0000054727-95-000055.txt : 19950815 0000054727-95-000055.hdr.sgml : 19950815 ACCESSION NUMBER: 0000054727-95-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INC CENTRAL INDEX KEY: 0000054727 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 860176061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04618 FILM NUMBER: 95562996 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD INC DATE OF NAME CHANGE: 19890515 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD BUILDING CO DATE OF NAME CHANGE: 19711006 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________ FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 -------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________________to__________________ Commission file number 1-4618 SUNAMERICA INC. --------------- (Exact Name of Registrant as Specified in Its Charter) Maryland 86-0176061 -------- ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 1 SunAmerica Center, Los Angeles, California 90067-6022 ------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (310) 772-6000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Common Stock, par value $1.00 per share, 29,398,010 shares outstanding Nontransferable Class B Stock, par value $1.00 per share, 6,826,439 shares outstanding SUNAMERICA INC. INDEX Page Number(s) --------- Part I - Financial Information Consolidated Balance Sheet (Unaudited) - June 30, 1995 and September 30, 1994 3-4 Consolidated Income Statement (Unaudited) - Three Months and Nine Months Ended June 30, 1995 and 1994 5 Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended June 30, 1995 and 1994 6-7 Notes to Consolidated Financial Statements (Unaudited) 8-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-25 Part II - Other Information 26 SUNAMERICA INC. CONSOLIDATED BALANCE SHEET (In thousands - unaudited) June 30, September 30, 1995 1994 ------------ ------------- ASSETS Investments: Cash and short-term investments $ 766,926 $ 569,382 Bonds, notes and redeemable preferred stocks: Available for sale, at fair value (amortized cost: June 30, 1995, $6,271,857; September 30, 1994, $5,599,780) 6,236,728 5,270,738 Held for investment, at amortized cost (fair value: June 30, 1995, $831,416; September 30, 1994, $1,072,222) 809,731 1,064,132 Mortgage loans 1,534,936 1,426,924 Common stocks, at fair value (cost: June 30, 1995, $25,699; September 30, 1994, $49,336) 38,834 61,660 Partnerships 784,523 593,854 Real estate 102,898 107,053 Other invested assets 198,179 186,647 ------------ ------------- Total investments 10,472,755 9,280,390 Variable annuity assets 4,893,894 4,513,093 Accrued investment income 105,897 105,686 Deferred acquisition costs 523,620 581,874 Other assets 199,382 175,182 ------------ ------------- TOTAL ASSETS $ 16,195,548 $ 14,656,225 ============ ============= SUNAMERICA INC. CONSOLIDATED BALANCE SHEET (Continued) (In thousands - unaudited) June 30, September 30, 1995 1994 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts $ 4,887,635 $ 4,519,623 Reserves for guaranteed investment contracts 3,276,686 2,783,522 Trust deposits 430,868 442,320 Payable to brokers for purchases of securities 552,723 643,734 Income taxes currently payable 10,567 4,600 Other liabilities 316,147 212,429 ------------ ------------- Total reserves, payables and accrued liabilities 9,474,626 8,606,228 ------------ ------------- Variable annuity liabilities 4,893,894 4,513,093 ------------ ------------- Senior indebtedness: Long-term notes and debentures 472,835 472,835 Collateralized mortgage obligations -- 28,662 ------------ ------------- Total senior indebtedness 472,835 501,497 ------------ ------------- Deferred income taxes 136,585 74,319 ------------ ------------- Company-obligated preferred securities of grantor trust whose sole asset is $54,259 principal amount of 9.95% junior subordinated debentures, due 2044, of the Company 52,631 -- ------------ ------------- Shareholders' equity: Preferred stock 321,642 374,273 Nontransferable Class B Stock 6,826 6,826 Common Stock 29,398 28,977 Additional paid-in capital 201,277 188,667 Retained earnings 614,800 512,571 Net unrealized losses on debt and equity securities available for sale (8,966) (150,226) ------------ ------------- Total shareholders' equity 1,164,977 961,088 ------------ ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,195,548 $ 14,656,225 ============ ============= SUNAMERICA INC. CONSOLIDATED INCOME STATEMENT For the three months and nine months ended June 30, 1995 and 1994 (In thousands, except per share amounts - unaudited)
Three months Nine months --------------------- --------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Investment income $ 233,261 $ 187,019 $ 650,885 $ 560,952 --------- --------- --------- --------- Interest expense on: Fixed annuity contracts (67,940) (60,863) (190,284) (194,783) Guaranteed investment contracts (54,215) (36,835) (151,776) (108,211) Trust deposits (2,625) (2,251) (7,901) (6,223) Senior indebtedness (13,413) (12,829) (41,031) (36,044) --------- --------- --------- --------- Total interest expense (138,193) (112,778) (390,992) (345,261) --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust (364) -- (364) -- --------- --------- --------- --------- NET INVESTMENT INCOME 94,704 74,241 259,529 215,691 --------- --------- --------- --------- NET REALIZED INVESTMENT LOSSES (8,975) (5,312) (24,550) (16,566) --------- --------- --------- --------- Fee income: Variable annuity fees 21,246 19,837 61,467 59,148 Asset management fees 6,712 7,541 20,399 24,017 Net retained commissions 8,670 7,181 22,673 20,888 Loan servicing fees 5,874 -- 13,907 -- Trust fees 3,892 3,081 11,584 9,051 --------- --------- --------- --------- TOTAL FEE INCOME 46,394 37,640 130,030 113,104 --------- --------- --------- --------- Other income and expenses: Surrender charges 3,013 2,883 9,169 8,034 General and administrative expenses (44,358) (32,198) (118,582) (98,155) Amortization of deferred acquisition costs (21,783) (17,241) (59,197) (48,574) Other, net 370 1,150 3,254 2,700 --------- --------- --------- --------- TOTAL OTHER INCOME AND EXPENSES (62,758) (45,406) (165,356) (135,995) --------- --------- --------- --------- PRETAX INCOME 69,365 61,163 199,653 176,234 Income tax expense (21,100) (19,100) (58,900) (54,600) --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 48,265 42,063 140,753 121,634 Cumulative effect of change in accounting for income taxes -- -- -- (33,500) --------- --------- --------- --------- NET INCOME $ 48,265 $ 42,063 $ 140,753 $ 88,134 ========= ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES $ 1.05 $ .91 $ 3.06 $ 2.63 Cumulative effect of change in accounting for income taxes -- -- -- (.81) --------- --------- --------- --------- NET INCOME $ 1.05 $ .91 $ 3.06 $ 1.82 ========= ========= ========= ========= NET EARNINGS APPLICABLE TO COMMON STOCK (used in the computation of earnings per share) $ 44,478 $ 37,958 $ 128,653 $ 75,827 ========= ========= ========= ========= AVERAGE SHARES OUTSTANDING 42,288 41,546 42,069 41,596 ========= ========= ========= =========
SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the nine months ended June 30, 1995 and 1994 (In thousands - unaudited) 1995 1994 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 140,753 $ 88,134 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts 190,284 194,783 Guaranteed investment contracts 151,776 108,211 Trust deposits 7,901 6,223 Net realized investment losses 24,550 16,566 Amortization (accretion) of net premiums (discounts) on investments (21,438) 391 Provision for deferred income taxes (13,798) 62,738 Cumulative effect of change in accounting for income taxes -- 33,500 Change in: Deferred acquisition costs (19,146) (19,726) Other assets (8,839) (5,163) Income taxes currently payable 11,883 (56,130) Other liabilities 64,884 6,558 Other, net 10,882 4,199 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 539,692 440,284 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks available for sale (3,890,673) (4,475,927) Bonds, notes and redeemable preferred stocks held for investment (55,641) (36,035) Mortgage loans (194,043) (213,674) Partnerships (335,035) (236,821) Other investments, excluding short-term investments (83,844) (46,263) Net assets of Imperial Premium Finance, Inc. (442,804) -- Sales of: Bonds, notes and redeemable preferred stocks available for sale 2,825,190 3,455,845 Bonds, notes and redeemable preferred stocks held for investment 2,052 13,349 Kaufman and Broad Home Corporation warrants -- 28,618 Partnerships 109,591 25,775 Other investments, excluding short-term investments 78,461 46,324 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks available for sale 1,061,049 318,525 Bonds, notes and redeemable preferred stocks held for investment 309,969 298,590 Mortgage loans 67,460 114,509 Other investments, excluding short-term investments 76,202 123,964 ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (472,066) (583,221) ------------ ------------ SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the nine months ended June 30, 1995 and 1994 (In thousands - unaudited) 1995 1994 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends to shareholders $ (38,524) $ (37,489) Premium receipts on: Fixed annuity contracts 812,980 127,192 Guaranteed investment contracts 1,104,699 675,416 Net exchanges to (from) the fixed accounts of variable annuity contracts 41,114 (36,275) Receipts of trust deposits 346,335 236,619 Withdrawal payments on: Fixed annuity contracts (537,798) (528,636) Guaranteed investment contracts (763,311) (518,621) Trust deposits (365,684) (180,074) Claims and annuity payments on fixed annuity contracts (136,632) (133,079) Net proceeds from issuances of long-term notes -- 92,275 Repayments of collateralized mortgage obligations (28,662) (66,556) Net decrease in other senior indebtedness -- (15,119) Net repayments of other short-term financings (304,599) (379,207) ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 129,918 (763,554) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 197,544 (906,491) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 569,382 1,797,796 ------------ ------------ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 766,926 $ 891,305 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness $ 39,282 $ 40,355 ============ ============ Income taxes paid, net of refunds received $ 60,816 $ 47,992 ============ ============ NON-CASH FINANCING ACTIVITY: Exchange of 2,105,235 shares of 9-1/4% Series B Preferred Stock for preferred securities of grantor trust $ 52,631 $ -- ============ ============ SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation --------------------- In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 1995 and September 30, 1994, the results of its consolidated operations for the three months and nine months ended June 30, 1995 and 1994 and its consolidated cash flows for the nine months ended June 30, 1995 and 1994. The results of operations for the three months and nine months ended June 30, 1995 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 30, 1994, contained in the Company's 1994 Annual Report to Shareholders. Certain items have been reclassified to conform to the current periods' presentation. 2. Preferred Securities of Grantor Trust ------------------------------------- On June 13, 1995, pursuant to an exchange offer, SunAmerica Capital Trust I (the "Grantor Trust"), a consolidated wholly owned subsidiary of the Company, issued $52,630,875 liquidation amount of its 9.95% Trust Originated Preferred Securities (the "Preferred Securities") to holders of 2,105,235 shares of the Company's 9-1/4% Series B Preferred Stock, also having a liquidation preference of $52,630,875. In connection with the issuance of the Preferred Securities and the related purchase by the Company of the Grantor Trust's Common Securities, the Company issued to the Grantor Trust $54,258,650 principal amount of 9.95% Junior Subordinated Debentures, due 2044 (the "Debentures"). The interest and other payment dates on the Debentures correspond to the distribution and other payment dates on the Preferred and Common Securities. Under certain circumstances involving a change in law or legal interpretation, the Debentures may be distributed to holders of the Preferred and Common Securities in liquidation of the Grantor Trust. The Debentures are redeemable at the option of the Company on or after June 15, 1997 at a redemption price of $25 per Debenture plus accrued and unpaid interest. The Preferred and Common Securities will be redeemed on a pro rata basis, to the same extent as the Debentures are repaid, at $25 per security plus accumulated and unpaid distributions. The Company believes that its obligations under the Debentures and related agreements, taken together, are equivalent to a full and unconditional guarantee of payments due on the Preferred Securities. The Debentures and the Common Securities are eliminated in the accompanying consolidated balance sheet. SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) 3. Earnings per Share ------------------ The calculation of earnings per share is made by dividing applicable earnings by the weighted average number of shares of Common Stock and Nontransferable Class B Stock (collectively referred to as "Common Stock") outstanding during each period, adjusted for the incremental shares attributed to common stock equivalents. Common stock equivalents include outstanding employee stock options and convertible preferred stock, which includes the Series A and D Depositary Shares issued in October 1991 and March 1993, respectively. Earnings Applicable To Common Stock are reduced by preferred stock dividend requirements, which amounted to $3,787,000 and $4,105,000 for the three months ended June 30, 1995 and 1994, respectively, and $12,100,000 and $12,307,000 for the nine months ended June 30, 1995 and 1994, respectively. These preferred stock dividend requirements do not include dividends paid on the convertible issues, which amounted to $3,477,000 and $5,142,000 in the three months ended June 30, 1995 and 1994, respectively, and $10,430,000 and $15,425,000 for the nine months ended June 30, 1995 and 1994, respectively. 4. Ratios of Earnings to Fixed Charges ----------------------------------- The ratios of earnings to fixed charges for the three months and nine months ended June 30, 1995 and 1994 are as follows: Three Months Nine Months --------------- --------------- 1995 1994 1995 1994 ----- ----- ----- ----- Ratio of earnings to fixed charges (excluding interest on fixed annuities, guaranteed investment contracts and trust deposits) 6.0x 5.8x 5.8x 5.9x ===== ===== ===== ===== Ratio of earnings to fixed charges (including interest on fixed annuities, guaranteed investment contracts and trust deposits) 1.5x 1.5x 1.5x 1.5x ===== ===== ===== ===== SUNAMERICA INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of financial condition and results of operations of SunAmerica Inc. (the "Company") for the three months and nine months ended June 30, 1995 and 1994. RESULTS OF OPERATIONS INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $48.3 million or $1.05 per share in the third quarter of 1995 and $140.8 million or $3.06 per share in the nine months of 1995, compared with $42.1 million or $0.91 per share in the third quarter of 1994 and $121.6 million or $2.63 per share in the nine months of 1994. The cumulative effect of the change in accounting for income taxes resulting from the implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of $33.5 million or $0.81 per share in the first quarter of fiscal 1994. Accordingly, net income amounted to $88.1 million or $1.82 per share in the nine months of 1994. PRETAX INCOME totaled $69.4 million in the third quarter of 1995 and $61.2 million in the third quarter of 1994. For the nine months, pretax income totaled $199.7 million in 1995, compared with $176.2 million in 1994. These improvements primarily resulted from increased net investment income and fee income, which were partially offset by increased general and administrative expenses, additional amortization of deferred acquisition costs and higher net realized investment losses. NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest or dividends paid on fixed annuities and other interest-bearing liabilities, increased to $94.7 million in the third quarter of 1995 from $74.2 million in third quarter of 1994. These amounts represent net investment spreads of 3.81% on average invested assets (computed on a daily basis) of $9.93 billion in the third quarter of 1995 and 3.37% on average invested assets of $8.81 billion in the third quarter of 1994. For the nine months, net investment income increased to $259.5 million in 1995 from $215.7 million in 1994, representing net investment spreads of 3.59% and 3.25%, respectively, on average invested assets of $9.63 billion and $8.84 billion, respectively. Investment income totaled $233.3 million in third quarter of 1995, up $46.3 million from the $187.0 million recorded in the third quarter of 1994. For the nine months, investment income amounted to $650.9 million in 1995, up $89.9 million from the $561.0 million recorded in 1994. Investment income increased in 1995 as a result of increased yields on higher levels of average invested assets. The yield on average invested assets rose to 9.39% in the third quarter of 1995 from 8.49% in the third quarter of 1994. For the nine months, the yield on average invested assets rose to 9.01% in 1995 from 8.46% in 1994. These yields are computed without subtracting net realized investment losses. If net realized investment losses were included in the computation, the yields would be 9.03% in the third quarter of 1995, 8.25% in the third quarter of 1994, 8.67% in the nine months of 1995 and 8.21% in the nine months of 1994. Over the last seven fiscal quarters, the Company's yields (before considering net realized investment losses) on average invested assets have ranged from 8.32% to 9.39%; however, there can be no assurance that the Company will achieve similar yields in future periods. Increased investment yields in 1995 reflect higher average prevailing interest rates relative to the comparable 1994 periods. In addition, investment income in 1995 includes increased contributions from the Company's investments in partnerships and other similar entities. Income from such investments in 1995 totaled $77.3 million ($30.9 million in the third quarter), compared with $44.4 million in 1994 ($18.7 million in the third quarter). This income represents a yield of 14.33% on related average assets of $719.0 million in 1995 (16.11% on related average assets of $766.9 million in the third quarter of 1995), compared with 10.75% on related average assets of $550.3 million in 1994 (13.36% on related average assets of $558.7 million in the third quarter of 1994). The Company has also historically enhanced investment yield through its use of both dollar roll transactions ("Dollar Rolls") and total return corporate bond swap agreements ("Total Return Agreements"). The Company recorded income on the Total Return Agreements of $9.7 million ($5.5 million in the third quarter) in 1995, compared with $4.1 million ($0.3 million in the third quarter) in 1994. Although the Company continues to use Dollar Rolls, they did not have a significant impact on investment income in fiscal 1995. (See "Asset-Liability Matching" for additional discussion of Dollar Rolls and Total Return Agreements). Total interest and dividend expense aggregated $138.6 million in the third quarter of 1995 and $112.8 million in the third quarter of 1994. For the nine months, interest and dividend expense aggregated $391.4 million in 1995, compared with $345.3 million in 1994. The average rate paid on all interest-bearing liabilities increased to 6.03% in the third quarter of 1995 from 5.52% in the third quarter of 1994. For the nine months, the average rate paid on all interest-bearing liabilities increased to 5.86% in 1995 from 5.61% in 1994. Interest-bearing liabilities averaged $9.19 billion during the third quarter of 1995, compared with $8.16 billion during the third quarter of 1994. For the nine months, interest-bearing liabilities averaged $8.90 billion in 1995, compared with $8.20 billion in 1994. The increases in the average rate paid on all interest-bearing liabilities primarily resulted from increased average crediting rates on the Company's guaranteed investment contracts ("GICs"). Average GIC crediting rates were 6.84% in the third quarter of 1995, 6.24% in the third quarter of 1994, 6.69% in the nine months of 1995 and 6.15% in the nine months of 1994. Approximately 30% of the Company's GIC portfolio are variable-rate obligations that reprice periodically based upon certain defined indices. In addition, in fiscal 1995, the Company increased its average crediting rate on new fixed-rate GIC obligations relative to those issued in the comparable 1994 periods to maintain a generally competitive market rate. For the nine months, the increase in the average GIC crediting rate was partially offset by a modest decline in the average crediting rate on the Company's fixed annuity contracts. Average fixed annuity crediting rates were 5.60% in the third quarter of 1995, 5.28% in the third quarter of 1994, 5.43% in the nine months of 1995 and 5.49% in the nine months of 1994. GROWTH IN AVERAGE INVESTED ASSETS since 1994 primarily reflects sales of the Company's fixed-rate products, consisting of fixed annuities (including the fixed accounts of variable annuity products) and GICs. Fixed annuity premiums have aggregated $915.8 million since June 30, 1994. GIC premiums have aggregated $1.47 billion since June 30, 1994. Third quarter fixed annuity premiums totaled $253.7 million in 1995, up significantly from $70.1 million in 1994, while nine-month premiums from fixed annuities aggregated $813.0 million in 1995, up from $127.2 million in 1994. These premiums include premiums for the fixed accounts of variable annuities totaling $70.9 million, $48.0 million, $217.4 million and $84.1 million, respectively. These increases in fixed annuity premiums during 1995 reflect generally heightened demand for fixed-rate products in 1995 relative to the comparable 1994 periods. This heightened demand may be attributed, in part, to the increase in prevailing long-term interest rates that began during the latter half of fiscal 1994 and continued into the first quarter of fiscal 1995. GIC premiums increased to $387.9 million in the third quarter of 1995 from $299.0 million in the third quarter of 1994. For the nine months, GIC premiums totaled $1.10 billion in 1995, compared with $675.4 million in 1994. These increases in GIC sales reflect the variable demand for such products from state and local governmental authorities, pension plans, banks and asset management firms. In addition, the increase in GIC sales reflects the success of the Company's efforts to increase its GIC client base, particularly among asset management firms. The GICs issued by the Company and its life insurance subsidiaries typically guarantee the payment of principal and interest at a fixed rate for a fixed term of three to five years. In the case of GICs sold to pension plans, certain withdrawals may be made at book value in the event of circumstances specified in the plan document, such as employee retirement, death, disability, hardship withdrawal or employee termination. The life insurance subsidiaries impose surrender penalties in the event of other withdrawals prior to maturity. Contracts purchased by banks or state and local governmental authorities may also permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. Contracts purchased by asset management firms either prohibit withdrawals or permit withdrawals with notice ranging from seven to 270 days. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity (see "Financial Condition and Liquidity"). NET REALIZED INVESTMENT LOSSES totaled $9.0 million in the third quarter of 1995 and $5.3 million in the third quarter of 1994 and include impairment writedowns of $6.3 million and $5.9 million, respectively. Therefore, net losses realized from sales of investments totaled $2.7 million in the third quarter of 1995, compared with net gains of $0.6 million realized in the third quarter of 1994. For the nine months, net realized investment losses totaled $24.6 million in 1995, compared with $16.6 million in 1994 and include impairment writedowns of $28.0 million and $20.7 million, respectively. Therefore, for the nine months, net gains realized from sales of investments totaled $3.4 million in 1995 and $4.1 million in 1994. Net gains in 1995 include $17.7 million of net gains ($6.9 million in the third quarter) realized on sales of common stocks made primarily to maximize total return and $16.9 million of net losses ($8.9 million in the third quarter) realized on sales of various bonds that were also primarily made to maximize total return. In addition, the Company realized $2.2 million of net gains ($0.1 million of net losses in the third quarter) on sales of real estate. Net gains in 1994 include $22.2 million of net gains ($6.3 million in the third quarter) realized on sales of common stocks made primarily to maximize total return. Net gains in 1994 also include $18.9 million of net losses ($11.7 million in the third quarter) realized on $2.50 billion of sales of bonds ($490.2 million in the third quarter). These bond sales include approximately $1.26 billion of sales of mortgage-backed securities ("MBSs") ($201.2 million in the third quarter) made primarily to acquire other MBSs that were then used in Dollar Rolls. In addition, bond sales include sales of high-yield investments and sales of certain collateralized mortgage obligations and asset-backed securities that were made primarily to maximize total return. Impairment writedowns include additional provisions applied to defaulted bonds, amounting to $18.3 million in 1995 ($0.2 million in the third quarter), and $4.9 million of provisions applied to mortgage loans ($4.1 million in the third quarter). Impairment writedowns in 1994 include $13.2 million of additional provisions applied to defaulted bonds ($5.9 million in the third quarter). In addition, the Company wrote down certain mortgage loans by $2.5 million during the third quarter of 1994 for estimated losses resulting from the January 17, 1994 Los Angeles earthquake. VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $21.2 million in the third quarter of 1995 and $19.8 million in the third quarter of 1994. For the nine months, variable annuity fees totaled $61.5 million in 1995, compared with $59.1 million in 1994. Variable annuity assets averaged $4.72 billion during the third quarter of 1995 and $4.41 billion during the third quarter of 1994. For the nine months, variable annuity assets averaged $4.53 billion in 1995, compared with $4.40 billion in 1994. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, aggregated $472.0 million since June 30, 1994. Variable annuity premiums declined to $150.1 million in the third quarter of 1995 from $167.2 million in the third quarter of 1994. For the nine months, variable annuity premiums declined to $356.4 million in 1995 from $643.7 million in 1994. These declines in premiums can be attributed, in part, to a heightened demand for fixed-rate investment options, including the fixed accounts of variable annuities (see "Growth in Average Invested Assets"). The Company has encountered increased competition in the variable annuity marketplace in fiscal 1994 and 1995 and anticipates that the market will remain highly competitive for the foreseeable future. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds and private accounts by SunAmerica Asset Management Corp. Such fees totaled $6.7 million on average assets managed of $2.06 billion in the third quarter of 1995, compared with $7.5 million on average assets managed of $2.31 billion in the third quarter of 1994. For the nine months, asset management fees totaled $20.4 million on average assets managed of $2.07 billion in 1995, compared with $24.0 million on average assets managed of $2.44 billion in 1994. Asset management fees decreased due to a decline in assets managed, principally resulting from $468.2 million of redemptions, excluding redemptions of money market funds, since June 30, 1994. Sales of mutual funds, excluding sales of money market funds, totaled $39.5 million in the third quarter of 1995, compared with $65.9 million in the third quarter 1994. For the nine months, such sales totaled $100.0 million in 1995, compared with $302.2 million in 1994. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiaries, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $8.7 million in the third quarter of 1995 and $7.2 million in the third quarter of 1994. For the nine months, net retained commissions totaled $22.7 million in 1995, compared with $20.9 million in 1994. Broker-dealer sales (mainly mutual funds and general securities) totaled $2.05 billion in the third quarter of 1995 and $1.86 billion in the third quarter of 1994. For the nine months, broker-dealer sales totaled $5.23 billion in 1995, compared with $5.38 billion in 1994. Net retained commissions are not proportionate to sales primarily due to differences in sales mix. TRUST FEES are earned by Resources Trust Company for providing administrative and custodial services primarily for individual retirement accounts ("IRAs"), as well as for other qualified pension plans. Trust fees increased to $3.9 million in the third quarter of 1995 on an average of 199,200 trust accounts from $3.1 million in the third quarter of 1994 on an average of 150,700 trust accounts. For the nine months, trust fees totaled $11.6 million in 1995 on an average of 197,700 trust accounts, compared with $9.1 million in 1994 on an average of 147,900 trust accounts. The increases in trust fees and the average number of trust accounts in 1995 principally resulted from the October 1, 1994 acquisition of the right to service certain IRAs from New England Mutual Life Insurance Company. LOAN SERVICING FEES are earned by the Company's subsidiary, Imperial Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment loans for businesses to fund their commercial property and casualty insurance premiums. These loans are secured by the unearned premium associated with the underlying insurance policies. Currently, Imperial sells most of the short- term loans it originates and earns fee income by servicing the sold loans. Such fee income totaled $5.9 million on average loans serviced of $438.3 million in the third quarter and $13.9 million on average loans serviced of $437.2 million in the nine months of 1995. Imperial's net assets were acquired on November 30, 1994, and, therefore, no such fee income was earned in the comparable periods of 1994. SURRENDER CHARGES on fixed and variable annuities totaled $3.0 million in the third quarter of 1995, compared with $2.9 million in the third quarter of 1994. For the nine months, surrender charges totaled $9.2 million in 1995 and $8.0 million in 1994. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first five to seven years of the contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $333.6 million in the third quarter of 1995 and $308.3 million in the third quarter of 1994. These payments represent 14.7% and 14.5%, respectively, of average fixed and variable annuity reserves. For the nine months, withdrawal payments totaled $991.4 million in 1995 and $853.1 million in 1994, and represent 15.2% and 13.2%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the separate accounts totaling $160.2 million in the third quarter of 1995, $113.6 million in the third quarter of 1994, $469.4 million in the nine months of 1995 and $336.4 million in the nine months of 1994. Variable annuity surrenders have increased primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace. In addition, fixed annuity surrenders have increased in the nine months of 1995 largely due to policies coming off surrender charge restrictions. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future and the Company's investment portfolio has been structured to provide sufficient liquidity for anticipated withdrawals. GENERAL AND ADMINISTRATIVE EXPENSES totaled $44.4 million in the third quarter of 1995, compared with $32.2 million in the third quarter of 1994. For the nine months, general and administrative expenses totaled $118.6 million in 1995, compared with $98.2 million in 1994. General and administrative expenses in fiscal 1995 include the expenses of recently acquired Imperial. In addition, fiscal 1995 includes expenses related to a national advertising campaign to increase the Company's brand name awareness. General and administrative expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS increased from that recorded during 1994 primarily due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other acquisition costs. Amortization of all deferred acquisition costs totaled $21.8 million in the third quarter of 1995 and $17.2 million in the third quarter of 1994. For the nine months, such amortization totaled $59.2 million in 1995 and $48.6 million in 1994. INCOME TAX EXPENSE totaled $21.1 million in the third quarter of 1995 and $19.1 million in the third quarter of 1994, representing effective tax rates of 30% and 31%, respectively. For the nine months, income tax expense totaled $58.9 million in 1995, compared with $54.6 million in 1994, also representing effective tax rates of 30% and 31%, respectively. These tax rates reflect the favorable impact of certain affordable housing tax credits. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDERS' EQUITY increased by $83.1 million to $1.16 billion at June 30, 1995 from $1.08 billion at March 31, 1995. This increase primarily reflects a $100.9 million reduction in net unrealized losses on debt and equity securities available for sale charged directly to shareholders' equity and $48.3 million of net income recorded in the third quarter of 1995. These favorable factors were partially offset by a reduction of outstanding preferred stock resulting from an exchange of $52.6 million of 9-1/4% Series B Preferred Stock for $52.6 million of preferred securities of SunAmerica Capital Trust I, a grantor trust and a wholly owned subsidiary of the Company (see Note 2 of Notes to Consolidated Financial Statements). Book value per share amounted to $24.94 at June 30, 1995, compared with $21.66 at March 31, 1995. Excluding net unrealized losses on debt and equity securities available for sale, book value per share amounted to $25.15 at June 30, 1995 and $24.33 at March 31, 1995. TOTAL ASSETS increased by $965.3 million to $16.20 billion at June 30, 1995 from $15.23 billion at March 31, 1995, principally due to a $674.4 million increase in invested assets and a $358.3 million increase in the separate account for variable annuities. INVESTED ASSETS at June 30, 1995 totaled $10.47 billion, compared with $9.80 billion at March 31, 1995. This $674.4 million increase primarily resulted from sales of guaranteed investment contracts and fixed annuity contracts and a $100.9 million decrease in net unrealized losses on debt and equity securities available for sale. The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. The Company carries the portion of its portfolio of bonds, notes and redeemable preferred stocks that is available for sale (the "Available for Sale Portfolio") at estimated fair value. The remaining portion of its portfolio of bonds, notes and redeemable preferred stocks is held for investment and is carried at amortized cost. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), at June 30, 1995, had an aggregate amortized cost that exceeded its fair value by $13.4 million (including net unrealized losses of $35.1 million on the Available for Sale Portfolio). The aggregate amortized cost of the Bond Portfolio was $235.5 million above its fair value at March 31, 1995 (including net unrealized losses of $246.2 million on the Available for Sale Portfolio). The decrease in net unrealized losses on the Bond Portfolio since March 31, 1995 principally resulted from a decrease in prevailing long-term interest rates and the corresponding effect on the fair value of the Bond Portfolio. Approximately $7.06 billion or 99.5% of the Bond Portfolio (at amortized cost) at June 30, 1995 was rated by Standard and Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At June 30, 1995, approximately $6.12 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $4.62 billion of U.S. government/agency securities and MBSs. At June 30, 1995, the Bond Portfolio included $934.5 million (fair value, $918.2 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their June 30, 1995 amortized cost, these bonds accounted for 5.8% of the Company's total assets and 8.9% of invested assets. In addition to its direct investment in non-investment grade bonds, the Company has entered into Total Return Agreements with an aggregate notional principal amount of $212.4 million at June 30, 1995 (see "Asset-Liability Matching"). Non-investment grade securities generally provide higher yields and involve greater risks than investment grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade securities. The Company intends that its holdings of such securities not exceed current levels, but its policies may change from time to time, including in connection with any possible acquisition. The Company had no material concentrations of non-investment grade securities at June 30, 1995. The table on the following page summarizes the Company's rated bonds by rating classification as of June 30, 1995. Rated Bonds By Rating Classification (Dollars in thousands)
Issues not rated by S&P/Moody's Issues Rated by S&P/Moody's By NAIC Category Total ---------------------------------------------- ----------------------------------- ---------------------------------- Estimated NAIC Estimated Percent of Estimated S&P (Moody's) Amortized fair category Amortized fair Amortized invested fair category(1) cost value (2) cost value cost assets(3) value --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ---------- AAA+ to A- (Aaa to A3) $4,059,123 $4,033,047 1 $1,138,401 $1,146,425 $5,197,524 49.52% $5,179,472 BBB+ to BBB- (Baa1 to Baa3) 175,613 175,595 2 749,188 749,106 924,801 8.81 924,701 BB+ to BB- (Ba1 to Ba3) 56,645 55,060 3 162,789 169,193 219,434 2.09 224,253 B+ to B- (B1 to B3) 415,363 414,128 4 216,125 214,600 631,488 6.02 628,728 CCC+ to C- (Caa to C) 16,510 14,931 5 33,264 22,692 49,774 0.47 37,623 D -- -- 6 33,783 27,555 33,783 0.32 27,555 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL RATED ISSUES $4,723,254 $4,692,761 $2,333,550 $2,329,571 $7,056,804 $7,022,332 ========== ========== ========== ========== ========== ========== (1) S&P rates debt securities in eleven rating categories, from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in nine rating categories, from Aaa (the highest) to C (extremely poor prospects of attaining real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's rating groups listed above, with categories 1 and 2 considered investment grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its implementation of NAIC rating guidelines. (3) At amortized cost.
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $716.7 million at June 30, 1995. Secured Loans are primarily originated by money center or investment banks or are originated directly by the Company. Secured Loans are senior to subordinated debt and equity, and virtually all are secured by assets of the issuer. At June 30, 1995, Secured Loans consisted of loans to 117 borrowers spanning 35 industries, with no industry concentration constituting more than 11% of these assets. While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. The majority of the Company's Secured Loans are not rated by S&P or Moody's. However, 92% of the Secured Loans (at amortized cost) are rated in NAIC categories 1 and 2. Although, as a result of restrictive financial covenants, Secured Loans involve greater risk of technical default than do publicly traded investment grade securities, management believes that the risk of loss upon default for its Secured Loans is mitigated by their financial covenants and senior secured positions. MORTGAGE LOANS aggregated $1.53 billion at June 30, 1995 and consisted of 649 first mortgage loans with an average loan balance of approximately $2.4 million, collateralized by properties located in 26 states. Approximately 49% of the portfolio was multifamily residential, 23% was retail, 6% was industrial, 5% was office and 17% was other types. At June 30, 1995, approximately 30% of the portfolio was secured by properties located in California and no more than 12% of the portfolio was secured by properties in any other single state. At June 30, 1995, there were 27 loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 29% of the portfolio. At the time of their origination or purchase by the Company, virtually all mortgage loans had loan-to-value ratios of 75% or less. At June 30, 1995, approximately 21% of the mortgage loan portfolio consisted of loans with balloon payments due before July 1, 1998. At June 30, 1995, loans delinquent by more than 90 days totaled $37.8 million and constituted 2.5% of total mortgages. Loans foreclosed upon and transferred to real estate in the balance sheet totaled $12.6 million (0.8% of total mortgages) at June 30, 1995. Approximately 37% of the mortgage loans in the portfolio at June 30, 1995 were seasoned loans underwritten to the Company's standards and purchased at or near par from the Resolution Trust Corporation and other financial institutions, many of which were downsizing their portfolios. Such loans generally have higher average interest rates than loans that could be originated today. The balance of the mortgage loan portfolio has been originated by the Company under strict underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk for the industry than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the effects of general economic conditions on these commercial properties. However, due to the seasoned nature of the Company's mortgage loans, its emphasis on multifamily loans and its strict underwriting standards, the Company believes that it has reduced the risk attributable to its mortgage loan portfolio while maintaining attractive yields. At June 30, 1995, mortgage loans having an aggregate carrying value of $56.8 million have been restructured. Of this amount, $10.6 million was restructured during fiscal 1995, $8.3 million was restructured during fiscal 1993 and $37.4 million was restructured during fiscal 1992. PARTNERSHIP investments totaled $784.5 million at June 30, 1995, constituting investments in approximately 300 separate partnerships with an average size of $2.6 million. The portfolio includes: (i) $369.1 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including over 800 separate issuers; (ii) $266.2 million of partnerships that make tax-advantaged investments in affordable housing, currently involving approximately 240 multifamily projects in 34 states; and (iii) $149.2 million of partnerships that invest in mortgage loans and income-producing real estate. At June 30, 1995, $508.7 million of the Company's partnerships were accounted for by using the cost method and $275.8 million by using the equity method. The risks generally associated with partnerships include those related to their underlying investments (i.e. equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated for the affordable housing partnerships by the marketability of the tax credits they generate. The Company believes that these risks are acceptable in light of anticipated partnership returns and the contractual termination provisions contained in the partnership agreements. ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed maturities that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed maturities are priced over the yield curve and general competitive conditions within the industry. Its portfolio strategy is designed to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its annuity and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed maturities. The Company's fixed-rate products incorporate surrender charges, two-tiered interest rate structures or other limitations on when contracts can be surrendered for cash to encourage persistency and discourage withdrawals. Approximately 76% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at June 30, 1995. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. The cash flow obtained from MBSs helps to maintain the anticipated spread, while providing desired liquidity. At June 30, 1995 the weighted average life of the Company's investments was approximately 3.8 years and the portfolio had a duration of approximately 3.2 years. Weighted average life is defined as the average time to receipt of all principal, incorporating the effects of scheduled amortization and expected prepayments, weighted by book value. Duration is a common measure for the price sensitivity of a fixed-income security or portfolio to changes in interest rates. It is the weighted average time to receipt of all expected cash flows, both principal and interest, including the effects of scheduled amortization and expected prepayments, in which the weight attached to each year of receipt is the proportion of the present value of cash to be received during that year to the total present value of the portfolio. As a component of investment strategy, the Company utilizes Interest Rate Swap Agreements ("Swap Agreements") to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At June 30, 1995, the Company had 22 outstanding Swap Agreements with an aggregate notional principal amount of $871.6 million. These agreements mature in various years through 1998 and have an average remaining maturity of 36 months. The Company also seeks to provide liquidity, while enhancing its spread income, by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls and Total Return Agreements and by investing in MBSs. Reverse Repos involve a sale of securities and an agreement to repurchase the same securities at a later date at an agreed upon price and are generally over-collateralized. Dollar Rolls are similar to Reverse Repos except that the repurchase involves securities that are only substantially the same as the securities sold and the arrangement is not collateralized, nor is it governed by a repurchase agreement. Total Return Agreements effectively exchange a fixed rate of interest on the notional amount for the coupon income plus or minus the increase or decrease in the market value of specified non-investment grade corporate bonds. MBSs are generally investment grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans. There are risks associated with some of the techniques the Company uses to enhance its spread income and match its assets and liabilities. The primary risk associated with Dollar Rolls, Reverse Repos and Swap Agreements is the risk associated with counterparty nonperformance. In addition, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of the Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable rate liabilities. The primary risks associated with Total Return Agreements are the risk of potential loss due to bond market fluctuation and counterparty risk. The Company believes, however, that the counterparties to its Dollar Rolls, Reverse Repos, Swap Agreements and Total Return Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. Counterparty risk associated with Dollar Rolls is further mitigated by the Company's participation in an MBS trading clearinghouse. The sell and buy transactions that are submitted to this clearinghouse are marked to market on a daily basis and each participant is required to over-collateralize its net loss position by 30% with either cash, letters of credit or government securities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. INVESTED ASSETS EVALUATION routinely includes a review by the Company of its portfolio of debt securities. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. The carrying values of bonds that are determined to have declines in value that are other than temporary are reduced to net realizable value and no further accruals of interest are made. Mortgage loan writedowns are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments (at amortized cost) that are in default as to the payment of principal or interest, totaled $62.2 million at June 30, 1995, including $24.4 million (fair value, $18.4 million) of unsecured loans and $37.8 million (fair value, $37.8 million) of mortgage loans. At June 30, 1995, defaulted investments constituted 0.6% of total invested assets at amortized cost. At March 31, 1995, defaulted investments totaled $56.6 million, including $36.2 million (fair value, $28.7 million) of mortgage loans and $20.4 million (fair value, $20.4 million) of mortgage loans. At March 31, 1995, defaulted investments constituted 0.6% of total invested assets at amortized cost. SOURCES OF LIQUIDITY are readily available to the Company in the form of existing cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At June 30, 1995, approximately $4.45 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $161.4 million, while approximately $2.63 billion had an aggregate unrealized loss of $174.8 million. In addition, the Company's investment portfolio also currently provides approximately $102.4 million of monthly cash flow from scheduled principal and interest payments. Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company's average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market. In a declining rate environment, the Company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities and GICs. Should increased liquidity be required for withdrawals, the Company believes that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market. On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"), at June 30, 1995, had invested assets with an amortized cost of $759.2 million (fair value, $759.6 million) and outstanding senior indebtedness of $472.8 million, comprising all of the Company's consolidated senior indebtedness. Additionally, as of June 30, 1995, the Parent had three GICs purchased by local government authorities that aggregated $255.4 million. In connection with the issuance of the Preferred Securities, and the related purchase by the Parent of the Common Securities, of SunAmerica Capital Trust I (the "Grantor Trust"), the Parent issued $54.3 million of 9.95% junior subordinated debentures, due 2044 (the "Debentures"), to the Grantor Trust. The Parent's annual debt service with respect to its senior indebtedness, GIC obligations and Debentures totals $22.4 million for the remainder of fiscal 1995, $75.7 million for fiscal 1996, $75.7 million for fiscal 1997, $95.3 million for fiscal 1998, $204.3 million for fiscal 1999 and $1.21 billion, in the aggregate, thereafter. The Parent received dividends from its regulated life insurance subsidiaries of $69.2 million in March 1995, $43.0 million in December 1993, $30.0 million in December 1992 and $25.0 million in December 1991. The Parent also received dividends of $1.5 million in fiscal 1995, $2.4 million in fiscal 1994, $4.7 million in fiscal 1993, $17.1 million in fiscal 1992 and $43.2 million in fiscal 1991 from its other directly-owned subsidiaries. The Parent, SunAmerica Life Insurance Company, SunAmerica Financial, Inc., and SunAmerica Asset Management Corp. have sold certain of their interests in various partnerships that make tax-advantaged affordable housing investments. As part of the sales transactions, the Parent has guaranteed a minimum defined yield and funding of certain defined operating deficits in return for a fee. A portion of the fees received has been deferred to absorb any required payments with respect to these guarantees. Based on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose. Accordingly, management does not anticipate any material future losses with respect to these guarantees. Anchor National Life Insurance Company has undertaken to dispose of $55.8 million (its statutory carrying value) of certain of its real estate located in the Phoenix, Arizona metropolitan area during the next one to two years, either to affiliated or nonaffiliated parties, and the Parent has guaranteed that Anchor will receive its statutory carrying value of these assets. The Parent has pledged certain marketable securities having an amortized cost of $14.0 million at June 30, 1995 to secure this guarantee. This real estate has a consolidated carrying value of approximately $28.5 million at June 30, 1995. REGULATION The Company's insurance subsidiaries are subject to regulation and supervision by the states in which they are authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, licensing agents, approving policy forms, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type and amount of investments permitted, limiting the amount of dividends that can be paid without first obtaining regulatory approval and other related matters. In recent years, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the NAIC. Various states have considered or enacted legislation that changes, and in many cases increases, the states' authority to regulate insurance companies. Legislation has been introduced from time to time in Congress that could result in the federal government assuming some role in the regulation of insurance companies. The NAIC has recently approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. These initiatives include new investment reserve requirements, risk-based capital standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws to govern insurance company investments. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any change would have on the Company. SunAmerica Asset Management is registered with the Securities and Exchange Commission (the "Commission") as a registered investment adviser under the Investment Advisers Act of 1940. The mutual funds that it markets are subject to regulation under the Investment Company Act of 1940. SunAmerica Asset Management and the mutual funds are subject to regulation and examination by the Commission. In addition, variable annuities and the related separate accounts of the Company's life insurance subsidiaries are subject to regulation by the Commission under the Securities Act of 1933 and the Investment Company Act of 1940. Resources Trust is subject to regulation by the Colorado State Banking Board and the Federal Deposit Insurance Corporation. The Company's broker-dealer subsidiaries are subject to regulation and supervision by the states in which they transact business, as well as by the National Association of Securities Dealers, Inc. (the "NASD"). The NASD has broad administrative and supervisory powers relative to all aspects of business and may examine the subsidiaries' business and accounts at any time. The Company's premium finance subsidiaries are subject to regulation and supervision by substantially all of the states in which they are authorized to transact business. State premium finance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, approving finance agreement forms, regulating certain finance charge rates, regulating marketing and other trade practices (including the procedures to cancel financed insurance policies for non-payment), prescribing the form and content of required financial statements and reports, performing financial and other examinations and other related matters. SUNAMERICA INC. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- EXHIBITS 10(a) Employment Agreement, dated April 17, 1995, between the Company and Joseph M. Tumbler. 10(b) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob. 11 Statement re computation of per share earnings. 23 The consent of Price Waterhouse, independent accountants, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 27 Financial Data Schedule. REPORTS ON FORM 8-K On April 24, 1995, the Company filed a current report on Form 8-K announcing its second quarter 1995 earnings. On May 26, 1995, the Company filed a current report on Form 8-K related to the offer by SunAmerica Capital Trust I, a grantor trust established by the Company, to exchange its 9.95% Trust Originated Preferred Securities for up to 5,500,000 shares of the Company's outstanding 9-1/4% Preferred Stock, Series B. On July 14, 1995, the Company filed a current report on Form 8-K announcing that the name of its subsidiary, Sun Life Insurance Company of America, had been changed to "SunAmerica Life Insurance Company." On July 28, 1995, the Company filed a current report on Form 8-K announcing its third quarter 1995 earnings. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNAMERICA INC. ----------------------------------- Registrant Dated August 14, 1995 /s/ JAY S. WINTROB ---------------------------- ----------------------------------- Jay S. Wintrob Vice Chairman Dated August 14, 1995 /s/ SCOTT L. ROBINSON ---------------------------- ----------------------------------- Scott L. Robinson Senior Vice President and Controller SUNAMERICA INC. LISTS OF EXHIBITS FILED ----------------------- 10(a) Employment Agreement, dated April 17, 1995, between the Company and Joseph M. Tumbler. 10(b) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob. 11 Statement re computation of per share earnings. 27 Financial Data Schedule. EX-27 2
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1995 JUN-30-1995 6,236,728 809,731 831,416 38,834 1,534,936 102,898 10,472,755 766,926 0 523,620 16,195,548 8,164,321 0 0 0 472,835 36,224 0 321,642 807,111 16,195,548 0 601,589 (24,550) 130,030 324,060 59,197 106,159 199,653 58,900 140,753 0 0 0 140,753 3.06 3.06 0 0 0 0 0 0 0
EX-11 3 EXHIBIT 11 SUNAMERICA INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS For the three months and nine months ended June 30, 1995 and 1994 (In thousands, except per share amounts)
Three months Nine months -------------------- -------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period: Common Stock issued and outstanding at beginning of period 36,168 33,172 35,803 33,163 Average number of common shares issued upon exercise of employee stock options or under other employee stock plans 29 89 327 57 Average number of common stock equivalent shares arising from outstanding employee stock options 1,090 806 937 897 Average number of shares issuable upon conversion of convertible preferred stock: Series A Mandatory Conversion Premium Dividend Preferred Stock -- 2,476 -- 2,476 Series D Mandatory Conversion Premium Dividend Preferred Stock 5,001 5,003 5,002 5,003 -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period 42,288 41,546 42,069 41,596 ======== ======== ======== ======== Earnings applicable to common stock: Income before cumulative effect of change in accounting for income taxes $ 48,265 $ 42,063 $140,753 $121,634 Less preferred dividend requirements other than those related to convertible issues: 9-1/4% Preferred Stock, Series B (2,911) (3,249) (9,409) (9,747) SunAmerica Adjusted Rate Cumulative Preferred Stock, Series C (876) (856) (2,691) (2,560) -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes applicable to common stock 44,478 37,958 128,653 109,327 Cumulative effect of change in accounting for income taxes -- -- -- (33,500) -------- -------- -------- -------- Net income applicable to common stock $ 44,478 $ 37,958 $128,653 $ 75,827 ======== ======== ======== ======== Earnings per common and common equivalent share: Income before cumulative effect of change in accounting for income taxes $ 1.05 $ 0.91 $ 3.06 $ 2.63 Cumulative effect of change in accounting for income taxes -- -- -- (.81) -------- -------- -------- -------- Net income $ 1.05 $ 0.91 $ 3.06 $ 1.82 ======== ======== ======== ========
EX-10.1 4 April 13, 1995 PERSONAL AND CONFIDENTIAL Mr. Joseph M. Tumbler REVISED 25 Poplar Hill Road Louisville, Kentucky 40207 Dear Joe: We are pleased to make you the following offer of employment to join SunAmerica Inc. (the "Company") on or about May 15, 1995 or earlier. 1. Your position with the Company will be one of two Vice Chairmen. Your initial responsibilities will include marketing and sales, treasury and planning, service center operations and systems. 2. Your annual salary will be $375,000 payable semi-monthly, subject to normal deductions and withholding. Your salary will be reviewed annually. 3. Incentive Compensation: Together with other senior officers, you shall be eligible to participate in the SunAmerica Inc. annual formula-based incentive compensation plan, commencing with the fiscal year beginning October 1, 1994 (your actual award would be prorated for your length of service within the fiscal year). Such incentive plan entitles participants employed through the end of the fiscal year to cash equal to a percentage share of a compensation pool to be paid in December following the fiscal year end. You shall be eligible to receive a seven percent (7.0%) share of the pool for the fiscal year ending September 30, 1995. During your employment you shall be eligible for future annual SunAmerica Inc. incentive plans. The 1995 incentive compensation pool (for the fiscal year 10/1/94 - 9/30/95) is currently estimated at $12.5 million, which would yield an award of $875,000, before proration and subject to normal deductions and withholding. Your actual award could be higher or lower, corresponding to increased or decreased business performance for the year. I would be glad to meet with you to discuss in more detail the prospects for the Company's financial performance in 1995 and beyond, and the impact of such performance on the incentive plan. 4. The above notwithstanding, for the employment period ending March 31, 1997 the Company will provide you with an annual cash compensation guarantee of $1,200,000 (to be prorated for your length of service during each fiscal year). 5. I will recommend to the Personnel, Compensation and Stock Option Committee of SunAmerica Inc. that you be granted options to purchase 50,000 shares of SunAmerica Inc. common stock pursuant to the 1988 SunAmerica Inc. Employee Stock Plan. The exercise price for the options will be the fair market value of SunAmerica Inc. common stock at the date of grant. The options will have a ten year term and be exercisable on a cumulative basis in 20% installments commencing with the first anniversary of the option grant. 6. I will recommend to the Personnel, Compensation and Stock Option Committee that you be granted 75,000 restricted shares of SunAmerica Inc. common stock under the SunAmerica 1995 Performance Stock Plan which entitles you, upon achievement of super performance levels as described in the Plan, to 112,500 shares. This grant is subject to certain restrictions which will lapse over a five-year performance period ending September 30, 1999 upon the achievement of specified performance objectives which will be fully set forth in a stock restriction agreement and which are summarized herein. Dates for the five-year performance period may be subject to change contingent upon legal and tax constraints. Performance shall be related to the achievement of overall corporate success, as measured by EPS and TRS (total return to shareholders) over the 5-year performance period: 50% of Award Determined by Cumulative EPS: Fixed $ Cumulative EPS Restrictions Lapse Threshold $24.04 (1) 18,750 (25% x 75,000) Target $27.77 (2) 37,500 (50% x 75,000) "Super" Target $34.28 (3) 56,250 (75% x 75,000) PLUS 50% of Award Determined by Cumulative TRS: TRS vs. S&P 500 Restrictions Lapse Threshold March S&P 500 18,750 (25% x 75,000) Target Beat S&P 500 by 15% 37,500 (50% x 75,000) "Super" Beat S&P 500 by 30% 56,250 (75% x 75,000) and TOTAL Earned under Plan at 1999 will be: Threshold = 37,500 Target = 75,000 Super = 112,500 Dividends are payable on the 75,000 restricted shares over the five-year performance period. I will be glad to discuss the outlook for the Company's financial performance over the plan period and the resultant impact on this plan. 7. Upon your first day of employment you will be entitled to a $500,000 cash payment. 8. The Company will coordinate and pay all reasonable costs related to the move of your household goods from Louisville to Los Angeles. Upon your family establishing a residence in Los Angeles, you shall be entitled to receive a one-time cash payment of $100,000 to cover relocation-related expenses. In addition, we will pay for your housing until you have a binding unconditional agreement of sale on your Louisville residence or up to one year, whichever occurs earlier. 9. You will be eligible to receive and/or participate in employee benefits commensurate with your position with the Company and consistent with benefits afforded other senior officers, all subject to the terms and conditions of the various benefit plans, including: 401(k) Plan: Assuming that your first day of employment is May 1, you would become eligible to participate in the Company's 401(k) Plan on August 1, 1995. Participants in this plan may defer up to 10% of salary earnings each pay period, of which the first 4% currently is matched by the company (subject to the IRS annual deferral limit). Company matching contributions are subject to a five-year vesting schedule, with 25% vesting earned upon two years of service. Supplemental Deferral Plan: On January 1, 1996, you would be eligible to participate in the supplemental Deferral Plan, a non-qualified deferred compensation plan which supplements the 401(k) plan by allowing participants to defer compensation in excess of the IRS annual limit, up to 10% of their eligible compensation. Assuming an annual salary of $375,000, if you were to participate in both the 401(k) and the Supplemental Plan, you would be able to defer up to a total of $37,500 and receive $15,000 in matching funds in 1996. You would also be able to make additional unmatched deferrals of incentive compensation awards. Executive Medical: Assuming an employment date of May 1, your coverage would begin July 1. Upon satisfaction of deductibles and through monthly contributions, this plan would provide 100% reimbursement for all covered medical and prescriptions charges (certain limits apply to mental health charges). (1) Based on actual FY94 EPS ($3.58) compounded 10% annually. (2) Based on actual FY94 EPS ($3.58) compounded 15% annually. (3) Based on actual FY94 EPS ($3.58) compounded 22.5% annually. Auto: You would receive a monthly auto allowance of $225 plus a gasoline credit card for use for your primary business vehicle. In addition you would be eligible for reimbursement of up to $1,000 per year for automobile insurance. Life Insurance and Disability:Upon your first day of employment, you will be eligible for a Company-paid life insurance benefit of two times your annual salary earnings, up to a maximum benefit of $500,000. You will also be eligible for Company-paid short and long-term disability coverage, beginning six months from your date of hire. Financial and Tax Planning: For the first year you would be eligible for reimbursement of up to $5,500 for tax and estate planning services; annually you would also be eligible for reimbursement of up to $1,250 for tax preparation as well as $1,000 for work related to any audit. 10. Should this agreement and your employment be terminated by the Company without Cause, you shall receive severance as follows: $375,000 to be payable immediately and $31,250 per month for up to 24 months will be paid. It is understood that during such severance period you would use your best efforts to secure employment and that severance payments would cease at the commencement of other employment. Should this agreement and your employment terminate with Cause or be terminated by you, then all salary, benefits and rights under this agreement shall cease upon such termination. Nothing contained in this agreement shall prevent your receipt of the benefits described in the Company's published policies, plans or agreements with respect to the profit sharing plan, your group insurance coverage, employee stock options and restricted shares. For purposes of this agreement, "Cause" shall mean (i) the conviction of the executive of a felony or other crime involving fraud, dishonesty, moral turpitude or sexual harassment, (ii) fraud with respect to the business of the Company, or (iii) failure to perform your duties with the Company (other than as a result of incapacity due to physical or mental illness), which is willful and deliberate or the result of Executive's gross neglect of duties, and which is not remedied in a reasonable period of time after receipt of written notice from the Board of Directors of the Company specifying such breach. 11. During the performance of your duties on behalf of the Company, you shall receive and be entrusted with certain confidential and/or secret information of a proprietary nature. You shall not disclose or use, during the term of this agreement or any time thereafter, any such information which is not otherwise publicly available. 12. You agree that during your employment you will not engage as director, officer, owner, part-owner (five or more percent shareholder), joint venture or otherwise, in any business competitive with the Company or any of its affiliates or subsidiaries. It is assumed that passive investments are permitted by this paragraph. 13. In the event of the termination of your employment for any reason, you directly or indirectly, shall not for a period of one year: (i) employ or seek to employ any person or engage any employee of the company or any of its affiliates or subsidiaries nor any person who is an independent contractor involved in sales or manufacture of such products sold or manufactured by the Company or any of its affiliates or subsidiaries; or (ii) make any public statement concerning the Company, any of its affiliates or subsidiaries, or your employment unless previously approved by the Company, except as may be required by law; or (iii) induce, attempt to induce or knowingly encourage any customer of the Company or its affiliates or subsidiaries to divert any business or income from such company or to stop or alter the manner in which they are then doing business with the Company or its affiliates or subsidiaries. The term "Customer" shall mean any individual or business firm that is a customer or client, or one that is a party in a selling agreement, provided, however, "Customer" shall not include any business firm that is not among the Company's top ten sources of product distribution (based on sales levels during the prior 18 months) nor any individual associated with such business firm; or (iv) induce, attempt to induce or knowingly encourage, directly or through an intermediary such as a registered representative, insurance agent or a broker-dealer firm, any contractholder, shareholder or client, as the case may be, to cancel, surrender, lapse or not renew any insurance or annuity policy, mutual fund shares or trust services offered by a subsidiary of the Company. 14. Nothing contained in this letter that could be construed to the contrary is intended to create a contractual obligation on your part to serve the Company for any specified period of time. Your relationship to the Company is intended to be that of an "at will" employee. You are free to terminate your employment at any time, with or without notice and with; or without cause. Likewise, the Company is free to terminate your employment at any time, with or without notice or with or without cause, subject to the terms of this agreement. Joe, if the above is acceptable to you, please execute the enclosed copy of this agreement and return it to me. Sincerely, ELI BROAD EB/shc Agreed to this _________day of April, 1995. JOSEPH M. TUMBLER 4/17/95 Joseph M. Tumbler Date EX-10.2 5 EMPLOYMENT AGREEMENT ____________________ AGREEMENT by and between SunAmerica Inc., a Maryland corporation (the "Company"), and Jay S. Wintrob (the "Executive"), dated as of the 27th day of April, 1995. In view of Executive's long-term service with and continuing contribution to the Company, the Company's Board of Directors (the "Board") believes it is in the best interests of the Company and its shareholders to secure Executive's continued services by reducing the personal uncertainties and risks associated with the possibility or occurrence of a Change of Control (as defined in Exhibit A). The Board has, therefor, caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. (a) The "Effective Date" shall mean the first date following the eighth anniversary of Executive's employment with the Company and prior to April 27, 2000 on which a Change of Control occurs; provided that no Change of Control shall be deemed to have occurred so long as Eli Broad continues to serve as the Chief Executive Officer of the Company or continues to beneficially own more than 35% of the Outstanding Company Voting Securities (as such terms are defined in Exhibit A). Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs within one year after termination of Executive's employment with the Company, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who had taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The Executive and the Company acknowledge that, prior to the Effective Date, the employment of the Executive by the Company is "at will" and may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. 2. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending on the fifth anniversary of such date (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including titles and reporting requirements), authority and duties shall be at least commensurate in all material respects with those held, exercised and assigned during the 180-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where he was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 50 miles from such location. (ii) During the Employment Period, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and to use his reasonable best efforts to perform faithfully and efficiently the responsibilities assigned to him in accordance with this Agreement. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on civic or charitable boards or committees, (B) fulfill speaking engagements and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary at least equal to his annual base salary in effect immediately prior to the Effective Date. (ii) Compensation Plans. During the Employment Period, the Executive shall be entitled to participate in all bonus and incentive compensation plans, practices, policies and programs ("Compensation Plans") available generally to other peer executives of the Company and its affiliated companies. Such Compensation Plans shall provide the Executive with the opportunity under reasonable expectations of Company performance to earn an amount of bonus and incentive compensation at least equal, in the aggregate, to the average annual bonus and incentive compensation received by Executive with respect to the Company's two full fiscal years immediately preceding the Effective Date or, if greater, an amount consistent with the bonus and incentive compensation paid to other peer executives of the Company and its affiliated companies. (iii)Additional Benefits and Policies. During the Employment Period, the Executive shall be entitled to (A) life and executive medical insurance and other welfare benefits and fringe benefits, (B) prompt reimbursement for all reasonable employment expenses incurred by the Executive, (C) paid vacation, and (D) an office and secretarial and other assistants, in each case in accordance with the policies, practices and procedures of the Company in effect generally with respect to other peer executives of the Company and its affiliated companies. (iv) Affiliated Companies. For purposes of this Agreement, the term "affiliated companies" will not includeany corporation or other entity not controlled by theCompany but deemed to be an affiliate because of theownership or control of Eli Broad. 4. Termination of Employment. (a) Certain Definitions. The terms "Cause," "Disability," "Good Reason" and "Notice of Termination," as used in this Agreement, are defined in Exhibit A, which is incorporated in and made a part of this Agreement. (b) Termination of Employment. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company may terminate the Executive's employment during the Employment Period for Cause or due to the Executive's Disability. The Executive may terminate his employment during the Employment Period for Good Reason. (c) Notice of Termination. Any termination by the Company for Cause or Disability, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9(b). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Cause or Disability shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 5. Obligations of the Company upon Termination. (a) Payments Upon Termination. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability, or the Executive shall terminate his employment for Good Reason, the Company shall pay to the Executive as severance an amount in cash equal to (i) Executive's average annual cash compensation (base salary plus any bonus or incentive compensation) earned during the Company's three full fiscal years immediately preceding the fiscal year in which the Date of Termination occurs (the "Average Cash Compensation"), multiplied by (ii) a fraction, the numerator of which is the number of days remaining, after the Date of Termination (as defined in Exhibit A), in the Employment Period, and the denominator of which is 365; provided, however, that in no event will the amount of such payment be less than one or more than two times the Average Cash Compensation (the "Severance Amount"). One half of such Severance Amount shall be paid to Executive in a lump sum within 10 days after the Date of Termination, with the remaining one half payable in equal installments on the last day of each of the twelve calendar months immediately following the Date of Termination. In addition to any amounts that may be due to Executive pursuant to the previous two sentences or any other provision of this Agreement, upon termination of the Executive's employment with the Company during the Employment Period for any reason whatsoever, the Company (i) will pay to executive, within 10 days after the Date of Termination, any amount of base salary accrued but unpaid through the Date of Termination, any compensation previously deferred by the Executive and accrued vacation pay, and (ii) will timely pay or provide to the Executive and/or his family any other amounts or benefits required to be paid or provided, or which the Executive and/or his family is eligible to receive, pursuant to this Agreement or under any plan, program, policy or practice, contract or agreement of the Company applicable to the Executive or generally applicable to other peer executives of the Company and its affiliated companies (except for severance payments under the severance plan in effect for all Company employees, the benefits under which are replaced during the Employment Period by the provisions of this Section 5(a)). (b) Effect of Termination on Restricted Stock and Stock Options. Notwithstanding any other provision of this Agreement, of any Company plan or any agreement between Executive and the Company, if Executive's employment with the Company is terminated during the Employment Period (i) by the Company other than for Cause or Disability, or by Executive for Good Reason, then (x) all options to purchase securities of the Company theretofore granted to Executive and not fully exercisable shall become exercisable in full and may be exercised by Executive at any time prior to the one-year anniversary of the Date of Termination, and (y) all restrictions on any shares of restricted stock granted by the Company to and then held by Executive (other than "Super Shares," as defined in the Company's 1995 Performance Stock Plan) shall lapse, and (z) the Company shall issue to Executive the number of Super Shares subject to Executive's outstanding awards and as to which the applicable Super Performance Objectives (as defined in the Company's 1995 Performance Stock Plan) have been achieved on or prior to the Date of Termination, or, if such objectives have not been achieved by such date, as to which the Company's Board determines, in the reasonable exercise of its business judgement and based on the Company's actual and reasonably anticipated financial results through the end of the applicable Performance Period (as defined in the Company's 1995 Performance Stock Plan), that the applicable Super Performance Objectives are reasonably certain to be achieved by the end of such Performance Period, or (ii) by reason of the Executive's death or Disability, then (x) all restrictions will lapse on that number of shares of restricted stock then held by Executive as to which such restrictions would have lapsed on or prior to the Date of Termination had each agreement between the Company and Executive regarding grants of restricted stock provided for restrictions to lapse on 1-2/3% of the number of shares (other than "Super Shares") included in such grant at the end of each month following the date of such grant, and (y) the Company shall issue to Executive a number of Super Shares equal to the number that would have been issued pursuant to Section 5(b)(i)(z) above had Executive's employment been terminated by the Company other than for Cause or Disability, multiplied by a fraction, the numerator of which is the number of shares of restricted stock as to which restrictions will lapse in accordance with Section 5(b)(ii)(x) above and the denominator of which is the number of shares of restricted stock held by Executive as of the Date of Termination. Certificates representing the number of shares of Company common stock as to which restrictions shall have lapsed and to be issued to Executive under awards of Super Shares pursuant to the previous sentence shall be delivered to Executive (or his estate or legal representatives) by the Company, free of any restrictive legends or conditions, within 10 days after the Date of Termination. This Section 5(b) shall be deemed an amendment to any agreements between the Company and the Executive with respect to outstanding stock options, shares of restricted stock or Super Shares. 6. Non-exclusivity of Rights; Option to Waive Benefits. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify (except for the severance plan in effect for all Company employees, the benefits under which are replaced during the Employment Period by the provisions of Section 5(a) hereof), nor shall anything herein reduce such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. Executive shall be entitled to refuse or defer all or any portion of any payments or benefits under this Agreement, by delivering written notice of such refusal or deferral to the Company in writing, if he determines that the receipt of such payment or benefit may result in adverse tax consequences to him; provided that such refusal or deferral shall not extend or modify the period during which options may be exercised or restrictions may lapse on restricted shares or Super Shares or as to which performance is measured under any Company benefit or stock plan. 7. Successors. This Agreement is personal to the Executive and shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets that becomes subject to this Agreement by operation of law or otherwise. 8. Confidentiality and Solicitation. During the performance of Executive's duties on behalf of the Company, Executive will receive and be entrusted with certain confidential and/or secret information of a proprietary nature. Executive shall not disclose or use, during his employment or any time thereafter, any such information which is not otherwise publicly available, except as may be required by law. Executive agrees that during his employment he will not engage as a director, officer, owner, part-owner (five or more percent shareholder), joint venturer or otherwise, in any business competitive with the Company or any of its affiliated companies; provided that passive investments are permitted by this sentence. In the event of termination of Executive's employment for any reason, for a period of one year thereafter, Executive will not (a) employ or seek to employ or engage any employee of the Company or any of its affiliated companies, or (b) make any public statement concerning the Company, any of its affiliates or affiliated companies, or his employment unless previously approved by the Company, except as may be required by law. 9. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of California. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Jay S. Wintrob 2465 La Condesa Drive Los Angeles, CA 90049 If to the Company: SunAmerica Inc. 1 SunAmerica Center Century City Los Angeles, CA 90071-6022 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) If any legal action shall be brought for the enforcement of this Agreement, or because of any alleged dispute, breach or default hereunder, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in such action in addition to any other relief to which it or he may be entitled. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has executed this Agreement and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. JAY S. WINTROB Jay S. Wintrob SUNAMERICA INC. By: ELI BROAD EXHIBIT A Certain Definitions I. "Cause." For purposes of this Agreement, "Cause" shall mean (i) the conviction of the Executive of a felony or other crime involving fraud, dishonesty or moral turpitude, (ii) fraud with respect to the business of the Company, or (iii) a material breach by the Executive of the Executive's obligations under Section 3(a) of this Agreement (other than as a result of incapacity due to physical or mental illness), which is willful and deliberate or the result of Executive's gross neglect of duties, and which is not remedied in a reasonable period of time after receipt of written notice from the Board of Directors of the Company specifying such breach. II. "Change of Control." For purposes of this Agreement, a "Change of Control" shall mean the occurrence of any of the following events: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more, or such greater percentage as shall be required to make such individual, entity or group, immediately following such acquisition, the largest holder, of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (A), (B) and (C) of subsection (c) of this paragraph II are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company, (ii) a reorganization, consolidation or merger (a "Reorganization"), or (iii) the sale or other disposition of all or substantially all of the assets of the Company (a "Sale"), unless, following the consummation of any such Reorganization or Sale, the following requirements are satisfied with respect to the corporation resulting from such Reorganization, or the corporation which has acquired all or substantially all of the assets of the Company: (A) more than 60% of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Reorganization or Sale, in substantially the same proportion as their ownership, immediately prior to such Reorganization or Sale of the Outstanding Company Voting Securities, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such reorganization, consolidation or merger, or such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Voting Securities) beneficially owns, directly or indirectly, 20% or more of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such Reorganization or Sale. If any of the foregoing events occurs and Eli Broad is then the Chief Executive Officer of the Company or the beneficial owner of more than 35% of the Outstanding Company Voting Securities, then, notwithstanding the foregoing, such Change of Control shall be deemed to have occurred on the first date on which Mr. Broad is no longer the Chief Executive Officer of the Company or the beneficial owner of more than 35% of the Outstanding Company Voting Securities. III. "Date of Termination." For purposes of this Agreement, the "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause or Disability, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death, the Date of Termination shall be the date of Executive's death. IV. "Disability." For purposes of this Agreement, "Disability" shall mean the absence of the Executive from his duties with the Company on a full-time basis for 120 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or his legal representative (such agreement as to acceptability not to be withheld unreasonably). V. "Good Reason." For purposes of this Agreement, "Good Reason" shall mean: (i) any action or failure to act by the Company which results in Executive's position (including titles and reporting requirements), authority or duties being reduced below the level specified in Section 3(a)(i)(A) of this Agreement; (ii) any failure by the Company to comply with the provisions of Section 3(b) of this Agreement; (iii)the Company's requiring the Executive to be based at any office or location other than that described in Section 3(a)(i)(B) of this Agreement; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement. VI. "Notice of Termination." For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment (specifying the provision of this Agreement relied upon) and (ii) if the Date of Termination is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice).