWNER(S) OR OWNER(S) -- The person(s) having the privileges of
ownership defined in the Contract.
CONTRACT VALUE -- The value under a Contract, equal to the sum of the values of
the Owner's interest in the Fixed Account and the Separate Account.
CONTRACT YEAR -- A year starting from the Contract Date in one calendar year and
ending on the Contract Date in the succeeding calendar year.
CONTRIBUTION YEAR -- With respect to a given Purchase Payment, a year starting
from the date of the Purchase Payment in one calendar year and ending on the day
before the anniversary of such date in the succeeding calendar years. The
Contribution Year in which a Purchase Payment is made is "Contribution Year 0,"
subsequent Contribution Years are successively numbered beginning with
Contribution Year 1.
DUE PROOF OF DEATH -- (1) A certified copy of a 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 the
Company.
FIXED ANNUITY -- A series of payments made during the Annuity Period to a payee
under a Contract that are fixed in amount.
4
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GENERAL ACCOUNT -- The Company's general investment account which contains all
the assets of the Company, with the exception of the Separate Account and other
segregated asset accounts.
GUARANTEE RATE -- The interest rate in effect for a particular allocation to the
General Account.
LATEST ANNUITY DATE -- The first day of the month following the 85th birthday of
the Annuitant. In the case of Contracts issued in connection with Qualified
Plans, the Code generally requires that a minimum distribution be taken by April
1 of the calendar year following the calendar year in which the Owner attains
age 70 1/2. Accordingly, the Company may require an Owner in a Qualified Plan to
annuitize prior to such date unless the Owner demonstrates that the minimum
distribution is otherwise being made.
NONQUALIFIED PLAN -- A retirement plan which does not receive favorable tax
treatment under Sections 401, 403(b), 408 or 457 of the Code.
PORTFOLIO -- A subdivision of the Separate Account invested wholly in shares of
one of the investment series of the Trust.
PURCHASE PAYMENTS -- Amounts paid to the Company by a Contract Owner.
QUALIFIED PLAN -- A retirement plan which receives favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Code.
SEPARATE ACCOUNT -- A segregated investment account of the Company entitled
"Variable Annuity Account Three."
TRUST -- The Pacifica Variable Trust, an open-end management investment company.
UNDERLYING FUND(S) -- The underlying series of the Trust in which the Portfolios
invest.
VALUATION DATE -- Each day the New York Stock Exchange is open for business.
VALUATION PERIOD -- The period commencing at the close of normal trading on the
New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time) on each
Valuation Date and ending at the close of normal trading on the NYSE on the next
succeeding Valuation Date.
VARIABLE ANNUITY -- A series of payments made during the Annuity Period which
vary in amount in accordance with the investment experience of the Portfolios to
which Contract Values have been allocated.
WITHDRAWAL CHARGE -- The contingent deferred sales charge assessed against
certain withdrawals.
WITHDRAWAL VALUE -- Contract Value, minus any Contract Administration Charge,
any premium tax payable, and any applicable Withdrawal Charge.
5
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SUMMARY
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This prospectus describes the uses and objectives of the Contracts, their
costs, and the rights and privileges of the Owner. It also contains information
about the Company, the General Account, the Separate Account and its Portfolios,
and the Underlying Funds in which the Portfolios invest. We urge you to read it
carefully and retain it and the prospectus for the Trust for future reference.
(The prospectus for the Trust is attached to and follows this prospectus).
WHAT IS THE CONTRACT?
The Contract offered is a tax deferred annuity which provides fixed
benefits, variable benefits or a combination of both. Individuals wishing to
purchase a Contract must complete an application and provide an initial Purchase
Payment which will be sent to the Company at its Annuity Service office or in
such other manner as deemed acceptable to the Company. The minimum and maximum
of Purchase Payments vary depending upon the type of Contract purchased. (See
"Minimum Purchase Payment," page 19).
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
The Contract has appropriate provisions relating to variable and fixed
accumulation values and variable and fixed annuity payments. A Variable Annuity
and a Fixed Annuity have certain similarities. Both provide that Purchase
Payments, less certain deductions, will be accumulated prior to the Annuity
Date. After the Annuity Date, annuity payments will be made to a designated
payee (normally, the Owner), for the life of the Annuitant or a period certain
or a combination thereof. The Company assumes mortality and expense risks under
the Contracts, for which it receives certain compensation.
The most significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk before and after
the Annuity Date is assumed by the Owner or other payee; the amounts of the
annuity payments vary with the investment performance of the Portfolios of the
Separate Account selected by the Owner. Under a Fixed Annuity, in contrast, the
investment risk after the Annuity Date is assumed by the Company and the amounts
of the annuity payments do not vary. In the case of amounts allocated to the
General Account prior to the Annuity Date, the Owner bears the risk that the
Guarantee Rate to be credited on amounts allocated to the General Account may
not exceed the minimum guaranteed rate of 3%.
HOW MAY PURCHASE PAYMENTS BE ALLOCATED?
Purchase Payments for the Contracts may be allocated pursuant to
instructions in the application to one or more Portfolios of the Separate
Account, and/or to the Company's General Account. The Separate Account invests
in shares of the following Underlying Funds (see "Separate Account Investments,"
page 13):
* EMERGING GROWTH
* EQUITY VALUE
* BALANCED
* INTERMEDIATE BOND
* MONEY MARKET
Purchase Payments allocated to the General Account will earn interest at
the Guarantee Rate then being offered by the Company for a one year period
beginning on the date amounts are allocated to it. (See "General Account," page
12).
Prior to the Annuity Date, transfers may be made among the Portfolios
and/or the General Account. Fifteen transfers are permitted before a transfer
fee will be assessed. (See "Purchases, Withdrawals and Contract
Value -- Transfer During Accumulation Period," page 20).
MAY WITHDRAWALS BE MADE BEFORE ANNUITIZATION?
Except as explained below, Contract Value may be withdrawn at any time
during the Accumulation Period. In addition to potential losses due to
investment risks, withdrawals may be reduced by a Withdrawal Charge, and a
penalty tax and income tax may apply. Contracts in connection with
6
<PAGE> 7
Qualified Plans may be subject to additional withdrawal restrictions imposed by
the plan. Earnings under a Contract may be withdrawn at any time during such
period free of a Withdrawal Charge but may be subject to a penalty tax and
income tax. Alternatively, there is a free withdrawal amount which applies to
the first withdrawal during a Contract Year after the first Contract Year. (See
"Contract Charges -- Sales Charges -- Withdrawal Charge," page 16). Certain
Owners of Nonqualified Plan Contracts and Contracts issued in connection with
Individual Retirement Annuities ("IRAs") may choose to withdraw amounts which in
the aggregate add up to 10% of their Purchase Payments annually pursuant to a
systematic withdrawal program without charge. (See "Purchases, Withdrawals and
Contract Value -- Withdrawals (Redemptions) -- Systematic Withdrawal Program,"
page 23.) Withdrawals are taxable and a 10% federal tax penalty may apply to
withdrawals before age 59 1/2.
Owners should consult their own tax counsel or other tax adviser regarding
any withdrawals or distributions.
CAN I EXAMINE THE CONTRACT?
The Contract Owner may return the Contract to the Company within 10 days
(or longer period if required by state law) after it is received by delivering
or mailing it to the Company's Annuity Service Center. If the Contract is
returned to the Company, it will be terminated and, unless otherwise required by
state law, the Company will pay the Owner an amount equal to the Contract Value
represented by the Contract on the date it is mailed or delivered to the
Company.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
A mortality and expense risk charge is assessed daily against the assets of
each Portfolio at an annual rate of 1.25%. A distribution expense charge is
assessed daily against the assets of each Portfolio at an annual rate of 0.15%.
The Contracts also provide for certain deductions and charges, including a
contract administration charge of $30 annually, which is guaranteed not to
increase. The Contract permits up to 15 free transfers each Contract Year, after
which point a $25 transfer fee ($10 in Texas) is applicable to each subsequent
transfer. Additionally, a Withdrawal Charge may be assessed against the Contract
Value during the first seven Contribution Years (7%-6%-5%-4%-3%-2%-1%) when a
withdrawal is made. (See "Contract Charges," page 15.)
DOES THE CONTRACT PAY ANY DEATH BENEFITS?
A Death Benefit is provided in the event of the death of the Owner during
the Accumulation Period. The Death Benefit is equal to the greater of: (1) the
Contract Value upon receipt of Due Proof of Death; or (2) the total of Purchase
Payments made prior to the death of the Owner, minus any partial withdrawals or
partial annuitizations and premium taxes incurred; or (3) if the Owner was less
than age 70 on the Contract Date, after the seventh Contract Year, the Contract
Value on the seventh Contract anniversary, plus any Purchase Payments made
thereafter, and minus any partial withdrawals or partial annuitizations and
premium taxes incurred since that date. (See "Description of the
Contracts -- Death Benefit," page 19.)
WHAT ARE THE AVAILABLE ANNUITY OPTIONS UNDER THE CONTRACT?
There are five available annuity options under the Contract. They include
an annuity for life, a joint and survivor annuity, a joint and survivor life
annuity with 120 monthly payments guaranteed, a life annuity with 120 or 240
monthly payments guaranteed and monthly payments for a specified number of
years. The Annuity Date may not be deferred beyond an Owner's 85th birthday. If
a Contract Owner does not elect otherwise, monthly annuity payments generally
will be made under the fourth option to provide a life annuity with 120 monthly
payments certain. (See "Annuity Period -- Annuity Options," page 24.)
DOES THE OWNER HAVE ANY VOTING RIGHTS UNDER THE CONTRACT?
Owners will have the right to vote on matters affecting the Underlying
Funds to the extent that proxies are solicited by the Trust. If the Owner does
not vote, the Company will vote such interests in the same proportion as it
votes shares for which it has received instructions. (See "Separate Account
Investments -- Voting Rights," page 14.)
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FEE TABLES
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OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
CONTRIBUTION YEAR
<S> <C>
Zero.............................................................................................. 7%
One............................................................................................... 6%
Two............................................................................................... 5%
Three............................................................................................. 4%
Four.............................................................................................. 3%
Five.............................................................................................. 2%
Six............................................................................................... 1%
Seven and later................................................................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE................................................................... $30
TRANSFER FEE............................................................................................ $25*
(applies solely to transfers in excess of fifteen in a Contract Year)
</TABLE>
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*$10 in Texas.
The Owner Transaction Expenses apply to the Contract Value allocated to the
General Account, as well as the Separate Account.
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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>
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ANNUAL TRUST EXPENSES*
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL ANNUAL
ADVISORY FEE ADMINISTRATION FEE OTHER EXPENSES EXPENSES
------------ ------------------ -------------- ------------
<S> <C> <C> <C> <C>
Emerging Growth..................................... .75% .05 .40 1.20%
Equity Value........................................ .75% .05 .40 1.20%
Balanced............................................ .75% .05 .40 1.20%
Intermediate Bond................................... .65% .05 .40 1.10%
Money Market........................................ .60% .05 .40 1.05%
</TABLE>
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*The Trust has no prior operating history. The estimated Advisory and
Administration Fees are based on the initial level of fees to be paid under the
investment advisory and administration agreements. "Other Expenses" is based on
estimated amounts for the current fiscal year.
8
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EXAMPLES
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<TABLE>
<S> <C> <C>
IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT SURRENDER YOUR
AT THE END OF THE APPLICABLE CONTRACT: You would pay the
TIME PERIOD: You would pay the following expenses on a $1,000
following expenses on a $1,000 investment, assuming a 5% an-
investment, assuming a 5% nual return on assets:
annual return on assets:
1 Year 3 Years 1 Year 3 Years
Emerging Growth $97 $134 $27 $84
Equity Value $97 $134 $27 $84
Balanced $97 $134 $27 $84
Intermediate Bond $96 $131 $26 $81
Money Market $96 $129 $26 $79
</TABLE>
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1. The purpose of the foregoing table and examples is to assist an investor in
understanding the various costs and expenses that he or she will bear
directly or indirectly by investing in the Separate Account. The Owner
Transaction Expenses at the beginning of the Fee Tables are applicable to
Contract Value allocated to the General Account as well as to the Separate
Account. However, the balance of the fee tables, and the Examples, apply only
to investments in the Separate Account. The table reflects expenses of the
Separate Account as well as the Underlying Funds. For additional information
see "Contract Charges," beginning on page 15 of this prospectus; see also the
sections relating to management of the Underlying Funds in the Trust
prospectus. The examples do not illustrate the tax consequences of
surrendering a Contract.
2. The examples assume that there were no transactions which would result in the
imposition of the transfer fee. The amount of the transfer fee is $25 ($10 in
Texas), except that the first 15 transfers per Contract Year are not subject
to a fee. (See "Administrative Charges -- Transfer Fee," page 15). Premium
taxes are not reflected. (See "Contract Charges -- Premium Taxes," page 17).
3. NEITHER THE FEE TABLES NOR THE EXAMPLES ARE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
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NOTE: AS OF THE DATE OF THIS PROSPECTUS, THE SALE OF CONTRACTS HAD NOT
COMMENCED, AND THE PORTFOLIOS HAD NO ASSETS. THEREFORE, NO CONDENSED FINANCIAL
INFORMATION WITH RESPECT TO THE SEPARATE ACCOUNT IS PRESENTED IN THE PROSPECTUS.
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PERFORMANCE DATA
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From time to time the Separate Account may advertise the Money Market
Portfolio's "yield" and "effective yield." Both yield 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 Portfolio (which invests in shares of
the Money Market Portfolio of the Trust) over a seven-day period (which period
will be stated in the advertisement). 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 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 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 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 Portfolios other than the Money Market Portfolio. These yield
figures are based upon the actual performance of the 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.
For a more complete description of Contract charges, see "Contract
Charges," beginning on page 15. More detailed information on the computation of
advertised performance data for the Separate Account is contained in the
Statement of Additional Information.
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DESCRIPTION OF THE COMPANY AND THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
COMPANY
The Company is a stock life insurance company organized under the laws of
the state of California in April 1965. Its legal domicile and principal business
address is 1 SunAmerica Center, Los Angeles, California 90067-6022. The Company
is a wholly owned subsidiary of SunAmerica Life Insurance Company, an Arizona
corporation, which is wholly owned by SunAmerica Inc.
The Company and its affiliates, SunAmerica Life Insurance Company, First
SunAmerica Life Insurance Company, SunAmerica Asset Management Corp., Imperial
Premium Finance, Inc., Resources Trust Company and two broker-dealers, offer a
full line of financial services, including fixed and variable annuities, mutual
funds, premium finance and trust administration services. As of September 30,
1995, the Company had $7.78 billion in assets while SunAmerica Inc., the
Company's ultimate parent, together with its subsidiaries, held $28.39 billion
of assets, consisting of $16.84 billion of assets owned, $2.13 billion of assets
managed in mutual funds and private accounts and $9.42 billion under custody in
retirement trust accounts.
The Company may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("Standard & Poor's"), and Duff & Phelps. A.M. Best's
and Moody's ratings reflect their current opinion on the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. Standard & Poor's and Duff & Phelps
provide ratings which measure the claims-paying ability of insurance companies.
These ratings are opinions about an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Claims-paying ability ratings do not refer to an insurer's ability
to meet non-policy obligations (i.e., debt/commercial paper). These ratings do
not apply to the Separate Account. However, the contractual obligations under
the Contracts are the general corporate obligations of the Company.
The Company is admitted to conduct life insurance and annuity business in
the District of Columbia and in all states except New York. The Contract will be
available in a limited number of jurisdictions in which the Company is admitted
to conduct annuity business. The Contracts offered by this prospectus are issued
by the Company and will be funded in the Separate Account as well as the
Company's General Account.
SEPARATE ACCOUNT
Variable Annuity Account Three was originally established by the Company on
May 24, 1994, pursuant to the provisions of California law, as a segregated
asset account of the Company. The Separate Account meets the definition of a
"separate account" under the federal securities laws and is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940. This registration does not involve supervision
of the management of the Separate Account or the Company by the Securities and
Exchange Commission.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to its reserves and other
contract liabilities, are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income, gains and losses, whether or not realized, from assets allocated to
the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains or losses of the Company.
The Separate Account is divided into Portfolios, with the assets of each
Portfolio invested in the shares of one of the Underlying Funds. The Company
does not guarantee the investment performance
11
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of the Separate Account, its Portfolios or the Underlying Funds. Values
allocated to the Separate Account and the amount of Variable Annuity payments
will vary with the values of shares of the Underlying Funds, and are also
reduced by Contract charges.
The basic objective of a Variable Annuity contract is to provide Variable
Annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that Variable Annuity payments
will reflect the investment performance of the Separate Account with respect to
amounts allocated to it both before and after the Annuity Date. Since the
Separate Account is always fully invested in shares of the Underlying Funds, its
investment performance reflects the investment performance of those entities.
The values of such shares held by the Separate Account fluctuate and are subject
to the risks of changing economic conditions as well as the risk inherent in the
ability of the Underlying Funds' management to make necessary changes in their
portfolios to anticipate changes in economic conditions. Therefore, the Owner
bears the entire investment risk that the basic objectives of the Contract may
not be realized, and that the adverse effects of inflation may not be lessened.
There can be no assurance that the aggregate amount of Variable Annuity payments
will equal or exceed the Purchase Payments made for the reasons described above,
or because of the premature death of an Annuitant.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of Variable Annuity payments made
during the lifetime of the Annuitant will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contract
(although the Company does not guarantee the amounts of the Variable Annuity
payments).
- --------------------------------------------------------------------------------
GENERAL ACCOUNT
- --------------------------------------------------------------------------------
THAT PORTION OF THE CONTRACT RELATING TO ALLOCATIONS TO THE GENERAL ACCOUNT
IS NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR AS AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE "1940 ACT").
ACCORDINGLY, THIS PORTION OF THE CONTRACT IS NOT SUBJECT TO THE PROVISIONS OR
RESTRICTIONS OF THE ACT OR THE 1940 ACT, AND THE DISCLOSURE CONTAINED HEREIN
RELATING THERETO HAS NOT BEEN REVIEWED BY THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION. THE FOLLOWING DISCLOSURE ABOUT THE GENERAL ACCOUNT MAY BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS REGARDING THE ACCURACY AND COMPLETENESS OF DISCLOSURE.
The General Account is made up of all of the general assets of the Company
other than those allocated to the Separate Account or any other segregated asset
account of the Company. Purchase Payments may be allocated to the General
Account. In addition, all or part of the Contract Value may be transferred from
the Separate Account to the General Account as described under "Purchases,
Withdrawals and Contract Value -- Transfer During Accumulation Period," and
"Annuity Period -- Transfer During Annuity Period," page 26. Amounts allocated
to the General Account will earn interest for one year at the Guarantee Rate set
by the Company and in effect at the time the amounts are thus applied. The
Company guarantees that the Guarantee Rate will be at least 3% but Owners bear
the risk that the Guarantee Rate may not exceed this guaranteed minimum. The
Guarantee Rate may change from time to time due to changes in market conditions
or other factors. However, the Guarantee Rate in effect at the time amounts are
allocated to the General Account will not change during the one year period. THE
COMPANY'S OBLIGATION TO PAY INTEREST AT THE GUARANTEE RATE IS NOT AFFECTED BY
THE PERFORMANCE OF THE COMPANY'S GENERAL ACCOUNT INVESTMENTS.
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<PAGE> 13
Amounts allocated or transferred to the General Account may be transferred
from the General Account at any time prior to the Annuity Date. If the Company
does not receive transfer instructions from the Owner within 30 days after the
anniversary date of an initial allocation to the General Account, the Company
will assume reallocation in the General Account at the then current Guarantee
Rate.
General Account assets are available to fund the claims of all classes of
customers of the Company, as well as of its creditors. Accordingly, all of the
Company's assets held in the General Account will be available to fund the
Company's obligations under the Contracts as well as such other claims. The
Company will invest the assets of the General Account in the manner chosen by
the Company and allowed by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
Each of the Portfolios of the Separate Account invests in the shares of one
of the five following Underlying Funds, which are investment series of Pacifica
Variable Trust, an open-end management investment company registered under the
Investment Company Act of 1940:
* EMERGING GROWTH
* EQUITY VALUE
* BALANCED
* INTERMEDIATE BOND
* MONEY MARKET
First Interstate Capital Management, Inc. (the "Adviser") is the investment
adviser for each of the Underlying Funds. Its headquarters are at 7501 E.
McCormick Parkway, Scottsdale, Arizona 85258. As investment adviser to the
Underlying Funds, the Adviser makes investment decisions subject to such
policies as the Board of Trustees of the Trust may determine. First Interstate
Bank of California (the "Custodian"), 707 Wilshire Boulevard, Los Angeles,
California 90017, serves as Custodian for the Underlying Funds. The Custodian'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. Furman Selz, Incorporated ("Furman Selz") will act as administrator of
each of the Underlying Funds. Its headquarters are at 237 Park Avenue, New York,
New York 10017. As administrator of the Underlying Funds, Furman Selz provides
certain services including coordinating relationships with independent
contractors and agents, preparing for signature by officers and filing of
certain documents, preparing financial statements, arranging for the maintenance
of books and records, and providing office facilities.
A summary description, including its investment objective, of the
Underlying Funds in which the Portfolios invest is as follows:
EMERGING GROWTH PORTFOLIO seeks to maximize long-term capital appreciation
by investing primarily in common stocks of medium-sized domestic and foreign
companies, although the Portfolio may invest in larger or smaller size companies
which show strong growth prospects. In addition, the Portfolio may also invest
in preferred stocks, lower-rated convertible securities, common stock warrants
and up to 10% of its net assets in securities issued by foreign companies.
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<PAGE> 14
EQUITY VALUE PORTFOLIO seeks long-term capital appreciation by investing
primarily in common stocks of domestic and foreign companies, but the Portfolio
may also invest in preferred stocks, high grade securities convertible into
common stocks, warrants and up to 10% of its net assets in securities issued by
foreign companies. The Portfolio will typically invest at least 65% of its total
assets in common stocks or securities convertible into common stocks.
BALANCED PORTFOLIO seeks both capital appreciation and current income
resulting in a high total investment return. The Portfolio will invest in both
securities and debt instruments. Debt instruments may include commercial paper,
rated A-2 or better by Standard & Poor's or Prime-2 or better by Moody's,
corporate debt securities rated BBB or better by Standard & Poor's or Baa or
better by Moody's, and mortgage- and asset-backed securities rated AA or better
by Standard & Poor's or Aa or better by Moody's.
INTERMEDIATE BOND PORTFOLIO seeks a high level of current income consistent
with the preservation of capital and maintenance of liquidity through investment
in a broad range of investment grade debt instruments.
MONEY MARKET PORTFOLIO seeks high current income and stability of principal
by investing exclusively in money market instruments which have remaining
maturities not exceeding 13 months and in certain repurchase agreements.
DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUS OF THE TRUST. AN INVESTOR SHOULD CAREFULLY
REVIEW THE PROSPECTUS BEFORE ALLOCATING AMOUNTS TO BE INVESTED IN THE PORTFOLIOS
OF THE SEPARATE ACCOUNT.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. Owners bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values will fluctuate in
accordance with the investment performance of the Portfolio(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the Contracts. Shares of the Trust are currently issued
and redeemed only in connection with investments in, and payments under, the
Contracts to be sold by the Company.
VOTING RIGHTS
To the extent required by applicable law, the Company will vote the shares
of the Underlying Funds held in the Separate Account at meetings of the
shareholders of the Trust in accordance with instructions received from persons
having the voting interest in the corresponding Portfolios. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions. The Underlying Funds do
not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Trust not more than 60 days prior to the
meeting of the respective Underlying Fund's shareholders. Voting instructions
will be solicited by written communication in advance of such meeting. Except as
may be limited by the terms of the retirement plan pursuant to which the
Contract was issued, the person having such voting rights will be the Owner
before the Annuity Date; thereafter the payee entitled to receive payments under
the Contract.
SUBSTITUTION OF SECURITIES
If the shares of any of the Underlying Funds should no longer be available
for investment by the Separate Account or if, in the judgment of the Company's
Board of Directors, further investment in the shares of an Underlying Fund is no
longer appropriate in view of the purposes of the Contract, the Company may
substitute shares of another open-end management investment company (or series
thereof) for Underlying Fund shares already purchased and/or to be purchased in
the future by Purchase Payments under the Contract. No such substitution of
securities may take place without prior approval of the Securities and Exchange
Commission and under such requirements as the Commission may impose.
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<PAGE> 15
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CONTRACT CHARGES
- --------------------------------------------------------------------------------
As is more fully described below, charges under the Contract offered by
this prospectus are assessed in three ways: (1) as deductions for administrative
expenses and, if applicable, for premium taxes; (2) as charges against the
assets of the Separate Account for the assumption of mortality and expense risks
and as distribution expense charges; and (3) as Withdrawal Charges (contingent
deferred sales charges). In addition, certain deductions are made from the
assets of the Underlying Funds for investment management fees and expenses;
those fees and expenses are described in the prospectus for the Trust.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from each Portfolio
during each Valuation Period. The aggregate Mortality and Expense Risk Charge is
equal, on an annual basis, to 1.25% of the net asset value of each Portfolio
(approximately 0.90% is for mortality risks and approximately 0.35% is for
expense risks). The Mortality and Expense Risk Charge is assessed during both
the Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the General Account.
The mortality risks assumed by the Company arise from its contractual
obligations: (1) to make annuity payments after the Annuity Date for the life of
the Annuitant(s); (2) to pay a Death Benefit if the Contract Owner dies during
the Accumulation Period; and (3) to waive the Withdrawal Charge in the event of
the death of the Owner. The expense risk assumed by the Company is that the
costs of administering the Contracts and the Separate Account will exceed the
amount received from the Contract Administration Charge. (See "Administrative
Charges" below.) The mortality and expense risk charges are guaranteed by the
Company and cannot be increased.
ADMINISTRATIVE CHARGES
CONTRACT ADMINISTRATION CHARGE
An annual Contract Administration Charge of $30 is charged against each
Contract. The amount of this charge is guaranteed and cannot be increased by the
Company. This charge 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 Contract Date
that occurs on or prior to the Annuity Date. 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. This charge is not assessed during the Annuity
Period.
The total Contract Administration Charge is allocated between the
Portfolios and the General Account in proportion to the respective Contract
Values similarly allocated. The Contract Administration Charge is at cost with
no margin included for profit.
TRANSFER FEE
In general, a transfer fee of $25 ($10 in Texas) is assessed on each
transaction effecting transfer(s) from Portfolio(s) to other Portfolio(s), from
Portfolio(s) to the General Account, and from the General Account to
Portfolio(s). However, the first fifteen such transactions effecting transfer(s)
in any Contract Year are permitted without the imposition of the transfer fee,
which will be assessed on the sixteenth and each subsequent transaction within
the Contract Year.
This fee will be deducted from Contract Values which remain in the
Portfolio(s) (or, where applicable, the General Account) from which the transfer
was made. If such remaining Contract Value is insufficient to pay the transfer
fee, then the fee will be deducted from transferred Contract Values. The
transfer fee is at cost with no margin included for profit.
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<PAGE> 16
SALES CHARGES
WITHDRAWAL CHARGE
Federal tax law places a number of constraints on withdrawals from annuity
contracts. Subject to those limitations, the Contract Value may be withdrawn at
any time during the Accumulation Period. Owners should consult their own tax
counsel or other tax advisers regarding any withdrawals. (See "Taxes -- Tax
Treatment of Withdrawals," page 31.)
A contingent deferred sales charge, which is referred to as the Withdrawal
Charge, may be imposed upon certain withdrawals. Withdrawal Charges will vary in
amount depending upon the Contribution Year of the purchase payment at the time
of withdrawal in accordance with the Withdrawal Charge table shown below.
WITHDRAWAL CHARGE TABLE
<TABLE>
<CAPTION>
APPLICABLE WITHDRAWAL
CONTRIBUTION YEAR CHARGE PERCENTAGE
------------------------------------------------------- ---------------------
<S> <C>
Zero................................................... 7%
First.................................................. 6%
Second................................................. 5%
Third.................................................. 4%
Fourth................................................. 3%
Fifth.................................................. 2%
Sixth.................................................. 1%
Seventh and later...................................... 0%
</TABLE>
The Withdrawal Charge is deducted from 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 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.
Purchase Payments that are no longer subject to the Withdrawal Charge (and
not previously withdrawn) plus earnings may be withdrawn free of Withdrawal
Charges at any time.
In addition, for the first withdrawal during a Contract Year after the
first Contract Year no Withdrawal Charge is applied to that part of the
withdrawal which does not exceed the greater of (a) earnings in the Contract or
(b) the Free Corridor. The Free Corridor amount is equal to 10% of 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.
The portion of a withdrawal which exceeds the sum of earnings in the Contract
and premiums which are both no longer subject to a Withdrawal Charge and not yet
withdrawn is assumed to be a withdrawal against future earnings. Although
amounts withdrawn free of a Withdrawal Charge reduce principal, they do not
reduce Purchase Payments for purposes of calculating the Withdrawal Charge. As a
result, an Owner will not receive the benefit of a free withdrawal in a full
surrender.
If the withdrawal request does not specify from which Portfolio(s) (or
General Account if applicable) the withdrawal is to be made, the request will be
processed by reducing the Contract Values in each category in proportion to
their allocations, including any allocations to the General Account.
The Company will waive the Withdrawal Charge on any withdrawal necessary to
satisfy the minimum distribution requirements of the Code or upon payment of a
death benefit. In addition, 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 or to a trustee of one of the Underlying Funds.
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<PAGE> 17
For Contracts issued with an appropriate endorsement, if the Owner is
confined to a nursing care facility (as defined in the endorsement) for sixty
(60) consecutive days or longer, the Company will also waive the Withdrawal
Charge on certain withdrawals prior to the Annuity Date. Such confinement must
begin after the Contract Date and the Company must receive satisfactory written
evidence of such confinement. The Company will waive the Withdrawal Charge under
the endorsement only for withdrawals made during such confinement or within
ninety (90) days after the confinement ends. The endorsement is not available in
all states. Owners should contract the Company or the financial representative
from which this prospectus was obtained as to the availability of this
endorsement.
The amounts obtained from the Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the Withdrawal Charge is
insufficient to cover all sales commissions and other promotional or
distribution expenses, the Company may use any of its corporate assets,
including potential profit which may arise from the Mortality and Expense Risk
Charge and the Distribution Expense Charge, to make up any difference.
DISTRIBUTION EXPENSE CHARGE
The Company deducts a Distribution Expense Charge from each Portfolio
during each Valuation Period which is equal, on an annual basis, to 0.15% of the
net asset value of the Portfolio. This 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 (a contingent deferred sales
charge). The staff of the Securities and Exchange Commission considers the
Distribution Expense Charge to constitute a sales charge for purposes of the
Investment Company Act of 1940. In no event will this charge be increased.
Moreover, the sum of all Withdrawal Charges described above and the Distribution
Expense Charges assessed will at no time exceed 9% of all Purchase Payments
previously made. The Distribution Expense Charge is assessed during both the
Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the General Account.
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 of surrender or when annuity payments begin. The Company currently intends
to deduct premium taxes at the time of surrender, upon death of the Owner or
upon annuitization; however, it reserves the right to deduct any premium taxes
when incurred. Premium taxes generally range from 0% to 3.5%.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES
While the Company is not currently maintaining a provision for taxes, the
Company 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. The Company will deduct for any
taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a provision for taxes and whether or not it was
sufficient. (See "Taxes," page 28.)
OTHER EXPENSES
The charges and expenses applicable to the various Underlying Funds are
borne indirectly by Owners having Contract Values allocated to the Portfolios
that invest in the respective Underlying Funds. For a summary of current
estimates of those charges and expenses, see "Fee Tables," page 8. For more
detailed information about those charges and expenses, please refer to the
prospectus for the Trust.
REDUCTION OF CHARGES FOR SALES TO CERTAIN GROUPS
The Company may reduce the sales and administrative charges on Contracts
sold to certain groups of individuals, or to a trustee, employer or other entity
representing a group, where it is
17
<PAGE> 18
expected that such sales will result in savings of sales or administrative
expenses. The Company determines the eligibility of groups for such reduced
charges, and the amount of such reductions for particular groups, by considering
the following factors: (1) the size of the group; (2) the total amount of
Purchase Payments expected to be received from the group; (3) the nature of the
group for which the Contracts are purchased, and the persistency expected in
that group; (4) the purpose for which the Contracts are purchased and whether
that purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which the Company believes to be relevant to determining whether
reduced sales or administrative expenses may be expected. None of the reductions
in charges for group sales is contractually guaranteed. Such reductions may be
withdrawn or modified by the Company on a uniform basis. The Company's
reductions in charges for group sales will not be unfairly discriminatory to the
interests of any Owners.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
The Contracts provide for the accumulation of Contract Values during the
Accumulation Period. (See "Purchases, Withdrawals and Contract Value," page 19.)
Upon Annuitization, benefits are payable under the Contracts in the form of an
annuity, either for the life of the Annuitant or for a fixed number of years.
(See "Annuity Period -- Annuity Options," page 24.)
ANNUITANT
The Annuitant is the person on whose life annuity payments under a Contract
depend. The Owner may change the designated Annuitant at any time prior to the
Annuity Date. In the case of a Contract issued in connection with a plan
qualified under Section 403(b) or 408 of the Code, the Owner is the Annuitant.
The Owner may also designate a second person on whose life, together with that
of the Annuitant, annuity payments depend. In the case of Qualified Plans, the
designated second person is generally required to be the Owner's spouse if the
Owner is married. In the event an Annuitant dies prior to the Annuity Date, the
Owner must notify the Company and designate a new Annuitant. The Owner must
attest to the Annuitant being alive before the Company will annuitize a
Contract.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive any provisions of the Contract. Any change or waiver must be in
writing. No agent has the authority to change or waive the provisions of the
Contract.
The Company reserves the right to change the terms of the Contract as may
be necessary to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Nonqualified 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. The Company will not be bound by any assignment until written
notice is received by the Company at its Annuity Service Center. The Company is
not responsible for the validity, or tax or legal consequences of any
assignment. An assignment will not affect any payments the Company may make or
actions it may take before it receives notice of the assignment.
If the Contract is issued pursuant to a Qualified Plan (or a Nonqualified
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.
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<PAGE> 19
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, CONTRACT OWNERS SHOULD
CONSULT COMPETENT TAX ADVISERS SHOULD THEY WISH TO ASSIGN THEIR CONTRACTS.
DEATH BENEFIT
If the Contract Owner dies during the Accumulation Period, a death benefit
will be payable to the Beneficiary upon receipt by the Company of Due Proof of
Death of the Owner. The death benefit will be reduced by premium taxes incurred
by the Company, if any. Provided the Beneficiary provides a written election to
the Company within 60 days of the Company's receipt of Due Proof of Death of the
Owner, the Beneficiary may alternatively elect to (i) receive the death benefit
in a lump sum payment, (ii) receive the death benefit in the form of one of the
annuity options (over the life of the Beneficiary or over a period not extending
beyond the life expectancy of the Beneficiary), with payments commencing within
one year of the Owner's death, (iii) elect to continue the Contract and receive
the entire Contract Value (adjusted for any applicable Withdrawal Charge) within
5 years after the Owner's death, or (iv) if the Owner was the Beneficiary's
spouse, elect to continue the Contract in force. If no option is selected within
60 days of the Company's receipt of Due Proof of Death of the Owner, the Company
will pay the death benefit in a single lump sum to the Beneficiary.
The death benefit is equal to the greater of:
(1) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center; or
(2) the total dollar amount of Purchase Payments made prior to the
death of the Owner, minus any partial withdrawals and partial
annuitizations; or
(3) if the Owner was less than age 70 on the Contract Date, after the
seventh Contract Year, the Contract Value on the seventh Contract
anniversary, plus any Purchase Payments made thereafter, minus any partial
withdrawals or partial annuitizations since that date.
BENEFICIARY
The Owner may designate the Beneficiary(ies) to receive any amount payable
on death. The original Beneficiary(ies) will be named in the application. Unless
an irrevocable Beneficiary(ies) designation was previously filed, the Owner may
change the Beneficiary(ies) prior to the Annuity Date by written request
delivered to the Company at its Annuity Service Center. Any change will take
effect when recorded by the Company. The Company is not liable for any payment
made or action taken before it records the change.
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
MINIMUM PURCHASE PAYMENT
The minimum initial Purchase Payment for Contracts is $2,000 in the case of
a Qualified Plan and $5,000 in the case of a Non-Qualified Plan. Minimum
subsequent Purchase Payments may be made in amounts of $250 or more ($100 or
more if made in connection with an Automatic Payment Plan). The Company reserves
the right to refuse any Purchase Payment at any time. Generally, the Company
will not issue a Contract under a Non-Qualified Plan to an Owner who is age 85
or older or under a Qualified Plan to an Owner who is age 70 1/2 or older.
Purchase Payments of more than $500,000 require prior Company approval.
AUTOMATIC PAYMENT PLAN
Owners utilizing automatic bank drafts through the Company's Automatic
Payment Plan may make scheduled subsequent Purchase Payments of $100 or more per
month. An enrollment form for this program is available through the Company's
Annuity Service Center.
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<PAGE> 20
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of the Portfolios over a period of time
may be able to do so through the Dollar Cost Averaging ("DCA") Program. Under
the DCA Program, an Owner may authorize the automatic transfer of a fixed dollar
amount ($100 minimum) of his or her choice at regular intervals from a source
account to one or more of the Portfolios (other than the source account) at the
unit values determined on the dates of the transfers. Currently, the General
Account and all Portfolios are available as source accounts. However, the Owner
must elect to have the transfers exclusively from one source account. The
intervals between transfers may be monthly, quarterly, semi-annually or
annually, at the option of the Owner. The theory of dollar cost averaging is
that, if purchases are made at fluctuating prices, this will have the effect of
reducing the aggregate average cost per unit to less than the average of the
unit prices on the same purchase dates. However, participation in the DCA
Program does not assure the Owner of a greater profit from his or her purchases
under the program; nor will it prevent or necessarily alleviate losses in a
declining market.
Another option under the DCA Program is the periodic transfer of a selected
percentage of the value of the source account to one of the Portfolios (other
than the source account). A third option is to transfer the entire Contract
Value in the source account in a stated number of transfers as selected by the
Owner. Although the various options under the DCA Program will allow transfers
to be made either from the General Account or the Portfolios, the Owner must
elect to have the transfers made exclusively from one of these source accounts.
An Owner may elect to increase, decrease or change the frequency or amount
of Purchase Payments under the DCA Program. The Dollar Cost Averaging enrollment
form should be sent to the Company at its P.O. Box for correspondence
accompanied by payments. The Company reserves the right to modify, suspend or
terminate the DCA Program at any time.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the General Account and/or the
Portfolio(s) selected by the Owner. Owners making initial Purchase Payments
should specify their allocations on the application for a Contract. If the
application is in good order, the Company will apply the initial Purchase
Payment to the General Account and/or the Portfolio(s), as selected, and credit
the Contract with Accumulation Units within two business days of receipt at the
Company's P.O. Box for correspondence accompanied by payments. The number of
Accumulation Units in a Portfolio attributable to a Purchase Payment is
determined by dividing that portion of the Purchase Payment which is allocated
to the Portfolio by that Portfolio's Accumulation Unit value as of the end of
the Valuation Period when the allocation occurs.
IF THE APPLICATION DOES NOT SPECIFY AN ALLOCATION, THE APPLICATION IS NOT
IN GOOD ORDER. If the application for a Contract is not in good order, for this
or any other reason, the Company will attempt to rectify it within five business
days of its receipt at the Company's P.O. Box for correspondence accompanied by
payments. The Company will credit the initial Purchase Payment within two
business days after the application has been rectified. Unless the prospective
Owner consents otherwise, the application and the initial Purchase Payment will
be returned if the application cannot be put in good order within five business
days of such receipt.
As with initial Purchase Payments, Owners making subsequent Purchase
Payments should specify how they want their payments allocated. OTHERWISE, THE
COMPANY WILL AUTOMATICALLY PROCESS THE PURCHASE PAYMENT BASED ON THE PREVIOUS
ALLOCATION.
TRANSFER DURING ACCUMULATION PERIOD
During the Accumulation Period, the Owner, or his or her agent, may
transfer Contract Values among Portfolios and/or the General Account, by written
request or by telephone authorization unless the Owner specifies on the Contract
application that telephone transfers are not to be accepted. The Company has in
place procedures which are designed to provide reasonable assurance that
telephone
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authorizations are genuine, including tape recording of telephone communications
and requesting identifying information. Accordingly, the Company and its
affiliates disclaim all liability for any claim, loss or expense resulting from
any alleged error or mistake in connection with a telephone transfer which was
not properly authorized by the Owner. However, if the Company fails to employ
reasonable procedures to ensure that all telephone transfers are properly
authorized, the Company may be held liable for such losses. The Company reserves
the right to suspend, modify or discontinue at any time and without notice the
use of telephone transfers and acceptance of transfer instructions from someone
other than the Owner. Telephone calls authorizing transfers must be completed by
4:00 p.m. Eastern time on a Valuation Date in order to be effected at the price
determined on such date. Transfer authorizations, whether written or telephone,
which are received after 4:00 p.m. Eastern time will be processed as of the next
Valuation Date.
A transfer fee may be assessed (See "Contract Charges -- Transfer Fee,"
page 15.)
The minimum partial transfer amount is $100. Also, no partial transfer may
be made if the value of the Owner's interest in the Portfolio from which a
transfer is being made (or the amount remaining in the General Account, where
applicable), would be less than $100 after the transfer. These dollar amounts
are subject to change at the Company's option. The Company may waive the minimum
partial transfer amount in connection with preauthorized automatic transfer
programs.
Both prior to and after the Annuity Date, Contract Values may be
transferred from the Separate Account to the General Account. Any amounts
allocated or transferred to the General Account may, however, be transferred
from the General Account to the Separate Account only prior to the Annuity Date.
For transfers from the General Account, see "General Account," page 12.
Such transfers are counted against the 15 transfer allowance on free transfers.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE
Accumulation Unit value is determined Monday through Friday on each day
that the New York Stock Exchange is open for business.
A separate Accumulation Unit value is determined for each Portfolio. If the
Company elects or is required to assess a charge for taxes, a separate
Accumulation Unit value may be calculated for Contracts issued in connection
with Non-Qualified and Qualified Plans, respectively, within each account.
The Accumulation Unit value for each Portfolio will vary with the price of
a share in the Underlying Fund and in accordance with the Mortality and Expense
Risk Charge, Distribution Expense Charge, and any provision for taxes.
Assessments of Withdrawal Charges, transfer fees and Contract Administration
Charges are made separately for each Contract. They are effected by the
redemption of Accumulation Units and do not affect the Accumulation Unit value.
The Accumulation Unit value of a Portfolio for any Valuation Period is
calculated by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the total value at the end of the Valuation Period of the
assets attributable to the Accumulation Units of the Portfolio minus
liabilities;
(2) is the cumulative unpaid charge for the assumption of mortality
and expense risks and for the distribution expense; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
DISTRIBUTION OF CONTRACTS
Contracts are sold by registered representatives of broker-dealers who are
licensed insurance agents of the Company, either individually or through an
incorporated insurance agency. Commissions on initial Purchase Payments paid to
registered representatives may vary, but are not anticipated to exceed 7.25% of
any Purchase Payment (including any promotional sales incentives). In addition,
under certain circumstances and in exchange for lower initial commission,
certain sellers of the
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Contracts may be paid persistency bonuses which will take into account, among
other things, the length of time Purchase Payments have been held under a
Contract, and Contract Values. A persistency bonus is not anticipated to exceed
.40%, on an annual basis, of the Contract Values considered in connection with
the bonus. All such commissions, incentives and bonuses are paid by the Company.
SunAmerica Capital Services, Inc., located at 733 Third Avenue, 4th Floor,
New York, New York, 10017, serves as distributor of the Contract. SunAmerica
Capital Services, Inc., an indirect wholly owned subsidiary of the Company, 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.
WITHDRAWALS (REDEMPTIONS)
Except as explained below, an Owner may redeem a Contract for all or a
portion of its Contract Value during the Accumulation Period. Withdrawal Charges
may be applicable, however, which would reduce the Contract Value upon
redemption. (See "Contract Charges -- Sales Charges -- Withdrawal Charge," page
16.)
Withdrawals and distributions from Contracts issued in connection with
certain Qualified Plans may be subject to a mandatory 20% withholding
requirement. (See "Taxes -- Withholding Tax on Distributions," page 28.)
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to circumstances only: when the Owner attains age 59 1/2, separates
from service, dies, becomes disabled (within the meaning of Section 72(m)(7) of
the Code), or in the case of hardship. Withdrawals for hardship are restricted
to the portion of the Contract Value which represents contributions made by the
Owner and does not include any investment results. These limitations on
withdrawals apply to: (1) salary reduction contributions made after December 31,
1988; (2) income attributable to such contributions; and (3) income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or exchanges between certain Qualified Plans. Tax penalties may
also apply. While the foregoing limitations only apply to certain Contracts
issued in connection with Section 403(b) Qualified Plans, all Owners should seek
competent tax advice regarding any withdrawals or distributions. (See "Taxes,"
page 28.)
Except in connection with a Systematic Withdrawal Program, described below,
the minimum partial withdrawal amount is $1,000, or, if less, the Owner's entire
interest in the Portfolio from which a withdrawal is requested (or the General
Account, where applicable). The Owner's interest in the Portfolio from which the
withdrawal is requested (or the remaining Contract Value in the General Account)
must be at least $100 after the withdrawal is completed if anything is left in
that Portfolio (or General Account allocation).
A written withdrawal request or Systematic Withdrawal Program enrollment
form, as the case may be, must be sent to the Company at its Annuity Service
Center. The required program form will not be in good order unless it includes
the Participant's Tax I.D. Number (e.g., Social Security Number) and provides
instructions regarding withholding of income taxes. The Company provides the
required forms.
If the request is for total withdrawal, the Contract, or a Lost Contract
Affidavit (which may be obtained by calling the Company at its Annuity Service
Center), must be submitted as well. The Withdrawal Value is determined on the
basis of the Contract Values next computed following receipt of a request in
proper order. The Withdrawal Value will normally be paid within seven days after
the day a proper request is received by the Company. However, the Company may
suspend the right of withdrawal from the Separate Account or delay payment for
such withdrawal more than seven days: (1) during any period when the New York
Stock Exchange ("NYSE") is closed (other than customary weekend and holiday
closings); (2) when trading on the NYSE is restricted or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
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Separate Account's investments or determination of Accumulation Unit value is
not reasonably practicable; or (3) for such other periods as the Securities and
Exchange Commission, by order, may permit for protection of Owners.
SYSTEMATIC WITHDRAWAL PROGRAM
Certain Owners of Non-Qualified Plan Contracts and Contracts issued in
connection with IRAs may choose to withdraw amounts which in the aggregate add
up to a maximum of 10% of their Purchase Payments annually pursuant to a
Systematic Withdrawal Program without charge. Withdrawals are taxable and a 10%
federal tax penalty may apply to withdrawals before age 59 1/2. Systematic
withdrawals will not be limited to 10% of Purchase Payments once the Withdrawal
Charge is no longer applicable. Owners must complete an enrollment form which
describes the program and send it to the Company at its Annuity Service Center.
Participation in the Systematic Withdrawal Program may be elected at the time
the Contract is issued or on any date thereafter, prior to the Annuity Date.
Depending on fluctuations in the net asset value of the Portfolios, systematic
withdrawals may reduce or even exhaust Contract Value. The minimum systematic
withdrawal amount is $250 per withdrawal. The Company reserves the right to
modify, suspend or terminate the Systematic Withdrawal Program at any time.
ERISA PLANS
Spousal consent may be required when a married Owner seeks a distribution
from a Contract that has been issued in connection with a Qualified Plan (or a
Nonqualified Plan that is subject to Title 1 of ERISA). Owners should obtain
competent advice.
DEFERMENT OF GENERAL ACCOUNT WITHDRAWAL PAYMENTS
In the case of withdrawals from the General Account, the Company may defer
making payment for a period of up to six months (or the period permitted by
applicable state insurance law, if less) from the date the Company receives
notice of such withdrawal request. Only under highly unusual circumstances will
the Company defer a withdrawal payment from the General Account for more than 7
days, and if the Company defers payment for more than 7 days, it will pay
interest of at least 3% per annum on the amount deferred. While all the
circumstances under which the Company could defer payment upon withdrawal may
not be foreseeable at this time, such circumstances could include, for example,
a time of unusually high surrender rate among Owners, accompanied by a radical
shift in interest rates. If the Company intends to withhold payment for more
than 7 days, it will notify affected Owners in writing.
MINIMUM CONTRACT VALUE
If the Contract Value is less than $500 and no Purchase Payments have been
made during the previous three full calendar years, the Company reserves the
right, after 60 days written notice to the Owner, to terminate the Contract and
distribute its Withdrawal Value to the Owner. This privilege will be exercised
only if the Contract Value has been reduced to less than $500 as a result of
withdrawals, and state law permits. In no instance shall such termination occur
if the value has fallen below $500 due to either decline in Accumulation Unit
value or the imposition of fees and charges.
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ANNUITY PERIOD
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ANNUITY DATE
The Owner selects an Annuity Date (the date on which annuity payments are
to begin) at the time of application. The Annuity Date must always be the first
day of a calendar month and must be at least two years after the Contract Date,
but in any event will be no later than the Latest Annuity Date. Annuity payments
will begin no later than the Latest Annuity Date. If no Annuity Date is
selected, the Annuity Date will be the Latest Annuity Date. The Owner may change
the Annuity Date at any time
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at least seven days prior to the Annuity Date then indicated on the Company's
records by written notice to the Company at its Annuity Service Center.
DEFERMENT OF PAYMENTS
The Company may defer making Fixed Annuity payments for a period of up to
six months or such lesser time as state law may permit. Interest, subject to
state law requirements, will be credited during the deferral period. For a
discussion of the circumstances under which the Company could defer these
payments, please refer to "Purchases, Withdrawals and Contract
Value -- Deferment of General Account Withdrawal Payments, page 23."
PAYMENTS TO OWNER
The Company will make annuity payments to the Owner, unless the Owner
designates an alternate payee. Such designation must be made in writing to the
Company's Annuity Service Center and must be received more than 30 days before
the Annuity Date.
ALLOCATION OF ANNUITY PAYMENTS
If all of the Contract Value on the Annuity Date is allocated to the
General Account, the Annuity will be paid as a Fixed Annuity. If all of the
Contract Value on that date is allocated to the Separate Account, the Annuity
will be paid as a Variable Annuity. If the Contract Value on that date is
allocated to both the General Account and the Separate Account, the Annuity will
be paid as a combination of a Fixed Annuity and a Variable Annuity to reflect
the allocation between the Portfolios and the General Account. Variable Annuity
payments will reflect the investment performance of the Portfolios. The Owner
may, by written notice to the Company, convert Variable Annuity payments to
Fixed Annuity payments. However, Fixed Annuity payments may not be converted to
Variable Annuity payments.
ANNUITY OPTIONS
The Owner, or any Beneficiary who is so entitled, may elect to receive a
lump sum at the end of the Accumulation Period. However, a lump sum distribution
may be deemed to be a withdrawal, and at least a portion of it may be subject to
federal income tax. (See "Taxes -- Tax Treatment of Withdrawals," page 31.)
Alternatively, any of the annuity options listed below may be elected. The Owner
may elect an annuity option or change an annuity option at any time prior to the
Annuity Date.
If no other annuity option is elected, monthly annuity payments will be
made in accordance with annuity option 4 below, a life annuity with a 120-month
period certain (annuity option 3 in the case where payments are to be made for
the joint lives of the Annuitant and a designated second person and for the life
of the survivor). Annuity payments will be made in monthly, quarterly,
semi-annual or annual installments as selected by the Owner. However, if the
amount available to apply under an annuity option is less than $5,000, and state
law permits, the Company has the right to pay the annuity in one lump sum. In
addition, if the first payment provided would be less than $50, and state law
permits, the Company shall have the right to require the frequency of payments
be at quarterly, semi-annual or annual intervals so as to result in an initial
payment of at least $50.
NO WITHDRAWALS OF CONTRACT VALUE ARE PERMITTED DURING THE ANNUITY PERIOD
FOR ANY ANNUITY OPTION IN WHICH PAYMENTS ARE BASED ON A PERSON'S LIFE.
The following annuity options are generally available under the Contract.
Each is available in the form of either a Fixed Annuity or a Variable Annuity
(or a combination of both Fixed and Variable Annuity). However, there may be
restrictions in the retirement plan pursuant to which a Contract has been
purchased.
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OPTION 1 -- LIFE INCOME
An annuity payable monthly during the lifetime of the Annuitant. Under this
option, no further payments are payable after the death of the Annuitant and
there is no provision for a death benefit payable to the Beneficiary. Therefore,
it is possible under option 1 for the payee to receive only one monthly annuity
payment under the Contract.
OPTION 2 -- JOINT AND SURVIVOR ANNUITY
An annuity payable monthly while both the Annuitant and a designated second
person are living. Upon the death of either person, the monthly income payable
will continue during the lifetime of the survivor at either the full amount
previously payable or as a percentage (either one-half or two-thirds) of the
full amount, as chosen by the Owner at the time of election of this option.
Annuity payments terminate automatically and immediately upon the death of
the surviving person without regard to the number or total amount of payments
received.
There is no minimum number of guaranteed payments and it is possible to
have only one annuity payment if both the Annuitant and the designated second
person die before the due date of the second payment.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY --
120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2, above, but with the additional
guarantee that payments will be made for not fewer than 120 monthly periods. If
the surviving Annuitant dies before all such payments have been made, the
balance of the guaranteed number of payments will be made to the Beneficiary.
OPTION 4 -- LIFE ANNUITY WITH 120 OR 240 MONTHLY
PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant, with the
guarantee that if, at the death of the Annuitant, payments have been made for
fewer than the guaranteed 120 or 240 monthly periods, as elected by the Owner,
the balance of the guaranteed number of payments will be made to the
Beneficiary.
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
Under this option, a payee can elect an annuity payable monthly for any
period of years from 3 to 30. This election must be made for full 12 month
periods. In the event the payee dies before the specified number of payments has
been made, the Beneficiary may elect to continue receiving the scheduled
payments or may alternatively elect to receive the discounted present value of
any remaining guaranteed payments as a lump sum.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. (See "Contract
Charges -- Mortality and Expense Risk Charge," page 15.) Since option 5, Income
for a Specified Period, does not contain an element of mortality risk, the payee
is not getting the benefit of the Mortality Risk Charge if option 5 is selected
on a variable basis.
OTHER OPTIONS
At the sole discretion of the Company, other annuity options may be made
available. However, to the extent that Withdrawal Charges would otherwise apply
to a withdrawal or termination, the identical Withdrawal Charge may apply with
respect to any additional options.
With respect to Contracts issued under Sections 401, 403(b) or 408 of the
Internal Revenue Code, any payments will be made only to the Owner and/or the
Owner's spouse.
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TRANSFER DURING ANNUITY PERIOD
During the Annuity Period, the Owner may transfer the Contract Value to the
General Account and/or among Portfolios. Such transfers are subject to the same
limitations and conditions as are prescribed for transfers during the
Accumulation Period, page 20, except that, in addition, no transfers may be made
from the General Account to the Separate Account during the Annuity Period.
Transfers from the Separate Account to the General Account are effected by
crediting the General Account with the actuarial present value of future annuity
payments to be made, assuming that all such payments would be equal to a
subsequent Variable Annuity payment as computed on the effective date of the
transfer, in the manner described below under "Annuity Payments."
DEATH BENEFIT DURING ANNUITY PERIOD
If the Annuitant dies after the Annuity Date while the Contract is in
force, the death proceeds, if any, will depend upon the Annuity Option in effect
at the time of the Annuitant's death. If the Annuitant dies after the Annuity
Date and before the entire interest in the Contract has been distributed, the
remaining interest, if any, as provided for in the option elected, will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
ANNUITY PAYMENTS
INITIAL MONTHLY ANNUITY PAYMENT
The initial annuity payment is determined by taking the Contract Value,
less any premium tax, and then applying it to the annuity table specified in the
Contract (or, if more favorable to the payee, the annuity tables in effect as of
the Annuity Date for similar immediate annuity contracts issued by the Company).
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 Plans 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 annuity 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 Annuity
payment. The number of Annuity Units determined for the first Variable Annuity
payment remains constant for the second and subsequent monthly Variable Annuity
payments, assuming that no reallocation of Contract Values is made.
SUBSEQUENT MONTHLY PAYMENTS
For a Fixed Annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
The amount of the second and each subsequent monthly Variable Annuity
payment is determined by multiplying the number of Annuity Units, as determined
in connection with the determination of the initial monthly payment, above, by
the annuity unit value, below, as of the Valuation Period ending on the
Valuation Date next preceding the date on which each annuity payment is due.
ANNUITY UNIT VALUE
The value of an Annuity Unit is determined independently for each
Portfolio, but was initially set at $10.00.
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
Portfolio exceeds 3.5%, Variable Annuity payments derived from allocations to
that Portfolio will increase over time. Conversely, if the actual rate is less
than 3.5%, Variable Annuity payments will decrease over time. If the net
investment rate
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equals 3.5%, Variable Annuity payments will remain constant. If a higher assumed
investment rate had been used, the initial monthly payment would be higher, but
the actual net investment rate would also have to be higher in order for annuity
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 Portfolios elected, and the amount of each annuity payment
will vary accordingly.
For each Portfolio, the value of an Annuity Unit for any Valuation Period
is determined by multiplying the Annuity Unit Value for the immediately
preceding Valuation Period by the Net Investment Factor for the Valuation Period
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 which is assumed in the annuity tables
contained in the Contract. The Net Investment Factor is described below.
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the net investment
performance of a Portfolio from one Valuation Date to the next. The Net
Investment Factor 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 Net Investment Factor for any Portfolio for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of an Underlying Fund share held in the
Portfolio determined as of the Valuation Date at the end of the
Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Underlying Fund if the "ex-dividend" date occurs during
the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Portfolio (no federal income taxes are applicable under present law);
(b) is the net asset value of the Underlying Fund share held in the
Portfolio determined as of the Valuation Date at the end of the preceding
Valuation Period; and
(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and the distribution expenses.
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ADMINISTRATION
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The Company has primary responsibility for all administration of the
Contracts and the Separate Account. The mailing address of the Company's Annuity
Service Center is P.O. Box 54299, Los Angeles, California 90054-0299, and its
telephone number is (800) PVA-0628.
The administrative services provided include, but are not limited to:
issuance of the Contracts; maintenance of records; Contract Owner services;
calculation of unit values; and preparation of reports.
Contract statements and transaction confirmations are mailed to Owners at
least quarterly. Owners should read their statements and confirmations carefully
and verify their accuracy. Questions about periodic statements should be
communicated to the Company promptly. The Company will investigate all
complaints and make any necessary adjustments retroactively, provided that it
has
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received notice of a potential error within 30 days after the date of the
questioned statement. If the Company has not received notice of a potential
error within this time, any adjustment shall be made as of the date that the
Annuity Service Center receives notice of the potential error.
The Company will also provide Owners with such additional periodic and
other reports, information and prospectuses as may be required by federal
securities laws.
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TAXES
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NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of 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 annuity payments under
the annuity 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 Non-Qualified
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 annuity 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 annuity 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 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) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee
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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
payments under the Contract. The Code contains a safe harbor provision which
provides that annuity contracts such as the Contracts 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 Contract. 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".
The Company intends that each of the Underlying Funds will be managed by
its investment adviser in such a manner as to comply with these diversification
requirements.
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.
29
<PAGE> 30
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. (See "Tax
Treatment of Withdrawals -- Qualified Plans," page 31.)
(A) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational 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. (See "Tax Treatment of
Withdrawals -- Qualified Plans," below.) Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
(B) 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. (See "Tax Treatment of
Withdrawals -- Qualified Plans" below.) 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.
(C) 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
30
<PAGE> 31
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. (See "Tax Treatment of Withdrawals -- Qualified Plans" below.)
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.
(D) 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.
TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any early distribution from qualified retirement plans, including contracts
issued and qualified under Code Sections 401 (Corporate Pension and
Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (IRAs).
The tax penalty will not apply to the following distributions: (1) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (2) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
"disability" is defined in Section 72(m)(7) of the Code); (3) distributions that
are part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his or her designated beneficiary; (4)
distributions to an Owner or Annuitant (as applicable) who has separated from
service after he or she has attained age 55; (5) distributions made to the Owner
or Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Owner or Annuitant
(as applicable) for amounts paid during the taxable year for medical care; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The exceptions stated in items (4), (5) and (6) above do not apply in the
case of an IRA.
Limitations imposed by the Code on withdrawals from tax-sheltered annuities
are described above under "Purchases, Withdrawals and Contract
Value -- Withdrawals (Redemptions)," page 22.
The taxable portion of a withdrawal or distribution from Contracts issued
under certain types of plans may, under some circumstances, be "rolled over"
into another eligible plan so as to continue to defer income tax on the taxable
portion. Effective January 1, 1993, such treatment is available for any
"eligible rollover distribution" made by certain types of plans (as described
above under "Taxes -- Withholding Tax on Distributions," page 28) that is
transferred within 60 days of receipt into a plan qualified under section 401(a)
or 403(a) of the Code, a tax-sheltered annuity, an IRA, or an individual
retirement account described in section 408(a) of the Code. Plans making such
eligible rollover distributions are also required, with some exceptions
specified in the Code, to provide for a direct "trustee to trustee" transfer of
the distribution to the transferee plan designated by the recipient.
Amounts received from IRAs may also be rolled over into other IRAs,
individual retirement accounts or certain other plans, subject to limitations
set forth in the Code.
31
<PAGE> 32
NONQUALIFIED PLANS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate Purchase
Payments made, any amount withdrawn not in the form of an annuity payment will
be treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includable in a taxpayer's gross income. Section 72 further provides that a 10%
penalty will apply to the income portion of any premature distribution. The
penalty is not imposed on amounts received: (1) after the taxpayer reaches
59 1/2; (2) upon the death of the Owner or Annuitant (as applicable); (3) if the
taxpayer is totally disabled; (4) in a series of substantially equal periodic
payments made for the life of the taxpayer or for the joint lives of the
taxpayer and his or her Beneficiary; (5) under an immediate annuity; or (6)
which are allocable to purchase payments made prior to August 14, 1982.
The above information applies to Contracts issued pursuant to Section 457
of the Code, but does not apply to other Qualified Plan Contracts. Separate tax
withdrawal penalties and restrictions apply to Qualified Plan Contracts.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no legal proceedings affecting the Separate Account. The Company
and its subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to their respective
total assets or material with respect to the Separate Account.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Company.............................................................................. 1
Distributors......................................................................... 1
Performance Data..................................................................... 1
Financial Statements................................................................. 3
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
- ------------------------------
- ------------------------------
- ------------------------------ Stamp
</TABLE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
ANNUITY SERVICE CENTER
P.O. BOX 54299
LOS ANGELES, CA 90054-0299
<PAGE> 34
Please forward a copy (without charge) of the Statement of Additional
Information concerning the Pacifica Variable Annuity Contracts to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: Signed:
<PAGE> 35
As filed pursuant to Rule 497(c)
Registration Nos. 33-83476 and 811-8874
STATEMENT OF ADDITIONAL INFORMATION
PACIFICA FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS
issued by
VARIABLE ANNUITY ACCOUNT THREE
of
ANCHOR NATIONAL LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE PACIFICA FLEXIBLE
PAYMENT VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS DATED
JANUARY 2, 1996, AS IT MAY BE SUPPLEMENTED, CALL OR WRITE THE COMPANY C/O ITS
ANNUITY SERVICE CENTER, P.O. BOX 54299, LOS ANGELES, CALIFORNIA 90054-0299,
(800) PVA-0628.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 2, 1996.
<PAGE> 36
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
COMPANY .................................................. 1
DISTRIBUTORS ............................................. 1
PERFORMANCE DATA ......................................... 1
Money Market Portfolio ................................. 1
Other Portfolios ....................................... 2
FINANCIAL STATEMENTS ..................................... 3
</TABLE>
<PAGE> 37
COMPANY
Information regarding Anchor National Life Insurance Company (the
"Company") and its ownership is contained in the Prospectus.
DISTRIBUTORS
The Contracts are offered through the distributor for the Separate
Account, SunAmerica Capital Services, Inc., located at 733 Third Avenue, 4th
Floor, New York, New York 10017. SunAmerica Capital Services, Inc. is
registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, is a member of the National Association of Securities Dealers, Inc.
The Company and SunAmerica Capital Services, Inc. are each indirect
wholly-owned subsidiaries of SunAmerica Inc.
Contracts are offered on a continuous basis.
PERFORMANCE DATA
Performance data for the various Portfolios are computed in the manner
described below.
Money Market Portfolio
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)/(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
The value of the Accumulation Unit at the end of the period (EV) is
determined by (1) adding, to the value of the Accumulation Unit at the
beginning of the period (SV), the investment income from the Money Market
Portfolio attributed to the Accumulation Unit over the period, and (2)
subtracting, from the result, the sum of (a) the portion of the annual
Mortality and Expense Risk and Distribution Expense Charges allocable to the 7
day period (obtained by multiplying the charges by the fraction 7/365), and (b)
a prorated portion of the annual Contract Administration Charge of $30 per
Contract. The Contract Administration Charge is first allocated among the
Portfolios and the General Account so that each Portfolio's allocated portion
of the charge is proportional to the percentage of the number of Contract
Owners' accounts that have money allocated to that 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, as is done
with the other charges discussed above, the result is multiplied by the
fraction 7/365 to arrive at the portion attributable to the 7 day period.
<PAGE> 38
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 Money Market Portfolio. 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:
Effective Yield = [(Base Period Return + 1)*365/7-1].
Net investment income for yield quotation purposes will not include
either realized capital gains and losses or unrealized appreciation and
depreciation, whether reinvested or not. The yield quotations also do not
reflect any impact of premium taxes, transfer fees, or withdrawal charges.
Yields 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 type, quality and maturities of the
investments held by the Money Market Portfolio and changes in interest rates on
such investments, but also on factors such as a Contract 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 Portfolios
Portfolios of the Separate Account other than the Money Market
Portfolio compute their performance data as "total return."
Total return for a Portfolio represents a computed annual rate of
return that, when compounded annually over the time period shown and applied to
a hypothetical initial investment in a Contract funded by that 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. The total rate of return (T) is computed so that it satisfies the
formula:
<PAGE> 39
P(1+T)*n = ERV
where:
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10 year
periods as of the end of the 1, 5, or 10 year periods
(or fractional portion thereof).
The total return figures will reflect the effect of both non-recurring
and recurring charges, as discussed herein. Recurring charges are taken into
account in a manner similar to that used for the 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 Contract Administration
Charges on a particular Contract 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 Portfolio over the same time
periods will generally be 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.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of September
30, 1995 and 1994 and for each of the three years in the period ended September
30, 1995 are presented in this Statement of Additional Information. 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
Contracts.
As of the date of this Statement of Additional Information, the sale
of Contracts had not commenced and the Portfolios had no assets. Therefore, no
financial statements with respect to the Separate Account are presented in this
Statement of Additional Information.
Price Waterhouse LLP, 400 South Hope Street, Los Angeles, California
90071, serves as the independent accountants for the Separate Account and the
Company. The consolidated financial statements of the Company referred to
above have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
<PAGE> 40
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 at September 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1995, 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.
As discussed in Note 7, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 6, 1995
<PAGE> 41
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 249,209,000 $ 157,438,000
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value
(amortized cost: 1995, $1,500,062,000;
1994, $1,108,271,000) 1,489,213,000 1,026,120,000
Held for investment, at amortized cost
(fair value: 1995, $165,004,000; 1994, $180,247,000) 157,901,000 175,885,000
Mortgage loans 94,260,000 108,332,000
Common stocks, at fair value (cost: 1995, $6,576,000;
1994, $8,789,000) 4,097,000 7,550,000
Real estate 55,798,000 89,539,000
Other invested assets 64,430,000 67,208,000
--------------- ---------------
Total investments 2,114,908,000 1,632,072,000
Variable annuity assets 5,230,246,000 4,486,703,000
Accrued investment income 14,192,000 17,565,000
Deferred acquisition costs 383,069,000 416,289,000
Other assets 41,282,000 49,497,000
--------------- ---------------
TOTAL ASSETS $ 7,783,697,000 $ 6,602,126,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 1,497,052,000 $ 1,437,488,000
Reserves for guaranteed investment contracts 277,095,000 ---
Payable to brokers for purchases of securities 155,861,000 124,624,000
Income taxes currently payable 15,720,000 12,331,000
Other liabilities 58,204,000 58,891,000
--------------- ---------------
Total reserves, payables and accrued liabilities 2,003,932,000 1,633,334,000
--------------- ---------------
Variable annuity liabilities 5,230,246,000 4,486,703,000
--------------- ---------------
Subordinated notes payable to Parent 34,000,000 34,000,000
--------------- ---------------
Deferred income taxes 73,459,000 64,567,000
--------------- ---------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 252,876,000 252,876,000
Retained earnings 191,346,000 152,088,000
Net unrealized losses on debt and equity
securities available for sale (5,673,000) (24,953,000)
--------------- ---------------
Total shareholder's equity 442,060,000 383,522,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,783,697,000 $ 6,602,126,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 42
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Investment income $ 129,466,000 $ 127,758,000 $ 137,591,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (72,975,000) (66,311,000) (87,479,000)
Guaranteed investment contracts (3,733,000) --- ---
Senior indebtedness (227,000) (71,000) (34,000)
Subordinated notes payable to Parent (2,448,000) (2,380,000) (1,166,000)
------------- ------------- -------------
Total interest expense (79,383,000) (68,762,000) (88,679,000)
------------- ------------- -------------
NET INVESTMENT INCOME 50,083,000 58,996,000 48,912,000
------------- ------------- -------------
NET REALIZED INVESTMENT LOSSES (4,363,000) (33,713,000) (22,247,000)
------------- ------------- -------------
Fee income:
Variable annuity fees 84,171,000 79,101,000 67,222,000
Asset management fees 26,935,000 31,302,000 32,293,000
Net retained commissions 23,267,000 19,180,000 16,928,000
------------- ------------- -------------
TOTAL FEE INCOME 134,373,000 129,583,000 116,443,000
------------- ------------- -------------
Other income and expenses:
Surrender charges 5,889,000 5,034,000 5,306,000
General and administrative expenses (61,629,000) (52,636,000) (55,142,000)
Provision for future guaranty fund
assessments --- --- (4,800,000)
Amortization of deferred acquisition costs (57,005,000) (43,992,000) (30,825,000)
Other, net (2,351,000) 4,048,000 5,865,000
------------- ------------- -------------
TOTAL OTHER INCOME AND EXPENSES (115,096,000) (87,546,000) (79,596,000)
------------- ------------- -------------
PRETAX INCOME 64,997,000 67,320,000 63,512,000
Income tax expense (25,739,000) (22,705,000) (21,794,000)
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 39,258,000 44,615,000 41,718,000
Cumulative effect of change in accounting
for income taxes --- (20,463,000) ---
------------- ------------- -------------
NET INCOME $ 39,258,000 $ 24,152,000 $ 41,718,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 43
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,258,000 $ 24,152,000 $ 41,718,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Interest credited to:
Fixed annuity contracts 72,975,000 66,311,000 87,479,000
Guaranteed investment contracts 3,733,000 --- ---
Net realized investment losses 4,363,000 33,713,000 22,247,000
Accretion of net discounts on
investments (6,865,000) (2,050,000) (9,149,000)
Amortization of goodwill 1,168,000 1,169,000 1,167,000
Provision for deferred income taxes (1,489,000) 19,395,000 2,982,000
Cumulative effect of change in
accounting for income taxes --- 20,463,000 ---
Change in:
Deferred acquisition costs (7,180,000) (34,612,000) (48,413,000)
Other assets 7,047,000 5,133,000 3,017,000
Income taxes receivable/payable 3,389,000 6,559,000 23,479,000
Other liabilities 2,231,000 46,000 11,596,000
Other, net 3,380,000 (950,000) 466,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 122,010,000 139,329,000 136,589,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts 245,320,000 138,526,000 63,796,000
Guaranteed investment contracts 275,000,000 --- ---
Net exchanges to (from) the fixed
accounts of variable annuity
contracts 10,475,000 (29,286,000) (45,516,000)
Withdrawal payments on:
Fixed annuity contracts (237,977,000) (269,412,000) (245,250,000)
Guaranteed investment contracts (1,638,000) --- ---
Claims and annuity payments on
fixed annuity contracts (31,237,000) (31,146,000) (33,938,000)
Net increase in subordinated notes
payable to Parent --- --- 18,500,000
Net receipts from (repayments of)
other short-term financings 5,034,000 (166,685,000) 38,857,000
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 264,977,000 (358,003,000) (203,551,000)
------------ ------------ ------------
</TABLE>
<PAGE> 44
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks available for sale $(1,556,586,000) $(1,197,743,000) $(1,254,755,000)
Bonds, notes and redeemable preferred
stocks held for investment --- (209,000) (64,167,000)
Mortgage loans --- (10,666,000) (39,100,000)
Other investments, excluding
short-term investments (13,028,000) (26,108,000) (31,674,000)
Sales of:
Bonds, notes and redeemable preferred
stocks available for sale 1,026,078,000 877,068,000 878,277,000
Bonds, notes and redeemable preferred
stocks held for investment --- --- 82,014,000
Real estate 36,813,000 33,443,000 38,333,000
Other investments, excluding
short-term investments 5,130,000 2,353,000 21,616,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks available for sale 157,195,000 139,691,000 255,787,000
Bond, notes and redeemable preferred
stocks held for investment 21,493,000 34,072,000 184,925,000
Investment in real estate separate
account --- --- 92,130,000
Mortgage loans 14,403,000 10,087,000 17,614,000
Other investments, excluding
short-term investments 13,286,000 13,500,000 6,962,000
Payment of holdback liability for 1990
purchase of annuity business --- --- (14,250,000)
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (295,216,000) (124,512,000) 173,712,000
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 91,771,000 (343,186,000) 106,750,000
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 157,438,000 500,624,000 393,874,000
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 249,209,000 $ 157,438,000 $ 500,624,000
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 3,235,000 $ 1,175,000 $ 34,000
=============== =============== ===============
Income taxes paid (recovered) $ 23,656,000 $ (3,328,000) $ (6,736,000)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 45
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: Anchor National Life Insurance Company (the "Company") is a
wholly owned indirect subsidiary of SunAmerica Inc. (the "Parent").
The consolidated financial statements include the accounts of the
Company and all significant subsidiaries, including Anchor Investment
Advisor, Inc.; SunAmerica Asset Management Corp.; SunAmerica Capital
Services, Inc.; Saamsun Holdings Corp.; SAM Holdings Corporation;
SunRoyal Holding Corporation; and Royal Alliance Associates, Inc.
All significant intercompany transactions have been eliminated.
Certain items have been reclassified to conform to the current year's
presentation.
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. It is
management's intent, and the Company has the ability, to hold the
remainder of bonds, notes and redeemable preferred stocks until
maturity, and therefore, these investments are carried at amortized
cost. Bonds, notes and redeemable preferred stocks, whether available
for sale or held for investment, 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 dependant 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, most of 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. Realized gains and
losses on the sale of investments are recognized in operations at the
date of sale and are determined using the specific cost identification
method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives
of the investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in
relation to the present value of estimated gross profits, which 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 consist of commissions and other costs
which vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at
aggregate fair value, an adjustment is made to deferred acquisition
costs equal to the change in amortization that would have been
recorded if such
<PAGE> 46
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities had been sold at their stated aggregate fair value and the
proceeds reinvested at current yields. The change in this adjustment,
net of tax, is included with the change in net unrealized gains or
losses on debt and equity securities available for sale that is
credited or charged directly to shareholder's equity. At September
30, 1995 and 1994, deferred acquisition costs have been increased by
$4,600,000 and $45,000,000, respectively, 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 $20,647,000 at September 30, 1995,
is amortized by using the straight-line method over a period averaging
25 years and is included in Other Assets in the balance sheet.
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 and asset management fees are
recognized in income as earned. Net retained commissions are
recognized 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. Effective October 1, 1993 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.
<PAGE> 47
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale and held for investment
by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
<S> <C> <C>
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 63,701,000 $ 65,195,000
Mortgage-backed securities 1,144,645,000 1,134,361,000
Securities of public utilities 792,000 774,000
Corporate bonds and notes 290,924,000 288,883,000
--------------- ---------------
Total available for sale $ 1,500,062,000 $ 1,489,213,000
--------------- ---------------
HELD FOR INVESTMENT:
Securities of the United States
Government $ 10,379,000 $ 10,797,000
Mortgage-backed securities 8,378,000 8,378,000
Corporate bonds and notes 105,980,000 112,665,000
Other debt securities 33,164,000 33,164,000
--------------- ---------------
Total held for investment $ 157,901,000 $ 165,004,000
=============== ===============
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 16,623,000 $ 16,379,000
Mortgage-backed securities 833,445,000 765,946,000
Securities of public utilities 13,423,000 12,837,000
Corporate bonds and notes 243,405,000 229,411,000
Redeemable preferred stocks 1,375,000 1,547,000
--------------- ---------------
Total available for sale $ 1,108,271,000 $ 1,026,120,000
=============== ===============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 10,370,000 $ 10,320,000
Mortgage-backed securities 8,831,000 8,725,000
Corporate bonds and notes 126,333,000 130,851,000
Other debt securities 30,351,000 30,351,000
--------------- ---------------
Total held for investment $ 175,885,000 $ 180,247,000
=============== ===============
</TABLE>
<PAGE> 48
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks available for sale and held for investment
by contractual maturity, as of September 30, 1995, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less $ 10,243,000 $ 11,285,000
Due after one year through five years 52,644,000 52,922,000
Due after five years through ten years 223,820,000 222,362,000
Due after ten years 68,710,000 68,283,000
Mortgage-backed securities 1,144,645,000 1,134,361,000
--------------- ---------------
Total available for sale $ 1,500,062,000 $ 1,489,213,000
=============== ===============
HELD FOR INVESTMENT:
Due in one year or less $ 500,000 $ 500,000
Due after one year through five years 33,465,000 35,103,000
Due after five years through ten years 67,109,000 70,970,000
Due after ten years 48,449,000 50,053,000
Mortgage-backed securities 8,378,000 8,378,000
--------------- ---------------
Total held for investment $ 157,901,000 $ 165,004,000
=============== ===============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will differ
from those shown above because of prepayments and redemptions.
<PAGE> 49
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds, notes and redeemable
preferred stocks available for sale and held for investment by major
category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
-------------- ---------------
<S> <C> <C>
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 1,545,000 $ (51,000)
Mortgage-backed securities 12,117,000 (22,401,000)
Securities of public utilities --- (18,000)
Corporate bonds and notes 5,344,000 (7,385,000)
-------------- ---------------
Total available for sale $ 19,006,000 $ (29,855,000)
============== ===============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 432,000 $ (14,000)
Corporate bonds and notes 6,685,000 ---
-------------- ---------------
Total held for investment $ 7,117,000 $ (14,000)
============== ===============
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States
Government $ --- $ (244,000)
Mortgage-backed securities 2,852,000 (70,351,000)
Securities of public utilities --- (586,000)
Corporate bonds and notes 753,000 (14,747,000)
Redeemable preferred stocks 172,000 ---
-------------- ---------------
Total available for sale $ 3,777,000 $ (85,928,000)
============== ===============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 85,000 $ (135,000)
Mortgage-backed securities 7,000 (113,000)
Corporate bonds and notes 4,619,000 (101,000)
-------------- ---------------
Total held for investment $ 4,711,000 $ (349,000)
============== ===============
</TABLE>
<PAGE> 50
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS (CONTINUED)
At September 30, 1995, gross unrealized gains on equity securities
aggregated $1,082,000 and gross unrealized losses aggregated
$3,561,000. At September 30, 1994, gross unrealized gains on equity
securities aggregated $878,000 and gross unrealized losses aggregated
$2,117,000.
Gross realized investment gains and losses on sales of all types of
investments are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Bonds, notes and redeemable
preferred stocks:
Available for sale:
Realized gains $ 15,983,000 $ 12,760,000 $ 20,193,000
Realized losses (21,842,000) (31,066,000) (8,132,000)
Held for investment:
Realized gains 2,413,000 890,000 5,194,000
Realized losses (586,000) (1,913,000) (257,000)
Equities:
Realized gains 994,000 467,000 2,445,000
Realized losses (114,000) (303,000) (2,653,000)
Other investments:
Realized gains 3,561,000 --- 255,000
Realized losses (12,000) (358,000) (1,573,000)
Impairment writedowns (4,760,000) (14,190,000) (37,719,000)
------------- ------------- -------------
Total net realized
investment losses $ (4,363,000) $ (33,713,000) $ (22,247,000)
============= ============= =============
</TABLE>
The net realized gains and losses included in bonds, notes and
redeemable preferred stocks held for investment in 1995 and 1994
reflect net gains and losses realized upon redemptions, the net of
which amounted to gains of $1,827,000 in 1995 and losses of $1,023,000
in 1994. In 1993, the net gains of $4,937,000 were realized on sales
of securities totaling $77,077,000.
<PAGE> 51
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Short-term investments $ 8,308,000 $ 4,648,000 $ 7,278,000
Bonds, notes and
redeemable preferred
stocks 107,643,000 98,935,000 106,013,000
Mortgage loans 7,419,000 12,133,000 9,418,000
Common stocks 3,000 1,000 15,000
Real estate (51,000) 1,379,000 302,000
Limited partnerships 5,128,000 9,487,000 12,064,000
Other invested assets 1,016,000 1,175,000 2,501,000
------------- ------------- -------------
Total investment income $ 129,466,000 $ 127,758,000 $ 137,591,000
============= ============= =============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$1,983,000 for the year ended September 30, 1995, $1,714,000 for the
year ended September 30, 1994, and $1,478,000 for the year ended
September 30, 1993 and are included in General and Administrative
Expenses in the income statement.
At September 30, 1995, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
At September 30, 1995, mortgage loans were collateralized by
properties located in 8 states, with loans totaling approximately 22%
of the aggregate carrying value of the portfolio secured by properties
located in Colorado, approximately 18% by properties located in
California and approximately 17% by properties located in New Jersey.
No more than 13% of the portfolio was secured by properties in any
other single state.
At September 30, 1995, bonds, notes and redeemable preferred stocks
included $148,355,000 (at amortized cost, with fair value of
$143,778,000) of investments not rated investment grade by either
Standard & Poor's Corporation, Moody's Investors Service or under
National Association of Insurance Commissioners' guidelines. The
Company had no material concentrations of non-investment grade assets
at September 30, 1995.
At September 30, 1995, the amortized cost of investments in default as
to the payment of principal or interest was $4,958,000 and the fair
value was $3,500,000, all of which are unsecured non-investment grade
bonds.
At September 30, 1995, $5,108,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
The Company has undertaken to dispose of certain real estate
investments, having an aggregate carrying value of $55,798,000, during
the next one to two years, to affiliated or nonaffiliated parties,
and the Parent has
<PAGE> 52
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS (CONTINUED)
guaranteed that the Company will receive its current carrying value
for these assets.
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of only the Company's financial
instruments. The disclosures do not address the value of the
Company's recognized and unrecognized nonfinancial assets (including
its other invested assets, equity investments and real estate
investments) 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.
VARIABLE ANNUITY ASSETS: 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 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.
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.
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
VARIABLE ANNUITY LIABILITIES: 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.
The estimated fair values of the Company's financial instruments at
September 1995 and 1994, compared with their respective carrying
values are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
--------------- ---------------
<S> <C> <C>
1995:
Assets:
Cash and short-term investments $ 249,209,000 $ 249,209,000
Bonds, notes and redeemable
preferred stocks 1,647,114,000 1,654,217,000
Mortgage loans 94,260,000 95,598,000
Variable annuity assets 5,230,246,000 5,230,246,000
Liabilities:
Reserves for fixed annuity
contracts 1,497,052,000 1,473,757,000
Reserves for guaranteed
investment contracts 277,095,000 277,095,000
Payable to brokers for
purchases of securities 155,861,000 155,861,000
Variable annuity liabilities 5,230,246,000 5,077,257,000
Subordinated notes payable to
Parent 34,000,000 34,620,000
=============== ===============
1994:
Assets:
Cash and short-term investments $ 157,438,000 $ 157,438,000
Bonds, notes and redeemable
preferred stocks 1,202,005,000 1,206,367,000
Mortgage loans 108,332,000 104,835,000
Variable annuity assets 4,486,703,000 4,486,703,000
Liabilities:
Reserves for fixed annuity
contracts 1,437,488,000 1,411,117,000
Payable to brokers for purchases
of securities 124,624,000 124,624,000
Variable annuity liabilities 4,486,703,000 4,335,753,000
Subordinated notes payable to
Parent 34,000,000 33,897,000
=============== ===============
</TABLE>
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent bear interest at a weighted
average rate of 7.20% (with rates ranging from 7.00% to 9.00%) and
require principal payments of $22,500,000 in 1996, $4,000,000 in 1997
and $7,500,000 in 1998.
5. CONTINGENT LIABILITIES
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 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.
6. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par
value Common Stock. At September 30, 1995, 1994 and 1993, 3,511
shares are outstanding. Changes in shareholder's equity are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance $ 152,088,000 $ 127,936,000 $ 86,218,000
Net income 39,258,000 24,152,000 41,718,000
------------- ------------- -------------
Ending balance $ 191,346,000 $ 152,088,000 $ 127,936,000
============= ============= =============
NET UNREALIZED GAINS (LOSSES)
ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance $ (24,953,000) $ (13,230,000) $ (20,127,000)
Change in net unrealized
gains (losses) on debt
securities available
for sale 71,302,000 (69,407,000) 4,998,000
Change in net unrealized
gains (losses) on equity
securities available
for sale (1,240,000) (753,000) 1,899,000
Change in adjustment to
deferred acquisition costs (40,400,000) 45,000,000 ---
Tax effects of net changes (10,382,000) 13,437,000 ---
------------- ------------- -------------
Ending balance $ (5,673,000) $ (24,953,000) $ (13,230,000)
============= ============= =============
</TABLE>
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDER'S EQUITY (CONTINUED)
Dividends which the Company may pay to its shareholder in any year
without prior approval of the California Insurance Commissioner are
limited by statute. Under California insurance law, without prior
approval of the insurance commissioner, dividends and distributions to
shareholders are limited to the greater of (i) 10% of the preceding
December 31 balance of statutory surplus as regards policyholders or
(ii) the prior calendar year's net statutory gain from operations. In
addition, new law requires prior notice of any dividend and grants the
commissioner authority to order that a dividend not be paid. No
dividends were paid in fiscal years 1995, 1994 or 1993.
Under statutory accounting principles utilized in filings with
insurance regulatory authorities, the Company's net income for the
nine months ended September 30, 1995 was $34,477,000. The statutory
net income for the year ended December 31, 1994 was $35,060,000 and
for the year ended December 31, 1993 was $51,686,000. The Company's
statutory capital and surplus was $260,454,000 at September 30, 1995,
$219,577,000 at December 31, 1994 and $199,082,000 at December 31,
1993.
7. 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>
1995:
Currently payable $ 4,248,000 $ 22,980,000 $ 27,228,000
Deferred (6,113,000) 4,624,000 (1,489,000)
------------ ------------ ------------
Total income tax expense $ (1,865,000) $ 27,604,000 $ 25,739,000
============ ============ ============
1994:
Currently payable $ (6,825,000) $ 10,135,000 $ 3,310,000
Deferred (1,320,000) 20,715,000 19,395,000
------------ ------------ ------------
Total income tax expense $ (8,145,000) $ 30,850,000 $ 22,705,000
============ ============ ============
1993:
Currently payable $ (836,000) $ 19,648,000 $ 18,812,000
Deferred (6,819,000) 9,801,000 2,982,000
------------ ------------ ------------
Total income tax expense $ (7,655,000) $ 29,449,000 $ 21,794,000
============ ============ ============
</TABLE>
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
Income taxes computed at the United States federal income tax rate of
35% for 1995 and 1994 and 34.75% for 1993 and income taxes provided
differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Amount computed at
statutory rate $ 22,749,000 $ 23,562,000 $ 22,000,000
Increases (decreases)
resulting from:
Amortization of differences
between book and tax
bases of net assets
acquired 3,049,000 465,000 1,423,000
State income taxes, net of
federal tax benefit 437,000 (662,000) (223,000)
Tax credits (168,000) (612,000) (1,849,000)
Other (328,000) (48,000) 443,000
-------------- -------------- --------------
Total income tax expense $ 25,739,000 $ 22,705,000 $ 21,794,000
============== ============== ==============
</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,
1995. The Company does not anticipate any transactions which would
cause any part of this surplus to be taxable.
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
Effective October 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Accordingly, the cumulative effect of this change in
accounting for income taxes was recorded during the quarter ended
December 31, 1993 to increase the liability for deferred income taxes
by $20,463,000.
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, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Investments $ 14,181,000 $ 17,079,000
Deferred acquisition costs 118,544,000 117,200,000
State income taxes 1,847,000 2,917,000
------------- -------------
Total deferred tax liabilities 134,572,000 137,196,000
------------- -------------
Deferred tax assets:
Contractholder reserves (55,910,000) (54,819,000)
Guaranty fund assessments (1,123,000) (1,197,000)
Deferred expenses (1,025,000) (3,177,000)
Net unrealized losses on certain
debt and equity securities (3,055,000) (13,436,000)
------------- -------------
Total deferred tax assets (61,113,000) (72,629,000)
------------- -------------
Deferred income taxes $ 73,459,000 $ 64,567,000
============= =============
</TABLE>
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica
Securities, Inc. and Royal Alliance Associates, Inc. These
broker-dealers represent a significant portion of the Company's
business, amounting to approximately 28.2%, 28.3% and 30.6% of
premiums in 1995, 1994 and 1993, respectively. Commissions paid to
these broker-dealers totaled $19,828,000 in 1995, $18,725,000 in 1994
and $17,541,000 in 1993.
The Company purchases administrative, investment management,
accounting, marketing and data processing services from SunAmerica
Financial, Inc., whose purpose is to provide services to the
SunAmerica companies. Amounts paid for such services totaled
$42,083,000 for the year ended September 30, 1995, $36,934,000 for the
year ended September 30, 1994 and $32,711,000 for the year ended
September 30, 1993.
During the year ended September 30, 1994, the Company sold to the
Parent real estate for cash equal to its carrying value of
$29,761,000. During the year ended September 30, 1993, the Company
sold to the Parent various invested assets for cash equal to their
carrying values of $88,488,000 (including real estate of $45,668,000).
During the year ended September 30, 1993, the Company sold to
SunAmerica Life Insurance Company various invested assets with
carrying values of $46,332,000 for cash of $46,334,000 and recorded
net gains of $2,000.
<PAGE> 59
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BUSINESS SEGMENTS
The Company has three business segments: annuity operations, asset
management, and broker-dealer operations. Respectively, these include
the sale of fixed and variable annuities; the management and marketing
of mutual funds; and the sale of securities and financial services
products. Summarized data for the years ended September 30, 1995,
1994 and 1993 follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX TOTAL
REVENUES EXPENSE INCOME ASSETS
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
1995:
Annuity operations $ 205,698,000 $ 36,642,000 $ 55,462,000 $7,667,946,000
Asset management 30,253,000 24,069,000 510,000 86,510,000
Broker-dealer operations 23,525,000 411,000 9,025,000 29,241,000
------------- ------------- ------------- --------------
Total $ 259,476,000 $ 61,122,000 $ 64,997,000 $7,783,697,000
============= ============= ============= ==============
1994:
Annuity operations $ 171,553,000 $ 26,298,000 $ 52,284,000 $6,473,065,000
Asset management 32,803,000 19,330,000 7,916,000 102,192,000
Broker-dealer operations 19,272,000 408,000 7,120,000 26,869,000
------------- ------------- ------------- --------------
Total $ 223,628,000 $ 46,036,000 $ 67,320,000 $6,602,126,000
============= ============= ============= ==============
1993:
Annuity operations $ 181,057,000 $ 23,634,000 $ 42,682,000 $6,545,966,000
Asset management 33,826,000 8,853,000 14,806,000 98,137,000
Broker-dealer operations 16,904,000 440,000 6,024,000 27,286,000
------------- ------------- ------------- --------------
Total $ 231,787,000 $ 32,927,000 $ 63,512,000 $6,671,389,000
============= ============= ============= ==============
</TABLE>
