-----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, LkN/KaQYSDyQJBsCR3+WjxvL0ZmInkYAuDeY0i7+Cr4vZIUJ8pRHsBl1jQ2Kx8QV 1hjOpH+Z9B/DtVcWPDroDA== 0000006342-98-000002.txt : 19980218 0000006342-98-000002.hdr.sgml : 19980218 ACCESSION NUMBER: 0000006342-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR NATIONAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000006342 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860198983 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-47472 FILM NUMBER: 98540375 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: C/O THOMAS B PHILLIPS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3107726056 MAIL ADDRESS: STREET 1: 1 SUN AMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: ANCHOR LIFE INSURANCE CO DATE OF NAME CHANGE: 19600201 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 33-47472 ANCHOR NATIONAL LIFE INSURANCE COMPANY Incorporated in Arizona 86-0198983 IRS Employer Identification No. 1 SunAmerica Center, Los Angeles, California 90067-6022 Registrant's telephone number, including area code: (310) 772-6000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes x No --- --- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON FEBRUARY 12, 1997 WAS AS FOLLOWS: Common Stock (par value $1,000 per share) 3,511 shares ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX Page Number(s) --------- Part I - Financial Information Consolidated Balance Sheet (Unaudited) - December 31, 1997 and September 30, 1997 3 - 4 Consolidated Income Statement (Unaudited) - Three Months Ended December 31, 1997 and 1996 5 Consolidated Statement of Cash Flows (Unaudited) - Three Months Ended December 31, 1997 and 1996 6 - 7 Note to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 21 Part II - Other Information 22 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Unaudited) December 31, September 30, 1997 1997 --------------- -------------- ASSETS Investments: Cash and short-term investments $ 264,176,000 $ 113,580,000 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: December 1997, $1,914,265,000; September 1997, $1,942,485,000) 1,957,256,000 1,986,194,000 Mortgage loans 334,156,000 339,530,000 Common stocks, at fair value (cost: December 1997, $115,000; September 1997, $271,000) 288,000 1,275,000 Real estate 24,000,000 24,000,000 Other invested assets 40,196,000 143,722,000 --------------- -------------- Total investments 2,620,072,000 2,608,301,000 Variable annuity assets 9,602,687,000 9,343,200,000 Accrued investment income 23,328,000 21,759,000 Deferred acquisition costs 564,931,000 536,155,000 Other assets 71,551,000 61,524,000 --------------- -------------- TOTAL ASSETS $12,882,569,000 $12,570,939,000 =============== ==============
See accompanying note 3 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) December 31, September 30, 1997 1997 --------------- -------------- LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts $ 2,087,965,000 $2,098,803,000 Reserves for guaranteed investment contracts 301,212,000 295,175,000 Payable to brokers for purchases of securities 6,959,000 263,000 Income taxes currently payable 53,218,000 32,265,000 Other liabilities 107,073,000 122,728,000 --------------- -------------- Total reserves, payables and accrued liabilities 2,556,427,000 2,549,234,000 --------------- -------------- Variable annuity liabilities 9,602,687,000 9,343,200,000 --------------- -------------- Subordinated notes payable to Parent 36,311,000 36,240,000 --------------- -------------- Deferred income taxes 68,328,000 67,047,000 --------------- -------------- Shareholder's equity: Common Stock 3,511,000 3,511,000 Additional paid-in capital 308,674,000 308,674,000 Retained earnings 288,976,000 244,628,000 Net unrealized gains on debt and equity securities available for sale 17,655,000 18,405,000 --------------- -------------- Total shareholder's equity 618,816,000 575,218,000 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $12,882,569,000 $12,570,939,000 =============== ==============
See accompanying note 4 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED INCOME STATEMENT (Unaudited) Three Months Ended December 31, ------------------------------- 1997 1996 ------------- ------------- Investment income $ 59,855,000 $ 46,712,000 ------------- ------------- Interest expense on: Fixed annuity contracts (27,821,000) (25,191,000) Guaranteed investment contracts (4,550,000) (6,038,000) Senior indebtedness (193,000) (181,000) Subordinated notes payable to Parent (809,000) (758,000) ------------- ------------- Total interest expense (33,373,000) (32,168,000) ------------- ------------- NET INVESTMENT INCOME 26,482,000 14,544,000 ------------- ------------- NET REALIZED INVESTMENT GAINS (LOSSES) 20,935,000 (19,116,000) ------------- ------------- Fee income: Variable annuity fees 44,364,000 30,606,000 Net retained commissions 10,461,000 7,796,000 Surrender charges 1,289,000 1,350,000 Asset management fees 6,903,000 6,418,000 Other fees 967,000 993,000 ------------- ------------- TOTAL FEE INCOME 63,984,000 47,163,000 ------------- ------------- GENERAL AND ADMINISTRATIVE EXPENSES (23,019,000) (22,395,000) ------------- ------------- AMORTIZATION OF DEFERRED ACQUISITION COSTS (17,202,000) (13,817,000) ------------- ------------- ANNUAL COMMISSIONS (3,526,000) (1,433,000) ------------- ------------- PRETAX INCOME 67,654,000 4,946,000 Income tax expense (23,306,000) (1,600,000) ------------- ------------- NET INCOME $ 44,348,000 $ 3,346,000 ============= =============
See accompanying note 5 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended December 31, ------------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 44,348,000 $ 3,346,000 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts 27,821,000 25,191,000 Guaranteed investment contracts 4,550,000 6,038,000 Net realized investment losses (gains) (20,935,000) 19,116,000 Amortization (accretion) of net premiums (discounts) on investments 1,966,000 (2,615,000) Amortization of goodwill 293,000 291,000 Provision for deferred income taxes 1,682,000 (5,305,000) Change in: Accrued investment income (1,569,000) (729,000) Deferred acquisition costs (28,376,000) (28,927,000) Other assets (10,320,000) (7,788,000) Income taxes currently payable 20,953,000 2,321,000 Other liabilities (4,036,000) 3,924,000 Other, net 126,000 (6,000) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 36,503,000 14,857,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks (456,172,000) (1,068,608,000) Mortgage loans --- (25,124,000) Other investments, excluding short-term investments --- (3,108,000) Sales of: Bonds, notes and redeemable preferred stocks 288,402,000 833,249,000 Other investments, excluding short-term investments 43,135,000 856,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks 214,105,000 67,201,000 Mortgage loans 5,996,000 --- Other investments, excluding short-term investments 67,475,000 7,027,000 ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 162,941,000 (188,507,000) ------------ ------------
See accompanying note 6 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (Unaudited) Three Months Ended December 31, ------------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts $ 261,968,000 $ 325,993,000 Guaranteed investment contracts 5,619,000 5,000,000 Net exchanges from the fixed accounts of variable annuity contracts (242,466,000) (82,234,000) Withdrawal payments on: Fixed annuity contracts (49,414,000) (25,292,000) Guaranteed investment contracts (4,131,000) (5,711,000) Claims and annuity payments on fixed annuity contracts (8,876,000) (8,741,000) Net receipts from (repayments of) other short-term financings (11,548,000) 10,308,000 Capital contributions received --- 28,411,000 ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (48,848,000) 247,734,000 ------------ ------------ NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 150,596,000 74,084,000 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 113,580,000 122,058,000 ------------ ------------ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 264,176,000 $ 196,142,000 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness $ 318,000 $ 288,000 ============ ============ Income taxes paid $ 794,000 $ 4,584,000 ============ ============
See accompanying note 7 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation --------------------- Anchor National Life Insurance Company (the "Company") is an indirect wholly owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of December 31, 1997 and September 30, 1997, and the results of its consolidated operations and its consolidated cash flows for the three months ended December 31, 1997 and 1996. The results of operations for the three months ended December 31, 1997 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 30, 1997, contained in the Company's Annual Report on Form 10-K. 8 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART I - FINANCIAL INFORMATION ITEM 2 - 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 Anchor National Life Insurance Company (the "Company") for the three months ended December 31, 1997 ("Fiscal 1998") and December 31, 1996 ("Fiscal 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 or profitability of the Company's activities. Forward-looking statements are necessarily based upon 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 $44.3 million in Fiscal 1998, compared with $3.3 million in Fiscal 1997. PRETAX INCOME totaled $67.7 million in Fiscal 1998 and $4.9 million in Fiscal 1997. This significant increase in pretax income primarily resulted from increased net realized investment gains, increased net investment income and increased fee income. 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 $26.5 million in Fiscal 1998 from $14.5 million in Fiscal 1997. These amounts equal 4.22% on average invested assets (computed on a daily basis) of $2.51 billion in Fiscal 1998 and 2.32% on average invested assets of $2.50 billion in Fiscal 1997. 9 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 $72.6 million in Fiscal 1998 and $150.5 million in Fiscal 1997. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 4.06% in Fiscal 1998 and 1.99% in Fiscal 1997. Investment income (and the related yields on average invested assets) totaled $59.9 million (9.54%) in Fiscal 1998, compared with $46.7 million (7.46%) in Fiscal 1997. Investment income and the related yields in Fiscal 1998 primarily reflect the higher returns realized on the Company's investments in limited partnerships. Partnership income increased to $15.2 million (for a yield of 400.95% on related average assets of $15.1 million) in Fiscal 1998, compared with $0.7 million (for a yield of 6.71% on related average assets of $44.6 million) in Fiscal 1997. Partnership 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. Total interest expense equalled $33.4 million in Fiscal 1998 and $32.2 million in Fiscal 1997. The average rate paid on all interest-bearing liabilities was 5.48% in Fiscal 1998, compared with 5.47% in Fiscal 1997. Interest-bearing liabilities averaged $2.44 billion during Fiscal 1998, compared with $2.35 billion during Fiscal 1997. Guaranteed Investment Contract ("GIC") premiums totaled $5.6 million in Fiscal 1998 and $5.0 million in Fiscal 1997. The Company does not actively market GICs; consequently, premiums may vary substantially from period to period. The GICs issued by the Company generally guarantee the payment of principal and interest at fixed or variable rates for a term of three to five years. Contracts that are purchased by banks for their long-term portfolios 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. NET REALIZED INVESTMENT GAINS totaled $20.9 million in Fiscal 1998, compared with net realized investment losses of $19.1 million in Fiscal 1997. There were no impairment writedowns in Fiscal 1998. Net realized investment losses in Fiscal 1997 include impairment writedowns of $16.1 million. Therefore, the Company realized $3.0 million of net losses from sales of investments in Fiscal 1997. The Company sold invested assets, principally bonds and notes, aggregating $310.3 million and $741.6 million in Fiscal 1998 and Fiscal 1997, 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 and losses from sales of investments fluctuate from period to period, and represent 1.70% and 0.48% of average invested assets for Fiscal 1998 and Fiscal 1997, respectively. Active portfolio management involves the ongoing evaluation of asset 10 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 in Fiscal 1997 reflect $15.7 million of provisions applied to non-income producing land in Arizona. The statutory carrying value of this land had been guaranteed by the Company's ultimate Parent, SunAmerica Inc. ("SunAmerica"). SunAmerica made a capital contribution of $28.4 million on December 31, 1996 to the Company through the Company's direct parent in exchange for the termination of its guaranty with respect to this land. Accordingly, the Company reduced the carrying value of this land to estimated fair value to reflect the termination of the guaranty. Impairment writedowns, on an annualized basis, represent 2.58% of average invested assets for Fiscal 1997. For the seventeen fiscal quarters beginning October 1, 1993, impairment writedowns as a percentage of average invested assets have ranged up to 3.64% and have averaged 0.45%. 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 $44.4 million in Fiscal 1998 and $30.6 million in Fiscal 1997. 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 $9.40 billion during Fiscal 1998 and $6.60 billion during Fiscal 1997. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, have aggregated $1.46 billion since December 31, 1996. Variable annuity premiums increased to $422.1 million in Fiscal 1998 from $226.8 million in Fiscal 1997. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $684.0 million and $589.5 million in Fiscal 1998 and Fiscal 1997, 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. Also, recent administrative budget proposals include the proposed taxation of exchanges involving variable annuity contracts and reallocation within variable annuity contracts and certain other proposals relating to annuities (see "Regulation"). NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiary, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $10.5 million in Fiscal 1998 and $7.8 million in Fiscal 1997. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $3.83 billion in Fiscal 1998 and $2.03 billion in Fiscal 1997. The increases in sales and net retained commissions reflect a greater number of registered 11 representatives, higher average production per representative and generally favorable market conditions. Increases in net retained commissions may not be proportionate to increases in sales primarily due to differences in sales mix. SURRENDER CHARGES on fixed and variable annuities totaled $1.3 million in Fiscal 1998, compared with $1.4 million in Fiscal 1997. 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 $268.5 million in Fiscal 1998, compared with $238.1 million in Fiscal 1997. These payments represent, 9.4% and 11.4%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity withdrawals from the separate accounts totaling $219.1 million in Fiscal 1998 (9.4% of average variable annuity reserves) and $176.0 million (10.7% of average variable annuity reserves) in Fiscal 1997. Surrender charges have decreased in Fiscal 1998, while withdrawal payments have increased, due to policies coming off surrender charge restrictions. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SunAmerica Asset Management Corp. Such fees totaled $6.9 million on average assets managed of $2.69 billion in Fiscal 1998 and $6.4 million on average assets managed of $2.21 billion in Fiscal 1997. 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, have aggregated $558.3 million since December 31, 1996. Mutual fund sales totaled $165.8 million in Fiscal 1998, up 166% from the $62.3 million in Fiscal 1997. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $92.0 million in Fiscal 1998 and $103.7 million in Fiscal 1997. The significant increase in sales during Fiscal 1998 over those in Fiscal 1997 principally resulted from the introduction in November 1996 of the Company's "Style Select Series" product. GENERAL AND ADMINISTRATIVE EXPENSES totaled $23.0 million in Fiscal 1998 and $22.4 million in Fiscal 1997. 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 $17.2 million in Fiscal 1998, compared with $13.8 million in Fiscal 1997. The increase in amortization during Fiscal 1998 was primarily due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other direct selling costs. ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company's variable annuity contracts. Substantially all of the Company's currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. Annual commissions totaled $3.5 million in Fiscal 1998 and $1.4 million in Fiscal 1997. The increase in annual commissions reflects increased sales of annuities that offer this commission option. The Company estimates that approximately 50% of the average balances of its variable annuity products is currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods. 12 INCOME TAX EXPENSE totaled $23.3 million in Fiscal 1998, compared with $1.6 million in Fiscal 1997, representing effective annualized tax rates of 34% and 32%, respectively. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased 7.6% to $618.8 million at December 31, 1997 from $575.2 million at September 30, 1997, primarily due to $44.3 million of net income recorded in Fiscal 1998. INVESTED ASSETS at December 31, 1997 totaled $2.62 billion, compared with $2.61 billion at September 30, 1997. The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company's need for liquidity and other similar factors. THE BOND PORTFOLIO, which constitutes 74% of the Company's total investment portfolio (at amortized cost), had an aggregate fair value that exceeded its amortized cost by $43.0 million at December 31, 1997, compared with an excess of $43.7 million at September 30, 1997. At December 31, 1997, the Bond Portfolio (at amortized cost, excluding $6.1 million of redeemable preferred stocks) included $1.86 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 $51.2 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 1997, approximately $1.75 billion of the Bond Portfolio was investment grade, including $614.7 million of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At December 31, 1997, the Bond Portfolio included $162.0 million (at amortized cost with a fair value of $170.4 million) of bonds that were not investment grade. Based on their December 31, 1997 amortized cost, these non- investment-grade bonds accounted for 1.3% of the Company's total assets and 6.3% of its invested assets. 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 December 31, 1997. The table on the following page summarizes the Company's rated bonds by rating classification as of December 31, 1997. 13 RATED BONDS BY RATING CLASSIFICATION (dollars in thousands)
Issues not rated by S&P/Moody's/ Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total - ---------------------------------------------- ----------------------------------- ----------------------------------- S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated [DCR]/{Fitch} Amortized fair category Amortized fair Amortized invested fair category (1) cost value (2) cost value cost assets(3) value - --------------- ----------- ----------- -------- ----------- ------------ ----------- --------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] {AAA to A-} $ 929,790 $ 949,144 1 $ 139,545 $ 146,168 $ 1,069,335 41.50% $ 1,095,312 BBB+ to BBB- (Baal to Baa3) [BBB+ to BBB-] {BBB+ to BBB-} 520,423 526,341 2 156,398 158,507 676,821 26.26 684,848 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-} 13,516 14,792 3 13,803 13,917 27,319 1.06 28,709 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-} 110,320 115,801 4 21,241 22,683 131,561 5.11 138,484 CCC+ to C (Caa to C) [CCC] {CCC+ to C-} --- --- 5 3,000 3,118 3,000 0.12 3,118 C1 to D [DD] {D} --- --- 6 104 104 104 0.00 104 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RATED ISSUES $ 1,574,049 $ 1,606,078 $ 334,091 $ 344,497 $ 1,908,140 $ 1,950,575 =========== =========== =========== =========== =========== =========== Footnotes appear on the following page.
14 Footnotes to the table of rated bonds by rating classification -------------------------------------------------------------- (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 $51.2 million (at amortized cost) of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. (3) At amortized cost. 15 Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $296.5 million at December 31, 1997. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At December 31, 1997, Secured Loans consisted of $168.2 million of publicly traded securities and $128.3 million of privately traded securities. These Secured Loans are composed of loans to 80 borrowers spanning 25 industries, with 22% of these assets (at amortized cost) concentrated in financial institutions. No other industry concentration constituted more than 11% of these assets. While the trading market for the Company's privately traded Secured Loans is more limited than for publicly traded issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory rating guidelines established by the NAIC. MORTGAGE LOANS aggregated $334.2 million at December 31, 1997 and consisted of 69 commercial first mortgage loans with an average loan balance of approximately $4.8 million, collateralized by properties located in 20 states. Approximately 23% of this portfolio was multifamily residential, 17% was office, 15% was manufactured housing, 13% was hotels, 11% was industrial, 11% was retail, and 10% was other types. At December 31, 1997, approximately 13% and 12% of this portfolio was secured by properties located in New York and California, respectively, and no more than 9% of this portfolio was secured by properties located in any other single state. At December 31, 1997, there were four mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 17% of this portfolio. At December 31, 1997, approximately 22% of the mortgage loan portfolio consisted of loans with balloon payments due before January 1, 2001. During Fiscal 1998 and Fiscal 1997, 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 December 31, 1997, approximately 17% 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 multi-family 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. 16 OTHER INVESTED ASSETS aggregated $40.2 million at December 31, 1997, including $14.3 million of investments in limited partnerships and an aggregate of $25.9 million of miscellaneous investments, including policy loans,residuals and leveraged leases. The Company's limited partnership interests, accounted for by using the cost method of accounting, are invested primarily in a combination of debt and equity securities. 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 or other restrictions in order to encourage persistency. Approximately 77% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at December 31, 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 December 31, 1997, these assets had an aggregate fair value of $2.51 billion with a duration of 3.8. The Company's fixed-rate liabilities include fixed annuities and GICs. At December 31,1997, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $2.32 billion with a duration of 1.4. The Company's potential exposure due to a relative 10% increase in interest rates prevalent at December 31, 1997 is a loss of approximately $35.9 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 17 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 December 31, 1997, the Company had one outstanding Swap Agreement with a notional principal amount of $15.9 million. This agreement matures in December 2024. 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. 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. 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 risk associated with the Company's Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its 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 value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, 18 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 $0.8 million of mortgage loans at December 31, 1997 (at amortized cost, with a fair value of $0.8 million). At December 31, 1997 defaulted investments constituted less than 0.1% of total invested assets. At September 30, 1997, defaulted investments totaled $1.4 million, including $0.5 million of bonds and notes and $0.9 million of mortgage loans, and constituted 0.1% 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 December 31, 1997, approximately $1.77 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $48.8 million, while approximately $145.3 million of the Bond Portfolio had an aggregate unrealized loss of $5.8 million. In addition, the Company's investment portfolio currently provides approximately $22.5 million of monthly cash flow from scheduled principal and interest payments. 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. 19 The Company relies significantly on computer systems and applications in its daily operations. Many of these systems and applications are not presently year 2000 compliant. The Company's business, financial condition and results of operations could be materially and adversely affected by the failure of the Company's systems and applications (and those operated by third parties interfacing with the Company's systems and applications) to properly operate or manage dates beyond the year 1999. The Company has a coordinated plan to repair or replace these noncompliant systems and to obtain similar assurances from third parties interfacing with the Company's systems and applications and expects to significantly complete its plan by the end of calendar year 1998. In fiscal year 1997, the Company recorded a $5.0 million provision for estimated programming costs to make necessary repairs of certain specific noncompliant systems. Management believes that this provision is adequate and does not anticipate any material future expenses associated with the repair phase of this project. Management also expects to make an additional $6.2 million expenditure to replace certain other specific noncompliant systems, which expenditure will be capitalized as software costs and amortized over future periods. REGULATION The Company is subject to regulation and supervision by the insurance regulatory agencies of the states in which it is 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 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 and regulations relating to product design, actuarial standards 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. 20 SunAmerica Asset Management Corp., a subsidiary of the Company, is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. The mutual funds that it markets are subject to regulation under the Investment Company Act of 1940. SunAmerica Asset Management 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 are subject to regulation by the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. The Company's broker-dealer subsidiary, Royal Alliance Associates, Inc., is subject to regulation and supervision by the states in which it transacts 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 subsidiary's business and accounts at any time. From time to time, Federal initiatives are proposed that could affect the Company's businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance products. Recent administration budget proposals include the proposed taxation of exchanges involving variable annuity contracts and reallocations within variable annuity contracts and certain other proposals relating to annuities. The Company believes these proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong popular and industry opposition to them. Other proposals made in recent years to limit the tax deferral of annuities have not been enacted. The Company believes that certain of the proposals, if implemented, would have an adverse effect on the Company's ability to sell variable annuities, and, consequently, on its results of operations. However, the Company would not expect this to materially impact earnings in the near term because the Company believes that adoption of the administration proposals, however unlikely, would reduce annuity surrenders on the existing block of variable annuity contracts and the ongoing earnings potential arising from that block would offset the near-term economic impact of the potential decrease in sales. 21 ANCHOR NATIONAL LIFE INSURANCE COMPANY PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable. Item 4. Submissions of Matters to a Vote of Security Holders ---------------------------------------------------- Not applicable. Item 5. Other Information ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K -------------------------------- EXHIBITS Exhibit No. Description - ------- ----------- 27 Financial Data Schedule. REPORTS ON FORM 8-K No Current Report on Form 8-K was filed during the three months ended December 31, 1997. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANCHOR NATIONAL LIFE INSURANCE COMPANY Date: February 13, 1998 By:/s/ SCOTT L. ROBINSON - ------------------------ ------------------------ Scott L. Robinson Senior Vice President and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ SCOTT L. ROBINSON Senior Vice President and February 13, 1998 - ------------------------ Director (Principal Financial ------------------ Scott L. Robinson Officer) /s/ N. SCOTT GILLIS Senior Vice President and February 13, 1998 - ------------------------ Controller (Principal ----------------- N. Scott Gillis Accounting Officer) 23 ANCHOR NATIONAL LIFE INSURANCE COMPANY LIST OF EXHIBITS FILED Exhibit No. Description - ------- ----------- 27 Financial Data Schedule.1 EX-27 2
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS SEP-30-1998 DEC-31-1997 1,957,256,000 0 0 288,000 334,156,000 24,000,000 2,620,072,000 264,176,000 0 564,931,000 12,882,569,000 2,389,177,000 0 0 0 36,311,000 3,511,000 0 0 615,305,000 12,882,569,000 0 58,853,000 20,935,000 63,984,000 32,371,000 17,202,000 3,526,000 67,654,000 23,306,000 44,348,000 0 0 0 44,348,000 0 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----