-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYMIIzX83eYLca1anAwvqK//Sk/BwrfE9Do7YlxDBwuD/m6TrSRWACYXAbVqF+ib 1f2wIUa2EbJniTA+yU721A== 0000950148-98-002763.txt : 19981222 0000950148-98-002763.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950148-98-002763 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981221 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-K SEC ACT: SEC FILE NUMBER: 001-04618 FILM NUMBER: 98772676 BUSINESS ADDRESS: STREET 1: PO BOX 54299 STREET 2: 1 SUNAMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 MAIL ADDRESS: STREET 1: 733 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 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-K 1 FORM 10-K, 9/30/97 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] For the fiscal year ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 1-4618 SUNAMERICA INC. INCORPORATED IN MARYLAND 86-0176061 (IRS EMPLOYER IDENTIFICATION NO.)
1 SunAmerica Center, Los Angeles, California 90067-6022 Registrant's telephone number, including area code: (310) 772-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock (par value $1.00 per share) New York Stock Exchange Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ___ No X The aggregate market value of voting stock held by non-affiliates of the Company on November 30, 1998 was $14,390,229,000. The number of shares outstanding of each of the registrant's classes of common stock on November 30, 1998 was as follows: Common Stock (par value $1.00 per share) 191,663,421 shares Nontransferable Class B Stock (par value $1.00 per share) 16,272,702 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION SunAmerica Inc. (the "Company") is incorporated in Maryland and maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. As used herein, the "Company" or "SunAmerica" refers to SunAmerica Inc. and, unless the context requires otherwise, its subsidiaries. The Company employs approximately 2,500 people. SunAmerica is a financial services company specializing in retirement savings and investment products and services. Together, the SunAmerica life insurance companies rank among the largest U.S. issuers of tax-deferred fixed and variable annuities and guaranteed investment contracts ("GICs"). Complementing these annuity and GIC operations are the Company's asset management operations and the SunAmerica Financial Network, consisting of broker-dealers, which provide a broad range of financial planning and investment services through more than 9,700 independent registered representatives nationwide; its trust company, which provides administrative and custodial services to qualified retirement plans; and its premium finance company, one of the nation's leaders in its field. At September 30, 1998, the Company earned fees or spread income on $109.82 billion of assets, consisting of $26.07 billion of investments; $11.41 billion of variable annuity assets; $12.95 billion of assets under custody in retirement trust accounts; $3.00 billion of assets managed in mutual funds and $56.39 billion of non-proprietary and advisory assets in the SunAmerica Financial Network. The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 will grow from 46 million to 60 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1987 and 1997, annual industry premiums from fixed and variable annuities and fund deposits increased from $86.32 billion to $207.64 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $190.63 billion to $874.26 billion. Benefiting from continued strong growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs. The Company's six wholly-owned broker-dealers comprise the largest network of independent registered representatives in the nation and the fifth-largest securities sales force, based on industry data. Its wholly owned broker-dealers accounted for approximately one-third of the Company's total annuity sales in fiscal 1998. The Company also distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms, independent general insurance agents, major financial institutions and, in the case of its GICs, by marketing directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. The Company has made significant investments in technology over the past several years in order to lower operating costs and enhance its marketing efforts. Its use of optical disk imaging and artificial intelligence has substantially reduced the more traditional paper-intensive life insurance processing procedures, reducing annuity processing and servicing costs and improving customer service. This has also enabled the Company to more efficiently assimilate acquired business. The Company has also implemented technology to interface with its wholly owned broker-dealers, which enables the Company to more effectively market its products and help the affiliated financial professionals to better service their clients. 1 3 In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based products and services such as variable annuities, mutual funds, trust services and premium financing through both internal growth and acquisition, resulting in significantly increased fee income. Fee income has also expanded through the receipt of broker-dealer net retained commissions, resulting primarily from the expansion of the Company's wholly owned broker-dealer network and increased demand for long-term investment products. The Company's fee generating businesses entail no portfolio credit risk and require significantly less capital support than its fixed rate business, which generates net investment income. For the year ended September 30, 1998, the Company's net investment income (including net realized investment losses) and fee income by primary product line or service are as follows: NET INVESTMENT AND FEE INCOME
Amount Percent Primary product or service -------------- ------- ---------------------------------- (In thousands) Net investment income (including net realized investment losses)........ $ 799,925 63.6% Fixed-rate products ---------- ----- Fee income: Variable annuity fees.............. 204,474 16.2 Variable annuities Net retained commissions........... 114,461 9.1 Broker-dealer sales Surrender charges.................. 54,361 4.3 Fixed- and variable-rate products Asset management fees.............. 29,592 2.4 Mutual funds Loan servicing fees................ 23,398 1.9 Premium finance Trust fees......................... 18,080 1.4 Self-directed retirement accounts Other fees......................... 14,461 1.1 ---------- ----- Total fee income................... 458,827 36.4 ---------- ----- Total...................... $1,258,752 100.0% ========== =====
For financial information on the Company's business segments, see Part IV -- "Notes to Consolidated Financial Statements -- Note 15 -- Business Segments." ACQUISITIONS Acquisitions have been significant to the Company's growth strategy. In April 1998, the Company acquired Sentra Securities Corporation and Spelman & Co., Inc. ("Sentra-Spelman"). At the date of acquisition, both firms had approximately 500 registered representatives. The Sentra-Spelman organization also provides back-office services to three other broker-dealers with an aggregate of more than 1,200 representatives. In October 1997, the Company acquired Financial Service Corporation, the parent company of FSC Securities Corporation, a national securities broker-dealer, licensing approximately 1,500 representatives at the date of acquisition. In March 1997, the Company acquired the annuity operations of John Alden Financial Corporation (including John Alden Life Insurance Company of New York ("JANY")) for approximately $238.3 million in cash. Assets acquired totaled $5.06 billion and annuity reserves assumed totaled $5.16 billion at the date of acquisition. On October 31, 1997, JANY was merged with and into First SunAmerica Life Insurance Company ("First SunAmerica"). In January 1997, the Company acquired The Financial Group, Inc., the parent company of Keogler Morgan & Company, an independent broker-dealer, and Keogler Investment Advisory Services, Inc., a fee-based registered investment advisor. At the date of acquisition, Keogler Morgan & Company had approximately 400 representatives. In April 1996, the Company assumed a block of annuity contracts aggregating $958.7 million and acquired related assets aggregating $939.0 million at the date of acquisition from The Central National Life Insurance Company of Omaha, a subsidiary of Beneficial Corp., for approximately 2 4 $20.8 million in cash. In February 1996, the Company acquired Ford Life Insurance Company ("Ford Life") from a subsidiary of Ford Motor Company ("Ford") for $172.5 million in cash. At the date of acquisition, Ford Life had assets of $3.15 billion and reserves for fixed annuity contracts of $3.05 billion. Ford Life was merged with and into SunAmerica Life Insurance Company in December 1996. In January 1996, the Company acquired Advantage Capital Corporation ("Advantage Capital"), a Houston-based broker-dealer with more than 1,000 affiliated independent registered representatives at the date of acquisition. In December 1995, the Company acquired CalAmerica Life Insurance Company ("CalAmerica"), from its parent, Zenith National Insurance Corp. for $120 million in cash. At the date of acquisition, CalAmerica had assets of $739.9 million and annuity reserves of $645.4 million. In July 1998, the Company entered into a definitive agreement to acquire MBL Life Assurance Corporation's individual life and individual and group annuity businesses (which had approximately $3 billion of fixed annuity reserves and $2 billion in reserves for universal life policies) for approximately $130 million in cash. The acquisition is subject to customary conditions and required regulatory approvals and is expected to be completed by the end of December 1998. LIFE INSURANCE COMPANIES SunAmerica's five life insurance subsidiaries had combined assets of $35.33 billion at September 30, 1998. Based on the latest available industry data, the Company believes that its life insurance group ranks among the largest issuers of fixed and variable annuities in the nation, as measured by 1997 annuity premiums and deposits, and among the top 2% of all U.S. life insurance companies, as measured by 1997 total assets. The Company's flagship life insurance subsidiary is 108-year old SunAmerica Life Insurance Company, acquired by the Company in 1971. Chartered in Arizona and licensed in 49 states and the District of Columbia, it had $17.77 billion of assets at September 30, 1998 and markets single- and flexible-premium fixed annuities and GICs. Anchor National Life Insurance Company ("Anchor"), founded in 1965 and acquired by the Company in 1986, had $14.52 billion of assets at September 30, 1998 and is chartered in Arizona and licensed in 49 states and the District of Columbia. Anchor markets flexible-premium variable annuities and GICs. CalAmerica, founded in 1951 and acquired by the Company in 1996, had $846.8 million of assets at September 30, 1998 and is chartered in California and licensed in 8 states. CalAmerica markets single- and flexible-premium fixed annuities. First SunAmerica, founded by the Company in 1978, had $1.94 billion of assets at September 30, 1998 and is chartered and licensed in New York and also licensed in New Mexico and Nebraska. First SunAmerica markets fixed annuities and flexible-premium variable annuities. SunAmerica National Life Insurance Company ("SunAmerica National"), formed by the Company in 1995 to market GICs, had $1.36 billion of assets at September 30, 1998 and is chartered in Arizona and licensed in 38 states and the District of Columbia. SunAmerica National is currently seeking authority to transact life insurance business in an additional 10 states. SunAmerica Life Insurance Company and Anchor each have a "AA-" (Excellent) claims-paying ability rating from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff & Phelps Credit Rating Co. ("DCR"), an "A2" (Good) rating from Moody's Investors Service ("Moody's") and an "A+" (Superior) rating from industry analyst A.M. Best Company. CalAmerica has an "A" rating from A.M. Best Company. First SunAmerica has an "A2" (Good) rating from Moody's and an "A+" (Superior) rating from A.M. Best Company. SunAmerica National has a "AAA" (Superior) rating, the highest rating issued by S&P. In addition to distributing its fixed and variable annuity products through its six wholly owned broker-dealers, the Company distributes its products through over 700 other independent broker-dealers, full-service securities firms and financial institutions as well as through independent general insurance agents. In total, more than 65,000 independent sales representatives nationally are licensed to sell the Company's annuity products. 3 5 Fixed Annuities and GICs The Company offers single-premium and flexible-premium deferred annuities that provide one-, three-, five-, seven-, or ten-year fixed interest rate guarantees. Although the Company's contracts remain in force an average of seven to ten years, a majority (approximately 75% at September 30, 1998) reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, annuity surrender assumptions and competitive industry pricing, among other factors. Its fixed annuity products offer many of the same features as conventional certificates of deposit from financial institutions, giving investors a choice of interest period and yield as well as additional advantages particularly applicable to retirement planning, such as tax-deferred accumulation and flexible payout options (including the option of payout over the life of the annuitant). The average size of a new single-premium fixed annuity contract sold by the Company in 1998 was approximately $36,000. The Company augments its retail annuity sales effort with the marketing of institutional products. At September 30, 1998, the Company had $8.38 billion of GIC obligations. At that date, approximately 71% of these obligations were fixed-rate and approximately 29% were variable-rate obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1998, approximately 35% was sold to international markets, 21% was sold to pension plans, 19% was sold to state and local governmental entities, 17% was sold to short-term portfolio asset management firms and 8% was sold to banks and long-term portfolio asset management firms. The average size of a new GIC contract sold by the Company in 1998 was approximately $45.0 million. 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-rate securities. The Company's fixed-rate products incorporate surrender charges, two-tiered interest rate structures or other restrictions in order to encourage persistency. Approximately 86% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1998. Variable Annuities The variable annuity products of Anchor and First SunAmerica offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. These companies earn fee income through the sale, administration and management of the variable account options of their variable annuity products. They also earn investment income on monies allocated to the fixed-rate account options of these products. Variable annuities offer retirement planning features similar to those offered by fixed annuities, but differ in that the contractholder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation fund selected by the contractholder. Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities. The Company's flagship variable annuity product, Polaris, is a multimanager variable annuity that offers investors a choice of 26 variable funds and 7 guaranteed fixed-rate funds. Polaris sales have increased significantly in recent years due to enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed income and guaranteed fixed account investment choices. At September 30, 1998, total variable product reserves were $13.31 billion, of which $11.41 billion were held in the separate accounts. The Company's variable annuity products incorporate surrender charges to encourage persistency. At September 30, 1998, 79% of the Company's variable annuity reserves held in separate accounts were subject to surrender penalties. The Company's variable annuity products also generally limit the number of transfers made in a specified period between account options without the assessment of a fee. The average size of a new variable annuity contract sold by the Company in 1998 was approximately $50,000. 4 6 Coinsurance Transactions In 1989 and 1996, the Company sold, through three separate 100% coinsurance transactions, the general agency division of SunAmerica Life Insurance Company, the credit life business of Ford Life and the mortality-based business of CalAmerica. With respect to these coinsurance transactions, SunAmerica Life Insurance Company and CalAmerica could become liable for in-force amounts ceded of $1.86 billion and $1.90 billion, respectively, at September 30, 1998, if the coinsurers were to become unable to meet the obligations assumed under the respective coinsurance agreements. At September 30, 1998, related policyholder reserves carried by the coinsurers were $70.1 million and $157.3 million, respectively. As part of the 1989 SunAmerica Life Insurance Company coinsurance transaction, assets substantially equal to the policyholder reserves assumed by the coinsurer are held in trust to secure the obligations of the coinsurer. Investment Operations The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, and general economic conditions. The Company manages most of its invested assets internally. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used stress-test interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting its investment operations to closely match the duration of the fixed-rate assets to that of its fixed-rate liabilities. The Company's fixed-rate assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; and investments in limited partnerships that invest primarily in fixed-rate securities and are accounted for by using the cost method. At September 30, 1998, these assets had an aggregate fair value of $24.36 billion with a duration of 3.7. The Company's fixed-rate liabilities include: fixed annuities; GICs; trust deposits; long-term notes and debentures; and preferred securities of subsidiary grantor trusts. At September 30, 1998, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $23.10 billion with a duration of 3.4. For the years ended September 30, 1998, 1997 and 1996, the Company's yields on average invested assets were 8.63%, 8.61% and 8.74%, respectively; its average rates paid on all interest-bearing liabilities were 5.70%, 5.66%, and 5.73%, respectively; and it realized net investment spreads of 3.36%, 3.26% and 3.43%, respectively, on average invested assets. Net realized investment losses were 0.17%, 0.14% and 0.21% of average invested assets in 1998, 1997 and 1996, respectively. The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in credit quality outlook for certain securities, the Company's need for liquidity and other similar factors. 5 7 The following table summarizes the Company's investment portfolio at September 30, 1998: SUMMARY OF INVESTMENTS
Percent Carrying of value portfolio -------------- --------- (In thousands) Cash and short-term investments............................. $ 1,796,132 6.9% U.S. government securities.................................. 828,809 3.2 Mortgage-backed securities.................................. 5,911,623 22.7 Other bonds, notes and redeemable preferred stocks.......... 12,060,415 46.3 Mortgage loans.............................................. 3,412,449 13.1 Equity-method partnerships.................................. 779,098 3.0 Cost-method partnerships.................................... 865,953 3.3 Real estate................................................. 53,605 0.2 Common stock................................................ 82,808 0.3 Other invested assets....................................... 274,515 1.0 ----------- ----- Total investments........................................... $26,065,407 100.0% =========== =====
At September 30, 1998, the Bond Portfolio, (excluding $292.0 million of redeemable preferred stocks) included $17.21 billion of bonds rated by S&P, Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC"), and $1.30 billion of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 1998, approximately $16.73 billion of the Bond Portfolio was investment grade, including $6.71 billion of U.S. government/agency securities and mortgage-backed securities. At September 30, 1998, the Bond Portfolio included $1.78 billion of bonds that were not investment grade. These non-investment-grade bonds accounted for 4.5% of the Company's total assets and 6.8% of its invested assets. In addition to its direct investment in non-investment-grade bonds, the Company has entered into total return bond swap agreements with an aggregate notional principal amount of $533.0 million at September 30, 1998. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $1.89 billion at September 30, 1998. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1998, Secured Loans consisted of loans to 310 borrowers spanning 44 industries, with 26% of these assets concentrated in financial institutions and 15% concentrated in utilities. No other industry concentration constituted more than 6% of these assets. Mortgage loans aggregated $3.41 billion at September 30, 1998 and consisted of 1,538 commercial first mortgage loans with an average loan balance of approximately $2.2 million, collateralized by properties located in 47 states. Approximately 27% of the portfolio was multifamily residential, 23% was retail, 17% was office, 11% was manufactured housing, 7% was industrial and 15% was other types. Partnership investments totaled $1.65 billion at September 30, 1998, constituting investments in approximately 661 separate partnerships with an average size of approximately $2.5 million. This portfolio includes: (i) $867.7 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities; (ii) $640.7 million of partnerships that make tax-advantaged investments in multifamily housing properties; and (iii) $136.7 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1998, the carrying value (after impairment writedowns) of all investments in default as to the payment of principal or interest totaled $55.0 million, which constituted 0.2% of total invested assets. For more information concerning the Company's investments, including the risks inherent in such investments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity." 6 8 MUTUAL FUNDS AND INVESTMENT SERVICES Through its registered investment advisor, SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), and its related distributor, the Company earns fee income by distributing and managing a diversified family of mutual funds and by providing professional management of individual, corporate and pension plan portfolios. The Company offers investors an array of equity, fixed-income, money market and tax-exempt mutual funds. Sales growth in recent years is primarily due to sales of the Company's "Style Select Series" product (which was introduced in November 1996) and the introduction in June 1998 of the "Dogs" of Wall Street. The "Style Select Series" is a group of mutual funds which are each managed by three industry-recognized fund managers. The "Dogs" of Wall Street fund contains 30 large capitalization value stocks which are selected by strict criteria. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $3.78 billion of assets at September 30, 1998, including mutual fund assets, private accounts and certain of the Company's variable annuity assets. The SunAmerica mutual funds are distributed nationally through a network of approximately 400 financial institutions and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiaries. RETIREMENT TRUST SERVICES Through Resources Trust, acquired in January 1990, the Company earns fee income by providing administrative and custodial services for approximately 210,000 self-directed retirement accounts. These self-directed retirement accounts, including IRAs, Keoghs, 401(k) plans, and pension and profit sharing plans, had combined account assets at September 30, 1998 of approximately $12.95 billion. Resources Trust also earns investment income on customer cash balances that are interest-bearing and insured by the Federal Deposit Insurance Corporation. Resources Trust's services are sold nationally through approximately 18,000 registered representatives affiliated with 1,000 broker-dealers, including the Company's broker-dealer subsidiaries. BROKER-DEALERS The Company owns six broker-dealers: Royal Alliance Associates, Inc., acquired in January 1990; SunAmerica Securities, Inc., which commenced business in 1989; Advantage Capital Corporation, acquired in 1996; FSC Securities Corporation, acquired by the Company in October 1997; and Sentra Securities Corp. and Spelman & Co., Inc., each acquired by the Company in April 1998. As a result of the Company's ongoing recruitment of independent registered representatives and acquisitions, the Company has increased its network of representatives from approximately 6,600 at September 30, 1996 to approximately 9,700 currently. PREMIUM FINANCE Through its premium finance company, Imperial, the Company earns fee income by servicing loans that Imperial has originated and sold. Imperial provides short-term installment loans for borrowers to fund their property and casualty insurance premiums. These loans are substantially secured by the unearned premiums associated with the underlying insurance policies. Currently, Imperial sells and services most of the short-term loans that it originates. Founded in 1972 and acquired in November 1994, Imperial owned or serviced approximately 89,000 loans with an average loan balance of approximately $5,900 at September 30, 1998. Imperial generally makes loans to borrowers through a network of approximately 5,200 qualified independent property and casualty insurance agents who arrange the loan or refer the client to Imperial. 7 9 REGULATION The Company's insurance subsidiaries are subject to regulation and supervision by the insurance regulatory agencies of the states in which they are authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers. Principal among these powers are 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 and valuation requirements, prescribing the form and content of required financial statements and reports, performing financial, market conduct and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, defining acceptable accounting principles, regulating the type, valuation and amount of investments permitted, and limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval. During the last decade, 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 or allowing combinations between insurance companies, banks and other entities. In recent years, the NAIC has developed several model laws and regulations designed to reduce the risk of insurance company insolvencies and market conduct violations. These initiatives include investment reserve requirements, risk-based capital ("RBC") standards, codification of insurance accounting principles, new investment standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws or regulations relating to product design, product reserving standards and illustrations of annuity products. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. The RBC standards consist of formulas which establish capital requirements relating to insurance, business, assets and interest rate risks, and which help to identify companies which are under-capitalized and require specific regulatory actions in the event an insurer's RBC falls below specified levels. Each of the Company's life insurance subsidiaries has more than enough statutory capital to meet the NAIC's RBC requirements as of the most recent calendar year-end. The states of Arizona, California and New York have adopted these RBC standards, and the Company's life insurance subsidiaries domiciled in these states are in compliance with such laws. Further, for statutory reporting purposes, the annuity reserves of the Company's life insurance subsidiaries are calculated in accordance with statutory requirements and are adequate under current cash-flow testing models. SunAmerica Asset Management is registered with the SEC as a registered investment advisor under the Investment Advisors 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 SEC. In addition, variable annuities and the related separate accounts of the Company's life insurance subsidiaries are subject to regulation by the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. Resources Trust Company is subject to regulation by the Colorado State Banking Board and the Federal Deposit Insurance Corporation. It has applied to the Office of Thrift Supervision to convert its charter to a federal savings association. 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 SEC and the National Association of Securities Dealers ("NASD"). The SEC and the NASD have broad administrative and supervisory powers relative to all aspects of business and may examine the broker-dealer subsidiaries' business and accounts at any time. The SEC also has broad jurisdiction to oversee various activities of the Company and its other subsidiaries. 8 10 The Company's premium finance business is subject to regulation and supervision by substantially all of the states in which it is 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. From time to time, Federal initiatives are proposed that could affect the Company's businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company's sales of affected products, and consequently on its results of operations, the Company believes such proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them. COMPETITION The businesses conducted by the Company's subsidiaries are highly competitive. The Company's life insurance subsidiaries compete with other life insurers, and also compete for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, the 100 largest writers of individual and group annuities account for approximately 96% of total net annuity premiums written. Net annuity premiums written among the top 100 companies range from less than $100 million to approximately $10 billion annually. SunAmerica ranks in the top quartile of this group. Certain of these companies and other life insurers with which the Company competes are significantly larger and have available to them much greater financial and other resources. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and GICs, include product flexibility, net return after fees, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting the annuity business include the benefits (including before-tax and after-tax investment returns) and guarantees provided to the customer and the commissions paid. Competitors of SunAmerica Asset Management include a large number of mutual fund organizations, both independent and affiliated with other financial services companies, including banks and insurance companies. Resources Trust competes for retirement plan assets against other trust companies, brokerage firms, mutual funds, banks and insurance companies. The Company's broker-dealers face competition from regional firms and large, national full service and discount brokerage firms. Imperial faces competition from other premium finance companies and many large insurance companies who directly finance their own premiums. 9 11 ITEM 2. PROPERTIES The Company's executive offices and the principal offices of its life insurance subsidiaries are in leased premises at 1 SunAmerica Center, Los Angeles, California. The Company's life insurance subsidiaries also lease office space in Woodland Hills, California; Houston, Texas; and New York, New York. The Company's broker-dealers lease space in Phoenix, Arizona; San Diego, California; Atlanta, Georgia; New York, New York and Houston, Texas. The Company's asset management subsidiary leases offices in New York, New York. The retirement trust services subsidiary occupies leased premises in Englewood, Colorado. The Company's premium finance subsidiary is headquartered in Sherman Oaks, California. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. 10 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the fourth quarter 1998 to a vote of security-holders, through the solicitation of proxies or otherwise. On November 18, 1998, subsequent to the Company's fiscal year end, the Company held a special meeting of shareholders in order to vote on the proposed merger with and into American International Group, Inc. The matter was approved with 300,221,917 votes for the proposal, 340,475 votes against and 561,536 votes abstaining. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the current executive officers of SunAmerica Inc. as of December 18, 1998:
Year assumed Present position at present Other positions and other business Name Age December 18, 1998 position experience within the last five years From-to - ------------------------- --- ---------------------- -------- ------------------------------------- ------------ Eli Broad 65 Chairman and Chief 1976 (Cofounded Company in 1957) Executive Officer 1986 President Jay S. Wintrob 41 Vice Chairman and 1998 Vice Chairman 1995-1998 Chief Operating Executive Vice President 1991-1995 Officer (Joined Company in 1987) James R. Belardi 41 Executive Vice 1995 Senior Vice President and 1992-1995 President Treasurer (Joined Company in 1986) Marc H. Gamsin 43 Senior Vice President 1996 Partner, O'Melveny & Myers LLP 1989-1996 Jana Waring Greer 46 Senior Vice President 1991 (Joined Company in 1974) Susan L. Harris 41 Senior Vice President, 1998 Senior Vice President, 1995-1998 General Counsel and General Counsel -- Corporate Affairs Secretary and Secretary Vice President, General Counsel -- 1994-1995 Corporate Affairs and Secretary Vice President, Associate General 1989-1994 Counsel and Secretary (Joined Company in 1985) Gary W. Krat 51 Senior Vice President 1992 (Joined Company in 1990) Scott H. Richland 36 Senior Vice President 1997 Senior Vice President & Treasurer 1997-1998 Vice President and Treasurer 1995-1997 Vice President and Assistant Treasurer 1994-1995 Assistant Treasurer 1993-1994 (Joined Company in 1990) Scott L. Robinson 52 Senior Vice President 1991 (Joined Company in 1978) and Controller James W. Rowan 36 Senior Vice President 1995 Vice President 1993-1995 (Joined Company in 1992) David R. Bechtel 31 Vice President and 1998 Vice President 1996-1998 Treasurer Deutsche Morgan Grenfell, Inc. Associate, 1995-1996 UBS Securities LLC Associate, 1994 Wachtell Lipton Rosen & Katz Associate, 1993-1994 Wells Fargo Nikko Investment Advisors
11 13 EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
Year assumed Present position at present Other positions and other business Name Age December 18, 1998 position experience within the last five years From-to - ------------------------- --- ---------------------- -------- ------------------------------------- ------------ Karel Carnohan 42 Vice President 1995 Vice President, Equity Analyst, C.J. 1994-1995 Lawrence/Deutsche Bank Securities Corporation First Vice President, Corporate 1990-1994 Finance and Investor Relations, Countrywide Credit Industries, Inc. Countrywide Mortgage Investments, Inc. Michael L. Fowler 44 Vice President 1988 (Joined Company in 1988) N. Scott Gillis 45 Vice President 1997 Senior Vice President and Controller, 1994-Present SunAmerica Life Companies (Joined Company in 1985) George L. Holdridge, Jr. 41 Vice President 1997 Senior Vice President, 1994-1995 SunAmerica Financial, Inc. Vice President and Director 1989-1994 of Technology, SunAmerica Financial, Inc. (Joined Company in 1983) Donald E. Spetner 39 Vice President 1997 Vice President, 1989-1997 Corporate Communications, Nissan North America, Inc.
12 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. The Company's Common Stock is also traded on the Boston, Midwest and Philadelphia Stock Exchanges. There is no trading or other market for the Nontransferable Class B Stock. High and low sales prices, based on the New York Stock Exchange Composite Price Tape, for the Company's Common Stock for each quarter during the fiscal years ended September 30, 1998 and 1997 are as follows:
1998 1997 -------------------- -------------------- High Low High Low ------- ------- ------- ------- First quarter............................ $45 5/8 $32 $30 53/64 $23 27/64 Second quarter........................... 50 15/16 37 34 24 43/64 Third quarter............................ 58 46 9/16 34 5/64 24 43/64 Fourth quarter........................... 76 1/4 54 3/4 40 53/64 32 29/64 ======= ======= ======= =======
HOLDERS As of November 30, 1998, the number of holders of record of each class of common equity of the Company was as follows:
Number of holders Title of Class of record -------------- ---------- Common Stock (par value $1.00 per share).................... 2,176 Nontransferable Class B Stock (par value $1.00 per share)... 8 ==========
DIVIDENDS Dividends paid per share on the Company's Common Stock and Nontransferable Class B Stock for each quarter during the fiscal years ended September 30, 1998 and 1997 are as follows:
1998 1997 ------------------------- ------------------------- Common Nontransferable Common Nontransferable Stock Class B Stock Stock Class B Stock ------- --------------- ------- --------------- First quarter................................. $0.1000 $0.0900 $0.0667 $0.0600 Second quarter................................ 0.1000 0.0900 0.0667 0.0600 Third quarter................................. 0.1000 0.0900 0.0667 0.0600 Fourth quarter................................ 0.1500 0.1350 0.0667 0.0600 ------- --------------- ------- --------------- Total......................................... $0.4500 $0.4050 $0.2668 $0.2400 ======= =============== ======= ===============
13 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein.
Years ended September 30, --------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (In thousands, except per-share amounts) RESULTS OF OPERATIONS Net investment income.............. $ 841,646 $ 679,377 $ 492,756 $ 365,555 $ 294,454 Net realized investment losses..... (41,721) (29,203) (30,314) (33,012) (21,124) Fee income......................... 458,827 317,703 248,411 198,604 171,085 General and administrative expenses......................... (310,273) (265,738) (210,650) (165,434) (135,161) Amortization of deferred acquisition costs................ (241,167) (165,089) (108,176) (86,107) (69,253) --------- --------- --------- --------- --------- Pretax income...................... 707,312 537,050 392,027 279,606 240,001 Income tax expense................. (191,000) (158,000) (117,600) (85,400) (74,700) --------- --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES............................ 516,312 379,050 274,427 194,206 165,301 Cumulative effect of change in accounting for income taxes...... -- -- -- -- (33,500) --------- --------- --------- --------- --------- NET INCOME......................... $ 516,312 $ 379,050 $ 274,427 $ 194,206 $ 131,801 ========= ========= ========= ========= ========= BASIC EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES.................. $ 2.61 $ 2.01 $ 1.44 $ 1.04 $ 0.87 Cumulative effect of change in accounting for income taxes... -- -- -- -- (0.18) --------- --------- --------- --------- --------- NET INCOME......................... $ 2.61 $ 2.01 $ 1.44 $ 1.04 $ 0.69 ========= ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES.................. $ 2.34 $ 1.81 $ 1.32 $ 0.96 $ 0.80 Cumulative effect of change in accounting for income taxes... -- -- -- -- (0.18) --------- --------- --------- --------- --------- NET INCOME......................... $ 2.34 $ 1.81 $ 1.32 $ 0.96 $ 0.62 ========= ========= ========= ========= ========= CASH DIVIDENDS PER SHARE PAID TO COMMON SHAREHOLDERS: Nontransferable Class B Stock.... $ 0.4050 $ 0.2400 $ 0.1800 $ 0.1200 $ 0.0800 ========= ========= ========= ========= ========= Common Stock..................... $ 0.4500 $ 0.2668 $ 0.2000 $ 0.1333 $ 0.0889 ========= ========= ========= ========= =========
14 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
Years ended September 30, ------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- RATIO OF EARNINGS TO FIXED CHARGES Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)........................................ 5.4x 4.6x 5.4x 5.8x 5.8x ==== ==== ==== ==== ==== Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, fixed annuities, guaranteed investment contracts and trust deposits).............................. 1.5x 1.5x 1.5x 1.5x 1.5x ==== ==== ==== ==== ==== Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)........................................ 4.9x 3.9x 3.8x 3.4x 2.8x ==== ==== ==== ==== ==== Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, fixed annuities, guaranteed investment contracts and trust deposits).............................. 1.5x 1.4x 1.4x 1.4x 1.4x ==== ==== ==== ==== ====
At September 30, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments................ $26,065,407 $24,408,178 $16,199,784 $10,808,959 $ 9,280,390 Variable annuity assets held in separate accounts................. 11,405,434 9,514,675 6,380,458 5,263,006 4,513,093 Deferred acquisition costs.................... 996,503 1,118,582 782,300 526,415 581,874 Other assets............... 733,063 595,451 364,279 245,787 280,868 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS............... $39,200,407 $35,636,886 $23,726,821 $16,844,167 $14,656,225 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts................ $12,970,549 $14,445,126 $ 9,654,674 $ 4,862,250 $ 4,519,623 Reserves for guaranteed investment contracts..... 8,380,844 5,553,292 4,169,028 3,607,192 2,783,522 Variable annuity liabilities related to separate accounts........ 11,405,434 9,514,675 6,380,458 5,263,006 4,513,093 Trust deposits............. 439,918 427,433 436,048 426,595 442,320 Other payables and accrued liabilities.............. 905,202 1,097,418 489,672 747,733 860,763 Long-term notes and debentures............... 1,216,483 1,136,072 573,335 524,835 472,835 Other senior indebtedness............. -- -- -- -- 28,662 Deferred income taxes...... 394,910 383,764 125,417 146,847 74,319 Preferred securities of grantor trusts........... 495,000 495,000 237,631 52,631 -- Shareholders' equity....... 2,992,067 2,584,106 1,660,558 1,213,078 961,088 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS EQUITY...... $39,200,407 $35,636,886 $23,726,821 $16,844,167 $14,656,225 =========== =========== =========== =========== ===========
15 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of SunAmerica Inc. (the "Company") for the three years in the period ended September 30, 1998 follows. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. RESULTS OF OPERATIONS NET INCOME totaled $516.3 million ($2.61 per basic share and $2.34 per diluted share) in 1998, compared with $379.1 million ($2.01 per basic share and $1.81 per diluted share) in 1997 and $274.4 million ($1.44 per basic share and $1.32 per diluted share) in 1996. On March 31, 1997, the Company acquired certain annuity contracts from John Alden Life Insurance Company and all of the outstanding common stock of John Alden Life Insurance Company of New York (collectively, the "John Alden Acquisition"). During fiscal 1996, the Company acquired CalAmerica Life Insurance Company ("CalAmerica") on December 29, 1995; Ford Life Insurance Company ("Ford Life") on February 29, 1996; and certain annuity contracts from The Central National Life Insurance Company of Omaha (the "Central National Annuity Contracts") on April 1, 1996 (collectively, the "1996 Acquisitions"). The John Alden Acquisition and the 1996 Acquisitions (collectively, the "Acquisitions") were accounted for under the purchase method of accounting, and, therefore, results of operations include those of the Acquisitions only from their respective dates of acquisition. Consequently, operating results for fiscal years 1998, 1997 and 1996 are not comparable. On a pro forma basis, using the historical operating results of the acquired businesses and assuming the Acquisitions had been consummated on October 1, 1995, the beginning of the earliest period discussed herein, net income would have been $397.4 million ($2.11 per basic share and $1.90 per diluted share) in 1997 and $323.2 million ($1.73 per basic share and $1.56 per diluted share) in 1996. PRETAX INCOME totaled $707.3 million in 1998, $537.1 million in 1997, and $392.0 million in 1996. The 31.7% improvement in 1998 over 1997 and the 37.0% improvement in 1997 over 1996 primarily resulted from increased net investment income and fee income. These favorable factors were partially offset by increased amortization of deferred acquisition costs, higher general and administrative expenses and, only with respect to 1998, higher net realized investment losses. 16 18 NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, increased to $841.6 million in 1998 from $679.4 million in 1997 and $492.8 million in 1996. These amounts equal 3.36% on average invested assets (computed on a daily basis) of $25.03 billion in 1998, 3.26% on average invested assets of $20.86 billion in 1997 and 3.43% on average invested assets of $14.36 billion in 1996. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, net investment income on related average invested assets would have been 3.14% in 1997 and 2.97% in 1996. Net investment spreads include the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. This excess amounted to $1.88 billion in 1998, $1.15 billion in 1997 and $1.06 billion in 1996. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.93% in 1998, 2.95% in 1997 and 3.01% in 1996. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, the Spread Difference would have been 2.91% in 1997 and 2.82% in 1996. Investment income (and the related yields on average invested assets) totaled $2.16 billion (8.63%) in 1998, compared with $1.80 billion (8.61%) in 1997 and $1.25 billion (8.74%) in 1996. Investment income and the related yields reflect the effects of the Acquisitions from their respective dates of acquisition. The invested assets associated with the Acquisitions included high-grade corporate, government and government/agency bonds and cash and short-term investments, which are generally lower yielding than a significant portion of the invested assets that comprise the remainder of the Company's portfolio. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, the yield on related average invested assets would have been 8.53% in 1997 and 8.37% in 1996. Thus, the increased yields in 1998 and 1997, when compared to the pro forma 1996 yield, reflect a partial reallocation of lower-yielding invested assets acquired as part of the Acquisitions into generally higher-yielding asset classes in which the Company has historically invested a portion of its portfolio. The increases in investment income also reflect increased income from the Company's investment in partnerships, as well as the effects of increases in average invested assets (in excess of those acquired through the Acquisitions). Partnership income increased to $371.1 million (a yield of 23.42% on related average assets of $1.58 billion) in 1998, compared with $241.5 million (a yield of 21.00% on related average assets of $1.15 billion) in 1997 and $178.6 million (a yield of 19.04% on related average assets of $937.8 million) in 1996. Partnership income includes income recognized by using the cost method of accounting, which amounted to $211.2 million in 1998, $114.7 million in 1997 and $82.1 million in 1996. Such income is based primarily upon cash distributions received from limited partnerships, the operations of which the Company does not influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future. The Company has historically sought to enhance investment yield through total return bond swap agreements (the "Total Return Agreements"). However, because of recent significant market declines in the non-investment-grade bond sector, the Company recorded losses of $33.7 million on Total Return Agreements in 1998. The Company recorded income of $35.4 million in 1997 and $32.5 million in 1996 on Total Return Agreements. (See "Asset-Liability Matching" for additional discussion of Total Return Agreements.) Total interest and dividend expense totaled $1.32 billion in 1998, $1.12 billion in 1997 and $761.5 million in 1996. The average rate paid on all interest-bearing liabilities was 5.70% in 1998, compared with 5.66% in 1997 and 5.73% in 1996. Interest-bearing liabilities averaged $23.15 billion during 1998, compared with $19.71 billion during 1997 and $13.29 billion during 1996. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, the average rate paid on all interest-bearing liabilities would have been 5.62% in 1997 and 5.55% in 1996. These increases in overall rates paid primarily reflect year-over-year increases in the percentage of average interest-bearing liabilities composed of guaranteed investment contracts ("GICs"), which, on average, bear higher interest rates while generally bearing lower acquisition costs, than the Company's other interest-bearing liabilities. 17 19 GROWTH IN AVERAGE INVESTED ASSETS since 1996 primarily reflects the impact of the Acquisitions and growth of the Company's GIC reserves. The Company acquired $722.5 million of invested assets of CalAmerica on December 29, 1995, $3.10 billion of invested assets of Ford Life on February 29, 1996, $908.8 million of invested assets associated with the Central National Annuity Contracts on April 1, 1996 and $5.00 billion of invested assets associated with the John Alden Acquisition on March 31, 1997. The Company intends to continue to pursue a strategy of enhancing its internal growth with complementary acquisitions. On July 15, 1998, the Company entered into a definitive agreement to acquire MBL Life Assurance Corporation's individual life and individual and group annuity business (which has approximately $2 billion of individual life reserves and $3 billion of fixed annuity reserves) for a purchase price of approximately $130 million in cash. The acquisition is subject to customary conditions and required regulatory approvals, and is expected to be completed by the end of December 1998. Average invested assets also increased as a result of sales of the Company's fixed-rate products, consisting of both fixed annuity premiums (including those for the fixed accounts of variable annuity products) and GIC premiums. Fixed annuity premiums totaled $1.80 billion in 1998, compared with $1.49 billion in 1997 and $993.4 million in 1996. These amounts represent 12%, 15% and 20% of the fixed annuity reserve balance at the beginning of the respective periods. The decreases in percentages in 1998 and 1997 reflect the impact of the Acquisitions, which increased fixed annuity reserve balances at the beginning of the respective periods. Fixed annuity premiums include premiums for the fixed accounts of variable annuities totaling $1.59 billion, $1.17 billion and $782.6 million, in 1998, 1997 and 1996, respectively. Increases in premiums for the fixed accounts of variable annuity products principally reflect higher variable annuity product sales and the use of the fixed accounts for dollar cost averaging into the variable accounts. GIC premiums increased to $4.01 billion in 1998 from $2.08 billion in 1997 and $1.02 billion in 1996. These amounts represent 72%, 50% and 28% of the GIC reserve balance at the beginning of the respective periods. The increases in GIC premiums reflect an expansion of the GIC client base due, in part, to a broadening of the Company's products and distribution channels, including its AAA-rated company, SunAmerica National Life Insurance Company, and its AAA/Aaa-rated credit-enhanced GIC products, and an expansion of its international client base. The size of the Company's GIC reserves increased over the three-year period to $8.38 billion at September 30, 1998 from $3.61 billion at September 30, 1995. The GICs issued by the Company generally guarantee the payment of principal and interest at a fixed rate for a fixed term of three to twelve years with an average of approximately 7 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 Company generally imposes surrender penalties in the event of other withdrawals prior to maturity. GICs purchased for their long-term portfolios by banks, asset management firms, certain trusts and state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. GICs purchased by asset management firms for their short-term portfolios either prohibit withdrawals or permit withdrawals with notice ranging from 90 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. NET REALIZED INVESTMENT LOSSES totaled $41.7 million in 1998, compared with $29.2 million in 1997 and $30.3 million in 1996. Net realized investment losses include impairment writedowns of $109.8 million in 1998, $65.3 million in 1997 and $34.9 million in 1996. Thus, net gains from sales and redemptions of investments totaled $68.1 million in 1998, $36.1 million in 1997 and $4.6 million in 1996. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $22.90 billion in 1998, $19.13 billion in 1997 and $11.21 billion in 1996, respectively. Sales of 18 20 investments result from the active management of the Company's investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains from sales and redemptions of investments fluctuate from period to period, and represent 0.27%, 0.17%, and 0.03% of average invested assets for 1998, 1997 and 1996, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company's active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk. Historically, impairment writedowns primarily have been applied to defaulted bonds. However, in 1998, as a result of equity market declines in the later part of the fiscal year, impairment writedowns were also applied to various cost-method partnerships. Impairment writedowns represent 0.44%, 0.31% and 0.24% of average invested assets for 1998, 1997 and 1996, respectively. For the five years ended September 30, 1998, impairment writedowns as a percentage of average invested assets have ranged from 0.24% to 0.63% and have averaged 0.41%. Such writedowns are based upon estimates of the net realizable value of the applicable assets. Actual realization will be dependent upon future events. VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $204.5 million in 1998, $141.2 million in 1997 and $104.7 million in 1996. These increased fees reflect growth in average variable annuity assets, due to increased market values, the receipt of variable annuity premiums and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders. Variable annuity fees represent 1.9%, 1.8% and 1.8% of average variable annuity assets for 1998, 1997 and 1996, respectively. Variable annuity assets averaged $10.93 billion during 1998, $7.66 billion during 1997 and $5.75 billion during 1996. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, have aggregated $1.88 billion in 1998, $1.31 billion in 1997 and $929.2 million in 1996. These amounts represent 20%, 20% and 18% of variable annuity reserves at the beginning of the respective periods. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $3.47 billion, $2.47 billion and $1.71 billion in 1998, 1997 and 1996, respectively, and primarily reflect sales of the Company's flagship variable annuity, Polaris. Polaris is a multi-manager variable annuity that offers investors a choice of 26 variable funds and 7 guaranteed fixed-rate funds. Increases in Variable Annuity Product Sales are due, in part, to market share gains through enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed income and guaranteed fixed account investment choices. In recent weeks, subsequent to the Company's fiscal year end, sales of variable annuities have slowed as investors paused to reevaluate their investment decisions in light of volatile markets. The Company believes that fluctuating market conditions increase the value of financial planning services and make the flexibility and security of variable annuities even more attractive. The Company has encountered increased competition in the variable annuity marketplace during recent years and anticipates that the market will remain highly competitive for the foreseeable future. Also, from time to time, Federal initiatives are proposed which could affect the taxation of variable annuities and annuities generally. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of non-proprietary 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 $114.5 million in 1998, $64.9 million in 1997 and $49.8 million in 1996. Broker- dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $29.31 billion in 1998, $17.52 billion in 1997 and $12.78 billion in 1996. The increases in sales and net retained commissions reflect a greater number of registered representatives, higher average production per 19 21 representative and generally favorable market conditions. The greater number of registered representatives was primarily due to acquisitions, including the April 2, 1998 acquisition of Sentra Securities Corporation and Spelman & Co. Inc. ("Sentra-Spelman"), the October 1, 1997 acquisition of Financial Service Corporation and the January 22, 1997 acquisition of The Financial Group, Inc. At their respective dates of acquisition, these acquired companies licensed through their subsidiaries approximately 500, 1,500 and 400 independent registered representatives, respectively. Increases in net retained commissions may not be proportionate to increases in sales primarily due to differences in sales mix. SURRENDER CHARGES on fixed and variable annuities totaled $54.4 million (including $37.4 million attributable to the Acquisitions) in 1998, $35.2 million (including $24.5 million attributable to the Acquisitions) in 1997 and $22.1 million (including $11.1 million attributable to the Acquisitions) in 1996. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of an annuity contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $3.12 billion (including $1.85 billion attributable to the Acquisitions) in 1998, compared with $2.28 billion (including $1.00 billion attributable to the Acquisitions) in 1997 and $1.42 billion (including $245.8 million attributable to the Acquisitions) in 1996. These payments represent 13.2% (23.7% of average fixed annuity reserves associated with the Acquisitions), 12.0% (15.0% of average fixed annuity reserves associated with the Acquisitions) and 11.1% (9.3% of average fixed annuity reserves associated with the 1996 Acquisitions), respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity withdrawals from the separate accounts totaling $964.9 million (8.8% of average variable annuity reserves), $827.3 million (10.8% of average variable annuity reserves) and $637.0 million (11.1% of average variable annuity reserves) in 1998, 1997 and 1996, respectively. Consistent with the assumptions used in connection with the Acquisitions, management anticipates that the level of withdrawal payments will continue to reflect higher relative withdrawal rates in the near future because of higher surrenders on the acquired annuity businesses. Excluding the effects of the Acquisitions, withdrawal payments represented 8.7% in 1998, 10.4% in 1997 and 11.6% in 1996 of related average fixed and variable annuity reserves. These lower surrender rates in the current periods reflect the continued decreases in the percentage of non-acquisition-related annuity contracts that are free of surrender charges. 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 by SunAmerica Asset Management Corp. Such fees totaled $29.6 million on average assets managed of $2.89 billion in 1998, $25.8 million on average assets managed of $2.34 billion in 1997 and $25.4 million on average assets managed of $2.14 billion in 1996. Asset management fees are not proportionate to average assets managed, principally due to changes in product mix. Sales of mutual funds, excluding sales of money market accounts, aggregated $853.6 million in 1998, compared with $454.8 million in 1997 and $223.4 million in 1996. The significant increases in sales principally resulted from sales of the Company's "Style Select Series" product (which was introduced in November 1996) and the introduction in June 1998 of the "Dogs" of Wall Street. The "Style Select Series" is a group of mutual funds which are each managed by three industry recognized fund managers. The "Dogs" of Wall Street fund contains 30 large capitalization value stocks which are selected by strict criteria. Sales of these products totaled $611.1 million in 1998, compared with $267.8 million in 1997, reflecting the addition of five new Style Select funds, which more than doubled the number of Style Select funds to nine, and generally favorable market conditions. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $402.5 million in 1998, $412.8 million in 1997 and $379.9 million in 1996, which represent 17.5%, 22.0% and 21.4%, respectively, of average mutual fund assets. 20 22 LOAN SERVICING FEES are earned by Imperial Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment loans for borrowers to fund their 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 loans it originates and earns fee income by servicing the sold loans. Such fee income totaled $23.4 million on average loans serviced of $483.0 million in 1998, compared with $24.3 million on average loans serviced of $490.5 million in 1997 and $23.8 million on average loans serviced of $457.8 million in 1996. TRUST FEES are earned by Resources Trust Company for providing administrative and custodial services primarily for individual retirement accounts, as well as for other qualified retirement plans. Trust fees increased to $18.1 million in 1998 (on an average of 208,000 trust accounts) from $17.9 million in 1997 (on an average of 204,000 trust accounts) and $16.7 million in 1996 (on an average of 202,000 trust accounts). GENERAL AND ADMINISTRATIVE EXPENSES totaled $310.3 million in 1998, compared with $265.7 million in 1997 and $210.7 million in 1996. General and administrative expenses reflect the impact of the Acquisitions, as well as the acquisitions of Sentra-Spelman, Financial Service Corporation and The Financial Group, Inc. As a result, the number of employees has increased to approximately 2,500 at September 30, 1998 from approximately 2,000 at September 30, 1997 and approximately 1,600 at September 30, 1996. As a result, compensation (net of deferrals) has increased to $174.8 million in 1998 from $145.3 million in 1997 and $123.5 million in 1996. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $241.2 million in 1998, compared with $165.1 million in 1997 and $108.2 million in 1996. The increases in amortization primarily reflect the amortization of the deferred acquisition costs attributable to the Acquisitions, which aggregated $133.0 million in 1998, $65.2 million in 1997 and $16.8 million in 1996. Amortization has also increased due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other direct selling costs. INCOME TAX EXPENSE totaled $191.0 million in 1998, compared with $158.0 million in 1997 and $117.6 million in 1996, representing effective tax rates of 27% in 1998, 29% in 1997 and 30% in 1996. These tax rates reflect the favorable impact of tax credits associated with tax-advantaged investments in affordable housing partnerships owned by the Company. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDERS' EQUITY increased 15.8% to $2.99 billion at September 30, 1998 from $2.58 billion at September 30, 1997, primarily due to $516.3 million of net income recorded in 1998, which was partially offset by $100.5 million of dividends paid to shareholders. On August 20, 1998, the Company entered into an agreement to merge with American International Group, Inc. ("AIG"). The merger will be treated as a pooling of interests for accounting purposes, and will be a tax-free reorganization. Each share of the Company's Common Stock (including Nontransferable Class B) will be exchanged for 0.855 shares of AIG's common stock. The transaction was approved by both the Company's and AIG's shareholders at special meetings on November 18, 1998. The merger is expected to be completed in late 1998 or early 1999. On September 22, 1998, the Company announced that it would redeem all of its Series E Preferred Stock. The redemption was completed on October 30, 1998 and resulted in the issuance of approximately 11.3 million shares of common stock. For the year ending September 30, 1998, the Series E Preferred Stock was included in the computation of diluted earnings per share as 12.2 million of common stock equivalents. 21 23 On October 7, 1998, subsequent to the Company's fiscal year end, the Company announced that it will redeem all of its 8 1/2% Premium Equity Redemption Cumulative Security Units ("PERCS Units") on December 6, 1998. In connection with this redemption, the Company will issue approximately 10.1 million shares of its common stock and will receive $431.3 million in cash proceeds. For the year ending September 30, 1998, the PERCS Units were included in the computation of diluted earnings per share as 4.3 million of common stock equivalents. BOOK VALUE PER SHARE amounted to $14.45 at September 30, 1998, up from $12.40 at September 30, 1997. Excluding net unrealized gains on debt and equity securities available for sale, book value per share amounted to $13.50 at September 30, 1998 and $11.39 at September 30, 1997. On a pro forma basis, assuming that the PERCS Units were converted to Common Stock, book value per share would have been $16.02 at September 30, 1998, compared with $13.40 at September 30, 1997 and, excluding net unrealized gains on debt and equity securities available for sale, would have been $15.10 at September 30, 1998 and $12.47 at September 30, 1997. INVESTED ASSETS at September 30, 1998 totaled $26.07 billion, compared with $24.41 billion at September 30, 1997. The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company's need for liquidity and other similar factors. THE BOND PORTFOLIO, which constitutes 72% of the Company's total investment portfolio, had an aggregate fair value that exceeded its amortized cost by $399.2 million at September 30, 1998, compared with an excess of $398.8 million at September 30, 1997. At September 30, 1998, the Bond Portfolio (excluding $292.0 million of redeemable preferred stocks) included $17.21 billion of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC"), and $1.30 billion of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 1998, approximately $16.73 billion of the Bond Portfolio was investment grade, including $6.71 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At September 30, 1998, the Bond Portfolio included $1.78 billion of bonds that were not investment grade. These non-investment-grade bonds accounted for 4.5% of the Company's total assets and 6.8% of its 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 $533.0 million at September 30, 1998 (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 had no material concentrations of non-investment-grade securities at September 30, 1998. 22 24 The following table summarizes the Company's rated bonds by rating classification as of September 30, 1998 (dollars in thousands):
Issues not rated by S&P/Moody's/ Issues rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC category Total - ----------------------------------------- ------------------------------------- -------------------------------------- S&P/(Moody's)/ Percent of [DCR]/{Fitch} Amortized Estimated NAIC Amortized Estimated Amortized Estimated invested category(1) cost fair value category(2) cost fair value cost fair value assets - -------------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- AAA+ to A- (Aaa to A3) [AAA to A-] {AAA to A-} $10,060,902 $10,397,846 1 $2,260,032 $2,436,591 $12,320,934 $12,834,437 49.24% BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-] {BBB+ to BBB-} 3,189,664 3,246,243 2 653,558 646,319 3,843,222 3,892,562 14.93 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-} 216,920 198,649 3 73,663 73,835 290,583 272,484 1.05 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-} 1,257,636 1,154,397 4 285,700 261,659 1,543,336 1,416,056 5.43 CCC+ to C (Caa to C) [CCC] {CCC+ to C-} 35,491 31,274 5 73,349 61,032 108,840 92,306 0.35 CI to D [DD] {D} -- -- 6 1,436 968 1,436 968 0.00 ----------- ----------- ---------- ---------- ----------- ----------- Total rated issues $14,760,613 $15,028,409 $3,347,738 $3,480,404 $18,108,351 $18,508,813 =========== =========== ========== ========== =========== ===========
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. DCR rates debt securities in rating categories ranging from AAA (the highest) to DD (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody's, DCR and Fitch ratings if rated by multiple agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $1.30 billion of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $1.89 billion at September 30, 1998. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1998, Secured Loans consisted of $982.0 million of publicly traded securities and $903.5 million of privately traded securities. These Secured Loans are composed of loans to 310 borrowers spanning 44 industries, with 26% of these assets concentrated in financial institutions and 15% concentrated in utilities. No other industry concentration constituted more than 6% of these assets. While the trading market for the Company's privately traded Secured Loans is more limited than for publicly traded issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC. 23 25 MORTGAGE LOANS aggregated $3.41 billion at September 30, 1998 and consisted of 1,538 commercial first mortgage loans with an average loan balance of approximately $2.2 million, collateralized by properties located in 47 states. Approximately 27% of this portfolio was multifamily residential, 23% was retail, 17% was office, 11% was manufactured housing, 7% was industrial and 15% was other types. At September 30, 1998, approximately 19%, 12% and 10% of this portfolio was secured by properties located in California, New York and Texas, respectively, and no more than 7% of this portfolio was secured by properties located in any other single state. At September 30, 1998, there were 59 mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 30% of this portfolio. At September 30, 1998, approximately 31% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2001. During 1998, 1997 and 1996 loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio. At September 30, 1998, approximately 40% of the mortgage loans were seasoned loans underwritten to the Company's standards and purchased at or near par from other financial institutions. Such loans generally have higher average interest rates than loans that could be originated today. The balance of the mortgage loan portfolio has been originated by the Company under strict underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the more immediate effects of general economic conditions on these commercial property types. However, due to the seasoned nature of the Company's mortgage loan portfolio, its emphasis on multifamily loans and its strict underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields. PARTNERSHIP investments totaled $1.65 billion at September 30, 1998, constituting investments in approximately 661 separate partnerships with an average size of approximately $2.5 million. This portfolio includes: (i) $867.7 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 4,700 separate issuers; (ii) $640.7 million of partnerships that make tax-advantaged investments in affordable housing properties, currently involving approximately 540 multifamily projects in 41 states; and (iii) $136.7 million of partnerships that invest in mortgage loans and income-producing real estate. 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, to some extent, a) for the affordable housing partnerships, by the marketability of the tax credits they generate, and b) in the case of many of the other partnerships, by the existence of contractual termination provisions. ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company's fixed-rate products incorporate surrender charges, two-tiered interest rate structures or other restrictions in order to encourage persistency. Approximately 86% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1998. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used stress-test interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what 24 26 it pays on its liabilities by designing its fixed-rate products and conducting its investment operations to closely match the duration of the fixed-rate assets to that of its fixed-rate liabilities. The Company's fixed-rate assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; and investments in limited partnerships that invest primarily in fixed-rate securities and are accounted for by using the cost method. At September 30, 1998, these assets had an aggregate fair value of $24.36 billion with a duration of 3.7. The Company's fixed-rate liabilities include: fixed annuities; GICs; trust deposits; long-term notes and debentures; and preferred securities of subsidiary grantor trusts. At September 30, 1998, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $23.10 billion with a duration of 3.4. The Company's potential exposure due to a 10% increase in prevailing interest rates from their September 30, 1998 levels is a loss of $50.8 million in fair value of its fixed-rate assets that is not offset by a decrease in the fair value of its fixed-rate liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss. Duration is a common option-adjusted measure for the price sensitivity of a fixed-maturity portfolio to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio if interest rates change by 100 basis points, recognizing the changes in cash flows resulting from embedded options such as policy surrenders, investment prepayments and bond calls. It also incorporates the assumption that the Company will continue to utilize its existing strategies of pricing its fixed annuity and GIC products, allocating its available cash flow amongst its various investment portfolio sectors and maintaining sufficient levels of liquidity. Because the calculation of duration involves estimation and incorporates assumptions, potential changes in portfolio value indicated by the portfolio's duration will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. As a component of its asset and liability management 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, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1998, the Company had 38 outstanding Swap Agreements with an aggregate notional principal amount of $1.87 billion. These agreements mature in various years through 2010 and have an average remaining maturity of 43 months. The Company also seeks to provide liquidity from time to time by using reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It also seeks to enhance its spread income by using Reverse Repos and Total Return Agreements. 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. 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 fair value of specified non-investment-grade 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 provide liquidity, enhance its spread income and match its assets and liabilities. The primary risks associated with Total Return Agreements are the credit risk on the underlying non-investment-grade bonds, the risk of potential loss due to bond market fluctuations and the risk associated with counterparty nonperformance. The primary risk associated with the Company's Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Total Return Agreements, Reverse Repos and Swap Agreements are financially responsible and that the 25 27 counterparty risk associated with those transactions is minimal. It is the Company's policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody's. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a 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 risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. As part of its decision to purchase an MBS, the Company assesses the risk of prepayment by analyzing the security's projected performance over an array of interest-rate scenarios. Once an MBS is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $55.0 million at September 30, 1998, including $19.7 million of bonds and notes and $35.3 million of mortgage loans. At September 30, 1998, defaulted investments constituted 0.2% of total invested assets. At September 30, 1997, defaulted investments totaled $38.0 million, including $15.1 million of bonds and notes and $22.9 million of mortgage loans, and constituted 0.2% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1998, approximately $15.74 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $717.0 million, while approximately $3.06 billion of the Bond Portfolio had an aggregate unrealized loss of $317.8 million. In addition, the Company's investment portfolio currently provides approximately $209.4 million of monthly cash flow from scheduled principal and interest payments. Further, $3.23 billion remains available to the Company to issue securities under a shelf registration statement filed in July 1997. Historically, cash flows from operations and from the sale of the Company's annuity and GIC products have been more than sufficient in amount to satisfy the Company's liquidity needs. Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate 26 28 environment, the Company's average cost of funds would increase over time as it prices its new and renewing annuities and GICs 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 September 30, 1998, had invested assets with a fair value of $2.53 billion and outstanding senior indebtedness of $1.22 billion, comprising all of the Company's outstanding senior indebtedness. Additionally, as of September 30, 1998, the Parent had three GICs purchased by local government entities, which aggregated $213.7 million. During November 1996 and October 1995, respectively, the Parent purchased the common securities of SunAmerica Capital Trust III and SunAmerica Capital Trust II (collectively, the "Grantor Trusts") and issued an aggregate of $511.9 million of junior subordinated debentures (the "Debentures") to the Grantor Trusts in connection with the public issuance of the preferred securities of the Grantor Trusts (see Note 10 of Notes to Consolidated Financial Statements). The Parent's annual debt service (principal and interest payments) with respect to its senior indebtedness, GIC obligations and Debentures totals $292.0 million for fiscal 1999, $563.5 million for fiscal 2000, $139.0 million for fiscal 2001, $297.4 million for fiscal 2002, $112.3 million for fiscal 2003 and $4.14 billion, in the aggregate, thereafter. On December 6, 1998, the Company is contractually scheduled to receive $431.3 million upon delivery of 10.1 million shares of the Company's Common Stock in accordance with the terms of the Company's PERCS Units. The Parent received dividends from its regulated life insurance subsidiaries totaling $143.0 million in September 1998, $118.7 million in April 1997 and $94.3 million in March 1996. The Parent also received dividends of $12.9 million in fiscal 1998, $17.5 million in fiscal 1997 and $16.0 million in fiscal 1996 from its other directly owned subsidiaries. The ability of the Company's life insurance subsidiaries to pay dividends is limited by statute. For the remainder of calendar year 1998, no amounts are available for dividends to the Parent from its regulated life insurance subsidiaries. The Company has sold, through three separate coinsurance transactions: (i) the general agency division of SunAmerica Life Insurance Company to Savers Life Insurance Company (in 1989) which subsequently transferred the business to Winterthur Life Re Insurance Company; (ii) the credit life business of Ford Life to Vista Life Insurance Company (in 1996); and (iii) the mortality-based business of CalAmerica Life Insurance Company to Protective Life Insurance Company (in 1996). With respect to these coinsurance transactions, SunAmerica entities could become liable for in-force amounts ceded of $894.7 million, $962.2 million and $1.90 billion, respectively, at September 30, 1998, if the coinsurers were to become unable to meet the obligations assumed under the respective coinsurance agreements. However, the Company considers these contingencies to be remote because the coinsurers are strong credit-worthy institutions and, in the case of the 1989 transaction, assets substantially equal to the policyholder reserves assumed by the coinsurer are held in trust to secure the obligations of the coinsurer. At September 30, 1998, related policyholder reserves carried by the coinsurers were $59.3 million, $10.9 million and $157.3 million, respectively. The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the 27 29 Parent has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third- party investors. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. In the ordinary course of business, the Company has agreed to make capital contributions, if required, aggregating approximately $670.2 million, to 121 limited partnerships over the next 5 years in exchange for ownership interests in such partnerships. YEAR 2000 The Company relies significantly on computer systems and applications in its daily operations. Many of these systems are not presently year 2000 compliant, which means that because they have historically used only two digits to identify the year in a date, they will fail to distinguish dates in the "2000s" from dates in the "1900s." The Company's business, financial condition and results of operations could be materially and adversely affected by the failure of the Company's systems and applications (and those operated by third parties interfacing with the Company's systems and applications) to properly operate or manage these dates. The Company has a coordinated plan to repair or replace these noncompliant systems and to obtain similar assurances from third parties interfacing with the Company's systems and applications. In fiscal 1997, the Company recorded a $15.0 million provision for estimated programming costs to make necessary repairs of certain specific noncompliant systems. Management is making expenditures which it expects to ultimately total $15.0 million to replace certain other specific noncompliant systems, which expenditures will be capitalized as software costs and amortized over future periods. Both phases of the project are currently proceeding in accordance with the plan and management expects them to be substantially completed by the end of calendar 1998. Testing of both the repaired and replacement systems will be conducted during calendar 1999. In addition, the Company has distributed a year 2000 questionnaire to certain of its significant suppliers, distributors, financial institutions, lessors and others with which it does business to evaluate their year 2000 compliance plans and state of readiness and to determine the extent to which the Company's systems and applications may be affected by the failure of others to remediate their own year 2000 issues. To date, however, the Company has received only preliminary feedback from such parties and has not independently confirmed any information received from other parties with respect to the year 2000 issues. Therefore, there can be no assurance that such other parties will complete their year 2000 conversions in a timely fashion or will not suffer a year 2000 business disruption that may adversely affect the Company's financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management's Disclosure and Analysis of Financial Condition and Results of Operations on pages 24 through 26 herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements begin on page F-3. Reference is made to the Index to Financial Statements on page F-1 herein. Additional financial statement schedules are included on pages S-3 through S-7 herein. Reference is made to the Index to Financial Statement Schedules on page S-1 herein. 28 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required under Part III (Items 10, 11, 12 and 13) will be filed by amendment to Form 10-K, except for the information regarding the executive officers of the Company, which is included in Part I on pages 11-12. Based solely on the review of the Forms 3, 4 and 5 furnished to the Company and certain representations made to the Company, the Company believes that the only filing deficiencies under Section 16(a) by its directors and executive officers during 1998 was one late report filed by James R. Belardi, relating to two gifts of an aggregate of 10 shares. 29 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the indexes set forth on pages F-1 and S-1 of this report. EXHIBITS
Exhibit No. Description - ------- ----------- 2(a) Stock Purchase Agreement between the Company and The American Road Insurance Company, dated as of November 10, 1995, whereby the Company acquired all of the outstanding stock of Ford Life Insurance Company from The American Road Insurance Company, a subsidiary of Ford Motor Company, is incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K, filed on December 12, 1995. 2(b) Share Exchange Agreement, dated January 12, 1996, among the Company, Stanford Ranch, Inc., and the Stockholders of Stanford Ranch, Inc. named therein, whereby the Company issued shares of its Common Stock in exchange for all of the outstanding shares of common stock of Stanford Ranch, Inc., is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting and Proxy Statement, filed January 15, 1996. 2(c) Asset Purchase and Sale Agreement between SunAmerica Life Insurance Company and John Alden Life Insurance Company, dated as of November 29, 1996 is incorporated herein by reference to Exhibit 2(c) to the Company's 1996 Annual Report on Form 10-K, filed December 10, 1996. 2(d) Stock Purchase Agreement between SunAmerica Life Insurance Company and John Alden Financial Corporation, dated as of November 29, 1996, regarding all of the outstanding stock of John Alden Life Insurance Company of New York, is incorporated herein by reference to Exhibit 2(d) to the Company's 1996 Annual Report on Form 10-K, filed December 10, 1996. 2(e) Purchase and Sale Agreement by and among the Company, Anchor National Life Insurance Company, First SunAmerica Life Insurance Company and MBL Life Assurance Corporation, dated as of July 15, 1998. 2(f) Agreement and Plan of Merger, dated as of August 19, 1998, providing, among other things, for the merger of the Company with and into American International Group, Inc. ("AIG"), is incorporated herein by reference to AIG's Current Report on Form 8-K, filed August 24, 1998, File No. 1-8787. 3(a) Restated Charter, dated October 3, 1991, is incorporated herein by reference to Exhibit 3(a) to the Company's Form 8 dated and filed October 4, 1991, amending the Company's Annual Report on Form 10-K for the year ended September 30, 1990, filed December 20, 1990. 3(b) Articles Supplementary, dated June 24, 1992, which define the rights of the holders of the Company's 9 1/4% Preferred Stock, Series B, are incorporated herein by reference to Exhibit 3(c) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 3(c) Amendment to the Company's Restated Articles of Incorporation, dated February 1, 1993, is incorporated herein by reference to Exhibit 1 to the Company's Form 8-K, filed February 3, 1993.
30 32
Exhibit No. Description - ------- ----------- 3(d) Articles Supplementary, dated March 9, 1993, which define the rights of the holders of the Company's Series D Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(e) to the Company's Registration Statement No. 33-66048 on Form S-4, filed July 22, 1993. 3(e) Articles Supplementary, dated August 31, 1993, which define the rights of the holders of the Company's Adjustable Rate Cumulative Preferred Stock, Series C, are incorporated herein by reference to Exhibit 3(f) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 3(f) Articles Supplementary, dated January 27, 1995, which define the reacquisition of the Company's Series A Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(g) to the Company's 1995 Annual Report on Form 10-K, filed November 29, 1995. 3(g) Articles Supplementary, dated October 30, 1995, which define the rights of the holders of the Company's Series E Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(h) to the Company's Annual Report on Form 10-K, filed November 29, 1995. 3(h) Articles of Amendment, dated October 30, 1995, are incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K, filed November 29, 1995. 3(i) Articles of Amendment, dated June 7, 1996, are incorporated herein by reference to Exhibit 3(j) to the Company's Annual Report on Form 10-K, filed December 10, 1996. 3(j) Articles of Amendment, dated February 14, 1997, are incorporated herein by reference to Exhibit 3(j) to the Company's Annual Report on Form 10-K, filed December 10, 1997. 3(k) Bylaws, as amended and restated on November 8, 1996, are incorporated herein by reference to Exhibit 3(k) to the Company's Annual Report on Form 10-K, filed December 10, 1996. 4(a) Restated Charter, dated October 3, 1991. See Exhibit 3(a). 4(b) Bylaws, as amended and restated on November 8, 1996. See Exhibit 3(k). 4(c) Articles Supplementary, dated June 24, 1992. See Exhibit 3(b). 4(d) Articles Supplementary, dated March 9, 1993. See Exhibit 3(d). 4(e) Articles Supplementary, dated August 31, 1993. See Exhibit 3(e). 4(f) Form of Subordinated Indenture, dated as of October 28, 1996, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement No. 333-14201 on Form S-3, filed October 16, 1996. 4(g) Senior Indenture, dated as of April 15, 1993, between the Company and The First National Bank of Chicago, as Trustee, defining the rights of the holders of the Company's 8 1/8% Debentures due April 28, 2023 and certain other debt securities of the Company, is incorporated herein by reference to Exhibit 4(h) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 4(h) Supplemental Indenture, dated as of June 28, 1993, supplementing the Senior Indenture, dated as of April 15, 1993, is incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement No. 333-14201 on Form S-3, filed October 16, 1996. 4(i) Supplemental Indenture, dated October 28, 1996, supplementing the Senior Indenture, dated as of April 15, 1993, as amended by the Supplemental Indenture, dated as of June 28, 1993, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.7 to the Company's Current Report on Form 8-K, filed November 6, 1996.
31 33
Exhibit No. Description - ------- ----------- 4(j) Junior Subordinated Indenture, dated as of March 15, 1995, as supplemented by the First Supplemental Indenture, dated as of March 15, 1995, defining the rights of the holders of the Company's 9.95% Junior Subordinated Debentures, Series A, due 2044, between the Company and The First National Bank of Chicago, is incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement No. 33-62405 on Form S-3, filed September 6, 1995. 4(k) Form of Second Supplemental Indenture, dated October 11, 1995, to the Junior Subordinated Indenture dated as of March 15, 1995, defining the rights of the holders of the Company's 8.35% Junior Subordinated Debentures due 2044, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement No. 33-64205 on Form S-3, filed September 6, 1995. 4(l) Supplemental Indenture, dated October 28, 1996, supplementing the Junior Subordinated Indenture, dated as of March 15, 1995, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.8 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(m) Fourth Supplemental Indenture, dated November 13, 1996, to the Junior Subordinated Indenture, dated as of March 15, 1995, defining the rights of the holders of the Company's 8.30% Junior Subordinated Debentures due 2045, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.16 to the Company's Current Report on Form 8-K, filed November 12, 1996. 4(n) Purchase Contract Agreement, dated November 6, 1996, between the Company and The Bank of New York, as Purchase Contract Agent (including Form of Security Certificate), is incorporated herein reference to Exhibit 4.3 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(o) Pledge Agreement, dated November 6, 1996, among the Company, The First National Bank of Chicago, as Collateral Agent, and The Bank of New York, as Purchase Contract Agent, is incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(p) Prepaid Securities Indenture, dated November 1, 1996, between the Company and The Bank of New York, as Trustee, is incorporated herein by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(q) Supplemental Indenture, dated November 6, 1996, to the Prepaid Securities Indenture (including Form of Certificate for the Prepaid Securities), is incorporated herein by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(r) Form of Senior Indenture, dated November 15, 1991, defining the rights of the holders of the Company's 9% Notes due January 15, 1999 and 9.95% Debenture due February 1, 2012 between the Company and Security Pacific National Bank, Trustee, is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-44084 on Form S-3, filed November 20, 1991. 4(s) Tri-Party Agreement, dated as of July 1, 1993, among The First National Bank of Chicago, Bank of America, NT & SA and the Company, appointing The First National Bank of Chicago as Successor Trustee to Bank of America NT & SA for the Company's 9% Notes due January 15, 1995 and 9.95% Debentures due February 1, 2012, is incorporated herein by reference to Exhibit 4(i) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993.
32 34
Exhibit No. Description - ------- ----------- 4(t) Form of Amended and Restated Declaration of Trust of SunAmerica Capital Trust I, dated as of June 6, 1995, among the Company and the Trustees of the Trust, is incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement Nos. 33-56961 and 33-56961-01 on Form S-4, filed April 12, 1995. 4(u) Form of Amended and Restated Declaration of Trust of SunAmerica Capital Trust II, dated as of October 11, 1995, among the Company and the Trustees of the Trust, is incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement Nos. 33-62405 and 33-62405-01 on Form S-3, filed September 6, 1995. 4(v) Amended and Restated Declaration of Trust of SunAmerica Capital Trust III, dated as of November 13, 1996, among the Company and Trustees of the Trust, is incorporated herein by reference to Exhibit 4.13 to the Company's Current Report on Form 8-K, filed November 12, 1996. 4(w) Form of Guarantee Agreement, dated October 11, 1995, between the Company and The Bank of New York, as Trustee, relating to the Preferred Securities of SunAmerica Capital Trust II, is incorporated herein by reference to Exhibit 4.14 to the Company's Registration Statement Nos. 33-62405 and 33-62405-01 on Form S-3, filed September 6, 1995. 4(x) Form of Guarantee Agreement, dated November 13, 1996, between the Company and The Bank of New York, as Trustee, relating to the Preferred Securities of SunAmerica Capital Trust III, is incorporated herein by reference to Exhibit 4.19 of the Company's Registration Statement Nos. 333-14201 and 333-14201-01 on Form S-3, filed October 16, 1996. 4(y) 9.95% Debentures due August 1, 2008, offered by the Company in exchange for issued and outstanding 9.95% Debentures due February 1, 2012, issued pursuant to a Senior Indenture, dated as of November 1, 1991. See Exhibit 4(r). 10(a) Employment Agreement, dated July 14, 1992, between the Company and Michael L. Fowler, is incorporated herein by reference to Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 10(b) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob, is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995. 10(c) Employment Agreement, dated August 15, 1997, between the Company and Gary W. Krat, is incorporated herein by reference to Exhibit 10(d) to the Company's 1997 Annual Report on Form 10-K, filed December 10, 1997. 10(d) 1988 Employee Stock Plan is incorporated herein by reference to Exhibit B to the Company's and Kaufman and Broad Home Corporation's Notice of and Joint Proxy Statement for Special Meeting of Shareholders held on February 21, 1989, filed January 24, 1989. 10(e) Amended and Restated 1978 Employee Stock Option Program, is incorporated herein by reference to Appendix A to the Company's Notice of 1987 Annual Meeting of Shareholder's and Proxy Statement, filed March 24, 1987. 10(f) Executive Deferred Compensation Plan is incorporated herein by reference to Exhibit 10(1) to the Company's 1985 Annual Report on Form 10-K, filed February 27, 1986. 10(g) 1987 Restricted Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1988 Annual Meeting of Shareholders and Proxy Statement, filed March 22, 1988. 10(h) Executive Deferred Compensation Plan, dated as of October 1, 1989, is incorporated herein by reference to Exhibit 10(h) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994.
33 35
Exhibit No. Description - ------- ----------- 10(i) SunAmerica Supplemental Deferral Plan is incorporated herein by reference to Exhibit 10(m) to the Company's 1989 Annual Report on Form 10-K, filed December 20, 1989. 10(j) Long-Term Performance-Based Incentive Plan, Amended and Restated 1997, is incorporated herein by reference to Appendix C to the Company's Notice of 1997 Annual Meeting of Shareholders and Proxy Statement, filed December 30, 1996. 10(k) Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(l) 1995 Performance Stock Plan as amended and restated is incorporated herein by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed May 15, 1997. 10(m) Registered Representatives' Deferred Compensation Plan is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-10523 on Form S-3, filed August 20, 1996. 10(n) Deferred Compensation Agreement is incorporated herein by reference to Exhibit 4.2 of the Company's Registration No. 333-10523 on Form S-3, filed August 20, 1996. 10(o) Amendment to Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement, filed January 15, 1996. 10(p) Amendment and Restatement, dated December 31, 1996, to the $250,000,000 Credit Agreement, dated as of October 27, 1996, among the Company and SunAmerica Financial, Inc. as Borrowers and Citibank, N.A. as Agent for the banks named therein, is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1996, filed February 13, 1997. 10(q) Executive Savings Plan, effective January 1, 1997, is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1996, filed February 13, 1997. 10(r) SunAmerica 1997 Employee Incentive Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(s) SunAmerica Long-Term Incentive Plan is incorporated herein by reference to Appendix B to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(t) Non-Employee Directors' Stock Option Plan is incorporated herein by reference to Appendix D to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(u) SunAmerica 1997 Employee Stock Purchase Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1998 Annual Meeting and Proxy Statement, filed January 2, 1998. 10(v) 1998 Long-Term Performance-Based Incentive Plan is incorporated herein by reference to Appendix B to the Company's Notice of 1998 Annual Meeting and Proxy Statement, filed on January 2, 1998. 10(w) List of Executive Compensation Plans and Arrangements. 12(a) Statement re Computation of ratio of earnings to fixed charges. 12(b) Statement re Computation of ratio of earnings to combined fixed charges and preferred stock dividends.
34 36
Exhibit No. Description - ------- ----------- 21 Subsidiaries of the Company. 23 Consent of Independent Accountants. 27 Financial Data Schedule.
REPORTS ON FORM 8-K On July 17, 1998, the Company filed a Current Report on Form 8-K to file a press release in connection with the Company's acquisition of, on behalf of its subsidiary, Anchor National Life Insurance Company, a block of individual life and individual and group annuity business of MBL Life Assurance Corporation. On August 25, 1998, the Company filed a Current Report on Form 8-K to file the Agreement and Plan of Merger, dated August 19, 1998, between the Company and American International Group, Inc. ("AIG") (incorporated by reference to Form 8-K filed by AIG on August 24, 1998, File No. 1-8787), and a Joint Press Release dated August 20, 1998, issued by the Company and AIG (incorporated by reference to Form 8-K filed by AIG on August 20, 1998, File No. 1-8787). 35 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: December 18, 1998 By: SCOTT L. ROBINSON ------------------------------------ Scott L. Robinson Senior Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- ELI BROAD Chairman, President December 18, 1998 - ------------------------------------------------ and Chief Executive Officer Eli Broad (Principal Executive Officer) JAY S. WINTROB Vice Chairman, Chief Operating December 18, 1998 - ------------------------------------------------ Officer and Director Jay S. Wintrob JAMES R. BELARDI Executive Vice President December 18, 1998 - ------------------------------------------------ (Principal Financial Officer) James R. Belardi SCOTT L. ROBINSON Senior Vice President and December 18, 1998 - ------------------------------------------------ Controller (Principal Scott L. Robinson Accounting Officer) WILLIAM F. ALDINGER Director December 18, 1998 - ------------------------------------------------ William F. Aldinger PHILIP G. HEASLEY Director December 18, 1998 - ------------------------------------------------ Philip G. Heasley DAVID O. MAXWELL Director December 18, 1998 - ------------------------------------------------ David O. Maxwell BARRY MUNITZ Director December 18, 1998 - ------------------------------------------------ Barry Munitz LESTER POLLOCK Director December 18, 1998 - ------------------------------------------------ Lester Pollack CARL E. REICHARDT Director December 18, 1998 - ------------------------------------------------ Carl E. Reichardt SANFORD C. SIGOLOFF Director December 18, 1998 - ------------------------------------------------ Sanford C. Sigoloff HAROLD M. WILLIAMS Director December 18, 1998 - ------------------------------------------------ Harold M. Williams KAREN HASTIE WILLIAMS Director December 18, 1998 - ------------------------------------------------ Karen Hastie Williams
36 38 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page(s) ---------------- Report of Independent Accountants........................... F-2 Consolidated Balance Sheet as of September 30, 1998 and 1997...................................................... F-3 Consolidated Income Statement for the years ended September 30, 1998, 1997 and 1996................................... F-4 Consolidated Statement of Cash Flows for the years ended September 30, 1998, 1997 and 1996......................... F-5 through F-6 Notes to Consolidated Financial Statements.................. F-7 through F-29
Separate financial statements of subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because they do not individually constitute a significant subsidiary. F-1 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of SunAmerica Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated income statement and statement of cash flows present fairly, in all material respects, the financial position of SunAmerica Inc. and its subsidiaries at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Los Angeles, California November 9, 1998 F-2 40 SUNAMERICA INC. CONSOLIDATED BALANCE SHEET
September 30, -------------------------- 1998 1997 ----------- ----------- (In thousands) ASSETS Investments: Cash and short-term investments........................... $ 1,796,132 $ 993,349 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: 1998, $18,401,656,000; 1997, $18,124,837,000)................ 18,800,847 18,523,655 Mortgage loans............................................ 3,412,449 3,139,309 Common stocks available for sale, at fair value (cost: 1998, $34,843,000; 1997, $32,821,000).................. 82,808 96,541 Equity-method partnerships................................ 779,098 561,336 Cost-method partnerships.................................. 865,953 725,457 Real estate............................................... 53,605 81,569 Other invested assets..................................... 274,515 286,962 ----------- ----------- Total investments......................................... 26,065,407 24,408,178 Variable annuity assets held in separate accounts........... 11,405,434 9,514,675 Accrued investment income................................... 297,313 296,637 Deferred acquisition costs.................................. 996,503 1,118,582 Other assets................................................ 435,750 298,814 ----------- ----------- TOTAL ASSETS................................................ $39,200,407 $35,636,886 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts...................... $12,970,549 $14,445,126 Reserves for guaranteed investment contracts.............. 8,380,844 5,553,292 Trust deposits............................................ 439,918 427,433 Payable to brokers for purchases of securities............ 91,463 266,477 Income taxes currently payable............................ 2,684 2,025 Other liabilities......................................... 811,055 828,916 ----------- ----------- Total reserves, payables and accrued liabilities.......... 22,696,513 21,523,269 ----------- ----------- Variable annuity liabilities related to separate accounts... 11,405,434 9,514,675 ----------- ----------- Long-term notes and debentures.............................. 1,216,483 1,136,072 ----------- ----------- Deferred income taxes....................................... 394,910 383,764 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary grantor trusts whose sole assets are junior subordinated debentures of the Company......... 495,000 495,000 ----------- ----------- Shareholders' equity: Preferred Stock........................................... 248,000 248,000 Nontransferable Class B Stock............................. 16,273 16,273 Common Stock.............................................. 179,526 179,076 Additional paid-in capital................................ 755,776 750,401 Retained earnings......................................... 1,596,220 1,180,446 Net unrealized gains on debt and equity securities available for sale..................................... 196,272 209,910 ----------- ----------- Total shareholders' equity................................ 2,992,067 2,584,106 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $39,200,407 $35,636,886 =========== ===========
See accompanying notes F-3 41 SUNAMERICA INC. CONSOLIDATED INCOME STATEMENT
Years ended September 30, ----------------------------------------- 1998 1997 1996 ------------ ------------ ----------- (In thousands, except per-share amounts) Investment income..................................... $ 2,160,463 $ 1,795,826 $1,254,288 ----------- ----------- ---------- Interest expense on: Fixed annuity contracts............................. (721,490) (644,426) (410,269) Guaranteed investment contracts..................... (426,496) (314,144) (252,027) Trust deposits...................................... (9,400) (9,726) (9,968) Senior indebtedness................................. (120,253) (106,279) (69,033) ----------- ----------- ---------- Total interest expense.............................. (1,277,639) (1,074,575) (741,297) ----------- ----------- ---------- Dividends paid on preferred securities of grantor trusts.............................................. (41,178) (41,874) (20,235) ----------- ----------- ---------- NET INVESTMENT INCOME................................. 841,646 679,377 492,756 ----------- ----------- ---------- NET REALIZED INVESTMENT LOSSES........................ (41,721) (29,203) (30,314) ----------- ----------- ---------- Fee income: Variable annuity fees............................... 204,474 141,204 104,661 Net retained commissions............................ 114,461 64,911 49,824 Surrender charges................................... 54,361 35,241 22,086 Asset management fees............................... 29,592 25,764 25,413 Loan servicing fees................................. 23,398 24,264 23,846 Trust fees.......................................... 18,080 17,912 16,684 Other fees.......................................... 14,461 8,407 5,897 ----------- ----------- ---------- TOTAL FEE INCOME...................................... 458,827 317,703 248,411 ----------- ----------- ---------- GENERAL AND ADMINISTRATIVE EXPENSES................... (310,273) (265,738) (210,650) ----------- ----------- ---------- AMORTIZATION OF DEFERRED ACQUISITION COSTS............ (241,167) (165,089) (108,176) ----------- ----------- ---------- PRETAX INCOME......................................... 707,312 537,050 392,027 Income tax expense.................................... (191,000) (158,000) (117,600) ----------- ----------- ---------- NET INCOME............................................ $ 516,312 $ 379,050 $ 274,427 =========== =========== ========== NET INCOME PER SHARE: Basic............................................... $ 2.61 $ 2.01 $ 1.44 =========== =========== ========== Diluted............................................. $ 2.34 $ 1.81 $ 1.32 =========== =========== ==========
See accompanying notes F-4 42 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $ 516,312 $ 379,050 $ 274,427 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts...................... 721,490 644,426 410,269 Guaranteed investment contracts.............. 426,496 314,144 252,027 Trust deposits............................... 9,400 9,726 9,968 Net realized investment losses................. 41,721 29,203 30,314 Accretion of net discounts on investments...... (61,691) (38,684) (28,610) Provision for deferred income taxes............ 22,477 128,001 (3,457) Change in: Accrued investment income....................... (881) (59,214) (10,347) Deferred acquisition costs...................... (48,187) (78,564) (50,495) Other assets.................................... (47,894) (32,846) (18,958) Income taxes currently payable.................. (3,687) (84,424) 19,052 Other liabilities............................... (15,653) 157,598 38,275 Other, net........................................ 1,247 (1,652) 15,721 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES......... 1,561,150 1,366,764 938,186 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of: Bonds, notes and redeemable preferred stocks.... (21,020,936) (19,506,303) (11,476,827) Mortgage loans.................................. (1,048,059) (990,408) (320,748) Partnerships.................................... (1,372,571) (1,062,133) (712,749) Other investments, excluding short-term investments.................................. (398,387) (269,538) (132,711) Net assets of acquired businesses............... (44,784) 173,239 62,790 Sales of: Bonds, notes and redeemable preferred stocks.... 16,978,966 13,108,441 7,490,441 Mortgage loans.................................. -- 333,763 -- Partnerships.................................... 786,919 679,169 318,303 Other investments, excluding short-term investments.................................. 73,676 92,626 63,556 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks.... 3,704,503 4,425,246 2,891,448 Mortgage loans.................................. 774,408 428,636 199,564 Partnerships.................................... 156,708 321,901 183,014 Other investments, excluding short-term investments.................................. 373,178 180,868 50,819 ------------ ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES............. (1,036,379) (2,084,493) (1,383,100) ------------ ------------ ------------
F-5 43 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Years ended September 30, -------------------------------------- 1998 1997 1996 ----------- ----------- ---------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends to shareholders............ $ (100,538) $ (67,819) $ (61,721) Premium receipts on: Fixed annuity contracts............................. 1,797,798 1,490,556 993,376 Guaranteed investment contracts..................... 4,007,478 2,076,941 1,019,275 Net exchanges from the fixed accounts of variable annuity contracts................................... (1,365,106) (660,332) (260,635) Receipts of trust deposits............................ 877,698 787,599 454,237 Withdrawal payments on: Fixed annuity contracts............................. (2,158,737) (1,454,718) (786,724) Guaranteed investment contracts..................... (1,607,875) (1,010,127) (708,743) Trust deposits...................................... (874,615) (805,937) (454,718) Claims and annuity payments on fixed annuity contracts........................................... (474,851) (387,181) (232,361) Net proceeds from issuances of long-term notes and debentures.......................................... 98,544 559,332 47,478 Net proceeds from issuances of preferred securities of subsidiary grantor trusts........................... -- 299,586 179,476 Payment for redemption of preferred securities of a subsidiary grantor trust............................ -- (52,631) -- Net proceeds from issuance of Preferred Stock......... -- -- 240,547 Payments for redemptions of Preferred Stock........... -- (136,549) -- Net proceeds from issuance of Common Stock............ -- 577,268 -- Other, net............................................ 78,216 (34,273) (310,560) ----------- ----------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES............. 278,012 1,181,715 118,927 ----------- ----------- ---------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS......................................... 802,783 463,986 (325,987) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD.............................................. 993,349 529,363 855,350 ----------- ----------- ---------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD...... $ 1,796,132 $ 993,349 $ 529,363 =========== =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness......................... $ 156,511 $ 130,461 $ 66,037 =========== =========== ========== Income taxes paid, net of refunds received............ $ 172,441 $ 114,423 $ 102,005 =========== =========== ==========
See accompanying notes F-6 44 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF OPERATIONS SunAmerica Inc. (the "Company") conducts its business through five segments: annuity operations, asset management, retirement trust services, broker-dealer operations and premium financing. Annuity operations, which include the sale and administration of fixed and variable annuities and guaranteed investment contracts, are conducted through the Company's five life insurance subsidiaries: SunAmerica Life Insurance Company; Anchor National Life Insurance Company; CalAmerica Life Insurance Company ("CalAmerica"); First SunAmerica Life Insurance Company; and SunAmerica National Life Insurance Company. Asset management, which includes the sale and management of mutual funds, is conducted by SunAmerica Asset Management Corp. Retirement trust services are provided by Resources Trust Company and include custodial and administrative services for self-directed retirement plans. Broker-dealer operations include the sale of securities and financial services products, and are conducted by the Company's six broker-dealer subsidiaries: Royal Alliance Associates, Inc.; SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Securities Corporation; Sentra Securities Corporation; and Spelman & Co., Inc. Premium financing is provided by Imperial Premium Finance, Inc. and involves the origination, sale and servicing of short-term premium finance loans. The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government, and policies of state and other regulatory authorities. The level of sales of the Company's financial products is influenced by many factors, including general market rates of interest, strength, weakness and volatility of equity markets, and terms and conditions of competing financial products. The Company is exposed to the typical risks normally associated with a portfolio of fixed-income securities, namely interest rate, option, liquidity and credit risk. The Company controls its exposure to these risks by, among other things, closely monitoring and matching the duration of its assets and liabilities, monitoring and limiting prepayment and extension risk in its portfolio, maintaining a large percentage of its portfolio in highly liquid securities, and engaging in a disciplined process of underwriting, reviewing and monitoring credit risk. The Company also is exposed to market risk, as market volatility may result in reduced fee income in the case of assets managed in mutual funds and held in separate accounts. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. On August 29, 1997, the Company paid a three-for-two stock split; on August 30, 1996, the Company paid a two-for-one stock split; and on November 10, 1995, the Company paid a three-for-two stock split (collectively, the "Stock Splits"). The Stock Splits were effected in the form of stock dividends on the Company's Common Stock and Nontransferable Class B Stock. The par value of the shares paid in connection with the Stock Splits was charged to Additional Paid-In Capital in the balance sheet. Per-share amounts, average shares outstanding, stock option plan data and related prices have been restated, for all periods presented, to reflect the Stock Splits. INVESTMENTS. Cash and short-term investments primarily include cash, commercial paper, money market investments, repurchase agreements and short-term bank participations. All such F-7 45 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, notes and redeemable preferred stocks available for sale and common stocks are carried at aggregate fair value and changes in unrealized gains or losses, net of tax, are credited or charged directly to shareholders' equity. Bonds, notes and redeemable preferred stocks are reduced to estimated net realizable value when necessary for declines in value considered to be other than temporary. Estimates of net realizable value are subjective and actual realization will be dependent upon future events. Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Real estate is carried at the lower of cost or fair value. Partnerships are accounted for by using the equity method if the Company exercises significant influence over their operating affairs; otherwise, the cost method is used. For partnerships that invest in tax-advantaged affordable housing units, interest is capitalized during construction. The Company invests in such partnerships principally with the intent to syndicate them to third-party investors once construction of the underlying projects is completed. Investments in such partnerships are accounted for by using the equity method and sales of such partnerships are accounted for as sales of real estate. Because the Company provides certain operating and yield guarantees to the buyers, the gain realized upon sale is deferred, after recognition of syndication compensation, and amortized over a 15-year period. Syndication compensation, imputed interest and amortization of deferred gains are included in Investment Income in the income statement. The carrying value of partnerships that are determined by the general partner to have declines in value that are other than temporary are reduced to net realizable value. Realized gains and losses on the sale of investments are recognized in operations at the date of sale and are determined using the specific cost identification method. Premiums and discounts on investments are amortized to investment income using the interest method over the contractual lives of the investments. Prior to September 24, 1998, the Company entered into certain combined structured note transactions which have been accounted for as separate notes and in accordance with the provisions of Consensus No. 96-12 of the Emerging Issues Task Force. At its November 1998 meeting, the task force issued Consensus No. 98-15 which concludes that combined structured note transactions entered into after September 24, 1998 should be accounted for as a unit. If the Company had accounted for these notes as a unit, net income for 1998 would have been increased by $72,103,000 (or $0.33 per diluted share) to $588,415,000 (or $2.67 per diluted share). INTEREST RATE SWAP AGREEMENTS. The net differential to be paid or received on interest rate swap agreements ("Swap Agreements") entered into to reduce the impact of changes in interest rates is recognized over the lives of the agreements, and such differential is classified as Investment Income or Interest Expense in the income statement. Initially, Swap Agreements are designated as hedges and, therefore, are not marked to market. However, when a hedged asset/liability is sold or repaid before the related Swap Agreement matures, the Swap Agreement is marked to market and any gain/loss is classified with any gain/loss realized on the disposition of the hedged asset/liability. Subsequently, the Swap Agreement is marked to market and the resulting change in fair value is included in Investment Income in the income statement. When a Swap Agreement that is designated as a hedge is terminated before its contractual maturity, any resulting gain/loss is credited/charged to the carrying value of the asset/liability that it hedged and is treated as premium/discount for the remaining life of the asset/liability. F-8 46 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TOTAL RETURN CORPORATE BOND SWAP AGREEMENTS. Total return corporate bond swap agreements ("Total Return Agreements") have been entered into for investment purposes, and, accordingly, are marked to market with the related gain/loss classified as Investment Income in the income statement. DEFERRED ACQUISITION COSTS. Policy acquisition costs are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the annuity contracts. Estimated gross profits are composed of net interest income, net realized investment gains and losses, variable annuity fees, surrender charges and direct administrative expenses. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. Deferred acquisition costs consist of commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to deferred acquisition costs equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains/losses on debt and equity securities available for sale that is credited or charged directly to shareholders' equity. Deferred Acquisition Costs have been decreased by $145,200,000 at September 30, 1998 and $139,600,000 at September 30, 1997 for this adjustment. VARIABLE ANNUITY ASSETS AND LIABILITIES. The assets and liabilities resulting from the receipt of variable annuity premiums are segregated in separate accounts. The Company receives administrative fees for managing the funds and other fees for assuming mortality and certain expense risks. Such fees are included in Variable Annuity Fees in the income statement. GOODWILL. Goodwill, amounting to $91,886,000 at September 30, 1998, is amortized by using the straight-line method over periods ranging from 25 to 40 years and is included in Other Assets in the balance sheet. Goodwill is evaluated for impairment when events or changes in economic conditions indicate that the carrying amount may not be recoverable. CONTRACTHOLDER RESERVES. Contractholder reserves for fixed annuity contracts and guaranteed investment contracts are accounted for as investment-type contracts in accordance with Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," and are recorded at accumulated value (premiums received, plus accrued interest, less withdrawals and assessed fees). FEE INCOME. Variable annuity fees, asset management fees, trust fees and surrender charges are recorded in income as earned. Net retained commissions are recognized as income on a trade date basis. Loan servicing fees are recognized as income ratably over the life of the serviced loans and include the difference between the loan yield and the rate earned by the purchasers of the loans. RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for reporting comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for the Company as of October 1, 1998 and is not included in these financial statements. F-9 47 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SFAS 131 establishes standards for the disclosure of information about the Company's operating segments. SFAS 131 is effective for the year ending September 30, 1999 and is not included in these financial statements. Implementation of SFAS 130 and SFAS 131 will not have an impact on the Company's results of operations, financial condition or liquidity. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for the Company as of October 1, 1999 and is not included in these financial statements. The Company has not completed its analysis of the effect of SFAS 133, but management believes that it will not have a material impact on the Company's results of operations, financial condition or liquidity. NOTE 3 -- PENDING MERGER WITH AMERICAN INTERNATIONAL GROUP, INC. On August 20, 1998, the Company announced that it has entered into a definitive agreement to merge with and into American International Group, Inc. ("AIG"). Under the terms of the agreement, each share of the Company's Common Stock (including Nontransferable Class B) will be exchanged for 0.855 shares of AIG's common stock. The transaction will be treated as a pooling of interests for accounting purposes and will be a tax-free reorganization. The transaction was approved by both the Company's and AIG's shareholders on November 18, 1998, and, subject to various regulatory approvals, will be completed in late 1998 or early 1999. F-10 48 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- EARNINGS PER SHARE The calculations of basic and diluted earnings per share are as follows:
Years ended September 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (In thousands, except per-share amounts) BASIC EARNINGS PER SHARE: Net income............................................... $516,312 $379,050 $274,427 -------- -------- -------- Less preferred stock dividends: 9 1/4% Preferred Stock, Series B....................... -- (5,754) (8,124) Adjustable Rate Cumulative Preferred Stock, Series C... -- (28) (3,408) Series D Mandatory Conversion Premium Dividend Preferred Stock..................................... -- -- (4,713) Series E Mandatory Conversion Premium Dividend Preferred Stock..................................... (12,400) (12,400) (10,815) -------- -------- -------- Total preferred stock dividends.......................... (12,400) (18,182) (27,060) -------- -------- -------- Income available to common shareholders.................. $503,912 $360,868 $247,367 ======== ======== ======== Average common shares issued and outstanding............. 195,405 182,640 175,118 Less common shares issued and outstanding but not vested to participants under various employee stock plans..... (2,382) (3,259) (3,527) -------- -------- -------- Average shares outstanding............................... 193,023 179,381 171,591 ======== ======== ======== Basic earnings per share................................. $ 2.61 $ 2.01 $ 1.44 ======== ======== ======== DILUTED EARNINGS PER SHARE: Net income............................................... $516,312 $379,050 $274,427 -------- -------- -------- Less preferred stock dividends: 9 1/4% Preferred Stock, Series B....................... -- (5,754) (8,124) Adjustable Rate Cumulative Preferred Stock, Series C... -- (28) (3,408) -------- -------- -------- Total preferred stock dividends.......................... -- (5,782) (11,532) -------- -------- -------- Income available to common shareholders.................. $516,312 $373,268 $262,895 ======== ======== ======== Average common shares issued and outstanding............. 195,405 182,640 175,118 Plus incremental shares from potential common stock: Average number of shares arising from outstanding employee stock plans................................ 8,472 5,612 4,147 Average number of shares issuable upon conversion of Series D Mandatory Conversion Premium Dividend Preferred Stock..................................... -- -- 3,876 Average number of shares issuable upon conversion of Series E Mandatory Conversion Premium Dividend Preferred Stock..................................... 12,216 14,301 16,212 Average number of shares issuable upon conversion of Premium Equity Redemption Cumulative Security Units............................................... 4,311 3,173 -- -------- -------- -------- Average shares outstanding............................... 220,404 205,726 199,353 ======== ======== ======== Diluted earnings per share............................... $ 2.34 $ 1.81 $ 1.32 ======== ======== ========
F-11 49 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- ACQUISITIONS On March 31, 1997, the Company completed the acquisition of 1) a block of annuity contracts from John Alden Life Insurance Company, a subsidiary of John Alden Financial Corporation, and 2) all of the outstanding common stock of John Alden Life Insurance Company of New York, for a total cash purchase price of approximately $238,282,000 (collectively, the "John Alden Acquisition"). As part of this transaction, the Company acquired assets having an aggregate fair value of $5,056,098,000, composed primarily of invested assets totaling $5,000,822,000. Liabilities assumed in this transaction totaled $5,218,828,000, including $5,161,538,000 of fixed annuity reserves. An amount equal to the sum of the purchase price and the fair value of the net liabilities assumed, amounting to $291,786,000 at September 30, 1998, is included in Deferred Acquisition Costs in the balance sheet. On October 31, 1997, John Alden Life Insurance Company of New York was merged with and into the Company's other New York-chartered life insurance subsidiary, First SunAmerica Life Insurance Company. On April 1, 1996, the Company completed the acquisition of a $958,672,000 block of annuity contracts (the "Central National Annuity Contracts") from The Central National Life Insurance Company of Omaha, a subsidiary of Beneficial Corp. for a purchase price of $20,806,000. As part of this acquisition, the Company acquired assets having an aggregate fair value of $939,006,000, composed primarily of invested assets totaling $929,561,000. An amount equal to the excess of the sum of the purchase price and fair value of the annuity reserves assumed over the fair value of the assets acquired, amounting to $19,715,000 at September 30, 1998, is included in Deferred Acquisition Costs in the balance sheet. On February 29, 1996, the Company completed the acquisition of all of the outstanding stock of Ford Life Insurance Company ("Ford Life") for a cash purchase price of $172,500,000. The Company acquired assets having an aggregate fair value of $3,146,072,000, composed primarily of invested assets totaling $3,097,151,000. Liabilities assumed in this acquisition totaled $3,090,123,000, including $3,050,575,000 of fixed annuity reserves. An amount equal to the excess of the purchase price over the fair value of the net assets acquired, amounting to $57,121,000 at September 30, 1998, is included in Deferred Acquisition Costs in the balance sheet. On December 31, 1996, Ford Life was merged with and into SunAmerica Life Insurance Company. On December 29, 1995, the Company completed the acquisition of all of the outstanding stock of CalAmerica for a cash purchase price of $120,000,000. The Company acquired assets having an aggregate fair value of $739,852,000, composed primarily of invested assets totaling $722,461,000. Liabilities assumed in this acquisition totaled $662,316,000, including $645,379,000 of fixed annuity reserves. An amount equal to the excess of the purchase price over the fair value of the net assets acquired, amounting to $28,897,000 at September 30, 1998, is included in Deferred Acquisition Costs in the balance sheet. These acquisitions have been accounted for by using the purchase method of accounting. Accordingly, the income statement includes the operating results of the John Alden Acquisition for only the period from April 1, 1997 through September 30, 1998; the operating results of the Central National Annuity Contracts for only the period from April 1, 1996 through September 30, 1998; Ford Life's operating results for only the period from March 1, 1996 through September 30, 1998; and CalAmerica's operating results for only the period from January 1, 1996 through September 30, 1998. On a pro forma (unaudited) basis, assuming the John Alden Acquisition occurred on October 1, 1996, revenues (investment income, net realized investment losses and fee income) would have been $2,269,135,000 and net income would have been $397,402,000 ($1.90 per diluted share) for the year ended September 30, 1997. F-12 50 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- ACQUISITIONS (CONTINUED) At September 30, 1998, the deferred acquisition costs arising from these transactions aggregated $397,519,000, and are being amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the assumed annuity contracts. Future annual amortization is projected to be as follows: 1999, $92,504,000; 2000, $69,717,000; 2001, $52,786,000; 2002, $39,481,000; 2003, $30,641,000; and thereafter, in the aggregate, $112,390,000. The deferred acquisition costs are substantially less than computations of the present values of estimated future profits discounted at the related weighted average crediting rates. On July 15, 1998, the Company entered into a definitive agreement to acquire MBL Life Assurance Corporation's individual life and individual and group annuity business (which had approximately $3 billion of fixed annuity reserves and $2 billion in reserves for universal life policies) for approximately $130 million in cash. The acquisition is subject to customary conditions and required regulatory approvals, and is expected to be completed by the end of December 1998. NOTE 6 -- INVESTMENTS The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by major category follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) AT SEPTEMBER 30, 1998: Securities of the United States Government.................. $ 791,544 $ 828,809 Mortgage-backed securities.................................. 5,752,003 5,911,623 Securities of public utilities.............................. 1,125,568 1,136,032 Corporate bonds and notes................................... 8,056,639 8,208,342 Asset-backed securities..................................... 1,768,848 1,790,037 Redeemable preferred stocks................................. 293,305 292,034 Other debt securities....................................... 613,749 633,970 ----------- ----------- Total available for sale.................................... $18,401,656 $18,800,847 =========== =========== AT SEPTEMBER 30, 1997: Securities of the United States Government.................. $ 1,111,064 $ 1,126,468 Mortgage-backed securities.................................. 6,208,610 6,344,036 Securities of public utilities.............................. 532,577 542,583 Corporate bonds and notes................................... 8,086,802 8,288,921 Asset-backed securities..................................... 1,566,605 1,586,242 Redeemable preferred stocks................................. 152,449 162,955 Other debt securities....................................... 466,730 472,450 ----------- ----------- Total available for sale.................................... $18,124,837 $18,523,655 =========== ===========
F-13 51 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by contractual maturity, as of September 30, 1998, follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) Due in one year or less..................................... $ 283,675 $ 279,357 Due after one year through five years....................... 3,903,566 4,094,035 Due after five years through ten years...................... 6,026,726 6,053,320 Due after ten years......................................... 2,435,686 2,462,512 Mortgage-backed securities.................................. 5,752,003 5,911,623 ----------- ----------- Total available for sale.................................... $18,401,656 $18,800,847 =========== ===========
Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above due to prepayments and redemptions. Gross unrealized gains and losses on bonds, notes and redeemable preferred stocks available for sale by major category follow:
Gross Gross unrealized unrealized gains losses ---------- ---------- (In thousands) AT SEPTEMBER 30, 1998: Securities of the United States Government.................. $ 38,126 $ (861) Mortgage-backed securities.................................. 177,753 (18,133) Securities of public utilities.............................. 40,185 (29,721) Corporate bonds and notes................................... 400,157 (248,454) Asset-backed securities..................................... 34,942 (13,753) Redeemable preferred stocks................................. 5,532 (6,803) Other debt securities....................................... 20,345 (124) -------- --------- Total available for sale.................................... $717,040 $(317,849) ======== ========= AT SEPTEMBER 30, 1997: Securities of the United States Government.................. $ 16,393 $ (989) Mortgage-backed securities.................................. 158,988 (23,562) Securities of public utilities.............................. 10,581 (575) Corporate bonds and notes................................... 236,038 (33,919) Asset-backed securities..................................... 20,261 (624) Redeemable preferred stocks................................. 10,564 (58) Other debt securities....................................... 6,018 (298) -------- --------- Total available for sale.................................... $458,843 $ (60,025) ======== =========
At September 30, 1998, gross unrealized gains on equity securities available for sale aggregated $49,631,000 and gross unrealized losses aggregated $1,666,000. At September 30, 1997, gross unrealized gains on equity securities available for sale aggregated $64,635,000 and gross unrealized losses aggregated $915,000. F-14 52 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INVESTMENTS (CONTINUED) Gross realized investment gains and losses on sales of investments are as follows:
Years ended September 30, ---------------------------------------- 1998 1997 1996 --------- --------- -------------- (In thousands) BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Available for sale: Realized gains................................... $ 306,251 $ 155,610 $ 81,323 Realized losses.................................. (259,249) (141,513) (93,261) EQUITIES: Realized gains..................................... 13,768 22,755 8,765 Realized losses.................................... (614) (760) (5,365) OTHER INVESTMENTS: Realized gains..................................... 8,858 2,286 13,234 Realized losses.................................... (948) (2,268) (72) IMPAIRMENT WRITEDOWNS.............................. (109,787) (65,313) (34,938) --------- --------- -------- Total net realized investment losses............... $ (41,721) $ (29,203) $(30,314) ========= ========= ========
The sources and related amounts of investment income are as follows:
Years ended September 30, ----------------------------------------- 1998 1997 1996 ---------- ---------- ------------- (In thousands) Short-term investments............................. $ 90,994 $ 83,021 $ 66,378 Bonds, notes and redeemable preferred stocks....... 1,413,205 1,169,631 819,812 Mortgage loans..................................... 287,829 222,403 149,476 Equity-method partnerships......................... 159,846 126,865 96,452 Cost-method partnerships........................... 211,228 114,667 82,116 Other invested assets.............................. (2,639) 79,239 40,054 ---------- ---------- ---------- Total investment income............................ $2,160,463 $1,795,826 $1,254,288 ========== ========== ==========
Expenses incurred to manage the investment portfolio amounted to $30,653,000 for the year ended September 30, 1998, $26,801,000 for the year ended September 30, 1997 and $21,475,000 for the year ended September 30, 1996 and are included in General and Administrative Expenses in the income statement. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $779,098,000 at September 30, 1998. At that date, total combined assets of these partnerships were $3,033,520,000 (consisting entirely of investments) and total combined liabilities were $2,156,368,000 (including $1,379,117,000 of nonrecourse notes payable to banks). For the year then ended, total combined revenues and expenses of such partnerships were $446,412,000 and $214,010,000, respectively, resulting in $232,402,000 of total combined pretax income. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $561,336,000 at September 30, 1997. At that date, total combined assets of these partnerships were $2,220,060,000 (including $2,211,405,000 of investments) and total combined liabilities were $1,593,596,000 (including $1,543,148,000 of nonrecourse notes payable to banks). For the year then ended, total combined revenues and expenses of such partnerships were $290,406,000 and $146,104,000, respectively, resulting in $144,302,000 of total combined pretax income. F-15 53 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INVESTMENTS (CONTINUED) At September 30, 1998, no investment exceeded 10% of the Company's consolidated shareholders' equity. At September 30, 1998, mortgage loans were collateralized by properties located in 46 states, with loans totaling approximately 19%, 12% and 10% of the aggregate carrying value of the portfolio secured by properties located in California, New York and Texas, respectively. At September 30, 1998, bonds, notes and redeemable preferred stocks included $1,781,814,000 of bonds and notes not rated investment grade. The Company had no material concentrations of non-investment-grade assets at September 30, 1998. At September 30, 1998, the carrying value of investments in default as to the payment of principal or interest was $55,009,000, consisting of $19,672,000 of non-investment-grade bonds and $35,337,000 of mortgage loans. As a component of its asset and liability management strategy, the Company utilizes Swap Agreements to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1998, the Company had 38 outstanding Swap Agreements with an aggregate notional principal amount of $1,870,427,000. These agreements mature in various years through 2010 and have an average remaining maturity of 43 months. With respect to swaps that hedge assets, net interest received (paid) amounted to ($6,706,000), ($1,091,000) and $5,214,000 for the years ended September 30, 1998, 1997 and 1996, respectively, and is included in Investment Income in the income statement. With respect to swaps that hedge liabilities, net interest paid amounted to $5,430,000, $1,706,000 and $168,000 for the years ended September 30, 1998, 1997 and 1996, respectively, and is included in Interest Expense on Guaranteed Investment Contracts in the income statement. For investment purposes, the Company also has entered into various Total Return Agreements with an aggregate notional principal amount of $533,000,000 (the "Notional Amount") at September 30, 1998. The Total Return Agreements effectively exchange a fixed rate of interest (the "Payment Amount") on the Notional Amount for the coupon income plus or minus the increase or decrease in the fair value (the "Total Return") of specified non-investment-grade bonds (the "Bonds"). The Total Return Agreements mature in March 1999; however, the Company intends to enter into other similar agreements. The Company is exposed to potential loss, due to credit risk on the underlying non-investment-grade bonds and bond market fluctuations, equal to the Payment Amount plus any reduction in the aggregate fair value of the Bonds below the Notional Amount. The Company is also exposed to potential credit loss in the event of nonperformance by the investment-grade-rated counterparty with respect to any increase in the aggregate market value of the Bonds above the Notional Amount. However, nonperformance is not anticipated and, therefore, no collateral is held or pledged. Net amounts received (paid) are included in Investment Income in the income statement and totaled ($33,716,000), $35,368,000, and $32,490,000 for the years ended September 30, 1998, 1997 and 1996, respectively. F-16 54 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value disclosures are limited to reasonable estimates of the fair value of only the Company's financial instruments. The disclosures do not address the value of the Company's recognized and unrecognized nonfinancial assets (including its partnerships accounted for by using the equity method, real estate investments and other invested assets) and liabilities or the value of anticipated future business. The Company does not plan to sell most of its assets or settle most of its liabilities at these estimated fair values. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Selling expenses and potential taxes are not included. The estimated fair value amounts were determined using available market information, current pricing information and various valuation methodologies. If quoted market prices were not readily available for a financial instrument, management determined an estimated fair value. Accordingly, the estimates may not be indicative of the amounts the financial instruments could be exchanged for in a current or future market transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a reasonable estimate of fair value. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. Fair values include the market value, determined from independent broker quotes, of Swap Agreements that hedge certain bonds and notes. MORTGAGE LOANS: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. COMMON STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for by using the cost method is based upon the fair value of the net assets of the partnerships as determined by the general partners. VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are carried at the market value of the underlying securities. RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single premium life contracts are assigned a fair value equal to current net surrender value, which includes the estimated fair value of hedging Swap Agreements, determined from independent broker quotes. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates and is net of the estimated fair value of hedging Swap Agreements, determined from independent broker quotes. TRUST DEPOSITS: Trust deposits are carried at the fair value of deposits payable upon demand. PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent net transactions of a short-term nature for which the carrying value is considered a reasonable estimate of fair value. VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of contracts in the accumulation phase are based on net surrender values. Fair values of contracts in the payout phase are based on the present value of future cash flows at assumed investment rates. F-17 55 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) LONG-TERM NOTES AND DEBENTURES: Fair value is estimated based on the quoted market prices for the same or similar issues. PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUSTS: Fair value is based upon independent pricing services. The estimated fair values of the Company's financial instruments at September 30, 1998 and 1997, compared with their respective carrying values, are as follows:
Carrying Fair value value ----------- ----------- (In thousands) 1998: ASSETS: Cash and short-term investments........................... $ 1,796,132 $ 1,796,132 Bonds, notes and redeemable preferred stocks.............. 18,800,847 18,800,847 Mortgage loans............................................ 3,412,449 3,543,314 Common stocks............................................. 82,808 82,808 Cost-method partnerships.................................. 865,953 1,213,668 Variable annuity assets held in separate accounts......... 11,405,434 11,405,434 LIABILITIES: Reserves for fixed annuity contracts...................... 12,970,549 12,487,682 Reserves for guaranteed investment contracts.............. 8,380,844 8,618,089 Trust deposits............................................ 439,918 439,918 Payable to brokers for purchases of securities............ 91,463 91,463 Variable annuity liabilities related to separate accounts............................................... 11,405,434 10,951,726 Long-term notes and debentures............................ 1,216,483 1,330,568 Preferred securities of subsidiary grantor trusts......... 495,000 507,256 =========== =========== 1997: ASSETS: Cash and short-term investments........................... $ 993,349 $ 993,349 Bonds, notes and redeemable preferred stocks.............. 18,523,655 18,523,655 Mortgage loans............................................ 3,139,309 3,269,079 Common stocks............................................. 96,541 96,541 Cost-method partnerships.................................. 725,457 1,158,833 Variable annuity assets held in separate accounts......... 9,514,675 9,514,675 LIABILITIES: Reserves for fixed annuity contracts...................... 14,445,126 13,806,124 Reserves for guaranteed investment contracts.............. 5,553,292 5,515,335 Trust deposits............................................ 427,433 427,433 Payable to brokers for purchases of securities............ 266,477 266,477 Variable annuity liabilities related to separate accounts............................................... 9,514,675 9,240,245 Long-term notes and debentures............................ 1,136,072 1,172,392 Preferred securities of subsidiary grantor trusts......... 495,000 507,375 =========== ===========
F-18 56 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- INDEBTEDNESS Indebtedness consists of the following long-term notes and debentures (interest rates are as of September 30):
September 30, ----------------------- 1998 1997 ---------- ---------- (In thousands) 5.6% debentures due July 31, 2097 (net of unamortized discount of $43,077,000 at September 30, 1998 and $43,513,000 at September 30, 1997)........................ $ 131,923 $ 131,487 Medium-term notes due 1999 through 2026 (5 3/8% to 7 3/8%)................................................... 228,310 248,335 8 1/8% debentures due April 28, 2023........................ 100,000 100,000 9.95% debentures due February 1, 2012....................... 26,791 100,000 9.95% debentures due August 1, 2008......................... 73,209 -- 6.2% notes due October 31, 1999............................. 431,250 431,250 9% notes due January 15, 1999............................... 125,000 125,000 6.75% debentures due October 1, 2007........................ 100,000 -- ---------- ---------- Total indebtedness.......................................... $1,216,483 $1,136,072 ========== ==========
In July 1997, the Company filed a shelf registration statement under which it may issue up to $3,500,000,000 of securities in the form of debt; preferred stock; common stock; warrants to purchase debt, preferred stock or common stock; stock purchase contracts or stock purchase units; or preferred securities of the Company's subsidiary grantor trusts. On July 28, 1997, the Company issued $175,000,000 of its 5.6% debentures, due July 31, 2097, and received discounted proceeds of approximately $130,000,000, and on October 7, 1997, the Company issued $100,000,000 of 6.75% notes due October 1, 2007. Subsequent to these offerings, $3,225,000,000 remains available to the Company to issue securities under the July 1997 shelf registration statement. Short-term borrowings, which include short-term bank notes, reverse repurchase agreements and borrowings under a commercial paper program, averaged $514,055,000 at a weighted average interest rate of 5.0% during 1998 and $611,719,000 at a weighted average interest rate of 6 1/4% during 1997. The highest level of short-term borrowings at any month-end was $1,167,676,000 at 5 1/4% during 1998 and $1,019,754,000 at 5 3/8% during 1997. There were no short-term borrowings outstanding at either September 30, 1998 or September 30, 1997. Principal payments on long-term borrowings are due as follows: 1999, $17,775,000; 2000, $570,250,000; 2001, $24,000,000; 2002, $24,000,000; 2003, $18,900,000; and thereafter, $604,635,000. NOTE 9 -- CONTINGENT LIABILITIES The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. In 1989 and 1996, the Company sold, through three separate 100% coinsurance transactions, the general agency division of SunAmerica Life Insurance Company, the credit life business of Ford Life and the mortality-based business of CalAmerica. With respect to these coinsurance transactions, SunAmerica Life Insurance Company and CalAmerica could become liable for in-force amounts ceded of $1,856,928,000 and $1,897,974,000, respectively, at September 30, 1998, if the coinsurers were to become unable to meet the obligations assumed under the respective coinsurance agreements. At F-19 57 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CONTINGENT LIABILITIES (CONTINUED) September 30, 1998, related policyholder reserves carried by the coinsurers were $70,123,000 and $157,278,000, respectively. As part of the 1989 SunAmerica Life Insurance Company coinsurance transaction, assets substantially equal to the policyholder reserves assumed by the coinsurer are held in trust to secure the obligations of the coinsurer. The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Company has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. In the ordinary course of business, the Company has agreed contingently to make capital contributions, aggregating approximately $670,192,000, to 121 limited partnerships over the next 5 years (4.5 years on a weighted average basis) in exchange for ownership interests in such partnerships. NOTE 10 -- COMPANY-OBLIGATED PREFERRED SECURITIES OF GRANTOR TRUSTS Preferred securities of subsidiary grantor trusts comprise $185,000,000 liquidation amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica Capital Trust II in October 1995 and $310,000,000 liquidation amount of 8.30% Trust Originated Preferred Securities issued by SunAmerica Capital Trust III in November 1996. In connection with the issuance of the 8.35% Trust Originated Preferred Securities and the related purchase by the Company of the grantor trust's common securities, the Company issued to the grantor trust $191,224,250 principal amount of 8.35% junior subordinated debentures, due 2044, which are redeemable at the option of the Company on or after September 30, 2000 at a redemption price of $25 per debenture plus accrued and unpaid interest. In connection with the issuance of the 8.30% Trust Originated Preferred Securities and the related purchase by the Company of the grantor trust's common securities, the Company issued to the grantor trust $320,670,000 principal amount of 8.30% junior subordinated debentures, due 2045, which are redeemable at the option of the Company on or after November 13, 2001 at a redemption price of $25 per debenture plus accrued and unpaid interest. The interest and other payment dates on the debentures correspond to the distribution and other payment dates on the preferred and common securities. The preferred and common securities will be redeemed on a pro rata basis, to the same extent as the debentures are repaid. 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(s). The Company's obligations under the debentures and related agreements, taken together, provide a full and unconditional guarantee of payments due on the preferred securities. The grantor trusts are wholly owned subsidiaries of the Company. The debentures issued to the grantor trusts and the common securities purchased by the Company from the grantor trusts are eliminated in the balance sheet. F-20 58 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- SHAREHOLDERS' EQUITY The Company is authorized to issue 20,000,000 shares of preferred stock ("Preferred Stock"). All preferred shares of the Company rank on a parity with each other and rank senior to Common Stock and Nontransferable Class B Stock of the Company as to payment of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company. On November 1, 1995, the Company issued 4,000,000 $3.10 Depositary Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $62 per share. On September 22, 1998, the Company announced that it would redeem all of its Series E Depositary Shares. The redemption was completed on October 30, 1998 and resulted in the issuance of 11,250,709 shares of the Company's Common Stock and cash payment of all accrued and unpaid dividends through the redemption date. On March 10, 1993, the Company issued 5,002,500 $2.78 Depositary Shares (the "Series D Depositary Shares"), each representing one-fiftieth of a share of Series D Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $37 per share. On January 2, 1996, the Company redeemed all of the Series D Depositary Shares for a call price equal to $49.95 per share plus accrued and unpaid dividends to the redemption date. The call price was paid with 5,112,529 shares of the Company's Common Stock. At September 30, 1996, the Company had outstanding 486,800 shares of Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred Shares"), with a liquidation preference of $100 per share. On October 4, 1996, the Company redeemed all of the Series C Preferred Shares for a cash payment equal to the total liquidation amount of $48,680,000 plus accrued and unpaid dividends to the redemption date. In 1992, the Company issued 5,620,000 shares of 9 1/4% Preferred Stock, Series B (the "Series B Preferred Shares"), with a liquidation preference of $25 per share. On June 13, 1995, the Company exchanged 2,105,235 Series B Preferred Shares with a liquidation preference of $52,630,875 for $52,630,875 liquidation amount of 9.95% Trust Originated Preferred Securities of SunAmerica Capital Trust I. On June 16, 1997, the Company redeemed all of the remaining Series B Preferred Shares for a cash payment equal to the total liquidation amount of approximately $87,869,000 plus accrued and unpaid dividends to the redemption date. The Company is authorized to issue 350,000,000 shares of its $1.00 par value Common Stock and is authorized to repurchase 15,000,000 shares of such stock. At September 30, 1998, 179,526,000 shares were outstanding and at September 30, 1997, 179,076,000 shares were outstanding. On November 6, 1996, the Company issued 11,500,000 8 1/2% Premium Equity Redemption Cumulative Security Units (the "Units") with a stated amount of $37.50 per Unit. Each Unit consists of a stock purchase contract (the "Contract") and a United States Treasury Note (the "Treasury Note") having a principal amount equal to the stated amount and maturing on October 31, 1999. The holders of the Units will receive interest on the Treasury Notes payable by the United States Government at a rate of 7 1/2% per annum and Contract fees payable by the Company at a rate of 1% per annum (both, the "Unit Payments") based upon the stated amount. The Contract obligates the Company to deliver on October 31, 1999 to the holder of each Unit one and one-half shares of Common Stock of the Company, subject to adjustment under certain defined circumstances, and obligates the holder of the Unit to pay to the Company $37.50 per Unit. The Treasury Notes will be held by a collateral agent to secure payment to the Company as required under the Contract, but may be redeemed by the holders of the Units under certain defined circumstances. On October 7, 1998, F-21 59 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- SHAREHOLDERS' EQUITY (CONTINUED) subsequent to the Company's fiscal year end, the Company announced that it will redeem all of its Units on December 6, 1998. In connection with this redemption, the Company will issue 10,108,229 shares of the Company's Common Stock and will make a cash payment for all accrued and unpaid Contract fees. The Company is authorized to issue 25,000,000 shares of its $1.00 par value Nontransferable Class B Stock. Holders of this stock have rights identical to those of the Company's common stockholders except that they have ten votes per share and are entitled to only 90% of any cash dividend paid on the Common Stock. This stock is convertible at any time into shares of Common Stock. At September 30, 1998 and 1997, 16,273,000 shares were outstanding. Changes in shareholders' equity are as follows:
Years ended September 30, ------------------------------- 1998 1997 1996 -------- -------- --------- (In thousands) PREFERRED STOCK: Beginning balance........................................... $248,000 $384,549 $ 321,642 Issuance of 4,000,000 Series E Preferred Shares............. -- -- 248,000 Redemption of 5,002,500 Series D Depositary Shares.......... -- -- (185,093) Redemption of 3,514,765 Series B Preferred Shares........... -- (87,869) -- Redemption of 486,800 Series C Preferred Shares............. -- (48,680) -- -------- -------- --------- Ending balance.............................................. $248,000 $248,000 $ 384,549 ======== ======== ========= NONTRANSFERABLE CLASS B STOCK: Beginning balance........................................... $ 16,273 $ 10,848 $ 10,240 Conversion of 4,816,000 shares to Common Stock.............. -- -- (4,816) Stock Splits................................................ -- 5,425 5,424 -------- -------- --------- Ending balance.............................................. $ 16,273 $ 16,273 $ 10,848 ======== ======== ========= COMMON STOCK: Beginning balance........................................... $179,076 $108,604 $ 44,175 Issuance of 10,669,745 shares of Common Stock at $54 1/8 per share..................................................... -- 10,670 -- Issuance of 5,112,529 shares to redeem the Series D Depositary Shares......................................... -- -- 5,113 Conversion of Nontransferable Class B Stock to 4,776,000 shares.................................................... -- -- 4,776 Stock options and other employee benefit plans.............. 450 115 252 Stock Splits................................................ -- 59,687 54,288 -------- -------- --------- Ending balance.............................................. $179,526 $179,076 $ 108,604 ======== ======== =========
F-22 60 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, ----------------------------------- 1998 1997 1996 ---------- ---------- --------- (In thousands) ADDITIONAL PAID-IN CAPITAL: Beginning balance........................................ $ 750,401 $ 304,295 $ 185,211 Issuance of Common Stock................................. -- 566,598 -- Cost of issuance of Series E Preferred Shares............ -- -- (7,453) Excess of redemption value of Series D Preferred Shares over par value of shares of Common Stock issued, net of transaction costs...................................... -- -- 179,972 Cost of issuance of 7,400,000 shares of Trust Originated Preferred Securities of SunAmerica Capital Trust II.... -- -- (5,524) Cost of issuance of 12,400,000 shares of Trust Originated Preferred Securities of SunAmerica Capital Trust III... -- (10,414) -- Cost of issuance of 11,500,000 Premium Equity Redemption Cumulative Security Units.............................. -- (44,605) -- Stock options and other employee benefit plans........... 5,375 (361) 11,801 Stock Splits............................................. -- (65,112) (59,712) ---------- ---------- --------- Ending balance........................................... $ 755,776 $ 750,401 $ 304,295 ========== ========== ========= RETAINED EARNINGS: Beginning balance........................................ $1,180,446 $ 869,215 $ 656,509 Net income............................................... 516,312 379,050 274,427 Dividends on: Preferred Stock........................................ (12,400) (18,808) (27,063) Nontransferable Class B Stock.......................... (6,589) (3,906) (4,878) Common Stock........................................... (81,549) (45,105) (29,780) ---------- ---------- --------- Ending balance........................................... $1,596,220 $1,180,446 $ 869,215 ========== ========== ========= NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance........................................ $ 209,910 $ (16,953) $ (4,699) Change in net unrealized gains/losses on debt securities available for sale..................................... 373 474,414 (44,464) Change in net unrealized gain on equity securities available for sale..................................... (15,755) 27,206 18,011 Change in adjustment to deferred acquisition costs....... (5,600) (152,600) 7,600 Tax effects of net changes............................... 7,344 (122,157) 6,599 ---------- ---------- --------- Ending balance........................................... $ 196,272 $ 209,910 $ (16,953) ========== ========== =========
Dividends that the Company may receive from its life insurance subsidiaries in any year without prior approval of the Arizona, California or New York insurance commissioners are limited by statute. At September 30, 1998, restricted net assets of these consolidated life insurance subsidiaries totaled approximately $1,934,653,000, none of which is available for the payment of dividends until calendar year 1999. The combined statutory equity of the Company's five life insurance subsidiaries totaled $1,415,095,000 at September 30, 1998, $1,430,935,000 at December 31, 1997, and $1,187,013,000 at December 31, 1996. The combined statutory net income of these subsidiaries totaled $294,413,000 for the nine months ended September 30, 1998, $257,049,000 for the year ended December 31, 1997, and $210,791,000 for the year ended December 31, 1996. F-23 61 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- STOCK COMPENSATION PLANS At September 30, 1998, the Company had five stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for such plans, and, accordingly, no compensation cost has been recognized for stock options granted pursuant to these plans. If compensation cost for such stock options had been recognized, based on the fair value at the grant dates and computed in a manner consistent with a method described by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") then the Company's net income would have been $486,345,000 ($2.46 per basic share and $2.21 per diluted share), $366,825,000 ($1.94 per basic share and $1.75 per diluted share) and $269,878,000 ($1.42 per basic share and $1.30 per diluted share) for the years ended September 30, 1998, 1997 and 1996, respectively. The weighted average per share fair value used to compute compensation cost for the year ended September 30, 1998 was $19.78 and reflects weighted average assumptions including a dividend yield of 0.7%, a volatility of 40.6%, a risk-free interest rate of 5.9% and an option life of 8.0 years. The weighted average per share fair value used to compute compensation cost for the year ended September 30, 1997 was $11.92 and reflects weighted average assumptions including a dividend yield of 0.9%, a volatility of 39.3%, a risk-free interest rate of 6.2% and an option life of 7.0 years. The weighted average per share fair value used to compute compensation cost for the year ended September 30, 1996 was $6.32 and reflects weighted average assumptions including a dividend yield of 1.3%, a volatility of 40.3%, a risk-free interest rate of 6.0% and an option life of 6.6 years. The Company's five stock plans are the 1997 Employee Incentive Stock Plan (the "1997 Plan"), the 1995 Performance Stock Plan (the "1995 Plan"), the 1988 Employee Stock Plan (the "1988 Plan"), the Long-Term Performance-Based Incentive Plan (the "CEO Plan") and the Non-Employee Directors' Stock Option Plan. The 1988 Plan has been replaced by the 1997 Plan. Under these stock plans, the Company may grant an aggregate of 42,632,550 shares to its employees in the form of either stock options, restricted stock or stock units. At September 30, 1998, 10,298,429 shares remain available for future grant. Options granted under the plans have an exercise price equal to the market price at the date of grant, have a maximum term of 10 years and generally become exercisable ratably over a five-year period. Under the terms of the stock option agreements, the pending merger with AIG (See Note 3) constitutes a change in control of the Company and, when consummated, will cause all unvested stock options to become immediately exercisable. If the pending merger had been completed in 1998, an additional $70,806,000 of compensation cost would have been recognized for purposes of the SFAS 123 pro forma disclosures, and net income for 1998 would have been $415,539,000 ($2.09 per basic share and $1.89 per diluted share). Under its CEO Plan, the Company may grant shares of its Common Stock to the Company's Chief Executive Officer ("CEO") in the form of stock options. Prior to amendment of the CEO Plan, which was approved by shareholders in fiscal 1997, awards under this plan were also made in the form of restricted stock or deferred shares. The actual number of options granted is predicated upon defined performance of the Company's Common Stock relative to defined performance of the S&P 500 Index. Restricted shares are held in escrow until the earlier of the CEO's death, disability or retirement or change in control of the Company. Deferred shares are held in escrow until 18 months after the earlier of the CEO's death, disability or retirement or change in control of the Company. Stock options granted under this plan have an exercise price equal to the market price at the date of grant, have a maximum term of 10 years and are immediately exercisable. F-24 62 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- STOCK COMPENSATION PLANS (CONTINUED) A summary of the status of the Company's stock option plans as of September 30, 1998, 1997 and 1996 and changes during the years then ended follows:
1998 1997 1996 ------------------ ------------------ ------------------ Weighted Weighted Weighted average average average Shares exercise Shares exercise Shares exercise (000's) price (000's) price (000's) price ------- -------- ------- -------- ------- -------- Options outstanding at beginning of year............................... 14,995 $14.27 12,452 $ 9.23 10,320 $ 6.82 Options granted...................... 2,872 45.99 3,438 30.51 2,593 18.32 Options exercised.................... (942) 8.29 (762) 4.63 (306) 5.00 Options forfeited.................... (690) 21.80 (133) 16.82 (155) 8.83 ------ ------ ------ Options outstanding at end of year... 16,235 19.91 14,995 14.27 12,452 9.23 ====== ====== ====== ====== ====== ====== Options exercisable at end of year... 11,709 $15.07 9,710 $ 9.65 8,022 $ 6.69 ====== ====== ====== ====== ====== ======
The following table summarizes information about stock options outstanding at September 30, 1998:
Options outstanding Options exercisable -------------------------------- ------------------- Weighted average Weighted Weighted remaining average average Shares contractual exercise Shares exercise Range of exercise prices (000's) life price (000's) price ------------------------ ------- ----------- -------- ------- --------- $0.86 to $2.35............................... 2,163 1.8 years $ 2.00 2,163 $ 2.00 $4.50 to $7.15............................... 1,643 4.2 5.74 1,643 5.74 $8.11 to $12.31.............................. 4,160 6.2 10.02 3,402 9.73 $14.97 to $20.46............................. 2,286 7.4 18.08 1,434 16.86 $25.33 to $33.33............................. 2,134 8.1 26.29 1,124 25.41 $39.35 to $60.41............................. 3,849 9.2 44.29 1,943 39.55 ------ ------ Total........................................ 16,235 6.5 19.91 11,709 15.07 ====== ========= ====== ====== ======
At September 30, 1998, 2,169,284 shares of unvested restricted stock are outstanding, and deferred shares and stock units representing 2,121,375 shares of stock are outstanding. The Company granted restricted stock and stock units aggregating 370,116 shares in the year ended September 30, 1997 and 527,634 shares in the year ended September 30, 1996. No restricted stock or stock units were granted in the year ended September 30, 1998. The weighted average per share fair value of such stock at the date of grant was $23.08 in 1997 and $15.83 in 1996. Restrictions generally lapse either on an accelerated basis, upon achievement of defined performance goals, upon a change in control of Company, or over a defined length of service. Compensation cost charged to operations for all outstanding restricted stock, deferred shares and stock units amounted to $10,988,000 for the year ended September 30, 1998, $23,940,000 for the year ended September 30, 1997 and $21,124,000 for the year ended September 30, 1996. The pending merger with AIG (See Note 3) constitutes a change in control of the Company under the terms of the various stock compensation plans and, when consummated, all unvested restricted stock and 630,000 stock units will vest. As a result, unamortized compensation cost, aggregating $26,306,000 at September 30, 1998, will be charged to operations upon completion of the merger. F-25 63 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- INCOME TAXES The components of the provisions for income taxes on pretax income consist of the following:
Federal State Total -------- ------- -------- (In thousands) 1998: Currently payable......................................... $155,841 $12,682 $168,523 Deferred.................................................. 20,746 1,731 22,477 -------- ------- -------- Total income tax expense.................................. $176,587 $14,413 $191,000 ======== ======= ======== 1997: Currently payable......................................... $ 28,281 $ 1,718 $ 29,999 Deferred.................................................. 127,347 654 128,001 -------- ------- -------- Total income tax expense.................................. $155,628 $ 2,372 $158,000 ======== ======= ======== 1996: Currently payable......................................... $110,531 $10,526 $121,057 Deferred.................................................. (991) (2,466) (3,457) -------- ------- -------- Total income tax expense.................................. $109,540 $ 8,060 $117,600 ======== ======= ========
Income taxes computed at the United States federal income tax rate of 35% and income taxes provided differ as follows:
Years ended September 30, -------------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Amount computed at statutory rate........................ $247,560 $187,968 $137,209 Increases (decreases) resulting from: Affordable housing tax credits......................... (38,806) (24,436) (21,742) State income taxes, net of federal tax benefit......... 9,368 1,542 5,238 Dividends-received deduction........................... (19,292) (12,634) (8,277) Other, net............................................. (7,830) 5,560 5,172 -------- -------- -------- Total income tax expense................................. $191,000 $158,000 $117,600 ======== ======== ========
F-26 64 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability of Deferred Income Taxes are as follows:
September 30, ---------------------- 1998 1997 --------- --------- (In thousands) DEFERRED TAX LIABILITIES: Investments................................................. $ 105,896 $ 125,852 Deferred acquisition costs.................................. 388,234 341,131 State income taxes.......................................... 4,568 3,428 Other liabilities........................................... 143,453 125,928 Net unrealized gains on certain debt and equity securities................................................ 105,686 113,028 --------- --------- Total deferred tax liabilities.............................. 747,837 709,367 --------- --------- DEFERRED TAX ASSETS: Contractholder reserves..................................... (298,719) (299,905) Other assets................................................ (54,208) (25,698) --------- --------- Total deferred tax assets................................... (352,927) (325,603) --------- --------- Deferred income taxes....................................... $ 394,910 $ 383,764 ========= =========
F-27 65 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended September 30, 1998 and 1997 follow:
First Second Third Fourth -------- -------- -------- -------- (In thousands, except per-share amounts) 1998: Net investment income........................ $198,153 $205,190 $214,185 $224,118 Net realized investment gains (losses)....... 3,194 2,258 5,772 (52,945) Fee income................................... 100,822 108,971 123,566 125,468 General and administrative expenses.......... (77,362) (77,398) (81,219) (74,294) Amortization of deferred acquisition costs... (55,468) (55,628) (63,386) (66,685) -------- -------- -------- -------- Pretax income................................ 169,339 183,393 198,918 155,662 Income tax expense........................... (45,700) (49,500) (54,000) (41,800) -------- -------- -------- -------- Net income................................... $123,639 $133,893 $144,918 $113,862 ======== ======== ======== ======== Per basic share.............................. $ 0.63 $ 0.68 $ 0.73 $ 0.57 ======== ======== ======== ======== Per diluted share............................ $ 0.56 $ 0.60 $ 0.66 $ 0.52 ======== ======== ======== ======== 1997: Net investment income........................ $143,669 $152,004 $185,760 $197,944 Net realized investment gains (losses)....... (9,304) (9,442) (12,136) 1,679 Fee income................................... 70,067 73,510 81,796 92,330 General and administrative expenses.......... (59,254) (62,035) (70,419) (74,030) Amortization of deferred acquisition costs... (30,410) (30,003) (52,080) (52,596) -------- -------- -------- -------- Pretax income................................ 114,768 124,034 132,921 165,327 Income tax expense........................... (34,400) (37,200) (38,600) (47,800) -------- -------- -------- -------- Net income................................... $ 80,368 $ 86,834 $ 94,321 $117,527 ======== ======== ======== ======== Per basic share.............................. $ 0.43 $ 0.46 $ 0.51 $ 0.60 ======== ======== ======== ======== Per diluted share............................ $ 0.39 $ 0.42 $ 0.46 $ 0.54 ======== ======== ======== ========
F-28 66 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- BUSINESS SEGMENTS Summarized data for the Company's business segments follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ---------- ------------ -------- ----------- (In thousands) 1998: Annuity operations..................... $2,340,933 $236,298 $652,112 $38,355,034 Broker-dealer operations............... 119,865 7,276 34,141 195,822 Retirement trust services.............. 50,774 1,796 6,133 499,121 Asset management....................... 41,040 14,780 9,171 104,476 Premium financing...................... 24,957 1,050 5,755 45,954 ---------- -------- -------- ----------- Total.................................. $2,577,569 $261,200 $707,312 $39,200,407 ========== ======== ======== =========== 1997: Annuity operations..................... $1,905,412 $155,714 $490,349 $34,909,441 Broker-dealer operations............... 67,052 2,401 22,622 101,049 Retirement trust services.............. 49,279 1,497 13,001 487,598 Asset management....................... 35,661 16,357 2,798 81,518 Premium financing...................... 26,922 1,039 8,280 57,280 ---------- -------- -------- ----------- Total.................................. $2,084,326 $177,008 $537,050 $35,636,886 ========== ======== ======== =========== 1996: Annuity operations..................... $1,315,553 $ 97,806 $350,183 $23,032,076 Broker-dealer operations............... 51,906 1,228 17,253 74,140 Retirement trust services.............. 45,216 1,166 13,570 481,974 Asset management....................... 33,047 18,295 2,448 74,410 Premium financing...................... 26,663 962 8,573 64,221 ---------- -------- -------- ----------- Total.................................. $1,472,385 $119,457 $392,027 $23,726,821 ========== ======== ======== ===========
F-29 67 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES
Page number in this Annual Report on Form 10-K ------------------ Report of Independent Accountants on Financial Statement Schedules................................................. S-2 Schedule II -- Condensed Financial Information of Registrant................................................ S-3 through S-6 Schedule IV -- Reinsurance.................................. S-7
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. S-1 68 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of SunAmerica Inc. Our audits of the consolidated financial statements referred to in our report dated November 9, 1998 appearing on page F-2 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedules listed on page S-1 of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Los Angeles, California November 9, 1998 S-2 69 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
September 30, -------------------------------- 1998 1997 -------------- -------------- ASSETS Investment in and advances to subsidiaries................. $2,626,558,000 $2,086,981,000 Other investments.......................................... 2,533,232,000 2,506,556,000 Other assets............................................... 253,631,000 219,956,000 -------------- -------------- TOTAL ASSETS............................................... $5,413,421,000 $4,813,493,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes and debentures.............................. $1,216,483,000 $1,136,072,000 Junior subordinated debentures........................... 511,894,000 511,894,000 Reserves for guaranteed investment contracts............. 213,707,000 226,959,000 Payable to brokers for purchases of securities........... 306,000 92,990,000 Other liabilities........................................ 290,204,000 261,472,000 -------------- -------------- Total liabilities........................................ 2,232,594,000 2,229,387,000 Shareholders' equity....................................... 3,180,827,000 2,584,106,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $5,413,421,000 $4,813,493,000 ============== ==============
CONDENSED INCOME STATEMENT
Years ended September 30, -------------------------------------------- 1998 1997 1996 ------------- ------------- ------------ Dividends received from subsidiaries............ $ 155,878,000 $ 136,205,000 $110,256,000 Investment income............................... 411,393,000 280,277,000 189,911,000 Net realized investment gains (losses).......... (73,113,000) 16,835,000 4,598,000 Other income.................................... 4,503,000 1,804,000 3,625,000 ------------- ------------- ------------ TOTAL INCOME.................................... 498,661,000 435,121,000 308,390,000 ------------- ------------- ------------ Interest expense on senior notes and debentures.................................... (93,408,000) (78,575,0000) (51,062,000) Interest expense on junior subordinated debentures.................................... (42,583,000) (43,290,000) (20,902,000) Interest expense on guaranteed investment contracts..................................... (18,357,000) (19,435,000) (20,411,000) General and administrative expenses, net of reimbursement from subsidiaries of $12,289,000 in 1998, $38,315,000 in 1997 and $33,930,000 in 1996....................................... (19,774,000) 338,000 (146,000) ------------- ------------- ------------ TOTAL EXPENSES.................................. (174,122,000) (140,962,000) (92,521,000) ------------- ------------- ------------ PRETAX INCOME................................... 324,539,000 294,159,000 215,869,000 Income tax expense.............................. (36,758,000) (45,614,000) (35,404,000) ------------- ------------- ------------ INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................... 287,781,000 248,545,000 180,465,000 Equity in undistributed net income of subsidiaries.................................. 228,531,000 130,505,000 93,962,000 ------------- ------------- ------------ NET INCOME...................................... $ 516,312,000 $ 379,050,000 $274,427,000 ============= ============= ============
S-3 70 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
Years ended September 30, ------------------------------------------------- 1998 1997 1996 ------------- --------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 516,312,000 $ 379,050,000 $ 274,427,000 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries...................... (384,409,000) (266,710,000) (204,218,000) Net realized investment losses (gains)........................... 73,113,000 (16,835,000) (4,598,000) Other, net............................... (108,695,000) 74,750,000 22,644,000 ------------- --------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 96,321,000 170,255,000 88,255,000 ------------- --------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of investments............. (474,486,000) (1,055,976,000) (153,640,000) Dividends received from subsidiaries..... 155,878,000 136,205,000 110,256,000 Returns (contributions) of capital received from (paid to) subsidiaries... 2,897,000 (115,861,000) (435,928,000) ------------- --------------- ------------- NET CASH USED BY INVESTING ACTIVITIES.... (315,711,000) (1,035,632,000) (479,312,000) ------------- --------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends............... (100,538,000) (67,819,000) (61,721,000) Withdrawal payments on guaranteed investment contracts................... (31,610,000) (31,525,000) (31,725,000) Net proceeds from issuances of long-term notes and debentures................... 98,544,000 559,332,000 47,478,000 Payments for redemptions of long-term notes and debentures................... (20,025,000) -- -- Net proceeds from issuances of junior subordinated debentures................ -- 310,256,000 185,700,000 Payment for redemption of 9.95% junior subordinated debentures................ -- (54,259,000) -- Payments for redemptions of Preferred Stock.................................. -- (136,549,000) -- Net proceeds from issuance of Series E Preferred Stock........................ -- -- 240,547,000 Net proceeds from issuance of Common Stock.................................. -- 577,268,000 -- Net issuance cost of 8 1/2% Premium Equity Redemption Cumulative Security Units.................................. -- (44,605,000) -- ------------- --------------- ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................. (53,629,000) 1,112,099,000 380,279,000 ------------- --------------- ------------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS................. (273,019,000) 246,722,000 (10,778,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD.................... 356,903,000 110,181,000 120,959,000 ------------- --------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD................................. $ 83,884,000 $ 356,903,000 $ 110,181,000 ============= =============== =============
S-4 71 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- INDEBTEDNESS Indebtedness consists of the following long-term notes and debentures (interest rates are as of September 30):
September 30, -------------------------------- 1998 1997 -------------- -------------- SENIOR NOTES AND DEBENTURES: 5.6% debentures due July 31, 2097 (net of unamortized discount of $43,077,000 in 1998 and $43,513,000 in 1997).................................................... $ 131,923,000 $ 131,487,000 Medium-term notes due 1999 through 2026 (5 3/8% to 7 3/8%).................................................. 228,310,000 248,335,000 8 1/8% debentures due April 28, 2023....................... 100,000,000 100,000,000 9.95% debentures due February 1, 2012...................... 26,791,000 100,000,000 9.95% debentures due August 1, 2008........................ 73,209,000 -- 6.75% notes due October 1, 2007............................ 100,000,000 -- 6.2% notes due October 31, 1999............................ 431,250,000 431,250,000 9% notes due January 15, 1999.............................. 125,000,000 125,000,000 -------------- -------------- Total senior notes and debentures.......................... 1,216,483,000 1,136,072,000 -------------- -------------- JUNIOR SUBORDINATED DEBENTURES: 8.35% junior subordinated debentures, due 2044............. 191,224,000 191,224,000 8.30% junior subordinated debentures, due 2045............. 320,670,000 320,670,000 -------------- -------------- Total junior subordinated debentures....................... 511,894,000 511,894,000 -------------- -------------- Total indebtedness......................................... $1,728,377,000 $1,647,966,000 ============== ==============
In addition, the Company is the issuer of the following guaranteed investment contracts ("GICs") (interest rates are as of September 30):
September 30, -------------------------------- 1998 1997 -------------- -------------- 8 1/2% GIC due serially through 2002 (including interest credited of $1,294,000 in 1998 and $1,275,000 in 1997)... $ 183,924,000 $ 187,414,000 8 3/8% GIC due serially through 2003 (including interest credited of $142,000 in 1998 and $203,000 in 1997)....... 20,567,000 30,308,000 7 3/8% GIC due in 2018 (including interest credited of $303,000 in 1998 and $303,000 in 1997)................... 9,216,000 9,237,000 -------------- -------------- Total guaranteed investment contracts...................... $ 213,707,000 $ 226,959,000 ============== ==============
Aggregate debt service payments (i.e., principal and interest payments), including GICs and indebtedness, are due as follows: 1999, $291,967,000; 2000, $563,506,000; 2001, $139,000,000; 2002, $297,379,000; 2003, $112,290,000 and $4,137,059,000, in the aggregate, thereafter. S-5 72 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- GUARANTEES The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Parent has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. NOTE 3 -- CONTINGENCIES The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. In the ordinary course of business, the Parent has agreed contingently to make capital contributions, aggregating approximately $497,049,000 to 37 limited partnerships over the next 5 years (4.5 years on a weighted average basis) in exchange for ownership interests in such partnerships. S-6 73 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV -- REINSURANCE AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS)
Percentage Ceded Assumption of amount Gross to other from other Net assumed amount companies companies amount to net ---------- ---------- ---------- ---------- ---------- 1998: Life insurance in force........... $4,481,760 $4,198,926 $ -- $ 282,834 --% ========== ========== ======= ========== ===== Premiums: Annuities and other single premiums..................... $1,773,945 $ 6,478 $30,331 $1,797,798 1.69% Annual life insurance premiums..................... 32,736 24,178 -- 8,558 -- Accident and health insurance premiums..................... 920 870 -- 50 -- ---------- ---------- ------- ---------- ----- Total premiums.......... $1,807,601 $ 31,526 $30,331 $1,806,406 1.68% ========== ========== ======= ========== ===== 1997: Life insurance in force........... $6,749,549 $5,757,164 $ -- $ 992,385 --% ========== ========== ======= ========== ===== Premiums: Annuities and other single premiums..................... $1,427,699 $ -- $62,857 $1,490,556 4.22% Annual life insurance premiums..................... 30,321 26,232 7,632 11,721 65.11% Accident and health insurance premiums..................... (1,338) (1,557) -- 219 -- ---------- ---------- ------- ---------- ----- Total premiums.......... $1,456,682 $ 24,675 $70,489 $1,502,496 4.69% ========== ========== ======= ========== ===== 1996: Life insurance in force........... $8,009,173 $7,701,296 $ -- $ 307,877 --% ========== ========== ======= ========== ===== Premiums: Annuities and other single premiums..................... $ 984,334 $ -- $ 9,042 $ 993,376 0.91% Annual life insurance premiums..................... 42,364 42,364 -- -- -- Accident and health insurance premiums..................... 16,613 16,613 -- -- -- ---------- ---------- ------- ---------- ----- Total premiums.......... $1,043,311 $ 58,977 $ 9,042 $ 993,376 0.91% ========== ========== ======= ========== =====
S-7 74 SUNAMERICA INC. 1998 FORM 10-K [SUNAMERICA LOGO] 75 1 SUNAMERICA CENTER LOS ANGELES, CALIFORNIA 90067-6022 (310) 772-6000 76 SUNAMERICA INC. LIST OF EXHIBITS FILED - ---------------------- 2(e) Purchase and Sale Agreement, dated July 15, 1998 between the Company and MBL Life Assurance Corporation. 4(y) 9.95% Debentures due August 1, 2008, offered by the Company in exchange for issued and outstanding 9.95% Debentures due February 1, 2012. 10(w) List of Executive Compensation Plans and Arrangements. 12(a) Statement re Computation of ratio of earnings to fixed charges. 12(b) Statement re Computation of ratio of earnings to combined fixed charges and preferred stock dividends. 21 Subsidiaries of the Company. 23 Consent of Independent Accountants. 27 Financial Data Schedule. EX-2.(E) 2 EXHIBIT 2(E) 1 EXHIBIT 2(e) AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES The Company hereby agrees to furnish supplementally to the Securities and Exchange Commission upon its request a copy of any of the exhibits and schedules to Exhibit 2(e) to this Report on Form 10-K. Each of such Exhibits to this Report on Form 10-K sets forth a description of each schedule and exhibit. 2 PURCHASE AND SALE AGREEMENT, dated as of July 15, 1998, among MBL Life Assurance Corporation, a New Jersey stock life insurance company (the "Seller"), SunAmerica Inc., a Maryland corporation (the "Purchaser"), Anchor National Life Insurance Company, an Arizona stock life insurance company ("ANLIC"), and First SunAmerica Life Insurance Company, a New York stock life insurance company ("First SunAmerica"). W I T N E S S E T H I. The Seller. A. On July 16, 1991, pursuant to an order of the Superior Court of New Jersey (the "Court"), The Mutual Benefit Life Insurance Company, a New Jersey mutual life insurance company ("Mutual Benefit"), was placed in rehabilitation under the supervision of the New Jersey Commissioner of Insurance (now known as the Commissioner of Banking and Insurance) (the "Commissioner"); B. Pursuant to the Third Amended and Restated Plan of Rehabilitation of Mutual Benefit, dated January 24, 1994 (as amended, the "Plan"), on May 1, 1994, the Seller assumed and reinsured certain restructured and reaffirmed insurance contracts of Mutual Benefit in consideration for the sale, transfer and assignment to the Seller of substantially all of the assets of Mutual Benefit; C. The Settlement Agreement In The Matter of Mutual Benefit Life Insurance Company, approved by the Court on January 9, 1997 (the "Settlement Agreement"), resolved certain appeals of and challenges to the Plan; D. Pursuant to the Plan, Mutual Benefit transferred all of the Seller's issued and outstanding capital stock to the Stock Trust (the "Stock Trust"), a New Jersey stock trust governed by the Third Amended Stock Trust Agreement, dated April 29, 1994, between Mutual Benefit and the Commissioner (the "Stock Trust Agreement"); E. The Commissioner is the trustee (the "Trustee") of the Stock Trust and has the power, subject to Court and other approvals, to cause the Seller to dispose of all or substantially all of its assets; F. Pursuant to the Settlement Agreement, the Report of the Joint Committee on Allocation, dated July 7, 1997 (the "Joint Allocation Report"), and the Order of the Court Approving Methodology for Allocating and Distributing Policyholder Value Share, dated February 25, 1998, prior to the Closing Date the Seller will seek an order of the Court approving certain amendments to the Plan, described in Exhibit I, including modifications to the calculation and payment of the Policy Enhancements, with respect to the annuity and life insurance policies that comprise the Reinsured Policies as described therein. II. The Acquisition. Upon the terms and subject to the conditions of this Agreement, the Seller wishes to cede, and ANLIC and First SunAmerica wish to assume, the annuity contracts and life policies that comprise the Reinsured Policies and the obligations under the Inward Reinsurance Agreements, and, in connection therewith, the Seller wishes to transfer, and ANLIC and First SunAmerica wish to acquire, certain assets of the Seller used or held for use by the Seller in the conduct of its business of being the issuer of and administering the Reinsured Policies (the "Business"). As of the Closing Date, all Reinsured Policies will be reinsured on an indemnity reinsurance basis by ANLIC pursuant to the Indemnity Reinsurance Agreement. On the New York Assumption Date, the Indemnity Reinsurance Agreement will terminate with respect to the Reinsured Policies held 3 by Residents of New York as of the New York Assumption Date and the Seller will cede and First SunAmerica will assume such Reinsured Policies on an assumption reinsurance basis pursuant to the First SunAmerica Assumption Reinsurance Agreement. On the Assumption Date for each other jurisdiction, the Indemnity Reinsurance Agreement will terminate with respect to the Reinsured Policies held by Residents of such jurisdiction as of such Assumption Date and the Seller will cede and ANLIC will assume such Reinsured Policies on an assumption reinsurance basis pursuant to the ANLIC Assumption Reinsurance Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. SALE AND PURCHASE 1.1 Ceding Commission; Reinsurance Premium; Acquisition of Transferred Assets and Assumption of Assumed Liabilities. 1.1.1 Ceding Commission. The ceding commission for the Reinsured Policies (as adjusted pursuant to the terms hereof, the "Ceding Commission") will be $131,000,000 (the "Base Ceding Commission") less the sum of: (a) the Reserve Liabilities Adjustment Amount; (b) the Outward Reinsurance Adjustment Amount; (c) the Policy Enhancements Calculation Adjustment Amount; and (d) the Remedy Compromise Adjustment Amount. The calculation of the Ceding Commission as set forth above is not intended to establish the amount, if any, of the "ceding commission" attributable to the Transactions for Tax purposes. 1.1.2 Reinsurance Premium; Transferred Reserve Assets. The reinsurance premium for the Reinsured Policies (the "Reinsurance Premium") will be an amount equal to the Reserve as of the Closing Date. Subject to the terms and conditions hereof, on the Closing Date the Seller will transfer, convey, sell, assign and deliver to ANLIC and ANLIC will purchase and accept from the Seller, all of the Seller's right, title and interest in and to Transferred Reserve Assets with an aggregate Value as of the Closing Date equal to (a) the Reinsurance Premium, less (b) the Ceding Commission. The Reinsurance Premium and the Ceding Commission, including each adjustment thereto as set forth in Section 1.1.1, will be estimated as of the end of the second calendar month preceding the Closing Date or, if the Closing Date is December 31, 1998, as of November 30, 1998 (the "Calculation Date") in accordance with Section 1.2.2, subject to adjustment following the Closing Date in accordance with Section 1.3. 1.1.3 Changes to Transferred Reserve Assets. The Seller will deliver, in place of any asset listed on Schedule 3 that is a receivable due from an Outward Reinsurer under an Outward Reinsurance Agreement that is not assigned to ANLIC as an Assigned Contract on the Closing Date pursuant to Section 1.1.4, cash or Cash Equivalents that have an aggregate Value as of the Closing Date equal to or greater than the Value reflected in Schedule 3 for such receivable. The Seller can, without the prior written consent of the Purchaser, deliver at the Closing, in place of any asset listed on Schedule 3, cash or Cash Equivalents that have an aggregate Value as of the Closing Date equal to or greater than the Value reflected in Schedule 3 for such asset. If the Seller receives any payment with respect to any asset listed in Schedule 3 or sells or otherwise disposes of any such asset on or prior to the Closing Date, the Seller will reinvest such proceeds in cash or Cash Equivalents that have an aggregate Value as of the Closing Date equal to or greater than the Value reflected in Schedule 3 for the asset collected, sold or disposed of by the Seller. 1.1.4 Other Assets Transferred on the Closing Date. In addition to the Transferred Reserve Assets, on the Closing Date the Seller will transfer, convey, sell, assign and deliver to ANLIC and ANLIC will acquire from the Seller, all of the Seller's 4 right, title and interest in and to the following: (a) the Books and Records, provided, however, that the Seller will maintain the originals of all Books and Records in its possession until the Transition Period Termination Date (at which time all such original Books and Records will be delivered to ANLIC and First SunAmerica, as appropriate) and the Purchaser, ANLIC and First SunAmerica will have access to such original Books and Records in accordance with the terms hereof; and (b) Seller's rights in and all claims arising under the contracts listed on Schedule 4, comprised of (i) each Outward Reinsurance Agreement for which all necessary consents to assignment to ANLIC on the Closing Date (and, if applicable, the subsequent partial assignment by ANLIC to First SunAmerica relating to the New York Reinsured Policies on the New York Assumption Date) have been obtained on or prior to the Closing Date, excluding the Outward Reinsurance Agreements relating to the Policies ceded to Integrity Life Insurance Company, and each Substitute Outward Reinsurance Agreement effective as of the Closing Date; (ii) each Inward Reinsurance Agreement listed on Section 2.14.2 of the Seller's Disclosure Schedule of which the ceding insurer is an Outward Reinsurer of an Outward Reinsurance Agreement assigned to ANLIC pursuant to clause (i) above and for which all necessary consents to effect an assignment to ANLIC on the Closing Date have been obtained on or prior to the Closing Date; and (iii) the Commission Agreements with respect to the Reinsured Life Policies, provided that the Purchaser will not be obligated by virtue of the assignment of such Commission Agreements to appoint the Agents as agents of ANLIC and/or First SunAmerica except as required pursuant to Section 5.20 (the agreements listed in clause (b) together with the agreements listed in Section 1.1.5(a) are, collectively, the "Assigned Contracts"). Without limiting the generality of the foregoing, the term "Assigned Contracts" will expressly exclude any administrative services contracts and other obligations with respect to group pension contracts, Fully Administered Qualified Plans or 401(k) Contracts that are not required to be performed by the Seller by the terms of the Reinsured Policies. 1.1.5 Other Assets Transferred After the Closing Date. (a) As promptly as reasonably practical following the date on which, pursuant to Section 5.16: (i) the Seller or the Purchaser obtains all necessary consents to effect an assignment of any Remaining Outward Reinsurance Agreement to ANLIC and First SunAmerica, as applicable (e.g., if such date occurs before the New York Assumption Date and the Remaining Outward Reinsurance Agreement relates to any New York Reinsured Policy, all necessary consents will include consents to an assignment first to ANLIC and then a subsequent partial assignment by ANLIC to First SunAmerica on the New York Assumption Date); or (ii) the date on which the Seller has entered into any Substitute Outward Reinsurance Agreement with respect to a Remaining Outward Reinsurance Agreement, the Seller will transfer, convey, sell, assign and deliver to ANLIC or First SunAmerica, as applicable, and ANLIC or First SunAmerica, as applicable, will acquire from the Seller, all of the Seller's right, title and interest in and to such Remaining Outward Reinsurance Agreement or Substitute Outward Reinsurance Agreement. If, pursuant to Section 1.1.3, the Seller transferred cash or Cash Equivalents on the Closing Date in place of any receivable due from an Outward Reinsurer of a Remaining Outward Reinsurance Agreement listed on Schedule 3, and if the Seller subsequently effects an assignment of such Remaining Outward Reinsurance Agreement pursuant to Section 5.16.1 and this Section 1.1.5(a) then, together with the assignment of such Remaining Outward Reinsurance Agreement, the Seller may transfer, convey, sell, assign and deliver to ANLIC and First SunAmerica, as applicable, a receivable in an amount equal to the remainder of (x) (A) the amount due from the Reinsurer as listed on Schedule 3 minus (B) any amounts previously recovered by the Seller, minus (y) (A) any amounts in dispute with respect to such receivable plus (B) any amounts that, pursuant to the normal accounting cycle of the Remaining Outward Reinsurance Agreement, should have been paid prior to the 5 relevant date of transfer. Within five Business Days of transfer of any such receivable, the Purchaser will deliver, or will cause ANLIC or First SunAmerica, as applicable, to deliver, cash or Cash Equivalents with an aggregate Value equal to the Value of the transferred receivable. (b) On the Transition Period Termination Date the Seller will transfer, convey, sell, assign and deliver to ANLIC and First SunAmerica, as applicable, and ANLIC and First SunAmerica, as applicable, will acquire from the Seller, all of the Seller's right, title and interest in and to the Agent Debit Balance as of the Transition Period Termination Date. In addition, on the Transition Period Termination Date the Seller will deliver to the location(s) designated by the Purchaser for such delivery the originals of all Books and Records; provided, however, that the Seller will be entitled to keep and maintain copies of all Books and Records from and after the Transition Period Termination Date, and to have access to the originals of the Books and Records in accordance with the terms hereof. (c) On the Account Values True-Up Date the Seller will transfer, convey, sell, assign and deliver to ANLIC and First SunAmerica, as applicable, and ANLIC and First SunAmerica, as applicable, will acquire from the Seller, all of the Seller's right, title and interest in and to cash and Cash Equivalents that have an aggregate Value as of the Account Values True-Up Date equal to the Account Values True-Up Amount. (d) On the IBNR Settlement Date the Seller will transfer, convey, sell, assign and deliver to ANLIC and First SunAmerica, as applicable, and ANLIC and First SunAmerica, as applicable, will acquire from the Seller, cash and Cash Equivalents that have an aggregate Value as of the IBNR Settlement Date equal to the IBNR Settlement Amount. The assets referred to in Section 1.1.4, this Section 1.1.5, and the Transferred Reserve Assets are, collectively, the "Transferred Assets." 1.1.6 Assumption of Liabilities; Excluded Liabilities. Upon the terms and subject to the conditions of this Agreement: (a) on the Closing Date ANLIC will reinsure on a 100% coinsurance basis the Insurance Liabilities as of the Closing Date pursuant to the Indemnity Reinsurance Agreement; and (b) on the respective Assumption Dates, ANLIC and First SunAmerica will assume their respective Insurance Liabilities pursuant to the Assumption Reinsurance Agreements; provided, however, that with respect to each Reinstated Policy, ANLIC will reinsure on a 100% coinsurance basis the Insurance Liabilities in respect of such Reinstated Policy for the period, if any, from the Reinstatement Date to the applicable Assumption Date and ANLIC or First SunAmerica, as the case may be, will assume the Insurance Liabilities in respect of such Reinstated Policy as of the later of the Reinstatement Date and the applicable Assumption Date. Other than (a) the Insurance Liabilities as of the Closing Date, the applicable Assumption Date or the applicable Reinstatement Date, as the case may be, and (b) obligations arising under each Assigned Contract on or after the date of transfer thereof, in each case in accordance with the terms thereof (e.g., excluding any liabilities or obligations arising from any breach thereof or default thereunder on or prior to the date of transfer thereof), none of the Purchaser, ANLIC or First SunAmerica is assuming, nor will any of them be deemed to have assumed, any liability or obligation of the Seller or Mutual Benefit, any predecessor of the Seller (including Mutual Benefit), or any Affiliate or Representative of any of them, of any kind or nature, whether absolute, contingent, accrued or otherwise, known or unknown, and whether arising before or after the Closing Date, including: (i) any liability arising under or in connection with any Contract other than the Reinsured Policies; (ii) any liability in respect of the marketing, sale or administration of the Reinsured Policies, the Policies subject to the Inward Reinsurance Agreements or the ownership or use of any Transferred Asset arising or relating to a date that is on or prior to the date of transfer thereof; 6 (iii) the Extra Contractual Obligations; (iv) any liability with respect to any Outward Reinsurance Agreement that is not an Assigned Contract, including the Outward Reinsurance Agreement with Integrity Life Insurance Company or arising under the Policies subject to such Outward Reinsurance Agreement; (v) any liability for Commissions accruing with respect to the Reinsured Annuity Contracts or the Reinsured Life Policies (x) prior to the Closing or (y) after the Closing other than pursuant to the express written terms of the relevant Assigned Contract; (vi) any liability for Commissions accruing with respect to the Reinsured Annuity Contracts or the Reinsured Life Policies whether before or after the Closing if arising under agreements or arrangements that are not Assigned Contracts; (vii) any liability under the Reinsured Policies or the Policies subject to the Inward Reinsurance Agreements resulting from the death of a Policyholder prior to the Closing Date that is reported prior to the Transition Period Termination Date; (viii) any liability arising under or in connection with any administrative services contracts or responsibilities with respect to Fully Administered Qualified Plans; and (ix) any liability arising under the Plan or any Rehabilitation Document other than payment of the Policy Enhancements in accordance with the Policy Enhancements Procedures and payment of the Account Values True-Up as expressly contemplated by this Agreement (collectively, the "Excluded Liabilities"). 1.1.7 Transfer and Sales Taxes. Any transfer or sales Tax or other fees or charges imposed by a Governmental Authority upon the transfer, sale or recording of the Transferred Assets will be paid by the Seller. 1.1.8 Allocation of Ceding Commission and Transferred Reserve Assets. The parties will allocate the Ceding Commission and the Transferred Reserve Assets between the Reinsured Life Policies and the Reinsured Annuity Contracts as of the Closing Date and among the Non New York Reinsured Life Policies, the New York Reinsured Life Policies, the Non New York Reinsured Annuity Contracts and the New York Reinsured Annuity Contracts as of the New York Assumption Date in accordance with procedures described in Schedule 7. The Seller, the Purchaser, ANLIC and First SunAmerica will use such allocation procedures for all Tax and statutory filings and reports. 1.2 Closing; Estimated Closing Statement. 1.2.1 Place and Time of Closing. The closing of the Transactions (the "Closing") will take place at the offices of Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, as of 12:01 a.m. on the first day of the month immediately following the date on which all of the Closing Conditions have been satisfied unless all of the Closing Conditions have been satisfied during December 1998, in which case the Closing of the Transactions will take place on December 31, 1998, or at such other place and time as the Seller and the Purchaser may mutually agree (the "Closing Date"). 1.2.2 Estimated Closing Date Statement. At least ten days prior to the Closing Date, the Seller will deliver to the Purchaser a statement (the "Estimated Closing Date Statement") of the Seller's good faith estimate as of the Calculation Date of the following: (a) the Reserve (including an updated Schedule 5); (b) the Ceding Commission, including each adjustment thereto as set forth in Section 1.1.1; and (c) subject to compliance with Section 1.1.3 and Section 6.4.13, a list of each of the Transferred Reserve Assets to be delivered to the Purchaser at the Closing and the calculation of the Value thereof (including an updated Schedule 3). Except for the calculation of the Policy Enhancements Amount (which will be made in accordance with the terms of this Agreement) and the IBNR Reserve Amount, the calculation of the Reserve and each component thereof, including the Tax reserves, reflected in the Estimated Closing Date Statement will be prepared using the same methodology and 7 assumptions used in preparing the Seller's December 31, 1997 Audited SAP Statements, including the assumptions that the Rehabilitation Period Termination Date will be December 31, 1999 and that the applicable credited rate during the Rehabilitation Period will be calculated as specified in the Settlement Agreement, notwithstanding any actual change thereto as a consequence of the Transactions. 1.3 Post-Closing Adjustment. 1.3.1 Final Closing Date Statement. No later than 45 days after the Closing Date, the Seller will prepare and deliver to the Purchaser (a) a statement (the "Final Closing Date Statement") that has been reviewed and certified by Coopers & Lybrand L.L.P. and that sets forth the actual amount as of the Closing Date of the following: (i) the Reserve (including an updated Schedule 5) (as may be finally determined in accordance with Section 1.3.2, the "Final Reserve"); (ii) the Ceding Commission, including each adjustment thereto as set forth in Section 1.1.1 (as may be finally determined in accordance with Section 1.3.2, the "Final Ceding Commission"); and (iii) a list of each of the Transferred Reserve Assets delivered to the Purchaser at the Closing and a calculation of the Value thereof as of the Closing Date (including an updated Schedule 3) (as may be finally determined in accordance with Section 1.3.2, the "Final Reserve Assets"); (b) a detailed explanation of changes from the Estimated Closing Date Statement; and (c) a copy of all documents used in the preparation of the Final Closing Date Statement and the explanation pursuant to clause (b). The Final Closing Date Statement will be prepared in a manner consistent with the Estimated Closing Date Statement. The fees and other expenses of review and certification of the Final Closing Date Statement by Coopers & Lybrand L.L.P. will be paid by the Seller. The Final Closing Date Statement will be binding on the Purchaser unless the Purchaser delivers to the Seller within 45 days after its receipt of the Final Closing Date Statement from the Seller written notice of disagreement specifying in reasonable detail the nature and extent of the disagreement. 1.3.2 Final Determination of Disputes. If the Purchaser and the Seller are unable to resolve any disagreement with respect to the Final Closing Date Statement within 30 days after the Seller receives a timely notice of disagreement, the items of disagreement alone will be referred for final determination to the U.S. national office of KPMG Peat Marwick or, if such firm is unable or unwilling to make such final determination, to such other independent accounting firm as the parties will mutually designate. The firm making such determination is referred to herein as the "Independent Party." The Final Closing Date Statement will be deemed to be binding on the Purchaser and the Seller upon the earliest to occur of: (a) the Purchaser's failure to deliver to the Seller a timely notice of disagreement; (b) resolution of any disagreement by mutual written agreement of the parties after a timely notice of disagreement has been delivered to the Seller; or (c) notification by the Independent Party of its final determination of the items of disagreement submitted to it. If the net amount of the payment to be made pursuant to Section 1.3.3 to either the Seller or ANLIC is closer to the amount of such payment calculated on the basis of the Final Closing Date Statement than the amount of such payment calculated on the basis of the Purchaser's notice of disagreement, the fees and disbursements of the Independent Party will be paid by the Purchaser. Otherwise, the fees and disbursements of the Independent Party will be paid by the Seller. 1.3.3 Adjustments; Payment and Interest. If the amount of the Final Reserve less the Final Ceding Commission is greater than the Value as of the Closing Date of the Final Reserve Assets transferred to ANLIC on the Closing Date, then the Seller will pay the difference to ANLIC. If the amount of the Final Reserve less the Final Ceding Commission is less than the Value as of the 8 Closing Date of the Final Reserve Assets transferred to ANLIC on the Closing Date, then the Purchaser will pay (or will cause ANLIC to pay) the difference to the Seller. Payments to be made under this Section 1.3.3 will be made, together with interest thereon from the Closing Date to the date of actual payment at the rate of 6.8% per annum, by wire transfer in cash by the applicable party. Any amounts not subject to dispute pursuant to the Purchaser's notice of disagreement delivered pursuant to Section 1.3.1 will be paid by the applicable party within five Business Days of the delivery of such notice of disagreement. Any amount subject to dispute will be paid by the applicable party within five Business Days of the final determination of such amounts, whether through application of Section 1.3.1 or 1.3.2. 1.4 Closing Items. At the Closing, the parties will execute (where appropriate) and deliver the agreements and instruments described below, in each case dated as of the Closing Date. 1.4.1 Assumption Reinsurance Agreements. The Seller and ANLIC on the one hand, and the Seller and First SunAmerica on the other hand, will enter into the ANLIC Assumption Reinsurance Agreement and First SunAmerica Assumption Reinsurance Agreement, respectively, substantially in the forms of Exhibits A-1 and A-2 (collectively, the "Assumption Reinsurance Agreements"), providing, among other things, for the assumption by First SunAmerica of the New York Reinsured Policies as of the New York Assumption Date and the assumption by ANLIC of all other Reinsured Policies as of the applicable Assumption Dates. 1.4.2 Indemnity Reinsurance Agreement. The Seller and ANLIC will enter into the Indemnity Reinsurance Agreement substantially in the form of Exhibit B (the "Indemnity Reinsurance Agreement"), providing, among other things, for the indemnity reinsurance as of the Closing Date by ANLIC of the Insurance Liabilities under the Reinsured Policies, pending reinsurance of such Reinsured Policies by ANLIC and First SunAmerica on an assumption basis pursuant to the Assumption Reinsurance Agreements. 1.4.3 Administrative Services Agreement. The Seller and the Purchaser will enter into the Administrative Services Agreement substantially in the form of Exhibit C, providing for the provision by the Purchaser or one or more of its Subsidiaries of certain administrative services to the Seller following the Closing Date with respect to the Reinsured Policies. 1.4.4 Transition Services Agreement. The Seller and ANLIC will enter into the Transition Services Agreement substantially in the form of Exhibit D, providing for the provision by the Seller of certain transition services to ANLIC from the Closing Date to the Transition Period Termination Date. 1.4.5 Escrow Agreement. The Seller, the Purchaser, ANLIC and First SunAmerica will enter into the Escrow Agreement substantially in the form of Exhibit E (the "Escrow Agreement"), providing, among other things, for the deposit by the Seller on the Closing Date for satisfaction of Escrow Claims of: (a) the Claims Escrow Amount; (b) the Tax Reserves Indemnity Escrow Amount; (c) the DAC Reduction Escrow Amount or the DAC Election Escrow Amount, as the case may be; (d) if applicable, the Outward Reinsurance Escrow Amount; (e) the COI Adjustment Escrow Amount; and (f) if applicable, the Policy Enhancements Endorsements Escrow Amount. 1.4.6 Bill of Sale. The Seller will execute and deliver to ANLIC and First SunAmerica a Bill of Sale substantially in the form of Exhibit F providing for the transfer and conveyance of the Transferred Assets. 1.4.7 Other Deliveries. All other agreements, certificates, opinions and documents required by the terms of this Agreement to be delivered by or on behalf of the parties will be executed and 9 delivered by the relevant Person(s). 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER Except as expressly set forth in the relevant sections of the Seller's Disclosure Schedule, the Seller represents and warrants to the Purchaser as follows: 2.1 Corporate Status of the Seller. The Seller is a stock insurance company duly organized, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to conduct its business and to own or lease its properties, as now conducted, owned or leased. 2.2 Authority. The Seller has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, to perform its obligations and to consummate the Transactions. Such execution, delivery, performance and consummation have been (a) duly authorized by its Board of Directors and its sole shareholder, which constitutes all necessary corporate action on the part of the Seller for such authorization, and (b) approved by the Commissioner in her capacity as Liquidator/Rehabilitator of Mutual Benefit. Each of this Agreement and the Ancillary Agreements has been or will have been on or prior to the Closing, as applicable, duly executed and delivered by the Seller and (assuming its due execution and delivery by the Purchaser, ANLIC and/or, First SunAmerica, to the extent a party thereto) constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium, receivership or similar laws affecting creditors of insurance companies and creditors' rights generally and by general principles of equity (whether considered at law or in equity). 2.3 No Conflicts, Consents and Approvals, etc.. 2.3.1 No Conflicts. Neither the execution, delivery or performance of this Agreement and the Ancillary Agreements by the Seller, nor the consummation of the Transactions will result in: (a) any conflict with, or default under, any of the Organizational Documents of the Seller; (b) any breach or violation of, or default under, any Applicable Law or any condition imposed by any Governmental Authority binding upon Seller or any of its Subsidiaries with respect to the Business, the Reinsured Policies or any Transferred Asset; (c) any breach or violation of, or default under, the Plan or any Rehabilitation Document, or any breach or violation of, or default under any material mortgage, agreement, deed of trust, guaranty, note, bond, lease, indenture or any other instrument relating to or arising in connection with the Business or to which the Seller or any of its Subsidiaries is a party or by which any of them or any of their respective properties or assets are bound; (d) the creation or imposition of any Encumbrances on the Transferred Assets; or (e) the breach or violation of any of the terms or conditions of, or a default under, or otherwise cause an impairment or revocation of, any Permit related to the Business, the Reinsured Policies or the Transferred Assets, except for such conflicts, defaults, breaches, violations, conditions or Encumbrances that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. 2.3.2 Consents. Section 2.3.2 of the Seller's Disclosure Schedule sets forth each consent, approval, exemption or authorization required to be obtained from, notice required to be given to, and filing required to be made with, any Governmental Authority or any other Person by the Seller or any of its Subsidiaries in connection with the execution and delivery of this Agreement and the Ancillary Agreements, the consummation of the Transactions, or to prevent the termination of any material 10 right, privilege, franchise, Permit or agreement of the Seller or any of its Subsidiaries related to the Business, the Reinsured Policies or any of the Transferred Assets, except filings with, or consents or approvals of, (a) the Court, as specified in Section 6.2.3, (b) the Class Four Creditors, as specified in Section 6.2.4, (c) the Reinsurers, as specified in Section 6.2.5,(d) filings required with respect to the HSR Act, or (e) the Governmental Authorities having responsibility for the regulation of insurance in each jurisdiction in which the Seller holds a certificate of authority to engage in the business of insurance. The Seller will deliver to the Purchaser not later than 30 days prior to the Closing Date an updated Section 2.3.2 of the Seller's Disclosure Schedule setting forth all required filings with and consents or approvals of the Governmental Authorities described in clause (e) above. 2.4 Permits, Licenses, etc.. The Seller is duly licensed to conduct insurance business under the laws of the State of New Jersey and under the laws of each other State of the United States and the District of Columbia in the capacity and subject to the limitations set forth opposite each such jurisdiction on Section 2.4 of the Seller's Disclosure Schedule. Such limitations individually or in the aggregate would not reasonably be expected to result in a Material Adverse Effect. The Seller has been duly authorized by all necessary Governmental Authorities to issue the Reinsured Policies and to reinsure the Policies subject to the Inward Reinsurance Agreements in the respective jurisdictions in which they have been issued. The Seller has all Permits necessary to conduct the Business in the manner and in the areas in which the Business is presently being conducted, subject, in the case of insurance licenses, to the limitations set forth opposite each jurisdiction on Section 2.4 of the Seller's Disclosure Schedule, and all such Permits are valid and in full force and effect, except where the failure to have such a Permit would not, individually or in the aggregate, result in a Material Adverse Effect. No revocation or non- renewal of such Permits has occurred and, to the knowledge of the Seller, the Seller has not engaged in any activity that would cause revocation or suspension of any such Permits, no Action looking to or contemplating the revocation or suspension of any such Permit is pending or, to the knowledge of the Seller, threatened, and the Seller has not received notice from any Person of any intention to revoke or to refuse renewal of any such Permit, except for such revocations, non-renewals or suspensions that would not, individually or in the aggregate, result in a Material Adverse Effect. 2.5 Compliance with Laws. Neither the Seller nor any of its Subsidiaries is, nor, to the knowledge of the Seller, has any of their Representatives been, in material violation (or with or without notice or lapse of time or both, would be in violation) of any Applicable Law with respect to the Business, the Reinsured Policies or any of the Transferred Assets except any such violation that has been cured, resolved through binding agreements with applicable Governmental Authorities, or barred by applicable statutes of limitations. Neither the Seller nor any of its Subsidiaries has received any written notice of any violation by any of them of any Applicable Law, except for violations that, individually or in the aggregate, would not reasonably be expected to materially impair the ability of the Seller to perform its obligations under, or to consummate the Transactions. 2.6 Financial Statements. The Seller has delivered to the Purchaser true, correct and complete copies of the financial statements described below. 2.6.1 Audited GAAP Statements. The audited consolidated balance sheets of the Seller and its Subsidiaries as at December 31, 1996 and December 31, 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the periods then ended, together with 11 the notes thereto and the unqualified report of Coopers & Lybrand L.L.P. thereon (the "GAAP Statements"); 2.6.2 Statutory Statements. The annual statements of the Seller, including all notes, exhibits and schedules thereto and any affirmations and certifications filed therewith and the actuarial opinions applicable to the Seller for such years (the "Statutory Statements") as filed with the Department of Banking and Insurance of the State of New Jersey for the years ended December 31, 1996 and December 31, 1997; and 2.6.3 Audited SAP Statements. The audited statutory-basis balance sheets of the Seller as at December 31, 1996 and December 31, 1997, and the related summaries of operations, statutory-basis statements of income, capital and surplus, and cash flow for the periods then ended, together with the notes thereto and the unqualified report of Coopers & Lybrand L.L.P. thereon (the "Audited SAP Statements;" and together with the Statutory Statements, the "SAP Statements"). 2.6.4 GAAP Representations. The GAAP Statements present fairly, in all material respects, the consolidated financial position of the Seller and its Subsidiaries as at the respective dates thereof and the results of their consolidated income, changes in shareholders' equity and cash flows for the respective periods then ended, in each case, in accordance with GAAP applied on a consistent basis throughout the periods indicated, except for the deviations from GAAP disclosed thereon or in the notes thereto. 2.6.5 SAP Representations. The SAP Statements have been prepared in accordance with accounting practices prescribed or permitted by the Department of Banking and Insurance of the State of New Jersey, and such accounting practices have been applied on a consistent basis throughout the periods indicated, except as expressly set forth or disclosed in the respective notes thereto. The Audited SAP Statements present fairly, in all material respects, the admitted assets, reserves, liabilities, capital and surplus of the Seller as at the respective dates thereof and the results of its operations and its cash flow for the respective periods then ended. The Statutory Statements complied in all material respects with all Applicable Laws when filed, were timely filed with all required Governmental Authorities, and no material deficiency has been asserted or is otherwise known by the Seller with respect to such statements by the Department of Banking and Insurance of the State of New Jersey or any other applicable Governmental Authority. 2.7 Computer Software. Section 2.7 of the Seller's Disclosure Schedule sets forth a listing of all Owned Software and a listing of all Licensed Software (each of which categorizes the Owned Software or the Licensed Software, as applicable, in accordance with their respective uses, including: (a) generating policyholder illustrations; (b) reinsurance administration; (c) group and individual annuity administration; (d) life administration; (e) commission payments; and (f) other financial or management reporting). The Seller is the owner of all Owned Software necessary to perform the Seller's obligations under the Transition Services Agreement and has the right under valid licenses to use all Licensed Software necessary to perform the Seller's obligations under the Transition Services Agreement, in each case free and clear of any Encumbrances, except with respect to Licensed Software for royalty or other payment obligations (including any one-time license transfer fees imposed by the licensor). The Owned Software and the Licensed Software constitute all of the computer software programs that are necessary to conduct the Business as presently conducted by the Seller. 2.8 Litigation. To the extent related to the Business, the Reinsured Policies or the Transferred Assets, there are: (a) no outstanding orders, decrees or judgments by or with any 12 Governmental Authority before which the Seller or any of its Subsidiaries is or was a party; (b) no material Actions, pending or, to the knowledge of the Seller, threatened or contemplated, either by or against the Seller or any of its Subsidiaries; or (c) to the knowledge of the Seller, no events, facts or circumstances that have arisen or occurred (other than the routine claims for benefits under insurance policies and annuities in force, not including any claims for consequential or punitive damages) that would reasonably be expected to result in the commencement of any material Action against the Seller or any of its Subsidiaries. Section 2.8 of the Seller's Disclosure Schedule, as to each Action disclosed therein, describes the parties, the nature of the proceeding, the date and method commenced, and the amount of damages (if known) or other relief sought, and if applicable, paid or granted. 2.9 Regulatory Filings. The Seller has made available for inspection by the Purchaser all material registrations, filings and submissions made by the Seller or any of its Subsidiaries with any Governmental Authority and final financial, market conduct and other reports of examinations with respect to the Seller or any of its Subsidiaries issued by any such Governmental Authority along with Seller's or the Subsidiary's responses thereto to the extent that such registrations, filings, submissions and reports (a) were made or issued on or subsequent to December 31, 1996 and (b) relate to the Business, the Reinsured Policies or the Transferred Assets. The Seller and its Subsidiaries have filed all material reports, statements, documents, registrations, filings or submissions (including any sales, marketing or advertising material) required to be filed by any of them with any Governmental Authority to the extent they relate to the Business, the Reinsured Policies or the Transferred Assets. All such reports, statements, registrations, filings and submissions were in compliance in all material respects with Applicable Laws when filed or as amended or supplemented. No material deficiencies have been asserted by any such Governmental Authority with respect to such registrations, filings or submissions that have not been cured to the satisfaction of such Governmental Authority. Since December 31, 1996, neither the Seller nor any of its Subsidiaries has submitted any written response with respect to material comments from any Governmental Authority concerning such reports, statements, registrations, filings, submissions or reports of examinations. Since December 31, 1996, no fine or penalty has been imposed on the Seller or any of its Subsidiaries with respect to the Business, the Reinsured Policies or the Transferred Assets. No deposits have been made by the Seller or any of its Subsidiaries with, or at the direction of, any Governmental Authority with respect to the Business or the Reinsured Policies that are not shown on the most recent GAAP Statements of the Seller. 2.10 Tax Matters. 2.10.1 Tax Treatment of Reinsured Policies. None of the Reinsured Policies fails to meet the requirements under the Code that must be met in order for the Policyholder thereof to receive treatment under the Code that is no less favorable than the treatment that was (a) represented would be received by the Policyholder or any beneficiary thereof in materials provided to the Policyholder or any such beneficiary by the Seller, Mutual Benefit or any of their respective Affiliates or Representatives at any time prior to the Closing Date with respect to the Reinsured Policy or the predecessor policy issued by Mutual Benefit, or (b) customary for that type of Policy when issued. 2.10.2 Tax Reserves. The Seller's tax reserves for the Reinsured Policies as reflected in the Seller's federal income tax return for the fiscal year ended December 31, 1996 have been properly calculated under the Code, and such tax reserves have been maintained since such date in accordance with all applicable requirements of the Code. 13 2.10.3 Tax Impact on Policyholders. The crediting to the Account Value of an Eligible Policy of the Policy Enhancement as expressly contemplated by this Agreement will, under the Code, other Applicable Law and official administrative or controlling judicial interpretations thereof as currently in effect, be treated with respect to each Policyholder as a deferred amount that is not includable in income for federal income tax purposes unless or until an amount with respect to the Policy Enhancements is actually received in cash by such Policyholder, its designee, or the beneficiary of an Eligible Policy; provided, that this representation will not apply with respect to funding agreements or annuity contracts described in Section 72(u) of the Code where interest or dividends are credited to the Account Value in the ordinary course of business (without regard to the Transactions) and are includable in taxable income when credited or ratably over the term of the Contract; and provided, further, that to the extent that the Purchaser and its Affiliates do not comply with the requirements of Section 5.23 and such failure causes this representation to be false, the Purchaser will not be entitled to assert a claim against the Seller for breach of this representation. 2.11 Absence of Changes. Except as expressly contemplated or required by this Agreement, since December 31, 1997 the Seller has conducted the Business only in the ordinary course (taking into account the restrictions imposed on the Seller pursuant to the Plan) consistent with past practice and there has not occurred or arisen any transaction, commitment, dispute, damage, destruction, loss or other event or condition of any character (whether or not in the ordinary course of business), individually or in the aggregate having, or that would reasonably be expected to have, a Material Adverse Effect, and neither the Seller nor any of its Subsidiaries has with respect to the Business, the Reinsured Policies or the Transferred Assets: (a) subjected, or permitted to exist with respect to, any of the Transferred Assets (whether tangible or intangible) to any material Encumbrance; (b) amended, terminated, cancelled or compromised any material claims of the Seller or any of its Subsidiaries or waived any other rights of substantial value to the Seller or any of its Subsidiaries; (c) made any material change in the customary methods of operation of the Seller or any of its Subsidiaries, including any of their respective purchasing, marketing, selling, underwriting, pricing, actuarial or investment practices or policies, or made any change in any of their respective financial, Tax or accounting practices or policies, or in any assumption underlying such a practice or policy, in either case including any basis for calculating Reserve Liabilities or establishing reserves contained in the GAAP Statements or the SAP Statements (including the excess interest reserve) or any depreciation or amortization policies or rates other than as required by a change in GAAP, SAP or Applicable Law; (d) taken any action to forfeit, abandon, modify, waive, terminate or otherwise change any of its Permits, or any insurance policies under which the Seller is an insured, or allowed such Permits or insurance policies to lapse or terminate except (i) as may have been required in order to comply with Applicable Law, or (ii) as may have been contemplated by this Agreement; (e) amended any Reinsured Policies or issued or sold new policies in the categories of the Reinsured Policies, or amended existing Reinsured Policies, except to the extent required to comply with the terms of the Reinsured Policies or Applicable Law and disclosed in Section 2.11 of the Seller's Disclosure Schedule; 14 (f) abandoned or permitted to lapse any Owned Software or Licensed Software necessary for the Seller to perform its obligations under the Transition Services Agreement; (g) terminated or amended any Outward Reinsurance Agreement or Inward Reinsurance Agreement, or entered into as ceding or assuming insurer any reinsurance, coinsurance or other similar agreement or any trust agreement or security agreement related thereto, other than renewals of the Outward Reinsurance Agreements and the Inward Reinsurance Agreements on substantially the same terms and in the ordinary course of business; or (h) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 2.11, or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights or commitments with respect to any of the actions specified in this Section 2.11, except as expressly contemplated by this Agreement. 2.12 Reinsured Policies. 2.12.1 Forms. (a) Attached hereto are the following schedules, listing and describing the forms of all Reinsured Policies, including all endorsements, Benefit Plans and Qualified Contracts, utilized for all Reinsured Policies in effect on May 31, 1998: Schedule 1-A (All Reinsured Life Policies); Schedule 2-A (All Reinsured Annuity Contracts); Schedule 1-B (Non New York Reinsured Life Policies); Schedule 1-C (New York Reinsured Life Policies); Schedule 2-B (Non New York Reinsured Annuity Contracts); and Schedule 2-C (New York Reinsured Annuity Contracts). (b) The Seller has delivered to the Purchaser supplements to Schedule 1-A and Schedule 2-A listing each Policy comprising the Reinsured Policies (i) in effect on March 31, 1998, and (ii) in effect on June 30, 1998. Such supplements set forth with respect to each such Policy the following information: policy number, Policyholder name (both the owner and the insured) and Resident jurisdiction, policy form, plan code, Account Balance or statutory reserve for those Policies that do not have Account Balances (e.g., Contracts in Pay Status) and face amount, if applicable, except that the supplements as of March 31, 1998 do not set forth Policyholder name or policy form information. (c) All Reinsured Policies in effect on the Closing Date or the New York Assumption Date, as applicable, will be set forth, together with (i) updated information in each category described in the supplements described in paragraph (b) above; (ii) for each Policy listed in an updated Schedule 1-A, Schedule 1-B, Schedule 1-C, Schedule 2-A, Schedule 2-B and Schedule 2-C, a calculation for each such Policy of the Reserves Liabilities associated with such Policy, where applicable, or for those Policies in which Reserve Liabilities are only calculated in the aggregate, a calculation of the aggregate Reserve Liabilities associated with such Policies; and (iii) for each Policy listed in an updated Schedule 1-A, Schedule 1-B and Schedule 1-C, a recalculation as of the Closing Date for each such Policy of the seven pay test in accordance with Section 7702A of the Code. The Seller will deliver to the Purchaser such updated schedules not later than 30 days following each of the Closing Date and the New York Assumption Date. 2.12.2 Life Policies. The Reinsured Life Policies listed on Schedule 1-A and the supplements thereto include all Contracts that are life insurance policies (other than the Contracts ceded to Integrity Life Insurance Company) in effect on March 31, 1998, May 31, 1998 or June 30, 1998, as applicable. The Non New York Reinsured Life Policies listed on Schedule 1-B and the supplements thereto include all Contracts that are life insurance policies (other than the Contracts ceded to Integrity Life Insurance Company) and are in effect on March 31, 1998, May 31, 15 1998 or June 30, 1998, as applicable, issued to Policyholders Resident as of such date in jurisdictions other than New York, and the New York Reinsured Life policies listed on Schedule 1-C and the supplements thereto include all Contracts that are life insurance policies (other than the Contracts ceded to Integrity Life Insurance Company) and are in effect on March 31, 1998, May 31, 1998 or June 30, 1998, as applicable, issued to Policyholders Resident as of such date in New York. The Reinsured Life Policies listed on the updated Schedule 1-A, the Non New York Reinsured Life Policies listed on the updated Schedule 1-B and the New York Reinsured Life Policies listed on the updated Schedule 1-C, each as delivered by the Seller following each of the Closing Date and the New York Assumption Date as provided in Section 2.12.1(c), will include all Contracts that are life insurance policies (other than the Contracts ceded to Integrity Life Insurance Company) and are in effect on the Closing Date and the New York Assumption Date, respectively, issued to all Policyholders or to Policyholders Resident as of the applicable date in the specified jurisdictions, and will include updated information in each category set forth in Section 2.12.1(b) and all additional information required pursuant to Section 2.12.1(c). 2.12.3 Annuity Contracts. The Reinsured Annuity Contracts listed on Schedule 2-A and the supplements thereto include all Covered Accumulation Contracts and Contracts in Pay Status (other than the Excluded Annuity Contracts) in effect on March 31, 1998, May 31, 1998 or June 30, 1998, as applicable. The Non New York Reinsured Annuity Contracts listed on Schedule 2-B and the supplements thereto include all Covered Accumulation Contracts and Contracts in Pay Status (other than the Excluded Annuity Contracts) in effect on March 31, 1998, May 31, 1998 or June 30, 1998, as applicable, issued to Policyholders Resident as of such date in jurisdictions other than New York. The New York Reinsured Annuity Contracts listed on Schedule 2-C and the supplements thereto include all Covered Accumulation Contracts and Contracts in Pay Status (other than Excluded Annuity Contracts) in effect on March 31, 1998, May 31, 1998 or June 30, 1998, as applicable, issued to Policyholders Resident as of such date in New York. The Reinsured Annuity Contracts listed on the updated Schedule 2-A, the Non New York Reinsured Annuity Contracts listed on the updated Schedule 2-B and the New York Reinsured Annuity Contracts listed on the updated Schedule 2-C, each as delivered by the Seller following each of the Closing Date and the New York Assumption Date as provided in Section 2.12.1(c), will include all Covered Accumulation Contracts and Contracts in Pay Status (other than Excluded Annuity Contracts) in effect on the Closing Date and the New York Assumption Date, respectively, issued to all Policyholders or to Policyholders Resident as of the applicable dates in the specified jurisdictions, and will include updated information in each category set forth in Section 2.12.1(b) and all additional information required pursuant to Section 2.12.1(c). 2.12.4 Compliance with Law. (a) All of the Reinsured Policies currently in effect or that the Seller has a current contractual obligation to issue are, to the extent required under Applicable Laws, on forms approved by applicable Governmental Authorities of the jurisdiction where issued or have been filed with and not objected to by such Governmental Authorities within the period provided for objection, and such forms comply in all material respects with Applicable Laws. (b) All policy applications in respect of Reinsured Policies required to be filed with or approved by applicable Governmental Authorities under Applicable Laws have been so filed or approved. (c) All rated and other elements, including Cost of Insurance and premium rates, with respect to Reinsured Policies required to be filed with or approved by applicable Governmental Authorities 16 under Applicable Laws have been so filed or approved and premiums charged conform thereto. (d) No material deficiencies have been asserted by any Governmental Authority with respect to any filings referenced in paragraphs (a), (b) or (c) above that have not been cured or otherwise resolved to the satisfaction of such Governmental Authority. (e) None of the Reinsured Policies is a "security" requiring registration under federal securities laws. (f) The Seller has timely provided to all relevant Policyholders all annual statements and other material reports, in either case to the extent required by the terms of the Reinsured Policies or Applicable Laws. (g) Each Reinsured Policy used as a funding vehicle or otherwise in connection with a Tax Deferred Annuity Arrangement satisfies and has satisfied all requirements under the Code and Applicable Law for it to be so used, and there is no obligation based on Applicable Law to amend or endorse any such Reinsured Policy so as to maintain such status. Except for conflicts arising solely due to modifications of any such Reinsured Policy by the Plan (all of which are disclosed in Section 2.12.4(g) of the Seller's Disclosure Schedule), to the knowledge of the Seller no such Reinsured Policy which is an ERISA Plan is in conflict with, or provides any participant with any right that is in conflict with, the provisions of ERISA or the applicable provisions of the ERISA Plan. To the knowledge of the Seller, no rights granted or provision in any Reinsured Policy violates the Code, ERISA or any other Applicable Law. (h) No non-exempt "prohibited transaction," within the meaning of Section 4975 of the Code and Section 406 of ERISA, has occurred or, to the Seller's knowledge, is reasonably expected to occur with respect to any Reinsured Policy that involved any action or inaction by the Seller. 2.12.5 Policies in Effect. (a) All of the Reinsured Policies are (i) in full force and effect, (ii) legal, valid and binding obligations of the Seller, and, to the knowledge of the Seller, of the other parties thereto, and (iii) enforceable against the Seller, and, to the knowledge of the Seller, the other parties thereto, in each case in accordance with their respective terms. (b) The Transactions will not affect the legality, validity or binding character of any Reinsured Policy. 2.12.6 Sales Practices. (a) Each Reinsured Policy complies with all Applicable Laws and each Reinsured Policy has been offered, sold and administered in accordance with its terms and in compliance with all Applicable Laws (it being understood that, without limiting the definition of Excluded Liabilities or any other provision of this Agreement, no representation is made in this Section 2.12.6(a) as to the Policies issued by Mutual Benefit previously held by Policyholders who received Restructured Contracts pursuant to the Plan). All policy illustrations authorized or provided by the Seller or, to knowledge of the Seller, authorized or provided by any other Person, to Policyholders comply with the requirements of all Applicable Laws as in effect at such time and, if and to the extent applicable, (i) the requirements of Section 10(c) of the NAIC Life Illustration Model Regulation, and (ii) the illustration actuarial standards of the American Academy of Actuaries. (b) The Seller has no liabilities of any kind or nature arising from or relating to the conduct or practices of Mutual Benefit, 17 its Affiliates or Representatives with respect to Policies issued or offered by Mutual Benefit. 2.12.7 Payment of Policy Benefits. All benefits payable by the Seller and, to the knowledge of the Seller, by any other Person that is a party to or bound by any reinsurance, coinsurance, or other similar contract with the Seller, with respect to the Reinsured Policies and the Policies subject to the Inward Reinsurance Agreements have been paid in accordance with the terms of the Reinsured Policy under which they arose, except for such benefits for which there is, in the reasonable opinion of the Seller, a reasonable basis to contest and all such contested benefits have been disclosed in Section 2.12.7 of the Seller's Disclosure Schedule. 2.12.8 No Other Distributions. No Reinsured Policy or Policy subject to an Inward Reinsurance Agreement issued, reinsured, or underwritten by the Seller entitles the Policyholder or any other Person to receive dividends, distributions, or other benefits based on the revenues or earnings of the Seller or any other Person. 2.12.9 Underwriting Standards. The underwriting standards utilized and ratings applied by the Seller with respect to the Reinsured Policies and the Policies subject to the Inward Reinsurance Agreements conform in all material respects to industry accepted practices and to the standards and ratings required pursuant to the terms of the respective reinsurance, coinsurance, or other similar contracts. 2.12.10 Financial Status of Reinsurers. The Seller has not received any non-public information that would cause it to believe that there is or may reasonably be expected to be any material impairment of or adverse trend with respect to the financial condition of any reinsurer under any Outward Reinsurance Agreement or insurer under any Inward Reinsurance Agreement, in either case if such agreement is included in the Assigned Contracts. 2.12.11 No Waivers. The Seller has not waived any defenses or Actions that would have been available to it under the Reinsured Policies or the Policies subject to the Inward Reinsurance Agreements that, individually or in the aggregate, have had or would reasonably be expected to have a material adverse effect on the applicable Policies on or after the Closing Date. 2.12.12 Consistent with Books and Records. All of the Reinsured Policies are consistent with the Books and Records and any amendments, riders, or other modifications to the Reinsured Policies are fairly and accurately reflected in the Books and Records. 2.12.13 Guaranty Fund Assessments. The Seller has not received at any time since December 31, 1997 any written notice of any assessments imposed or to be imposed on the Seller by any Governmental Authority or other Person administering any insurance guaranty fund or association in any jurisdiction with respect to the Reinsured Policies that is unpaid or will be unpaid after 30 days following receipt of such notice. Section 2.12.13 of the Seller's Disclosure Schedule sets forth the amounts of all unpaid assessments. 2.12.14 Cost of Insurance and Interest Rates. The Seller is in compliance with all contract provisions and Applicable Laws relating to Cost of Insurance rates and credited interest rates with respect to the Reinsured Policies. 2.12.15 Taxable Basis. The Seller's administration systems and/or the Books and Records (in a reasonably identifiable location, arranged in an orderly fashion) contain accurate information regarding the taxable basis of each Reinsured Policy. 18 2.12.16 Lists of Group Pension Customers. (a) The Seller has delivered to the Purchaser a true and complete list, as of March 31, 1998, of each of the following: (i) (A) the name of each Group Pension Customer; (B) whether the assets held on behalf of such Group Pension Customer in the Group Pension Accounts are held for a Qualified Plan, a Tax Deferred Annuity Arrangement or an Other Plan; (C) in the case of a Qualified Plan, whether such Qualified Plan is a Fully Administered Qualified Plan; (D) with regard to each Tax Deferred Annuity Arrangement or Other Plan, whether such plan is an ERISA Plan; (E) the dollar amount of assets held by the Seller on behalf of each Benefit Plan or Qualified Contract of such Group Pension Customer in each of the Group Pension Accounts; (F) whether the Group Pension Customer has an individual or a group annuity contract with the Seller; (G) where the Seller performs recordkeeping by participant, the number of lives that are covered by the Seller on behalf of each Benefit Plan or Qualified Contract of the Group Pension Customer; (H) in the case of each group annuity contract, whether or not the Group Pension Customer has an allocated contract for which recordkeeping by the Seller is done separately for each participant covered by such contract; and (I) whether or not such Group Pension Customer is making ongoing contributions to the Seller; and (ii) an aggregation, by type of product, of the data which sets forth the dollar amount of assets held by the Seller on behalf of such Group Pension Customer in each of the Group Pension Accounts, and, where the Seller performs recordkeeping by participant, the number of lives which are covered by the Seller on behalf of such Group Pension Customer in each of the Group Pension Accounts. (b) The Seller has delivered to the Purchaser a true and complete list of each of the following, with respect to each Group Pension Customer: (i) all fees or other amounts MBL has collected for administrative services performed during 1997 for such Group Pension Customer and, to the extent paid in advance, the amount allocable to future services to be performed; (ii) all Group Pension Customers who are making ongoing new contributions to plans with the Seller; (iii) the amount of such ongoing contributions (excluding loan repayments) by Group Pension Customers during 1997; (iv) all active life insurance contracts that the Seller has with a Group Pension Customer, under a Benefit Plan, along with the scheduled premium on each; and (v) all outstanding loans as of March 31, 1998 under the Tax Deferred Annuity Arrangements and Fully Administered Qualified Plans, including the amount of such loan, whether or not it is current and whether or not it has been treated as in default for tax reporting purposes. 2.12.17 Contracts and Administrative Procedures of Group Pension Business; Group Pension Accounts; Reaffirmed Other Contracts. (a) The Books and Records contain, in a reasonably identifiable location, arranged in an orderly fashion, a true and complete copy of: (i) each contract and each document or written communication that establishes (and a written summary of any oral communications or practices that establish) an agreement, arrangement, or understanding or practice (including internal memoranda or administrative manuals), with respect to any administrative or other services that the Seller provides or has provided in the calendar years of 1994 through 1997, inclusive, or under which the Seller has any responsibility relating to, or covering its Group Pension Business; and (ii) any other contract or agreement, including plans of operation for its separate accounts and obligations of indemnification from claims, damages or other matters relating to the Group Pension Business. (b) All of the assets held on behalf of the customers in the 19 Group Pension Accounts are held only under the following types of contracts or accounts: Covered Contracts, Wrapped Contracts, Combination Contracts, New Money Accumulation Contracts, pooled separate accounts, (including Variable Annuities) or are held by Persons other than the Seller in mutual funds. True and complete copies of all organizational and operational documents, governmental filings, agreements with state insurance guarantee corporations or other insurance companies, prospectuses, disclosure statements and similar documentation with regard to the foregoing are contained in the Seller's Books and Records. 2.12.18 Documents Relating to Fully Administered Qualified Plans. (a) With respect to each Fully Administered Qualified Plan for which the Seller provides administrative or other services currently or as of the Closing Date, the Books and Records contain, in a reasonably identifiable location, arranged in an orderly fashion, true and complete copies, if applicable, of: (i) the documents embodying or relating to such Fully Qualified Administered Plan, including the Fully Qualified Administered Plan document(s) (past and present), the adoption agreements, all amendments thereto, the related trust or funding agreements, investment management agreements, administrative service contracts, insurance contracts, the current summary plan description and any summary of mutual modification since such summary plan description was distributed and, to the extent in the Seller's possession or control, all previous summary plan descriptions, summaries of material modifications, and material communications(s) to participants; (ii) the latest annual report, and all Schedule A's, and, to the extent in the Seller's possession or control, any prior annual reports; and (iii) each communication received since July 16, 1991 by the Seller or Mutual Benefit, or by the customer of which the Seller has a copy, from the IRS, the U.S. Department of Labor ("DOL"), or any other Governmental Authority, including an opinion letter from the IRS for each prototype plan, the two most recent applications for an opinion letter from the IRS submitted by the Seller or Mutual Benefit, the most recent application for a determination letter submitted to the IRS, and the most recent determination letter received from the IRS. None of the Fully Administered Qualified Plans is subject to regulation under foreign law or is a "multiemployer plan" (within the meaning of Sections (3)(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code). (b) Each Fully Administered Qualified Plan for which the Seller provides administrative or other services currently or as of the Closing Date has been amended to comply with, and has received a current determination letter (except in the case of a standardized prototype plan) from the IRS to the effect that such Fully Administered Qualified Plan is qualified under, Section 401(a) of the Code and any trust maintained pursuant thereto is exempt from federal income taxation under Section 501(a) of the Code or a current opinion letter from the IRS in the case of a plan that is a prototype plan to the effect that the form of the Plan and trust maintained pursuant thereto satisfy the requirements of Sections 401(a) and 501(a) of the Code. None of such amendments, opinion or letters is required to cover amendments required by the Small Business Job Protection Act of 1996 or the Taxpayer Relief Act of 1997. 2.12.19 No Excluded Policies. The Reinsured Policies do not include any Excluded Policy. 2.12.20 Account Values True-Up. The Seller's calculation of the Account Values True-Up for each Reinsured Policy will, when delivered: (a) be correct and complete, (b) be calculated in accordance with the requirements of the Plan and the applicable Rehabilitation Documents, and (c) for each Reinsured Policy represent the maximum liability in respect thereof. 2.12.21 Eligible Policies. The only Policies eligible for 20 Policy Enhancements pursuant to the Plan and the Rehabilitation Documents are the Eligible Policies. 2.12.22 MEC's. The Seller has delivered to the Purchaser a correct and complete list as of May 31, 1998 of each Reinsured Life Policy that may, in the absence of the Grandfathering Ruling, be deemed to be a MEC as a result of the consummation of the Transactions either (a) if the policyholder of such Policy makes annual premium payments in an amount equal to or greater than the average annual premium payment made with respect to such Policy during the four year period ending May 31, 1998, or (b) if the policyholder of such Policy makes annual premium payments in an amount equal to or greater than the premium payments made with respect to such Policy in 1997. 2.13 Reserves. Section 2.13 of the Seller's Disclosure Schedule sets forth in detail the components of the Reserve. All reserves and other liabilities of the Seller with respect to the Reinsured Policies and the Policies subject to the Inward Reinsurance Agreements as established or reflected, and all other provisions made for policy and contract claims with respect to the Reinsured Policies and the Policies subject to the Inward Reinsurance Agreements (excluding the Policy Enhancements Amount, collectively, "Reserve Liabilities") in the Statutory Statements have been determined in accordance with accounting practices prescribed or permitted by the Department of Banking and Insurance of the State of New Jersey (except as set forth therein) and GAAS using prescribed morbidity and mortality tables and interest rates that are in accordance with the nature of the benefits specified in the related Reinsured Policy or the relevant Policy subject to an Inward Reinsurance Agreement. Except with respect to the Seller's IBNR reserve in contemplation of the IBNR Settlement Amount and the Policy Enhancements Amount, each as expressly contemplated by this Agreement, no insurance reserving practice or policy of the Seller and its Subsidiaries with respect to the Business has changed, in any material respect, since December 31, 1996, and the results of the application of such practices and policies are reflected in the Statutory Statements and are at least as great as the minimum aggregate amounts required for the conduct of the Business in each other jurisdiction in which the Reinsured Policies and the Policies subject to the Inward Reinsurance Agreements have been issued. Without limiting the foregoing, to the knowledge of the Seller, the Seller has made adequate provision for all Reserve Liabilities to cover the total amount of all reasonably anticipated matured and unmatured benefits, claims and other liabilities under all Reinsured Policies. Reserve Liabilities with respect to the Restructured Life Contracts are at least as great as those that would be calculated by applying the CRVM Method to such Policies. The Seller owns cash, Cash Equivalents and Investment Grade Securities that qualify as legal reserve assets under Applicable Laws in an aggregate amount at least equal to the amount of all such Reserve Liabilities less the amount of principal and accrued interest on Reinsured Policy loans. All reserves and accrued liabilities for estimated losses, settlements, costs and expenses from pending Actions included in each Statutory Statement were determined in accordance with SAP and Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board. 2.14 Reinsurance Agreements. 2.14.1 Outward Reinsurance Agreements. Section 2.14.1 of the Seller's Disclosure Schedule lists all written Outward Reinsurance Agreements and a description or term sheet with all material terms of any oral Outward Reinsurance Agreements pursuant to which the Seller cedes or retrocedes or has any obligation to cede or retrocede risks assumed under the Reinsured Policies and all Reinsured Policies that are subject to such Outward Reinsurance Agreements. All Outward Reinsurance Agreements: (a) are legal, valid, binding and in full force and 21 effect; (b) are enforceable against the Seller, and, to the Seller's knowledge, each other party thereto, in accordance with their respective terms; (c) conform in all material respects to all Applicable Laws; and (d) reinsure Reinstated Policies in accordance with the Seller's customary reinstatement practices and the terms of the relevant Policies. No Outward Reinsurance Agreement will cease to be in full force and effect on terms identical to those currently in effect as a result of the consummation of the Transactions, nor will the consummation of the Transactions constitute a breach or default under any such Outward Reinsurance Agreement. Each Outward Reinsurance Agreement is assignable to ANLIC on the Closing Date, and may be partially assigned by ANLIC to First SunAmerica with respect to the New York Reinsured Polices on the New York Assumption Date, on terms identical to those currently in effect. Neither the Seller, nor, to the knowledge of the Seller, any other party thereto, is in default of any provision of any Outward Reinsurance Agreement. The Seller has previously furnished or made available to the Purchaser true, correct and complete copies of each Outward Reinsurance Agreement. 2.14.2 Inward Reinsurance Agreements. Section 2.14.2 of the Seller's Disclosure Schedule lists all Inward Reinsurance Agreements pursuant to which the Seller reinsures or assumes or has any obligation to reinsure or assume risks of Policies issued or retroceded by reinsurers under the Outward Reinsurance Agreements. All Inward Reinsurance Policies are: (a) legal, valid, binding and in full force and effect; (b) enforceable against the Seller, and, to the Seller's knowledge, each other party thereto, in accordance with their respective terms; and (c) conform in all material respects to all Applicable Laws. No Inward Reinsurance Agreement will cease to be in full force and effect on terms identical to those currently in effect as a result of the consummation of the Transactions, nor will the consummation of the Transactions constitute a breach or default under any such Inward Reinsurance Agreement. Each Inward Reinsurance Agreement is assignable to ANLIC on the Closing Date on terms identical to those currently in effect. Neither the Seller nor, to the knowledge of the Seller, any other party thereto, is in default of any provision of any Inward Reinsurance Agreement. The Seller has previously furnished or made available to the Purchaser, true, correct and complete copies of all Inward Reinsurance Agreements. 2.15 Brokers. All negotiations relating to this Agreement and the Transactions have been carried out without the intervention of any Person acting on behalf of the Seller in such a manner as to give rise to any valid claim against the Purchaser or the Seller for any brokerage, finder's or financial advisor's commission, fee or similar compensation, except for Goldman, Sachs & Co., whose fees in respect hereof will be paid by the Seller. 2.16 Severance Plan. The Seller's severance and retention plan as in effect on the date hereof (the "Severance Plan") is consistent in all material respects with the summary thereof that the Seller delivered to the Purchaser on June 26, 1998. 2.17 Absence of Undisclosed Liabilities. Neither the Seller nor any of its Subsidiaries has incurred or is subject to any material liabilities with respect to the Business, the Reinsured Policies or the Transferred Assets (including obligations or liabilities arising from policyholder claims or guaranty fund assessments), and, to the knowledge of the Seller, the Seller has not incurred and is not subject to any other material liabilities, of any kind or nature, whether absolute, accrued, contingent or otherwise, that are required by GAAP or SAP to be reflected in a consolidated balance sheet (or reflected in the notes thereto), except for: (a) liabilities reflected or reserved against in the GAAP Statements, the Statutory Statements or the Audited SAP Statements in accordance with the standards of disclosure applicable thereto; (b) liabilities incurred since the date of the most recent such statement in the ordinary course of 22 business; (c) liabilities reflected in Section 2.17 of the Seller's Disclosure Schedule (and quantified by reference therein); and (d) liabilities arising after the date hereof for which separate reserves will be established on or prior to the Closing Date in addition to those reserves and other holdbacks referenced in the financial data previously provided by the Seller to the Purchaser. 2.18 Transferred Assets. The Seller has legal and beneficial ownership of, and good and marketable title to, all of the Transferred Assets free and clear of all Encumbrances. All of the Transferred Reserve Assets qualify as legal reserve assets and admitted assets under Applicable Laws, including the insurance laws of the states of New Jersey, New York and Arizona, and meet the requirements of the Plan for assets comprising the Reserve. All Transferred Reserve Assets are, and will be when transferred to the Purchaser, either cash, Cash Equivalents, Investment Grade Securities, policy loans or amounts due from Outward Reinsurers or other receivables in respect of the Reinsured Policies and are, in each case, listed on Schedule 3, with such changes thereto as are required or permitted by Section 1.1.3. None of the Investment Grade Securities is, or will be when transferred to the Purchaser, in default. 2.19 Books and Records. The Books and Records are complete and accurate in all material respects, and have been maintained in accordance with all Applicable Laws and with good business and bookkeeping practices. 2.20 Threats of Cancellation. Since December 31, 1997, through the date of this Agreement, no Policyholder, group of Policyholders, or Persons writing, selling, or producing, either directly or through reinsurance assumed, insurance business that individually or in the aggregate for each such Policyholder, group or Person, respectively, accounted for (a) five percent (5%) or more of the annual premium (as determined in accordance with SAP) or (b) one percent (1%) of reserves of the Seller relating to the Reinsured Policies, in each case at or for the twelve month period then ended, has terminated or, to the knowledge of the Seller, given notice that it intends to terminate its relationship with the Seller. 2.21 Rehabilitation Plan. 2.21.1 List of Rehabilitation Documents. The Plan (as amended, modified or supplemented to date) and all agreements entered into in connection with the Plan, together with all exhibits, schedules, attachments and amendments thereto, including the Rehabilitation Agreement and Settlement Agreement (collectively, the "Rehabilitation Documents") are listed on Section 2.21.1 of the Seller's Disclosure Schedule. The Seller has delivered or made available to the Purchaser true, correct and complete copies of all of the Rehabilitation Documents. 2.21.2 Approval; Compliance. The Plan and each of the Rehabilitation Documents have been approved by all necessary Governmental Authorities, are in full force and effect and are legal, valid and binding on the Seller or its Subsidiaries, as applicable, and are enforceable in accordance with their respective terms. The Seller is in compliance with all provisions of the Plan and all Rehabilitation Documents. The Seller has no knowledge of any default by any other party of any of such other party's obligations under the Plan or any Rehabilitation Document. 2.21.3 No Actions. There is no Action pending or, to the knowledge of the Seller, threatened, arising out of, relating to or based upon the Plan or any Rehabilitation Document that relates to the Business, the Reinsured Policies or the Transferred Assets or that would otherwise reasonably be expected to have a Material Adverse Effect. 23 2.22 Assigned Contracts. Each of the Assigned Contracts is legal, valid, binding and enforceable against the Seller in accordance with its terms and, to the knowledge of the Seller, each other party thereto, in full force and effect according to its terms, and is freely assignable to ANLIC on the Closing Date and, if applicable, may be partially assigned by ANLIC to First SunAmerica with respect to the New York Reinsured Policies on the New York Assumption Date pursuant to this Agreement and the relevant Ancillary Agreements without notice to or consent of any Person. The Seller is not in default, nor, to the knowledge of the Seller, is any other party to any Assigned Contract in default, in any material respect under any Assigned Contract. 2.23 Agreements Relating to Payment of Commissions. 2.23.1 Forms of Commission Agreements. Each of the Commission Agreements is in one of the forms attached as Section 2.23.1 of the Seller's Disclosure Schedule and is consistent with the Books and Records concerning such Commission Agreements. Other than the Commission Agreements listed on Section 2.23.1 of the Seller's Disclosure Schedule, there are no agreements or arrangements pursuant to which Commissions are or may be payable with respect to the Reinsured Policies. The Seller has duly performed all of the terms, conditions, covenants and warranties of the Commission Agreements required of it, including the payment of all Commissions, and to the knowledge of the Seller, all other parties to the Commission Agreements have duly performed all of the terms, conditions, covenants and warranties of the Commission Agreements required on their part. 2.23.2 Insurance Agents. Section 2.23.2 of the Seller's Disclosure Schedule sets forth (a) all insurance agents and other producers with respect to the Reinsured Policies, and (b) identifies each such agent or producer having an Agent Debit Balance and the nature and amount of such Agent Debit Balance. 2.23.3 Renewal Commissions. The Seller is not liable to pay Commissions upon the renewal of any Reinsured Policy nor is it a party to any agreement providing for the collection of annuity or insurance premiums payable to the Seller by any other Person, which Commissions or premiums exceed $50,000 in the aggregate, except in accordance with customary insurance industry practice. 2.24 Third Party Administration Agreements. Section 2.24 of the Seller's Disclosure Schedule sets forth a complete and accurate listing and description of all third party administration agreements relating to the Reinsured Policies, regardless of whether the Seller is receiving or providing services (the "Third Party Administration Agreements"). Neither the Seller, nor, to the knowledge of the Seller, any other party thereto, is in breach of any Third Party Administration Agreement, and each Third Party Administration Agreement is in full force and effect and is legal, valid and binding on the Seller, enforceable against the Seller, and to the Seller's knowledge each other party thereto, in accordance with its terms, except to the extent that enforcement thereof may be limited by or subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general application relating to or affecting creditors' rights and to general equity principles. To the knowledge of the Seller, each party acting as a third party administrator under a Third Party Administration Agreement is duly licensed, qualified or admitted to do business and is in good standing in all jurisdictions in which it is required to be so licensed, qualified or admitted to do business as a third party administrator by Applicable Laws. 2.25 Impairments. With respect to the calculation of Impairments that is delivered by the Seller to the Purchaser pursuant to Section 4.17, the aggregate amount of the Impairments for the Reinsured Annuity Contracts and the Excluded Annuity Policies that are in each case Eligible Policies will be at least 60% of the aggregate amount of the Impairments for the Reinsured 24 Policies and the Excluded Policies that are in each case Eligible Policies as of the date of such calculation. 2.26 Wrapped Accumulation Contracts. Prior to giving effect to any amendment to the Settlement Agreement contemplated by this Agreement, all Wrapped Accumulation Contracts terminate automatically on December 31, 1999 in accordance with the Plan and the Settlement Agreement. 2.27 Policyholder Lists. Neither the Seller, any of its Affiliates nor any of their respective Representatives has given to any Person a complete or partial list (in any form) of holders of Reinsured Policies, Excluded Annuity Contracts, Wrapped Annuity Contacts or Variable Annuities, other than (a) the Purchaser, ANLIC, First SunAmerica or their respective Representatives or (b) parties to the Plan or participants in the auction process conducted by the Seller's investment bankers for the sale of the Seller's capital stock or the sale of all or any part of the Business (which participants received no greater information than the Purchaser and are bound by confidentiality agreements with the Seller). 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Except as expressly set forth in the relevant Sections of the Purchaser's Disclosure Schedule, the Purchaser represents and warrants to the Seller as follows: 3.1 Corporate Status and Authority. The Purchaser is duly organized, validly existing and in good standing under the laws of the State of Maryland, each of ANLIC and First SunAmerica are stock life insurance companies duly organized, validly existing and in good standing under the laws of the States of Arizona and New York, respectively, and each of Purchaser, ANLIC and First SunAmerica has all requisite corporate power and authority to conduct its business and to own or lease its properties, as now conducted, owned or leased. Each of the Purchaser, ANLIC and First SunAmerica has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, to perform its obligations and to consummate the Transactions. Such execution, delivery, performance and consummation have been or will have been on or prior to the Closing, as applicable, duly authorized by the Board of Directors of the Purchaser, ANLIC or First SunAmerica, as the case may be, which constitutes all necessary corporate action on the part of the Purchaser, ANLIC and First SunAmerica for such authorization. Each of this Agreement and the Ancillary Agreements to which it is a party has been or will have been on or prior to the Closing, as applicable, duly executed and delivered by each of the Purchaser, ANLIC and First SunAmerica, as applicable, and (assuming its due execution and delivery by the Seller) constitutes the legal, valid and binding obligation of the Purchaser, ANLIC or First SunAmerica, as the case may be, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium, receivership or similar laws affecting creditors or insurance companies and creditors' rights generally and by general principles of equity (whether considered at law or in equity). 3.2 No Conflicts, Consents and Approvals, etc.. 3.2.1 No Conflicts. Neither the execution, delivery or performance by each of the Purchaser, ANLIC and First SunAmerica of this Agreement and the Ancillary Agreements to which it is a party, nor the consummation of the Transactions will result in: (a) any conflict with, or default under, any of the Organizational Documents of the Purchaser, ANLIC or First SunAmerica, as applicable; (b) any breach or violation of, or default under, any Applicable Law; (c) any breach or violation of, or default under, any material mortgage, agreement, deed of trust, guaranty, note, bond, lease, indenture or any other 25 instrument to which the Purchaser, ANLIC or First SunAmerica is a party or by which the Purchaser, ANLIC and First SunAmerica or any of their respective properties or assets are bound; (d) the creation or imposition of any Encumbrance on their respective properties or assets; or (e) the breach or violation of any of the terms and conditions of, or a default under, or otherwise cause an impairment or revocation of, any Permit held by the Purchaser, ANLIC or First SunAmerica except for such conflicts, defaults, breaches, violations, conditions or Encumbrances that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. 3.2.2 Consents. No consent, approval, exemption or authorization is required to be obtained from, no notice is required to be given to, and no filing is required to be made with, any Governmental Authority or any other Person by the Purchaser, ANLIC or First SunAmerica in connection with the execution and delivery of this Agreement and the Ancillary Agreements to which the Purchaser, ANLIC or First SunAmerica is a party or the consummation of the Transactions, except filings, consents or approvals required with respect to (a) the HSR Act, and (b) Governmental Authorities having responsibility for the regulation of insurance in each of the jurisdictions in which ANLIC or First SunAmerica holds a certificate of authority to engage in the business of insurance. The Purchaser will deliver to the Seller not later than 30 days prior to the Closing Date an updated Section 3.2.2 of the Purchaser's Disclosure Schedule setting forth all filings with, consents or approvals of, Governmental Authorities described in clause (b) above. 3.3 Compliance with Laws. None of the Purchaser, ANLIC or First SunAmerica is in violation or has received any written notice of any violation of any Applicable Law, except for violations that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. 3.4 Litigation. Except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, there are: (a) no outstanding orders, decrees or judgments by or with any Governmental Authority before which the Purchaser, ANLIC or First SunAmerica is or was a party; (b) no Actions, pending or, to the knowledge of the Purchaser, threatened or contemplated, either by or against the Purchaser, ANLIC or First SunAmerica; or (c) to the knowledge of the Purchaser, no events, facts or circumstances that have arisen or occurred that would reasonably be expected to result in the commencement of any such Action. Section 3.4 of the Purchaser's Disclosure Schedule, as to each Action disclosed therein, describes the parties, the nature of the proceeding, the date and method commenced, and the amount of damages (if known) or other relief sought, and, if applicable, paid or granted. 3.5 Permits, Licenses, etc.. First SunAmerica is duly licensed to conduct insurance business under the laws of the States of New York, Nebraska and New Mexico, and ANLIC is duly licensed to conduct insurance business under the laws of the State of Arizona and under the laws of each other state of the United States and the District of Columbia, except the State of New York. ANLIC or First SunAmerica, as applicable, has been duly authorized by all necessary Governmental Authorities to transact insurance business of the types reflected by the Reinsured Policies in the respective jurisdictions in which they have been issued. ANLIC or First SunAmerica, as applicable, have all Permits necessary to conduct the Business in the manner and in the areas in which the Business is presently being conducted, and all such Permits are valid and in full force and effect, except where the failure to have such a Permit would not, individually or in the aggregate, result in a Material Adverse Effect. No revocation or non- renewal of such Permits has occurred, and, to the knowledge of the Purchaser, neither ANLIC nor First SunAmerica has engaged in any activity that would cause the revocation or suspension of any such Permit, no Action looking to or contemplating the revocation 26 or suspension of any such Permit is pending or, to the knowledge of ANLIC or First SunAmerica, as applicable, threatened, and neither ANLIC nor First SunAmerica has received a notice from any Person of any intention to revoke or to refuse renewal of any such Permit, except for such revocations, non-renewals or suspensions that would not, individually or in the aggregate, result in a Material Adverse Effect. 3.6 Financial Statements. The Purchaser has delivered to the Seller true, correct and complete copies of the Financial Statements described below. 3.6.1 Audited GAAP Statements. The audited consolidated balance sheet of the Purchaser and its Subsidiaries at September 30, 1997 and September 30, 1996 and the related consolidated income statements and statement of cash flows for the periods then ended, together with the notes thereto and the unqualified report of Price Waterhouse LLP, the independent certified public accountant of the Purchaser (the "Audited Purchaser Financial Statements"); 3.6.2 Statutory Statements. The annual statements of each of ANLIC and First SunAmerica, including all notes, exhibits and schedules thereto and any affirmations and certifications filed therewith and the actuarial opinions applicable to the insurance business for such years as filed with the Arizona Department of Insurance and the New York State Insurance Department, respectively, for the years ended December 31, 1996 and December 31, 1997 (the "ANLIC Statutory Statements"); and 3.6.3 Audited SAP Statements. The audited statutory-basis balance sheets of each of ANLIC and First SunAmerica as at December 31, 1996 and December 31, 1997, and the related summaries of operations, statutory-basis statements of income, capital and surplus, and cash flow for the periods then ended, together with the notes thereto and the unqualified report of Price Waterhouse LLP thereon (the "ANLIC Audited SAP Statements;" together with the ANLIC Statutory Statements, the "ANLIC SAP Statements"). 3.6.4 GAAP Statement Representations. The Audited Purchaser Financial Statements present fairly, in all material respects, the consolidated financial position of the Purchaser and its Subsidiaries as at the respective dates thereof and the results of their consolidated income, changes in shareholders' equity and cash flows for the respective periods then ended, in each case, in accordance with GAAP applied on a consistent basis throughout the periods indicated, except for the deviations from GAAP disclosed thereon or in the notes thereto. 3.6.5 SAP Statement Representations. The ANLIC Audited SAP Statements have been prepared in accordance with accounting practices prescribed or permitted by the Arizona Department of Insurance (with respect to ANLIC) and the New York State Insurance Department (with respect to First SunAmerica), and such accounting practices have been applied on a consistent basis throughout the periods indicated, except as expressly set forth or disclosed in the respective notes thereto. The ANLIC Audited SAP Statements present fairly, in all material respects, the admitted assets, reserves, liabilities, capital and surplus of ANLIC and First SunAmerica as at the respective dates thereof and the results of their respective operations and cash flow for the respective periods then ended. The ANLIC Statutory Statements complied in all material respects with all Applicable Laws when filed, were timely filed with all required Governmental Authorities, and no material deficiency has been asserted with respect to such statements by either the Arizona Department of Insurance or the New York State Insurance Department or any other applicable Governmental Authority. 3.7 Absence of Changes. Except as expressly contemplated or required by this Agreement, since December 31, 1997 (a) there has 27 not been any adverse change in the business, financial condition, results of operations or property of the Purchaser, ANLIC or First SunAmerica, and (b) the Purchaser has not received notice of, and it has no knowledge of any circumstances that would reasonably be expected to result in, any impending downgrades of the ratings of the Purchaser, ANLIC or First SunAmerica as set forth in Section 3.9, except for the changes or ratings downgrades, as the case may be, that have not had and would not reasonably be expected to have a Material Adverse Effect. 3.8 Brokers. All negotiations relating to this Agreement and the Transactions have been carried out without the intervention of any Person acting on behalf of the Purchaser, ANLIC or First SunAmerica in such a manner as to give rise to any valid claim against the Purchaser, ANLIC or First SunAmerica or the Seller for any brokerage or finder's or financial advisor's commission, fee or similar compensation. 3.9 Rating. As of the date hereof, the Standard & Poor's Ratings Group Claims-Paying Ability Rating of ANLIC is AA-, the Moody's Investor Service, Inc. Financial Strength Rating of ANLIC is A2, the Duff & Phelps Rating of ANLIC is A, and the A.M. Best & Co. Rating of each of ANLIC and First SunAmerica is A+. 4. PRE-CLOSING COVENANTS 4.1 Consents; Cooperation. 4.1.1 Consents to be Obtained. The Purchaser and the Seller acknowledge that the consents, approvals and authorizations with respect to the consummation of the Transactions (a) referenced in Section 2.3.2 and set forth in Section 2.3.2 of the Seller's Disclosure Schedule, and (b) referenced in Section 3.2.2 and set forth in Section 3.2.2 of the Purchaser's Disclosure Schedule are required from the parties indicated thereon to consummate the Transactions at the Closing and that such consents, approvals and authorizations have not, as of the date hereof, been obtained. 4.1.2 Cooperation. Subject to the terms and conditions of this Agreement, each party will use its commercially reasonable efforts to cause the Closing to occur, including: (a) causing the Closing Conditions to be satisfied, to the extent within the control of such party; (b) cooperating as contemplated by Section 4.1.3; and (c) defending against any Actions that challenge this Agreement or any provision of it or the consummation of the Transactions, including seeking to have any temporary restraining order, preliminary injunction or other legal restraint or prohibition entered or imposed by any Governmental Authority that is not yet final and nonappealable, vacated or reversed; provided, however, if approval of any Governmental Authority is necessary to approve any Competitive Bid that is submitted pursuant to procedures adopted by the Court after the Seller has satisfied the requirements of Sections 4.15 and 4.16, the Seller will not be required to oppose such approval. Without limiting the foregoing, the Seller and the Purchaser will use their respective commercially reasonable efforts to cause the Closing to occur on or as soon as practicable after the satisfaction of all of the Closing Conditions. 4.1.3 Regulatory Filings; Other Consents. (a) Each of the Seller and the Purchaser will as promptly as practicable, but in no event later than 15 Business Days following the date of this Agreement, file with the United States Federal Trade Commission (the "FTC") and the United States Department of Justice (the "DOJ") the notification and report form, if any, required for the Transactions and any supplemental information requested in connection therewith pursuant to the HSR Act. Any such notification and report form and supplemental information will be in substantial compliance with the requirements of the HSR Act. The Seller and the Purchaser will 28 as promptly as practicable comply with any Applicable Laws of any jurisdiction pursuant to which any Permit of, or filing with, any Governmental Authority or any other Person in connection with the Transactions is necessary, including the filing by the Purchaser of a current report on Form 8-K on or after the Closing Date. The Seller and the Purchaser will keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the FTC and the DOJ and any other Governmental Authority and will exercise commercially reasonable efforts to comply promptly with any such inquiry or request. Each of the Seller and the Purchaser will use commercially reasonable efforts to obtain any clearance required under the HSR Act or any other Permit of any Governmental Authority necessary for the consummation of the Transactions. (b) The Seller and the Purchaser will cooperate and use their commercially reasonable efforts to obtain Permits and agreements of, and give and make all notices and filings with, any Governmental Authorities necessary to authorize, approve or permit the consummation of the Transactions, including the preparation and filing by the Seller of the Petition for Court Approval and its attachments including the Plan amendments and motions for the other orders described in Section 4.11, the Policyholder Disclosure Statement and the Policy Enhancements Procedures, the filing by the Purchaser of a current report on Form 8-K on or after the Closing Date and the preparation and filing (i) by the Seller of the Policy Enhancements Endorsements and (ii) by the Purchaser of its endorsements with respect to the Policy Enhancements. The Seller will not file any Policy Enhancements Endorsements or the Petition for Court Approval or any of its attachments without the prior review and approval of the Purchaser, which will not be unreasonably withheld or delayed. The Seller will use its commercially reasonable efforts to obtain all consents and approvals contemplated by this Agreement and the Ancillary Agreements as referenced in Section 2.3.2 and as set forth in Section 2.3.2 of the Seller's Disclosure Schedule. The Purchaser will use its commercially reasonable efforts to obtain all consents and approvals contemplated by this Agreement and the Ancillary Agreements as set forth in Section 3.2.2 of the Purchaser's Disclosure Schedule. (c) Each of the Seller and the Purchaser will furnish to the other such necessary information and reasonable assistance as the other may request in connection with: (i) its preparation of any filing that is necessary under any Applicable Law; (ii) its obtaining all other relevant Permits from Governmental Authorities; (iii) its obtaining the approval of the Court, as specified in Section 6.2.3; (iv) its obtaining the approval of the Class Four Creditors, as specified in Section 6.2.4; (v) its obtaining the approval of the Reinsurers as specified in Section 6.2.5; and (vi) its obtaining any other required consents or approvals of any Person. 4.2 Seller's Conduct of Business, etc. Except as set forth in Section 4.2 of the Seller's Disclosure Schedule, from the date of this Agreement until the Closing, the Seller will, and will cause its Subsidiaries to, unless it receives the prior written consent of the Purchaser, and except as expressly contemplated by this Agreement: (a) operate the Business as presently operated and only in the ordinary course (taking into account the restrictions imposed on the Seller by the Plan) and consistent with past practice, and use commercially reasonable efforts to preserve its relationship with and the goodwill of its brokers, customers, suppliers, employees and other Persons having business dealings with the Seller in connection with the Business; (b) give prompt notice to the Purchaser of any event, occurrence or circumstance of which the Seller has knowledge and that is reasonably likely to result in or contribute to a Material 29 Adverse Effect or result in or contribute to a breach by the Seller of this Agreement; (c) not take any action or omit to take any action that would result in a breach or inaccuracy of any of the representations and warranties set forth in Section 2 in any material respect at, or as of any time prior to, the Closing; (d) not directly or indirectly assign, transfer, mortgage, pledge, lease or otherwise dispose of or grant or create or permit to exist any material Encumbrance on, any Transferred Assets, other than a disposition of a Transferred Reserve Asset in accordance with Section 1.1.3; (e) maintain its Books and Records and the Transferred Assets in its usual, regular and ordinary manner, consistent with its past practice; (f) not make or permit any material change in its underwriting, pricing, actuarial, or investment practices or policies with respect to the Business, the Reinsured Policies or the Transferred Assets or make, or agree to make, any material change in its financial, Tax or accounting practices or policies, or in any assumption underlying such a practice or policy, in either case including any basis for establishing reserves (including excess interest reserves), or any depreciation or amortization policies or rates, in each case other than as required by a change in GAAP, SAP or Applicable Law after the date hereof and provided that the Seller gives the Purchaser prompt notice of any such required change; (g) maintain all, and not take any action to forfeit, abandon, modify, waive, terminate or otherwise change any, of its Permits material to the Business, except (i) as may be required in order to comply with Applicable Law, (ii) as may be expressly contemplated by this Agreement, or (iii) such modifications or waivers of Permits made in the ordinary course of business of the Seller as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (h) not issue or sell new Policies in the categories of the Reinsured Policies, or amend existing Reinsured Policies, except to the extent required to comply with the terms of the Reinsured Policies or Applicable Law; (i) (i) cause all Reserve Liabilities with respect to Reinsured Policies established or reflected in the Books and Records to be (A) established or reflected on a basis consistent with those Reserve Liabilities and reserving methods followed by the Seller in the preparation of the December 31, 1997 Annual Statement and (B) in continued compliance with Section 2.13; and (ii) continue to own cash, Cash Equivalents, Investment Grade Securities, policy loans and amounts due from Outward Reinsurers or other receivables in respect of the Reinsured Policies as listed on Schedule 3, with such changes thereto as are required or permitted by Section 1.1.3, that qualify as legal reserve assets under all Applicable Laws in an amount at least equal to the amount of the Reserve less the amount listed on Schedule 3 with respect to principal and accrued interest on Reinsured Policy loans; (j) to comply with all Applicable Laws with respect to the Business, the Reinsured Policies and the Transferred Assets, comply with the terms of the Plan and the Rehabilitation Documents, perform all obligations that it or any of its Subsidiaries have under the Plan and the Rehabilitation Documents and not amend or modify the Plan or any Rehabilitation Document except as expressly contemplated by this Agreement; (k) prepare and deliver to Policyholders of Reinsured Policies all annual statements and other reports to the extent required by the terms of the Reinsured Policies or Applicable Laws; 30 (l) as soon as practicable upon the request of any Policyholder, provide, prior to the Closing Date, a new illustration to such Policyholder that gives effect to the Transactions in accordance with the assumptions set forth on Schedule 8; and (m) not agree or commit to do, or agree or commit not to do, as the case may be, any of the actions referred to in this Section 4.2. 4.3 Access and Information. From the date hereof until the Closing, upon reasonable notice, the Seller will give to the Purchaser and its Representatives access at all reasonable times during normal business hours to the Books and Records and to the properties of the Seller and its Subsidiaries as they relate to the Business, the Transferred Assets, the Reinsured Policies, the Wrapped Accumulation Contracts, the Excluded Annuity Contacts, or the Variable Annuities and furnish for inspection and copying such Books and Records as the Purchaser reasonably requests. All Books and Records obtained by the Purchaser and its Representatives will be subject to the terms of the Confidentiality Agreement. 4.4 Certain Transactions. From the date of this Agreement through the Closing, neither the Seller nor any of its Affiliates or Representatives will, directly or indirectly, solicit, encourage or initiate any inquiry, offer or proposal from or any negotiations or discussions with, provide any information to, participate in any negotiations or discussions with, or otherwise cooperate in any manner with, any Person or group (other than the Purchaser and its Affiliates) concerning (a) any direct or indirect sale, transfer or other disposition of (i) the Business (including the Reinsured Policies and, subject to Section 1.1.3, the Transferred Reserve Assets), (ii) the stock or assets of the Seller's Subsidiary First Priority Investment Corp., (iii) except as otherwise agreed by the Seller and the Purchaser, the 51% partnership interest in Markston Investment Management held by the Seller's Subsidiary MBL Sales Corporation, or (iv) the stock or assets of the Seller's Subsidiary Mutual Benefit Marketing Group d/b/a Financial Partners Marketing Group), or (b) any acquisition, disposition, merger, tender or exchange offer or other form of business combination the acceptance of which would be inconsistent with the consummation of the Transactions; provided, however, that the Seller will not be required to defend against any Action brought, nor will it be precluded from entertaining any bid or offer for the Seller or the Business required to be entertained by the Court, pursuant to the overbid procedures described in Section 4.16 or alternate overbid procedures mandated by the Court. Within five Business Days of the Seller's receipt of any such inquiries, proposals, offers or discussions, the Seller will provide the Purchaser with a written notice of all relevant details of any such inquiries, proposals, offers or discussions. Compliance with this Section 4.4 will not relieve the Seller of any other express or implied obligations under this Agreement, the Ancillary Agreements, or Applicable Law. 4.5 Financial Statements and Reports. As promptly as practicable after each calendar quarter and year ending between the date hereof and the Closing Date, the Seller will deliver to the Purchaser true and complete copies of the GAAP basis and SAP basis financial statements prepared by the Seller for the quarter then ended and audited GAAP basis and SAP basis financial statements, together with the notes thereto and the unqualified report of Coopers & Lybrand L.L.P. thereon, for each year then ended. The Seller will continue to prepare in the ordinary course consistent with past practice and will deliver, as soon as available, to the Purchaser, true and complete copies of such other financial statements and reports, or analyses as may be prepared or received by the Seller related to the Business, the Reinsured Policies or the Transferred Assets, including normal internal reports (such as those reflecting monthly cash flow, surrenders, assets under administration, operations expense, head 31 count and claims). 4.6 Intentionally Deleted. 4.7 Reinsurance Agreements. Prior to the Closing Date, the Seller will either (a) enter into a legal, valid and binding written agreement embodying the terms of any oral Outward Reinsurance Agreement described in Section 2.14.1 of the Seller's Disclosure Schedule, or (b) transfer the Policies covered by any such oral agreement to a legal, valid and binding written Outward Reinsurance Agreement with another reinsurer. The Seller will use its commercially reasonable efforts to cause each of the Outward Reinsurance Agreements and Inward Reinsurance Agreements listed on Sections 2.14.1 and 2.14.2, respectively, of the Seller's Disclosure Schedule to continue to be in full force and effect and to be assigned to ANLIC on the Closing Date (and, if applicable, to subsequently be partially assigned by ANLIC to First SunAmerica with respect to the New York Reinsured Policies on the New York Assumption Date), including by obtaining any necessary consent to effect such assignments. Such assignment must be on terms identical to those currently in effect, except, if required to effect such assignment, with an adjustment of the applicable premium, in connection with the consummation of the Transactions. In lieu of the Seller effecting such an assignment of any Outward Reinsurance Agreement, the Seller may enter into an agreement with a substitute reinsurer (each, a "Substitute Outward Reinsurer") that is identical in all material respects, other than the applicable premium, to the original Outward Reinsurance Agreement (each, a "Substitute Outward Reinsurance Agreement") and that is assignable to ANLIC as of the Closing Date (and, if applicable, may subsequently be partially assigned by ANLIC to First SunAmerica relating to the New York Reinsured Policies on the New York Assumption Date). Each Substitute Outward Reinsurer must have a rating, as of the date of the Substitute Outward Reinsurance Agreement and as of the Closing Date, of "A" or better by both Standard & Poor's Ratings Group and Moody's Investor Service, Inc. 4.8 Expenses. Subject to Sections 4.14, 4.15, 4.16 and 4.22 and except as otherwise expressly provided in this Agreement, the parties to this Agreement will bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the Transactions, including all fees and expenses of Representatives; provided, however, that (a) the Seller and the Purchaser will share equally the cost of the filing fees in connection with the filings with the FTC and the DOJ under the HSR Act with respect to the Transactions; (b) the Seller will pay the cost of, and reimburse the Purchaser for the Purchaser's actual out-of-pocket costs (other than fees and expenses of Representatives) relating to, obtaining required Permits for the implementation of this Agreement and the Ancillary Agreements from Governmental Authorities and the actual out-of-pocket costs of providing Policyholder notices and, with the exception of the expenses described in (c), otherwise implementing this Agreement and the Ancillary Agreements in accordance with their respective terms; and (c) the Purchaser will pay the costs of, and reimburse the Seller for the Seller's actual out-of-pocket costs (other than fees and expenses of Representatives) relating to, the filing and mailing of the certificates of assumption for the Reinsured Policies. Notwithstanding the foregoing, if it is commercially reasonable to do so, the Seller will include the Policyholder notices with respect to the certificates of assumption with its mailing of other Policyholder notices, thereby reducing additional mailing costs with respect to the certificates of assumption. 4.9 Publicity. From and after the date hereof and until the effectiveness of this Section 4.9 is terminated pursuant to Section 5.9, except as may be required by (a) Applicable Law (in the reasonable opinion of counsel), (b) the applicable rules or regulations of, or any listing agreement with, a national or foreign securities exchange or (c) any order of any Governmental 32 Authority of competent jurisdiction, in which case the Seller and the Purchaser, as the case may be, will use commercially reasonable efforts to allow the other party sufficient time, consistent with such obligations, to review the nature of such legal obligations and to comment upon such disclosure prior to publication, and except for discussions and filings with Governmental Authorities and rating agencies, neither the Seller or its Affiliates or Representatives, on the one hand, nor the Purchaser or its Affiliates or Representatives, on the other hand, will make, or cause to be made, any press release or public announcement in respect of this Agreement or the Ancillary Agreements or the Transactions or otherwise communicate with news or other media in respect thereof, without the prior written consent of the other party. The Seller and the Purchaser will cooperate as to the timing and contents of any press release or public announcement. 4.10 Contact with Employees, Policyholders and Other Constituencies. (a) After reasonable consultation with the Seller regarding the timing and content of such communication, the Purchaser (and its Representatives) will be entitled to contact and communicate with (i) the employees, customers, policyholders, suppliers, creditors and brokers of the Seller and its Subsidiaries, and (ii) the Reinsurers, NOLHGA and other parties to the Rehabilitation Documents in connection with the Transactions. The Purchaser will make commercially reasonable efforts to allow a Representative of the Seller to attend or otherwise be present during any contact or communication covered by this Section 4.10(a). Prior to the Closing Date, except in compliance with procedures and a "script" or other content outline mutually agreed by the Seller and the Purchaser, neither the Seller nor any of its Subsidiaries will contact or communicate with any of the Policyholders with respect to the Transactions without the prior written consent of the Purchaser; provided, however, that the Seller and its Subsidiaries may contact or communicate with any of the Policyholders on any other matter in the ordinary course of business consistent with past practice without the prior written consent of the Purchaser. (b) Without the prior written consent of the Seller, neither the Purchaser nor any of its Affiliates will directly solicit for employment any of the employees of the Seller with whom the Purchaser has had direct verbal or written communications during the investigation of and negotiations with the Seller, except for such employees who have been involuntarily terminated by the Seller. 4.11 Amendments to Plan and Other Orders. The Seller and the Purchaser will cooperate with each other in preparing and filing with the Court as part of the Petition for Court Approval as promptly as practicable after execution of this Agreement, the proposed amendments to the Plan and the Rehabilitation Documents and motions requesting certain additional orders to effectuate and confirm the items described in Exhibit I by the respective dates indicated therein. 4.12 Funding of Policy Enhancements. 4.12.1 Recognition of Liability. As of the Closing, the Seller will recognize in its financial statements as a liability under insurance policies an amount equal to the Policy Enhancements Amount to fund the Policy Enhancements, and will record an appropriate liability on the Seller's balance sheet for such purpose. On or before ten days prior to the Closing, the Seller will deliver to the Purchaser a calculation of the Policy Enhancements Amount. 4.12.2 Allocation of Policy Enhancements to Policyholders. (a) The Policy Enhancements will be credited at each Scheduled Vesting Date, or upon death, if sooner, as specified in the 33 Policy Enhancements Procedures. (b) The Policy Enhancement for an individual Policyholder at a Scheduled Vesting Date will be the greater of (i) the guarantee to be made to that individual Policyholder under the terms of the Policy Enhancements Endorsement provided to such Policyholder; and (ii) the individual Policyholder's Policy Enhancement calculated in accordance with the Settlement Agreement but assuming that the total Policy Enhancements credited or paid to all eligible Policyholders on such Scheduled Vesting Date is the Guaranteed Policy Enhancement Amount as of such date (calculated for this purpose without including the aggregate amount of Policy Enhancements paid as death benefits with respect to deaths reported prior to such Scheduled Vesting Date and after the immediately preceding Scheduled Vesting Date, if any). The guarantee to be made to an individual Policyholder pursuant to clause (i) above will be determined by ANLIC or First SunAmerica, as applicable, based on the Maximum Guaranteed Policy Enhancement Amount, the lapse assumptions used in the "Actuarial Analysis of MBL Life Assurance Corporation projected as of June 30, 1998" prepared by Coopers & Lybrand L.L.P., and the preliminary calculation of Impairments delivered pursuant to Section 4.17. Such guarantee for an individual Policyholder will in no event exceed the preliminary calculation of Impairment for that Policyholder. Such guarantee, once established, may be reduced to consider net withdrawals by a Policyholder consistent with the terms of the Settlement Agreement. The Seller will have the right to review information that it reasonably requests regarding the calculation of the individual Policyholder guarantees as well as the calculation of the Policy Enhancements credited or paid at each Scheduled Vesting Date. Upon the death of a Policyholder, the Policy Enhancement to be credited or paid to such Policyholder will be the full remaining amount, whether vested or unvested, due such Policyholder as of the end of the previous calendar quarter. (c) If all or any portion of any of the DAC Election Escrow Amount (or DAC Reduction Escrow Amount, as applicable), the COLI DAC Election Escrow Amount or the Policy Enhancements Endorsements Escrow Amount is released to the Seller prior to the final Scheduled Vesting Date, the Seller will deliver or cause to be delivered to ANLIC and First SunAmerica, not less than 60 days preceding the next Scheduled Vesting Date, cash in an amount equal to the applicable portion of the amounts released from such escrows that are to be added to the Policy Enhancements Amount in accordance with the Settlement Agreement (the "Additional Policy Enhancements Amount"). The Purchaser will cause ANLIC and First SunAmerica to credit (or, in the case of Eligible Policies that are Restructured Contracts in Pay Status, pay) the Additional Policy Enhancements Amount as of the next Scheduled Vesting Date to individual Eligible Policies in proportion to the respective Impairments of Eligible Policies remaining in effect on such Scheduled Vesting Date. The amount and application of the Additional Policy Enhancements Amount (i) will be fully incremental to the amount to be credited (or paid, as the case may be), pursuant to paragraph (b) above; and (ii) will not affect the calculation of the guarantee described in clause (i) of paragraph (b) above. Except for the obligation to credit (or pay, as the case may be) to policyholders of Eligible Policies amounts delivered to ANLIC or First SunAmerica as expressly set forth in this paragraph (c), none of the Purchaser or any of its Affiliates will have any obligation in connection with the Additional Policy Enhancements Amount, including the calculation thereof or the terms or timing of the release of funds from the COLI DAC Escrow Account. 4.12.3 No Set-off. The Purchaser agrees that it will have no right to set-off against its obligations under this Section 4.12 any Damages awarded the Purchaser in any Action arising out of or relating to this Agreement. 4.12.4 Endorsements to Eligible Policies. The Seller will 34 prepare and file all necessary endorsements and use commercially reasonable efforts to obtain all necessary Permits to assure that: (a) each Eligible Policy that is a Reinsured Life Policy has an endorsement providing that the Policy Enhancement for which such Policy is eligible will be credited to the Account Value of such Policy; and (b) each Eligible Policy that is a Reinsured Annuity Contract has and endorsement providing that the Policy Enhancement for which such Policy is eligible will be credited to the Account Value of such Policy (or, in the case of Eligible Policies that are Restructured Contracts in Pay Status, paid to the Policyholder) either (i) by the Seller, if the Closing does not occur and the Policy is not ceded to a reinsurer prior to December 31, 1999, or (ii) by ANLIC or First SunAmerica, as the case may be, if the Closing takes place but only if the Policyholder selects a Replacement Policy in accordance with Section 5.10 (collectively, the "Policy Enhancements Endorsements"). The Seller will cooperate with and assist the Purchaser in filing endorsements and obtaining necessary Permits with respect to the Policy Enhancements for the applicable Replacement Policies. 4.12.5 Policy Enhancements Endorsements Escrow Amount. (a) If the Seller has not obtained, at least five Business Days prior to the Closing Date, all Permits necessary to attach the Policy Enhancements Endorsements in all jurisdictions, the Seller will deposit the Policy Enhancements Endorsements Escrow Amount in the Policy Enhancements Endorsements Escrow Account established under the Escrow Agreement. The "Policy Enhancements Endorsements Escrow Amount" means the dollar amount equal to the sum of (i) 1.5% of the Account Balances (or statutory reserves in the case of Restructured Contracts in Pay Status) as of the Calculation Date of those Reinsured Annuity Contracts that are Eligible Policies for which all necessary Permits to attach the Policy Enhancements Endorsements have not been obtained by the Seller prior to such date; plus (ii) 3.5% of the Account Balances as of the Calculation Date of those Reinsured Life Policies that are Eligible Policies for which all necessary Permits to attach the Policy Enhancements Endorsements have not been obtained by the Seller prior to such date. (b) If the Seller obtains all Permits necessary to attach the Policy Enhancements Endorsements from additional jurisdictions within 60 days after the Closing Date, the Seller will be entitled to a payment out of the Policy Enhancements Endorsements Escrow Account of 100% of such portion of the Policy Enhancements Endorsements Escrow Amount that relates to the additional jurisdictions for which such Permits have been obtained during such period, together with net accrued interest or earnings on such amount. If the Seller obtains all Permits necessary to attach the Policy Enhancements Endorsements for additional jurisdictions not sooner than 60 days but no later than 90 days after the Closing Date, the Seller will be entitled to a payment out of the Policy Enhancements Endorsements Escrow Account of 75% of such portion of the Policy Enhancements Endorsements Escrow Amount that relates to the additional jurisdictions for such Permits have been obtained during such period, together with net accrued interest or earnings on such amount. If the Seller obtains all Permits necessary to attach the Policy Enhancements Endorsements for additional jurisdictions not sooner than 90 days but no later than 120 days after the Closing Date, the Seller will be entitled to payment out of the Policy Enhancements Endorsements Escrow Account of 50% of such portion of the Policy Enhancements Endorsements Escrow Amount that relates to the additional jurisdictions for which such Permits have been obtained during such period, together with net accrued interest or earnings on such amount. All amounts remaining in the Policy Enhancements Endorsements Escrow Account 120 days after the Closing Date and not payable to the Seller pursuant to the foregoing sentences of this Section 4.12.5(b) will be released to the Purchaser and the Seller will continue to use commercially reasonable efforts to obtain all remaining Policy Enhancements 35 Endorsements. 4.13 Endorsement of Certain Associations. The Seller will cooperate with the Purchaser in obtaining and/or maintaining the endorsements of the associations representing Policyholders. 4.14 Break-Up Fee; Expense Reimbursement. 4.14.1 Break-Up Fee. If (a) this Agreement has been terminated for any reason (including a termination by the Purchaser pursuant to Section 10.3.1(c), a failure to obtain any consent, approval or order of any Person or Governmental Authority that is required for the Seller to lawfully consummate the Transactions, or a failure to satisfy any of the other conditions in Section 6) other than (i) a breach by the Purchaser of its obligations hereunder; (ii) a failure by the Purchaser to satisfy any of the conditions in Section 6.3 in accordance with the terms thereof; or (iii) a failure to satisfy any of the conditions in Section 6.2.1, Section 6.2.2 (but excluding for purposes of this clause (iii) any failure of such condition relating to an Applicable Law of or Action brought by any New Jersey Governmental Authority or the Commissioner in any of her capacities), or Section 6.2.8 (but excluding for purposes of this clause (iii) any failure to obtain any Permit from a New Jersey Governmental Authority or the Commissioner in any of her capacities), provided that the failure to satisfy any of the conditions specified in clauses (ii) and (iii) above is not waived by the Purchaser or caused by the failure of the Seller to fulfill its obligations under this Agreement; and (b) the Seller has entered into any binding agreement with one or more third parties prior to October 1, 1999 regarding an Acquisition Proposal, the Seller will promptly, but not later than five Business Days after the later of such termination or the date the Seller enters into any such agreement(s), pay $10,000,000 in same day funds to the Purchaser. 4.14.2 Expense Reimbursement. On July 14, 1998, the Seller deposited $2,500,000 into the Expense Reimbursement Escrow Account. If this Agreement has been terminated for any reason (including a termination by the Purchaser pursuant to Section 10.3.1(c), a failure to obtain any consent, approval or order of any Person or Governmental Authority that is required for the Seller to lawfully consummate the Transactions, or a failure to satisfy any of the other conditions in Section 6) other than a breach by the Purchaser of its obligations hereunder or the failure of the Purchaser to fulfill when due any of the conditions in Section 6.3, the Purchaser will be entitled to payment of said amount out of the Expense Reimbursement Escrow Account. Such amount constitutes an agreed upon amount in consideration of the indirect costs and direct out-of-pocket expenses incurred by the Purchaser and its Representatives in connection with the Purchaser's due diligence investigation of the Business and the preparation and negotiation of this Agreement. Such amount will be payable to the Purchaser without any showing of proof by the Purchaser of the actual incurrence of such expenses. 4.14.3 Cumulative Remedies. Sections 4.14.1, 4.14.2 and 4.22 are cumulative, if applicable, and are not mutually exclusive. The Seller acknowledges: (a) its extensive efforts to sell the Business and the lengthy bidding process involved in such efforts; (b) the complexity of the process of negotiating and consummating the Transactions; (c) its belief that the Transactions represent a fair purchase price for the Business that confers a significant benefit on the Seller and Persons having an interest in the Seller; (d) the considerable time and expense that the Purchaser has invested and expects to continue to invest in the Transactions; (e) the magnitude of the Purchaser's anticipated capital commitment if the Transactions are consummated; and (f) that without the agreements contained in this Section 4.14 and in Sections 4.15, 4.16 and 4.22, the Purchaser would not enter into this Agreement. 36 4.15 Enforcement of Other Agreements. The Seller has represented to the Purchaser that each Person with whom the Seller or its Representatives has had negotiations with respect to the purchase of the capital stock of the Seller or all or any part of the Business, or that submitted bids or indications of interest in connection therewith, are subject to confidentiality agreements all of which contain the provisions set forth on Schedule 13 under the heading "unsolicited proposals" and certain of which contain the provisions set forth on Schedule 13 under the heading "challenges". The Purchaser has relied on that statement in connection with entering into this Agreement. The Seller will take such steps as are reasonably necessary to enforce the provisions of such agreements according to their respective terms and to prevent and prohibit such "unsolicited proposals" or "challenges" from such parties. 4.16 Overbidding Procedures. Together with the filing of the Petition for Court Approval, the Seller will file a motion (which motion will request review by the Court on the most expedited basis available) with the Court for an order, in form and substance reasonably satisfactory to the Purchaser, establishing the procedures described below for any party other than the Purchaser (each, a "Competitive Bidder") who wishes to make an Acquisition Proposal on terms that it considers to be better or higher than those set forth in this Agreement to make such a proposal (the "Competitive Bid Order"). The Seller will use its commercially reasonable efforts to cause the Court to enter the Competitive Bid Order as soon as possible. The Competitive Bid Order will include the following conditions and procedures, and no other conditions or procedures inconsistent in any material respect with the following: (a) Before the Seller may commence discussions with the Competitive Bidder, the Competitive Bidder must move to intervene in the Court approval proceeding (which motion must include a mark-up of this Agreement that the Competitive Bidder would be willing to execute without further negotiation) not later than the earlier of (i) ten Business Days after the Competitive Bid Order has been entered by the Court, and (ii) the date scheduled by the Court for the hearing relating to the approval of the consummation of the Transactions to be completed at the Closing. (b) The Competitive Bidder cannot be a Person or an Affiliate of a Person who (i) participated in the auction process conducted by the Seller's investment bankers for the sale of the Seller's capital stock or for the sale of all or any part of the Business, by receiving non-public information (including a Confidential Memorandum similar to the one delivered to the Purchaser) regarding the Seller or the Business, and/or submitting one or more proposals to acquire the capital stock of the Seller or all or any part of the Business, or (ii) is a Class Four Creditor that is or has at any time been a party to an agreement with the Seller restricting such Class Four Creditor from trading its Class Four Claims. (c) The Acquisition Proposal must be with respect to all of the Business, including all of the Reinsured Life Policies and Reinsured Annuity Contracts. (d) The total after-tax present value to the Seller of the Acquisition Proposal must be at least $12,500,000 higher than the total after-tax present value to the Company as of the date hereof of the Transactions (assuming that the Transactions had closed in accordance with their respective terms), as determined, based on reasonable and consistent assumptions, by Goldman Sachs & Co., the Seller's financial advisor. (e) The other material terms of the Acquisition Proposal, including the nature and timing of consideration to the Seller and the conditions to closing, must be no less favorable to the Seller than the similar terms of the Transactions. 37 (f) The Competitive Bidder must be at least as creditworthy (expressed in terms of credit ratings of at least two national ratings agencies) as ANLIC. (g) The Acquisition Proposal must be accompanied by the latest available certified SAP basis and GAAP basis financial statements of the Competitive Bidder and such subsequent financial statements and other financial information that would enable the Seller to evaluate the Competitive Bidder's ability to consummate the Acquisition Proposal. (h) The Competitive Bidder will have 10 Business Days after it submits the mark-up referred to in paragraph (a) above to conduct due diligence, after which it must, within three Business Days, submit to the Seller its best and last proposed purchase price and other terms. (i) The Competitive Bidder will secure and deliver to the Seller, not later than the date it submits the mark-up referred to in paragraph (a) above, a surety bond in an amount equal to 10% of the ceding commission under the Acquisition Proposal as a guarantee of payment of such ceding commission. (j) If one or more Acquisition Proposals meet all of the above requirements, the Seller will select the highest and best to consider. If the Seller commences consideration of such Acquisition Proposal, the Seller will, within ten Business Days, deliver to Purchaser a copy of the executed definitive agreement relating to such Acquisition Proposal, which will provide that the Seller may not amend or modify such agreement in any material respect except in a manner that would make it more favorable to the Seller and which will be subject to the Purchaser's right to match as set forth in this paragraph. The Seller will be obligated to terminate such definitive agreement and proceed to consummate the Transactions with the Purchaser if the Purchaser agrees, within ten Business Days of its receipt of the definitive agreement relating to the Acquisition Proposal, to modify this Agreement to meet (without any requirement that the Purchaser exceed such terms) the material terms thereof. (k) If the Purchaser does not elect to meet the material terms of the Acquisition Proposal as finally proposed by the Competitive Bidder pursuant to paragraphs (h) and (j) above, the Purchaser will be entitled, upon notice to the Seller to such effect, to immediate payment of the amounts required pursuant to Sections 4.14.1, 4.14.2 and 4.22. 4.17 Calculation of Impairments. As soon as reasonably practicable, but not later than the earlier of (i) October 15, 1998, and (ii) fifteen days after the end of the second calendar month preceding the Closing Date (or, if the Closing Date is December 31, 1998, November 30, 1998), the Seller will deliver to the Purchaser a preliminary calculation of the Impairment as of the last day of the month immediately preceding the date of delivery for each Reinsured Policy and each other Eligible Policy, which calculation will include the effect of the Account Values True-Up Amount that has accrued through the date of calculation, together with all supporting documentation used by the Seller as a basis for its calculation. 4.18 COI. 4.18.1 Modified COI Scale. The Seller will use its commercially reasonable efforts to file and obtain all Permits necessary to permit changes to mortality charges as set forth below (the "Modified COI Scale"). Mortality charges may be changed on the policy anniversary beginning 15 months after the Rehabilitation Period Termination Date, to scales reflecting the greater of (a) actual mortality experience and (b) anticipated mortality experience based on the following formulas: ---------------------------------------------------------------------- 38 - - | (A) | (B) | ---------------------------------------------------------------------- - - | Aggregate Account Values of all | | | Reinsured Life Policies in effect | | | One Year following the Rehabilitation | Increase in COIs | | Period Termination Date as a percent of | | | aggregate Account Values on 12/31/97 | | ---------------------------------------------------------------------- - - | 95% or more | 0% | | | | | Less than 95% | .7% for each 1% that the | | | Aggregate Account Values | | | percentage in column (A) | | | is less than 95% | ---------------------------------------------------------------------- - - Such amounts may be further adjusted to reflect items such as: (i) an increase or anticipated increase in the reinsurance rates charged by Outward Reinsurers where such increase is made subsequent to the Closing Date and not considered in the Outward Reinsurance Adjustment Amount; (ii) changes in taxation; and (iii) changes in Applicable Laws that increase the cost of administering the Reinsured Policies. In no event will any change in the Cost of Insurance scale increase the Cost of Insurance rate for any Reinsured Policy above the guaranteed COI rate contained in such Reinsured Policy. 4.18.2 COI Adjustment Amount. The COI Adjustment Amount will be calculated by the Purchaser as of the first anniversary of the Rehabilitation Period Termination Date and such calculation, together with a detailed statement explaining how such calculation was made, will be delivered to the Seller within 30 days after the first anniversary of the Rehabilitation Period Termination Date. The Seller will then have ten Business Days to dispute the Purchaser's calculation. If the Seller does not give timely notice of any dispute regarding the Purchaser's calculation, the Purchaser will be entitled to payment of such amount out of the COI Adjustment Escrow Account. If the Seller gives timely notice of any dispute regarding the Purchaser's calculation, the Purchaser will file a notice of its COI Adjustment Escrow Claim pursuant to the Escrow Agreement, and the parties will proceed to resolve such dispute by submitting such dispute to the Independent Party in accordance with Section 8.5. 4.19 Acquisition Agreement Regarding Broker/Dealer. The Seller and the Purchaser will negotiate in good faith to reach an agreement prior to the Closing for the acquisition by the Purchaser or any Subsidiary designated by the Purchaser of the assets of the Seller's Subsidiaries First Priority Investment Corp. and Mutual Benefit Marketing Group d/b/a Financial Partners Marketing Group for a purchase price of $125,000. 4.20 Grandfathering Ruling. On or before the date on which the Petition for Court Approval is filed, the Seller will file a request for a ruling which describes the facts associated with 39 the Transactions in a manner reasonably satisfactory to the Purchaser, and thereafter will use its best efforts to obtain, as promptly as possible a private letter ruling from the IRS (the "Grandfathering Ruling"): (a) describing the modification or restructuring of the Reinsured Life Policies that has or will have occurred as part of the rehabilitation of Mutual Benefit or the Seller pursuant to the Plan, including any modifications occurring pursuant to the Settlement Agreement or this Agreement (and including the attachment of the Policy Enhancements Endorsements to the Reinsured Life Policies), and (b) concluding, based on representations provided by the Seller (which representations will be reasonably acceptable to the Purchaser when submitted to the IRS) that the assumption of the Reinsured Life Policies by the Purchaser and its Affiliates pursuant to this Agreement (i) will not have an effect on the date that the Reinsured Life Policies were issued, entered into, or purchased for purposes of Sections 72, 101(f), 264, 7702 and 7702A of the Code, and (ii) will not require retesting or the start of a new test period under Sections 264(c)(1), 7702(f)(7)(B)-(E) and 7702A(c); and (c) referring to the application of Rev. Proc. 92- 57 to the Policy Enhancements and the Additional Policy Enhancements without negative comment. The Purchaser will be provided an opportunity to participate in all material communications with the IRS with respect to the Grandfathering Ruling through its designated Representative, and the Seller will not withdraw the request for the Grandfathering Ruling without the Purchaser's written consent, which consent will not be unreasonably withheld. The Purchaser will cooperate with the Seller in obtaining the Grandfathering Ruling on a timely basis. 4.21 Additional Enhancements DAC Amount. The Additional Enhancements DAC Amount will be calculated by the Seller as of each date on which any Additional Policy Enhancement Amount is paid by the Seller to the Purchaser pursuant to Section 4.12.2(c), and such calculation, together with a detailed statement explaining how such calculation was made, will be delivered to the Purchaser within 30 days of such payment date. The Seller will then have 30 days to pay to the Purchaser the Additional Enhancements DAC Amount, and if such amount is not so paid, Purchaser will be entitled to payment of such amount out of the Claims Escrow Account; provided, that if the payment to the Purchaser in connection with the release to the Seller of the COLI DAC Escrow Amount or the Policy Enhancements Endorsements Escrow Amount occurs in the tax year of the Seller which includes the Closing Date and at the time of such payment there has not been a Final Determination that the Seller is qualified to make the Election, then the Seller may pay the Additional Enhancements DAC Amount into the DAC Tax Indemnity Account as an addition to the DAC Election Escrow Amount which will be released only under the terms of Section 7.1 hereof; and provided, further, that the Additional Enhancements DAC Amount will not be payable if, and to the extent that, pursuant to the Letter Ruling (but no other form of Final Determination) and as a result of the Election (or a comparable election pursuant to Treas. Reg. Section 1.848-2(i)(4) for the year in which such payment date occurs), the Seller demonstrates to the Purchaser's reasonable satisfaction that there will be an additional "reduction amount," as determined under the Allocation Regulations, available to the Purchaser or its Affiliates that is attributable to the payment and receipt of the Additional Policy Enhancements Amount. 4.22 Reimbursable Transition Expenses. Prior to the Closing Date, the Purchaser will incur certain transition expenses relating to the conversion of its computer and other systems, including data mapping and conversion testing in preparation for the acquisition of the Business. Before the Purchaser incurs any such expenses, the Purchaser will notify the Seller of the expenditure. The Seller will then have five Business Days to approve or reject such expenditure. If the Seller approves such expenditure, the Seller will immediately deposit a sum equal to the amount of such expenditure into the Expense Reimbursement Escrow Account. If this Agreement has been terminated for any 40 reason (including a termination by the Purchaser pursuant to Section 10.3.1(c), a failure to obtain any consent, approval or order of any Person or Governmental Authority that is required for the Seller to lawfully consummate the Transactions, or a failure to satisfy any of the other conditions in Section 6), other than a breach by the Purchaser of its obligations hereunder or the failure of the Purchaser to fulfill when due any of the conditions set forth in Section 6.3, the Purchaser will be entitled to payment of all such approved expenditures out of the Expense Reimbursement Escrow Account upon presentation by the Purchaser of invoices or other reasonable evidence of such expenditures. If the Seller rejects such expenditure and the Purchaser elects to incur it in any event, then the Purchaser will not be entitled to reimbursement for such expenditure. Upon the Closing of the Transactions, the Seller will be entitled to payment of all amounts in the Expense Reimbursement Escrow Account (including amounts deposited pursuant to Section 4.14.2). 4.23 Transfer of Class Four Claims. On the date hereof, the Seller has delivered to the Purchaser letter agreements executed by certain Class Four Creditors providing, among other things, for such Class Four Creditors' support of the provisions of Sections 4.14, 4.15 and 4.16. Following the date hereof, the Seller will seek to obtain the consent of the Class Four Creditors to the consummation of the Transactions at the Closing and the other matters set forth in Exhibit I. In each case, these documents provide for the agreements set forth therein to be binding on the Class Four Creditors' successors and assigns and require the Class Four Creditors to deliver a written confirmation of any successor or assign of a Class Four Claim acknowledging that the terms of such documents are binding on such Person to the same extent as if a signatory thereto. In furtherance thereof, the Seller will instruct the transfer agent of such claims not to effect the transfer of any such claims without first being provided such confirmation. 4.24 Delivery of Updated Policy Lists. On or prior to the Calculation Date, the Seller will deliver to the Purchaser correct and complete lists as of such date of each Reinsured Life Policy that may, in the absence of the Grandfathering Ruling, be deemed to be a MEC as a result of the consummation of the Transactions if (a) the policyholder makes annual premium payments in an amount equal to or greater than the average annual premium payment made with respect to such Policy during the four year period ending on the Calculation Date; and (b) if the policyholder makes annual premium payments in an amount equal to or greater than the premium payments made with respect to such Policy for the 12 month period ending on the Calculation Date; provided, however, if the Grandfathering Ruling is obtained prior to the Calculation Date, the Seller will not be required to deliver the lists described in this Section 4.24. 5. CONTINUING COVENANTS 5.1 Continuing Access Obligations. 5.1.1 Access Obligations During Transition Period. Following the Closing Date until the Transition Period Termination Date, the Seller will continue to provide the Purchaser with all rights of access as provided in Section 4.3. On the Transition Period Termination Date, the Seller will deliver to the location(s) designated by the Purchaser for such delivery, the originals of all Books and Records. 5.1.2 Continuing Access Obligations of the Purchaser. Following the Transition Period Termination Date, the Purchaser will (a) allow the Seller, upon reasonable prior notice and during regular business hours, through its Representatives, the right, at the Seller's expense, to examine and make copies of the Books and Records delivered to the Purchaser on the Transition Period Termination Date, for any reasonable business purpose including the preparation or examination of Tax returns, filings 41 with Governmental Authorities and financial statements and the conduct of any Action whether pending or threatened, and (b) maintain such Books and Records for not less than seven years after the Closing Date for the Seller's examination and copying. Access to such Books and Records will be at the Seller's expense and may not unreasonably interfere with the Purchaser's or any successor company's business operations. 5.1.3 Continuing Access Obligations of the Seller. Following the Transition Period Termination Date, the Seller will (a) allow the Purchaser, upon reasonable prior notice and during regular business hours, through its Representatives, the right, at the Purchaser's expense, to examine and make copies of any documents, filings, information, records and lists relating to the Business, the Reinsured Policies, the Transferred Assets or the Excluded Policies retained by the Seller (the "Retained Books and Records"), for any reasonable business purpose, including (i) the preparation or examination of Tax Returns, filings with any Governmental Authority and financial statements and (ii) the conduct of any Action, whether pending or threatened, concerning the conduct of the Business prior to the Closing Date and (b) maintain such Retained Books and Records for not less than seven years after the Closing Date for the Purchaser's examination and copying; provided that if the Seller liquidates or dissolves prior to such date, Seller will deliver all such Retained Books and Records to the Purchaser. Access to such Retained Books and Records will be at the Purchaser's expense and can not unreasonably interfere with the Seller's or any successor company's business operations. 5.2 Distribution of Class Four Creditor Value Share; Liquidation. 5.2.1 Provision of Adequate Reserves.The Seller will not distribute any amount in respect of the Class Four Creditor Value Share or otherwise distribute assets in liquidation without providing and maintaining adequate reserves to satisfy the Seller's obligations under this Agreement and the Ancillary Agreements and all of the Seller's other liabilities and obligations, whether known or contingent. The Seller will not dissolve or otherwise cease its corporate existence prior to the end of the sixth month following the Transition Period Termination Date. 5.2.2 Distribution of Class Four Creditor Value Share. Without limiting the generality of Section 5.2.1 above, the distribution of the Class Four Creditor Value Share will be subject to the provisions of this Section 5.2.2. (a) The Seller will not make any distribution of the Class Four Creditor Value Share prior to the Certified Statement Date (as defined below). The "Certified Statement Date" means the earlier to occur of (i) the date of delivery to the Purchaser of the Final Closing Date Statement, or (ii) the date of delivery to the Purchaser of the Certified Estimated Closing Date Statement (as defined below); provided, however, that the Certified Statement Date will in no event be earlier than the Closing Date; further provided, that the Seller may only deliver the Certified Estimated Closing Date Statement on or before the 15th day following the Closing Date. The "Certified Estimated Closing Date Statement" means the Estimated Closing Date Statement as reviewed and certified by Coopers & Lybrand L.L.P to accurately set forth the actual amount (rather than the Seller's good faith estimate) as of the Calculation Date of each of the amounts required to be set forth in the Estimated Closing Date Statement. Following the Certified Statement Date (and except as provided in Section 5.2.2(b)), the Seller may only distribute that portion of the Class Four Creditor Value Share that exceeds the Reserved Value Share (as defined below). The "Reserved Value Share" means the sum of $285 million plus (x) if the Certified Statement Date is the date of delivery of the Final Closing Date Statement, an amount (which will not be less than zero) equal to the remainder 42 of (1) the Reserve minus the Ceding Commission, each as determined pursuant to the Final Closing Date Statement, minus (2) the Value (as of the Closing Date) of the Transferred Reserve Assets transferred to ANLIC on the Closing Date, or (y) if the Certified Statement Date is the date of delivery of the Certified Estimated Closing Date Statement, an amount (which will not be less than zero) equal to the remainder of (1) the Reserve minus the Ceding Commission, each as determined pursuant to the Certified Estimated Closing Date Statement, minus (2) the Value (as of the Closing Date) of the Transferred Reserve Assets transferred to ANLIC on the Closing Date. The Reserved Value Share will be retained in cash and Cash Equivalents by the Seller. (b) After (i) the earlier to occur of (A) the date the Purchaser delivers a notice of disagreement with the Final Closing Date Statement or (B) the end of the period provided for the Purchaser's review thereof as provided in Section 1.3.1, and (ii) the Seller's payment to ANLIC out of the Reserved Value Share of all undisputed amounts owing to ANLIC pursuant to Section 1.3.3, the Seller may make a distribution to the Class Four Creditors out of the remaining portion of the Reserved Value Share equal to the remainder of (x) the remaining portion of the Reserved Value Share, minus (y) the amount claimed as owing to ANLIC in such notice of disagreement to the extent disputed by the Seller. Upon final resolution of such disputes and payment out of the remaining portion of the Reserved Value Share to ANLIC of the full amount owing to ANLIC with respect thereto, the Seller may make an additional distribution to the Class Four Creditors equal to any remaining portion of the Reserved Value Share. 5.2.3 Restriction on Liquidating Distributions. Without limiting the generality of Section 5.2.1 above, except as expressly contemplated pursuant to Section 5.2.2 above, the Seller will not distribute any amount in respect of the Class Four Creditor Value Share or otherwise distribute assets in liquidation prior to the Transition Period Termination Date. 5.3 Termination of Excluded Annuity Contracts. If approved by the Court pursuant to Section 4.11, the Seller will make commercially reasonable efforts to terminate all Excluded Annuity Contracts (other than Variable Annuities that are Contracts in Pay Status) at the end of the Rehabilitation Period. 5.4 Termination of Wrapped Accumulation Contracts. The Seller will, promptly after the termination of the Wrapped Accumulation Contracts, apply the surplus contained in Seller's Separate Account B as carried on the Seller's books on such date to such policies in compliance with the terms of the Plan and the relevant Rehabilitation Documents. 5.5 Marketing Support. The Seller will: (a) provide the Purchaser with any information reasonably requested by the Purchaser or its Representatives with respect to the owners and holders of Wrapped Accumulation Contracts, Excluded Annuity Contracts and Variable Annuities (collectively, the "Terminating Policies"); (b) not provide any information with respect to the Terminating Policies to any other Person other than as necessary for the administration of the Terminating Policies; and (c) otherwise cooperate fully with the Purchaser in its marketing efforts to offer Replacement Policies to all owners and holders of Terminating Policies subject to the terms of the Transition Services Agreement. 5.6 Sufficiency of Staff and Assets. The Seller will continue to maintain sufficient levels of employees and assets (whether tangible or intangible) and all Permits necessary to perform the services contemplated by the Transition Services Agreement. 5.7 Policy Endorsements. At the Seller's cost and expense, the Seller will obtain all Permits from all relevant Governmental 43 Authorities regarding all endorsements to the Reinsured Policies and all other Policies issued by the Seller that are required to effect the termination of the Rehabilitation Period in accordance with the terms of this Agreement, each of which must be made available for review by, and be reasonably acceptable to, the Purchaser prior to the filing thereof with any Governmental Authority. The Purchaser and First SunAmerica, as applicable, will cooperate with the Seller in preparing, filing and obtaining the Purchaser's related endorsements for the Replacement Policies. 5.8 Rehabilitation Documents. The Seller will continue to perform, and will cause each of its Subsidiaries to perform, all of their respective obligations relating to the Business, the Reinsured Policies and the Transferred Assets pursuant to the Plan and each Rehabilitation Document, as amended in accordance with this Agreement, to the extent that any such obligations continue in effect after the Closing. 5.9 Post-Closing Publicity. Following the Closing Date and until the Assumption Reinsurance Agreements have become effective with respect to all Reinsured Policies, the provisions of Section 4.9 will continue to apply. 5.10 Post-Rehabilitation Treatment of Reinsured and Replacement Policies. 5.10.1 Continuation or Replacement. With respect to each Reinsured Life Policy, the Purchaser agrees to provide or cause ANLIC or First SunAmerica to provide a continuation of the existing Reinsured Life Policy in accordance with its terms. With respect to each Reinsured Annuity Contract, Purchaser agrees to provide or cause ANLIC or First SunAmerica to provide, as applicable, in its sole discretion, either (a) a continuation of the existing Reinsured Annuity Contract in accordance with its terms, or (b) a replacement policy written by the Purchaser, ANLIC or First SunAmerica, as applicable, that is substantially similar to the existing Reinsured Annuity Contract (each such replacement policy, a "Preserved Replacement Policy"). Any Preserved Replacement Policy will fully preserve all contractually guaranteed rights and values expressly provided in the existing Policy. Except for the Reinsured Policies for which the Policyholders have elected reduced paid-up or reduced face- amount options, to the extent any such Reinsured Policy has cash surrender rights, the cash surrender value of the Preserved Replacement Policy immediately after replacement will equal or exceed the Account Value of the Reinsured Policy immediately before replacement (without reduction for any moratorium or surrender charges). 5.10.2 Additional Replacement Policies. The Purchaser may offer, or may cause ANLIC or First SunAmerica to offer, as applicable, other replacement Policies written by the Purchaser or any Subsidiary of the Purchaser, that do not need to comply with the requirements of Section 5.10.1 (each, an "Additional Replacement Policy"; each Preserved Replacement Policy and each Additional Replacement Policy is referred to as a "Replacement Policy"). For all such Additional Replacement Policies, the Purchaser agrees to establish, as applicable, all guaranteed contractual terms in a commercially fair and reasonable manner which terms are in the aggregate at least as favorable as those provided by the Purchaser, ANLIC or First SunAmerica, as the case may be, to its own existing policyholders under substantially similar Policies currently in force. Such exchange will be based on the full Account Value from the Reinsured Policy without application of any front-end sales charges other than premium taxes, if applicable, but such Additional Replacement Policy can include surrender charges and other customary policy features. 5.10.3 Non-Guaranteed Elements. For all Replacement Policies issued pursuant to either Section 5.10.1 or 5.10.2, the Purchaser agrees to establish, or to cause ANLIC or First SunAmerica to 44 establish, as applicable, all non-guaranteed elements of Replacement Policies in a competitive manner which elements will be, in the aggregate, at least as favorable as those provided from time to time by the Purchaser, ANLIC, First SunAmerica or any other Subsidiary of the Purchaser that may assume Reinsured Policies or issue Replacement Policies, as the case may be, to its own policyholders under substantially similar circumstances. In establishing such non-guaranteed elements, the Purchaser may take into consideration all relevant factors, including the presence or absence of surrender charges, actual and anticipated persistency, the interest rate environment in which the premium was received and in which crediting rates were established, actual and anticipated mortality, reinsurance premiums charged by third party reinsurers, administrative expenses and Taxes, notwithstanding the non-guaranteed elements used in policy illustrations prior to the date hereof. 5.10.4 Eligible Policies. The following Policies are the only Policies that are eligible for Policy Enhancements: (a) each Policy that is either a continuation of an existing Reinsured Life Policy or a Replacement Policy for any such Reinsured Life Policy; (b) each Policy that is an Additional Replacement Policy for any Reinsured Annuity Contract that is a Covered Accumulation Contract; (c) each Additional Replacement Policy for any Excluded Annuity Contract that is a Covered Accumulation Contract; and (d) each Policy that is a continuation of an existing Reinsured Policy that is a Restructured Contract in Pay Status (collectively, the "Eligible Policies"). A Replacement Policy offered pursuant to Section 5.10.1 or 5.10.2 that falls within one of the above categories, will constitute an Eligible Policy even if such Replacement Policy is accepted by a policyholder prior to the Rehabilitation Period Termination Date. With respect to such Eligible Policies, the Purchaser, ANLIC and First SunAmerica agree to comply with all of the terms of Sections 5.10.1, 5.10.2, and 5.10.3 without regard to the Policy Enhancements Amount to be applied to such Eligible Policies. The amount of any Policy Enhancement must be fully incremental to each Eligible Policy (other than the Restructured Contracts in Pay Status where such Policy Enhancement is paid in cash), including any cash surrender value (other than Reinsured Policies that have elected "reduced paid up" or "reduced face amount" options in connection with the Rehabilitation), on the date such amount is applied. 5.10.5 Approvals. The Purchaser agrees that prior to the time it offers or causes ANLIC or First SunAmerica to offer, as applicable, any Replacement Policy pursuant to this Section 5.10, the Purchaser, ANLIC or First SunAmerica, as applicable, will have obtained all policy form and endorsement Permits required to be obtained from Governmental Authorities for such Replacement Policy. Prior to the Closing, the Seller will cooperate with the Purchaser and its Subsidiaries in securing all such policy form and endorsement Permits. 5.10.6 Guidelines for Restructured Life Policies. In addition to the above provisions, the Purchaser, ANLIC and First SunAmerica agree to the following with respect to the administration of Reinsured Life Policies (excluding those Reinsured Policies with respect to which the Policyholders have elected non-forfeiture options, including reduced paid-up and extended term insurance). (a) Mortality and expense charges will be initially established at the end of the Rehabilitation Period at the current "Preferred" COI scales, as modified prior to the Closing Date by mutual agreement of the Seller and the Purchaser. (b) Credited rates will be initially established at the end of the Rehabilitation Period at 5.0% based on the United States Treasury Rate on March 12, 1998. Such rate will be adjusted upward to the nearest 25 basis points if such rate declines, or downward to the nearest 25 basis points if such rate increases, 45 in either case from the United States Treasury Rate on March 12, 1998 as compared to the United States Treasury Rate on last Business Day of the fourth month preceding the Rehabilitation Period Termination Date. (c) year crediting rates on funds paid into any Restructured Life Policy after the Rehabilitation Period Termination Date will be initially established at the end of the Rehabilitation Period at a level at least 50 basis points higher than the generally applicable crediting rate with respect to that Reinsured Policy. Such rate, once established, will remain in effect through December 31, 1999 and will apply to funds received prior to such date for one year from the date of receipt. (d) After the current elements have been initially established as set forth above, the Purchaser may establish, or cause ANLIC or First SunAmerica to establish, as applicable, such rates and charges from time to time in accordance with the requirements of Sections 4.18 and 5.10.3. 5.10.7 Covered Accumulation Contract Replacement Policies. Except as set forth in the last sentence in this Section 5.10.7 and in Section 5.14, the Purchaser agrees to offer, or to cause ANLIC or First SunAmerica to offer, as applicable, at least one suitable contemporary fixed annuity and one suitable contemporary variable annuity as an Additional Replacement Policy, to be written by the Purchaser or any Subsidiary of the Purchaser with an issue date on or prior to January 1, 2000, for each Reinsured Annuity Contract (other than a 401(k) Contract) that is a Covered Accumulation Contract and each Excluded Annuity Contract that is a Covered Accumulation Contract and to offer at least one suitable contemporary Additional Replacement Policy to be written by any such Person for each Reinsured Annuity Contract that is a 401(k) Contract; provided, however, that the Purchaser and its Subsidiaries will only be obligated to offer a fixed annuity with respect to any Unallocated Accumulation Contract included in the Reinsured Policies. Such exchange will be based on the full Account Value from the relevant Policy without application of any front-end sales charges other than premium taxes, if applicable, but such Additional Replacement Policy can include surrender charges and other customary policy features. Notwithstanding the foregoing, the Purchaser will not be required to offer Additional Replacement Policies to those policyholders in any jurisdiction for which all necessary endorsements (including the Policy Enhancements Endorsements) and/or Permits have not been received. 5.11 Election to Capitalize Specified Policy Acquisition Expenses. Pursuant to Treas. Reg Section 1.848-2(g)(8), the Seller, the Purchaser, ANLIC and First SunAmerica hereby elect to determine specified policy acquisition expenses with respect to the Transactions without regard to the general deductions limitation. The provisions of this Section 5.11 will remain in effect for all taxable years for which the Indemnity Reinsurance Agreement remains in effect. The Seller, the Purchaser, ANLIC and First SunAmerica agree that the entity with net positive consideration for each taxable year will capitalize specified policy acquisition expenses with respect to the Transactions without regard to the general deductions limitation of Section 848(c)(1) of the Code. The Seller, the Purchaser, ANLIC and First SunAmerica agree to exchange information pertaining to the amount of net positive consideration for all reinsurance agreements in force between the Seller, on the one hand, and the Purchaser, ANLIC and First SunAmerica, on the other, each year to maintain consistency. To achieve this, the Seller will provide to the Purchaser a schedule of its calculation of net positive consideration for all reinsurance agreements in force between the Seller and the Purchaser, ANLIC or First SunAmerica for each taxable year by no later than April 30 of the succeeding year. The Purchaser will advise the Seller if it disagrees with the amounts provided by no later than May 31 of such year, otherwise the amounts will be presumed correct and will be reported by the parties in their respective federal income Tax returns for such year. If the Purchaser contests the Seller's calculation of the 46 net positive consideration, the parties agree to act in good faith to resolve any differences within 30 days of the date the Purchaser submits its alternative calculation in accordance with the provisions of Section 8.2.2. Any disputed item that cannot be resolved within such period will be submitted to the Independent Party in accordance in Section 8.5. The Seller, ANLIC and First SunAmerica represent and warrant that they are subject to U.S. taxation under Subchapter L of the Code. The first taxable year for which this election will be effective is the taxable year in which the Closing Date occurs. As used in this Section 5.11, the terms "net positive consideration," "specified policy acquisition expenses," and "general deductions limitation" will have the meanings specified in Section 848 of the Code and Treas. Reg. Section 1.848-2. 5.12 Maintenance of Business. The Seller will refrain and will cause its present and future Affiliates to refrain from causing or attempting to cause or influence (or assisting any other Person in causing or attempting to cause or influence) (a) any Policyholder or customer to replace or terminate any Reinsured Policy or any Replacement Policy issued by the Purchaser or any of its Affiliates, in whole or in part, with products of any other Person at any time; or (b) any reinsurer to terminate or reduce any reinsurance, coinsurance or other similar contact, or sever a relationship with the Purchaser or any of its Affiliates at any time. The Seller will include in any transaction for the sale or disposition of any of its present and future Affiliates a covenant of the purchaser or successor thereof undertaking the terms of this Section 5.12 and making the Purchaser a third party beneficiary of such covenant. The Seller further agrees to promptly take all reasonable actions to enforce the terms of any rights it may have, whether under contract or Applicable Law, against any Person causing or attempting to cause or influence any event set forth above. 5.13 IBNR Settlement Amount. 5.13.1 Allocation of Liability. Any liability under the Reinsured Policies or the Policies subject to the Inward Reinsurance Agreements resulting from the death of a Policyholder prior to the Closing Date that is reported to the Seller prior to the Transition Period Termination Date is an Excluded Liability and the Seller agrees that it will promptly service all such claims in the ordinary course of its business in accordance with past practices, including the Seller's policies regarding claims in course of settlement, due and unpaid claims and resisted claims. The Purchaser will make the payments with respect to the Account Values of such Policies required by the Transition Services Agreement. Any liability under the Reinsured Policies or the Policies subject to Inward Reinsurance Agreements resulting from the death of a Policyholder prior to the Closing Date that is not reported to the Seller prior to the Transition Period Termination Date will, subject to the terms hereof, become an Insurance Liability assumed by ANLIC or First SunAmerica, as applicable, on the IBNR Settlement Date and the Seller will transfer to ANLIC and First SunAmerica, as applicable, cash and/or Cash Equivalents equal to the IBNR Settlement Amount on the IBNR Settlement Date. 5.13.2 Calculation of IBNR Settlement Amount. (a) The IBNR Settlement Amount will be calculated as follows: if the Transition Period Termination Date occurs no more than five days after the end of the preceding calendar quarter, the Purchaser will use the Social Security Sweep for such calendar quarter to determine the Policyholders who have died prior to the 47 Closing Date and whose deaths have not been reported to the Seller. If the Transition Period Termination Date occurs more than five days after the end of the preceding calendar quarter, the Purchaser will use the Social Security Sweep for the next calendar quarter ending after the Transition Period Termination Date to determine the Policyholders who have died prior to the Closing Date and whose deaths have not otherwise been reported to the Seller. With respect to all such Policyholders, the IBNR Settlement Amount will be an amount in cash equal to the face amount of such Policyholders' Policies less the sum of (i) the Account Value of such Policies; (ii) the amount recoverable from any Outward Reinsurer with respect to such Policies, provided that such Outward Reinsurance Agreement or Substitute Outward Reinsurance Agreement has been assigned to ANLIC or First SunAmerica; and (iii) any amounts paid by the Seller in settlement of death benefits with respect to such Policies (exclusive of amounts paid in (i) and (ii) above). (b) If the Transition Period Termination Date occurs no more than five days after the end of the preceding calendar quarter, the Purchaser will deliver its calculation of the amount of the IBNR Settlement Amount to the Seller within 60 days after the end of such calendar quarter. If the Transition Period Termination Date occurs more than five days after the end of the preceding calendar quarter, the Purchaser will deliver its calculation of the amount of the IBNR Settlement Amount to the Seller within 60 days after the end of the next calendar quarter following the Transition Period Termination Date. The Purchaser will provide the Seller access to any information used by the Purchaser in making its calculation of the IBNR Settlement Amount. 5.14 Solicitation of Policyholders. If the Purchaser solicits any policyholder to take any Replacement Policy prior to the end of the Rehabilitation Period, the Purchaser will make commercially reasonable efforts to solicit all of the Policyholders within 90 days of the first solicitation; provided that if any Policyholder accepts a Replacement Policy, the Seller will, with respect to the Account Value transferred to the Replacement Policy, conditionally waive the moratorium charge applicable to the surrendered Policy, which waiver will become irrevocable if the Replacement Policy is in force on the day following the last day of the applicable "free look" period. Notwithstanding the foregoing, neither the Purchaser nor any of its Affiliates will be required to offer any Policyholder a product if that Policyholder (a) does not meet the Purchaser's or such Affiliate's customary underwriting requirements for such product; or (b) is a Resident of a jurisdiction in which the Seller has not taken all actions and obtained all Permits required in connection with the Seller's Policy Enhancements Endorsement. In addition, neither the Purchaser nor any of its Affiliates will be required to offer a Replacement Policy with respect to any Restructured Contract in Pay Status. 5.15 Reinstated Policies. The Seller will only permit lapsed Policies in the categories of the Reinsured Policies to be reinstated as expressly required by the terms of such Policies. All reinstatement premiums received by the Seller will, for the period from the Closing Date through the Transition Period Termination Date, be transferred to ANLIC in accordance with the Indemnity Reinsurance Agreement and the Transition Services Agreement, and thereafter by direct payment from the Seller to ANLIC or First SunAmerica, as applicable. 5.16 Outward Reinsurance Agreements. 5.16.1 Remaining Outward Reinsurance Agreements. If on or prior to the Closing Date the Seller has not, with respect to 100% of the aggregate face amount reinsured of all Reinsured Policies subject to Outward Reinsurance Agreements, either (a) effected an assignment (with or without an adjustment to the applicable premium) of the Outward Reinsurance Agreements by the Seller to ANLIC, including obtaining any consents required to effect such assignment (and, if applicable, the subsequent partial assignment by ANLIC to First SunAmerica relating to the New York Reinsured Policies on the New York Assumption Date), or (b) entered into one or more Substitute Outward Reinsurance Agreements (each Outward Reinsurance Agreement not so assigned or substituted being a "Remaining Outward Reinsurance Agreement" and 48 the reinsurer thereunder being a "Remaining Outward Reinsurer"), the provisions of this Section 5.16 will apply. The Seller will use its commercially reasonable efforts to effect the assignment(s) or substitution of all Remaining Outward Reinsurance Agreements within 90 days after the Closing Date. At the end of such period, the Seller will, within five Business Days, pay to the Purchaser the amount that would have been added to the Outward Reinsurance Adjustment Amount with respect to the Outward Reinsurance Agreements assigned and the Substitute Outward Reinsurance Agreements effected during such period had the Outward Reinsurance Adjustment Amount been calculated as of the date such assignment or substitution became effective, together with interest thereon at a rate of 6.8% per annum from such effective date to the date of payment. If the Seller does not pay such amount within the stated time period, the Purchaser will be entitled to payment of such amount out of the Outward Reinsurance Escrow Account. 5.16.2 Outward Reinsurance Escrow Amount. On the Closing Date, the Seller will deposit into escrow under the Escrow Agreement an amount (the "Outward Reinsurance Escrow Amount") equal to the sum of (a) for each Remaining Outward Reinsurance Agreement the greater of (i) five times the average aggregate claims paid by the Remaining Outward Reinsurer with respect to Reinsured Policies in 1996 and 1997, and (ii) five times the average aggregate reinsurance premium paid to such Remaining Outward Reinsurer in 1996 and 1997; plus (b) for all Remaining Outward Reinsurance Agreements, the sum of the two largest single life or second-to-die policies, with the respective size of single life policies measured as 100% of the net amount at risk, and with the respective size of second-to-die policies measured as 100% of the net amount at risk if only one Policyholder is alive or 50% of the net amount at risk if both Policyholders are alive. Such calculation will be made based on the financial information as of the Calculation Date for the Remaining Outward Reinsurance Agreements. 5.16.3 Monthly Accounting. If at the beginning of the month in which the Closing Date occurs or any month following the Closing Date there are Reinsured Life Policies subject to a Remaining Outward Reinsurance Agreement (such month being an "Uncovered Month"), ANLIC and First SunAmerica will submit to the Seller within 30 days after the end of such Uncovered Month a calculation of (a) the amounts that would have been recoverable from the Remaining Outward Reinsurers for such month had the relevant Outward Reinsurance Agreements been assigned on the Closing Date, minus (b) an amount equal to one-twelfth of the cumulative annualized premium that would have been paid by the Purchaser to such Remaining Outward Reinsurers (adjusted for reinsurance of risk under Policies that would no longer be in force at the end of the Uncovered Month), in each case between the Closing Date and the end of the month for which the accounting is being prepared. If such calculation yields a net amount owing to ANLIC and/or First Sun America, then a portion of the Outward Reinsurance Escrow Amount equal to such amount plus interest thereon at a rate of 6.8% per annum from the end of the relevant Uncovered Month to the date of payment will be released from escrow and paid to ANLIC and/or First SunAmerica, as applicable. 5.16.4 Settlement. If within 90 days after the Closing Date the Seller has failed to effect the assignment or substitution of all Remaining Outward Reinsurance Agreements, then the Purchaser will have an additional 180 days to obtain such assignment or substitution on such terms as the Purchaser, acting in good faith, deems appropriate. The Seller will provide information reasonably requested by the Purchaser and prospective Substitute Reinsurers at the Seller's cost. At the end of such period, the Seller will, within five Business Days, pay to the Purchaser the amount that would have been added to the Outward Reinsurance Adjustment Amount with respect to the Outward Reinsurance Agreements assigned and the Substitute Outward Reinsurance 49 Agreements effected during such period, together with interest thereon at a rate of 6.8% per annum from the date such assignment or substitution became effective to the date of payment. If the Purchaser is not able to obtain all needed assignments or substitutions within such period, the parties will negotiate in good faith for a period of 30 days for a reduction of the Ceding Commission in accordance with the terms of Section 8.2.2. If they are unable to reach a settlement, the issue will be submitted to the Independent Party for a binding resolution to be determined in accordance with the procedures set forth in Section 8.5. Prior to the assignment or substitution of all Remaining Outward Reinsurance Agreements or the agreement of the parties set forth above, the Seller will continue to assume responsibility for claims thereunder and will make all appropriate claims against the applicable Outward Reinsurers with respect thereto. 5.16.5 Release of Escrowed Funds and Payment of Net Reinsurance Premium to Seller. After obtaining all assignments or substitutions of Remaining Outward Reinsurance Agreements or the Seller's payment in full of any settlement with the Purchaser described in Section 5.16.4, (a) any remaining amounts in the Outward Reinsurance Escrow Account in excess of 10% of the original Outward Reinsurance Escrow Amount will be released to the Seller, and the remaining amounts will be held to satisfy claims arising during the Uncovered Months and (b) the Purchaser will pay (or will cause ANLIC or First SunAmerica, as applicable, to pay) to the Seller an amount in cash equal to the amount of net positive reinsurance premium for all Uncovered Months, if any, owing to the Seller pursuant to the calculation set forth in Section 5.16.3. After release of all amounts owing to ANLIC and First SunAmerica for Uncovered Months ending during such 180 day period, all remaining amounts in the Outward Reinsurance Escrow Account will be released to the Seller and the Seller will have no further liability for death claims incurred during any Uncovered Month. 5.17 Taxable Basis of Reinsured Policies. On or prior to December 31, 1998, the Seller's Life Insurance Administration System will contain accurate information regarding the taxable basis of all but 13,000 or fewer Reinsured Life Policies with an Account Value of $5,000 or more. If this requirement is not satisfied on or prior to December 31, 1998, the Purchaser will be entitled to be paid $250,000 from the Claims Escrow Account. 5.18 Calculation of Account Values True-Ups. On or prior to the Account Values True- Up Date, the Seller will deliver to the Purchaser an audited calculation of the Account Values True-Up Amount for each Reinsured Policy as of the Rehabilitation Period Termination Date. Such calculation will be complete and correct when delivered and will comply with all applicable requirements of the Plan and the Rehabilitation Documents. The Purchaser's only obligation with respect thereto will be to credit or pay such amount promptly following receipt of cash and/or Cash Equivalents from the Seller as provided in Section 1.1.5(c). 5.19 Sale of Broker/Dealer. If the parties have not reached an agreement for the sale of the assets described in Section 4.19 prior to the Closing Date, the Seller agrees that it will not consummate a sale of such assets to any other Person for six months after the Transition Period Termination Date unless as part of such sale, the Seller obtains a non-competition covenant of the purchaser or successor thereof pursuant to which such Person undertakes the terms of Section 5.12 of this Agreement and makes the Purchaser a third party beneficiary of such covenant. 5.20 Agents. From and after the Closing Date the Purchaser agrees to pay, or cause ANLIC and/or First SunAmerica to pay, to Agents the commissions and other fees and compensation accruing after such date under the express written terms of the Assigned Contracts. The Purchaser further agrees that, to the extent necessary in order to allow it to fulfill its obligations to pay 50 such commissions and other fees and compensation, it will cause ANLIC and/or First SunAmerica, as applicable, to appoint the Agents as agents of ANLIC and/or First SunAmerica under the Reinsured Life Policies, enter into appropriate agency contracts with the Agents and make all appropriate regulatory filings to effectuate such appointment. 5.21 Transfer of Assets to First SunAmerica. On the New York Assumption Date, ANLIC will transfer the appropriate amount of assets to First SunAmerica in respect of Reinsured Policies that First SunAmerica is assuming pursuant to the First SunAmerica Assumption Reinsurance Agreement. All assets transferred by ANLIC to First SunAmerica pursuant to this Section 5.21 will comply with applicable New York insurance laws and regulations relating to reserve assets. The Seller will have the right to review the documents effecting such transfer, such documents to be in form and substance that are reasonably satisfactory to the Seller. 5.22 Amendment of Schedules. On or prior to the New York Assumption Date, the Seller will deliver to the Purchaser amended and restated versions of Schedules 3, 5 and Section 2.13 of the Seller's Disclosure Schedule allocating the items reflected in such Schedules to reflect the termination of the Indemnity Reinsurance Agreement with respect to the New York Reinsured Life Policies and the New York Reinsured Annuity Contracts and the assumption reinsurance of such Policies by First SunAmerica pursuant to the First SunAmerica Assumption Reinsurance Agreement. 5.23 Treatment of Policy Enhancements. Except with respect to Eligible Policies for which cash is distributed with respect to the Policy Enhancements to the Policyholder, its designee or the beneficiary of the Eligible Policy, as of the date the Policy Enhancements are credited to any Eligible Policy, the Purchaser and its Affiliates will reflect such crediting for SAP and Tax purposes as credited interest in the calculation of reserves with respect to such Eligible Policy, except to the extent required by a change in the Code, a published IRS ruling or a change in Applicable Law or SAP after the date of this Agreement. 5.24 Sale of Non-Terminated Variable Annuities. If the Court does not approve the termination of all Variable Annuities in accordance with Section 4.11, (a) the Seller will not enter into any transaction to reinsure or otherwise transfer any Variable Annuities in accumulation phase to any other Person prior to the three month anniversary of the Transition Period Termination Date; and (b) the Seller will not enter into any transaction to reinsure or otherwise transfer any Variable Annuities in pay-out status to any other Person prior to the Transition Period Termination Date; provided, however, that before the Seller enters into any binding agreement to reinsure or otherwise transfer any Variable Annuities, the Purchaser will have a right of first offer with respect thereto; and provided, further, any such sale to another Person must be on terms that are no less favorable to the Seller than the terms offered by the Purchaser. 5.25 Grandfathered Premiums Indemnity. (a) If the Grandfathering Ruling has not been obtained prior to the Closing Date, the Seller will keep track of the Grandfathered Premiums and Net Grandfathered Premiums as part of the services provided to the Purchaser under the Transition Services Agreement prior to the Transition Period Termination Date. If the Grandfathering Ruling has not been received prior to the ten month anniversary of the Closing Date or such earlier date as the Purchaser and the Seller in good faith agree that the Grandfathering Ruling will not be obtained, the Grandfathered Premiums Indemnity Amount will be calculated by the Purchaser as of the 14th month anniversary of the Closing Date, and such calculation, together with a detailed statement explaining how such calculation was made, will be delivered to the Seller within 51 30 Business Days after the 14th month anniversary of the Closing Date. The Seller will then have ten Business Days to dispute the Purchaser's calculation. If the Seller does not give timely notice of any dispute regarding the Purchaser's calculation, the Purchaser will be entitled to payment of such amount out of the Claims Escrow Account. If the Seller gives timely notice of any dispute regarding the Purchaser's calculation, the Purchaser will file a notice of its Claims Escrow Claim pursuant to the Escrow Agreement, and the parties will proceed to resolve such dispute by submitting such dispute to the Independent Party in accordance with Section 8.5. (b) If the Grandfathering Ruling has not been received prior to the ten month anniversary of the Closing Date, the Purchaser will cause ANLIC and/or First SunAmerica, as applicable, to give the policyholders of the Reinsured Policies listed on the deliveries specified in Section 4.24 the option to have Grandfathered Premiums returned and to have their Account Value reduced accordingly. The Purchaser may provide such notice earlier than the ten month anniversary of the Closing Date if the Purchaser and the Seller in good faith agree that the Grandfathering Ruling will not be obtained. 5.26 Severance Plan. Prior to the Transition Period Termination Date, the Seller will maintain in effect and not amend or modify its Severance Plan in any material respect without the prior written consent of the Purchaser, which will not be unreasonably withheld. 5.27 Transition Period Termination Date Policy Lists. On or prior to the 15th Business Day after the Transition Period Termination Date, the Seller will deliver to the Purchaser a correct and complete schedule containing the following information with respect to each Reinsured Policy: (a) the Account Value as of the Transition Period Termination Date; (b) all premiums received after the Closing Date and prior to the Transition Period Termination Date; and (c) each premium identified in clause (b) accumulated to the Transition Period Termination Date at the credited interest rate actually applied to that premium; provided, however, the Seller will not be obligated to provide the information specified in clauses (b) and (c) above if the Grandfathering Ruling has been obtained on or prior to the Transition Period Termination Date. 6. CONDITIONS PRECEDENT 6.1 General. The respective obligations set forth herein of the Seller and the Purchaser to consummate the Transactions at the Closing are subject to the satisfaction, on or before the Closing Date, in the case of the Seller, of the conditions set forth in Sections 6.2 and 6.3, and in the case of the Purchaser, of the conditions set forth in Sections 6.2 and 6.4 (collectively, the "Closing Conditions"). It is the specific intent of the parties that each obligation to be satisfied and each agreement to be performed prior to the Closing Date or in the event of a termination prior to the consummation of the Transactions is a separate agreement of the parties and is a presently enforceable obligation of the relevant parties not subject to satisfaction of the Closing Conditions except as expressly set forth in the provision giving rise to such obligation or agreement. The Seller will not contest or support the effort of any Person to contest the enforceability of any such obligation or agreement and, to the fullest extent permitted by Applicable Law, waives any claim or objection it might have to the effect that any such obligation or agreement is subject to satisfaction of the Closing Conditions. 6.2 Conditions to Obligations of Both Parties. 6.2.1 HSR Act. The waiting period under the HSR Act will have expired or been terminated. 52 6.2.2 No Injunction, etc. Except with respect to the approval of the Court as set forth in Section 6.2.3 below or in connection with the proceedings before the Court with respect to such approval: (a) consummation of the Transactions will not have been restrained, enjoined or otherwise prohibited by any Applicable Law, including any order, injunction, decree or judgment of any Governmental Authority; and (b) no Action will have been instituted and remain pending at the Closing Date by any Governmental Authority or any other Person to restrain, enjoin or otherwise prevent the consummation of the Transactions. There will not have been promulgated, entered, issued or determined by any Governmental Authority to be applicable to this Agreement or the Ancillary Agreements any Applicable Law making illegal the consummation of the Transactions. 6.2.3 Approval of the Court. The Court will have entered orders, none of which will be subject to conditions that are materially burdensome and each of which will have become a Final Order, with respect to the amendments and other orders to be filed with the Court as described in Exhibit I and indicated in Exhibit I as conditions to the obligations of both the Seller and the Purchaser to consummate the Transactions to be completed at the Closing. 6.2.4 Approval of the Class Four Creditors. The Class Four Creditors, representing the requisite percentage as set forth in the Plan, the Stock Trust Agreement and the Settlement Agreement, will have approved, in the form attached hereto as Exhibit J, the consummation of the Transactions in accordance with Section 6.08(b) of the Plan and Section 4.1(b) of the Stock Trust Agreement. 6.2.5 Approval of the Reinsurers. A majority in interest of the Reinsurers (determined in accordance with the Reinsurance Agreement) will have approved, in form and substance satisfactory to the Purchaser, (a) the consummation of the Transactions in accordance with Section 12(j) of the Reinsurance Agreement, and (b) the amendments to the Plan modifying their participation, obligations and rights under certain Rehabilitation Documents as of the Rehabilitation Period Termination Date. 6.2.6 Approval of NOLHGA on Behalf of the Participating Guaranty Associations. NOLHGA, on behalf of the Participating Guaranty Associations, will have approved, in form and substance satisfactory to the Purchaser, the amendments to the Plan modifying their participation, obligations and rights under certain Rehabilitation Documents as of the Rehabilitation Period Termination Date. 6.2.7 Approval of First SunAmerica by the Commissioner. The Commissioner will have approved First SunAmerica as an accredited reinsurer in the State of New Jersey. 6.2.8 Other Permits. All other Permits required to be made or obtained prior to the Closing in connection with the execution and delivery of this Agreement and the Ancillary Agreements and consummation of the Transactions, in addition to those referred to in Sections 6.2.1 through 6.2.7, will have been made or obtained. 6.2.9 Ancillary Agreements. Each Ancillary Agreement will have been signed and delivered by the parties thereto. 6.2.10 Additional Instruments and Documents. Additional instruments or documents reasonably requested by a party in connection with the execution of this Agreement and the Ancillary Agreements and the consummation of the Transaction will have been signed and delivered by the parties thereto. 6.2.11 Change in Law Regarding Tax Impact on Policyholders. There has not been, since the date of this Agreement, (a) a change in the Code, (b) a published IRS ruling, or (c) a change 53 in SAP or other Applicable Law that would result in a change in the Purchaser's treatment for SAP and Tax purposes of the crediting of the Policy Enhancements from that provided in Section 5.23, in any case that causes the representation and warranty in Section 2.10.3 not to be true and correct in all material respects. 6.3 Conditions to Obligations of the Seller. 6.3.1 Representations, Warranties and Agreements of the Purchaser. The representations and warranties in Section 3 will be true and correct in all material respects when made and at and as of the Closing with the same effect as though made at and as of such time. The Purchaser will have duly performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it at or before the Closing. 6.3.2 Officer's Certificate. The Purchaser will have delivered to the Seller a certificate, dated the Closing Date and signed by an authorized executive officer, as to the fulfillment of the conditions set forth in Section 6.3.1. 6.3.3 Opinions of Counsel. The Seller will have received opinions from the general counsel of the Purchaser and O'Melveny & Myers LLP and McElroy, Deutsch and Mulvaney, each as special counsel for the Purchaser, in the form of Exhibits G-1, G-2 and G- 3, respectively. 6.4 Conditions to Obligations of the Purchaser. 6.4.1 Representations, Warranties and Agreements of the Seller. The representations and warranties in Section 2 will be true and correct in all material respects when made and at and as of the Closing with the same effect as though made at and as of such time. The Seller will have duly performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it at or before the Closing. 6.4.2 Officer's Certificate. The Seller will have delivered to the Purchaser a certificate, dated the Closing Date and signed by an authorized executive officer, as to the fulfillment of the conditions set forth in Section 6.4.1. 6.4.3 Opinions of Counsel. The Purchaser will have received opinions from the general counsel of the Seller, and Debevoise & Plimpton and Gibbons, Del Deo, Dolan, Griffinger & Vecchione, each as special counsel for the Seller, as set forth on Exhibits H-1, H-2 and H-3, respectively. 6.4.4 Funding of Escrow Agreement. The Seller will have deposited into escrow cash and Cash Equivalents with an aggregate Value on the Closing Date equal to the sum of: (a) the Claims Escrow Amount; (b) the Tax Reserves Indemnity Escrow Amount; (c) the DAC Reduction Escrow Amount or the DAC Election Escrow Amount, as the case may be; (d) if applicable, the Outward Reinsurance Escrow Amount; (e) the COI Adjustment Escrow Amount; and (f) if applicable, the Policy Enhancements Endorsements Escrow Amount, in each case in accordance with the terms of the Escrow Agreement. 6.4.5 Policy Enhancements Amount. The Policy Enhancements Amount as of the Closing Date will not be less than the remainder of (a) $225,000,000, minus (b) the Integrity Policy Enhancements Amount. 6.4.6 Reserve Liabilities. The aggregate amount of the Reserve Liabilities as of the Closing Date excluding reserves for pending death claims will not be less than (a) if the Closing Date is on or before January 1, 1999: (i) $5,248,519,895 if the Reinsured 401(k) Contracts exclude the Policies described in 54 clause (b) of the definition thereof, or (ii) $5,340,004,108 if the Reinsured 401(k) Contracts include the Policies described in clause (b) of the definition thereof; and (b) if the Closing Date is after January 1, 1999: $4,849,175,990 if the Reinsured 401(k) Contracts exclude the Policies described in clause (b) of the definition thereof, or (ii) $4,933,699,448 if the Reinsured 401(k) Contracts include the Policies described in clause (b) of the definition thereof, and, in either case, the Seller will have delivered to the Purchaser a certificate signed by its chief financial officer confirming the foregoing. 6.4.7 Assurances Regarding Simultaneous Assumption of Reinsured Policies. The Purchaser will have received assurances in form and substance reasonably satisfactory to it that a simultaneous assumption of all Reinsured Policies held by Residents of the states of New York, New Jersey and Arizona can be effected on the Rehabilitation Period Termination Date without obtaining Policyholder consent thereto in any such jurisdiction. 6.4.8 Outward Reinsurance Agreements. The Seller will have, with respect to not less than 75% of the aggregate face amount reinsured of all Reinsured Policies subject to Outward Reinsurance Agreements on the date of this Agreement, either (a) effected an assignment to the Purchaser of the Outward Reinsurance Agreements (with or without an adjustment to the applicable premium), or (b) entered into one or more Substitute Outward Reinsurance Agreements. 6.4.9 Court Order, Regulatory Approvals and Other Filings. (a) The Court will have entered orders, each of which will have become a Final Order with respect to the amendments and other orders to be filed with the Court as described in Exhibit I and indicated in Exhibit I as conditions to the obligations of the Purchaser to consummate the Transactions at the Closing. (b) The New York State Insurance Department will have waived any requirement for the posting of security by reason of ANLIC's status as a non-New York licensed reinsurer and the Purchaser will have received assurances in form and substance reasonably satisfactory to it that ANLIC will not be subject to regulatory requirements in New York or regulatory oversight by the New York State Insurance Department by virtue of the transactions contemplated by the Indemnity Reinsurance Agreement or this Agreement. (c) The Seller will have obtained the approval from the appropriate Governmental Authority in all jurisdictions of the forms of the Reaffirmed Contracts and the Restructured Contracts. If the approval of a particular jurisdiction is not obtained, the Purchaser may elect to treat the Policies of that jurisdiction as Excluded Policies with appropriate adjustments to the Ceding Commission, the Policy Enhancements Amount and other applicable elements. (d) The Seller will have obtained all necessary Permits to attach the Policy Enhancements Endorsements in at least as many jurisdictions as are required to account for 85% of the aggregate Account Values of each of the Reinsured Life Policies and the Reinsured Annuity Contracts, measured as of the Calculation Date, and such jurisdictions will include Arizona, New York, New Jersey, Michigan and Illinois. 6.4.10 Updated Calculation of Impairments. The Seller will have delivered to the Purchaser an updated calculation of the Impairment for each Reinsured Policy and each other Eligible Policy as of a date not more than 45 nor less than 30 days before the Closing Date, which calculation will include the effect of the Account Values True-Up Amount that has accrued through the date of calculation, together with all supporting documentation used by the Seller as a basis for its calculation. 55 6.4.11 Changes to COI Scale. The Seller will have obtained all necessary Permits for the Purchaser to implement the Modified COI Scale in Arizona, New York and New Jersey. 6.4.12 Estimated Closing Date Statement and Updated Schedules. The Seller will have delivered to the Purchaser the documents required to be delivered prior to the Closing Date pursuant to Section 1.2.2. 6.4.13 Transferred Reserve Assets. Of the Transferred Reserve Assets transferred to ANLIC at Closing, not less than $1.0 billion will consist of cash, Cash Equivalents and Investment Grade Securities that mature no later than September 30, 1999. 6.4.14 Updated Policy Lists. Unless the Grandfathering Ruling has been obtained prior to the Closing Date, the Seller will have delivered to the Purchaser a copy of the lists described in Section 4.24, which lists will not reflect a material increase in either the total number of policyholders or total amount of premiums with respect to the Reinsured Life Policies contained on such lists from the lists provided to the Purchaser in accordance with Section 2.12.22. For purposes of this Section 6.4.14, (a) the list provided to the Purchaser pursuant to Section 2.12.22(a) will be compared to the list provided to the Purchaser pursuant to Section 4.24(a) and the list provided to the Purchaser pursuant to Section 2.12.22(b) will be compared to the list provided to the Purchaser pursuant to Section 4.24(b); (b) a "material increase" in the number of Policyholders will mean that the list provided to the Purchaser pursuant to Section 4.24(a) includes 100,000 or more Policyholders; and (c) a "material increase" in the total amount of premiums will mean that the aggregate amount of premiums reflected on the list provided pursuant to Section 4.24(a) is 120% or more of the aggregate amount of premiums reflected on the list provided pursuant to Section 2.12.22(a). 7. INDEMNIFICATION AND SURVIVAL 7.1 Tax Indemnification and Other Tax Matters. 7.1.1 Section 848 Election Tax Benefit. In calculating the payments to be made pursuant to Section 1.1, the parties have assumed that the Purchaser will not be required to capitalize any portion of its specified policy acquisition expenses calculated pursuant to Section 848(c)(1) of the Code as a result of the assumption and reinsurance (or indemnity reinsurance) of the Reinsured Policies (any amount of specified policy acquisition expenses required to be capitalized by the Purchaser as calculated under Section 848 of the Code is referred to herein as the "DAC Amount"). To the extent this assumption proves to be incorrect, the parties agree that payments will be made in accordance with this Section 7.1, which is intended to reach a result consistent with this principle. 7.1.2 Assumptions for Insolvent Insurance Company Election Tax Benefit. The amounts payable pursuant to Section 1.1 have been agreed to by the parties based, in part, upon the assumption that: (a) the Seller is qualified to make the election provided pursuant to Treas. Reg. Section 1.848-2(i)(4) with respect to the reinsurance of the Reinsured Policies by the Purchaser pursuant to this Agreement (the "Election"); (b) as a result of the Election, there will be a "reduction amount," as determined under Treas. Reg. 1.848-2(i)(4)(iii)(A)-(D) (the "Allocation Regulations"), that is equal to, and in no event less than, the DAC Amount that would result from the Purchaser's assumption and reinsurance of the Reinsured Policies in the absence of the Election; and (c) the full amount referred to in clause (b) will be available to the Purchaser as a result of the Election (collectively, the "Assumptions"). 7.1.3 Deposits to DAC Tax Indemnity Account at Closing. If a 56 ruling from the IRS, reasonably satisfactory to the Purchaser addressing the Transactions and in which the Purchaser has participated, to the effect that Seller is qualified to make the Election (the "Letter Ruling") has been received prior to the Closing Date, then the Seller at Closing will deposit the DAC Reduction Escrow Amount into the DAC Tax Indemnity Account created pursuant to the Escrow Agreement. If the Letter Ruling has not been received prior to the Closing Date, then the Seller will deposit the DAC Election Escrow Amount into the DAC Tax Indemnity Account created pursuant to the Escrow Agreement. 7.1.4 Computation of DAC Reduction Amount. (a) No later than 135 days after the end of its taxable year that includes the Closing Date, the Seller will provide to the Purchaser its initial calculation of the DAC Reduction Amount, together with all reasonably requested documentation supporting such calculation (the "Initial Calculation"). If the Seller fails to provide such Initial Calculation by the date set forth in the preceding sentence, the Initial Calculation amount will equal the DAC Reduction Escrow Amount. Regardless of whether the Letter Ruling will have been received prior to the date thereof, such calculation will be prepared in a manner consistent with the Assumption set forth in clause (a) of Section 7.1.2. Within 30 Business Days following its receipt of such Initial Calculation, including supporting documentation, the Purchaser will inform the Seller, in writing, of any dispute regarding the amounts set forth in such report, and such dispute, if not resolved by the parties within 30 Business Days following the Seller's receipt of notice of the dispute, will be resolved by the Independent Party. The amount determined pursuant to the preceding sentence, including the resolution of any dispute with respect thereto, is referred to as the "Final DAC Reduction Amount". (b) On the date that is 30 Business Days after the determination of the Final DAC Reduction Amount an amount equal to the Final DAC Reduction Amount (but not less than the Initial Calculation amount) will be paid from the DAC Tax Indemnity Account to the Purchaser, together with a pro rata portion of the earnings on such amount in the DAC Tax Indemnity Account from the date of deposit until the date of such payment ("Interest"). If, on the date provided in the preceding sentence, there will have been a Final Determination that the Seller is qualified to make the Election, the remaining balance in the DAC Tax Indemnity Account will be paid from the DAC Tax Indemnity Account to the Seller. If, on such date, a Final Determination that the Seller is qualified to make the Election has not occurred, the remaining balance in the DAC Tax Indemnity Account will be retained in such account and distributed only as provided below. 7.1.5 Release of the DAC Election Escrow Amount. If a Final Determination that the Seller is qualified to make the Election occurs at any time at least 30 days prior to the last date, taking into account automatic extensions, that First SunAmerica (if the Closing Date is in 1998) or ANLIC (if the Closing Date is in 1999) is eligible to file its federal income tax return for the taxable year that includes the Closing Date (the "Filing Date"), then, on the date that is 20 Business Days after the date on which the Seller provides to the Purchaser a copy of the Letter Ruling or a copy of such other documents evidencing a Final Determination, Seller will be paid the following from the DAC Tax Indemnity Account: (a) if, on or before such date, the Purchaser has received payment pursuant to Section 7.1.4(b), the remaining balance in the DAC Tax Indemnity Account will be paid to Seller; or (b) if, on or before such date, the Purchaser has not received payment pursuant to Section 7.1.4(b) an amount equal to the excess of (x) the amount deposited by the Seller into the DAC Tax Indemnity Account pursuant to Section 7.1.3 over (y) the DAC Reduction Escrow Amount, plus a pro rata portion of Interest on 57 such excess, will be paid to Seller. If at least 30 days prior to the Filing Date a Final Determination that the Seller is qualified to make the Election has not occurred, then the amount held in the DAC Tax Indemnity Account (as reduced by any distribution to the Purchaser pursuant to Section 7.1.4(b)) will be retained in the account and distributed only as provided in Section 7.1.6 or Section 7.1.7. 7.1.6 Filing of the Purchaser's Tax Return. (a) If at least 30 days prior to the Filing Date a Final Determination that the Seller is qualified to make the Election has not occurred, the Seller will provide to the Purchaser a legal opinion (the "Qualification Opinion") addressed to the Purchaser from a nationally recognized law firm, which firm is reasonably acceptable to the Purchaser (an "Acceptable Law Firm") concluding that a court would more likely than not hold that the Seller is qualified to make the Election. If, and only if, a Final Determination that the Seller is qualified to make the Election has occurred or the Purchaser has received the Qualification Opinion when and as provided for pursuant to this Section 7.1.6, then the Purchaser will, and will cause its Affiliates to, make (and not modify or withdraw) the Election as required by Treas. Reg. 1.848-2(i)(4)(iv) and prepare and file its federal income tax returns (and all state or local tax returns and all financial and statutory reports reflecting the Tax consequences of the Transactions) in a manner consistent with having made the Election. If the Purchaser is not required, pursuant to this Section 7.1.6, to file its federal income tax returns for the taxable year in which the Closing Date occurs, in a manner consistent with having made the Election, then the amount in the DAC Tax Indemnity Account will be paid to the Purchaser from such account on the Filing Date. (b) If the Purchaser is required pursuant to Section 7.1.6(a) to make the Election and to file its federal income tax returns in a manner consistent with having made the Election, the Seller will make (and not modify or withdraw) the Election and will give evidence to the Purchaser that such Election has been properly made under Treas. Reg. 1.848-2(i)(4)(iv). Appropriate forms for making the Election will be executed by the Seller at Closing and deposited with the Purchaser. If the Purchaser is required pursuant to Section 7.1.6(a) to make the Election and to file its federal income tax returns in a manner consistent with having made the Election, the Seller will, and will cause its Affiliates to, prepare and file its federal income Tax returns (and all state or local Tax returns and all financial and statutory reports reflecting the Tax consequences of the Transactions) in a manner consistent with having made the Election. 7.1.7 Method for Ensuring Benefits. The Seller will indemnify the Purchaser for the benefit determined under Section 7.1.1 (the "Insolvent Insurer Election Tax Indemnity"); provided, that the Purchaser's right to indemnification will be limited to the funds held in the DAC Tax Indemnity Account, as reduced by any amounts previously distributed from such account in accordance with the terms of this Agreement. The Insolvent Insurer Election Tax Indemnity will be implemented as follows: (a) If a Final Determination that the Seller is qualified to make the Election has not occurred as of 30 days prior to the Filing Date, then 30 days after a Final Determination that the Seller is eligible to make the Election and has done so, if the distribution to the Purchaser has been made pursuant to Section 7.1.4(b), the remaining balance in the DAC Tax Indemnity Account, or if the distribution to the Purchaser has not been made pursuant to Section 7.1.4(b), an amount equal to (x) the amount deposited by the Seller into the DAC Tax Indemnity Account pursuant to Section 7.1.3 over (y) the DAC Reduction Escrow Amount, plus a pro rata portion of Interest on such excess, will be paid to Seller from the DAC Tax Indemnity Account. 58 (b) If a Final Determination is made, whether as a result of a settlement agreement with the IRS or otherwise, that the Purchaser is entitled to a portion of the federal income tax benefit attributable to the Election, then a portion of the remaining DAC Election Escrow Amount in an amount that is not greater than the amount necessary to indemnify the Purchaser (including any previously unreimbursed reasonable out-of-pocket costs of contest, interest and penalties) with respect to the disallowed portion of such benefit, will be paid to the Purchaser from the DAC Tax Indemnity Account, together with Interest on such portion, and any remainder of the DAC Election Escrow Amount, together with Interest on such remainder, will be paid to the Seller from the DAC Tax Indemnity Account. (c) Upon a Final Determination that the Seller is not eligible to make the Election, provided the Purchaser has filed its federal income Tax return consistent with having made the Election to the extent required by Section 7.1.6(a) or (b), the remaining balance in the DAC Tax Indemnity Account will be paid to the Purchaser from the DAC Tax Indemnity Account. (d) Any amount payable from the DAC Tax Indemnity Account pursuant to Section 7.1.7(b) will be determined by agreement between the Purchaser and the Seller, and any dispute between them will be resolved, in a manner consistent with the principles set forth in Section 7.1.1, by the Independent Party. All amounts payable to the Seller pursuant to this Section 7.1.7 will be reduced by any previously unreimbursed reasonable out-of-pocket costs of contest with the IRS incurred by the Purchaser in reaching a Final Determination, which amount will be paid from the DAC Tax Indemnity Account to the Purchaser. 7.1.8 Calculation of DAC Escrow Amounts. (a) The DAC Election Escrow Amount will be determined by the Seller in good faith on an estimated basis in accordance with the procedures set forth in Schedule 9 and reported to the Purchaser no later than five Business Days prior to the Closing Date, and such estimated amount will, if a Final Determination that the Seller is qualified to make the Election has not occurred by such date, be used on the Closing Date for purposes of determining the amount deposited in the DAC Tax Indemnity Account. No later than 60 days after the Closing Date the Purchaser will provide to the Seller its report of the final DAC Election Escrow Amount, calculated in a manner consistent with the preceding sentence, and any dispute with respect thereto will be resolved by the Independent Party. If a Final Determination that the Seller is qualified to make the Election has not occurred within five Business Days after the later of Seller's receipt of such report or the resolution of any such dispute, the Seller will deposit into the DAC Tax Indemnity Account an additional amount, equal to the excess, if any, of the DAC Election Escrow Amount as so finally determined over the amount deposited on the Closing Date, or an amount equal to the excess, if any, of the amount of the DAC Election Escrow Amount deposited on the Closing Date over the amount as so finally determined will be released from escrow and delivered to the Seller. (b) The DAC Reduction Escrow Amount will be determined by the Seller in good faith on an estimated basis in accordance with the procedures set forth in Schedule 9 and reported to the Purchaser no later than five Business Days prior to the Closing Date, and, if a Final Determination that the Seller is qualified to make the Election has occurred, such estimated amount will be used on the Closing Date for purposes of determining the DAC Reduction Escrow Amount deposited in the DAC Tax Indemnity Account on the Closing Date. No later than 60 days after the end of its taxable year that includes the Closing Date, the Seller will deliver to the Purchaser its report of the final DAC Reduction Escrow Amount in a manner consistent with preceding sentences, and any dispute with respect thereto will be resolved by the Independent Party. 59 If a Final Determination that the Seller is qualified to make the Election has not occurred, within five Business Days after the later of the Purchaser's receipt of such report or the resolution of any such dispute, the Seller will deposit into the DAC Tax Indemnity Account an additional amount equal to the excess, if any, of the DAC Reduction Escrow Amount as so finally determined over the amount deposited on the Closing Date, or an amount equal to the excess, if any, of the amount of the DAC Reduction Escrow Amount deposited on the Closing Date over the amount as so finally determined will be released from escrow and delivered to the Seller. 7.2 Survival of Representations and Covenants of the Purchaser. The representations and warranties set forth in Section 3 will survive the execution, delivery and performance of this Agreement and the consummation of the Transactions for a period of two years following the Closing Date. The covenants and agreements of the Purchaser set forth in this Agreement will survive such execution, delivery, performance and consummation until the expiration of all applicable statutes of limitations. No Action can be commenced by the Seller with respect to any claim arising out of or relating to such warranties, representations, covenants or agreements after the expiration of the period for which such representations, warranties, covenants and agreements will survive pursuant to this Section 7.2 (the "Applicable Purchaser Survival Period"); provided, however, that subject to this Section 7.2, the Seller will have the right to commence an Action after the expiration of the Applicable Purchaser Survival Period with respect to claims arising out of or relating to such representations, warranties, covenants or agreements that have been asserted by Seller under Section 7.4 hereof before the expiration of the Applicable Purchaser Survival Period. 7.3 Survival of Representations and Covenants of the Seller. The representations and warranties set forth in Section 2 will survive the execution, delivery and performance of this Agreement and the consummation of the Transactions for a period of two years following the Closing Date; provided, however, that the representations contained in Sections 2.2, 2.3, 2.10, 2.18 and 2.21 will survive until the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive). The covenants and agreements of the Seller set forth in this Agreement will survive such execution, delivery, performance and consummation until the expiration of all applicable statutes of limitations. No Action, including any Escrow Claim, can be commenced by the Purchaser with respect to any claim arising out of or relating to such warranties, representations, covenants or agreements after the expiration of the period for which such representations, warranties, covenants and agreements will survive pursuant to this Section 7.3 (the "Applicable Seller Survival Period"); provided, however, that, subject to this Section 7.3, Purchaser will have the right to commence an Action or make an Escrow Claim after the expiration of the Applicable Seller Survival Period with respect to claims arising out of or relating to such representations, warranties, covenants and agreements that have been asserted by Purchaser, as the case may be, under Section 7.5 before the expiration of the Applicable Seller Survival Period. 7.4 Indemnification by the Purchaser. Subject to Section 7.2, the Purchaser will indemnify the Seller for, and will hold it harmless from, any and all Damages incurred or sustained by the Seller relating to, associated with or arising out of (a) any breach of any covenant or agreement contained in this Agreement or in any Ancillary Agreement by the Purchaser, ANLIC or First SunAmerica; (b) any breach of any of the warranties or representations of the Purchaser set forth in Section 3 of this Agreement or in any Ancillary Agreement; (c) any Insurance Liability; (d) the failure by the Purchaser, ANLIC or First SunAmerica to administer the Policy Enhancements in accordance 60 with the Policy Enhancements Procedures; or (e) the failure of the Purchaser, ANLIC or First SunAmerica to perform its obligations arising under Assigned Contracts. 7.5 Indemnification by the Seller. 7.5.1 General Indemnity. Subject to Section 7.3, the Seller will indemnify the Purchaser, ANLIC and First SunAmerica for, and will hold the Purchaser, ANLIC and First SunAmerica harmless from, any and all Damages asserted against or incurred or sustained by the Purchaser, ANLIC or First SunAmerica relating to, associated with or arising out of: (a) any Excluded Liability; (b) any breach of any covenant or agreement contained in this Agreement or in any Ancillary Agreement by the Seller; (c) death benefits, net of the sum of any amounts recovered from reinsurers and Account Values, on deaths occurring on or before the Closing Date that are reported prior to the Transition Period Termination Date; and (d) any breach of any of the warranties or representations of the Seller set forth in Section 2 of this Agreement (deleting, for this purpose, (i) any materiality or knowledge qualifier or requirement regarding Material Adverse Effect contained in the following: Section 2.3.1, Section 2.5, Section 2.8, Section 2.12.4, Section 2.12.6, Section 2.12.11 and Section 2.17; and (ii) any scheduled exception contained in Section 2.12.4(g) of the Seller's Disclosure Schedule). 7.5.2 Tax Treatment of Policies Indemnity. Without limiting the generality of Section 7.5.1 and subject to Section 7.6.1, the Seller will indemnify the Purchaser, ANLIC and First SunAmerica for, and will hold the Purchaser, ANLIC and First SunAmerica harmless from, any and all Damages asserted against or incurred or sustained by the Purchaser, ANLIC or First SunAmerica attributable to: (a) costs and losses incurred by Policyholders of Reinsured Policies, or payments required to be made to any Governmental Authority or Policyholders of Reinsured Policies in respect of such costs or losses as a result of the breach of the representation contained in Section 2.10.1; and (b) increased Taxes of the Purchaser, ANLIC or First SunAmerica as a result of the breach of the representation contained in Section 2.10.1; provided, that unless and until the cumulative amounts described in clauses (a) and (b) of this Section 7.5.2 exceed $750,000, the Seller's indemnification obligation will be limited to 50% of such Damages and only such 50% share will be applied against and reduce the threshold described in Section 7.6.1. Notwithstanding the foregoing sentence, the Seller will have no obligation to indemnify or hold harmless the Purchaser, ANLIC or First SunAmerica hereunder solely to the extent that any such Damages arise as a result of an amendment or modification of a Reinsured Policy effected after the assumption of such Policy by ANLIC by any Person other than the Seller. 7.5.3 Tax Reserves Indemnity. Without limiting the generality of Section 7.5.1, the Seller will indemnify the Purchaser, ANLIC and First SunAmerica for, and will hold the Purchaser, ANLIC and First SunAmerica harmless from, any and all Damages asserted against or incurred or sustained by the Purchaser, ANLIC or First SunAmerica attributable to costs, expenses and increased Taxes as a result of any overstatement in the tax reserves as of the Closing Date due to the treatment by the Seller (for tax reserving purposes) of the moratorium charges. 7.5.4 Tax Contests. The Purchaser will: (a) give prompt notice to the Seller of any federal income tax adjustment proposed in writing pursuant to any tax audit or other proceeding with respect to the Purchaser or any of its Affiliates that could give rise to a claim under Section 7.1 or with respect to the breach of any representation contained in Section 2.10; (b) upon the Seller's reasonable request, discuss with the Seller and the Seller's counsel the position that the Purchaser or its Affiliate intends to take regarding such proposed adjustment; (c) afford the Seller and its counsel reasonable opportunity to participate 61 in any IRS conference, other administrative proceeding or judicial proceeding regarding such proposed adjustment, including the right to attend conferences or submit pertinent material in support of the Seller's position. Subject to the preceding sentence, the Purchaser will control the forum and contest of any challenge by the IRS to the claimed benefit of the Election or that could otherwise give rise to a claim for indemnification under this Section 7 arising in connection with the audit of a federal income tax return or report filed by the Purchaser or its Affiliates. The Seller will control the contest of all other Tax matters relating to the Seller or its Affiliates; however, the Seller will (i) promptly provide the Purchaser with copies of all correspondence and other written communication and notice of other communication to or from the IRS with respect to any of the Transactions, the Reinsured Policies, the Replacement Policies issued with respect to the Reinsured Policies, and the Additional Replacement Policies issued with respect to the Excluded Policies; (ii) not settle any Tax matter described in clause (i) above in a manner which purports to bind the Purchaser or adversely affects the Purchaser or its policyholders without the Purchaser's written consent, which consent will not be unreasonably withheld; and (iii) consult with the Purchaser with respect to such Tax matters. The Purchaser or the Seller will appeal any adverse IRS determination arising in a contest subject to its control to a court of competent jurisdiction, only if a law firm reasonably acceptable to the Seller (or the Purchaser, as the case may be) renders an opinion that the Purchaser (or the Seller, as the case may be) would have a reasonable likelihood of success if such determination were appealed. Such contest will continue only so long as reasonable out-of-pocket expenses of such contest (including reasonable legal, accounting and actuarial costs, fees and expenses) have been paid by the party requesting such appeal within 20 Business Days of a written request therefor by the Purchaser. The Purchaser will not settle any dispute with respect to any issue described in clause (a) of this Section 7.5.4 absent express written consent by the Seller, which will not be unreasonably withheld; provided, however, that if the Seller breaches its obligations with respect to reporting or fails to pay the out-of-pocket expenses of the contest and appeal of the matter when due, the Purchaser will be entitled to settle the dispute in its judgment without the Seller's consent. So long as amounts are held in the Claims Escrow Account, the Purchaser will not, and will not permit any of its Affiliates to, request relief from the IRS with respect to any alleged failure of any Reinsured Life Policy or Reinsured Annuity Policy to meet the requirements for any tax treatment under the Code (for example, relief pursuant to Section 7702(f)(8) of the Code, Treas. Reg. 1.817-5(a)(2) or any comparable provision of law, regulation, rulings or IRS procedures presently or subsequently adopted) without the express written consent of the Seller, which consent will not be unreasonably withheld. In connection with any such request, and any administrative or judicial proceedings with respect thereto, the Seller will be afforded the rights granted to it pursuant to this Section 7.5.4 with respect to a proposed adjustment arising in connection with the audit of a federal income tax return or report filed by the Seller or its Affiliates, including the right to consent to any settlement that could give rise to the claim for indemnification under this Agreement (which consent will not be unreasonably withheld), subject to the conditions described above. 7.6 Damages. 7.6.1 Basket and Threshold. No claim for indemnification will be made by the Purchaser, ANLIC and First SunAmerica on the one hand, or the Seller on the other hand, until and unless the cumulative Damages incurred by it or them exceeds $1,500,000 in the aggregate, it being understood that after such Damages exceed such amount, the Indemnifying Party will be liable to the Indemnified Party or Parties, in the aggregate, for all cumulative Damages in excess of $750,000; provided, however, that the limitations in this Section 7.6.1 will not apply to Damages 62 claimed or other amounts to be paid out of escrow pursuant to Sections 4.12.5, 4.18, 4.21, 5.17, 5.25 and 7.5.3, which Damages and amounts will be recoverable from the first dollar thereof. 7.6.2 Limit on Tax Reserves Indemnity. The maximum aggregate liability of the Seller with respect to Damages claimed pursuant to the indemnity set forth in Section 7.5.3 will be the Tax Reserves Indemnity Escrow Amount and the earnings thereon held in the Tax Reserves Indemnity Escrow Account under the terms of the Escrow Agreement. 7.6.3 Limit on COI Adjustment Amount Recovery. The maximum aggregate liability of the Seller with respect to Damages claimed pursuant to Section 4.18 will be the COI Adjustment Escrow Amount and the earnings thereon held in the COI Adjustment Escrow Account under the terms of the Escrow Agreement. 7.6.4 Limit on Policy Enhancements Endorsements Indemnity. The maximum aggregate liability of the Seller with respect to Damages claimed pursuant to Sections 4.12.4 and 4.12.5 will be the Policy Enhancements Endorsements Escrow Amount and the earnings thereon held in the Policy Enhancements Endorsements Escrow Account under the terms of the Escrow Agreement. 7.6.5 Intentionally Deleted. 7.6.6 Excluded Damages. Except with respect to Damages arising from any Indemnifying Party's intentional, willful or reckless misrepresentation or breaches of warranties or agreements made as part of or pursuant to this Agreement, no Indemnitor will be liable to any Indemnitee for any punitive, exemplary, lost profits, consequential or similar Damages relating to the breach or alleged breach of this Agreement. In addition, the Seller will not be liable for Damages relating to the breach or alleged breach of any representation or warranty set forth in Section 2.10 if the Purchaser takes any position with respect to the Reinsured Policies, the calculation of the tax reserves for the Reinsured Policies or the crediting of the Policy Enhancements Amount to the Account Value of an Eligible Policy for federal income tax purposes which is inconsistent with such representation or warranty unless the Purchaser, prior to taking such position, will have provided to the Seller a legal opinion, addressed to the Seller from a nationally recognized law firm, which firm is reasonably acceptable to the Seller, concluding that there is not substantial authority (as determined for purposes of Section 6662 of the Code) for the Purchaser to take a position that is consistent with such representation or warranty. 7.6.7 Exclusive Remedy. Except with respect to Damages arising from: (a) the Seller's failure to pay when due the amounts described in Section 4.14.1 and 4.14.2; (b) the Seller's failure to authorize the release of funds from escrow to pay the expense reimbursements set forth in Sections 4.14.2 and 4.22; (c) the Seller's failure to pay or deliver when due amounts or other assets relating to the Ceding Commission, the Transferred Reserve Assets, the other Transferred Reserve Assets, and the amounts to be funded into escrow under the Escrow Agreement; or (d) the Excluded Liabilities, the indemnities provided for in this Section 7 will be the sole and exclusive remedy for monetary damages of the Purchaser after the Closing for any inaccuracy of any representation or warranty of the Seller or any failure or breach of any covenant, obligation, condition or agreement to be performed or fulfilled by the Seller in this Agreement and the Seller's maximum liability under such indemnities will be limited to the amounts deposited into escrow and, where applicable, the earnings thereon, under the Escrow Agreement. Except as provided in the preceding sentence, no claim may be brought by the Purchaser, ANLIC or First SunAmerica in excess of the aggregate escrowed amount plus all accrued interest and earnings on such amount; provided, however, none of the Purchaser, ANLIC or First SunAmerica will be prohibited from bringing any claim against the 63 Seller, whether pursuant to this Section 7 or another Action, arising from the Seller's intentional, willful or reckless misrepresentation or breach of representations, warranties or agreements made as part of or pursuant to this Agreement even if such claim, when taken together with all prior Damages recovered pursuant to this Section 7, exceeds the aggregate escrowed amount; and provided further, Outward Reinsurance Escrow Claims (as defined in the Escrow Agreement) that exceed the Outward Reinsurance Escrow Amount will be satisfied out of the Claims Escrow Account. 7.7 Indemnification Procedure. 7.7.1 Notice of Claim. Within a reasonable time after obtaining knowledge thereof, a Person who may be entitled to indemnification hereunder (the "Indemnitee") will promptly give the party who may be obligated to provide such indemnification (the "Indemnitor") written notice (a "Notice of Claim") of any Damages suffered by the Indemnitee that the Indemnitee has reasonably determined has given or could give rise to a claim for indemnification hereunder. No failure or delay in giving any such Notice of Claim will relieve the Indemnitor of its obligations unless, and only to the extent, that it is materially prejudiced thereby. A Notice of Claim will specify in reasonable detail the nature and scope of such Damages. The Indemnitor, after making a good faith determination, based on the facts alleged in such Notice of Claim or that are otherwise known to Indemnitor, will, within 30 days after the Indemnitor has received such Notice of Claim, either (a) inform the Indemnitee in writing that the Indemnitor acknowledges that it has an indemnification obligation hereunder in respect of such Damages set forth in the Notice of Claim (a "Claim Acceptance Notice") and will perform its indemnification obligations in respect of such Damages, including, where the Seller is the Indemnitor, by executing an instruction to the escrow agent under the Escrow Agreement to release escrowed funds in the amount of such Damages; or (b) dispute such Notice of Claim in writing, specifying in reasonable detail the nature and extent of the dispute (a "Claim Dispute Notice"); provided, however, that with respect to Tax matters arising in connection with a government tax audit of the Seller, the Purchaser or their Affiliates, for which procedures are provided in Section 7.1 or Section 7.5.4, the parties will follow the procedures set forth in Section 7.1. The Indemnitee can take any action it deems necessary to preserve its rights with respect to such Damages during such 30 day period, but will not settle the claim giving rise to such Damages or proceed to final judgment with respect thereto prior to the expiration of such 30 day period. If Indemnitor fails to respond with either a Claim Acceptance Notice or a Claim Dispute Notice within such 30 day period, Indemnitor will be deemed to have delivered a Claim Acceptance Notice on the 30th day. 7.7.2 Third Party Claims. Other than with respect to those Tax matters that are covered by Section 7.1 or Section 7.5.4, if the Damages relate to a Third Party Claim and the Indemnitor has delivered a Claim Acceptance Notice, the Indemnitor will be entitled, in good faith and at its own cost and expense, to participate in any Action and/or direct the defense or settlement of any Action or otherwise to cure, remediate, mitigate, remedy or otherwise handle any event or circumstance that gives rise to such Damages. Subject to the following provisions of this Section 7.7.2 and, other than with respect to those Tax matters that are covered by Section 7.5.4, such right will include: (a) the right to investigate any such event or circumstance; (b) the right to cure, mitigate, remediate, remedy and otherwise handle any such event or circumstance on such terms and conditions and by such means as the Indemnitor may reasonably determine; and (c) the right to defend, contest or otherwise oppose any Third Party Claim with legal counsel selected by it. The Indemnitor will promptly inform the Indemnitee of all material developments related to any such Third Party Claim. Other than with respect to Tax matters which are covered by 64 Section 7.5.4, notwithstanding anything contained herein to the contrary, the Indemnitee will have the right, but not the obligation, to participate, at its own cost and expense, in the defense, contest or other opposition of any such Third Party Claim through legal counsel selected by it, and will have the right, but not the obligation, to assert any and all cross-claims, counterclaims or other Actions that it may have. So long as the Indemnitor is assuming the defense of such Action in accordance with this Section 7.7.2, the Indemnitee will (a) at Indemnitor's cost and expense, cooperate in all reasonable ways with, make its relevant files and records available for inspection and copying by, make its employees reasonably available to and otherwise render reasonable assistance to the Indemnitor upon request and (b) not compromise or settle any such Action without the prior written consent of the Indemnitor. If the Indemnitor does not elect to assume the defense of any such claim or action, the Indemnitee will act reasonably and in accordance with its good faith business judgment with respect thereto, and will not settle or compromise any such claim or action without providing the Indemnitor the opportunity to participate in the settlement or reassume the defense of the Action. If the Indemnitee is entitled to indemnification hereunder in respect of the event or circumstance as to which the Indemnitee takes such actions, then the Indemnitor will, in addition to indemnifying Indemnitee for the Damages, indemnify the Indemnitee for all of the reasonable legal, accounting, actuarial and other costs, fees and expenses incurred in connection therewith; provided, however, that after notice to the Indemnitee of the Indemnitor's election to assume the defense of such claim or action, the Indemnitor will not be liable to the Indemnitee under this Section 7 for any such legal, accounting, actuarial costs, fees and expenses subsequently incurred by the Indemnitee in connection with the defense thereof other than reasonable costs of investigation, provided that the Indemnitee will have the right to employ counsel to represent it if the Indemnitee has available to it one or more defenses or counterclaims that are inconsistent with one or more of those claims alleged by the Indemnitor, and in any such event the fees and expenses of such separate counsel will be paid by the Indemnitee. If the Indemnitor proposes to settle or compromise any such Third Party Claim, the Indemnitor will give written notice to that effect (together with a statement in reasonable detail of the terms and conditions of such settlement or compromise) to the Indemnitee a reasonable time prior to effecting such settlement or compromise. The Indemnitee will have the right: (x) to approve such settlement or compromise; (y) to object to such settlement or compromise, whereupon, if such settlement or compromise is solely for cash, the Indemnitee will assume the defense, contest or other opposition of such Third Party Claim for its own account and as if it were the Indemnitor and the Indemnitor will be released from any and all liability with respect to such Third Party Claim to the extent that such liability exceeds the liability that the Indemnitor would have had in respect of such a settlement or compromise; or (z) to assume, at any time by giving written notice to that effect to the Indemnitor, the cure, mitigation, remediation, remedy or other handling of such event or circumstance and the defense, contest or other opposition of such Third Party Claim for its own account, whereupon the Indemnitor will be released from any and all liability with respect to such event or circumstance and such Third Party Claim. 7.7.3 Disputes. If the Indemnitor timely delivers a Claim Dispute Notice, the Indemnitor and the Indemnitee will proceed to resolve the dispute in accordance with the provisions of Section 8. Prior to final resolution thereof, the Indemnitee can take any action it deems necessary to preserve its rights with respect to the relevant Damages, but will not settle the claim giving rise to such Damages or proceed to final judgment with respect thereto. 7.7.4 Mitigation. Notwithstanding anything contained herein 65 to the contrary, each party will use, and will cause its Affiliates to use, commercially reasonable efforts to mitigate any and all Damages in respect of which it may be entitled to indemnification hereunder. 7.8 Release of Funds From Escrow. 7.8.1 DAC Election/Reduction Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, the remaining amount, if any, in the DAC Tax Indemnity Account, less the aggregate amount sought under any pending claims, will be released from escrow and delivered to the Seller as provided in Section 7.1. 7.8.2 Outward Reinsurance Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, the remaining amount, if any, in the Outward Reinsurance Escrow Account, less the aggregate amount of any pending claims, will be released from escrow and delivered to the Seller as provided in Section 5.16. 7.8.3 Tax Reserves Indemnity Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, the remaining amount, if any, in the Tax Reserves Indemnity Escrow Amount, less the aggregate amount sought under any pending claims, will be released from escrow and delivered to the Seller upon the earliest to occur of (a) the date that is 20 Business Days after the date on which the Seller provides to the Purchaser a copy of the documents evidencing a Final Determination that the treatment either (x) by the Purchaser of the moratorium charges (for tax reserving purposes), so long as the Purchaser's treatment is consistent with the Seller's treatment, is appropriate, or (y) by the Seller of the moratorium charges, if the Purchaser's treatment is not consistent with the Seller's treatment of such charges, is appropriate; (b) the Business Day following payment in full of the Purchaser's Damages (up to the amount held in the Tax Reserves Indemnity Account) as a result of a Final Determination that the treatment by the Seller of the moratorium charges is not appropriate; or (c) on the Escrow Termination Date. If the Purchaser and the Seller are unable to agree on the calculation of the Purchaser's Damages within 30 days of the Seller's providing to the Purchaser the documents specified in clause (b) above, the dispute will be submitted for final resolution by the Independent Party in accordance with Section 8.5. 7.8.4 Claims Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, (a) the remaining amount in the Claims Escrow Account in excess of the sum of $22,500,000 and the aggregate amount sought under any pending claims will be released from escrow and delivered to the Seller on the second anniversary of the Closing Date; (b) the remaining amount in the Claims Escrow Account in excess of the sum of $11,250,000 and the aggregate amount sought under any pending claims, will be released from escrow and delivered to the Seller on the fourth anniversary of the Closing Date; and (c) the remaining amount in the Claims Escrow Account in excess of the aggregate amount sought under any pending claims will be released from escrow and delivered to the Seller on the Escrow Termination Date. 7.8.5 COI Adjustment Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, the remaining amount, if any, in the COI Adjustment Escrow Account, less the aggregate amount sought under any pending claims, will be released from escrow and delivered to the Seller on the last day of the 15th month following the Rehabilitation Period Termination Date. 7.8.6 Policy Enhancements Endorsements Escrow Amount. Subject to the terms of the Escrow Agreement with respect thereto, the remaining amount, if any, in the Policy Enhancements Endorsements Escrow Account, less the aggregate amount sought under any pending claims, will be released from escrow and delivered as provided in Section 4.12.5. 66 7.8.7 Notices and Joint Instructions. In each case where funds are to be added to or released from escrow pursuant to this Agreement on a date that is not certain as of the date hereof, the parties will each execute and deliver an appropriate notice or joint instruction to the Escrow Agent establishing such date, specifying the amount to be added to or released from escrow and either directing the Escrow Agent to release such amount to the party entitled to receive such amount or including with such notice or instruction a deposit from the party obligated to add such amount to the relevant escrow. The parties will also each execute a notice to the Escrow Agent if this Agreement is terminated pursuant to Section 10.3. 8. DISPUTE RESOLUTION 8.1 Governing Law. This Agreement will be construed, performed and enforced in accordance with the laws of the State of New Jersey. 8.2 Arbitration of Disputes. 8.2.1 Matters in Exclusive Jurisdiction of Court. Prior to the Closing Date, any dispute will remain in the exclusive jurisdiction of the Court. Following the Closing Date, any claim for indemnification or other dispute involving any of the following matters will remain in the exclusive jurisdiction of the Court: the calculation or payment of the Policy Enhancements or Account Values True-Up, the issuance of Replacement Policies in accordance with the terms of this Agreement and the termination of the Rehabilitation Period. 8.2.2 Pre-Arbitration Dispute Resolution. Except as expressly provided in Section 8.2.1, the parties will attempt in good faith to resolve any dispute, controversy or claim under, arising out of, relating to, or in connection with this Agreement or any of the Ancillary Agreements, including the negotiation, execution, interpretation, construction, performance, non- performance, breach, termination, validity, scope, coverage or enforceability of this Agreement or any of the Ancillary Agreements or of this Section 8.2 (a "Dispute"), promptly by negotiations between the parties without the initiation of an Action by either party, unless necessary to preserve any applicable statute of limitations. If the parties are unable to resolve said Dispute within 30 days after a party gives a notice, referring to this Section 8.2, that it wants to commence such negotiations (which period can be extended by mutual agreement), the parties will resolve the Dispute as set forth below; provided, however, if this Agreement expressly provides that such Dispute will be resolved by the Independent Party, the parties will proceed in accordance with the procedures set forth in Section 8.5. 8.2.3 Arbitration. If the parties are unable to resolve any Dispute in the time period set forth in Section 8.2.2, and such Dispute is not to be resolved by the Independent Party pursuant to the terms of this Agreement, the parties hereby agree to arbitrate all such Disputes pursuant to the terms of this Section 8.2.3. To initiate arbitration, a party must give notice to the other party after the time period set forth in Section 8.2.2 expires. All arbitrations will be conducted in accordance with the Center For Public Resources ("CPR") Rules for Non-Administered Arbitration of Business Disputes before a panel of three arbitrators, one of whom will be selected by the Purchaser, the second of whom will be selected by the Seller and the third of whom will be selected by the other two arbitrators and will chair the tribunal. If either party fails or refuses to select an arbitrator within fifteen days after notice of the selection of the first arbitrator, or the two arbitrators selected fail to select the third arbitrator within fifteen days after their selection, the necessary arbitrator or arbitrators will be selected by the presiding judge of a court of general jurisdiction in New York. Decisions of the tribunal must be made 67 by not less than two of the arbitrators. The arbitration will be governed by the Federal Arbitration Act (9 U.S.C. 1-16). The arbitration, including the determination of any amount of Damages suffered by any party hereto by reason of the acts or omissions of any party, will be final and binding upon the parties to the maximum extent permitted by Applicable Law, except that the arbitrators will not be authorized to award punitive damages with respect to any such Dispute or to revise or restructure the business or economic terms of the Transactions. No party will seek punitive Damages relating to any matter under, arising out of, in connection with or relating to this Agreement in any other forum. The parties intend this Section 8 to be legal, valid, binding, enforceable and irrevocable and that it survive any termination of this Agreement. (a) Upon request of either party, the arbitrators will order such discovery (including third-party discovery) as the arbitrators determine to be reasonable under the circumstances. The arbitrators will, however, impose reasonable schedules and deadlines to ensure that discovery is produced, conducted and concluded on a timely basis and will impose sanctions on either party for abuse or delay of discovery. Rules of evidence will be applied as the arbitrators determine to be reasonable under the circumstances. (b) In their award, the arbitrators must allocate between the parties all costs and expenses of arbitration, including the fees and expenses of the arbitrators, and reasonable attorneys' fees, costs and expert witness and other expenses. Any arbitration proceedings hereunder must be held in New York, New York. Judgment upon any award rendered by the arbitrators can be entered by any Court having jurisdiction thereof. (c) If the rules of the CPR differ from those of this Section 8.2.3, the provisions of this Section 8.2.3 will control. 8.2.4 Confidentiality. All offers, promises, conduct and statements, whether oral or written, made in the course of the settlement discussions, Independent Party process or arbitration process (including the notices) by any party or its Representatives are confidential. All such information will be considered "settlement negotiations" and will not be referred to or used, or be admissible or discoverable, for any purpose in any subsequent Action between the parties (other than to the limited extent that it would be relevant to establish the intent of the parties if necessary to clarify any ambiguity in any final, written settlement reached). Notwithstanding the foregoing, the Independent Party and/or the arbitrators are disqualified as witnesses in any subsequent Action for any party to the Independent Party proceedings or arbitration and any oral or written statement or opinion expressed by the Independent Party or the arbitrators during the Independent Party proceedings or arbitration is inadmissible for all purposes in any subsequent Action. 8.2.5 Interim Relief. If a party believes immediate interim relief is necessary to preserve the status quo during or prior to Independent Party proceedings or arbitration, or to compel Independent Party proceedings or arbitration as required hereby, it can file an Action in an appropriate court identified in Section 8.3 to seek interim relief as contemplated by Section 8.4. The substantially prevailing party under this Section 8.2.5 will have all of its reasonably incurred costs in bringing, or opposing, as the case may be, such Action, including all reasonable attorneys' fees and any out-of-pocket expenses paid by the other party. 8.2.6 Enforcement. Any refusal to proceed with Independent Party review or arbitrate under this Section 8.2 is a breach of contract for which Damages can be recovered. If the party who ultimately prevails in any Action institutes an Action (other than under Section 8.2.5) without first attempting Independent Party review or arbitration as required hereby, such party will 68 not be entitled to attorneys' fees or costs that might otherwise be available to it under this Agreement in connection with such Action. If a party refuses to proceed with Independent Party review or arbitrate prior to filing an Action and ultimately is not the substantially prevailing party in the Action, it will be liable for all attorneys' fees and costs reasonably incurred in the Action by the other party. 8.3 Consent to Jurisdiction; Waiver of Jury Trial, etc.. 8.3.1 Consent to Jurisdiction. (a) Subject to Sections 8.2 and 8.5, each of the parties hereto hereby submits to the jurisdiction of the Court, and any appellate court thereof, to enforce any settlement, Independent Party or arbitration award pursuant to Sections 8.2 and 8.5, and each of the parties hereto hereby agrees that all such claims may be heard and determined in such New Jersey state court or, to the extent permitted by Applicable Law, in a federal court in New Jersey. A final judgment in any such Action will be conclusive and can be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Applicable Law. (b) Each of the parties hereto hereby waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any Action in any New Jersey state or federal court. Each of the parties hereto hereby waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such Action in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.5. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Applicable Law. 8.3.2 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS. 8.4 Injunctive Relief. Each party acknowledges and agrees that its failure to perform any of its agreements and covenants in this Agreement would cause irreparable injury to the other party and would cause Damages that would be difficult to ascertain or quantify. Accordingly, without limiting any remedies that may be available with respect to any breach of this Agreement, each party consents to the entry by an arbitrator or a court of temporary restraining orders, preliminary and permanent injunctions, and other appropriate interim relief or equitable remedies or to compel Independent Party proceedings or arbitration as required hereby. 8.5 Independent Party. Except with respect to Disputes involving the calculation of the Final Closing Date Statement, which will be resolved in accordance with the procedures set forth in Section 1.3.2, the parties will employ the following procedures with respect to the submission of Disputes to the Independent Party. If the parties are unable to resolve a Dispute that is required by this Agreement to be submitted to the Independent Party within the time period set forth in Section 8.2.2 (or such other time period provided in the relevant 69 section), such Dispute will be submitted to the Independent Party, who will be selected in the manner described in Section 1.3.2. To initiate the Independent Party review process, a party must give notice to the other party of its intent to commence such review process after the time period set forth in Section 8.2.2 (or such other time period provided in the relevant section) expires. Upon confirmation or selection of the Independent Party by the parties, the parties will have ten Business Days to provide the Independent Party with any and all information relevant to the Independent Party's determination, and will otherwise cooperate with the Independent Party to assist its prompt resolution of any Dispute brought before it. The parties will also notify the Independent Party if final payment of a Dispute will be made out of one of the escrow accounts established pursuant to this Agreement and the Escrow Agreement, and if so, the proper address that the Independent Party should use for notifying the Escrow Agent of its final decision of the Dispute (as required below). The Independent Party will make a final decision within 30 days of the submission of such information. Once the Independent Party makes a final decision as to a Dispute brought before it, the Independent Party will notify the parties and the Escrow Agent, if applicable, of its decision. The decision of the Independent Party will be final and binding upon the parties to the maximum extent permitted by Applicable Law. Within five Business Days of the Independent Party's notice of its final decision, the relevant party will deliver to the recipient party cash, or where amounts with respect to such Dispute are to be paid out one of the escrow accounts established pursuant to this Agreement and the Escrow Agreement, a written consent to the immediate release of such amount to the recipient party, in the amount indicated in such notice, together (except with respect to amounts payable out of the DAC Tax Indemnity Account) with interest on such amount from the date initially due under this Agreement to the date of payment at the rate of 6.8% per annum. The fees and expenses of the Independent Party will be paid by the party that is not deemed by the Independent Party to be the substantially prevailing party of such Dispute. However, if either (i) no party is deemed the substantially prevailing party by the Independent Party, or (ii) the Dispute is settled by the parties prior to resolution by the Independent Party, then the fees and expenses of the Independent Party will be paid equally by the Seller and the Purchaser. 9. DEFINITIONS As used herein, the following terms have the following meanings: "401(k) Contract" means a Covered Contract relating to a plan intended to qualify under Section 401(k) of the Code. "Acceptable Law Firm" is defined in Section 7.1.6. "Account Value" means, as of a reference date, (i) with respect to each Contract other than Contracts in Pay Status and term life policies, the amount that would be payable to the Policyholder in the event of surrender on such date, before the application of surrender charges or moratorium charges, and (ii) with respect to each Contract in Pay Status and term life policy, the statutory reserve for such Contract as of such date. "Account Values True-Up" means the amount of additional credited interest to be applied to certain Reinsured Policies pursuant to enhanced guarantees under the Plan and certain Rehabilitation Documents. "Account Values True-Up Amount" means the maximum amount of the Account Values True-Up as calculated by the Seller in compliance with the terms of the Plan and the Rehabilitation Documents as in effect on the Closing Date. "Account Values True-Up Date" means as soon as reasonably practicable after the Rehabilitation Period Termination Date, but in no event later than the 15th Business Day following the Rehabilitation Period Termination Date. "Accumulation Contract" means any individual or group annuity Contract, except that the term "Accumulation Contract" does not 70 include a Separate Account Contract or a Contract in Pay Status. The term "Accumulation Contract" includes an income certificate elected prior to July 16, 1991 pursuant to the election of an "interest income option" under a matured or surrendered life insurance Contract (including pursuant to the application of death benefit proceeds). "Action" means any action, complaint, petition, audit, investigation, suit, claim, dispute, controversy or other proceeding whether civil, criminal or administrative, in law or in equity or by or before any Governmental Authority. "Acquisition Proposal" means any proposal or proposals for, or agreement or agreements relating to, the sale or disposition (including pursuant to a reinsurance or similar arrangement involving the Reinsured Life Policies, the Reinsured Annuity Contracts and the Transferred Assets) of all or substantially all of the Business in one or a series of transactions with one or more Persons other than the Purchaser or its Affiliates. "Additional Enhancements DAC Amount" means the product of (a) .22 multiplied by (b) the sum of the products of (i) the amount of the Additional Policy Enhancements Amount paid to the Purchaser or its Affiliates that is allocated to each category (as described in Section 848(c) of the Code) of Specified Insurance Contracts (as defined in Section 848(e) of the Code) (following allocation of the Additional Policy Enhancements Amount between Specified Insurance Contracts and non-Specified Insurance Contracts) based on the relative Impairments of all contracts on the Scheduled Vesting Date, multiplied by (ii) the percentage provided in Section 848(c)(1) of the Code applicable to each such category of Specified Insurance Contracts. "Additional Policy Enhancements Amount" is defined in Section 4.12.2. "Additional Replacement Policy" is defined in Section 5.10.2. "Administrative Services Agreement" means the Administrative Services Agreement to be entered into between the Seller and the Purchaser substantially in the form of Exhibit C. "Affiliate" with respect to any Person means any other Person that directly or indirectly controls, is controlled by, or is under common control with, the referenced Person. "Agent Debit Balance" means a balance owed to the Seller by an insurance agent or other producer for advances, loans and other payments. "Agreement" means this Purchase and Sale Agreement, including the Schedules and Exhibits. "Allocation Regulations" is defined in Section 7.1.2. "Allowed Claim" is defined in the Plan. "Ancillary Agreements" means the Assumption Reinsurance Agreements, the Indemnity Reinsurance Agreement, the Administrative Services Agreement, the Transition Services Agreement, the Bill of Sale, the Escrow Agreement, the Expense Reimbursement Escrow Agreement and any other agreements to effect, or in connection with, the Transactions. "ANLIC" is defined in the introductory paragraph. "ANLIC Assumption Reinsurance Agreement" means the Assumption Reinsurance Agreement that is substantially in the form of Exhibit A-1. "ANLIC Audited SAP Statements" is defined in Section 3.6.3. 71 "ANLIC SAP Statements" is defined in Section 3.6.3. "ANLIC Statutory Statements" is defined in Section 3.6.2. "Annuity Contracts" means all individual and group annuity Contracts in effect on the date hereof, or on the Closing Date, as applicable, including the Reinsured Annuity Contracts and the Excluded Annuity Contracts. "Applicable Law" with respect to any Person means any domestic or foreign, federal, state, provincial or local statute, law (including common law), ordinance, rule, administrative interpretation or other interpretation by a Governmental Authority, regulation, bulletin, order, writ, injunction, directive, judgment, decree, rule or other requirement of any Governmental Authority applicable to such Person, its business or any of its respective properties or assets, including the insurance laws, rules and regulations of the jurisdictions in which the Reinsured Policies are issued, as well as those of any other applicable jurisdictions. "Applicable Purchaser Survival Period" is defined in Section 7.2. "Applicable Seller Survival Period" is defined in Section 7.3. "Assigned Contracts" is defined in Section 1.1.4. "Assumption Date" is defined in the Assumption Reinsurance Agreements. "Assumption Reinsurance Agreements" is defined in Section 1.4.1. "Assumptions" is defined in Section 7.1.2. "Audited Purchaser Financial Statements" is defined in Section 3.6.1. "Audited SAP Statements" is defined in Section 2.6.3. "Base Ceding Commission" is defined in Section 1.1.1. "Benefit Plan" means a Fully Administered Qualified Plan, a Tax Deferred Annuity Arrangement or an Other Plan. "Bill of Sale" means the Bill of Sale to be delivered by the Seller at the Closing substantially in the form of Exhibit F. "Books and Records" means the originals or copies of all policyholder, accountholder, and customer lists, policy information, Reinsured Policies, forms and rating plans, disclosure and other documents and filings required under Applicable Laws, claim records, sales records, underwriting records and financial, accounting, Tax, business, marketing and compliance records relating to the operation of the Business, the Reinsured Policies or the Transferred Assets, including any data base, magnetic, electronic or optical media (to the extent not subject to licensing restrictions) and any other form of recorded, computer generated or stored information or process. "Business" is defined in the Recitals. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in the States of New Jersey, Arizona, California or New York are permitted or obligated by law to be closed. "Calculation Date" is defined in Section 1.1.2. "Cash Equivalents" means: (a) securities issued or directly and unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing not later than 72 June 30, 1999; (b) commercial paper maturing not later than June 30, 1999 and, as of the relevant date of valuation having a rating of at least A-1 from Standard & Poor's Ratings Group and at least P-1 from Moody's Investors Service; (c) certificates of deposit or bankers' acceptances maturing not later than June 30, 1999 issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having unimpaired capital and surplus of not less than $500,000,000; and (d) money market funds that maintain a stable net asset value and have the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. "Ceding Commission" is defined in Section 1.1.1. "Certified Estimated Closing Date Statement" is defined in Section 5.2.2. "Certified Statement Date" is defined in Section 5.2.2. "Claim Acceptance Notice" is defined in Section 7.7.1. "Claim Dispute Notice" is defined in Section 7.7.1. "Claims Escrow Account" is defined in the Escrow Agreement. "Claims Escrow Amount" means $45,000,000, comprised of cash and Cash Equivalents, each valued at their respective Value as of the Closing Date, and deposited by the Seller on the Closing Date in the Claims Escrow Account. "Class Four Creditor" is defined in the Settlement Agreement. "Class Four Creditor Value Share" is defined in the Settlement Agreement. "Closing" is defined in Section 1.2.1. "Closing Conditions" is defined in Section 6.1. "Closing Date" is defined in Section 1.2.1. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "COI Adjustment Amount" means an amount equal to $750,000 multiplied by the product of (a) 100 multiplied by (b) the percentage increase in the Modified COI Scale pursuant to Section 4.18, plus accrued interest at a rate of 6.8% per annum from the date of any such adjustment pursuant to Section 4.18.2 until the date of payment. For example, if the Account Values for Reinsured Life Policies remaining one year following the Transition Period Termination Date, expressed as a percentage of Account Values on December 31, 1997, is 91.8%, then the percent increase in COI is calculated as follows: the result of: (i) (A) .7% multiplied by (B) 95% minus 91.8%; divided by (ii) 1%. This example would yield a COI Scale factor equal to 2.24 and a COI Adjustment Amount of $1,680,000 (2.24 multiplied by $750,000) plus interest thereon at the above rate. "COI Adjustment Escrow Account" is defined in the Escrow Agreement. "COI Adjustment Escrow Amount" means $6,000,000, comprised of cash and Cash Equivalents, each valued at their respective Value as of the Closing Date, and deposited by the Seller on the Closing Date in the escrow account established pursuant to the Escrow Agreement. "COLI DAC Election Escrow Amount" means the amount placed in escrow in connection with the separate sale of the Seller's COLI business to a third party with respect to the DAC election sought 73 by the Seller in such transaction. "Combination Contracts" means Contracts with respect to which assets are held in both Seller's general account and in Seller's Separate Account B. "Commission Agreements" means all agreements providing for the payment of Commissions relating to any Reinsured Policy. "Commissioner" is defined in the Recitals. "Competitive Bidder" is defined in Section 4.16. "Competitive Bid Order" is defined in Section 4.16. "Confidentiality Agreement" means that certain Confidentiality Agreement dated October 30, 1997 between the Purchaser and Goldman Sachs & Co., as representative of the Seller. "Contract" means a life insurance, health insurance, disability income insurance, endowment or annuity contract issued by the Seller or Mutual Benefit. The term "Contract" includes, without limitation, any and all individual and group annuity and investment contracts issued by the Seller or Mutual Benefit under or in connection with employee benefit plan or programs to which Section 401, 403(b), 408 or 457 of the Code relate, to whomever or whatever Persons such Contracts are issued, together with all individual annuities issued pursuant to such Contracts. "Contract in Pay Status" means any Contract, the terms of which provide for the Seller or Mutual Benefit to make periodic payments for a period measured by the life or lives of individuals or for a period of years, including: (a) obligations under individual annuity contracts (including individual retirement annuities); (b) annuity certificates issued under group annuity contracts; and (c) income certificates evidencing settlement options elected under matured or surrendered life insurance policies (other than "interest income options" elected prior to July 16, 1991), provided such payments have commenced. The term "Contract in Pay Status" includes a Contract designated by the Seller or Mutual Benefit as a dedicated investment portfolio Contract or as a lottery Contract and does not include a Separate Account Contract. "Cost of Insurance" means the monthly rate to be charged to provide mortality and other ancillary benefits on a life insurance policy. "Court" is defined in the Recitals. "Covered Accumulation Contracts" means Accumulation Contracts that are Covered Contracts. "Covered Contract" means (i) those Restructured Contracts and Reaffirmed Contracts that are covered, in whole or in part, by a Participating Guaranty Association under the Participation Agreement and (ii) those unsupported Contracts that would have been Covered Contracts if the relevant Guaranty Association had been a Participating Guaranty Association. "CPR" is defined in Section 8.2.3. "CRVM Method" means the Commissioner Reserve Valuation Method as prescribed by each jurisdiction in which the Seller files its Statutory Statements. "DAC Amount" is defined in Section 7.1.1. "DAC Election Escrow Amount" means the amount determined in accordance with the calculation set forth in Section 1 of Schedule 9, as provided in Section 7.1.8(a), with respect to the Purchaser's assumption and reinsurance of the Reinsured Policies 74 in the absence of the Election. "DAC Reduction Amount" means the product of .22 multiplied by that portion of the sum of (a) the unamortized balance (as of the beginning of its taxable year which includes the Closing Date) of amounts previously capitalized by the Seller under Section 848(a) of the Code, plus (b) any amount required to be capitalized by the Seller under Section 848(a) of the Code for its taxable year which includes the Closing Date that is allocable to the Purchaser and its Affiliates in connection with the Transactions, as determined under the Allocation Regulations. "DAC Reduction Escrow Amount" means the amount determined in accordance with the calculation set forth in Section 3 of Schedule 9, as provided in Section 7.1.8(b). "DAC Tax Indemnity Account" means the separate account established pursuant to the Escrow Agreement for the DAC Reduction Escrow Amount or the DAC Election Escrow Amount, as the case may be. "Damages" means any and all costs, damages, liabilities, fines, fees, penalties, interest obligations, deficiencies, losses and expenses, amounts paid in settlement, interest, court costs, costs of investigation, reasonable fees and expenses of attorneys, accountants, actuaries and other experts. "Dispute" is defined in Section 8.2.2. "DOJ" is defined in Section 4.1.3. "DOL" is defined in Section 2.12.18. "Election" is defined in Section 7.1.2. "Eligible Policy" is defined in Section 5.10.4. "Encumbrances" means any liens, security interests, pledges, mortgages, adverse claims, charges, encumbrances on, licenses, royalty or profit sharing obligations, or similar agreements. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Plan" means each "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a) the assets of which are held in whole or in part in the Group Pension Account or (b) with respect to which the Seller has any obligation. "Escrow Agent" means the escrow agent pursuant to the Escrow Agreement. "Escrow Agreement" is defined in Section 1.4.5. "Escrow Claim" means a claim by the Purchaser, ANLIC and/or First SunAmerica for satisfaction (a) out of the Claims Escrow Amount in respect of Damages determined in accordance with Sections 5.17, 7.5.1, 7.5.2 and 7.5.6; (b) out of the Tax Reserves Indemnity Escrow Amount in respect of Damages determined in accordance with Section 7.5.3; (c) out of the DAC Election Escrow Amount or the DAC Reduction Amount, as the case may be, for amounts determined in accordance with Section 7.1; (d) out of the Outward Reinsurance Escrow Amount for amounts determined in accordance with Section 5.16; (e) out of the COI Adjustment Escrow Amount for amounts determined in accordance with Section 4.18.2; and (f) out of the Policy Enhancements Endorsements Escrow Amount for amounts determined in accordance with Section 4.12.5. "Escrow Termination Date" means the sixth anniversary of the Closing Date. 75 "Estimated Closing Date Statement" is defined in Section 1.2.2. "Excluded Annuity Contracts" means, collectively, (a) each Wrapped Accumulation Contract; (b) each Separate Account Contract (including each Variable Annuity and each 401(k) Contract with respect to which assets are held in any of the Seller's Separate Accounts); (c) if termination thereof is approved by the Court pursuant to Section 4.11, each 401(k) Contract with respect to which assets are held in the Seller's general account and for which the Seller provides services; and (d) each Covered Accumulation Contract issued as a Restructured Contract together with any Variable Annuity. "Excluded Liabilities" is defined in Section 1.1.6. "Excluded Policies" means all of (a) the Excluded Annuity Contracts, (b) the Purchase Opt-Out Contracts, (c) the LICGC Contract, (d) if the Court does not approve bifurcation thereof pursuant to Section 4.11, the Combination Contracts, (e) any Policy that would otherwise be a Reinsured Policy with respect to which Seller has received notice of a death claim on or prior to the Closing Date and (f) the Policies ceded to Integrity Life Insurance Company. "Expense Reimbursement Escrow Account" is defined in the Expense Reimbursement Escrow Agreement. "Expense Reimbursement Escrow Agreement" means the escrow agreement dated as of July 14, 1998 attached hereto as Exhibit K. "Extra Contractual Obligations" means all liabilities (a) for compensatory, consequential, exemplary, punitive or similar damages that relate to or arise in connection with any alleged or actual act, error, omission, fraud or misrepresentation by the Seller, any predecessor of the Seller including Mutual Benefit, any of their respective Affiliates or any of their respective Representatives, prior to the Closing Date, whether intentional or otherwise, or (b) from any actual or alleged reckless conduct or bad faith by the Seller, any predecessor of the Seller including Mutual Benefit, any of their respective Affiliates or any of their respective Representatives in connection with the handling of any claim under any of the Reinsured Policies or any predecessor Policy in connection with the issuance, offer, sale, delivery, cancellation or administration of any of the Reinsured Policies or any predecessor Policy. "Filing Date" is defined in Section 7.1.5. "Final Ceding Commission" is defined in Section 1.3.1. "Final Closing Date Statement" is defined in Section 1.3.1. "Final Determination" will have been made with respect to an issue upon the earliest to occur of: (a) with respect to the Election, the receipt of the Letter Ruling; (b) a decision, judgment, decree, or other Final Order being issued by any court of competent jurisdiction, other than a decision adverse to the Purchaser by the first court of competent jurisdiction, in which case, such adverse decision will be a Final Tax Determination, unless appealed by the IRS; (c) the IRS having entered into a binding agreement with the Purchaser or having reached a final administrative or judicial determination with respect to the Purchaser that, whether by Applicable Law or agreement, has become a Final Order; and (d) the expiration of the applicable statute of limitations, including extensions thereof granted by the Purchaser to the IRS, which the Purchaser can grant in its sole discretion (such expiration will be treated as a Final Determination that the position as reported on the Purchaser's Federal income tax return is correct) with respect to the Purchaser's return. If (i) either (x) a private letter ruling has been issued by the IRS, or (y) a decision, judgment, decree or other Final Order has been issued by any court of competent 76 jurisdiction, providing that the Seller is qualified to make the election provided in Treas. Reg. 1.848-2 (i)(4) with respect to any other reinsurance transaction occurring in the Seller's Tax year that includes the Closing Date; and (ii) the Seller has provided to the Purchaser an opinion, reasonably acceptable to the Purchaser, of nationally recognized Tax counsel (which counsel will be reasonably acceptable to the Purchaser), concluding, based upon the reasoning underlying such private letter ruling, decision, judgment, decree or other order, that it is more likely than not that the Seller is entitled to make the Election, together with non-cancelable insurance, all of the premiums of which have been fully prepaid and that will pay to the Purchaser or its Affiliates an amount equal to the amount to be paid to the Seller as a consequence of having satisfied the requirements of this sentence, plus interest and potential penalties thereon in the event of a Final Determination (as defined without regard to this sentence) that the Seller is not qualified to make the Election on terms, including that the expenses of obtaining any Final Determination are paid by the insurer and the Purchaser is entitled to control any contest to the same extent as set forth in Section 7.5.4 hereof, and from a carrier (with at least an AA claims-paying ability rating from Standard & Poors Rating Group and an A+ claims-paying rating from A. M. Best & Co.) each reasonably acceptable to the Purchaser, then the delivery of such opinion and insurance to the Reinsurer will be treated for purposes of this Agreement as a Final Determination that the Seller is entitled to make the Election. If, following the Closing Date, the Seller will have provided to the Purchaser an opinion, reasonably acceptable to the Purchaser, of nationally recognized Tax counsel (which counsel will be reasonably acceptable to the Purchaser), concluding, based on (x) any statute enacted after the date hereof; (y) any published IRS ruling or regulation promulgated after the date hereof, addressing the treatment of moratorium charges similar to the moratorium charges as adjustments to tax reserves; or (z) any decision, judgment, decree or other Final Order of a court of competent jurisdiction after the date hereof, addressing the treatment of moratorium charges similar to the moratorium charges as adjustments to tax reserves, that the Seller's treatment of the moratorium charges for Tax reserving purposes as of the Closing Date will more likely than not be considered appropriate under the Code, together with non-cancelable insurance all of the premiums of which have been fully prepaid and that will pay to the Purchaser or its Affiliates an amount equal to the amount paid to the Seller as a consequence of having satisfied the requirements of this sentence, plus interest and potential penalties thereon, in the event of a Final Determination (as defined without regard to this sentence) that the Seller's treatment of the moratorium charges (for tax reserving purposes) is not appropriate on terms, including that the expenses of obtaining any Final Determination are paid by the insurer and the Purchaser is entitled to control any contest to the same extent as set forth in Section 7.5.4 hereof, and from a carrier (with at least an AA claims-paying rating from Standard & Poors and an A+ claims-paying rating from A.B. Best & Company) each reasonably acceptable to the Purchaser, then the delivery of such opinion and insurance will be treated for purposes of this Agreement as a Final Determination that the treatment by the Seller of the moratorium charges (for tax reserving purposes) is appropriate. "Final Order" means an order or judgment of a court entered on the docket, which has not been reversed, vacated or stayed and as to which the time to appeal, petition for certiorari or move for a new trial, reargument or rehearing has expired and as to which no appeal, petition for certiorari or other proceedings for a new trial, reargument or rehearing will then be pending or if an appeal, writ of certiorari, new trial, reargument or rehearing thereof has been sought, such order or judgment of the court shall have been affirmed by the highest court to which such order was appealed, or certiorari shall have been denied or a new trial, reargument or rehearing shall have been denied or resulted in no modification of such order, and the time to take any 77 further appeal, petition for certiorari or move for a new trial, reargument or rehearing shall have expired; provided, however, the possibility that a motion under Rule 60 of the Federal Rules of Civil Procedure, or similar rule or civil procedure of any state, may be filed relating to such order will not cause such order to lose its status as a Final Order. "Final Reserve" is defined in Section 1.3.1. "Final Reserve Assets" is defined in Section 1.3.1. "First SunAmerica" is defined in the introductory paragraph. "First SunAmerica Assumption Reinsurance Agreement" means the Assumption Reinsurance Agreement to be delivered at Closing substantially in the form of Exhibit A-2. "FTC" is defined in Section 4.1.3. "Fully Administered Qualified Plan" means each Qualified Plan that uses, or has used since July 16, 1991, any of the Seller's or Mutual Benefit's compliance services or that maintains, or on or after July 16, 1991 maintained, a prototype plan sponsored by the Seller or Mutual Benefit. "GAAP" means United States generally accepted accounting principles, consistently applied. "GAAP Statements" is defined in Section 2.6.1. "GAAS" means generally accepted actuarial standards as adopted by the Actuarial Standards Board and the National Association of Insurance Commissioners, as applicable, including Actuarial Guidelines as found in the Financial Condition Examiners Handbook, consistently applied. "Governmental Authority" means any national government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any government authority, agency, department, board, commission, court, tribunal or instrumentality of the United States, any State of the United States, or any political subdivision thereof, and any alternative dispute resolution tribunal with binding authority. "Grandfathered Premiums" means the premiums collected from the policyholders of Reinsured Policies listed or required to be listed on the delivery specified in clause (a) of Section 4.24 on or prior to the 12 month anniversary of the Closing Date. "Grandfathered Premiums Indemnity Amount" means an amount (that is not less than zero) which will be calculated as follows: the product of (a) 50% multiplied by (b) the remainder of (i) $20,000,000 less (ii) Net Grandfathered Premiums. "Grandfathering Ruling" is defined in Section 4.20. "Group Pension Accounts" means the assets held by the Seller for the benefit of its Group Pension Customers which are accounted for in the Seller's annual report to contractholders as part of MBL's group pension line of business, including any Tax Deferred Annuity Arrangement or Qualified Plan, Qualified Plan Contract and Other Plan. "Group Pension Business" means the business that is accounted for in the Seller's annual report to contractholders as the Seller's group pension line of business. "Group Pension Customer" means each customer on whose behalf assets are held by the Seller or any former customer to whom the Seller has any liabilities that, in each case are accounted for 78 in the Seller's annual report to contractholders as part of the Seller's group pension line of business. References to a Group Pension Customer will not include non-related business of such customer with the Seller or Mutual Benefit. "Guaranteed Policy Enhancement Amount" means, with respect to any Scheduled Vesting Date, (a) the amount vested on such Scheduled Vesting Date, plus (b) the amount unvested but accelerated on deaths between the previous Scheduled Vesting Date and such Scheduled Vesting Date, if any, and therefore credited or paid, the aggregate amount of which equals the applicable amounts credited or paid as set forth in Schedule 10. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "IBNR Reserve Amount" means $250,000, such amount to be a reserve for liabilities incurred for deaths prior to the Closing Date but not reported prior to the Transition Period Termination Date. Deaths "reported" pursuant to the Social Security Sweep procedures described in Section 5.13.2 will be deemed reported prior to the Transition Period Termination Date for all purposes under this Agreement. "IBNR Settlement Amount" means a dollar amount calculated as described in Section 5.13.2. "IBNR Settlement Date" means the 10th Business Day after the delivery by the Purchaser of its calculation of the IBNR Settlement Amount. "Impairment" is defined in the Joint Allocation Report. "Indemnitee" is defined in Section 7.7.1. "Indemnitor" is defined in Section 7.7.1. "Indemnity Reinsurance Agreement" means the Indemnity Reinsurance Agreement that is substantially in the form of Exhibit B. "Independent Party" is defined in Section 1.3.2. "Initial Calculation" is defined in Section 7.1.4. "Insolvent Insurer Election Tax Indemnity" is defined in Section 7.1.7. "Insurance Liabilities" means the following liabilities with respect to the Reinsured Policies only and no other liabilities whatsoever: (a) the contractual liabilities and obligations arising under the Reinsured Policies as evidenced by the written policy forms and riders; (b) liability for the Policy Enhancements in accordance with the terms of Section 4.12 not in excess of the Policy Enhancements Amount as represented by the Seller; (c) all liability for premium Taxes arising on account of premiums paid or annuities purchased after the Closing Date; (d) all amounts payable after the Closing Date for returns or refunds of premiums under the Reinsured Policies; (e) all liability for Commissions payable with respect to the Reinsured Life Policies to or for the benefit of brokers and service providers, including renewal Commissions and service fees, to the extent that such amounts accrue after the Closing Date under the terms of Commission Agreements that are Assigned Contracts; and (f) all Guaranty Fund Assessments and similar charges imposed with respect to the Reinsured Policies based on premiums paid after the Closing Date. Without limiting the generality of the foregoing, Insurance Liabilities do not include Excluded Liabilities or Extra Contractual Obligations. "Integrity Policy Enhancements Amount" means the portion of the Policy Enhancements attributable to Policies ceded to Integrity Life Insurance Company pursuant to reinsurance agreements, which 79 amount will not exceed $5,000,000. "Interest" is defined in Section 7.1.4. "Investment Grade Security" means: (a) a security issued or directly and unconditionally guaranteed by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States; (b) any corporate bond that (i) is Marketable (as defined below); (ii) is rated by at least two nationally recognized statistical rating organizations and that does not have (A) a rating below BBB- by Standard & Poor's Ratings Group, (B) a rating below Baa3 by Moody's Investors Service, or (C) a rating below a comparable investment grade by another nationally recognized statistical rating organization; (iii) has a rating of at least category "2" by the Securities Valuation Office, or any successor thereto, of the National Association of Insurance Commissioners; and (iv) is not in default. For purposes of the foregoing, "Marketable" means securities (i) that will have a readily available public bid by at least two broker/dealers in the OTC market and/or have a posted bid price on listed markets and which carry no restrictions as to their transferability; or (ii) that were sold pursuant to Rule 144A of the Securities Act of 1933, as amended, and for which (A) the initial issuance was at least $100 million, (B) the sale was either through initial purchasers to qualified institutional buyers or pursuant to a medium term notes facility, and (C) there is a public CUSIP number. Notwithstanding the foregoing, an instrument is not "Marketable" if (1) it is subject to lock-ups or other legal or contractual restrictions on transferability, including restrictions on the amount that can be transferred, or (2) it is not registered under the Securities Act of 1933, as amended, or freely transferable without registration thereunder. "Inward Reinsurance Agreements" means any binder, agreement, treaty, certificate, retrocession or other instrument of reinsurance assumed by the Seller with respect to any annuity contract or life insurance policy of a type included in the Reinsured Policies from any of the Reinsurers under the Outward Reinsurance Agreements. "IRS" means the Internal Revenue Service of the United States. "Joint Allocation Report" is defined in the Recitals. "Letter Ruling" is defined in Section 7.1.3. "Licensed Software" means all computer software programs used in the conduct of the Business that are either licensed by the Seller from a third party or licensed by a third party and assigned by such third party to the Seller in accordance with the terms of such licenses. "LICGC Contract" means the Accumulation Contract issued to the Life Insurance Company Guaranty Corporation of New York in exchange for payment to the Seller of payments under the Plan. "Market Value" means with respect to each asset that is a Cash Equivalent or Investment Grade Security, (a) that matures not later than six months after Closing Date, the average of the "bid" and "ask" price quotations, and (b) that matures later than six months after the Closing Date, the "bid" price quotation, in each case as provided by Goldman, Sachs & Co. as of the close of business (New York City time) on the Business Day immediately preceding the Closing Date, for settlement on the Closing Date. "Material Adverse Effect" means (a) with respect to the Seller, a material adverse effect on the business, property, financial condition or results of operations of the Seller and its Subsidiaries with respect to the Business taken as a whole or on the Reinsured Policies or Transferred Assets or on the legality, validity or enforceability of this Agreement or the Ancillary 80 Agreements or on the consummation of the Transactions, and (b) with respect to the Purchaser, a material adverse effect on the business, property, financial condition or results of operation of the Purchaser and its Subsidiaries taken as a whole or on the legality, validity or enforceability of this Agreement or the Ancillary Agreements or on the consummation of the Transactions. In either case, effects attributable to (x) the Transactions or (y) changes in general economic conditions, including changes affecting the insurance industry, will not be considered to be, or to contribute to, a Material Adverse Effect. "Maximum Guaranteed Policy Enhancements Amount" means the amount that is determined pursuant to Schedule 10 based on "Account Value (or Statutory Reserves for Restructured Contracts in Pay Status or Supplementary Contracts) Eligible at Vesting Date" being greater than or equal to $4.3 billion. "MEC's" means those Life Policies that qualify as modified endowment contracts under 7702A of the Code. "Modified COI Scale" is defined in Section 4.18. "Mutual Benefit" is defined in the Recitals. "Net Grandfathered Premiums" means the total premiums collected from the policyholders of Reinsured Policies listed or required to be listed on the delivery specified in clause (a) of Section 4.24 on or prior to the 12-month anniversary of the Closing Date, less any refund paid to such policyholders on or prior to the 14-month anniversary of the Closing Date. "New Money Accumulation Contract" means a contract covering assets delivered to Mutual Benefit or the Seller on or after July 16, 1991. "New York Assumption Date" means the date on which the mandatory simultaneous assumption of the New York Reinsured Policies pursuant to the First SunAmerica Reinsurance Agreement becomes effective, which will be no earlier than the Rehabilitation Period Termination Date. "New York Reinsured Annuity Contracts" means the Reinsured Annuity Contracts listed on Schedule 2-B, as updated as of the Closing Date, and as further updated as of the New York Assumption Date. "New York Reinsured Life Policies" means the Reinsured Life Policies listed on Schedule 1-B as updated a of the Closing Date, and as further updated as of the New York Assumption Date. "NOLHGA" means the National Organization of Life and Health Insurance Guaranty Associations. "Non New York Reinsured Annuity Contracts" means the Reinsured Annuity Contracts listed on Schedule 1-A, as updated as of the Closing Date, and as further updated as of the New York Assumption Date. "Non New York Reinsured Life Policies" means the Reinsured Life Policies listed on Schedule 2-A, as updated as of the Closing Date, and as further updated as of the New York Assumption Date. "Notice of Claim" is defined in Section 7.7.1. "Organizational Documents" as to any Person, as applicable, means its certificate or articles of incorporation or charter, by-laws, trust agreement, partnership agreement and any other organizational documents, as amended to date. "Other Plan" means any individual or group annuity contract or other contract, arrangement or plan, other than a Qualified Plan, a Qualified Plan Contract or a Tax Deferred Annuity Plan, (a) the 81 assets of which are held in whole or in part in the Group Pension Accounts, or (b) with respect to which the Seller has any responsibility to a Group Pension Customer, including Code Section 457 plans and deferred compensation arrangements. "Outward Reinsurance Adjustment Amount" means an amount equal to the sum of the present value of the excess of future reinsurance premium for each of the subsequent 30 years (a) charged by a reinsurer of an Outward Reinsurance Agreement pursuant to any amendment or modification to the Outward Reinsurance Agreement after the date hereof, including in connection with giving consent to the assignment of such Outward Reinsurance Agreement to the Purchaser, over those charged by such reinsurer under the Outward Reinsurance Agreement as in effect on the date hereof, and (b) charged by each Substitute Outward Reinsurer over those charged by the reinsurer of the original Outward Reinsurance Agreement, in each case calculated based on an 11% discount rate compounded annually. For purposes of calculating the Outward Reinsurance Adjustment Amount, the reinsurance premium under both the original Outward Reinsurance Agreement and the modified Outward Reinsurance Agreement or the Substitute Outward Reinsurance Agreement, as the case may be, will be based on the Reinsured Life Policies as of the end of the second month preceding the Closing Date and as projected using persistency assumptions outlined in the "Actuarial Appraisal of MBL Life Assurance Corporation projected as of June 30, 1998" prepared by Coopers & Lybrand L.L.P. "Outward Reinsurance Agreements" means any binder, contract, agreement, treaty, certificate, retrocession, understanding or other instrument of reinsurance ceded by the Seller, other than the Assumption Reinsurance Agreements or the Indemnity Reinsurance Agreements, in respect of any Reinsured Policy. "Outward Reinsurance Escrow Account" is defined in the Escrow Agreement. "Outward Reinsurance Escrow Amount" means an amount determined pursuant to Section 5.16.2, comprised of cash and Cash Equivalents, each valued at their respective Value as of the Closing Date, and deposited by the Seller on the Closing Date in the Outward Reinsurance Escrow Account as defined in and established pursuant to the Escrow Agreement. "Outward Reinsurer" means a reinsurer under an Outward Reinsurance Agreement or a Substitute Outward Reinsurance Agreement, as applicable. "Owned Software" means all computer software programs used in the conduct of the Business that are owned by the Seller. "Participating Guaranty Association" means a life and health insurance guaranty association (or other entity performing similar functions) established under the laws of any jurisdiction that is a party to the Participation Agreement. "Participation Agreement" means the Third Amended Participation Agreement, dated January 24, 1994, as amended, among the Seller, Mutual Benefit, the Commissioner, NOLHGA and each of the Participating Guaranty Associations. "Permits" means all licenses, permits, orders, consents, approvals, registrations, authorizations, qualifications and filings with any Governmental Authority or pursuant to any Applicable Laws. "Petition for Court Approval" means the petition filed by the Seller with the Court to approve inter alia, the proposed amendments to the Plan and the Rehabilitation Documents and certain other orders as described in Exhibit I, the consummation of the Transactions to be completed at Closing, and the Policy Enhancements Procedures. 82 "Person" means any individual, partnership, limited liability company, corporation, unincorporated organization or association, trust, or other entity. "Plan" is defined in the Recitals. "Policies" means all forms of insurance policies, annuity contracts and guaranteed interest contracts, and amendments and riders thereto. "Policy Enhancements" means the enhancements described in Article 6 of the Settlement Agreement (as such Settlement Agreement will be modified pursuant to the terms of this Agreement) to provide Policyholders reimbursement of a portion of previously impaired amounts which are in the aggregate the amount of the sum of the Policy Enhancements Amount and the Integrity Policy Enhancements Amount. "Policy Enhancements Amount" means an amount equal to the total liability for Policy Enhancements as determined by the Seller pursuant to the terms of the Plan and the Rehabilitation Documents as of the Closing Date, excluding the Integrity Policy Enhancements Amount. "Policy Enhancements Calculation Adjustment Amount" means an amount equal to 15% of the remainder, if any, of (a) the Policy Enhancements Amount as of the Closing Date minus (b) the remainder of (i) $275,000,000, minus (ii) the amount of the Integrity Policy Enhancements Amount. "Policy Enhancements Endorsements" is defined in Section 4.12.4. "Policy Enhancements Endorsements Escrow Account" is defined in the Escrow Agreement. "Policy Enhancements Endorsements Escrow Amount" is defined in Section 4.12.5. "Policy Enhancements Procedures" means the detailed procedures for calculation and administration of the Policy Enhancements (including the Policy Enhancements Amount and the Additional Policy Enhancements Amount) as submitted with the Petition for Court Approval. "Policyholder" means any holder, owner or beneficiary of a Reinsured Policy. "Policyholder Disclosure Statement" means the statement provided by the Seller to its policyholders notifying them of the Transactions. "Preserved Replacement Policy" is defined in Section 5.10.1. "Purchase Opt-Out Contracts" means the Accumulation Contracts issued to Participating Guaranty Associations (other than the LICGC Contract) in exchange for payment to the Seller of opt-out payments under the Plan. "Purchaser" is defined in the introductory paragraph; provided, however, for purposes of all Tax matters, including Section 7.1, any reference to the "Purchaser" will be deemed to mean the Purchaser and its Subsidiaries, including ANLIC and First SunAmerica, unless the context otherwise clearly indicates. "Purchaser's Disclosure Schedule" means the Disclosure Schedule delivered by the Purchaser on the date hereof. Section numbers in the Purchaser's Disclosure Schedule refer to the corresponding section numbers in this Agreement and, together with all matters under such heading will be deemed to qualify only that Section unless any matter under any heading is explicitly stated to qualify other Sections. 83 "Qualification Opinion" is defined in Section 7.1.6. "Qualified Contract" means an individual or group annuity contract (a) pursuant to which the assets of a Qualified Plan or Tax Deferred Annuity Arrangement are held in its Group Pension Accounts, or (b) with respect to which the Seller has any responsibility to a Group Pension Customer. "Qualified Plan" means a plan intended to qualify under Section 401(a) or 403(a) of the Code, (a) the assets of which are held in whole or in part in the Group Pension Accounts or (b) with respect to which the Seller has any responsibility to a Group Pension Customer. "Reaffirmed Contract" means any Contract or portion of a Contract that is reaffirmed by Mutual Benefit and then transferred and assigned to, and assumed and reinsured by the Seller, as provided in the Plan and in Articles 2 and 4 of the Rehabilitation Agreement. "Rehabilitation Agreement" means the Third Amended Agreement in Connection with the Rehabilitation of The Mutual Benefit Life Insurance Company between Mutual Benefit and the Seller dated January 24, 1994. "Rehabilitation Documents" is defined in Section 2.21.1. "Rehabilitation Period" means the period commencing on April 29, 1994 and ending on December 31, 1999, as modified pursuant to the terms of this Agreement to end on the Rehabilitation Period Termination Date. "Rehabilitation Period Termination Date" means the date on which the Rehabilitation Period ends as accelerated to the Transition Period Termination Date pursuant to the Court's approval of the Transactions. "Reinstated Policies" is defined in the Indemnity Reinsurance Agreement. "Reinstatement Date" with respect to any Reinstated Policy means the date on which such Reinstated Policy is deemed to be in force in accordance with the terms of such Reinstated Policy. "Reinsurance Agreement" means the Third Amended and Restated Reinsurance and Participation Agreement, dated January 24, 1994, as amended, among the Seller and each of the Reinsurers. "Reinsurance Premium" is defined in Section 1.1.2. "Reinsured 401(k) Contracts" means (a) 401(k) Contracts for which assets are held only in the Seller's general account and for which the Seller does not provide services; and (b) 401(k) Contracts for which assets are held only in the Seller's general account and for which the Seller does provide services if and only if the Court has not approved their termination in accordance with Section 4.11. "Reinsured Annuity Contracts" means the Annuity Contracts listed on Schedule 2-A, Schedule 2-B and Schedule 2-C, as updated as of the Closing Date. "Reinsured Life Policies" means the life insurance policies listed on Schedule 1-A, Schedule 1-B, and Schedule 1-C, as updated as of the Closing Date. "Reinsured Policies" means (a) Reinsured Life Policies, Reinsured Annuity Contracts and Reinsured 401(k) Contracts in effect as of the Closing Date; (b) any Reinstated Policy in effect as of the Reinstatement Date; and (c) any Resurrected Policy in effect as of the Resurrection Date. The term Reinsured Policies will also include all certificates and participation agreements in effect 84 as of the Closing Date (or in the case of Reinstated Policies or Resurrected Policies, as of the Reinstatement Date or the Resurrection Date, as applicable) issued in accordance with the terms of such Reinsured Life Policies, Reinsured Annuity Contracts, Reinsured 401(k) Contracts, Reinstated Policies and Resurrected Policies (including all supplements, endorsements, riders and ancillary agreements in connection therewith). "Reinsurers" means the reinsurers named in Schedule B to the Reinsurance Agreement. "Remaining Outward Reinsurance Agreement" is defined in Section 5.16.1. "Remaining Outward Reinsurer" is defined in Section 5.16.1. "Remedy Compromise Adjustment Amount" means $2,580,000, which amount is equal to 3% of the sum of the Base Ceding Commission less the Claims Escrow Amount. "Replacement Policy" is defined in Section 5.10.2. "Representatives" means, with respect to any Person, such Person's employees, officers, directors, legal counsel, investment bankers, accountants, actuaries and other agents. "Reserve" means an amount equal to (a) the sum of the Statutory Values of all the Reserve Liabilities in respect of the Reinsured Policies, plus (b) the Policy Enhancements Amount, plus (c) the IBNR Reserve Amount, all of which are listed in Schedule 5. "Reserve Liabilities" is defined in Section 2.13. "Reserve Liabilities Adjustment Amount" means an amount equal to the sum of (a) (i) 1% of the Base Ceding Commission multiplied by (ii) a fraction, (x) the numerator of which is a number equal to the basis point decline, from and excluding 300 basis points to and including 500 basis points, of the aggregate Reserve Liabilities as of the Closing Date (the "Closing Date Reserve Liabilities") from the aggregate Reserve Liabilities as of December 31, 1997 (calculated in accordance with the December 31, 1997 Audited SAP Statements, the "Base Reserve Liabilities"), and (y) the denominator of which is 100, plus (b) (i) 2% of the Base Ceding Commission multiplied by (ii) a fraction, (1) the numerator of which is a number equal to the basis point decline, from but excluding 500 basis points to and including 800 basis points, of the Closing Date Reserve Liabilities from the Base Reserve Liabilities, and (2) the denominator of which is 100. In addition, if the Closing Date is after January 1, 1999, the Reserve Liabilities Adjustment Amount will be increased by an amount equal to the sum of (A) 5% of the amount by which the Closing Date Reserve Liabilities have declined when compared to the Base Reserve Liabilities to the extent such decline is from but excluding 800 basis points to and including 1100 basis points, plus (B) 7% of the amount by which the Closing Date Reserve Liabilities have declined when compared to the Base Reserve Liabilities to the extent such decline is from but excluding 1100 basis points to and including 1500 basis points. For example, if the Closing Date Reserve Liabilities are 98% of the Base Reserve Liabilities, the Reserve Liabilities Adjustment Amount is zero. However, if the Closing Date Reserve Liabilities are 93.5% of the Base Reserved Liabilities, the Reserve Liabilities Adjustment Amount is the sum of (a) 1% of the Base Ceding Commission multiplied by 2, plus (b) 2% of the Base Ceding Commission multiplied by 1.5. Assuming the Base Ceding Commission is $131,000,000, this example would yield a Reserve Liabilities Adjustment Amount of $6,550,000. If the Closing Date Reserve Liabilities are 88% of the Base Reserve Liabilities and the Closing Date is after January 1, 1999, assuming the same Base Ceding Commission and Base Reserve Liabilities of $4 billion, the Reserve Liabilities Adjustment Amount is the sum of (a) 1% of the Base Ceding Commission multiplied by 2, plus (b) 2% of the Base 85 Ceding Commission multiplied by 3, plus (c) .05 multiplied by the product of $4 billion multiplied by .03 (i.e., the 300 basis point additional decline calculated at 5%), plus (d) .07 multiplied by the product of $4 billion multiplied by .01 (i.e., the 100 basis point additional decline calculated at 7%). This example would yield a Reserve Liabilities Adjustment Amount of $19,280,000. "Reserved Value Share" is defined in Section 5.2.2. "Resident" means, with respect to a jurisdiction, Persons residing or domiciled in such jurisdiction as of the referenced date; provided, that certain Reinsured Annuity Contracts that are group annuity contracts for which the plan sponsor or custodian is a Resident of another jurisdiction but the majority of participants are Residents of New York (all of which are indicated on the supplement as of June 30, 1998 to Schedule 2- C) will be deemed to be held by Residents of New York. "Restructured Annuity Contract" means the annuity contracts that are Restructured Contracts. "Restructured Contract" means any Contact or portion of a Contract that is or has been restructured by Mutual Benefit, and then transferred and assigned to, and assumed and reinsured by the Seller as provided in the Plan and Articles 2 and 4 of the Rehabilitation Agreement. "Restructured Contract in Pay Status" means a Restructured Contract that is a Contract in Pay Status. "Restructured Life Policies" means the life insurance policies that are Restructured Contracts. "Resurrected Policy" means any Policy that is considered on the Calculation Date to be an Excluded Policy under clause (e) of the definition of Excluded Policies but for which the Seller subsequently receives a notice that the death claim with respect to such Policy was made in error. "Resurrection Date" with respect to any Resurrected Policy means the date on which the Seller transfers to ANLIC and First SunAmerica, as applicable, cash and Cash Equivalents with an aggregate Value equal to the Account Value with respect to such Resurrected Policy. "Retained Books and Records" is defined in Section 5.1.3. "SAP" means the statutory accounting principles and practices required or permitted for life insurance companies by Applicable Laws of the National Association of Insurance Commissioners and the insurance regulatory authority in the State of New Jersey, as the case may be, consistently applied throughout the specified period and in the immediately prior comparable period. "SAP Statements" is defined in Section 2.6.3. "Scheduled Vesting Date" means any of January 1, 2000, June 30, 2001, June 30, 2002, or June 30, 2003. "Seller" is defined in the introductory paragraph. "Seller's Disclosure Schedule" means the Disclosure Schedule delivered by the Seller on the date hereof. Section numbers in the Seller's Disclosure Schedule refer to the corresponding section numbers in this Agreement and, together with all matters under such heading, will be deemed to qualify only that Section unless any matter under any heading is explicitly stated to qualify other Sections. "Seller's Separate Account B" means the separate account of the Seller with respect to assets relating to the Wrapped 86 Accumulation Contracts. "Seller Separate Accounts" means Seller's Separate Account B and the separate accounts of the Seller with respect to assets relating to the Variable Annuities, all of which accounts are listed on Schedule 6. "Separate Account Contract" means a variable life or annuity Contract or any Contract to the extent that assets held under such Contacts are allocated to one or more Separate Accounts, except that the term "Separate Account Contract" will not include a Wrapped Accumulation Contract. "Settlement Agreement" is defined in the Recitals. "Severance Plan" is defined in Section 2.16. "Social Security Sweep" means the quarterly listing published by the Untied States Social Security Administration of American deaths for the two years prior to Closing. "Statutory Statements" is defined in Section 2.6.2. "Statutory Value" means the value of an asset or liability determined in accordance with SAP, utilizing the same accounting principles, consistently applied, as those used in the preparation of the December 31, 1997 Audited SAP Statements. "Stock Trust" is defined in the Recitals. "Stock Trust Agreement" is defined in the Recitals. "Subsidiary" means, with respect to any Person, any other Person of which more than 50% of the securities or other ownership interests having by their terms ordinary voting power to elect a majority of the board of directors, or other Persons performing similar functions, of such other Person, is directly or indirectly owned or controlled by such Person, by one or more of such Person's Subsidiaries or by such Person and any one or more of such Person's Subsidiaries. "Substitute Outward Reinsurance Agreement" is defined in Section 4.7. "Substitute Outward Reinsurer" is defined in Section 4.7. "Tax Deferred Annuity Arrangement" means an individual or group annuity contract intended to satisfy the requirements of Section 403(b) of the Code, whether or not subject to the requirements of ERISA, (a) the assets of which are held in whole or in part in the Group Pension Accounts, or (b) with respect to which the Seller has any responsibility to a Group Pension Customer. "Tax Reserves Indemnity Escrow Account" is defined in the Escrow Agreement. "Tax Reserves Indemnity Escrow Amount" means $1,500,000, comprised of cash and Cash Equivalents, each valued at their respective Value as of the Closing Date, and deposited by the Seller on the Closing Date in the Tax Reserves Indemnity Escrow Account as defined and established pursuant to the Escrow Agreement. "Tax Returns" means all federal, state, local and foreign tax returns, declarations, statements, reports, schedules, forms and information returns and any amendments to any of the foregoing relating to Taxes. "Taxes" means all federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to 87 tax, or penalties applicable thereto. "Terminating Policies" is defined in Section 5.5. "Third Party Administration Agreements" is defined in Section 2.24. "Third Party Claim" means any demand or Action for which an Indemnitee would have a Loss that is asserted against or sought to be collected from the Indemnitee by any Person other than a party hereto or an Affiliate thereof. "Transactions" means the transactions contemplated by this Agreement and the Ancillary Agreements. "Transferred Assets" is defined in Section 1.1.5. "Transferred Reserve Assets" means the assets listed on Schedule 3, with such changes therein, additions thereto or deletions therefrom as are permitted or required pursuant to the terms of Section 1.1.3 or as otherwise agreed by the Seller and the Purchaser in writing. The Transferred Reserve Assets listed on Schedule 3 consist of: (a) cash; (b) Cash Equivalents; (c) Investment Grade Securities; (d) all of the Seller's rights and interests under the Reinsured Policies to receive principal and interest paid on Reinsured Policy loans on or after the Closing Date; (e) amounts due from reinsurers under the Outward Reinsurance Agreements and Substitute Outward Reinsurance Agreements that are transferred as Assigned Contracts on the Closing Date pursuant to Section 1.1.4, in each case due in accordance with the terms of such Outward Reinsurance Agreements and Substitute Outward Reinsurance Agreements; and (f) other receivables listed on Schedule 3 in respect of the Reinsured Policies. "Transition Period" means the period from the Closing Date to and including the Transition Period Termination Date. "Transition Period Termination Date" means the day that is the six month anniversary of the Closing Date or, if not a Business Day, the next succeeding Business Day. "Transition Services Agreement" means the Transition Services Agreement to be entered into between the Seller and ANLIC at the Closing, substantially in the form of Exhibit D. "Trustee" is defined in the Recitals. "Unallocated Accumulation Contract" means any Accumulation Contract for which allocation to individual participants is not provided by the Policyholder or otherwise required for the administration of such Accumulation Contract. "Uncovered Month" is defined in Section 5.16.3. "United States Treasury Rate" means the five-year treasury constant maturity rate on U.S. government securities as reported in the Federal Reserve Statistical Release H.15(519) on a given date. "Value" means with respect to (a) cash, the actual amount of immediately available funds; (b) Cash Equivalents, Market Value; (c) Investment Grade Securities, Market Value; (d) receivables with respect to Reinsured Policy loans, Statutory Value; (e) receivables with respect to Outward Reinsurance Agreements, Statutory Value; and (f) other receivables, Statutory Value. "Value Sharing Percentage" means the percentages set forth in Article 5 of the Settlement Agreement. "Variable Annuities" means all variable Annuity Contracts with respect to which assets are held in any of the Seller's Separate 88 Accounts. "Wrapped Accumulation Contracts" means all Restructured Annuity Contracts with respect to which assets are held in Seller's Separate Account B. 10. GENERAL PROVISIONS 10.1 Modification; Waiver. This Agreement can be modified only by agreement of all of the parties hereto. Any provision of this Agreement can be waived at any time by the party entitled to the benefits thereof, but such waiver must be in writing. Every amendment must be in writing and designated as an amendment and signed by all parties. No failure by any party to insist on the strict performance of any provision of this Agreement or any Ancillary Agreement, or to exercise any right or remedy, will be deemed a waiver of such performance, right or remedy, or of any other provision of this Agreement or any Ancillary Agreement. 10.2 Entire Agreement. This Agreement, including the Schedules and Exhibits (which are hereby incorporated by reference and made a part hereof), together with the Ancillary Agreements, represent the entire agreement of the parties with respect to the subject matter hereof. It supersedes all other prior agreements, understandings, statements, representations and warranties, oral or written, express or implied, between the parties hereto and their respective Affiliates and Representatives in respect of the subject matter hereof (including the Confidential Memorandum, dated October 1997, with respect to the Seller, and any supplements thereto). This Agreement does not, however, as to the Seller's business that is not part of the Business, supersede the Confidentiality Agreement, which the parties expressly reaffirm. 10.3 Termination By the Parties. 10.3.1 Events Causing Termination. This Agreement can be terminated: (a) at any time prior to the Closing Date by mutual consent of the Purchaser and the Seller; (b) at any time prior to the Closing by the Purchaser upon ten days notice to the Seller if the conditions set forth in Sections 6.2.4 and 6.2.5 have not been fulfilled within 15 Business Days after the date hereof, or the condition set forth in Section 6.2.6 has not been fulfilled within the later of (i) 15 days after the date hereof or (ii) the date the Petition for Court Approval is first filed with the Court, and, in each case, have not been waived by the Purchaser or cured during said notice period; (c) at any time prior to the Closing by the Purchaser upon notice to the Seller if (i) the Court fails to approve the overbid procedures set forth in Section 4.16 in all material respects prior to the later of (x) 75 days after the date of this Agreement or (y) the date on which an Acquisition Proposal is presented to the Seller or the Court, or (ii) an Acquisition Proposal is entertained by the Seller or the Court prior to approval of the overbid procedure set forth in Section 4.16 in all material respects, or (iii) an Acquisition Proposal that does not comply with the requirements of Section 4.16 is entertained by the Seller or the Court at any time; (d) by the Purchaser or the Seller, upon notice to the other, if the Closing has not taken place on or before April 1, 1999 or such later date as the parties agree to, provided that the non-occurrence of the Closing is not attributable to a breach hereof by the party seeking termination; (e) at any time prior to the Closing by the Seller, upon ten days notice to the Purchaser, if any of the conditions set forth 89 in Sections 6.2 and 6.3 have become incapable of fulfillment and have not been waived by the Seller or cured during said notice period, provided the non-fulfillment of such conditions is not attributable to a breach hereof by the Seller; or (f) at any time prior to the Closing by the Purchaser, upon ten days notice to the Seller if: (i) any of the conditions set forth in Sections 6.2 and 6.4 have become incapable of fulfillment and have not been waived by the Purchaser or cured during said notice period, provided the non-fulfillment of such conditions is not attributable to a breach hereof by the Purchaser; (ii) the Seller or any of its Representatives violates Section 4.4 or 4.14, 4.15 or 4.16; or (iii) an event or condition occurs that has resulted in or would reasonably be expected to result in a Material Adverse Effect that is incapable of cure and has not been waived by the Purchaser. 10.3.2 Automatic Termination. (a) If the Court approves the overbid procedures as set forth in Section 4.16 in all material respects and if the Seller has complied in all respects with Sections 4.14, 4,15 and 4.16, this Agreement will automatically terminate, without any further action taken by the parties, upon the election of the Purchaser not to match the Acquisition Proposal of a Competitive Bidder pursuant to paragraph (j) of Section 4.16. (b) If the Court does not approve the overbid procedures as set forth in Section 4.16 in all material respects and the Purchaser does not terminate this Agreement as a result of such failure, then this Agreement will immediately terminate, without any further action taken by the parties, if the Seller has after the date hereof, pursuant to a bidding procedure approved by the Court or any other bid or offer required to be entertained by the Court, entered into a definitive agreement or agreements with another Person regarding an Acquisition Proposal. 10.3.3 Effect of Termination. If this Agreement is terminated, no party (or any of their respective Representatives) will have any further liability hereunder, except as set forth in the next sentence and except with respect to a breach occurring prior to the termination. The Confidentiality Agreement, this Section 10.3, Section 4.14.1, Section 4.14.2, Section 4.14.3, Section 4.22, and second and third sentences of Section 6.1, Section 8.2, Section 10.5 and Section 10.11 will survive any termination and remain in full force and effect. 10.4 Further Actions. Each party will execute and deliver such certificates and other documents and take such other commercially reasonable actions as may reasonably be requested by the other party in order to consummate or implement the Transactions. 10.5 Notices. All notices, requests, demands and other communications hereunder must be in writing and will be deemed to have been duly given or made as follows: (a) if sent by registered or certified mail in the United States return receipt requested, upon receipt; (b) if sent by reputable overnight air courier (such as DHL or Federal Express), two Business Days after delivery to the courier; (c) if sent by facsimile transmission, with a copy sent on the same day in the manner provided in (a) or (b) above, when transmitted and receipt is confirmed by telephone; or (d) if actually personally delivered, when delivered. Any such materials must be delivered as follows: if to the Seller: if to the Purchaser, ANLIC or First SunAmerica: MBL Life Assurance Corporation SunAmerica Inc. 520 Broad Street 1 SunAmerica Center Newark, New Jersey 07102 Los Angeles, CA Attention: Alan J. Bowers 90067-6022 Fax Number: (973) 268-4319 Attention: Jay S. Wintrob Fax Number: (310) 772-6604 90 with a copy to: with a copy to: Debevoise & Plimpton 875 Third Avenue O'Melveny & Myers LLP New York, New York 10022 1999 Avenue of the Stars, #700 Attn: Thomas M. Kelly, Esq. Los Angeles, CA 90067 Fax Number: (212) 909-6836 Attention: Kent V. Graham, Esq. Fax Number: (310) 246-6779 or to such other address or to such other person as either party hereto last designated by notice to the other party. 10.6 Assignment. This Agreement is binding upon and will inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable, by operation of law or otherwise, by either party hereto without the prior written consent of the other party, except that the Purchaser may assign all or part of its, ANLIC's or First SunAmerica's rights and obligations to any Subsidiary of the Purchaser, provided that no such assignments will relieve the Purchaser of its obligations hereunder. Any purported assignment or other transfer made in violation of this Section 10.6 will be void and unenforceable. 10.7 No Third-Party Beneficiaries. Nothing in this Agreement will confer any rights or remedies upon any Person not a party or a successor or permitted assignee of a party to this Agreement, nor does anything in this Agreement relieve or discharge any obligation or liability of any third person to any party. No provision of this Agreement gives any third person any right of subrogation or action over or against any party to this Agreement. 10.8 Counterparts. This Agreement may be executed in counterparts, all of which will constitute one and the same instrument. 10.9 Certain Rules of Construction. 10.9.1 Headings, etc. All Article, Section, Subsection or paragraph titles or other captions in this Agreement are for convenience only, are not part of this Agreement and in no way define, limit, extend or describe the scope or intent of any of its provisions. 10.9.2 General Concepts. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) words in the singular include the plural, and words in the plural include the singular; (e) "amended," with reference to a law, statute, rule or regulation, is deemed to be followed by "from time to time"; (f) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Subsection, paragraph, clause, or other subdivision; (g) all references to "Appendix," "clause," "Exhibits," "Section," "Subsection," "Paragraph" or "Article" refer to the particular Appendices, clauses, Exhibits, Sections, Subsections, Paragraphs or Articles in or attached to this Agreement; (h) "desirable" includes "necessary," "advisable" and "appropriate"; and (i) "including" or "includes," when following any general provision, sentence, clause, statement, term or matter, will be deemed to be followed by ", but not limited to," and ", but is not limited to," respectively. 10.9.3 Discretion. If in this Agreement a Person is permitted or required to make a decision or determination: (a) in its "discretion" or "sole discretion" or under a grant of similar authority or latitude, the Person will be entitled to consider any interests and factors as it desires, including its own interests; (b) in its "good faith," in a "commercially reasonable" manner, using "reasonable best efforts," or under 91 another express standard, the Person will act under that express standard and will not be subject to any other or different standards imposed by this Agreement or otherwise; or (c) and no standard is expressed, the Person will apply relevant provisions of this Agreement in making the decision or determination. 10.9.4 Interpretation. If any claim is made by a party relating to any conflict, omission or ambiguity in the provisions of this Agreement, no presumption or burden of proof or persuasion will be implied because this Agreement was prepared by or at the request of any party or its counsel. The parties waive any statute or rule of law to the contrary. 10.10 Knowledge. Any references to the Seller's knowledge or the knowledge of the Seller will mean the actual knowledge of those individuals listed on Schedule 11 after reasonable inquiry. Any references to the Purchaser's knowledge or the knowledge of the Purchaser will mean the actual knowledge of those individuals listed on Schedule 12 after reasonable inquiry. 10.11 Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under any present or future Applicable Law, and if the rights or obligations of the parties under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom; and (d) in lieu of such illegal, invalid, or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid, and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 92 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. MBL LIFE ASSURANCE CORPORATION By: -------------------------------- Name: Title: SUNAMERICA INC. By: -------------------------------- Name: Title: ANCHOR NATIONAL LIFE INSURANCE COMPANY By: -------------------------------- Name: Title: FIRST SUNAMERICA LIFE INSURANCE COMPANY By: -------------------------------- Name: Title: 93 Acknowledgement and Agreement of the Commissioner The Commissioner, in her relevant capacities as rehabilitator/liquidator of Mutual Benefit and as trustee of the Stock Trust, hereby acknowledges and consents to the foregoing agreement and to the execution, delivery and performance of the foregoing agreement by the Seller. Further, the undersigned agrees that she will, unless otherwise required by law or legal responsibility: (a) not approve any arrangement or agreement with any third party that (i) would restrict or prevent the Purchaser's collection of the amounts set forth in Sections 4.14.1, 4.14.2, or 4.22 when due; and (ii) would permit a sale of all or substantially all of the Business (including the Reinsured Policies and the Transferred Assets) in one or a series of transactions without providing for the payment to the Purchaser of such amounts; (b) not initiate or support, directly or indirectly, any legal or administrative proceeding or other attempt to modify or set aside the provisions of Sections 4.14, 4.15, or 4.16; (c) to the extent necessary, join in and/or file affidavits or other documents to support the Seller's motion contemplated by Section 4.16 in the same capacities in which she executed this Acknowledgement and Agreement; and (d) take all actions as are reasonably necessary to obtain from Governmental Authorities any consents or approvals that are necessary to consummate the Transactions, including correspondence, filings and other communications encouraging approval by the insurance commissioners of other jurisdictions. Dated: July ___, 1998 ----------------------------------- Elizabeth E. Randall New Jersey Commissioner of Banking and Insurance 94 SCHEDULE 7 Allocation Procedures for Ceding Commission Allocation of Ceding Commission between Reinsured Life Policies and Reinsured Annuity Contracts The initial allocation of Ceding Commission and Final Ceding Commission to Reinsured Life Policies and Reinsured Annuity Contracts will be made assuming that each of the Seller and the Purchaser makes an Election. The allocation to each of the Reinsured Life Policies and Reinsured Annuity Contracts will be calculated so that Ceding Commission that results has the same internal rate of return (IRR) for each of Reinsured Life Policies and Reinsured Annuity Contracts, where such determination of IRR considers the projected profits of the Reserves, the required capital and investment income thereon, and one time expenses for each block of business, all on an after-tax basis. As amounts are released from escrow pursuant to Section 7.1, the allocation to each of the Reinsured Annuity Contracts and Reinsured Life Polices will be recalculated using the assumptions described in the preceding paragraph. Allocation of Ceding Commission between Non New York Reinsured Life Policies and New York Reinsured Life Policies Allocation between Non New York Reinsured Life Policies and New York Reinsured Life Policies will be made pro-rata on the basis of the total Account Values thereof or, for the Policies that do not provide for accumulation of Account Value, the Statutory Reserves of the respective Reinsured Life Policies; provided, however, such allocation will be adjusted as appropriate to reflect the elapsed time period between the Closing Date and the New York Assumption Date. Allocation of Ceding Commission between Non New York Reinsured Annuity Contracts and New York Reinsured Annuity Contracts Allocation between the Non New York Reinsured Annuity Contracts and New York Reinsured Annuity Contracts will be made pro-rata on the basis of the total of Account Value for Covered Accumulation Contracts and Statutory Reserves for Contracts in Pay Status of the respective Reinsured Annuity Contracts; provided, however, such allocation will be adjusted as appropriate to reflect the elapsed time period between the Closing Date and the New York Assumption Date. Allocation of Transferred Reserve Assets With respect to all Transferred Reserve Assets that relate to specific Policies or groups of Policies, an updated Schedule 3 as of the New York Assumption Date indicates which of such assets relate to New York Life Policies and Annuity Contracts. 95 SCHEDULE 8 Assumptions Regarding Illustrations In the preparation of Policyholder illustrations, the Seller will use the following assumptions from the date of this Agreement through the Closing Date: - Credited Interest Rates After the Rehabilitation Period Termination Date: The assumed credited rates for all Reinsured Life Policies other than "reduced paid up" policies will be 5.0%. The assumed credited rate will be adjusted upward to the nearest .25% for decreases and downward to the nearest .25% for increases in the United States Treasury Rate from March 12, 1998 as compared to the United States Treasury Rate on the Rehabilitation Period Termination Date on all Account Values other than Account Values resulting from premiums assumed to be deposited after the Rehabilitation Period Termination Date ("Post Moratorium Premiums"). Post Moratorium Premiums will, for one year from receipt, be credited at a rate .50% higher than that generally credited on the Account Value. The assumed credited rates for all Reinsured Life Policies that are "reduced paid up" policies will be 4.0%. From time to time the Purchaser will notify the Seller of the crediting rate to use on a periodic basis, but in any case no more frequently than once each month. - Cost of Insurance Rates and Expense Charges After the Rehabilitation Period Termination Date: The current "Preferred" COI scales as modified by mutual agreement of the Seller and the Purchaser. - End of the Rehabilitation Period: Beginning on the Closing Date, the Rehabilitation Period will be projected to end on the Transition Period Termination Date. - Disclosures: From the date of this Agreement, the Seller will make the following disclosures, which will be subject to the Purchaser's review and approval prior to implementation, as part of or provided together with the Policyholder illustrations: - that there is a pending sale of the Business, which may shorten the Rehabilitation Period. After December 31, 1999, the Current Elements (as defined below) otherwise guaranteed during the Rehabilitation Period pursuant to the Plan will no longer be guaranteed. - if the Policyholder holds an Eligible Policy, the Policy Enhancements Amount applicable to such Policy will vest proportionately on each of January 1, 2000, July 1, 2001, July 1, 2002, and July 1, 2003 if his Policy is still in force on each of these dates. Such Policy Enhancement may increase the cash value of the Policy. The Policy Enhancement vests fully on death for deaths after the Rehabilitation Period Termination Date but before July 1, 2003. The impact of the application of such Policy Enhancements Amount is not reflected in the illustration, and may increase the death benefit over and above that shown in the illustration. ***** Definition: "Current Elements" means credited interest, Cost of Insurance rates, and expense charges that may be different than those guaranteed in the applicable Policy. 96 SCHEDULE 9 DAC Calculation Procedures 1. DAC Election Escrow Amount A. Reinsured Reserve Liabilities at Closing will be divided into life and annuity and qualified vs. nonqualified subgroups. B. The DAC Election Escrow Amount will be calculated as $40 million minus the product of .22 multiplied by the positive or negative difference of (x) $174 million, over (y) 7.7% of the Reinsured Reserve Liability for the nonqualified life subgroup, as determined in 1A above. 2. DAC Reduction Amount A. The net consideration for the year that includes the Closing Date for each reinsurance arrangement, to which the Seller is a party, that yields a net negative consideration will be determined. B. The DAC taxable income associated with each of these will be determined as prescribed in Section 848 of the Code and summed. C. The ratio applicable to this Transaction will be calculated by dividing the DAC taxable income attributable to this Transaction by the sum of the amounts determined in 2B. D. The Seller's usable DAC will be determined by adding its unamortized DAC balance as of December 31 for the year preceding the Closing Date to the positive DAC taxable income arising from direct premiums and positive net reinsurance considerations during the year that includes the Closing Date. E. The DAC Reduction Amount will be calculated as the product of .22 multiplied by the usable DAC determined in 2D multiplied by the ratio determined in 2C. 3. DAC Reduction Escrow Amount A. To determine the escrow amount at time of closing, the method described in 2 above will be used to calculate an estimated DAC Reduction Amount. B. For this purpose, (i) reinsurance transactions in the ordinary course of business will be ignored; and (ii) for reinsurance transactions other than in the ordinary course, only reinsurance transactions that have closed by the Closing Date of this transaction and within the Seller's same tax year, will be considered in determining the ratio described in 2C. C. For usable DAC, the Seller's estimate of positive DAC for the year that includes the Closing Date will be combined with the actual unamortized DAC balance as of December 31 for the year preceding the Closing Date (or the Seller's estimate thereof if the Closing occurs after December 31, 1998. D. The DAC Reduction Escrow Amount will be calculated as 120% of 22% of the product of the ratio determined in 3B multiplied by the estimate of usable DAC determined in 3C. Notwithstanding the foregoing, if (i) the separate sale of the COLI business has closed, the DAC Reduction Escrow Amount will be no less than $3 million and no more than $7 million, and (ii) if the separate sale of the COLI business has not closed, the DAC Reduction Escrow Amount will be no less than $5 million and no more than $7 million. 97 SCHEDULE 10
Guaranteed Policy Enhancements Amount - --------------------------------------------------------------------------- - ------------- | | Guaranteed Policy | | | Enhancements Amount | | | per Vesting Date | - --------------------------------------------------------------------------- - ------------- |Account Value | Policy Enhancements Amount | Policy |Policy | |(or Statutory Reserves for | Greater than | Enhancements |Enhancements | |Restructured Contracts in | $250 million** | Amount |Amount | |Pay Status or Supplemen- | | $250 million |$225 million | |tary Contracts) Eligible* | | | |at Vesting Date | | | | - ---------------------------------------------------------------------------------------- |Greater than or equal to | | | | |$4.30 billion | $80 million + 110% of A | $80.0 million |$72.0 million| - ---------------------------------------------------------------------------------------- |Greater than 3.85 billion | | | |but less than $4.30 billion| $74 million + 107% of A | $74.0 million |$66.6 million| - ---------------------------------------------------------------------------------------- |Greater than $3.40 billion | | | |but less than $3.85 billion| $68 million + 103% of A | $68.0 million |$61.2 million| - ---------------------------------------------------------------------------------------- |$3.40 billion or less | $62.5 million + 100% of A | $62.5 million |$56.3 million| - ----------------------------------------------------------------------------------------
For a Policy Enhancement Amount between $225 million and $250 million, the amounts shown in the table will be interpolated. Should the Policy Enhancement Amount be less than $225 million due to the Integrity Policy Enhancements Amount, the Guaranteed Policy Enhancement Amounts will be pro rated down from $225 million. * For purposes of this Schedule 10, the term "Eligible" means those Contracts for which the Policy Enhancements Endorsement has been obtained. ** A = (Policy Enhancement Amount less $250 million) divided by 4 Adjustment to Guaranteed Policy Enhancements Amount for Closing Dates Beyond January 1, 1999: For each month that the Closing Date is delayed beyond January 1, 1999, the following adjustments will be made to reduce the Guaranteed Policy Enhancement Amounts (expressed as a percent of the Guaranteed Policy Enhancement Amount).
- ----------------------------------------------------------------------------------- | Account Value (or Statutory Reserves for Restructured Contracts |Monthly | | in Pay Status or Supplementary Contracts) Eligible at Vesting |Adjustment | | Date | - ----------------------------------------------------------------------------------- | Greater than or equal to $4.30 billion |.125% | - ----------------------------------------------------------------------------------- | Greater than $3.85 billion but less than $4.30 billion |.083% | - ----------------------------------------------------------------------------------- | Greater than $3.40 billion but less than $3.85 billion |.042% | - ----------------------------------------------------------------------------------- | $3.40 billion or less | 0% | - -----------------------------------------------------------------------------------
The result would be rounded to the nearest $100,000. For example: If the Closing Date is April 1, 1999 and the Policy Enhancement Amount is $270 million, the Guaranteed Policy Enhancement Amount is:
- ---------------------------------------------------------------------------------------- | Account Value (or Statutory Reserves | Calculation of Guaranteed |Guaranteed | | for Restructured Contracts in | Policy Enhancement |Policy | | Pay Status or Supplementary Contracts) | |Enhancement | | Eligible at Vesting Date | | | - ----------------------------------------------------------------------------------------- | Greater than or equal to $4.30 billion |80 +110%(5) - 3 * .125% * 270 |$84.5 million| - ----------------------------------------------------------------------------------------- | Greater than $3.85 billion but | less than $4.30 billion |74 + 107%(5) - 3 * .083% * 270 |$78.7 million| - ----------------------------------------------------------------------------------------- | Greater than $3.40 billion but | less than $3.85 billion | 68 +103%(5) - 3 * .042% * 270 |$72.8 million| - ----------------------------------------------------------------------------------------- | $3.40 billion or less | 62.5 + 100%(5) - 3 * 0 * 270 |$67.5 million| - -----------------------------------------------------------------------------------------
98 SCHEDULE 12 Purchaser's Employee List for Knowledge Qualifications (a) For all of Section 3: Andrew Cushnir Lorin Fife Marc Gamsin Deborah Gero James Rowan Richard Smith (b) With respect to Sections 3.6 and 3.7, only: Eli Broad Jay Wintrob Scott Robinson (c) With respect to Section 3.7 only: James Belardi 99 SCHEDULE 13 Confidentiality Agreement Language "unsolicited proposals" You hereby acknowledge that the Evaluations Material is being furnished to you in consideration of your agreement that you will not propose to the Company or any other person any transaction between you and the Company and/or its security holders or involving any of its securities or security holders unless the Company shall have requested in writing that you make such a proposal, and that you will not acquire, or assist, advise or encourage any other persons in acquiring, directly or indirectly, control of the Company or any of the Company's securities, business or assets for a period of three years from the date of this letter unless the Company shall have consented in advance in writing to such acquisition. You also agree that the Company shall be entitled to equitable relief, including injunction, in the event of any breach of the provisions of this paragraph and that you shall not oppose the granting of such relief. "challenges" As long as you and the Company have not entered into a written agreement regarding a transaction, you agree that in the event the Company enters into an agreement with another party to pursue with the Company a transaction of the type that is the subject of this letter, you will not, directly or indirectly, challenge such proposed transaction in any judicial forum, including, but not limited to, any hearing before the Superior Court of New Jersey to approve such proposed transaction, solicit or encourage the initiation of any competing proposal or offer by another party in any judicial forum or otherwise interfere with the consummation of such transaction. For purposes of this Schedule 13, "the Company" means the Seller. 100 PURCHASE AND SALE AGREEMENT By and Among MBL LIFE ASSURANCE CORPORATION on the one hand and SUNAMERICA INC., ANCHOR NATIONAL LIFE INSURANCE COMPANY and FIRST SUNAMERICA LIFE INSURANCE COMPANY on the other hand Dated as of July 15, 1998 101 TABLE OF CONTENTS 1. SALE AND PURCHASE 2 1.1 Ceding Commission; Reinsurance Premium; Acquisition of Transferred Assets and Assumption of Assumed Liabilities 2 1.1.1 Ceding Commission 2 1.1.2 Reinsurance Premium; Transferred Reserve Assets 2 1.1.3 Changes to Transferred Reserve Assets 3 1.1.4 Other Assets Transferred on the Closing Date 3 1.1.5 Other Assets Transferred After the Closing Date 4 1.1.6 Assumption of Liabilities; Excluded Liabilities 5 1.1.7 Transfer and Sales Taxes 6 1.1.8 Allocation of Ceding Commission and Transferred Reserve Assets 6 1.2 Closing; Estimated Closing Statement 6 1.2.1 Place and Time of Closing 6 1.2.2 Estimated Closing Date Statement 6 1.3 Post-Closing Adjustment 7 1.3.1 Final Closing Date Statement 7 1.3.2 Final Determination of Disputes 7 1.3.3 Adjustments; Payment and Interest 7 1.4 Closing Items 8 1.4.1 Assumption Reinsurance Agreements 8 1.4.2 Indemnity Reinsurance Agreement 8 1.4.3 Administrative Services Agreement 8 1.4.4 Transition Services Agreement 8 1.4.5 Escrow Agreement 8 1.4.6 Bill of Sale 9 1.4.7 Other Deliveries 9 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER 9 2.1 Corporate Status of the Seller 9 2.2 Authority 9 2.3 No Conflicts, Consents and Approvals, etc. 9 2.3.1 No Conflicts 9 2.3.2 Consents 10 2.4 Permits, Licenses, etc. 10 2.5 Compliance with Laws 11 2.6 Financial Statements 11 2.6.1 Audited GAAP Statements 11 2.6.2 Statutory Statements 11 2.6.3 Audited SAP Statements 11 2.6.4 GAAP Representations 11 2.6.5 SAP Representations 11 2.7 Computer Software 12 2.8 Litigation 12 2.9 Regulatory Filings 12 2.10 Tax Matters 13 2.10.1 Tax Treatment of Reinsured Policies 13 2.10.2 Tax Reserves 13 2.10.3 Tax Impact on Policyholders 13 2.11 Absence of Changes 14 2.12 Reinsured Policies 15 2.12.1 Forms 15 2.12.2 Life Policies 16 2.12.3 Annuity Contracts 16 2.12.4 Compliance with Law 16 2.12.5 Policies in Effect 17 2.12.6 Sales Practices 18 2.12.7 Payment of Policy Benefits 18 2.12.8 No Other Distributions 18 2.12.9 Underwriting Standards 18 2.12.10 Financial Status of Reinsurers 18 2.12.11 No Waivers 19 2.12.12 Consistent with Books and Records 19 2.12.13 Guaranty Fund Assessments 19 2.12.14 Cost of Insurance and Interest Rates 19 2.12.15 Taxable Basis 19 2.12.16 Lists of Group Pension Customers 19 2.12.17 Contracts and Administrative Procedures of Group Pension Business; Group Pension Accounts; Reaffirmed Other Contracts 20 2.12.18 Documents Relating to Fully Administered Qualified Plans 21 2.12.19 No Excluded Policies 21 2.12.20 Account Values True-Up 21 2.12.21 Eligible Policies 22 2.12.22 MEC's 22 2.13 Reserves 22 2.14 Reinsurance Agreements 23 102 2.14.1 Outward Reinsurance Agreements 23 2.14.2 Inward Reinsurance Agreements 23 2.15 Brokers 23 2.16 Severance Plan 24 2.17 Absence of Undisclosed Liabilities 24 2.18 Transferred Assets 24 2.19 Books and Records 24 2.20 Threats of Cancellation 24 2.21 Rehabilitation Plan 24 2.21.1 List of Rehabilitation Documents 25 2.21.2 Approval; Compliance 25 2.21.3 No Actions 25 2.22 Assigned Contracts 25 2.23 Agreements Relating to Payment of Commissions 25 2.23.1 Forms of Commission Agreements 25 2.23.2 Insurance Agents 25 2.23.3 Renewal Commissions 26 2.24 Third Party Administration Agreements 26 2.25 Impairments 26 2.26 Wrapped Accumulation Contracts 26 2.27 Policyholder Lists 26 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 27 3.1 Corporate Status and Authority 27 3.2 No Conflicts, Consents and Approvals, etc. 27 3.2.1 No Conflicts 27 3.2.2 Consents 28 3.3 Compliance with Laws 28 3.4 Litigation 28 3.5 Permits, Licenses, etc. 28 3.6 Financial Statements 29 3.6.1 Audited GAAP Statements 29 3.6.2 Statutory Statements 29 3.6.3 Audited SAP Statements 29 3.6.4 GAAP Statement Representations 29 3.6.5 SAP Statement Representations 29 3.7 Absence of Changes 30 3.8 Brokers 30 3.9 Rating 30 4. PRE-CLOSING COVENANTS 30 4.1 Consents; Cooperation 30 4.1.1 Consents to be Obtained 30 4.1.2 Cooperation 30 4.1.3 Regulatory Filings; Other Consents 31 4.2 Seller's Conduct of Business, etc 32 4.3 Access and Information 33 4.4 Certain Transactions 34 4.5 Financial Statements and Reports 34 4.6 Intentionally Deleted 34 4.7 Reinsurance Agreements 34 4.8 Expenses 35 4.9 Publicity 35 4.10 Contact with Employees, Policyholders and Other Constituencies 36 4.11 Amendments to Plan and Other Orders 36 4.12 Funding of Policy Enhancements 36 4.12.1 Recognition of Liability 36 4.12.2 Allocation of Policy Enhancements to Policyholders 37 4.12.3 No Set-off 38 4.12.4 Endorsements to Eligible Policies 38 4.12.5 Policy Enhancements Endorsements Escrow Amount 38 4.13 Endorsement of Certain Associations 39 4.14 Break-Up Fee; Expense Reimbursement 39 4.14.1 Break-Up Fee 39 4.14.2 Expense Reimbursement 40 4.14.3 Cumulative Remedies 40 4.15 Enforcement of Other Agreements 40 4.16 Overbidding Procedures 40 4.17 Calculation of Impairments 42 4.18 COI 42 4.18.1 Modified COI Scale 42 103 4.18.2 COI Adjustment Amount 43 4.19 Acquisition Agreement Regarding Broker/Dealer 43 4.20 Grandfathering Ruling 43 4.21 Additional Enhancements DAC Amount 44 4.22 Reimbursable Transition Expenses 44 4.23 Transfer of Class Four Claims 45 4.24 Delivery of Updated Policy Lists 45 5. CONTINUING COVENANTS 45 5.1 Continuing Access Obligations 45 5.1.1 Access Obligations During Transition Period 45 5.1.2 Continuing Access Obligations of the Purchaser 46 5.1.3 Continuing Access Obligations of the Seller 46 5.2 Distribution of Class Four Creditor Value Share; Liquidation 46 5.2.1 Provision of Adequate Reserves 46 5.2.2 Distribution of Class Four Creditor Value Share 46 5.2.3 Restriction on Liquidating Distributions 47 5.3 Termination of Excluded Annuity Contracts 47 5.4 Termination of Wrapped Accumulation Contracts 48 5.5 Marketing Support 48 5.6 Sufficiency of Staff and Assets 48 5.7 Policy Endorsements 48 5.8 Rehabilitation Documents 48 5.9 Post-Closing Publicity 48 5.10 Post-Rehabilitation Treatment of Reinsured and Replacement Policies 48 5.10.1 Continuation or Replacement 48 5.10.2 Additional Replacement Policies 49 5.10.3 Non-Guaranteed Elements 49 5.10.4 Eligible Policies 49 5.10.5 Approvals 50 5.10.6 Guidelines for Restructured Life Policies 50 5.10.7 Covered Accumulation Contract Replacement Policies 51 5.11 Election to Capitalize Specified Policy Acquisition Expenses 51 5.12 Maintenance of Business 52 5.13 IBNR Settlement Amount 52 5.13.1 Allocation of Liability 52 5.13.2 Calculation of IBNR Settlement Amount 52 5.14 Solicitation of Policyholders 53 5.15 Reinstated Policies 53 5.16 Outward Reinsurance Agreements 54 5.16.1 Remaining Outward Reinsurance Agreements 54 5.16.2 Outward Reinsurance Escrow Amount 54 5.16.3 Monthly Accounting 54 5.16.4 Settlement 55 5.16.5 Release of Escrowed Funds and Payment of Net Reinsurance Premium to Seller 55 5.17 Taxable Basis of Reinsured Policies 55 5.18 Calculation of Account Values True-Ups 56 5.19 Sale of Broker/Dealer 56 5.20 Agents 56 5.21 Transfer of Assets to First SunAmerica 56 5.22 Amendment of Schedules 56 5.23 Treatment of Policy Enhancements 57 5.24 Sale of Non-Terminated Variable Annuities 57 5.25 Grandfathered Premiums Indemnity 57 5.26 Severance Plan 58 5.27 Transition Period Termination Date Policy Lists 58 6. CONDITIONS PRECEDENT 58 6.1 General 58 6.2 Conditions to Obligations of Both Parties 58 6.2.1 HSR Act 58 6.2.2 No Injunction, etc 58 6.2.3 Approval of the Court 59 6.2.4 Approval of the Class Four Creditors 59 6.2.5 Approval of the Reinsurers 59 104 6.2.6 Approval of NOLHGA on Behalf of the Participating Guaranty Associations 59 6.2.7 Approval of First SunAmerica by the Commissioner 59 6.2.8 Other Permits 59 6.2.9 Ancillary Agreements 59 6.2.10 Additional Instruments and Documents 59 6.2.11 Change in Law Regarding Tax Impact on Policyholders 60 6.3 Conditions to Obligations of the Seller 60 6.3.1 Representations, Warranties and Agreements of the Purchaser 60 6.3.2 Officer's Certificate 60 6.3.3 Opinions of Counsel 60 6.4 Conditions to Obligations of the Purchaser 60 6.4.1 Representations, Warranties and Agreements of the Seller 60 6.4.2 Officer's Certificate 60 6.4.3 Opinions of Counsel 60 6.4.4 Funding of Escrow Agreement 60 6.4.5 Policy Enhancements Amount 61 6.4.6 Reserve Liabilities 61 6.4.7 Assurances Regarding Simultaneous Assumption of Reinsured Policies 61 6.4.8 Outward Reinsurance Agreements 61 6.4.9 Court Order, Regulatory Approvals and Other Filings 61 6.4.10 Updated Calculation of Impairments 62 6.4.11 Changes to COI Scale 62 6.4.12 Estimated Closing Date Statement and Updated Schedules 62 6.4.13 Transferred Reserve Assets 62 6.4.14 Updated Policy Lists 62 7. INDEMNIFICATION AND SURVIVAL 63 7.1 Tax Indemnification and Other Tax Matters 63 7.1.1 Section 848 Election Tax Benefit 63 7.1.2 Assumptions for Insolvent Insurance Company Election Tax Benefit 63 7.1.3 Deposits to DAC Tax Indemnity Account at Closing 63 7.1.4 Computation of DAC Reduction Amount 63 7.1.5 Release of the DAC Election Escrow Amount 64 7.1.6 Filing of the Purchaser's Tax Return 65 7.1.7 Method for Ensuring Benefits 65 7.1.8 Calculation of DAC Escrow Amounts 66 7.2 Survival of Representations and Covenants of the Purchaser 67 7.3 Survival of Representations and Covenants of the Seller 67 7.4 Indemnification by the Purchaser 68 7.5 Indemnification by the Seller 68 7.5.1 General Indemnity 68 7.5.2 Tax Treatment of Policies Indemnity 68 7.5.3 Tax Reserves Indemnity 69 7.5.4 Tax Contests 69 7.6 Damages 70 7.6.1 Basket and Threshold 70 7.6.2 Limit on Tax Reserves Indemnity 70 7.6.3 Limit on COI Adjustment Amount Recovery 70 7.6.4 Limit on Policy Enhancements Endorsements Indemnity 71 7.6.5 Intentionally Deleted 71 7.6.6 Excluded Damages 71 7.6.7 Exclusive Remedy 71 7.7 Indemnification Procedure 72 7.7.1 Notice of Claim 72 7.7.2 Third Party Claims 72 7.7.3 Disputes 74 7.7.4 Mitigation 74 7.8 Release of Funds From Escrow 74 7.8.1 DAC Election/Reduction Escrow Amount 74 7.8.2 Outward Reinsurance Escrow Amount 74 105 7.8.3 Tax Reserves Indemnity Escrow Amount 74 7.8.4 Claims Escrow Amount 74 7.8.5 COI Adjustment Escrow Amount 75 7.8.6 Policy Enhancements Endorsements Escrow Amount 75 7.8.7 Notices and Joint Instructions 75 8. DISPUTE RESOLUTION 75 8.1 Governing Law 75 8.2 Arbitration of Disputes 75 8.2.1 Matters in Exclusive Jurisdiction of Court 75 8.2.2 Pre-Arbitration Dispute Resolution 75 8.2.3 Arbitration 76 8.2.4 Confidentiality 77 8.2.5 Interim Relief 77 8.2.6 Enforcement 77 8.3 Consent to Jurisdiction; Waiver of Jury Trial, etc. 77 8.3.1 Consent to Jurisdiction 77 8.3.2 Waiver of Jury Trial 78 8.4 Injunctive Relief 78 8.5 Independent Party 78 9. DEFINITIONS 79 10. GENERAL PROVISIONS 101 10.1 Modification; Waiver 101 10.2 Entire Agreement 101 10.3 Termination By the Parties 101 10.3.1 Events Causing Termination 101 10.3.2 Automatic Termination 102 10.3.3 Effect of Termination 102 10.4 Further Actions 103 10.5 Notices 103 10.6 Assignment 103 10.7 No Third-Party Beneficiaries 103 10.8 Counterparts 104 10.9 Certain Rules of Construction 104 10.9.1 Headings, etc. 104 10.9.2 General Concepts 104 10.9.3 Discretion 104 10.9.4 Interpretation 104 10.10 Knowledge 104 10.11 Severability 105 Exhibits Exhibit A-1 ANLIC Assumption Reinsurance Agreement Exhibit A-2 First SunAmerica Assumption Reinsurance Agreement Exhibit B Indemnity Reinsurance Agreement Exhibit C Administrative Services Agreement Exhibit D Transition Services Agreement Exhibit E Escrow Agreement Exhibit F Bill of Sale Exhibit G-1 Opinion of Purchaser's General Counsel Exhibit G-2 Opinion of O'Melveny & Myers LLP Exhibit G-3 Opinion of McElroy, Deutsch and Mulvaney Exhibit H-1 Opinion of Seller's General Counsel Exhibit H-2 Opinion of Debevoise & Plimpton Exhibit H-3 Opinion of Gibbons, Del Deo, Dolan, Griffinger & Vecchione Exhibit I Proposed Amendments to the Plan and Other Orders Exhibit J Class Four Creditors Approval Exhibit K Expense Reimbursement Escrow Agreement Schedules Seller's Disclosure Schedule Purchaser's Disclosure Schedule Schedule 1-A All Reinsured Life Policies Schedule 1-B Non New York Reinsured Life Policies 106 Schedule 1-C New York Reinsured Life Policies Schedule 2-A All Reinsured Annuity Contracts Schedule 2-B Non New York Reinsured Annuity Contracts Schedule 2-C New York Reinsured Annuity Contracts Schedule 3 Transferred Reserve Assets Schedule 4 Assigned Contracts Transferred at Closing Schedule 5 Reserve Liabilities Schedule 6 Seller Separate Accounts Schedule 7 Allocation Procedures Schedule 8 Assumptions Regarding Illustrations Schedule 9 DAC Calculation Procedures Schedule 10 Guaranteed Policy Enhancements Amount Schedule 11 Seller's Employee List for Knowledge Qualifications Schedule 12 Purchaser's Employee List for Knowledge Qualifications Schedule 13 Confidentiality Agreement Language EX-4.(Y) 3 EXHIBIT 4(Y) 1 EXHIBIT 4(y) [FRONT SIDE OF NOTE] SUNAMERICA INC. 9.95% Debenture due August 1, 2008 Number R-1 CUSIP 866930 AK 6 Unless and until this certificate is exchanged in whole or in part for Debentures in definitive registered form, this Debenture may not be transferred except as a whole by The Depository Trust Company, a New York corporation ("DTC"), to its nominee or by its nominee to DTC or another nominee of DTC or by DTC or any such nominee to a successor Depositary or a nominee of such successor Depositary. Any certificate issued in exchange herefor shall be registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment in respect hereof shall be made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC). SUNAMERICA INC., a Maryland corporation (the "Issuer", which term includes any successor corporation under the Senior Indenture hereafter referred to), for value received, hereby promises to pay to Cede & Co. or registered assigns, at the office or agency of the Issuer in the Borough of Manhattan, The City of New York, or at such other locations as the Issuer may from time to time designate, the principal sum of SEVENTY-THREE MILLION TWO HUNDRED NINE THOUSAND DOLLARS ($73,209,000) on August 1, 2008, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on February 1 and August 1 of each year, commencing February 1, 1999, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Debenture, from the February 1 or the August 1, as the case may be, next preceding the date of this Debenture to which interest has been paid or duly provided for, unless the date hereof is a date to which interest has been paid or duly provided for, in which case from the date of this Debenture, or unless no interest has been paid on this Debenture or duly provided for, in which case from August 1, 1998, until payment of said principal sum has been made or duly provided for; provided, that payment of interest may be made at the option of the Issuer by check mailed by first class mail to the address of the person entitled thereto as such address shall appear on the Security register. Notwithstanding the foregoing, if the date hereof is after January 15 or July 15, as the case may be, and before the following February 1, or August 1, this Debenture shall bear interest from such February 1 or August 1; provided, that if the Issuer shall default in the payment of interest due on such February 1 or August 1, then this Debenture shall bear interest from the next preceding February 1 or August 1, to which interest has been paid or duly provided for or, if no interest has been paid on this Debenture or duly provided for, from August 1, 1998. The interest so payable on any February 1 or August 1 will, subject to certain exceptions provided in the Senior Indenture referred to on the reverse hereof, be paid to the person in whose name this Debenture (for one or more predecessor Debentures) is registered at the close of business on the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such February 1 or August 1. Reference is made to the further provisions of this Debenture set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been executed by the Trustee under the Senior Indenture referred to on the reverse hereof by manual signature. IN WITNESS WHEREOF, SunAmerica Inc. has caused this instrument to be signed by facsimile by one of its duly authorized officers and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. Dated: August 19, 1998 TRUSTEE'S CERTIFICATE OF AUTHENTICATION 2 This is one of the Securities referred to in the within-mentioned Senior Indenture. THE FIRST NATIONAL BANK OF CHICAGO, as Trustee /s/ [Illegible] ---------------------------------------- AUTHORIZED SIGNATORY TRUST OFFICER SUNAMERICA INC. /s/ James R. Belardi ---------------------------------------- EXECUTIVE VICE PRESIDENT [REVERSE OF NOTE] SUNAMERICA INC. 9.95% Debenture due August 1, 2008 This Debenture is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to a senior indenture dated as of November 15, 1991 (herein called the "Senior Indenture"), duly executed and delivered by the Issuer to The First National Bank of Chicago, as Trustee (herein called the "Trustee"), to which Senior Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the Holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as provided in the Senior Indenture. This Debenture is one of a series designated as the 9.95% Debentures due August 1, 2008 (the "Debentures") of the Issuer, limited in aggregate principal amount to $100,000,000. Except as otherwise provided in the Senior Indenture, this Debenture will be issued in global form only registered in the name of the Depositary or its nominee. This Debenture will not be issued in definitive form, except as otherwise provided in the Senior Indenture, and ownership of this Debenture shall be maintained in book-entry form by the Depositary for the accounts of participating organizations of the Depositary. In case an Event of Default with respect to the Debentures shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Senior Indenture. The Senior Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities of all series issued under such Senior Indenture then Outstanding and affected, voting as one class, to add any provisions to, or change in any manner or eliminate any of the provisions of, such Senior Indenture or modify in any manner the rights of the Holders of the Securities of each series so affected; provided that the Issuer and the Trustee may not, without the consent of the Holder of each outstanding Security affected thereby, (i) extend the stated maturity of the principal of any Security, or reduce the principal amount thereof or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or change the currency in which the principal thereof (including any amount in respect of original issue discount) or interest thereon is payable or reduce the amount of any original issue discount security payable upon acceleration or provable in bankruptcy or impair the right to institute suit for the enforcement of any payment on any Security when due or (ii) reduce the aforesaid percentage in principal amount of Securities of any 3 series issued under such Senior Indenture, the consent of the Holders of which is required for any such modification. It is also provided in the Senior Indenture that, with respect to certain defaults or Events of Default regarding the Securities of any series, prior to any declaration accelerating the maturity of such Securities, the Holders of a majority in aggregate principal amount Outstanding of the Securities of such series (or, in the case of certain defaults or Events of Default, all or certain series of the Securities) may on behalf of the Holders of all the Securities of such series (or all or certain series of the Securities, as the case may be) waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or interest on any of the Securities. Any such consent or waiver by the Holder of this Debenture (unless revoked as provided in the Senior Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Debenture and any Debentures which may be issued in exchange or substitution herefor or on registration of transfer hereof, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. No reference herein to the Senior Indenture and no provision of this Debenture or of the Senior Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Debenture in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Debentures are issuable in registered form without coupons in denominations of $1,000 and any integral multiple thereof at the office or agency of the Issuer in the Borough of Manhattan, The City of New York, or at such other locations as the Issuer may from time to time designate, and in the manner and subject to the limitations provided in the Senior Indenture, but without the payment of any service charge, Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations. The Debentures are not redeemable prior to maturity and are not entitled to any sinking fund. Upon due presentment for registration of transfer of this Debenture at the office or agency of the Issuer in the Borough of Manhattan, The City of New York, or at such other locations as the Issuer may from time to time designate, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Senior Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and subject to the provisions on the face hereof, interest hereon, and for all other purposes, and none of the Issuer, the Trustee or any authorized agent of the Issuer or the Trustee shall be affected by any notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Senior Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. This Debenture shall for all purposes be governed by, and construed in accordance with, the laws of the State of New York. Terms used herein which are defined in the Senior Indenture shall have the respective meanings assigned thereto in the Senior Indenture. 4 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-_____________Custodian____________ (Cust) (Minor) Under Uniform Gifts to Minors Act_______________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________________________________________________ _______________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE _______________________________________________________________________________ the within Debenture and all rights thereunder, hereby irrevocably constituting and appointing such person attorney to transfer such note on the books of the Issuer, with full power of substitution in the premises. Dated:________________________ Signed:__________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Debenture in every particular without attention or enlargement or any change whatsoever. Signature Guarantee:____________________________________________________________ EX-10.(W) 4 EXHIBIT 10(W) 1 EXHIBIT 10(w) SUNAMERICA INC. List of Executive and Director Compensation Plans and Arrangements
Exhibit No. Description ====== ======================================================= 10(a) Employment Agreement, dated July 14, 1992, between the Company and Michael L. Fowler, is incorporated herein by reference to Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 10(b) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob, is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995. 10(c) Employment Agreement, dated August 15, 1997, between the Company and Gary W. Krat is incorporated herein by reference to Exhibit 10(d) to the Company's 1997 Annual Report on Form 10-K, filed December 10, 1997. 10(d) 1988 Employee Stock Plan is incorporated herein by reference to Exhibit B to the Company's and Kaufman and Broad Home Corporation's Notice of and Joint Proxy Statement for Special Meeting of Shareholders held on February 21, 1989, filed January 24, 1989. 10(e) Amended and Restated 1978 Employee Stock Option Program is incorporated herein by reference to Appendix A to the Company's Notice of 1987 Annual Meeting of Shareholders and Proxy Statement, filed March 24, 1987. 10(f) Executive Deferred Compensation Plan is incorporated herein by reference to Exhibit 10(l) to the Company's 1985 Annual Report on Form 10-K, filed February 27, 1986. 10(g) 1987 Restricted Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1988 Annual Meeting of Shareholders and Proxy Statement, filed March 22, 1988. 10(h) Executive Deferred Compensation Plan, dated as of October 1, 1989, is incorporated herein by reference to Exhibit 10(h) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(i) SunAmerica Supplemental Deferral Plan is incorporated herein by reference to Exhibit 10(m) to the Company's 1989 Annual Report on Form 10-K, filed December 20, 1989. 10(j) Long-Term Performance-Based Incentive Plan, Amended and Restated 1997, is incorporated herein by reference to Appendix C to the Company's Notice of 1997 Annual Meeting of Shareholders and Proxy Statement, filed December 30, 1996. 10(k) Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(l) 1995 Performance Stock Plan as amended and restated is incorporated herein by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q, for the quarter ended March 31, 1997, filed May 15, 1997.
2 10(m) Registered Representatives' Deferred Compensation Plan is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-10523 on Form S- 3, filed August 20, 1996. 10(n) Deferred Compensation Agreement is incorporated herein by reference to Exhibit 4.2 of the Company's Registration No. 333-10523 on Form S-3, filed August 20, 1996. 10(o) Amendment to Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement, filed January 15, 1996. 10(q) Executive Savings Plan, effective January 1, 1997, is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1996, filed February 13, 1997. 10(r) SunAmerica 1997 Employee Incentive Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(s) SunAmerica Long-Term Incentive Plan is incorporated herein by reference to Appendix B to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(t) Non-Employee Directors' Stock Option Plan is incorporated herein by reference to Appendix D to the Company's Notice of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996. 10(u) SunAmerica 1997 Employee Stock Purchase Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1998 Annual Meeting and Proxy Statement, filed January 2, 1998. 10(v) 1998 Long-Term Performance-Based Incentive Plan is incorporated herein by reference to Appendix B to the Company's Notice of 1998 Annual Meeting and Proxy Statement, filed on January 2, 1998.
EX-12.(A) 5 EXHIBIT 12(A) 1 EXHIBIT 12(a) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR DEBT, BUT EXCLUDE INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ---------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- ---------- (In thousands, except ratios) Earnings: Pretax income. . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001 Add: Interest incurred on senior indebtedness. . . . . . . 120,253 106,279 69,033 55,985 50,292 Dividends paid on preferred securities of grantor trusts . . . 41,178 41,874 20,235 1,673 -- ---------- ---------- ---------- ---------- -------- Total earnings . . . . . . . . . . . $ 868,743 $ 685,203 $ 481,295 $ 337,264 $290,293 ========== ========== ========== ========== ======== Fixed charges: Interest incurred on senior indebtedness. . . . . . . . $ 120,253 $ 106,279 $ 69,033 $ 55,985 $ 50,292 Dividends paid on preferred securities of grantor trusts . . . 41,178 41,874 20,235 1,673 -- ---------- ---------- ---------- ---------- -------- Total fixed charges. . . . . . . . . $ 161,431 $ 148,153 $ 89,268 $ 57,658 $ 50,292 ========== ========== ========== ========== ======== Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred in senior debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits). . . . . . . . 5.4x 4.6x 5.4x 5.8x 5.8x ========== ========== ========== ========== ========
2 EXHIBIT 12(a) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR DEBT, FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- -------- (In thousands, except ratios) Earnings: Pretax income . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001 ----------- ----------- ----------- ----------- -------- Add: Interest incurred on: Fixed annuity contracts . . . . 721,490 644,426 410,269 258,730 254,464 Guaranteed investment contracts . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424 Trust deposits. . . . . . . . . 9,400 9,726 9,968 10,519 8,516 Senior indebtedness . . . . . . 120,253 106,279 69,033 55,985 50,292 ----------- ----------- ----------- ----------- -------- Total interest incurred . . . . 1,277,639 1,074,575 741,297 538,574 463,696 ----------- ----------- ----------- ----------- -------- Dividends paid on preferred securities of grantor trusts. . . 41,178 41,874 20,235 1,673 -- ----------- ----------- ----------- ----------- -------- Total earnings. . . . . . . . . . . $ 2,026,129 $ 1,653,499 $ 1,153,559 $ 819,853 $703,697 =========== =========== =========== =========== ======== Fixed charges: Interest incurred on: Fixed annuity contracts . . . . . $ 721,490 $ 644,426 $ 410,269 $ 258,730 $254,464 Guaranteed investment contracts . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424 Trust deposits. . . . . . . . . . 9,400 9,726 9,968 10,519 8,516 Senior indebtedness . . . . . . . 120,253 106,279 69,033 55,985 50,292 ----------- ----------- ----------- ----------- -------- Total interest incurred. . . . . 1,277,639 1,074,575 741,297 538,574 463,696 Dividends paid on preferred securities of grantor trusts. . . 41,178 41,874 20,235 1,673 -- ----------- ----------- ----------- ----------- -------- Total fixed charges . . . . . . . . $ 1,318,817 $ 1,116,449 $ 761,532 $ 540,247 $463,696 =========== =========== =========== =========== ======== Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, fixed annuities, guaranteed investment contracts and trust deposits) . . . . . . . 1.5x 1.5x 1.5x 1.5x 1.5x =========== =========== =========== =========== ========
EX-12.(B) 6 EXHIBIT 12(B) 1 EXHIBIT 12(b) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR DEBT, BUT EXCLUDE INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, --------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- -------- (in thousands, except ratios) Earnings: Pretax income. . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001 Add: Interest incurred on senior indebtedness. . . . . . 120,253 106,279 69,033 55,985 50,292 Dividends paid on preferred securities of grantor trusts . . 41,178 41,874 20,235 1,673 -- ---------- ---------- ---------- ---------- -------- Total earnings . . . . . . . . . . $ 868,743 $ 685,203 $ 481,295 $ 337,264 $290,293 ========== ========== ========== ========== ======== Combined fixed charges and preferred stock dividends: Interest incurred on: Senior indebtedness. . . . . . . $ 120,253 $ 106,279 $ 69,033 $ 55,985 $ 50,292 Dividends paid on preferred securities of grantor trusts . . 41,178 41,874 20,235 1,673 -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis. . . . 16,987 26,648 38,662 41,914 54,528 ---------- ---------- ---------- ---------- -------- Total combined fixed charges and preferred stock dividends. . $ 178,418 $ 174,801 $ 127,930 $ 99,572 $104,820 ========== ========== ========== ========== ======== Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits). . . . . . . 4.9x 3.9x 3.8x 3.4x 2.8x ========== ========== ========== ========== ========
2 EXHIBIT 12(b) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR DEBT, FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- -------- (In thousands, except ratios) Earnings: Pretax income . . . . . . . . . . . . $ 707,312 $ 537,050 $ 392,027 $ 279,606 $240,001 ----------- ----------- ----------- ----------- -------- Add: Interest incurred on: Fixed annuity contracts . . . . . 721,490 644,426 410,269 258,730 254,464 Guaranteed investment contracts . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424 Trust deposits. . . . . . . . . . 9,400 9,726 9,968 10,519 8,516 Senior indebtedness . . . . . . . 120,253 106,279 69,033 55,985 50,292 ----------- ----------- ----------- ----------- -------- Total interest incurred . . . . . 1,277,639 1,074,575 741,297 538,574 463,696 ----------- ----------- ----------- ----------- -------- Dividends paid on preferred securities of grantor trusts. . . . 41,178 41,874 20,235 1,673 -- ----------- ----------- ----------- ----------- -------- Total earnings. . . . . . . . . . . . $ 2,026,129 $ 1,653,499 $ 1,153,559 $ 819,853 $703,697 =========== =========== =========== =========== ======== Combined fixed charges and preferred sock dividends: Interest incurred on: Fixed annuity contracts . . . . . . $ 721,490 $ 644,426 $ 410,269 $ 258,730 $254,464 Guaranteed investment contracts . . . . . . . . . . . . 426,496 314,144 252,027 213,340 150,424 Trust deposits. . . . . . . . . . . 9,400 9,726 9,968 10,519 8,516 Senior indebtedness . . . . . . . . 120,253 106,279 69,033 55,985 50,292 ----------- ----------- ----------- ----------- -------- Total interest incurred. . . . . . 1,277,639 1,074,575 741,297 538,574 463,696 Dividends paid on preferred securities of grantor trusts. . . . 41,178 41,874 20,235 1,673 -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis . . . . . 16,987 26,648 38,662 41,914 54,528 ----------- ----------- ----------- ----------- -------- Total combined fixed charges and preferred stock dividends . . . $ 1,335,804 $ 1,143,097 $ 800,194 $ 582,161 $518,224 =========== =========== =========== =========== ======== Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior debt, fixed annuities, guaranteed investment contracts and trusts deposits . . . 1.5x 1.4x 1.4x 1.4x 1.4x =========== =========== =========== =========== ========
EX-21 7 EXHIBIT 21 1 EXHIBIT 21 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES LIST OF SUBSIDIARIES List of subsidiaries and certain other affiliates with percentage of voting securities owned by SunAmerica Inc. or SunAmerica Inc.'s subsidiary which is the immediate parent.
PERCENTAGE OF VOTING SECURITIES OWNED BY COMPANY OR COMPANY'S SUBSIDIARY WHICH IS THE IMMEDIATE PARENT ==================== NAME OF COMPANY =============== ARIZONA CORPORATIONS: % Anchor National Life Insurance Company 100 SunAmerica Life Insurance Company of America 100 SunAmerica National Life Insurance Company 100 CALIFORNIA CORPORATIONS: CalAmerica Life Insurance Company 100 Imperial Premium Finance, Inc. 100 Sentra Securities Corporation 100 Spellman & Co., Inc. 100 COLORADO CORPORATION: Resources Trust Company 100 DELAWARE CORPORATIONS: Imperial Premium Finance, Inc. 100 Imperial Premium Funding, Inc. 100 Royal Alliance Associates, Inc. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 SunAmerica Capital Trust II 100 SunAmerica Capital Trust III 100 SunAmerica Capital Trust IV 100 SunAmerica Capital Trust V 100 SunAmerica Capital Trust VI 100 SunAmerica Securities, Inc. 100 GEORGIA CORPORATIONS: FSC Service Corporation 100 Keogler Investment Advisory, Inc. 100 SunAmerica Investments, Inc. 100 NEW YORK CORPORATIONS: Advantage Capital Corporation 100 First SunAmerica Life Insurance Company 100
EX-23 8 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Prospectuses constituting part of these Registration Statements on Form S-8 pertaining to the 1997 Employee Stock Purchase Plan (No. 333-28799), 1997 Non-employee Directors Stock Plan (No. 333-24439), Long-term Performance Based Incentive Plan (No. 333-24441) and the 1997 Employee Incentive Stock Plan (No. 333-24437) and on Form S-3 pertaining to Debt Securities; Preferred Stock; Common Stock; Warrants to Purchase Debt Securities, Preferred Stock and Common Stock; Stock Purchase Contracts; and Stock Purchase Units (No. 333-31619) of SunAmerica Inc. of our report dated November 9, 1998 appearing on page F-2 of SunAmerica Inc.'s Annual Report on Form 10-K for the year ended September 30, 1998. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page S-2 of this Form 10-K. PricewaterhouseCoopers LLP Los Angeles, California December 18, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1998 SEP-30-1998 18,800,847 0 0 82,808 3,412,449 53,605 26,065,407 1,796,132 0 996,503 39,200,407 21,351,393 0 0 0 1,216,483 0 248,000 195,799 2,548,268 39,200,407 0 1,989,632 (41,721) 458,827 1,147,986 241,167 0 707,312 191,000 516,312 0 0 0 516,312 2.61 2.34 0 0 0 0 0 0 0
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