-----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, IQ7PiaE4WPKF3fnz3mHIVgBFtPogsWGBKk2b9AmAvC7EClUFwK2XqNqPWKFGdxEL W50GM9vqLSYNA0YgrkXrmw== 0000950148-97-003030.txt : 19971212 0000950148-97-003030.hdr.sgml : 19971212 ACCESSION NUMBER: 0000950148-97-003030 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971211 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INC CENTRAL INDEX KEY: 0000054727 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 860176061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04618 FILM NUMBER: 97736064 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD INC DATE OF NAME CHANGE: 19890515 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD BUILDING CO DATE OF NAME CHANGE: 19711006 10-K405 1 FORM 10-K405 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, 1997 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 $3.10 Depositary Shares representing Series E Mandatory Conversion Premium Dividend Preferred Stock New York Stock Exchange 8 1/2% Premium Equity Redemption Cumulative Security Units New York 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 X No ___ The aggregate market value of voting stock held by non-affiliates of the Company on November 30, 1997 was $7,188,895,000. The number of shares outstanding of each of the registrant's classes of common stock on November 30, 1997 was as follows: Common Stock (par value $1.00 per share) 178,727,821 shares Nontransferable Class B Stock (par value $1.00 per share) 16,272,702 shares DOCUMENTS INCORPORATED BY REFERENCE NOTICE OF 1998 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT (INCORPORATED INTO PART III) ================================================================================ 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 2,000 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; its four broker-dealers, which provide a broad range of financial planning and investment services through more than 9,000 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, 1997, the Company held $51.98 billion of assets, consisting of $35.64 billion of assets on its balance sheet; $2.59 billion of assets managed in mutual funds; and $13.75 billion of assets under custody in retirement trust accounts. 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 1986 and 1996, annual industry premiums from fixed and variable annuities and fund deposits increased from $82 billion to $179 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $216 billion to $685 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 four wholly-owned broker-dealers comprise the largest network of independent registered representatives in the nation and the fourth-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 1997. 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, certain trusts 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 eliminated 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 is also implementing technology to interface with its wholly owned broker-dealers, which will enable the Company to more effectively market its products and help the affiliated financial professionals to better serve 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, through both acquisitions and internal recruiting, 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, 1997, 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)......................... $650,174 67.2% Fixed-rate products -------- ----- Fee income: Variable annuity fees........... 141,204 14.6 Variable annuities Net retained commissions........ 64,911 6.7 Broker-dealer sales Surrender charges............... 35,241 3.6 Fixed- and variable-rate products Asset management fees........... 25,764 2.7 Mutual funds Loan servicing fees............. 24,264 2.5 Premium finance Trust fees...................... 17,912 1.8 Self-directed retirement accounts Other fees...................... 8,407 0.9 -------- ----- Total fee income................ 317,703 32.8 -------- ----- Total................... $967,877 100.0% ======== =====
For financial information on the Company's business segments, see Part IV -- "Notes to Consolidated Financial Statements -- Note 13 -- Business Segments." ACQUISITIONS Acquisitions have been significant to the Company's growth strategy. In October 1997, subsequent to the Company's fiscal year-end, 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 $918.2 million at the date of acquisition from The Central National Life Insurance Company of Omaha, a subsidiary of Beneficial Corp. 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 2 4 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 (formerly known as CalFarm 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 November 1994, the Company acquired substantially all of the assets of Imperial Premium Finance, Inc. ("Imperial"), the fourth largest insurance premium finance company in the United States, based on premiums financed (see "Premium Finance"). In October 1994, the Company's subsidiary, Resources Trust Company ("Resources Trust"), acquired the account servicing rights to approximately 44,500 individual retirement plan accounts ("IRAs"), representing approximately $1.55 billion in plan assets at September 30, 1997, from New England Securities Corporation, the broker-dealer subsidiary of New England Life Insurance Company. LIFE INSURANCE COMPANIES SunAmerica's five life insurance subsidiaries have combined assets of $31.75 billion at September 30, 1997. 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 1996 annuity premiums and deposits, and among the top 2% of all U.S. life insurance companies, as measured by 1996 total assets. The Company's flagship life insurance subsidiary is 107-year old SunAmerica Life Insurance Company, acquired by the Company in 1971. Chartered in Arizona and licensed in 48 states and the District of Columbia, it had $16.98 billion of assets at September 30, 1997 and markets single- and flexible-premium fixed-rate annuities and GICs. Anchor National Life Insurance Company ("Anchor"), founded in 1965 and acquired by the Company in 1986, had $12.57 billion of assets at September 30, 1997 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 $884.5 million of assets at September 30, 1997 and is chartered in California and licensed in 8 states. CalAmerica markets single- and flexible-premium fixed-rate annuities. First SunAmerica, founded by the Company in 1978, had $1.98 billion of assets (after giving effect to the merger with JANY) at September 30, 1997 and is chartered and licensed in New York and also licensed in New Mexico and Nebraska. First SunAmerica markets fixed-rate annuities and flexible-premium variable annuities. SunAmerica National Life Insurance Company ("SunAmerica National"), formed by the Company in 1995 to market GICs, had $295.6 million of assets at September 30, 1997 and is licensed in 31 states and the District of Columbia. SunAmerica National is currently seeking authority to transact life insurance business in an additional 18 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 four 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 81% at September 30, 1997) 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-rate 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 1997 was approximately $34,000. The Company augments its retail annuity sales effort with the marketing of institutional products. At September 30, 1997, the Company had $5.55 billion of GIC obligations. At that date, approximately 67% of these obligations were fixed-rate and approximately 33% were variable-rate obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1997, approximately 30% was sold to pension plans, 23% was sold to banks and long-term portfolio asset management firms, 19% was sold to state and local governmental entities, 16% was sold to short-term portfolio asset management firms and 12% was sold to certain trusts. The average size of a new GIC contract sold by the Company in 1997 was approximately $25.6 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 87% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1997. 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. At September 30, 1997, total variable product reserves were $11.26 billion, of which $9.51 billion were in the separate accounts. The Company's variable annuity products incorporate surrender charges to encourage persistency. At September 30, 1997, 78% of the Company's variable annuity reserves held in the separate account 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 1997 was approximately $45,500. 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 4 6 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, 1997, these assets had an aggregate fair value of $23.06 billion with a duration of 3.5. 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, 1997, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $21.43 billion with a duration of 3.0. For the years ended September 30, 1997, 1996 and 1995, the Company's yields on average invested assets were 8.61%, 8.74% and 9.15%, respectively; its average rates paid on all interest-bearing liabilities were 5.66%, 5.73%, and 5.90%, respectively; and it realized net investment spreads of 3.26%, 3.43% and 3.69%, respectively, on average invested assets. Net realized investment losses were 0.14%, 0.21% and 0.33% of average invested assets in 1997, 1996 and 1995, 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. The following table summarizes the Company's investment portfolio at September 30, 1997: SUMMARY OF INVESTMENTS
Percent Amortized of cost portfolio -------------- --------- (In thousands) Cash and short-term investments..................................... $ 993,349 4.2% U.S. government securities.......................................... 1,111,064 4.7 Mortgage-backed securities.......................................... 6,208,610 25.9 Other bonds, notes and redeemable preferred stocks.................. 10,805,163 45.1 Mortgage loans...................................................... 3,139,309 13.1 Partnerships........................................................ 1,286,793 5.4 Real estate......................................................... 81,569 0.3 Common stocks....................................................... 32,821 0.1 Other invested assets............................................... 286,962 1.2 ----------- ----- Total investments................................................... $ 23,945,640 100.0% =========== =====
5 7 At September 30, 1997, the Bond Portfolio (at amortized cost, excluding $136.4 million of redeemable preferred stocks) included $17.28 billion of bonds rated by S&P, Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") the National Association of Insurance Commissioners ("NAIC") and $707.2 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 1997, approximately $16.10 billion of the Bond Portfolio was investment grade, including $7.27 billion of U.S. government/agency securities and mortgage-backed securities. At September 30, 1997, the Bond Portfolio included $1.89 billion, (at amortized cost, with a fair value of $1.97 billion) of bonds that were not investment grade. Based on their September 30, 1997 amortized cost, these non-investment-grade bonds accounted for 5.3% of the Company's total assets and 7.9% 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 $439.1 million at September 30, 1997. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $2.46 billion at September 30, 1997. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1997, Secured Loans consisted of loans to 338 borrowers spanning 45 industries, with 21% of these assets (at amortized cost) concentrated in financial institutions and 14% concentrated in utilities. No other industry concentration constituted more than 5% of these assets. Mortgage loans aggregated $3.14 billion at September 30, 1997 and consisted of 1,267 commercial first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 45 states. Approximately 29% of the portfolio was multifamily residential, 27% was retail, 15% was office, 9% was manufactured housing, 7% was industrial and 13% was other types. Partnership investments totaled $1.29 billion at September 30, 1997, constituting investments in approximately 550 separate partnerships with an average size of approximately $2.3 million. This portfolio includes: (i) $664.6 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities; (ii) $516.2 million of partnerships that make tax-advantaged investments in affordable housing properties; and (iii) $106.0 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1997, the amortized cost (after impairment writedowns) of all investments in default as to the payment of principal or interest totaled $38.5 million (fair value $38.0 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." 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. SunAmerica offer investors an array of equity, fixed- income, money market and tax-exempt mutual funds. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $3.03 billion of assets at September 30, 1997, 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. 6 8 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, 1997 of approximately $13.75 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 17,500 registered representatives affiliated with 1,000 broker-dealers, including the Company's broker-dealer subsidiaries. BROKER-DEALERS The Company owns four broker-dealers: Royal Alliance, acquired in January 1990; SunAmerica Securities, which commenced business in 1989; Advantage Capital, acquired in 1996; and FSC Securities Corporation, acquired by the Company in October 1997, subsequent to its fiscal year-end. As a result of the Company's ongoing recruitment of independent registered representatives and the acquisition of The Financial Group, Inc. and FSC Securities Corporation, the Company has increased its network of representatives from approximately 6,600 at September 30, 1996 to approximately 9,000 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 86,000 loans with an average loan balance of approximately $6,600 at September 30, 1997. Imperial generally makes loans to borrowers through a network of approximately 4,500 qualified independent property and casualty insurance agents who arrange the loan or refer the client to Imperial. 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 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 7 9 combinations between insurance companies, banks and other entities. In recent years, the NAIC has approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies and market conduct violations. These initiatives include investment reserve requirements, risk-based capital 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 relating to product design and illustrations for 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. SunAmerica Asset Management Corp. 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 Corp. 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. 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 subsidiaries' business and accounts at any time. 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. 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 95% of total net annuity premiums written. Net annuity premiums written among the top 100 companies range from less than $100 million to more than $9 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. 8 10 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. 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 Torrance and Woodland Hills, California; Houston, Texas; and New York, New York. The Company's broker-dealers lease space in Phoenix, Arizona; Atlanta, Georgia; Houston, Texas; and New York, New York. The Company's asset management subsidiary leases offices in New York, New York, and 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the fourth quarter 1997 to a vote of security-holders, through the solicitation of proxies or otherwise. 9 11 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the current executive officers of SunAmerica Inc. as of December 10, 1997:
Year assumed Other positions and other business Present position at present experience within the last five Name Age December 10, 1997 position years From-to - ------------------------- ---- -------------------- ------- ----------------------------------- ------------- Eli Broad 64 Chairman and Chief 1976 (Cofounded Company in 1957) Executive Officer President 1986 Jay S. Wintrob 40 Vice Chairman 1995 Executive Vice President 1991-1995 (Joined Company in 1987) James R. Belardi 40 Executive Vice 1995 Senior Vice President and 1992-1995 President Treasurer (Joined Company in 1986) Lorin M. Fife 44 Senior Vice 1995 Vice President and General 1994-1995 President, General Counsel -- Regulatory Affairs Counsel -- Vice President and Associate 1989-1994 Regulatory Affairs General Counsel (Joined Company in 1989) Marc H. Gamsin 42 Senior Vice 1996 Partner, O'Melveny & Myers LLP 1989-1996 President Jana Waring Greer 45 Senior Vice 1991 (Joined Company in 1974) President Susan L. Harris 40 Senior Vice 1995 Vice President, General Counsel -- 1994-1995 President, General Corporate Affairs, and Secretary Counsel -- Corporate Vice President, Associate General 1989-1994 Affairs and Counsel and Secretary (Joined Secretary Company in 1985) Gary W. Krat 50 Senior Vice 1992 (Joined Company in 1990) President Scott H. Richland 35 Senior Vice 1997 Vice President and Treasurer 1995-1997 President and Vice President and Assistant 1994-1995 Treasurer Treasurer Assistant Treasurer 1993-1994 Director, SunAmerica Investments, 1990-1993 Inc. (Joined Company in 1990) Scott L. Robinson 51 Senior Vice 1991 (Joined Company in 1978) President and Controller James W. Rowan 35 Senior Vice 1995 Vice President 1993-1995 President (Joined Company in 1992) Karel Carnohan 41 Vice President 1995 Vice President, Equity 1994-1995 Analyst, C.J. Lawrence/ Deutsche Bank Securities Corporation First Vice President, 1990-1994 Corporate Finance and Investor Relations, Countrywide Credit Industries, Inc. Countrywide Mortgage Investments, Inc.
10 12 EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
Year assumed Other positions and other business Present position at present experience within the last five Name Age December 10, 1997 position years From-to - ------------------------- ---- -------------------- ------- ----------------------------------- ------------- Michael L. Fowler 43 Vice President 1988 (Joined Company in 1988) N. Scott Gillis 45 Vice President 1997 Senior Vice President 1994-Present and Controller, SunAmerica Life Companies Vice President and Controller 1990-1994 SunAmerica Life Companies (Joined Company in 1985) George L. Holdridge, Jr. 40 Vice President 1995 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 38 Vice President 1997 Vice President, 1989-1997 Corporate Communications, Nissan North America, Inc.
11 13 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, 1997 and 1996 are as follows:
1997 1996 ---------------------------------- ---------------------------------- High Low High Low -------------- -------------- -------------- -------------- First quarter................................. $30 53/64 $23 27/64 $16 37/64 $13 39/64 Second quarter................................ 34 24 43/64 19 11/64 14 45/64 Third quarter................................. 34 5/64 24 43/64 19 43/64 15 13/64 Fourth quarter................................ 40 53/64 32 29/64 24 37/64 17 27/64 ========= ========= ========= =========
The sales prices listed above have been restated to reflect a three-for-two stock split, paid in the form of a stock dividend on August 29, 1997. HOLDERS As of November 30, 1997, 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)........................................... 2,264 Nontransferable Class B Stock (par value $1.00 per share).......................... 7 =====
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, 1997 and 1996 are as follows:
1997 1996 ------------------------- ------------------------- Common Nontransferable Common Nontransferable Stock Class B Stock Stock Class B Stock ------- --------------- ------- --------------- First quarter................................. $0.0667 $0.0600 $0.0500 $0.0450 Second quarter................................ 0.0667 0.0600 0.0500 0.0450 Third quarter................................. 0.0667 0.0600 0.0500 0.0450 Fourth quarter................................ 0.0667 0.0600 0.0500 0.0450 ------- ------- ------- ------- Total......................................... $0.2668 $0.2400 $0.2000 $0.1800 ======= ======= ======= =======
The dividends listed above have been restated to reflect a three-for-two stock split, paid in the form of a stock dividend on August 29, 1997. 12 14 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. Per-share amounts have been restated to reflect to reflect a three-for-two stock split, paid in the form of a stock dividend on August 29, 1997. In addition, certain items have been reclassified to conform to the current year's presentation.
Years ended September 30, ------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (In thousands, except per-share amounts) RESULTS OF OPERATIONS Net investment income.............. $ 679,377 $ 492,756 $ 365,555 $ 294,454 $ 263,791 Net realized investment losses..... (29,203) (30,314) (33,012) (21,124) (21,287) Fee income......................... 317,703 248,411 198,604 171,085 148,646 General and administrative expenses......................... (265,738) (210,650) (165,434) (135,161) (153,923) Amortization of deferred acquisition costs................ (165,089) (108,176) (86,107) (69,253) (53,216) --------- --------- --------- --------- --------- Pretax income...................... 537,050 392,027 279,606 240,001 184,011 Income tax expense................. (158,000) (117,600) (85,400) (74,700) (57,000) --------- --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES............................ 379,050 274,427 194,206 165,301 127,011 Cumulative effect of change in accounting for income taxes...... -- -- -- (33,500) -- --------- --------- --------- --------- --------- NET INCOME......................... $ 379,050 $ 274,427 $ 194,206 $ 131,801 $ 127,011 ========= ========= ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES.................. $ 1.80 $ 1.30 $ 0.95 $ 0.80 $ 0.61 Cumulative effect of change in accounting for income taxes... -- -- -- (0.18) -- --------- --------- --------- --------- --------- NET INCOME....................... $ 1.80 $ 1.30 $ 0.95 $ 0.62 $ 0.61 ========= ========= ========= ========= ========= CASH DIVIDENDS PER SHARE PAID TO COMMON SHAREHOLDERS: Nontransferable Class B Stock.... $ 0.2400 $ 0.1800 $ 0.1200 $ 0.0800 $ 0.0560 ========= ========= ========= ========= ========= Common Stock..................... $ 0.2668 $ 0.2000 $ 0.1333 $ 0.0889 $ 0.0623 ========= ========= ========= ========= =========
13 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
Years ended September 30, -------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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)........................................ 4.6x 5.4x 5.8x 5.8x 6.1x === === === === === 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 1.4x === === === === === 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)........................................ 3.9x 3.8x 3.4x 2.8x 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).............................. 1.4x 1.4x 1.4x 1.4x 1.3x === === === === ===
At September 30, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments................ $24,408,178 $16,199,784 $10,808,959 $ 9,280,390 $10,364,952 Variable annuity assets.... 9,514,675 6,380,458 5,263,006 4,513,093 4,194,970 Deferred acquisition costs.................... 1,118,582 782,300 526,415 581,874 475,917 Other assets............... 595,451 364,279 245,787 280,868 231,582 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS............... $35,636,886 $23,726,821 $16,844,167 $14,656,225 $15,267,421 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts................ $14,445,126 $ 9,654,674 $ 4,862,250 $ 4,519,623 $ 4,934,871 Reserves for guaranteed investment contracts..... 5,553,292 4,169,028 3,607,192 2,783,522 2,216,104 Variable annuity liabilities.............. 9,514,675 6,380,458 5,263,006 4,513,093 4,194,970 Trust deposits............. 427,433 436,048 426,595 442,320 378,986 Other payables and accrued liabilities.............. 1,097,418 489,672 747,733 860,763 1,828,153 Long-term notes and debentures............... 1,136,072 573,335 524,835 472,835 380,560 Other senior indebtedness............. -- -- -- 28,662 127,151 Deferred income taxes...... 383,764 125,417 146,847 74,319 96,599 Preferred securities of grantor trusts........... 495,000 237,631 52,631 -- -- Shareholders' equity....... 2,584,106 1,660,558 1,213,078 961,088 1,110,027 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $35,636,886 $23,726,821 $16,844,167 $14,656,225 $15,267,421 =========== =========== =========== =========== ===========
14 16 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, 1997 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 $379.1 million or $1.80 per share in 1997, compared with $274.4 million or $1.30 per share in 1996 and $194.2 million or $0.95 per share in 1995. 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 (formerly known as CalFarm 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 the fiscal years 1997, 1996 and 1995 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, 1994, the beginning of the earliest period discussed herein, net income would have been $397.4 million ($1.88 per share) in 1997, $323.2 million ($1.54 per share) in 1996 and $232.3 million ($1.15 per share) in 1995. PRETAX INCOME totaled $537.1 million in 1997, $392.0 million in 1996 and $279.6 million in 1995. The 37.0% improvement in 1997 over 1996 and the 40.2% improvement in 1996 over 1995 primarily resulted from increased net investment income and fee income, which were partially offset by higher general and administrative expenses and increased amortization of deferred acquisition costs. 15 17 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 $679.4 million in 1997 from $492.8 million in 1996 and $365.6 million in 1995. These amounts equal 3.26% on average invested assets (computed on a daily basis) of $20.86 billion in 1997, 3.43% on average invested assets of $14.36 billion in 1996 and 3.69% on average invested assets of $9.90 billion in 1995. The invested assets associated with the Acquisitions were primarily 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. As a result of the Acquisitions, net investment income as a percent of average invested assets in 1997 and 1996 has declined. However, on a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1994, net investment income on related average invested assets would have been 3.14% in 1997, 2.97% in 1996 and 2.75% in 1995. 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 $1.15 billion in 1997, $1.06 billion in 1996 and $741.2 million in 1995. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.95% in 1997, 3.01% in 1996 and 3.25% in 1995. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1994, the Spread Difference would have been 2.91% in 1997, 2.82% in 1996 and 2.71% in 1995. Investment income (and the related yields on average invested assets) totaled $1.80 billion (8.61%) in 1997, compared with $1.25 billion (8.74%) in 1996 and $905.8 million (9.15%) in 1995. Investment income and the related yields reflect the effects of the Acquisitions from their respective dates of acquisition. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1994, the yields on related average invested assets would have been 8.53% in 1997, 8.37% in 1996 and 8.16% in 1995. This increased yield (on a pro forma basis) in 1997 reflects 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. In addition, the John Alden Acquisition increased the proportion of mortgage loans in the Company's portfolio. On average, mortgage loans have higher yields than that of the Company's overall portfolio. Increased investment income in 1997 and 1996 also reflects higher returns from the Company's investments in partnerships and total return bond swap agreements (the "Total Return Agreements"), as well as increases in average invested assets (in excess of those acquired through the Acquisitions). Partnership income increased to $241.5 million (a yield of 21.00% on related average assets of $1.15 billion) in 1997, compared with $178.6 million (a yield of 19.04% on related average assets of $937.8 million) in 1996 and $134.1 million (a yield of 18.17% on related average assets of $738.0 million) in 1995. Partnership income includes income recognized by using the cost method of accounting, which amounted to $71.7 million, $59.1 million and $106.9 million in 1997, 1996 and 1995, respectively. Such income is based 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 enhanced investment yield from time to time through Total Return Agreements. The Company recorded income of $35.4 million on Total Return Agreements in 1997, compared with $32.5 million recorded in 1996 and $13.0 million recorded in 1995. The improved results in 1997 and 1996 reflect improved overall performance of the non-investment-grade bonds underlying the Total Return Agreements and increases in the average notional principal amount of the Total Return Agreements. (See "Asset-Liability Matching" for additional discussion of Total Return Agreements.) 16 18 Total interest and dividend expense equalled $1.12 billion in 1997, $761.5 million in 1996 and $540.2 million in 1995. The average rate paid on all interest-bearing liabilities was 5.66% in 1997, compared with 5.73% in 1996 and 5.90% in 1995. Interest-bearing liabilities averaged $19.71 billion during 1997, compared with $13.29 billion during 1996 and $9.16 billion during 1995. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1994, the average rate paid on all interest-bearing liabilities would have been 5.62% in 1997, 5.55% in 1996 and 5.45% in 1995. These increases in overall rates paid reflect year-over-year increases in the percentage of average interest-bearing liabilities composed of senior debt, guaranteed investment contracts ("GICs") and preferred securities of subsidiary grantor trusts, which, though the average rates have declined on these liabilities since 1995, generally bear higher interest rates than that of the Company's interest-bearing liabilities on average. GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the impact of the Acquisitions. As part of the Acquisitions, 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. 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, and $1.44 billion of aggregate net proceeds from the issuances of Common Stock, preferred securities of subsidiary grantor trusts and long-term notes. Fixed annuity premiums totaled $1.49 billion in 1997, compared with $993.4 million in 1996 and $944.7 million in 1995. These premiums include premiums for the fixed accounts of variable annuities totaling $1.17 billion, $782.6 million and $286.7 million, respectively, which have increased primarily because of increased sales of the Company's Polaris product and greater inflows into the one-year fixed account of that product. GIC premiums increased to $2.08 billion in 1997 from $1.02 billion in 1996 and $1.77 billion in 1995. The increase in GIC premiums in 1997 reflects 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 and its AAA/Aaa-rated credit-enhanced GIC products. This increase also reflects increased sales of longer-maturity products to banks, asset management firms for their long-term portfolios and certain trusts. The decline in GIC premiums in 1996 primarily resulted from planned reductions of sales of short-term maturity products to asset management firms and from reductions of sales to banks. While GIC premiums declined, GIC surrenders and maturities also declined during 1996 to $708.7 million, compared with $1.16 billion in 1995. GIC surrenders and maturities were $1.01 billion in 1997. The size of the Company's GIC reserves increased over the three-year period to $5.55 billion at September 30, 1997 from $2.78 billion at September 30, 1994. 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 five years. In the case of GICs sold to pension plans, certain withdrawals may be made at book value in the event of circumstances specified in the plan document, such as employee retirement, death, disability, hardship withdrawal or employee termination. The Company generally imposes surrender penalties in the event of other withdrawals prior to maturity. GICs purchased by banks and asset management firms for their long-term portfolios, certain trusts or 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. 17 19 NET REALIZED INVESTMENT LOSSES totaled $29.2 million in 1997, $30.3 million in 1996 and $33.0 million in 1995. Net realized investment losses include impairment writedowns of $65.3 million in 1997, $34.9 million in 1996 and $42.7 million in 1995. Therefore, net gains from sales of investments totaled $36.1 million in 1997, $4.6 million in 1996 and $9.7 million in 1995. The Company sold invested assets, principally bonds and notes, aggregating $13.90 billion, $7.88 billion and $4.85 billion in 1997, 1996 and 1995, respectively. Sales of investments result from the active management of the Company's investment portfolio. Because sales of investments are made in both rising and falling interest rate environments, net gains from sales of investments fluctuate from period to period, and represent 0.17%, 0.03% and 0.10% of average invested assets for 1997, 1996 and 1995, 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 and interest-rate risk. Impairment writedowns primarily have been applied to defaulted bonds and mortgage loans. Impairment writedowns, on an annualized basis, represent 0.31%, 0.24% and 0.43% of average invested assets for 1997, 1996 and 1995, respectively. For the five years ended September 30, 1997, impairment writedowns as a percentage of average invested assets have ranged from 0.24% to 1.36% and have averaged 0.60%. 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 $141.2 million in 1997, $104.7 million in 1996 and $84.6 million in 1995. These increased fees reflect growth in average variable annuity assets, principally due to the receipt of variable annuity premiums, increased market values and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders. Variable annuity assets averaged $7.66 billion during 1997, $5.75 billion during 1996 and $4.67 billion during 1995. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $1.31 billion in 1997, $929.2 million in 1996 and $571.4 million in 1995. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $2.47 billion, $1.71 billion and $858.1 million in 1997, 1996 and 1995, respectively. 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. 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. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiaries, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $64.9 million in 1997, $49.8 million in 1996 and $33.7 million in 1995. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $17.52 billion in 1997, $12.78 billion in 1996 and $7.41 billion in 1995. The increases in sales and net retained commissions reflect a greater number of registered representatives, higher average production per representative and generally favorable market conditions. The greater number of registered representatives was primarily due to acquisitions, including the January 22, 1997 acquisition of The Financial Group, Inc., which, through its subsidiary, Keogler Morgan & Company, licensed more than 400 independent registered representatives at date of acquisition; and the January 3, 1996 acquisition of Advantage Capital Corporation, a Houston-based broker-dealer, which licensed approximately 1,000 independent registered representatives at date of acquisition. Increases in net retained commissions may not be proportionate to increases in sales primarily due to differences in sales mix. 18 20 SURRENDER CHARGES on fixed and variable annuities totaled $35.2 million (including $24.5 million attributable to the Acquisitions) in 1997, compared with $22.1 million in 1996 (including $11.1 million attributable to the Acquisitions) and $11.9 million in 1995. 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 $2.28 billion (including $1.00 billion attributable to the Acquisitions) in 1997, compared with $1.42 billion (including $245.8 million attributable to the Acquisitions) in 1996 and $1.31 billion in 1995. These payments represent 12.0% (15.0% of average fixed annuity reserves associated with the Acquisitions), 11.1% (9.3% of average fixed annuity reserves associated with the 1996 Acquisitions) and 14.8%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity withdrawals from the separate accounts totaling $827.3 million in 1997, $637.0 million in 1996 and $650.0 million in 1995. Consistent with the assumptions used in connection with the John Alden Acquisition, 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 annuity business acquired in the John Alden Acquisition. Excluding the effects of the Acquisitions, withdrawal payments represented 10.4% of related average fixed and variable annuity reserves in 1997 and 11.6% in 1996. These lower surrender rates reflect the continued decrease 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 $25.8 million on average assets managed of $2.34 billion in 1997, $25.4 million on average assets managed of $2.14 billion in 1996 and $26.9 million on average assets managed of $2.07 billion in 1995. 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, amounted to $454.8 million in 1997, compared with $223.4 million in 1996 and $140.2 million in 1995. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $412.8 million in 1997, $379.9 million in 1996 and $426.5 million in 1995. The significant increases in sales during 1997 principally resulted from the introduction in November 1996 of the Company's Style Select Series product. Higher mutual fund sales and lower redemptions in 1996 both reflect enhanced marketing efforts and the favorable performance records of certain of the Company's mutual funds, and heightened consumer demand for equity investments generally. 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 $24.3 million on average loans serviced of $490.5 million in 1997, compared with $23.8 million on average loans serviced of $457.8 million in 1996, and $19.8 million on average loans serviced of $438.3 million in 1995. Although average loans serviced have increased during 1997, loan servicing fees have not increased proportionately, largely due to increased competition in the premium finance marketplace. 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 $17.9 million in 1997 (on an average of 204,400 trust accounts) from $16.7 million in 1996 (on an average of 201,800 trust accounts) and $15.4 million in 1995 (on an average of 196,000 trust accounts). GENERAL AND ADMINISTRATIVE EXPENSES totaled $265.7 million in 1997, compared with $210.7 million in 1996 and $165.4 million in 1995. General and administrative expenses in 1997 and 1996 reflect the impact of acquisitions from their respective dates of occurrence. General and administrative expenses in 1997 include a $15.0 million provision for estimated programming costs associated with the year 2000. Management believes that this provision is adequate and does not anticipate any 19 21 material future expenses associated with this project. 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 $165.1 million in 1997, compared with $108.2 million in 1996 and $86.1 million in 1995. The increases in amortization primarily reflect the amortization of the deferred acquisition costs attributable to the Acquisitions, which aggregated $65.2 million in 1997 and $16.8 million in 1996. Amortization has also increased during the three-year period 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 $158.0 million in 1997, compared with $117.6 million in 1996 and $85.4 million in 1995, representing effective tax rates of 29% in 1997, 30% in 1996 and 31% in 1995. 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 55.6% to $2.58 billion at September 30, 1997 from $1.66 billion at September 30, 1996, primarily due to $577.3 million of net proceeds realized from the issuance of additional Common Stock, $379.1 million of net income recorded in 1997 and $209.9 million of net unrealized gains on debt and equity securities available for sale (credited directly to shareholders' equity), versus $17.0 million of net unrealized losses on such securities recorded at September 30, 1996. These favorable factors were partially offset by a $136.5 million aggregate reduction in outstanding preferred stock resulting from the redemption of Series B Preferred Stock and Adjustable Rate Cumulative Preferred Stock, Series C (see Note 9 of Notes to Consolidated Financial Statements) and $67.8 million of dividends paid to shareholders. INVESTED ASSETS at year end totaled $24.41 billion in 1997, compared with $16.20 billion at year-end 1996. This 50.7% increase primarily resulted from the John Alden Acquisition (with related invested assets aggregating $5.00 billion at the date of acquisition). Other factors contributing to this increase include sales of GICs; net proceeds from the issuance of Common Stock; $559.3 million of net proceeds from the issuance of long-term notes and debentures; the $462.5 million net unrealized gain recorded on debt and equity securities available for sale at September 30, 1997, versus the $39.1 million net unrealized loss recorded on such securities at September 30, 1996; and a $257.4 million net increase in preferred securities of subsidiary grantor trusts. 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 comprises 76% of the Company's total investment portfolio (at amortized cost), had an aggregate fair value that exceeded its amortized cost by $398.8 million at September 30, 1997. At September 30, 1996, the amortized cost exceeded the fair value of the Bond Portfolio by $75.6 million. The net unrealized gains on the Bond Portfolio since September 30, 1996 principally reflect the lower prevailing interest rates at September 30, 1997 and the corresponding effect on the fair value of the Bond Portfolio. At September 30, 1997, the Bond Portfolio (at amortized cost, excluding $136.4 million of redeemable preferred stocks) included $17.28 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 $707.2 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 1997, approximately $16.10 billion of the Bond 20 22 Portfolio was investment grade, including $7.27 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At September 30, 1997, the Bond Portfolio included $1.89 billion (at amortized cost with a fair value of $1.97 billion) of bonds that were not investment grade. Based on their September 30, 1997 amortized cost, these non-investment-grade bonds accounted for 5.3% of the Company's total assets and 7.9% 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 $439.1 million at September 30, 1997 (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, 1997. The following table summarizes the Company's rated bonds by rating classification as of September 30, 1997 (dollars in thousands):
Issues rated by S&P/Moody's/DCR/Fitch Issues not rated by S&P/Moody's/ Total - ---------------------------------------------- DCR/Fitch, by NAIC category -------------------------- S&P/(Moody's)/ ----------------------------------------- Percent of [DCR]/ Amortized Estimated NAIC Amortized Estimated Amortized invested category(1) cost fair value category(2) cost fair value cost assets(3) - --------------- ----------- ----------- ----------- ---------- ---------- ----------- ---------- AAA+ to A- (Aaa to A3) [AAA to A-] $10,656,174 $10,835,942 1 $1,468,979 $1,487,022 $12,125,153 50.64% BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-] 3,415,438 3,490,194 2 558,826 579,575 3,974,264 16.60 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] 137,818 151,979 3 85,731 88,911 223,549 0.93 B+ to B- (B1 to B3) [B+ to B-] 1,325,950 1,387,326 4 227,437 228,298 1,553,387 6.49 CCC+ to C (Caa to C) [CCC] 33,960 28,806 5 66,110 71,147 100,070 0.42 CI to D [DD] -- -- 6 11,965 11,500 11,965 0.05 ----------- ----------- ---------- ---------- ----------- Total rated issues $15,569,340 $15,894,247 $2,419,048 $2,466,453 $17,988,388 =========== =========== ========== ========== =========== Issues rated by S&P/Moody's/ DCR/Fitch - --------------- S&P/(Moody's)/ [DCR]/ Estimated category(1) fair value - --------------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] $12,322,964 BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-] 4,069,769 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] 240,890 B+ to B- (B1 to B3) [B+ to B-] 1,615,624 CCC+ to C (Caa to C) [CCC] 99,953 CI to D [DD] 11,500 ---------- Total rated issues $18,360,700 ===========
(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 $707.2 million (at amortized cost) of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. (3) At amortized cost. 21 23 Senior Secured Loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $2.46 billion at September 30, 1997. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1997, Secured Loans consisted of loans to 338 borrowers spanning 45 industries, with 21% of these assets (at amortized cost) concentrated in financial institutions and 14% concentrated in utilities. No other industry concentration constituted more than 5% of these assets. While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, 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 its Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC. MORTGAGE LOANS aggregated $3.14 billion at September 30, 1997 and consisted of 1,267 commercial first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 45 states. Approximately 29% of this portfolio was multifamily residential, 27% was retail, 15% was office, 9% was manufactured housing, 7% was industrial and 13% was other types. At September 30, 1997, approximately 18%, 11%, 9% and 8% of this portfolio was secured by properties located in California, New York, Florida and Texas, respectively, and no more than 5% of this portfolio was secured by properties located in any other single state. At September 30, 1997, there were 51 mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 30% of this portfolio. At the time of their origination or purchase by the Company, virtually all mortgage loans had loan-to-value ratios of 75% or less. At September 30, 1997, approximately 34% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2000. During 1997, 1996 and 1995, 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, 1997, the mortgage loan portfolio included $808.6 million of commercial mortgage loans obtained as part of the John Alden Acquisition. During 1997, the Company sold $333.8 million of single-family residential mortgage loans obtained as part of the John Alden Acquisition. At September 30, 1997, approximately 45% 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 $1.29 billion at September 30, 1997, constituting investments in approximately 550 separate partnerships with an average size of approximately $2.3 million. This portfolio includes: (i) $664.6 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 3,500 separate issuers; (ii) $516.2 million of partnerships that make tax-advantaged investments in affordable housing properties, currently involving approximately 525 multifamily projects in 43 states; and (iii) $106.0 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1997, $725.5 million of the Company's partnerships was accounted for by using the cost method and $561.3 million by using the equity method. The risks generally associated with partnerships include those related to their underlying investments (i.e. equity securities, debt 22 24 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 87% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1997. 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, 1997, these assets had an aggregate fair value of $23.06 billion with a duration of 3.5. 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, 1997, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $21.43 billion with a duration of 3.0. The Company's potential exposure due to a relative 10% increase in interest rates prevalent at September 30, 1997 is a loss of approximately $98.3 million in fair value of its fixed-rate assets that is not offset by an increase 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, 1997, the Company had 39 outstanding Swap Agreements 23 25 with an aggregate notional principal amount of $1.62 billion. These agreements mature in various years through 2003 and have an average remaining maturity of 38 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 counterparty risk associated with those transactions is minimal. 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 routinely includes a review by the Company of its portfolio of debt securities. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. The carrying values of bonds that are determined to have declines in value that are other than temporary are reduced to net realizable value and no further accruals of interest are made. The valuation allowances 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 $38.5 million at September 30, 1997 (at amortized cost after impairment writedowns, with a fair value of $38.0 million), including $15.6 million of bonds and notes and 24 26 $22.9 million of mortgage loans. At September 30, 1997, defaulted investments constituted 0.2% of total invested assets. At September 30, 1996, defaulted investments totaled $28.7 million, including $16.7 million of bonds and notes and $12.0 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, 1997, approximately $15.87 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $458.8 million, while approximately $2.25 billion of the Bond Portfolio had an aggregate unrealized loss of $60.0 million. In addition, the Company's investment portfolio currently provides approximately $184.7 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 (see Note 6 of Notes to Consolidated Financial Statements). 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 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, 1997, had invested assets with a fair value of $2.51 billion and outstanding senior indebtedness of $1.14 billion, comprising all of the Company's outstanding senior indebtedness. In October 1997, subsequent to its fiscal year-end, the Company issued $100 million of 6.75% notes due October 1, 2007 (the "6.75% Notes"). (See Note 6 of Notes to Consolidated Financial Statements.) Additionally, as of September 30, 1997, the Parent had three GICs purchased by local government entities which aggregated $227.0 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 8 of Notes to Consolidated Financial Statements). The Parent's annual debt service (principal and interest payments) with respect to its senior indebtedness (including the 6.75% Notes), GIC obligations and Debentures totals $183.6 million for fiscal 1998, $292.0 million for fiscal 1999, $574.6 million for fiscal 2000, $139.0 million for fiscal 2001, $297.4 million for fiscal 2002 and $4.27 billion, in the aggregate, thereafter. On or before October 31, 1999, the Company is contractually scheduled to receive $431.3 million upon delivery of 17.3 million or fewer shares of the Company's Common Stock in accordance with the terms of the Company's 8 1/2% Premium Equity Redemption Cumulative Security Units. 25 27 The Parent received dividends from its regulated life insurance subsidiaries totaling $118.7 million in April 1997, $94.3 million in March 1996 and $69.2 million in March 1995. The Parent also received dividends of $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. There are no dividends available to the Parent from its regulated life insurance subsidiaries for the remainder of calendar year 1997. 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. 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The Notice of 1998 Annual Meeting of Shareholders and Proxy Statement, which, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 10, 11, 12 and 13), except for the information regarding the executive officers of the Company, which is included in Part I on pages 10-11. 26 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, 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. 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. 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.
27 29
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 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. 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(l). 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. 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.
28 30
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 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 hereby by 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) 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. 4(s) 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(t) 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(u) 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.
29 31
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 4(v) 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(w) 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. 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 17, 1995, between the Company and Joseph M. Tumbler, is incorporated herein by reference to Exhibit 10(a) 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 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(d) Employment Agreement, dated August 15, 1997, between the Company and Gary W. Krat. 10(e) 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(f) 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(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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.
30 32
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 10(n) 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(o) 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(p) 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) 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(r) 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(s) 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(t) 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(u) 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(v) List of Executive Compensation Plans and Arrangements. 11 Statement re Computation of per-share earnings. 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.
REPORTS ON FORM 8-K On July 16, 1997, the Company filed a Current Report on Form 8-K to file exhibits in connection with the issuance of 10,669,745 shares of its Common Stock pursuant to the Company's Registration Statement on Form S-3 (File No. 333-14201). On July 31, 1997, the Company filed a Current Report on Form 8-K to file exhibits in connection with the issuance of its 5.60% Debentures due July 31, 2097 pursuant to the Company's Registration Statement on Form S-3 (File No. 333-31619). On October 7, 1997, the Company filed a Current Report on Form 8-K to file exhibits in connection with the issuance of its 6.75% Notes due October 1, 2007 pursuant to the Company's Registration Statement on Form S-3 (File No. 333-31619). On December 1, 1997, the Company filed a Current Report on Form 8-K to file exhibits in connection with its Medium Term Note Program. 31 33 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 10, 1997 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 10, 1997 - ---------------------------------------- and Chief Executive Officer Eli Broad (Principal Executive Officer) JAY S. WINTROB Vice Chairman and Director December 10, 1997 - ---------------------------------------- Jay S. Wintrob JAMES R. BELARDI Executive Vice President December 10, 1997 - ---------------------------------------- (Principal Financial Officer) James R. Belardi SCOTT L. ROBINSON Senior Vice President and December 10, 1997 - ---------------------------------------- Controller (Principal Scott L. Robinson Accounting Officer) WILLIAM F. ALDINGER Director December 10, 1997 - ---------------------------------------- William F. Aldinger KAREN HASTIE-WILLIAMS Director December 10, 1997 - ---------------------------------------- Karen Hastie-Williams DAVID O. MAXWELL Director December 10, 1997 - ---------------------------------------- David O. Maxwell BARRY MUNITZ Director December 10, 1997 - ---------------------------------------- Barry Munitz LESTER POLLACK Director December 10, 1997 - ---------------------------------------- Lester Pollack CARL E. REICHARDT Director December 10, 1997 - ---------------------------------------- Carl E. Reichardt SANFORD C. SIGOLOFF Director December 10, 1997 - ---------------------------------------- Sanford C. Sigoloff HAROLD M. WILLIAMS Director December 10, 1997 - ---------------------------------------- Harold M. Williams
32 34 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page(s) ----------------- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheet as of September 30, 1997 and 1996............... F-3 Consolidated Income Statement for the years ended September 30, 1997, 1996 and 1995................................................................. F-4 Consolidated Statement of Cash Flows for the years ended September 30, 1997, 1996 and 1995...................................................... F-5 through F-6 Notes to Consolidated Financial Statements................................. F-7 through F-28
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 35 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, 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. Price Waterhouse LLP Los Angeles, California November 7, 1997 F-2 36 SUNAMERICA INC. CONSOLIDATED BALANCE SHEET
September 30, --------------------------- 1997 1996 ----------- ----------- (In thousands) ASSETS Investments: Cash and short-term investments......................................... $ 993,349 $ 529,363 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: 1997, $18,124,837,000; 1996, $12,657,620,000)..................................................... 18,523,655 12,582,024 Mortgage loans.......................................................... 3,139,309 1,652,257 Common stocks available for sale, at fair value (cost: 1997, $32,821,000; 1996, $44,871,000)...................................... 96,541 81,385 Partnerships............................................................ 1,286,793 1,071,857 Real estate............................................................. 81,569 105,321 Other invested assets................................................... 286,962 177,577 ----------- ----------- Total investments....................................................... 24,408,178 16,199,784 Variable annuity assets................................................... 9,514,675 6,380,458 Accrued investment income................................................. 296,637 186,803 Deferred acquisition costs................................................ 1,118,582 782,300 Other assets.............................................................. 298,814 177,476 ----------- ----------- TOTAL ASSETS.............................................................. $35,636,886 $23,726,821 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts.................................... $14,445,126 $ 9,654,674 Reserves for guaranteed investment contracts............................ 5,553,292 4,169,028 Trust deposits.......................................................... 427,433 436,048 Payable to brokers for purchases of securities.......................... 266,477 42,518 Income taxes currently payable.......................................... 2,025 18,436 Other liabilities....................................................... 828,916 428,718 ----------- ----------- Total reserves, payables and accrued liabilities........................ 21,523,269 14,749,422 ----------- ----------- Variable annuity liabilities.............................................. 9,514,675 6,380,458 ----------- ----------- Long-term notes and debentures............................................ 1,136,072 573,335 ----------- ----------- Deferred income taxes..................................................... 383,764 125,417 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary grantor trusts whose sole assets are junior subordinated debentures of the Company............................................... 495,000 237,631 ----------- ----------- Shareholders' equity: Preferred Stock......................................................... 248,000 384,549 Nontransferable Class B Stock........................................... 16,273 10,848 Common Stock............................................................ 179,076 108,604 Additional paid-in capital.............................................. 750,401 304,295 Retained earnings....................................................... 1,180,446 869,215 Net unrealized gains (losses) on debt and equity securities available for sale............................................................. 209,910 (16,953) ----------- ----------- Total shareholders' equity.............................................. 2,584,106 1,660,558 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $35,636,886 $23,726,821 =========== ===========
See accompanying notes F-3 37 SUNAMERICA INC. CONSOLIDATED INCOME STATEMENT
Years ended September 30, ------------------------------------ 1997 1996 1995 ----------- ---------- --------- (In thousands, except per-share amounts) Investment income................................................. $ 1,795,826 $1,254,288 $ 905,802 ----------- ---------- --------- Interest expense on: Fixed annuity contracts......................................... (644,426) (410,269) (258,730) Guaranteed investment contracts................................. (314,144) (252,027) (213,340) Trust deposits.................................................. (9,726) (9,968) (10,519) Senior indebtedness............................................. (106,279) (69,033) (55,985) ----------- ---------- --------- Total interest expense.......................................... (1,074,575) (741,297) (538,574) ----------- ---------- --------- Dividends paid on preferred securities of grantor trusts.......... (41,874) (20,235) (1,673) ----------- ---------- --------- NET INVESTMENT INCOME............................................. 679,377 492,756 365,555 ----------- ---------- --------- NET REALIZED INVESTMENT LOSSES.................................... (29,203) (30,314) (33,012) ----------- ---------- --------- Fee income: Variable annuity fees........................................... 141,204 104,661 84,583 Net retained commissions........................................ 64,911 49,824 33,715 Surrender charges............................................... 35,241 22,086 11,885 Asset management fees........................................... 25,764 25,413 26,935 Loan servicing fees............................................. 24,264 23,846 19,792 Trust fees...................................................... 17,912 16,684 15,394 Other fees...................................................... 8,407 5,897 6,300 ----------- ---------- --------- TOTAL FEE INCOME.................................................. 317,703 248,411 198,604 ----------- ---------- --------- GENERAL AND ADMINISTRATIVE EXPENSES............................... (265,738) (210,650) (165,434) ----------- ---------- --------- AMORTIZATION OF DEFERRED ACQUISITION COSTS........................ (165,089) (108,176) (86,107) ----------- ---------- --------- PRETAX INCOME..................................................... 537,050 392,027 279,606 Income tax expense................................................ (158,000) (117,600) (85,400) ----------- ---------- --------- NET INCOME........................................................ $ 379,050 $ 274,427 $ 194,206 =========== ========== ========= EARNINGS PER SHARE................................................ $ 1.80 $ 1.30 $ 0.95 =========== ========== ========= NET EARNINGS APPLICABLE TO COMMON STOCK (used in the computation of earnings per share).......................................... $ 373,268 $ 262,895 $ 179,223 =========== ========== ========= AVERAGE SHARES OUTSTANDING........................................ 207,758 201,881 189,342 =========== ========== =========
See accompanying notes F-4 38 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, ----------------------------------------- 1997 1996 1995 ------------ ------------ ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................... $ 379,050 $ 274,427 $ 194,206 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts................................. 644,426 410,269 258,730 Guaranteed investment contracts......................... 314,144 252,027 213,340 Trust deposits.......................................... 9,726 9,968 10,519 Net realized investment losses............................. 29,203 30,314 33,012 Accretion of net discounts on investments.................. (38,684) (28,610) (33,756) Provision for deferred income taxes........................ 128,001 (3,457) (5,834) Change in: Accrued investment income.................................. (59,214) (10,347) 10,648 Deferred acquisition costs................................. (78,564) (50,495) (24,741) Other assets............................................... (32,846) (18,958) (4,731) Income taxes currently payable............................. (84,424) 19,052 52,433 Other liabilities.......................................... 157,598 38,275 25,523 Other, net................................................... (1,652) 15,721 12,674 ------------ ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................... 1,366,764 938,186 742,023 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks............... (19,506,303) (11,476,827) (6,852,129) Mortgage loans............................................. (990,408) (320,748) (250,547) Partnerships............................................... (1,062,133) (712,749) (410,299) Other investments, excluding short-term investments........ (269,538) (132,711) (92,516) Net assets of acquired businesses.......................... 173,239 62,790 (442,804) Sales of: Bonds, notes and redeemable preferred stocks............... 13,108,441 7,490,441 4,498,853 Mortgage loans............................................. 333,763 -- -- Partnerships............................................... 679,169 318,303 165,710 Other investments, excluding short-term investments........ 92,626 63,556 71,442 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks............... 4,425,246 2,891,448 2,134,509 Mortgage loans............................................. 428,636 199,564 107,102 Partnerships............................................... 321,901 183,014 104,734 Other investments, excluding short-term investments........ 180,868 50,819 53,928 ------------ ------------ ----------- NET CASH USED BY INVESTING ACTIVITIES........................ (2,084,493) (1,383,100) (912,017) ------------ ------------ -----------
F-5 39 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Years ended September 30, ----------------------------------------- 1997 1996 1995 ------------ ------------ ----------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends to shareholders................... $ (67,819) $ (61,721) $ (50,268) Premium receipts on: Fixed annuity contracts.................................... 1,490,556 993,376 944,742 Guaranteed investment contracts............................ 2,076,941 1,019,275 1,766,629 Net exchanges to (from) the fixed accounts of variable annuity contracts.......................................... (660,332) (260,635) 10,388 Receipts of trust deposits................................... 787,599 454,237 447,398 Withdrawal payments on: Fixed annuity contracts.................................... (1,454,718) (786,724) (690,292) Guaranteed investment contracts............................ (1,010,127) (708,743) (1,156,299) Trust deposits............................................. (805,937) (454,718) (473,611) Claims and annuity payments on fixed annuity contracts....... (387,181) (232,361) (178,487) Net proceeds from issuances of long-term notes and debentures................................................. 559,332 47,478 51,675 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................................................... (34,273) (310,560) (215,913) ----------- ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................... 1,181,715 118,927 455,962 ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS... 463,986 (325,987) 285,968 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD....... 529,363 855,350 569,382 ----------- ---------- ----------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD............. $ 993,349 $ 529,363 $ 855,350 =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness................................ $ 130,461 $ 66,037 $ 54,899 =========== ========== =========== Income taxes paid, net of refunds received................... $ 114,423 $ 102,005 $ 38,801 =========== ========== =========== NON-CASH FINANCING ACTIVITY: Exchange of 2,105,235 shares of 9 1/4% Series B Preferred Stock for preferred securities of a subsidiary grantor trust...................................................... $ -- $ -- $ 52,631 =========== ========== ===========
See accompanying notes F-6 40 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 (formerly known as CalFarm 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 three broker-dealer subsidiaries: Royal Alliance Associates, Inc.; SunAmerica Securities, Inc.; and Advantage Capital Corporation. Premium financing is provided by Imperial Premium Finance, Inc. and involves the origination 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. Certain prior period amounts have been reclassified to conform with the 1997 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. 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 41 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. 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. 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. All outstanding Swap Agreements are designated as hedges and, therefore, are not marked to market. However, in the event that a hedged asset/liability were to be sold or repaid before the related Swap Agreement matures, the Swap Agreement would be marked to market and any gain/loss classified with any gain/loss realized on the disposition of the hedged asset/liability. Subsequently, the Swap Agreement would be marked to market and the resulting change in fair value would be included in Investment Income in the income statement. In the event that a Swap Agreement that is designated as a hedge were to be terminated before its contractual maturity, any resulting gain/loss would be credited/charged to the carrying value of the asset/liability that it hedged. 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 F-8 42 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $139,600,000 at September 30, 1997 and increased by $13,000,000 at September 30, 1996 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 $55,704,000 at September 30, 1997, 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. EARNINGS PER SHARE. The calculation of earnings per share is made by dividing applicable earnings by the weighted average number of shares of Common Stock and Nontransferable Class B Stock (collectively referred to as "Common Stock") outstanding during each period, adjusted for the incremental shares attributed to common stock equivalents. Common stock equivalents include outstanding employee stock options; Premium Equity Redemption Cumulative Security Units issued in November 1996; and convertible preferred stock, which includes the Series D and E Depositary Shares issued in March 1993 and November 1995, respectively. Common stock equivalents are included in the computation only if their effect is dilutive. Net Earnings Applicable to Common Stock are reduced by preferred stock dividend requirements, which amounted to $5,782,000 in 1997, $11,532,000 in 1996 and $14,983,000 in 1995. These preferred stock dividend requirements do not include dividends paid on the convertible issues, which amounted to $12,400,000 in 1997, $15,528,000 in 1996 and $13,907,000 in 1995. F-9 43 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- 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 $369,372,000 at September 30, 1997, 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. As part of this acquisition, the Company acquired assets having an aggregate fair value of $918,200,000, composed primarily of invested assets totaling $908,755,000. An amount equal to the excess of the fair value of the annuity reserves assumed over the fair value of the assets acquired, amounting to $28,642,000 at September 30, 1997, 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 $92,805,000 at September 30, 1997, 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 $35,127,000 at September 30, 1997, 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, 1997; the operating results of the Central National Annuity Contracts for only the period from April 1, 1996 through September 30, 1997; Ford Life's operating results for only the period from March 1, 1996 through September 30, 1997; and CalAmerica's operating results for only the period from January 1, 1996 through September 30, 1997. On a pro forma (unaudited) basis, assuming these acquisitions occurred on October 1, 1994, the beginning of the earliest period presented, revenues (investment income, net realized investment losses and fee income) would have been $2,269,135,000, $1,972,178,000 and $1,704,979,000, and net income would have been $397,402,000 ($1.88 per share), $323,200,000 ($1.54 per share) and $232,321,000 ($1.15 per share) for the years ended September 30, 1997, 1996 and 1995, respectively. F-10 44 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- ACQUISITIONS (CONTINUED) At September 30, 1997, the deferred acquisition costs arising from these transactions aggregated $525,946,000, 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: 1998, $94,868,000; 1999, $82,251,000; 2000, $68,523,000; 2001, $56,047,000; 2002, $44,563,000; and thereafter, in the aggregate, $179,694,000. 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. NOTE 4 -- INVESTMENTS The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale and held for investment by major category follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) 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 =========== =========== AT SEPTEMBER 30, 1996: Securities of the United States Government........................ $ 1,067,498 $ 1,046,134 Mortgage-backed securities........................................ 4,519,643 4,458,171 Securities of public utilities.................................... 216,619 211,578 Corporate bonds and notes......................................... 5,193,079 5,186,864 Asset-backed securities........................................... 1,322,468 1,317,524 Redeemable preferred stocks....................................... 108,438 128,228 Other debt securities............................................. 229,875 233,525 ----------- ----------- Total available for sale.......................................... $12,657,620 $12,582,024 =========== ===========
F-11 45 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by contractual maturity, as of September 30, 1997, follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) Due in one year or less........................................... $ 453,552 $ 461,266 Due after one year through five years............................. 3,891,514 3,950,395 Due after five years through ten years............................ 5,219,820 5,356,891 Due after ten years............................................... 2,351,341 2,411,067 Mortgage-backed securities........................................ 6,208,610 6,344,036 ----------- ----------- Total available for sale.......................................... $18,124,837 $18,523,655 =========== ===========
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, 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, 1996: Securities of the United States Government............................ $ 542 $ (21,906) Mortgage-backed securities............................................ 46,677 (108,149) Securities of public utilities........................................ 176 (5,217) Corporate bonds and notes............................................. 91,751 (97,966) Asset-backed securities............................................... 6,963 (11,907) Redeemable preferred stocks........................................... 27,455 (7,665) Other debt securities................................................. 4,054 (404) -------- --------- Total available for sale.............................................. $177,618 $(253,214) ======== =========
At September 30, 1997, gross unrealized gains on equity securities available for sale aggregated $64,635,000 and gross unrealized losses aggregated $915,000. At September 30, 1996, gross unrealized gains on equity securities available for sale aggregated $39,194,000 and gross unrealized losses aggregated $2,680,000. F-12 46 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) Gross realized investment gains and losses on sales of investments are as follows:
Years ended September 30, --------------------------------- 1997 1996 1995 --------- -------- -------- (In thousands) BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Available for sale: Realized gains............................................ $ 155,610 $ 81,323 $ 61,104 Realized losses........................................... (141,513) (93,261) (83,308) Held for investment: Realized gains............................................ -- -- 9,262 Realized losses........................................... -- -- (2,626) EQUITIES: Realized gains.............................................. 22,755 8,765 25,863 Realized losses............................................. (760) (5,365) (4,985) OTHER INVESTMENTS: Realized gains.............................................. 2,286 13,234 6,453 Realized losses............................................. (2,268) (72) (2,028) IMPAIRMENT WRITEDOWNS....................................... (65,313) (34,938) (42,747) --------- -------- -------- Total net realized investment losses........................ $ (29,203) $(30,314) $(33,012) ========= ======== ========
The sources and related amounts of investment income are as follows:
Years ended September 30, ------------------------------------ 1997 1996 1995 ---------- ---------- -------- (In thousands) Short-term investments.................................... $ 83,021 $ 66,378 $ 43,485 Bonds, notes and redeemable preferred stocks.............. 1,169,631 819,812 555,260 Mortgage loans............................................ 222,403 149,476 146,311 Equity-method partnerships................................ 169,805 119,474 27,148 Cost-method partnerships.................................. 71,727 59,094 106,927 Other invested assets..................................... 79,239 40,054 26,671 ---------- ---------- -------- Total investment income................................... $1,795,826 $1,254,288 $905,802 ========== ========== ========
Expenses incurred to manage the investment portfolio amounted to $26,801,000 for the year ended September 30, 1997, $21,475,000 for the year ended September 30, 1996 and $19,077,000 for the year ended September 30, 1995 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 $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 $425,342,000 and $168,885,000, respectively, resulting in $256,457,000 of total combined pretax income. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $644,862,000 at September 30, 1996. At that date, total combined assets of these partnerships were $1,008,617,000 (consisting entirely of investments) and total combined liabilities were $458,485,000 (including $415,007,000 of nonrecourse notes payable to banks). For the year then F-13 47 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) ended, total combined revenues and expenses of such partnerships were $222,831,000 and $108,207,000, respectively, resulting in $114,624,000 of total combined pretax income. At September 30, 1997, no investment exceeded 10% of the Company's consolidated shareholders' equity. At September 30, 1997, mortgage loans were collateralized by properties located in 45 states, with loans totaling approximately 18%, 11%, 9% and 8% of the aggregate carrying value of the portfolio secured by properties located in California, New York, Florida and Texas, respectively. At September 30, 1997, bonds, notes and redeemable preferred stocks included $1,888,971,000 (fair value of $1,967,967,000) of bonds and notes not rated investment grade. The Company had no material concentrations of non-investment-grade assets at September 30, 1997. At September 30, 1997, the amortized cost of investments in default as to the payment of principal or interest was $38,481,000, consisting of $15,557,000 of non-investment-grade bonds and $22,924,000 of mortgage loans. Such nonperforming investments had an estimated fair value of $38,016,000. As a component of its asset and liability management strategy, the Company utilizes Swap Agreements to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities to fixed-rate instruments. At September 30, 1997, the Company had 39 outstanding Swap Agreements with an aggregate notional principal amount of $1,620,578,000. These agreements mature in various years through 2003 and have an average remaining maturity of 38 months. With respect to swaps that hedge assets, net interest received (paid) amounted to ($1,091,000), $5,214,000 and $8,017,000 for the years ended September 30, 1997, 1996 and 1995, respectively, and is included in Investment Income in the income statement. With respect to swaps that hedge liabilities, net interest paid amounted to $1,706,000, $168,000 and $718,000 for the years ended September 30, 1997, 1996 and 1995, 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 $439,113,000 (the "Notional Amount") at September 30, 1997. 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 November 1997; 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 are included in Investment Income in the income statement and totaled $35,368,000, $32,490,000 and $13,044,000 for the years ended September 30, 1997, 1996 and 1995, respectively. F-14 48 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value disclosures are limited to reasonable estimates of the fair value of only the Company's financial instruments. The disclosures do not address the value of the Company's recognized and unrecognized nonfinancial assets (including its 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. Fair values include the market value, determined from independent broker quotes, of Swap Agreements that hedge certain mortgage loans. 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: 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. F-15 49 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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: 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. LONG-TERM NOTES AND DEBENTURES: Fair value is estimated based on the quoted market prices for the same or similar issues and is net of the estimated fair value of a hedging Swap Agreement, determined from independent broker quotes. 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, 1997 and 1996, compared with their respective carrying values, are as follows:
Carrying Fair value value ----------- ----------- (In thousands) 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........................................ 725,458 935,948 Variable annuity assets......................................... 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.................................... 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-16 50 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Carrying Fair value value ----------- ----------- (In thousands) 1996: ASSETS: Cash and short-term investments................................. $ 529,363 $ 529,363 Bonds, notes and redeemable preferred stocks.................... 12,582,024 12,582,024 Mortgage loans.................................................. 1,652,257 1,696,080 Common stocks................................................... 81,385 81,385 Cost-method partnerships........................................ 426,996 549,652 Variable annuity assets......................................... 6,380,458 6,380,458 LIABILITIES: Reserves for fixed annuity contracts............................ 9,654,674 9,233,359 Reserves for guaranteed investment contracts.................... 4,169,028 4,119,407 Trust deposits.................................................. 436,048 436,048 Payable to brokers for purchases of securities.................. 42,518 42,518 Variable annuity liabilities.................................... 6,380,458 6,183,055 Long-term notes and debentures.................................. 573,335 588,705 Preferred securities of subsidiary grantor trusts............... 237,631 240,398 =========== ===========
NOTE 6 -- INDEBTEDNESS Indebtedness consists of the following long-term notes and debentures (interest rates are as of September 30):
September 30, ---------------------- 1997 1996 ---------- -------- (In thousands) 5.6% debentures due July 31, 2097 (net of unamortized discount of $43,513,000)........................................................ $ 131,487 $ -- Medium-term notes due 1998 through 2026 (5 3/8% to 7 3/8%)............ 248,335 248,335 8 1/8% debentures due April 28, 2023.................................. 100,000 100,000 9.95% debentures due February 1, 2012................................. 100,000 100,000 6.2% notes due October 31, 1999....................................... 431,250 -- 9% notes due January 15, 1999......................................... 125,000 125,000 ---------- -------- Total indebtedness.................................................... $1,136,072 $573,335 ========== ========
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. Subsequently, the Company issued $175,000,000 of its 5.6% debentures, due July 31, 2097, and received discounted proceeds of approximately $130,000,000. F-17 51 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INDEBTEDNESS (CONTINUED) On October 7, 1997, subsequent to the Company's fiscal year end, the Company issued $100,000,000 of 6.75% notes due October 1, 2007. Subsequent to this offering, $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 $611,719,000 at a weighted average interest rate of 6 1/4% during 1997 and $475,619,000 at a weighted average interest rate of 4 1/2% during 1996. The highest level of short-term borrowings at any month-end was $1,019,754,000 at 5 3/8% during 1997 and $747,961,000 at 4 3/4% during 1996. There were no short-term borrowings outstanding at September 30, 1997. Principal payments on long-term borrowings, including the 6.75% notes, are due as follows: 1998, $20,000,000; 1999, $142,775,000; 2000, $445,250,000; 2001, $24,000,000; 2002, $24,000,000; and thereafter, $623,560,000. On or before October 31, 1999, the Company is contractually scheduled to receive $431,250,000 upon delivery of 17,250,000 or fewer shares of the Company's Common Stock in accordance with the terms of the Company's 8 1/2% Premium Equity Redemption Cumulative Security Units. NOTE 7 -- 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 $3,052,583,000 and $2,248,683,000, respectively, at September 30, 1997, if the coinsurers were to become unable to meet the obligations assumed under the respective coinsurance agreements. At September 30, 1997, related policyholder reserves carried by the coinsurers were $93,062,000 and $99,117,000, 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 $637,100,000, to 167 limited partnerships over the next 12 years (four years on a weighted average basis) in exchange for ownership interests in such partnerships. F-18 52 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- 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. On June 16, 1997, SunAmerica Capital Trust I redeemed the 9.95% Trust Originated Preferred Securities for a cash payment equal to the liquidation amount of $52,630,875 plus accrued and unpaid dividends to the redemption date. Concurrently, the Company redeemed all of the related 9.95% junior subordinated debentures, due 2044, for a liquidation amount of $54,258,650 plus accrued 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. NOTE 9 -- 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 November 1, 1998, each of the outstanding Series E Depositary Shares will convert into four and one-half shares of Common Stock. The Company may redeem the Series E Depositary Shares prior to such date, in whole or in part, at a price per share initially equal to $81, declining by $0.006111 on each day following the date of issue to $74.767 on September 1, 1998, and equal to $74.40 thereafter. The call price is payable in shares of Common Stock having an aggregate current market price, as defined, equal to such call price, plus an amount paid in cash or in Common Stock representing all accrued and unpaid dividends. In addition, should the Company call the Series E Depositary Shares prior to November 1, 1998, holders will receive 50% of the excess, if any, of four and one-half times the current F-19 53 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED) market price, as defined, of the Common Stock over $74.40, payable in shares of Common Stock. 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 (see Note 8). 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, 1997, 179,076,000 shares were outstanding and at September 30, 1996, 108,604,000 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. The Company may call the Units (and close the Contract) prior to October 31, 1999, in whole or in part, at a price per Unit initially equal to $59.829, declining by $0.008060 on each day following the date of issue to $51.108 on August 31, 1999, and equal to $50.625 thereafter. The call price is payable in shares of Common Stock having an aggregate current market price, as defined, equal to such call price, plus an amount paid in cash equal to all accrued and unpaid Unit Payments. The Company receives no proceeds from this offering until the Contracts are consummated. 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, 1997, 16,273,000 shares were outstanding and at September 30, 1996, 10,848,000 shares were outstanding. F-20 54 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED) Changes in shareholders' equity are as follows:
Years ended September 30, ------------------------------ 1997 1996 1995 -------- -------- -------- (In thousands) PREFERRED STOCK: Beginning balance............................................ $384,549 $321,642 $374,273 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) -- -- Exchange of 2,105,235 Series B Preferred Shares for 2,105,235 shares of Trust Originated Preferred Securities of SunAmerica Capital Trust I................................. -- -- (52,631) -------- -------- -------- Ending balance............................................... $248,000 $384,549 $321,642 ======== ======== ======== NONTRANSFERABLE CLASS B STOCK: Beginning balance............................................ $ 10,848 $ 10,240 $ 6,826 Conversion of 4,816,000 shares to Common Stock............... -- (4,816) -- Stock Splits................................................. 5,425 5,424 3,414 -------- -------- -------- Ending balance............................................... $ 16,273 $ 10,848 $ 10,240 ======== ======== ======== COMMON STOCK: Beginning balance............................................ $108,604 $ 44,175 $ 28,977 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............... 115 252 473 Stock Splits................................................. 59,687 54,288 14,725 -------- -------- -------- Ending balance............................................... $179,076 $108,604 $ 44,175 ======== ======== ========
F-21 55 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, --------------------------------- 1997 1996 1995 ---------- -------- --------- (In thousands) ADDITIONAL PAID-IN CAPITAL: Beginning balance.......................................... $ 304,295 $185,211 $ 188,667 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) -- -- Cost of exchange of Series B Shares for shares of Trust Originated Preferred Securities of SunAmerica Capital Trust I.......................................... -- -- (2,500) Stock options and other employee benefit plans............. (361) 11,801 17,183 Stock Splits............................................... (65,112) (59,712) (18,139) ---------- -------- --------- Ending balance............................................. $ 750,401 $304,295 $ 185,211 ========== ======== ========= RETAINED EARNINGS: Beginning balance.......................................... $ 869,215 $656,509 $ 512,571 Net income................................................. 379,050 274,427 194,206 Dividends on: Preferred Stock.......................................... (18,808) (27,063) (29,112) Nontransferable Class B Stock............................ (3,906) (4,878) (3,686) Common Stock............................................. (45,105) (29,780) (17,470) ---------- -------- --------- Ending balance............................................. $1,180,446 $869,215 $ 656,509 ========== ======== ========= NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance.......................................... $ (16,953) $ (4,699) $(150,226) Change in net unrealized gains/losses on debt securities available for sale....................................... 474,414 (44,464) 297,910 Change in net unrealized gains on equity securities available for sale....................................... 27,206 18,011 6,179 Change in adjustment to deferred acquisition costs......... (152,600) 7,600 (80,200) Tax effects of net changes................................. (122,157) 6,599 (78,362) ---------- -------- --------- Ending balance............................................. $ 209,910 $(16,953) $ (4,699) ========== ======== =========
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, 1997, restricted net assets of these consolidated life insurance subsidiaries totaled approximately $1,555,215,000, none of which is available for the payment of dividends until calendar year 1998. The combined statutory equity of the Company's five life insurance subsidiaries totaled $1,055,225,000 at September 30, 1997, $1,187,013,000 at December 31, 1996, and $943,755,000 at December 31, 1995. The combined statutory net income of these subsidiaries totaled $30,348,000 for the nine months ended September 30, 1997, $210,791,000 for the year ended December 31, 1996, and $67,144,000 for the year ended December 31, 1995. F-22 56 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK COMPENSATION PLANS At September 30, 1997, 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," then the Company's net income would have been $366,825,000 ($1.74 per share) and $269,878,000 ($1.28 per share) for the years ended September 30, 1997 and 1996, respectively. 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 43,668,525 shares to its employees in the form of either stock options, restricted stock or stock units. At September 30, 1997, 12,696,300 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 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. Deferred shares are held in escrow until the earlier of the CEO's death, disability or eighteen months following retirement. 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-23 57 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK COMPENSATION PLANS (CONTINUED) A summary of the status of the Company's stock option plans as of September 30, 1997, 1996 and 1995, and changes during the years then ended follows:
1997 1996 1995 ------------------ ------------------ ------------------ 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.............................. 12,452 $ 9.23 10,320 $ 6.82 7,482 $ 4.97 Options granted..................... 3,438 30.51 2,593 18.32 3,950 10.29 Options exercised................... (762) 4.63 (306) 5.00 (419) 4.05 Options forfeited................... (133) 16.82 (155) 8.83 (693) 8.33 ------ ------ ------ Options outstanding at end of year.............................. 14,995 14.27 12,452 9.23 10,320 6.82 ====== ======= ====== ======= ====== ======= Options exercisable at end of year.............................. 9,710 $ 9.65 8,022 $ 6.69 5,994 $ 5.27 ====== ======= ====== ======= ====== =======
The following table summarizes information about stock options outstanding at September 30, 1997.
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 $2.57............................. 2,412 3.9 years $ 1.98 2,412 $ 1.98 $4.50 to $7.15............................. 1,922 5.9 5.72 1,731 5.56 $8.11 to $12.31............................ 4,699 7.4 10.13 3,224 9.64 $14.97 to $20.46........................... 2,538 8.5 18.27 1,230 16.30 $25.33 to $39.35........................... 3,424 9.3 30.47 1,113 25.35 ------ ------ Total...................................... 14,995 7.3 14.27 9,710 9.65 ====== ========== ====== ====== =======
At September 30, 1997, 3,126,804 shares of unvested restricted stock are outstanding and deferred shares and stock units representing 2,712,000 shares of stock are outstanding. The Company granted restricted stock and stock units aggregating 370,116 shares in the year ended September 30, 1997, 527,634 shares in the year ended September 30, 1996 and 3,121,875 shares in the year ended September 30, 1995. The weighted average per share fair value of such stock at the date of grant was $23.08 in 1997, $15.83 in 1996 and $9.25 in 1995. Restrictions generally lapse either on an accelerated basis, upon achievement of defined performance goals, or over a defined length of service. Compensation cost charged to operations for all outstanding restricted stock, deferred shares and stock units amounted to $23,940,000 for the year ended September 30, 1997, $21,124,000 for the year ended September 30, 1996 and $6,519,000 for the year ended September 30, 1995. F-24 58 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- INCOME TAXES The components of the provisions for income taxes on pretax income consist of the following:
Federal State Total -------- ------- -------- (In thousands) 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 ======== ======= ======== 1995: Currently payable......................................... $ 85,688 $ 5,546 $ 91,234 Deferred.................................................. (5,370) (464) (5,834) -------- ------- -------- Total income tax expense.................................. $ 80,318 $ 5,082 $ 85,400 ======== ======= ========
Income taxes computed at the United States federal income tax rate of 35% and income taxes provided differ as follows:
Years ended September 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Amount computed at statutory rate......................... $187,968 $137,209 $ 97,862 Increases (decreases) resulting from: Affordable housing tax credits.......................... (24,436) (21,742) (17,579) State income taxes, net of federal tax benefit.......... 1,542 5,238 3,686 Dividends-received deduction............................ (12,634) (8,277) (3,271) Other, net.............................................. 5,560 5,172 4,702 -------- -------- -------- Total income tax expense.................................. $158,000 $117,600 $ 85,400 ======== ======== ========
F-25 59 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability for Deferred Income Taxes are as follows:
September 30, ----------------------- 1997 1996 --------- --------- (In thousands) DEFERRED TAX LIABILITIES: Investments......................................................... $ 125,852 $ 135,647 Deferred acquisition costs.......................................... 341,131 231,978 State income taxes.................................................. 3,428 1,048 Other liabilities................................................... 125,928 8,442 Net unrealized gains on certain debt and equity securities.......... 113,028 -- --------- --------- Total deferred tax liabilities...................................... 709,367 377,115 --------- --------- DEFERRED TAX ASSETS: Contractholder reserves............................................. (299,905) (231,296) Other assets........................................................ (25,698) (11,273) Net unrealized losses on certain debt and equity securities......... -- (9,129) --------- --------- Total deferred tax assets........................................... (325,603) (251,698) --------- --------- Deferred income taxes............................................... $ 383,764 $ 125,417 ========= =========
F-26 60 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended September 30, 1997 and 1996 follow:
First Second Third Fourth -------- -------- -------- -------- (In thousands, except per-share amounts) 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 share.......................................... $ 0.39 $ 0.42 $ 0.45 $ 0.53 ======== ======== ======== ======== 1996: Net investment income.............................. $102,126 $112,294 $128,533 $149,803 Net realized investment gains (losses)............. 1,404 (3,589) (12,629) (15,500) Fee income......................................... 53,485 62,104 66,405 66,417 General and administrative expenses................ (43,358) (49,152) (52,977) (65,163) Amortization of deferred acquisition costs......... (21,071) (24,216) (29,875) (33,014) -------- -------- -------- -------- Pretax income...................................... 92,586 97,441 99,457 102,543 Income tax expense................................. (27,800) (29,200) (29,800) (30,800) -------- -------- -------- -------- Net income......................................... $ 64,786 $ 68,241 $ 69,657 $ 71,743 ======== ======== ======== ======== Per share.......................................... $ 0.31 $ 0.32 $ 0.33 $ 0.34 ======== ======== ======== ========
F-27 61 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- BUSINESS SEGMENTS Summarized data for the Company's business segments follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ---------- ----------- -------- ----------- (In thousands) 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 ========== ========= ======== =========== 1995: Annuity operations............................ $ 934,243 $ 69,554 $246,037 $16,172,140 Broker-dealer operations...................... 35,276 868 12,017 42,441 Retirement trust services..................... 46,676 1,461 15,268 484,456 Asset management.............................. 34,427 24,069 510 86,510 Premium financing............................. 20,772 713 5,774 58,620 ---------- --------- -------- ----------- Total......................................... $1,071,394 $ 96,665 $279,606 $16,844,167 ========== ========= ======== ===========
F-28 62 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- BUSINESS SEGMENTS (CONTINUED) 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 63 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 7, 1997, appearing on page F-2 of this Annual Report on Form 10-K of SunAmerica Inc. 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. Price Waterhouse LLP Los Angeles, California November 7, 1997 S-2 64 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
September 30, --------------------------------- 1997 1996 -------------- -------------- ASSETS Investment in and advances to subsidiaries................. $2,086,981,000 $1,770,212,000 Other investments.......................................... 2,506,556,000 1,045,629,000 Other assets............................................... 219,956,000 104,940,000 -------------- -------------- Total assets............................................... $4,813,493,000 $2,920,781,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes and debentures.............................. $1,136,072,000 $ 573,335,000 Junior subordinated debentures........................... 511,894,000 245,483,000 Reserves for guaranteed investment contracts............. 226,959,000 239,050,000 Payable to brokers for purchases of securities........... 92,990,000 46,684,000 Other liabilities........................................ 261,472,000 155,671,000 -------------- -------------- Total liabilities........................................ 2,229,387,000 1,260,223,000 Shareholders' equity....................................... 2,584,106,000 1,660,558,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $4,813,493,000 $2,920,781,000 ============== ==============
CONDENSED INCOME STATEMENT
Years ended September 30, ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Dividends received from subsidiaries.............. $136,205,000 $110,256,000 $ 69,287,000 Investment income................................. 280,277,000 189,911,000 158,228,000 Net realized investment gains (losses)............ 16,835,000 4,598,000 (25,459,000) Other income...................................... 1,804,000 3,625,000 3,636,000 ------------- ------------ ------------ TOTAL INCOME...................................... 435,121,000 308,390,000 205,692,000 ------------- ------------ ------------ Interest expense on senior notes and debentures... (78,575,000) (51,062,000) (44,729,000) Interest expense on junior subordinated debentures...................................... (43,290,000) (20,902,000) (2,854,000) Interest expense on guaranteed investment contracts....................................... (19,435,000) (20,411,000) (21,482,000) General and administrative expenses, net of reimbursement from subsidiaries of $38,315,000 in 1997, $33,930,000 in 1996 and $19,095,000 in 1995............................................ 338,000 (146,000) (2,354,000) ------------- ------------ ------------ TOTAL EXPENSES.................................... (140,962,000) (92,521,000) (71,419,000) ------------- ------------ ------------ PRETAX INCOME..................................... 294,159,000 215,869,000 134,273,000 Income tax expense................................ (45,614,000) (35,404,000) (21,116,000) ------------- ------------ ------------ INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES................................. 248,545,000 180,465,000 113,157,000 Equity in undistributed net income of subsidiaries.................................... 130,505,000 93,962,000 81,049,000 ------------- ------------ ------------ NET INCOME........................................ $379,050,000 $274,427,000 $194,206,000 ============= ============ ============
S-3 65 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENT OF CASH FLOW
Years ended September 30, --------------------------------------------------- 1997 1996 1995 --------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 379,050,000 $ 274,427,000 $ 194,206,000 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries... (266,710,000) (204,218,000) (150,336,000) Net realized investment (gains) losses.............................. (16,835,000) (4,598,000) 25,459,000 Other, net............................... 74,750,000 22,644,000 46,736,000 --------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 170,255,000 88,255,000 116,065,000 --------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of investments..... (1,055,976,000) (153,640,000) 24,505,000 Dividends received from subsidiaries..... 136,205,000 110,256,000 69,287,000 Contributions of capital paid to subsidiaries........................... (115,861,000) (435,928,000) (203,476,000) --------------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES.... (1,035,632,000) (479,312,000) (109,684,000) --------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends............... (67,819,000) (61,721,000) (50,268,000) Withdrawal payments on guaranteed investment contracts.................... (31,525,000) (31,725,000) (36,472,000) Net proceeds from issuances of long-term notes and debentures.................... 559,332,000 47,478,000 51,675,000 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 for 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.............................. 1,112,099,000 380,279,000 (35,065,000) --------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.................. 246,722,000 (10,778,000) (28,684,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD..................... 110,181,000 120,959,000 149,643,000 --------------- ------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD........................... $ 356,903,000 $ 110,181,000 $ 120,959,000 =============== ============= ============= NON-CASH FINANCING ACTIVITY: Exchange of junior subordinated debentures, Series A, due 2044 for 2,105,235 shares of 9 1/4% Series B Preferred Stock and for the common securities of a subsidiary grantor trust.......................... $ -- $ -- $ 54,259,000 =============== ============= =============
S-4 66 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- INDEBTEDNESS Indebtedness consist of the following long-term notes and debentures (interest rates are as of September 30):
September 30, ------------------------------- 1997 1996 -------------- ------------ SENIOR NOTES AND DEBENTURES: 5.6% debentures due July 31, 2097 (net of unamortized discount of $43,513,000).................................. $ 131,487,000 $ -- Medium-term notes due 1998 through 2026 (5 3/8% to 7 3/8%)................................................... 248,335,000 248,335,000 8 1/8% debentures due April 28, 2023........................ 100,000,000 100,000,000 9.95% debentures due February 1, 2012....................... 100,000,000 100,000,000 6.20% notes due October 31, 1999............................ 431,250,000 -- 9% notes due January 15, 1999............................... 125,000,000 125,000,000 -------------- ------------ Total senior notes and debentures........................... 1,136,072,000 573,335,000 -------------- ------------ JUNIOR SUBORDINATED DEBENTURES: 9.95% junior subordinated debentures, Series A, due 2044.... -- 54,259,000 8.35% junior subordinated debentures, due 2044.............. 191,224,000 191,224,000 8.30% junior subordinated debentures, due 2045.............. 320,670,000 -- -------------- ------------ Total junior subordinated debentures........................ 511,894,000 245,483,000 -------------- ------------ Total indebtedness.......................................... $1,647,966,000 $818,818,000 ============== ============
On October 7, 1997, subsequent to the Company's fiscal year end, the Company issued $100,000,000 of 6.75% notes due October 1, 2007. In addition, the Company is the issuer of the following guaranteed investment contracts ("GICs") (interest rates are as of September 30):
September 30, ----------------------------- 1997 1996 ------------ ------------ 8 1/2% GIC due serially through 2002 (including interest credited of $1,275,000 in 1997 and $1,252,000 in 1996)...... $187,414,000 $190,627,000 8 3/8% GIC due serially through 2003 (including interest credited of $203,000 in 1997 and $254,000 in 1996).......... 30,308,000 39,294,000 7 3/8% GIC due in 2018 (including interest credited of $303,000 in 1997 and $272,000 in 1996)...................... 9,237,000 9,129,000 ------------ ------------ Total guaranteed investment contracts......................... $226,959,000 $239,050,000 ============ ============
Aggregate debt service payments (i.e., principal and interest payments), including GICs, indebtedness and the 6.75% notes, are due as follows: 1998, $183,560,000; 1999, $291,960,000; 2000, $574,641,000; 2001, $138,995,000; 2002, $297,373,000; and $4,274,693,000, in the aggregate, thereafter. S-5 67 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 $332,959,000 to 153 limited partnerships over the next 6 years (four years on a weighted average basis) in exchange for ownership interests in such partnerships. S-6 68 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV -- REINSURANCE AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
Percentage Ceded Assumption of amount Gross to other from other Net assumed amount companies companies amount to net ---------- ---------- ---------- ---------- ---------- 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% ========== ========== ======= ========== ====== 1995: Life insurance in force..... $1,907,878 $1,592,650 $ -- $ 315,228 --% ========== ========== ======= ========== ====== Premiums: Annuities and other single premiums............... $ 944,742 $ -- $ -- $ 944,742 --% Annual life insurance premiums............... 16,225 16,225 -- -- -- ---------- ---------- ------- ---------- ------ Total premiums.... $ 960,967 $ 16,225 $ -- $ 944,742 --% ========== ========== ======= ========== ======
S-7 EX-3.(J) 2 EXHIBIT 3(J) (MODULE) 1 EXHIBIT 3(j) STATE OF MARYLAND 512294 STATE DEPARTMENT OF ASSESSMENTS AND TAXATION 301 West Preston Street, Baltimore, Maryland 21201 DATE: February 18, 1997 This is to advise you that the Articles of Amendment for SunAmerica Inc. were received and approved for record on February 18, 1997 at 2:43 P.M. FEE PAID: $3,550.00 SUNAMERICA INC. ARTICLES OF AMENDMENT SunAmerica Inc., a Maryland corporation, having its principal office in the State of Maryland in Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by striking out the first paragraph of Article Fifth of the Chapter and inserting in lieu thereof the following: ARTICLES FIFTH: the total number of shares of stock of all classes which the Corporation has authority to issue is 410,000,000 shares, which consists of 350,000,000 shares of Common Stock of the par value of One Dollar ($1) each for an aggregate par value of Three Hundred Fifty Million Dollars ($350,000,000), 25,000,000 shares of Nontransferable Class B Stock of the par value of One Dollar ($1) each for an aggregate par value of Twenty- Five Million Dollars ($25,000,000), 15,000,000 shares of Transferable Class B Stock of the par value of One Dollar ($1) each for an aggregate par value of Fifteen Million Dollars ($15,000,000), and 20,000,000 shares of Preferred Stock without par value. SECOND: (a) As of immediately before this amendment, the total number of shares of stock of all classes which the Corporation has authority to issue is 235,000,000 shares of which 175,000,000 shares are Common Stock (par value $1.00 per shares), 25,000,000 shares are Nontransferable Class B Stock (par value of $1.00 per share), 15,000,000 shares of Transferable Class B Stock (par value $1.00 per share), and 20,000,000 shares of Preferred Stock (without par value). (b) As amended, the total number of shares of stock of all classes which the Corporation has authority to issue is 410,000,000 shares, of which 350,000,000 shares are Common stock (par value $1.00 per share), 25,000,000 shares are Nontransferable Class B Stock (par value $1.00 per share), 15,000,000 shares are Transferable Class B Stock (par value $1.00 per share) and 20,000,000 shares are Preferred Stock (without par value). (c) The aggregate par value of all shares having a par value is $215,000,000 before the amendment and $390,000,000 as amended. (d) The shares of stock of the Corporation are divided into classes, but the descriptions of each class of stock of the Corporation are not changed by the amendment. THIRD: The foregoing amendment to the Charter of the Corporation has been advised by the Board of Directors and approved by the stockholders of the Corporation. IN WITNESS WHEREOF, SunAmerica Inc. has caused these presents to be signed in its name and on its behalf by its Vice Chairman and witnessed by its Secretary on February 14, 1997. SUNAMERICA INC. /s/ Jay S. Wintrob By:--------------------- Jay W. Wintrob Vice Chairman WITNESS: /s/ Susan L. Harris - ----------------------- Susan L. Harris Secretary THE UNDERSIGNED, Vice Chairman of SunAmerica Inc., who executed on behalf of the Corporation the foregoing Articles of Amendment of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles of Amendment to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ Jay S. Wintrob ------------------------- Jay S. Wintrob Vice Chairman EX-10.(D) 3 EXHIBIT 10.(D) 1 1 EXHIBIT 10(v) SUNAMERICA INC. List of Executive 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 17, 1995, between the Company and Joseph M. Tumbler, is incorporated herein by reference to Exhibit 10(a) 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 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(d) Employment Agreement, dated August 15, 1997, between the Company and Gary W. Krat. 10(e) 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(f) 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(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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) 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(r) 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(s) 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(t) 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(u) 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.
EX-10.(V) 4 EXHIBIT 10.(V) 1 1 EXHIBIT 10(v) SUNAMERICA INC. List of Executive 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 17, 1995, between the Company and Joseph M. Tumbler, is incorporated herein by reference to Exhibit 10(a) 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 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(d) Employment Agreement, dated August 15, 1997, between the Company and Gary W. Krat. 10(e) 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(f) 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(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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) 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(r) 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(s) 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(t) 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(u) 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.
EX-11 5 EXHIBIT 11 (MODULE) 1 EXHIBIT 11 SUNAMERICA INC. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share amounts)
Years ended September 30, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period: Common Stock issued and outstanding at beginning of period 179,179 163,245 161,115 149,235 144,060 Average number of common shares issued upon exercise of employee stock options or under other employee stock plans 3,461 417 1,622 372 3,587 Average number of common stock equivalent shares arising from outstanding employee stock options 5,737 6,001 3,980 3,980 4,200 Average number of common stock equivalent shares arising from other employee stock plans 1,446 675 612 -- -- Average number of shares issuable upon conversion of convertible preferred stock: Series A Mandatory Conversion Premium Dividend Preferred Stock -- -- -- 9,735 16,773 Series D Mandatory Conversion Premium Dividend Preferred Stock -- 3,876 22,013 22,515 12,528 Series E Mandatory Conversion Premium Dividend Preferred Stock 14,415 16,212 -- -- -- Average number of shares issuable upon conversion of Premium Equity Redemption Cumulative Security Units 3,520 -- -- -- -- Average number of shares issued upon redemption of Series A Depositary Shares on August 16, 1994 -- -- -- 1,410 -- Average number of shares issued upon redemption of Series D Depositary Shares on January 2, 1996 -- 11,463 -- -- -- Average number of shares redeemed upon exchange of Common Stock for Nontransferable Class B Stock on June 6, 1996 -- (8) -- -- -- -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period 207,758 201,881 189,342 187,247 181,148 ======== ======== ======== ======== ======== EXHIBIT 11 SUNAMERICA INC. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share amounts) (Continued) Years ended September 30, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Earnings applicable to common stock: Income before cumulative effect of change in accounting for income taxes $379,050 $274,427 $194,206 $165,301 $127,011 Less preferred dividend requirements other than those related to convertible issues: 9-1/4% Preferred Stock, Series B (5,754) (8,124) (11,440) (12,996) (12,996) SunAmerica Adjustable Rate Cumulative Preferred Stock, Series C (28) (3,408) (3,543) (3,424) (3,478) -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes applicable to common stock 373,268 262,895 179,223 148,881 110,537 Cumulative effect of change in accounting for income taxes -- -- -- (33,500) -- -------- -------- -------- -------- -------- Net income applicable to common stock $373,268 $262,895 $179,223 $115,381 $110,537 ======== ======== ======== ======== ======== Earnings per common and common equivalent share: Income before cumulative effect of change in accounting for income taxes $ 1.80 $ 1.30 $ 0.95 $ 0.80 $ 0.61 Cumulative effect of change in accounting for income taxes -- -- -- (0.18) -- -------- -------- -------- -------- -------- Net income $ 1.80 $ 1.30 $ 0.95 $ 0.62 $ 0.61 ======== ======== ======== ======== ========
EX-12.(A) 6 EXHIBIT 12(A) (MODULE) 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, --------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 537,050 $ 392,027 $ 279,606 $ 240,001 $ 184,011 Add: Interest incurred on senior indebtedness 106,279 69,033 55,985 50,292 36,246 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- --------- --------- --------- --------- --------- Total earnings $ 685,203 $ 481,295 $ 337,264 $ 290,293 $ 220,257 ========= ========= ========= ========= ========= Fixed charges: Interest incurred on senior indebtedness $ 106,279 $ 69,033 $ 55,985 $ 50,292 $ 36,246 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- --------- --------- --------- --------- --------- Total fixed charges $ 148,153 $ 89,268 $ 57,658 $ 50,292 $ 36,246 ========= ========= ========= ========= ========= 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) 4.6x 5.4x 5.8x 5.8x 6.1x ========= ========= ========= ========= ========= 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, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- Earnings: (In thousands, except ratios) Pretax income $ 537,050 $ 392,027 $ 279,606 $ 240,001 $ 184,011 ---------- ---------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 644,426 410,269 258,730 254,464 308,910 Guaranteed investment contracts 314,144 252,027 213,340 150,424 136,984 Trust deposits 9,726 9,968 10,519 8,516 8,438 Senior indebtedness 106,279 69,033 55,985 50,292 36,246 ---------- ---------- --------- --------- --------- Total interest incurred 1,074,575 741,297 538,574 463,696 490,578 ---------- ---------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- ---------- ---------- --------- --------- --------- Total earnings $1,653,499 $1,153,559 $ 819,853 $ 703,697 $ 674,589 ========== ========== ========= ========= ========= Fixed charges: Interest incurred on: Fixed annuity contracts $ 644,426 $ 410,269 $ 258,730 $ 254,464 $ 308,910 Guaranteed investment contracts 314,144 252,027 213,340 150,424 136,984 Trust deposits 9,726 9,968 10,519 8,516 8,438 Senior indebtedness 106,279 69,033 55,985 50,292 36,246 ---------- ---------- --------- --------- --------- Total interest incurred 1,074,575 741,297 538,574 463,696 490,578 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- ---------- ---------- --------- --------- --------- Total fixed charges $1,116,449 $ 761,532 $ 540,247 $ 463,696 $ 490,578 ========== ========== ========= ========= ========= 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 1.4x ========== ========== ========= ========= ========
EX-12.(B) 7 EXHIBIT 12(B) (MODULE) 1 EXHIBIT 12(b) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED 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, ---------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 537,050 $ 392,027 $ 279,606 $ 240,001 $ 184,011 Add: Interest incurred on senior indebtedness 106,279 69,033 55,985 50,292 36,246 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- --------- --------- --------- --------- --------- Total earnings $ 685,203 $ 481,295 $ 337,264 $ 290,293 $ 220,257 ========= ========= ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Senior indebtedness $ 106,279 $ 69,033 $ 55,985 $ 50,292 $ 36,246 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis 26,648 38,662 41,914 54,528 42,675 --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $ 174,801 $ 127,930 $ 99,572 $ 104,820 $ 78,921 ========= ========= ========= ========= ========= 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) 3.9x 3.8x 3.4x 2.8x 2.8x ========= ========= ========= ========= ======== EXHIBIT 12(b) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (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, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 537,050 $ 392,027 $ 279,606 $ 240,001 $ 184,011 ---------- ---------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 644,426 410,269 258,730 254,464 308,910 Guaranteed investment contracts 314,144 252,027 213,340 150,424 136,984 Trust deposits 9,726 9,968 10,519 8,516 8,438 Senior indebtedness 106,279 69,033 55,985 50,292 36,246 ---------- ---------- --------- --------- --------- Total interest incurred 1,074,575 741,297 538,574 463,696 490,578 ---------- ---------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- ---------- ---------- --------- --------- --------- Total earnings $1,653,499 $1,153,559 $ 819,853 $ 703,697 $ 674,589 ========== ========== ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Fixed annuity contracts $ 644,426 $ 410,269 $ 258,730 $ 254,464 $ 308,910 Guaranteed investment contracts 314,144 252,027 213,340 150,424 136,984 Trust deposits 9,726 9,968 10,519 8,516 8,438 Senior indebtedness 106,279 69,033 55,985 50,292 36,246 ---------- ---------- --------- --------- --------- Total interest incurred 1,074,575 741,297 538,574 463,696 490,578 Dividends paid on preferred securities of grantor trusts 41,874 20,235 1,673 -- -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis 26,648 38,662 41,914 54,528 42,675 ---------- ---------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $1,143,097 $ 800,194 $ 582,161 $ 518,224 $ 533,253 ========== ========== ========= ========= ========= Ratios 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) 1.4x 1.4x 1.4x 1.4x 1.3x ========== ========== ========= ========= =========
EX-21 8 EXHIBIT 21 (MODULE) 1 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 NAME OF COMPANY IMMEDIATE PARENT =============== ======================= ARIZONA CORPORATIONS: % Anchor National Life Insurance Company 100 SunAmerica Life Insurance Company of America 100 SunAmerica National Life Insurance Company 100 CALIFORNIA CORPORATIONS: CalFarm Life Insurance Company 100 Imperial Premium Finance of California, Inc. 100 COLORADO CORPORATION: Resources Trust Company 100 DELAWARE CORPORATIONS: 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 Fund Services, Inc. 100 Imperial Premium Finance, Inc. 100 SunAmerica Securities, Inc. 100 GEORGIA CORPORATIONS: SunAmerica Financial, Inc. 100 Koegler Investment Advisory, Inc. 100 NEW YORK CORPORATIONS: Advantage Capital Corporation 100 First SunAmerica Life Insurance Company 100 John Alden Life Insurance Company of New York 100
EX-23 9 EXHIBIT 23 (MODULE) 1 CONSENT OF INDEPENDENT ACCOUNTANTS -------------------------------- We hereby consent to the incorporation by reference in the Prospectuses constituting part of the 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 7, 1997 appearing on page F-2 of this Form 10-K. 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. Price Waterhouse LLP Los Angeles, California December 10, 1997 EX-27 10 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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1997 SEP-30-1997 18,523,655 0 0 96,541 3,139,309 81,569 24,408,178 993,349 0 1,118,582 35,636,886 19,998,418 0 0 0 1,136,072 0 248,000 195,349 2,140,757 35,636,886 0 1,637,947 (29,203) 317,703 958,570 165,089 0 537,050 158,000 379,050 0 0 0 379,050 1.80 1.80 0 0 0 0 0 0 0
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