-----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, VRFgQhWfbj+TVOP156k0u6RKnwlY7NSnFIAeVBgYfmWUJj4mwDHOgGj8/SzQG7KF jSKJ6xBpV/9nlaT1XTaDEw== 0000006342-00-000002.txt : 20000331 0000006342-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0000006342-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR NATIONAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000006342 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860198983 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-47472 FILM NUMBER: 585426 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: C/O THOMAS B PHILLIPS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3107726000 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-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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 December 31, 1999 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 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None 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. X -- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MARCH 28, 2000 WAS AS FOLLOWS: Common Stock (par value $1,000 per share) 3,511 shares PART I ITEM 1. BUSINESS GENERAL DESCRIPTION Anchor National Life Insurance Company, including its wholly owned subsidiaries, (The "Company") is an indirect wholly owned subsidiary of American International Group, Inc. ("AIG"), an international insurance and financial services holding company. At December 31, 1998, the Company was a wholly owned indirect subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1, 1999, SunAmerica Inc. merged with and into AIG in a tax-free reorganization that has been treated as a pooling of interests for accounting purposes. Thus, SunAmerica Inc. ceased to exist on that date. However, immediately prior to the date of the merger, substantially all of the net assets of SunAmerica Inc. were contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc., a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name to SunAmerica Inc. ("SunAmerica"). The Company ranks among the largest U.S. issuers of variable annuities. Complementing these annuity operations are the Company's guaranteed investment contract ("GIC") operations, its asset management operations and its wholly owned and affiliated broker-dealer operations, which provide a broad range of financial planning and investment services through more than 8,600 independent registered representatives nationwide. At December 31, 1999, the Company managed $32.47 billion of assets, consisting of $26.87 billion of assets on its balance sheet and $5.60 billion of assets managed in mutual funds. The Company is incorporated in Arizona and maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The Company has no employees; however, employees of SunAmerica and its other subsidiaries perform various services for the Company. SunAmerica had approximately 2,500 employees at December 31, 1999, approximately 1,500 of whom perform services for the Company as well as for certain of its affiliates. 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 grew from 46 million to 60 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1988 and 1998, annual industry premiums from fixed and variable annuities and fund deposits increased from $103.87 billion to $229.47 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $95.1 billion to $1.06 trillion. Benefiting from continued strong growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs. The Company's six affiliated broker-dealers comprise the largest network of independent registered representatives in the nation and the fifth-largest securities sales force, based on industry data. Its wholly owned or affiliated broker-dealers accounted for approximately one-third of the Company's total annuity sales in 1999. The Company also distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms, independent general insurance 1 agents, major financial institutions and, in the case of its GICs, by marketing directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. The Company and its affiliates have made significant investments in technology over the past several years in order to lower operating costs and enhance their marketing efforts. Its use of optical disk imaging and artificial intelligence has substantially reduced the more traditional paper-intensive life insurance processing procedures, reducing annuity processing and servicing costs and improving customer service. This has also enabled the Company to more efficiently assimilate acquired business. The Company has also implemented technology to interface with its wholly owned or affiliated broker-dealers, which enables the Company to more effectively market its products and help the affiliated financial professionals to better serve their clients. In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based products such as variable annuities and mutual funds, resulting in significantly increased fee income. Fee income has also expanded through the receipt of broker-dealer net retained commissions, resulting primarily from 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 December 31, 1999, 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 Primary product or Amount Percent service ------ ------- ------------------ (In thousands) Net investment income (including net realized investment losses). . . . $ 144,596 24.1% Fixed-rate products --------------- ------ Fee income: Variable annuity fees . . 306,417 51.1 Variable annuities Net retained commissions. 51,039 8.5 Broker-dealer sales Asset management fees . . 43,510 7.2 Mutual funds Universal life insurance fees. . . . . . . . . . 23,290 3.9 Fixed-rate universal life insurance Surrender charges . . . . 17,137 2.9 Fixed- and variable- rate products Other fees. . . . . . . . 13,999 2.3 --------------- ------ Total fee income. . . . . 455,392 75.9 --------------- ------ Total . . . . . . . . . . . $ 599,988 100.0% =============== ======
For financial information on the Company's business segments, see Part IV - "Notes to Consolidated Financial Statements - Note 14 - Business Segments". The business segments defined by the Company for disclosure under the requirements of Financial Accounting Standards No. 131, "Disclosures about 2 Segments of an Enterprise and Related information," are Annuity Operations, Asset Management Operations and Broker-Dealer Operations. Annuity Operations are discussed in the following four sections, and Asset Management and Broker-Dealer Operation are discussed on pages 6 and 7 respectively. ANNUITY OPERATIONS Founded in 1965, the Company is an Arizona-chartered company licensed in 49 states and the District of Columbia which markets flexible-premium variable annuities and GICs. It has a "AAA" (Extremely Strong) financial strength rating from Standard & Poor's Corporation ("S&P"), a "AAA"(Highest) rating from Duff & Phelps Credit Rating Co. ("DCR"), an "Aaa"(Exceptional) rating from Moody's Investors Service ("Moody's") and an "A++" (Superior) rating from industry analyst A.M. Best Company. In addition to distributing its variable annuity products through its six wholly owned or affiliated broker-dealers, the Company distributes its products through over 800 other independent broker-dealers, full-service securities firms and financial institutions as well as through independent general insurance agents. In total, more than 55,000 independent sales representatives nationally are licensed to sell the Company's annuity products. On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life"), via a 100% coinsurance transaction. The Company assumed reserves in this acquisition totaling $5,793,256,000, including $3,460,503,000 of fixed annuity contracts, $2,308,742,000 of universal life insurance contracts and $24,011,000 of guaranteed investment contracts. Policyholders of MBL annuity products were required to transfer their funds into an existing product of the Company or one of its affiliates by December 31, 1999 in order to receive the policy enhancements due under the MBL Life rehabilitation agreement. Over 92% of the deferred annuity reserves had either been transferred or surrendered by December 31, 1999. Included in the block of business acquired from MBL Life were policies whose owners are residents of New York State ("the New York Business"). On July 1, 1999, the New York Business was acquired by the Company's New York affiliate, First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance agreement, and the remainder of the business converted to assumption reinsurance, which superseded the coinsurance agreement. As part of this transfer, invested assets equal to $678,272,000, life reserves equal to $282,247,000, group pension reserves equal to $406,118,000, and other net assets of $10,093,000 were transferred to FSA. Substantially all of the Company's revenues are derived from the United States. ANNUITY OPERATIONS - VARIABLE ANNUITIES The variable annuity products of the Company offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income through the sale, administration and management of the variable account options of its variable annuity products. The Company also earns 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 3 customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities. The Company's flagship Polaris variable annuity products are multimanager variable annuities that offer investors a choice of more than 25 variable funds and a number of guaranteed fixed-rate funds. Polaris sales have increased significantly in recent years due to enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed-income and guaranteed fixed account investment choices. At December 31, 1999, total variable product reserves were $22.27 billion, of which $19.95 billion were held in separate accounts. The Company's variable annuity products incorporate surrender charges to encourage persistency. At December 31, 1999, 82% of the Company's variable annuity reserves held in the separate accounts were subject to surrender penalties. The Company's variable annuity products also generally limit the number of transfers made in a specified period between account options without the assessment of a fee. The average size of a new variable annuity contract sold by the Company in 1999 was approximately $52,000. ANNUITY OPERATIONS - FIXED ANNUITIES AND GICs The Company's general account obligations are fixed-rate products, including fixed annuity and universal life contracts issued in prior years and fixed-rate options of its variable annuity contracts. Although the Company's annuity contracts remain in force an average of seven to ten years, a majority (approximately 83% at December 31, 1999) of the annuity contracts, as well as the universal life contracts, reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, surrender assumptions and competitive industry pricing, among other factors. The Company augments its retail annuity business with the sale of institutional products. At December 31, 1999, the Company had $284.6 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indexes and $21.0 million of fixed-maturity, fixed-rate GICs acquired from MBL Life. Of the total GIC portfolio at December 31, 1999, approximately 68% was sold to asset management firms, 16% was sold to banks, 9% was sold to state and local government entities and 7% was sold to corporations. 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 fixed annuity, universal life 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 annuity and universal life products incorporate surrender charges and its GIC products incorporate other restrictions in order to encourage persistency. Approximately 48% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 1999. INVESTMENT OPERATIONS The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on a variety of factors, including the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. 4 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 December 31, 1999, these assets had an aggregate fair value of $5.05 billion with a duration of 3.2. The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes. At December 31, 1999, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $4.81 billion with a duration of 4.1. For the years ended December 31, 1999 and September 30, 1998 and 1997, the Company's yields on average invested assets were 7.11%, 8.53% and 7.97%, respectively; its average rates paid on all interest-bearing liabilities were 5.00%, 5.49% and 5.46%, respectively; it realized net investment spreads of 2.24%, 3.34% and 2.77%, respectively, on average invested assets; and net realized investment gains and losses were 0.27%, 0.75% and 0.66%, respectively, of average invested assets. 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, and the Company's need for liquidity and other similar factors. The following table summarizes the Company's investment portfolio at December 31, 1999:
SUMMARY OF INVESTMENTS Carrying Percent of value portfolio --------------- ----------- (In thousands) Cash and short-term investments . . . . . $ 475,162 8.6% U.S. government securities. . . . . . . . 22,884 0.4 Mortgage-backed securities. . . . . . . . 1,412,134 25.4 Other bonds, notes and redeemable preferred stocks. . . . . . . . . . . . 2,518,151 45.4 Mortgage loans. . . . . . . . . . . . . . 674,679 12.2 Policy loans. . . . . . . . . . . . . . . 260,066 4.7 Investment in separate account seed money 141,499 2.5 Partnerships. . . . . . . . . . . . . . . 4,009 0.1 Real estate . . . . . . . . . . . . . . . 24,000 0.4 Other invested assets . . . . . . . . . . 19,385 0.3 --------------- ----------- Total investments . . . . . . . . . . . . $ 5,551,969 100.0% =============== ===========
5 At December 31, 1999, the Bond Portfolio (excluding $4.5 million of redeemable preferred stocks) included $3.81 billion of bonds rated by S&P, Moody's, DCR, Fitch Investors Service, L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC"), and $138.5 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 1999, approximately $3.57 billion of the Bond Portfolio was investment grade, including $1.43 billion of U.S. government/agency securities and mortgage-backed securities. At December 31, 1999, the Bond Portfolio included $377.1 million of bonds that were not investment grade. These non-investment-grade bonds accounted for 1.4% of the Company's total assets and 6.8% of its invested assets. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $373.6 million at December 31, 1999. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At December 31, 1999, Secured Loans consisted of loans to 66 borrowers spanning 17 industries, with 13% of these assets concentrated in utilities and 11% concentrated in financial institutions. No other industry concentration constituted more than 7% of these assets. Mortgage loans aggregated $674.7 million at December 31, 1999 and consisted of 136 commercial first mortgage loans with an average loan balance of approximately $5.0 million, collateralized by properties located in 29 states. Approximately 36% of this portfolio was office, 17% was multifamily residential, 10% was hotels, 10% was manufactured housing, 9% was industrial, 5% was retail and 13% was other types. At December 31, 1999, approximately 36% and 11% of this portfolio were secured by properties located in California and New York, respectively, and no more than 8% of this portfolio was secured by properties located in any other single state. At December 31, 1999, the carrying value (after impairment writedowns) of all investments in default as to the payment of principal or interest totaled $1.5 million, which constituted less than 0.1% 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. The Company offers investors an array of equity, fixed-income, money market and tax-exempt mutual funds. Sales growth in recent years is primarily due to sales of the Company's "Style Select Series" product, which was introduced in November 1996. The "Style Select Series" is a group of mutual funds that are each managed by three industry-recognized fund managers. In 1999, one "Focus Portfolio" was added to the "Style Select Series", increasing to ten the number of portfolios. The Focus Portfolios utilize three leading independent money managers, each of whom manages one-third of the portfolio by choosing ten favorite stocks. In 1999, the Company introduced the Focused Value Portfolio. This portfolio, along with the two existing Focus Portfolios introduced in 1998, climbed to over $1.28 billion in assets. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $7.56 billion of assets at December 31, 6 1999, including mutual fund assets, private accounts and certain of the variable annuity assets of the Company and its affiliates. The SunAmerica mutual funds are distributed nationally through a network of approximately 450 financial institutions and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiary and its affiliated broker-dealers. BROKER-DEALER The Company owns two broker-dealers, Royal Alliance Associates, Inc. ("Royal") and SunAmerica Capital Services, Inc. ("SACS"). SACS underwrites proprietary mutual fund sales only and does not sell to the public. Royal sells proprietary insurance products and mutual funds, as well as a full range of non-proprietary investment products. Royal currently has a network of approximately 2,900 representatives. REGULATION The Company, in common with other insurers, is subject to regulation and supervision by the states and other jurisdictions in which it does business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than security holders. Risk-based capital ("RBC") standards are designed to measure the adequacy of an insurer's statutory capital and surplus in relation to the risks inherent in its business. The RBC standards consist of formulas that establish capital requirements relating to insurance, business, asset and interest rate risks. The standards are intended to help identify companies which are under-capitalized and require specific regulatory actions in the event an insurer's RBC is deficient. The RBC formula develops a risk- adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer's size, but also on the risk profile of the insurer's operations. The statutory capital and surplus of the Company exceeded its RBC requirements by a considerable margin as of December 31, 1999. Federal legislation has been recently enacted allowing combinations between insurance companies, banks and other entities. It is not yet known what effect this legislation will have on insurance companies. In addition, from time to time, Federal initiatives are proposed that could affect the Company's businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company's sales of affected products, and, consequently, on its results of operations, the Company believes these 7 proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them. 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 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 each subsidiary's business and accounts at any time. The SEC also has broad jurisdiction to oversee various activities of the Company and its other subsidiaries. COMPETITION The businesses conducted by the Company are highly competitive. The Company competes 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. During 1998, net annuity premiums written among the top 100 companies range from approximately $100 million to approximately $10 billion annually. The Company together with its affiliates ranks in the top quartile of this group. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and GICs, include product flexibility, net return after fees, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting the annuity business include the benefits (including before-tax and after-tax investment returns) and guarantees provided to the customer and the commissions paid. Competitors of SunAmerica Asset Management include a large number of mutual fund organizations, both independent and affiliated with other financial services companies, including banks and insurance companies. The Company's broker-dealer faces competition from regional firms and large, national full service and discount brokerage firms. ITEM 2. PROPERTIES The Company's executive offices and its principal office are in leased premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company, through an affiliate, also leases office space in Woodland Hills, California. The Company's broker-dealer and asset management subsidiaries lease offices in New York, New York. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. 8 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 relating to such litigation are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the quarter ending December 31, 1999 to a vote of security-holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. 9
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. Year Ended Three Months Ended Years Ended September 30, ------------------------------------------ December 31, 1999 December 31, 1998 1998 1997 1996 1995 ----------------- ---------------- --------- --------- --------- --------- (In thousands) RESULTS OF OPERATIONS Net investment income . . . $ 164,216 $ 26,583 $ 86,872 $ 73,201 $ 56,843 $ 50,083 Net realized investment gains (losses). . . . . . (19,620) 271 19,482 (17,394) (13,355) (4,363) Fee income. . . . . . . . . 455,392 83,330 290,362 213,146 169,505 145,105 General and administrative expenses. . . . . . . . . (154,665) (21,993) (96,102) (98,802) (81,552) (64,457) Amortization of deferred acquisition costs . . . . (116,840) (27,070) (72,713) (66,879) (57,520) (58,713) Annual commissions. . . . . (40,760) (6,624) (18,209) (8,977) (4,613) (2,658) ------------------- --------- --------- --------- --------- --------- Pretax income . . . . . . . 287,723 54,497 209,692 94,295 69,308 64,997 Income tax expense. . . . . (103,025) (20,106) (71,051) (31,169) (24,252) (25,739) ------------------- --------- --------- --------- --------- --------- NET INCOME. . . . . . . . . $ 184,698 $ 34,391 $138,641 $ 63,126 $ 45,056 $ 39,258 =================== ========= ========= ========= ========= =========
The results of operations of the Company for 1999 are affected by the acquisition of business from MBL Life on December 31, 1998 (See Note 4 of the accompanying consolidated financial statements). 10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued) At December 31, At September 30, --------------------- ------------------------------------------------ 1999 1998 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ---------- ---------- (In thousands) FINANCIAL POSITION Investments . . . . . . . . . $ 5,551,969 $ 8,306,943 $ 2,734,742 $ 2,608,301 $2,329,232 $2,114,908 Variable annuity assets held in separate accounts . 19,949,145 13,767,213 11,133,569 9,343,200 6,311,557 5,230,246 Deferred acquisition costs. . 1,089,979 866,053 539,850 536,155 443,610 383,069 Deferred income taxes 53,445 --- --- --- --- --- Other assets. . . . . . . . . 229,956 206,124 142,107 85,573 144,578 55,474 ----------- ----------- ----------- ----------- ---------- ---------- TOTAL ASSETS. . . . . . . . . $26,874,494 $23,146,333 $14,550,268 $12,573,229 $9,228,977 $7,783,697 =========== =========== =========== =========== ========== ========== Reserves for fixed annuity contracts . . . . . . . . . $ 3,254,895 $ 5,500,157 $ 2,189,272 $ 2,098,803 $1,789,962 $1,497,052 Reserves for universal life insurance contracts 1,978,332 2,339,194 --- --- --- --- Reserves for guaranteed investment contracts. . . . 305,570 306,461 282,267 295,175 415,544 277,095 Variable annuity liabilities related to separate accounts. . . . . . . . . . 19,949,145 13,767,213 11,133,569 9,343,200 6,311,557 5,230,246 Other payables and accrued liabilities . . . . . . . . 413,610 171,143 157,551 157,546 120,638 227,953 Subordinated notes payable to affiliates . . . . . . . 37,816 209,367 39,182 36,240 35,832 35,832 Deferred income taxes --- 105,772 95,758 67,047 70,189 73,459 Shareholder's equity. . . . . 935,126 747,026 652,669 575,218 485,255 442,060 ----------- ----------- ----------- ----------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. . . . $26,874,494 $23,146,333 $14,550,268 $12,573,229 $9,228,977 $7,783,697 =========== =========== =========== =========== ========== ==========
The financial position of the Company as of December 31, 1998 and thereafter is affected by the acquisition of business from MBL Life (See Note 4 of the accompanying consolidated financial statements). 11 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 Anchor National Life Insurance Company (the "Company") for the three years ended December 31, 1999, September 30, 1998 and 1997 follows. Effective December 31, 1998, the Company changed its fiscal year end from September 30 to December 31. Accordingly, the three- month period ended December 31, 1998 was a transition period. 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 $184.7 million in 1999, compared with $138.6 million in 1998 and $63.1 million in 1997. On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation (the "Acquisition"). Since the Acquisition was accounted for under the purchase method of accounting, results of operations include those of the Acquisition only from its date of acquisition. Consequently, the operating results for 1999 are not comparable with those of 1998 and 1997. On a pro forma basis, using the historical financial information of the acquired business and assuming that the Acquisition had been consummated on October 1, 1996, the beginning of the prior-year periods discussed herein, net income would have been $158.9 million and $83.4 million for the years ended September 30, 1998 and 1997, respectively. PRETAX INCOME totaled $287.7 million in 1999, $209.7 million in 1998 and $94.3 million in 1997. The 37.2% improvement in 1999 over 1998 primarily resulted from increased fee income and higher net investment 12 income, partially offset by higher net realized investment losses, increased general and administrative expenses and increased amortization of deferred acquisition costs. The 122.4% improvement in 1998 over 1997 primarily resulted from increased fee income and higher net realized investment gains, partially offset by increased annual commissions and increased amortization of deferred acquisition costs. 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 $164.2 million in 1999 from $86.9 million in 1998 and $73.2 million in 1997. These amounts equal 2.24% on average invested assets (computed on a daily basis) of $7.34 billion in 1999, 3.34% on average invested assets of $2.60 billion in 1998, and 2.77% on average invested assets of $2.65 billion in 1997. On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1996, net investment income on related average invested assets would have been 1.32% and 1.14% in the years ended September 30, 1998 and 1997, respectively. The improvement in 1999 net investment yields over these pro forma amounts reflects a redeployment of assets received in the Acquisition into higher yielding investment categories. Net investment spreads include the effect of income earned on the difference between average invested assets and average interest-bearing liabilities. Average invested assets exceeded average interest-bearing liabilities by $187.8 million in 1999, $140.4 million in 1998 and $126.5 million in 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 2.11% in 1999, 3.04% in 1998 and 2.51% in 1997. On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1996, the Spread Difference would have been 1.31% and 1.13% for the years ended September 30, 1998 and 1997, reflecting primarily the effect of the lower yielding assets received in the Acquisition. Investment income (and the related yields on average invested assets) totaled $522.0 million (7.11%) in 1999, compared with $222.0 million (8.53%) in 1998 and $210.8 million (7.97%) in 1997. Both the significant increases in investment income and the decreases in the related yields in 1999 as compared with 1998 and 1997 principally resulted from the Acquisition. The invested assets associated with the Acquisition included high-grade corporate, government and government/agency bonds and cash and short-term investments, which are generally lower yielding than a significant portion of the invested assets that comprise the remainder of the Company's portfolio. The increased yield in 1998 over 1997 includes the effects of an increasing proportion of mortgage loans in the Company's portfolio, which on average have higher yields than that of the Company's overall portfolio. Also in 1998, the Company experienced higher returns on its investments in partnerships. On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1996, the yield on related average invested assets would have been 6.59% and 6.41% in the years ended September 30, 1998 and 1997, respectively. Investment income and related yields in all periods also reflect the Company's investments in limited partnerships. Partnership income decreased to $13.1 million, (a yield of 24.66% on related average assets of $53.2 million) in 1999, compared with $25.8 million (a yield of 185.62% on related average assets of $13.9 million) in 1998, and $7.1 million (a yield of 16.17% on related average assets of $44.0 million) in 1997. Partnership income is based primarily upon cash distributions received from limited partnerships, the operations of which the Company does not influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future. 13 Total interest expense equaled $357.7 million in 1999, $135.1 million in 1998 and $137.6 million in 1997. The average rate paid on all interest-bearing liabilities was 5.00% in 1999, compared with 5.49% in 1998 and 5.46% in 1997. Interest-bearing liabilities averaged $7.15 billion during 1999, compared with $2.46 billion during 1998 and $2.52 billion during 1997. Total interest expense in 1999 and related average rates paid reflect the effects of the Acquisition. On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1996, the average rate paid on all interest-bearing liabilities would have been 5.28% in the years ended September 30, 1998 and 1997, respectively, and interest-bearing liabilities would have averaged $7.84 billion and $7.89 billion, respectively, in those years. The decreases in the overall rates paid in 1999 result primarily from a generally lower interest rate environment in 1999. GROWTH IN AVERAGE INVESTED ASSETS since 1998 largely resulted from the impact of the Acquisition. Changes in average invested assets also reflect sales of fixed annuities and the fixed account options of the Company's variable annuity products ("Fixed Annuity Premiums"), and renewal premiums on its universal life product ("UL Premiums") acquired in the Acquisition, partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Fixed Annuity Premiums and UL Premiums totaled $2.10 billion in 1999, compared with $1.51 billion in 1998 and $1.10 billion in 1997, and are largely premiums for the fixed accounts of variable annuities. Such premiums have increased principally because of greater customer allocation of new premium dollars to the fixed account options of variable products, particularly from the Acquisition business, resulting in greater inflows into the one-year and six-month fixed accounts of these products. Such fixed accounts are principally used for dollar-cost averaging into the variable accounts. Accordingly, the Company anticipates that it will see a large portion of these premiums transferred into the variable funds. These premiums represent 27%, 72% and 61%, respectively, of the related reserve balances at the beginning of the respective periods. The decrease in 1999 premiums when expressed as a percentage of related reserve balances results from the impact of the Acquisition. When premium and reserve balances resulting from the Acquisition are excluded, the resulting premiums represent 94% of the beginning fixed annuity reserve balance in 1999. There were no guaranteed investment contract ("GIC") premiums in 1999. GIC premiums totaled $5.6 million in 1998 and $55.0 million in 1997. GIC surrenders and maturities totaled $19.7 million in 1999, $36.3 million in 1998 and $198.1 million in 1997. The Company does not actively market GICs; consequently, premiums and surrenders 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. GICs that are purchased by banks for their long-term portfolios or by state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. GICs purchased by asset management firms for their short-term portfolios either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity. NET REALIZED INVESTMENT LOSSES totaled $19.6 in 1999, compared to net realized investment gains of $19.5 million in 1998 and net realized investment losses of $17.4 million in 1997. Net realized investment gains (losses) include impairment writedowns of $6.1 million in 1999, $13.1 million in 1998, and $20.4 million in 1997. Thus, net gains (losses) from sales and redemptions of investments totaled $13.5 million of losses in 1999, $32.6 million of gains in 1998 and $3.0 million of gains in 1997. 14 The Company sold or redeemed invested assets, principally bonds and notes, aggregating $4.43 billion in 1999, $2.23 billion in 1998 and $2.62 billion in 1997. Sales of investments result from the active management of the Company's investment portfolio, including assets received as part of the Acquisition. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.18%, 1.25%, and 0.11% of average invested assets for 1999, 1998 and 1997, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company's active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk. Impairment writedowns include $6.1 million of provisions applied to bonds in 1999, $9.4 million of provisions applied to partnerships in 1998 and $15.7 million of provisions applied to non-income producing land owned in Arizona in 1997. The statutory carrying value of this land had been guaranteed by the Company's former ultimate parent, SunAmerica Inc. SunAmerica Inc. made a capital contribution of $28.4 million on December 31, 1996 to the Company through the Company's direct parent, SunAmerica Life Insurance Company (the "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 full termination of the guaranty. Impairment writedowns represent 0.08%, 0.50%, and 0.77% of average invested assets for 1999, 1998 and 1997, respectively. For the five years ended December 31, 1999, impairment writedowns as a percentage of average invested assets have ranged from 0.06% to 0.77% and have averaged 0.40%. 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 $306.4 million in 1999, $200.9 million in 1998 and $139.5 million in 1997. The increased fees reflect growth in average variable annuity assets, principally due to the receipt of variable annuity premiums, net exchanges into the separate accounts from the fixed accounts of variable annuity contracts and increased market values, partially offset by surrenders. Variable annuity fees represent 1.9%, 1.9%, and 1.8% of average variable annuity assets for 1999, 1998 and 1997, respectively. Variable annuity assets averaged $16.15 billion in 1999, $10.70 billion during 1998 and $7.55 billion during 1997. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, aggregated $1.70 billion in 1999, $1.82 billion in 1998 and $1.27 billion in 1997. These amounts represent 12%, 19% and 20% of variable annuity reserves at the beginning of the respective periods. Such premiums have decreased in 1999 principally because of greater customer allocation of new premium dollars to the fixed account options of variable products, particularly from the Acquisition business, resulting in greater inflows into the one-year and six-month fixed accounts of these products. Transfers from the fixed accounts of the Company's variable annuity products to the separate accounts (see "Growth in Average Invested Assets") are not classified in variable annuity premiums (in accordance with generally accepted accounting principles). Accordingly, changes in variable annuity premiums are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company's variable annuity products. Sales of variable annuity products (which include premiums allocated 15 to the fixed accounts) ("Variable Annuity Product Sales") amounted to $3.66 billion, $3.33 billion and $2.37 billion in 1999, 1998 and 1997, respectively. Variable Annuity Product Sales primarily reflect sales of the Company's flagship variable annuity, Polaris. The Polaris products are multimanager variable annuities that offer investors a choice of more than 25 variable funds and a number of guaranteed fixed-rate funds. Increases in Variable Annuity Product Sales are due, in part, to enhanced distribution efforts and 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, from time to time, Federal initiatives are proposed that could affect the taxation of variable annuities and annuities generally (See "Regulation"). NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's subsidiary and affiliate broker-dealers, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $51.0 million in 1999, $48.6 million in 1998 and $39.1 million in 1997. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $13.40 million in 1999, $14.37 billion in 1998 and $11.56 billion in 1997. Fluctuations in net retained commissions may not be proportionate to fluctuations in sales primarily due to changes in sales mix. 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 $43.5 million on average assets managed of $4.19 billion in 1999, $29.6 million on average assets managed of $2.89 billion in 1998 and $25.8 million on average assets managed of $2.34 billion in 1997. Asset management fees are not necessarily proportionate to average assets managed, principally due to changes in product mix. Mutual fund sales, excluding sales of money market accounts, aggregated $1.48 billion in 1999, compared with $853.6 million in 1998 and $454.8 million in 1997. The increase in sales during 1999 and 1998 resulted in part from increased sales of the Company's "Style Select Series" product. The "Style Select Series" is a group of mutual funds that are each managed by three industry-recognized fund managers. In 1999, the number of portfolios in the "Style Select Series" increased by one "Focus Portfolio" to ten. The Focus Portfolios utilize three leading independent money managers, each of whom manages one-third of the portfolio by choosing ten favorite stocks. Sales of the "Style Select Series" products totaled $938.5 million in 1999, compared to $550.6 million in 1998 and $267.8 million in 1997. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $571.5 million in 1999, $402.5 million in 1998 and $412.8 million in 1997, which represent 16.8%, 17.5% and 22.0%, respectively, of average related mutual fund assets. UNIVERSAL LIFE INSURANCE FEES result from the universal life insurance contract reserves acquired in the Acquisition and the ongoing receipt of renewal premiums on such contracts, and comprise mortality charges, up-front fees earned on premiums received and administrative fees, net of the excess mortality expense on these contracts. Universal life insurance fees amounted to $23.3 million in 1999. Such fees represent 1.10% of average reserves for universal life insurance contracts for 1999. Since the Acquisition occurred on December 31, 1998, there were no such fees earned in 1998 or 1997. 16 SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $17.1 million in 1999 (including $1.5 million attributable to the Acquisition), $7.4 million in 1998 and $5.5 million in 1997. Surrender charges generally are assessed on withdrawals at declining rates during the first seven years of a contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $3.12 billion in 1999 (including $1.58 billion attributable to the Acquisition), $1.14 billion in 1998 and $1.06 billion in 1997. These payments when expressed as a percentage of average fixed and variable annuity and universal life reserves are 13.8% (7.0% attributable to the Acquisition), 9.0% and 11.2% for 1999, 1998 and 1997, respectively. The relatively high surrenders in the acquisition block of business were expected and occurred because July 1, 1999 was the first time since 1991 that these policyholders were able to surrender their policies without a moratorium fee. Excluding the effects of the Acquisition, withdrawal payments represent 8.3% of related average fixed and variable annuity reserves in 1999. Withdrawals include variable annuity withdrawals from the separate accounts totaling $1.34 billion (8.3% of average variable annuity reserves), $952.1 million (8.9% of average variable annuity reserves) and $822.0 million (10.9% of average variable annuity reserves) in 1999, 1998 and 1997, respectively. GENERAL AND ADMINISTRATIVE EXPENSES totaled $154.7 million in 1999, compared with $96.1 million in 1998 and $98.8 million in 1997. The increases in 1999 over 1998 principally reflect the increased costs related to the business acquired in the Acquisition and expenses related to servicing the Company's growing block of variable annuity policies. 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 $116.8 million (including $8.9 million attributable to the Acquisition) in 1999, compared with $72.7 million in 1998 and $66.9 million in 1997. The increases in amortization were 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 $40.8 million in 1999, $18.2 million in 1998 and $9.0 million in 1997. The increases in annual commissions since 1997 reflect increased sales of annuities that offer this commission option and gradual expiration of the initial fifteen-month periods before such payments begin. The Company estimates that over 55% of its variable annuity product liabilities are currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods. INCOME TAX EXPENSE totaled $103.0 million in 1999, compared with $71.1 million in 1998 and $31.2 million in 1997, representing effective tax rates of 36% in 1999, 34% in 1998 and 33% in 1997. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased 25.2% to $935.1 million at December 31, 1999 from $747.0 million at December 31, 1998, due principally to $184.7 million of net income recorded in 1999, partially offset by a $110.9 million increase in accumulated other comprehensive loss. In addition, the Company received a $114.3 million net capital contribution from the Parent (see Note 17 10 of Notes to Consolidated Financial Statements). INVESTED ASSETS at December 31, 1999 totaled $5.55 billion, compared with $8.31 billion at December 31, 1998. The decrease in invested assets in 1999 compared to 1998 is primarily due to the expected high surrenders in the business acquired in the Acquisition. 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 constituted 71% of the Company's total investment portfolio, had an amortized cost that was $202.6 million greater than its aggregate fair value at December 31, 1999, compared with an excess of $3.9 million at December 31, 1998. The net unrealized losses on the Bond Portfolio in 1999 principally reflect the recent increase in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at December 31, 1999. At December 31, 1999, the Bond Portfolio (excluding $4.5 million of redeemable preferred stocks) included $3.81 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 $138.5 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 1999, approximately $3.57 billion of the Bond Portfolio was investment grade, including $1.43 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At December 31, 1999, the Bond Portfolio included $376.1 million of bonds that were not investment grade. These non-investment-grade bonds accounted for 1.4% of the Company's total assets and 6.8% 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, 1999. The table on the next page summarizes the Company's rated bonds by rating classification as of December 31, 1999. 18
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 Estimated Percent of [DCR] {Fitch} Amortized fair category Amortized fair Amortized fair invested category (1) cost value (2) cost value cost value assets - ------------------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] {AAA to A-} . . . $2,809,442 $2,663,519 1 $ 167,810 $ 168,798 $2,977,252 $2,832,317 51.01% BBB+ to BBB- (Baal to Baa3) [BBB+ to BBB-] {BBB+ to BBB-}. . 636,752 609,079 2 133,351 131,111 770,103 740,190 13.33 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-}. . . 71,360 67,472 3 0 0 71,360 67,472 1.22 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-}. . . . 290,407 275,381 4 10,876 9,970 301,283 285,351 5.14 CCC+ to C (Caa to C) [CCC] {CCC+ to C-}. . . 17,357 11,638 5 13,867 11,523 31,224 23,161 0.42 CI to D [DD] {D} . . . . . . . 0 0 6 131 131 131 131 0.00 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL RATED ISSUES. $3,825,318 $3,627,089 $ 326,035 $ 321,533 $4,151,353 $3,948,622 ========== ========== ========== ========== ========== ========== Footnotes appear on the following page.
19 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 $138.5 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. 20 Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $373.6 million at December 31, 1999. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At December 31, 1999, Secured Loans consisted of $73.0 million of publicly traded securities and $300.6 million of privately traded securities. These Secured Loans are composed of loans to 66 borrowers spanning 17 industries, with 13% of these assets concentrated in utilities and 11% concentrated in financial institutions. No other industry concentration constituted more than 7% of these assets. While the trading market for the Company's privately traded Secured Loans is more limited than for publicly traded issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC. MORTGAGE LOANS aggregated $674.7 million at December 31, 1999 and consisted of 136 commercial first mortgage loans with an average loan balance of approximately $5.0 million, collateralized by properties located in 29 states. Approximately 36% of this portfolio was office, 17% was multifamily residential, 10% was hotels, 10% was manufactured housing, 9% was industrial, 5% was retail, and 13% was other types. At December 31, 1999, approximately 36% and 11% of this portfolio were secured by properties located in California and New York, respectively, and no more than 8% of this portfolio was secured by properties located in any other single state. At December 31, 1999, there were 10 mortgage loans with outstanding balances of $10 million or more, which collectively aggregated approximately 30% of this portfolio. At December 31, 1999, approximately 31% of the mortgage loan portfolio consisted of loans with balloon payments due before January 1, 2003. During 1999, 1998 and 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, 1999, approximately 12% 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 strict underwriting standards utilized, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields. POLICY LOANS aggregated $260.1 million at December 31, 1999, compared to $320.7 million at December 31, 1998. This decrease was primarily due to repayment of policy loans by surrendering policyholders from the Acquisition. PARTNERSHIP INVESTMENTS totaled $4.0 million at December 31, 1999, constituting investments in 6 separate partnerships with an average size of 21 approximately $0.7 million. These partnerships are accounted for by using the cost method of accounting and are managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including 8 separate issuers. The risks generally associated with partnerships include those related to their underlying investments (i.e., equity securities and debt securities), plus a level of illiquidity, which is mitigated to some extent by the existence of contractual termination provisions. SEPARATE ACCOUNT SEED MONEY totaled $141.5 million at December 31, 1999, consisting of seed money for mutual funds used as investment vehicles for the Company's variable annuity separate accounts. OTHER INVESTED ASSETS aggregated $19.4 million at December 31, 1999, compared with $15.2 million at December 31, 1998, and consist of collateralized bond obligations. 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, default rates 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 48% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 1999. 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, 1999, these assets had an aggregate fair value of $5.05 billion with a duration of 3.2. The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes. At December 31, 1999, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $4.81 billion with a duration of 4.1. The Company's potential exposure due to a 10% decrease in prevailing interest rates from their December 31, 1999 levels is a loss of approximately $22.4 million, representing an increase in the fair value of its fixed-rate liabilities that is not offset by an increase in the fair value of its fixed-rate assets. 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. 22 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, universal life 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 December 31, 1999, the Company had one outstanding Swap Agreement with a notional principal amount of $21.5 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. It is the Company's policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody's. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable-rate liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. As part of its decision to purchase an MBS, the Company assesses the risk of prepayment by analyzing the security's projected performance over an array of interest-rate scenarios. Once an MBS is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the 23 security with the intent to maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $0.9 ($0.2 million of bonds and $0.7 million of mortgage loans) at December 31, 1999, and constituted less than 0.1% of total invested assets. At December 31, 1998, defaulted investments totaled $1.9 million, including $1.2 million of bonds and $0.7 million of mortgage loans, and constituted less than 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, 1999, approximately $484.1 million of the Company's Bond Portfolio had an aggregate unrealized gain of $18.0 million, while approximately $3.47 billion of the Bond Portfolio had an aggregate unrealized loss of $220.5 million. In addition, the Company's investment portfolio currently provides approximately $46.4 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. As the Company anticipated, liquidity needs were unusually high this past year due to the Acquisition. Short-term investments were sold as needed to satisfy these current cash requirements. 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- 24 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. CONTINGENT LIABILITIES are discussed in Note 9 of the accompanying consolidated financial statements. RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of the accompanying consolidated financial statements. YEAR 2000 The year 2000 issue arose from computer programs written using two digits rather than four digits to define the applicable year. This possibly could have caused a failure of the information technology systems (IT systems) and other equipment containing imbedded technology (non-IT systems) in the year 2000. The Company implemented a plan to address the Year 2000 issue and to assess Year 2000 issues relating to third parties with which the Company has critical relationships. The Company's cost to make necessary repairs had no significant impact on its results of operations. The Company has not experienced any business disruption from the Year 2000 issue. Its IT and non-IT systems were compliant on January 1, 2000, and there have been no problems related to any third parties compliance. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management's Disclosure and Analysis of Financial Condition and Results of Operations on pages 22 and 23 herein. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," will be effective for the Company as of January 1, 2001. Therefore, it is not included in the accompanying financial statements. The Company has not completed its analysis of the effect of SFAS 133, but management believes that it will not have a material impact on the Company's results of operations, financial condition or liquidity. 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 25
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and principal officers of Anchor National Life Insurance Company (the "Company") as of March 29, 2000 are listed below, together with information as to their ages, dates of election and principal business occupation during the last five years (if other than their present business occupation). Other Positions and Year Other Business Present Assumed Experience Within Name Age Position Position Last Five Years** From-To ---- --- -------- -------- ----------------- ------- Eli Broad*. . . . 66 Chairman, 1994 Cofounded SAI Chief Executive in 1957 Officer and President of the Company Chairman, Chief 1986 Executive Officer and President of SunAmerica Inc. ("SAI") Jay S. Wintrob* . 42 Executive Vice 1991 (Joined SAI in 1987) President of the Company Vice Chairman and 1998 Chief Operating Officer of SAI James R. Belardi* 42 Senior Vice 1992 (Joined SAI in 1986) President of the Company Executive Vice 1995 President of SAI Marc H. Gamsin* . 44 Senior Vice 1999 Executive Vice President 1998 to President of the SunAmerica Investments, Present Company Inc. (GA) Senior Vice 1996 Executive Vice President, 1997-1998 President of SAI SunAmerica Investments, Inc. (DE) Partner, O'Melveny & 1976-1996 Myers, LLP Jana W. Greer*. . 47 Senior Vice 1994 (Joined SAI in 1974) President of the Company Senior Vice President of SAI 1992 ____________________________________ * Also services as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
26
Other Positions and Year Other Business Present Assumed Experience Within Name Age Position Position Last Five Years** From-To ---- --- -------- -------- ------------------- ------- Susan L. Harris* . . 42 Senior Vice 1994 Vice President, 1994-1995 President and General Counsel- Secretary of the Corporate Affairs and Company Secretary of SAI Senior Vice 1995 President, General Counsel and Secretary of SAI (Joined SAI in 1985) N. Scott Gillis* . . 46 Senior Vice 2000 Senior Vice President 1994-1999 President of the and Controller, Company SunAmerica Life Insurance Vice President of 1997 Companies ("SLC") SAI (Joined SAI in 1985) Gregory M. Outcalt . 37 Senior Vice 2000 Vice President, SLC 1993-1999 President of the (Joined SAI in 1986) Company Edwin R. Raquel. . . 42 Senior Vice 1995 Vice President, 1990-1995 President and Actuary, SLC Chief Actuary of the Company David R. Bechtel . . 32 Vice President 1998 Vice President, 1996-1998 and Treasurer of Deutsche Morgan the Company Grenfell, Inc. Vice President 1998 Associate, 1995-1996 and Treasurer of UBS Securities LLC SAI Associate, 1994 Wachtell Lipton Rosen & Katz P. Daniel Demko, Jr. 50 Vice President 1999 Executive Vice President, 1998 to of the Company SunAmerica Retirement Present Markets, Inc. President & Vice 1995-1998 Chairman, Global Health Network, LLC Owner, P. Demko Company 1992-1995 J. Franklin Grey . . 47 Vice President 1994 Vice President of 1994 to of the Company Certain SLC Present ____________________________________ * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
27
Other Positions and Year Other Business Present Assumed Experience Within Name Age Position Position Last Five Years** From-To ---- --- -------- -------- ------------------ ------- Kevin J. Hart. . . . 45 Vice President 1999 Executive Vice President, 1995 to of the Company SunAmerica Retirement Present Markets, Inc. National Sales Manager, 1991-1995 American Skandia Life Assurance Corporation Edward P. Nolan, Jr. 50 Vice President 1993 (Joined SAI in 1989) of the Company Stewart R. Polakov . 40 Vice President 2000 Vice President, 1997-1999 of the Company SunAmerica Financial, division of the Company Director, Investment 1994-1997 Accounting, SAI (Joined SAI in 1991) Scott H. Richland. . 37 Vice President 1994 Senior Vice President 1997-1998 of the Company and Treasurer of SAI Senior Vice 1997 Vice President and 1995-1997 President of SAI Treasurer of SAI Vice President and 1994-1995 Assistant Treasurer of SAI (Joined SAI in 1990) ____________________________________ * Also services as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
28 ITEM 11. EXECUTIVE COMPENSATION All of the executive officers of the Company also serve as employees of SunAmerica Inc. or its affiliates and receive no compensation directly from the Company. Some of the officers also serve as officers of other companies affiliated with the Company. Allocations have been made as to each individual's time devoted to his or her duties as an executive officer of the Company. The following table shows the cash compensation paid or earned, based on these allocations, to the chief executive officer and top four executive officers of the Company whose allocated compensation exceeds $100,000 for services rendered in all capacities to the Company during 1999:
Name of Individual or Capacities In Allocated Cash Number in Group Which Served Compensation ----------------------- ---------------------- -------------- Eli Broad . . . . . . . . Chairman, Chief Executive $1,717,681 Officer and President Jay S. Wintrob. . . . . . Executive Vice President 858,159 Jana Waring Greer . . . . Senior Vice President 673,541 Daniel P. Demko . . . . . Vice President 521,513 Scott H. Richland . . . . Vice President 273,303
Directors of the Company who are also employees of SunAmerica Inc. or its affiliates receive no compensation in addition to their compensation as employees of SunAmerica Inc. or its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is an indirect wholly owned subsidiary of American International Group, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 29 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 index set forth on page F-1 of this report. EXHIBITS Exhibit No. Description - ------ ----------- 2(a) Purchase and Sale Agreement, dated as of July 15, 1998, by and among the Company, SunAmerica Inc. ("SAI"), First SunAmerica Life Insurance Company and MBL Life Assurance Corporation, is incorporated herein by reference to Exhibit 2(e) to SAI's 1998 Annual Report on Form 10-K, filed December 21, 1998. 3(a) Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 22, 1995, is incorporated herein by reference to Exhibit 3(a) to the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996. 3(b) Amended and Restated Bylaws, as adopted January 1, 1996, is incorporated herein by reference to Exhibit 3(b) to the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996. 4(a) Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 12, 1996. See Exhibit 3(a). 4(b) Amended and Restated Bylaws, as adopted January 1, 1996. See Exhibit 3(b). 10(a) Amendment to the Subordinated Loan Agreement for Equity Capital, dated as of August 22, 1996, between the Company's subsidiary, SunAmerica Capital Services, Inc. ("SACS") and SAI, extending the maturity date to September 30, 1999 of a Subordinated Loan Agreement for Equity Capital, dated as of September 30, 1992, defining SAI's rights with respect to the 9% notes due September 29, 1996, is incorporated herein by reference to Exhibit 10(f) to the Company's Form 10-K, filed December 19, 1996. 10(b) Subordinated Loan Agreement for Equity Capital, dated as of July 24, 1996, between the Company's subsidiary, Royal Alliance Associates, Inc. and SAI, defining SAI's rights with respect to the 9% notes due August 23, 1999 is incorporated herein by reference to Exhibit 10(k) to the Company's Form 10-K, filed December 19, 1996. 10(c) Amendment to the Subordinated Loan Agreement for Equity Capital, dated as of September 3, 1996, between the Company's subsidiary, SunAmerica Asset Management Corp., and SAI, extending the maturity date to September 13, 1999 of a Subordinated Loan Agreement for Equity Capital, dated as of September 3, 1993, defining SAI's rights with respect to the 7% notes due September 13, 1996, is incorporated herein by reference to Exhibit 10(l) to the Company's Form 10-K, filed December 19, 1996. 10(d) Subordinated Loan Agreement for Equity Capital, dated as of February 19, 1997, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 9% notes due Exhibit March 14, 2000, is incorporated herein by reference to Exhibit 10(a) to Company's quarterly report on Form 10-Q for the quarter ended March 31, 1997, filed May 15, 1997. 30 Exhibit No. Description - ------ ----------- 10(e) Subordinated Loan Agreement for Equity Capital, dated as of April 29, 1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.5% notes due June 27, 2001, 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, 1998, filed August 14, 1998. 10(f) Subordinated Loan Agreement for Equity Capital, dated as of June 3, 1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.5% notes due July 30, 2001, 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, 1998, filed August 14, 1998. 10(g) Subordinated Loan Agreement for Equity Capital, dated as of August 25, 1998, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.5% notes due October 30, 2001, is incorporated herein by reference to Exhibit 10(g) to the Company's Form 10-K, filed December 23, 1998. 10(h) Subordinated Loan Agreement for Equity Capital, dated as of March 12, 1999, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.5% notes due April 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1999, filed May 14, 1999. 10(i) Subordinated Loan Agreement for Equity Capital, dated as of August 9, 1999, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8% notes due September 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1999, filed November 15, 1999. 10(j) Asset Lease Agreement, dated June 26, 1998, between the Company and Aurora National Life Assurance Company ("Aurora"), relating to a lease from Aurora of certain information relating to single premium deferred annuities, is incorporated herein by reference by Exhibit 10(h) to the Company's Form 10-K, filed December 23, 1998. 21 Subsidiaries of the Company. 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, 1999. 31
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 By/s/ N. SCOTT GILLIS ------------------------ N. Scott Gillis March 30, 2000 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/ ELI BROAD . . . . . . . . Chairman, Chief Executive March 30, 2000 - ------------------------------- Eli Broad . . . . . . . . Officer and President (Principal Executive Officer) /s/ N. SCOTT GILLIS . . . . . Senior Vice President and March 30, 2000 - ------------------------------- N. Scott Gillis . . . . . Director (Principal Financial Officer) /s/ GREGORY M. OUTCALT. . . . Senior Vice President and March 30, 2000 - ------------------------------- Gregory M. Outcalt. . . . Controller (Principal Accounting Officer) /s/ JAY S. WINTROB. . . . . . Executive Vice President March 30, 2000 - ------------------------------- Jay S. Wintrob. . . . . . and Director /s/ JAMES R. BELARDI. . . . . Senior Vice President, March 30, 2000 - ------------------------------- James R. Belardi. . . . . Treasurer and Director /s/ MARC H. GAMSIN. . . . . . Senior Vice President March 30, 2000 - ------------------------------- Marc H. Gamsin. . . . . . and Director /s/ JANA W. GREER . . . . . . Senior Vice President March 30, 2000 - ------------------------------- Jana W. Greer . . . . . . and Director /s/ SUSAN L. HARRIS . . . . . Senior Vice President, March 30, 2000 - ------------------------------- Susan L. Harris . . . . . Secretary and Director /s/ EDWIN R. RAQUEL . . . . . Senior Vice President March 30, 2000 - ------------------------------- Edwin R. Raquel . . . . . and Chief Actuary
32
ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number(s) ------------ Report of Independent Accountants . . . . . . . . . F-2 Consolidated Balance Sheet - December 31, 1999, December 31, 1998, and September 30, 1998 . . . . . F-3 to F-4 Consolidated Statement of Income and Comprehensive Income - Year Ended December 31, 1999, Three Months Ended December 31, 1998, Years Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statement of Cash Flows - Year Ended December 31, 1999, Three Months Ended December 31, 1998, Years Ended September 30, 1998 and 1997 . . . F-6 to F-7 Notes to Consolidated Financial Statements. . . . . F-8 to F-37
F-1 Report of Independent Accountants To the Board of Directors and Shareholder of Anchor National Life Insurance Company: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Anchor National Life Insurance Company and its subsidiaries (the "Company") at December 31, 1999, December 31, 1998, and September 30, 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, for the three months ended December 31, 1998 and for each of the two fiscal years in the period ended September 30, 1998, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Los Angeles, California January 31, 2000 F-2
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET December 31, December 31, September 30, 1999 1998 1998 --------------- --------------- --------------- ASSETS Investments: Cash and short-term investments . . . . $ 475,162,000 $ 3,303,454,000 $ 333,735,000 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: December 1999, $4,155,728,000; December 1998, $4,252,740,000; September 1998, $1,934,863,000) . . . 3,953,169,000 4,248,840,000 1,954,754,000 Mortgage loans. . . . . . . . . . . . . 674,679,000 388,780,000 391,448,000 Policy loans. . . . . . . . . . . . . . 260,066,000 320,688,000 11,197,000 Separate account seed money 141,499,000 --- --- Common stocks available for sale, at fair value (cost: December 1999, $0; December 1998, $1,409,000; September 1998, $115,000) --- 1,419,000 169,000 Partnerships. . . . . . . . . . . . . . 4,009,000 4,577,000 4,403,000 Real estate . . . . . . . . . . . . . . 24,000,000 24,000,000 24,000,000 Other invested assets . . . . . . . . . 19,385,000 15,185,000 15,036,000 --------------- --------------- --------------- Total investments . . . . . . . . . . . 5,551,969,000 8,306,943,000 2,734,742,000 Variable annuity assets held in separate accounts. . . . . . . . . . . . . . . . 19,949,145,000 13,767,213,000 11,133,569,000 Accrued investment income . . . . . . . . 60,584,000 73,441,000 26,408,000 Deferred acquisition costs. . . . . . . . 1,089,979,000 866,053,000 539,850,000 Receivable from brokers for sales of securities. . . . . . . . . . . . . . . 54,760,000 22,826,000 23,904,000 Income taxes currently receivable --- --- 5,869,000 Deferred income taxes 53,445,000 --- --- Other assets. . . . . . . . . . . . . . . 114,612,000 109,857,000 85,926,000 --------------- --------------- --------------- TOTAL ASSETS. . . . . . . . . . . . . . . $26,874,494,000 $23,146,333,000 $14,550,268,000 =============== =============== ===============
See accompanying notes F-3
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Continued) December 31, December 31, September 30, 1999 1998 1998 ---------------- ---------------- --------------- LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts . . . $ 3,254,895,000 $ 5,500,157,000 $ 2,189,272,000 Reserves for universal life insurance contracts 1,978,332,000 2,339,194,000 --- Reserves for guaranteed investment contracts. . . . . . . . . . . . . . . . 305,570,000 306,461,000 282,267,000 Payable to brokers for purchases of securities 139,000 --- 50,957,000 Income taxes currently payable 23,490,000 11,123,000 --- Modified coinsurance deposit liability 140,757,000 --- --- Other liabilities. . . . . . . . . . . . . 249,224,000 160,020,000 106,594,000 ---------------- ---------------- --------------- Total reserves, payables and accrued liabilities. . . . . . . . . 5,952,407,000 8,316,955,000 2,629,090,000 ---------------- ---------------- --------------- Variable annuity liabilities related to separate accounts. . . . . . . . . . . . . 19,949,145,000 13,767,213,000 11,133,569,000 ---------------- ---------------- --------------- Subordinated notes payable to affiliates . . 37,816,000 209,367,000 39,182,000 ---------------- ---------------- --------------- Deferred income taxes --- 105,772,000 95,758,000 ---------------- ---------------- --------------- Shareholder's equity: Common Stock . . . . . . . . . . . . . . . 3,511,000 3,511,000 3,511,000 Additional paid-in capital . . . . . . . . 493,010,000 378,674,000 308,674,000 Retained earnings. . . . . . . . . . . . . 551,158,000 366,460,000 332,069,000 Accumulated other comprehensive income (loss). . . . . . . . . . . . . . (112,553,000) (1,619,000) 8,415,000 ---------------- ---------------- --------------- Total shareholder's equity . . . . . . . . 935,126,000 747,026,000 652,669,000 ---------------- ---------------- --------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . $26,874,494,000 $23,146,333,000 $14,550,268,000 ================ ================ ===============
See accompanying notes F-4
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME Year Ended Three Months Ended Years Ended September 30, ----------------------------- December 31, 1999 December 31, 1998 1998 1997 ---------------------------------- ------------- -------------- Investment income. . . . . . . . $ 521,953,000 $ 54,278,000 $ 221,966,000 $ 210,759,000 ------------------- ------------- -------------- -------------- Interest expense on: Fixed annuity contracts. . . . (231,929,000) (22,828,000) (112,695,000) (109,217,000) Universal life insurance contracts (102,486,000) --- --- --- Guaranteed investment contracts. . . . . . . . . . (19,649,000) (3,980,000) (17,787,000) (22,650,000) Senior indebtedness. . . . . . (199,000) (34,000) (1,498,000) (2,549,000) Subordinated notes payable to affiliates. . . . . . . . (3,474,000) (853,000) (3,114,000) (3,142,000) ------------------- ------------- -------------- -------------- Total interest expense . . . . (357,737,000) (27,695,000) (135,094,000) (137,558,000) ------------------- ------------- -------------- -------------- NET INVESTMENT INCOME. . . . . . 164,216,000 26,583,000 86,872,000 73,201,000 ------------------- ------------- -------------- -------------- NET REALIZED INVESTMENT GAINS (LOSSES) . . . . . . . . (19,620,000) 271,000 19,482,000 (17,394,000) ------------------- ------------- -------------- -------------- Fee income: Variable annuity fees. . . . . 306,417,000 58,806,000 200,867,000 139,492,000 Net retained commissions . . . 51,039,000 11,479,000 48,561,000 39,143,000 Asset management fees. . . . . 43,510,000 8,068,000 29,592,000 25,764,000 Universal life insurance fees 23,290,000 --- --- --- Surrender charges. . . . . . . 17,137,000 3,239,000 7,404,000 5,529,000 Other fees . . . . . . . . . . 13,999,000 1,738,000 3,938,000 3,218,000 ------------------- ------------- -------------- -------------- TOTAL FEE INCOME . . . . . . . . 455,392,000 83,330,000 290,362,000 213,146,000 ------------------- ------------- -------------- -------------- GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . (154,665,000) (21,993,000) (96,102,000) (98,802,000) ------------------- ------------- -------------- -------------- AMORTIZATION OF DEFERRED ACQUISITION COSTS. . . . . . . (116,840,000) (27,070,000) (72,713,000) (66,879,000) ------------------- ------------- -------------- -------------- ANNUAL COMMISSIONS . . . . . . . (40,760,000) (6,624,000) (18,209,000) (8,977,000) ------------------- ------------- -------------- -------------- PRETAX INCOME. . . . . . . . . . 287,723,000 54,497,000 209,692,000 94,295,000 Income tax expense . . . . . . . (103,025,000) (20,106,000) (71,051,000) (31,169,000) ------------------- ------------- -------------- -------------- NET INCOME . . . . . . . . . . . 184,698,000 34,391,000 138,641,000 63,126,000 ------------------- ------------- -------------- -------------- Other comprehensive income (loss), net of tax: Net unrealized gains (losses) on debt and equity securities available for sale: Net unrealized gains (losses) identified in the current period . . . . (118,669,000) (10,249,000) (4,027,000) 16,605,000 Less reclassification adjustment for net realized (gains) losses included in net income . . 7,735,000 215,000 (5,963,000) 7,321,000 ------------------- ------------- -------------- -------------- OTHER COMPREHENSIVE INCOME (LOSS) . . . . . . . . . . . . (110,934,000) (10,034,000) (9,990,000) 23,926,000 ------------------- ------------- -------------- -------------- COMPREHENSIVE INCOME . . . . . . $ 73,764,000 $ 24,357,000 $ 128,651,000 $ 87,052,000 =================== ============= ============== ==============
See accompanying notes F-5
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended Three Months Ended Years Ended September 30, --------------------------------- December 31, 1999 December 31, 1998 1998 1997 ----------------- ------------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . $ 184,698,000 $ 34,391,000 $ 138,641,000 $ 63,126,000 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts . . 231,929,000 22,828,000 112,695,000 109,217,000 Universal life insurance contracts 102,486,000 --- --- --- Guaranteed investment contracts . . . . . . . . 19,649,000 3,980,000 17,787,000 22,650,000 Net realized investment losses (gains). . . . . . . 19,620,000 (271,000) (19,482,000) 17,394,000 Amortization (accretion) of net premiums (discounts) on investments. . . . . . . (18,343,000) (1,199,000) 447,000 (18,576,000) Universal life insurance fees (23,290,000) --- --- --- Amortization of goodwill. . . 776,000 356,000 1,422,000 1,187,000 Provision for deferred income taxes. . . . . . . . (100,013,000) 15,945,000 34,087,000 (16,024,000) Change in: Accrued investment income . . . 9,155,000 (1,512,000) (4,649,000) (2,084,000) Deferred acquisition costs. . . (208,228,000) (34,328,000) (160,926,000) (113,145,000) Other assets. . . . . . . . . . (5,661,000) (21,070,000) (19,374,000) (14,598,000) Income taxes currently payable . . . . . . . . . . . 12,367,000 16,992,000 (38,134,000) 10,779,000 Other liabilities . . . . . . . 49,504,000 5,617,000 (2,248,000) 14,187,000 Other, net. . . . . . . . . . . . 15,087,000 5,510,000 (5,599,000) 418,000 ------------------- --------------- ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . 289,736,000 47,239,000 54,667,000 74,531,000 ------------------- --------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks. . . . . . . (4,130,682,000) (392,515,000) (1,970,502,000) (2,566,211,000) Mortgage loans. . . . . . . . . (331,398,000) (4,962,000) (131,386,000) (266,771,000) Other investments, excluding short-term investments (227,268,000) (1,992,000) --- (75,556,000) Sales of: Bonds, notes and redeemable preferred stocks. . . . . . . 2,660,931,000 265,039,000 1,602,079,000 2,299,063,000 Other investments, excluding short-term investments. . . . 65,395,000 142,000 42,458,000 6,421,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks. . . . . . . 1,274,764,000 37,290,000 424,393,000 376,847,000 Mortgage loans. . . . . . . . . 46,760,000 7,699,000 80,515,000 25,920,000 Other investments, excluding short-term investments. . . . 33,503,000 853,000 67,213,000 23,940,000 Cash and short-term investments acquired in coinsurance transaction with MBL Life Assurance Corporation --- 3,083,211,000 --- --- Short-term investments transferred to First SunAmerica Life Insurance Company in assumption reinsurance transaction with MBL Life Assurance Corporation (371,634,000) --- --- --- ------------------- --------------- ---------------- ---------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES. . . . . . . (979,629,000) 2,994,765,000 114,770,000 (176,347,000) ------------------- --------------- ---------------- ----------------
F-6
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Year Ended Three Months Ended Years Ended September 30, --------------------------------- December 31, 1999 December 31, 1998 1998 1997 --------------------------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts. . . . $ 2,016,851,000 $ 351,616,000 $ 1,512,994,000 $1,097,937,000 Universal life insurance contracts 78,864,000 --- --- --- Guaranteed investment contracts --- --- 5,619,000 55,000,000 Net exchanges from the fixed accounts of variable annuity contracts. . . . . . . . . . . (1,821,324,000) (448,762,000) (1,303,790,000) (620,367,000) Withdrawal payments on: Fixed annuity contracts. . . . (2,232,374,000) (41,554,000) (191,690,000) (242,589,000) Universal life insurance contracts (81,634,000) --- --- --- Guaranteed investment contracts. . . . . . . . . . (19,742,000) (3,797,000) (36,313,000) (198,062,000) Claims and annuity payments on: Fixed annuity contracts. . . . (46,578,000) (9,333,000) (40,589,000) (35,731,000) Universal life insurance contracts (158,043,000) --- --- --- Net receipts from (repayments of) other short-term financings . . . . . . . . . . (129,512,000) 9,545,000 (10,944,000) 34,239,000 Net receipt/(payment) related to a modified coinsurance transaction 140,757,000 (170,436,000) 166,631,000 --- Receipts from issuance of subordinated note payable to affiliate --- 170,436,000 --- --- Net of capital contributions and return of capital 114,336,000 70,000,000 --- 28,411,000 Dividends paid --- --- (51,200,000) (25,500,000) ------------------- --------------- ---------------- --------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . (2,138,399,000) (72,285,000) 50,718,000 93,338,000 ------------------- --------------- ---------------- --------------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS . . . (2,828,292,000) 2,969,719,000 220,155,000 (8,478,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD . . . . . 3,303,454,000 333,735,000 113,580,000 122,058,000 ------------------- --------------- ---------------- --------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD . . . . . . . . $ 475,162,000 $3,303,454,000 $ 333,735,000 $ 113,580,000 =================== =============== ================ =============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness. . $ 3,787,000 $ 1,169,000 $ 3,912,000 $ 7,032,000 =================== =============== ================ =============== Net income taxes paid (refunded) . . . . . . . . . . $ 190,126,000 $ (12,302,000) $ 74,932,000 $ 36,420,000 =================== =============== ================ ===============
See accompanying notes F-7 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Anchor National Life Insurance Company, including its wholly owned subsidiaries, (the "Company") is an Arizona-domiciled life insurance company which conducts its business through three segments: annuity operations, asset management operations and broker-dealer operations. Annuity operations include the sale and administration of deposit-type insurance contracts, including fixed and variable annuities, universal life contracts and guaranteed investment contracts. Asset management operations, which include the distribution and management of mutual funds, are conducted by SunAmerica Asset Management Corp. Broker-dealer operations include the sale of securities and financial services products, and are conducted by Royal Alliance Associates, Inc. The Company is an indirect wholly owned subsidiary of American International Group, Inc. ("AIG"), an international insurance and financial services holding company. At December 31, 1998, the Company was a wholly owned indirect subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1, 1999, SunAmerica Inc. merged with and into AIG in a tax-free reorganization that has been treated as a pooling of interests for accounting purposes. Thus, SunAmerica Inc. ceased to exist on that date. However, immediately prior to the date of the merger, substantially all of the net assets of SunAmerica Inc. were contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc., a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name to SunAmerica Inc. ("SunAmerica"). 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, the 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. 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 items have been reclassified to conform to the current period's presentation. F-8 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Under generally accepted accounting principles, premiums collected on the non-traditional life and annuity insurance products, such as those sold by the Company, are not reflected as revenues in the Company's statement of earnings, as they are recorded directly to policyholders liabilities upon receipt. 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. INVESTED ASSETS: Cash and short-term investments primarily include cash, commercial paper, money market investments, repurchase agreements and short-term bank participations. All such investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, notes and redeemable preferred stocks available for sale and common stocks are carried at aggregate fair value and changes in unrealized gains or losses, net of tax, are credited or charged directly to shareholder's equity. 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. Policy loans are carried at unpaid balances. Separate account seed money consists of seed money for mutual funds used as investment vehicles for the Company's variable annuity separate accounts and is valued at market. Limited partnerships are accounted for by the cost method of accounting. Real estate is carried at cost, reduced by impairment provisions. Other invested assets include collateralized bond obligations. Realized gains and losses on the sale of investments are recognized in operations at the date of sale and are determined by using the specific cost identification method. Premiums and discounts on investments are amortized to investment income by 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. Initially, Swap Agreements are designated as hedges and, therefore, are not marked to market. However, when a hedged asset/liability is sold or repaid before the related Swap Agreement matures, the Swap Agreement is marked to market and any gain/loss is classified with any gain/loss realized on the disposition of the hedged asset/liability. Subsequently, the Swap Agreement is marked to market and the resulting change in fair value is included in Investment Income in the income F-9 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) statement. When a Swap Agreement that is designated as a hedge is terminated before its contractual maturity, any resulting gain/loss is credited/charged to the carrying value of the asset/liability that it hedged and is treated as a premium/discount for the remaining life of the asset/liability. 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, universal life insurance fees, surrender charges and direct administrative expenses. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. Deferred acquisition costs ("DAC") 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 DAC 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 accumulated other comprehensive income/(loss) that is credited or charged directly to shareholder's equity. DAC has been increased by $29,400,000 at December 31, 1999, increased by $1,400,000 at December 31, 1998, and decreased by $7,000,000 at September 30, 1998 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 $22,206,000 at December 31, 1999, is amortized by using the straight-line method over periods averaging 25 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, universal life insurance 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). MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified coinsurance transaction described in Note 8 is recorded as a deposit liability. F-10 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) FEE INCOME: Variable annuity fees, asset management fees, universal life insurance fees and surrender charges are recorded in income as earned. Net retained commissions are recognized as income on a trade date basis. INCOME TAXES: The Company files as a "life insurance company" under the provisions of the Internal Revenue Code of 1986. Its federal income tax return is consolidated with those of its direct parent, SunAmerica Life Insurance Company (the "Parent"), and its affiliate, First SunAmerica Life Insurance Company. Income taxes have been calculated as if the Company filed a separate return. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 was postponed by SFAS 137, and now will be effective for the Company as of January 1, 2001. Therefore, it is not included in the accompanying financial statements. The Company has not completed its analysis of the effect of SFAS 133, but management believes that it will not have a material impact on the Company's results of operations, financial condition or liquidity. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was adopted for the year ended December 31, 1999 and is included in Note 14 of the accompanying financial statements. 3. FISCAL YEAR CHANGE Effective December 31, 1998, the Company changed its fiscal year end from September 30 to December 31. Accordingly, the consolidated financial statements include the results of operations and cash flows for the three-month transition period ended December 31, 1998. Such results are not necessarily indicative of operations for a full year. The consolidated financial statements as of and for the three months ended December 31, 1998 were originally filed as the Company's unaudited Transition Report on Form 10-Q. Results for the comparable prior year period are summarized below.
Three Months Ended December 31, 1997 ----------------- Investment income . . . . . . 59,855,000 Net investment income . . . . 26,482,000 Net realized investment gains 20,935,000 Total fee income. . . . . . . 63,984,000 Pretax income . . . . . . . . 67,654,000 Net income. . . . . . . . . . 44,348,000 =================
F-11 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. ACQUISITION On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life") ("the Acquisition"), via a 100% coinsurance transaction, for a cash purchase price of $128,420,000. As part of this transaction, the Company acquired assets having an aggregate fair value of $5,718,227,000, composed primarily of invested assets totaling $5,715,010,000. Liabilities assumed in this acquisition totaled $5,831,266,000, including $3,460,503,000 of fixed annuity reserves, $2,308,742,000 of universal life reserves and $24,011,000 of guaranteed investment contract reserves. The excess of the purchase price over the fair value of net assets received amounted to $104,509,000 at December 31, 1999, after adjustment for the transfer of the New York business to First SunAmerica Life Insurance Company (see below), and is included in Deferred Acquisition Costs in the accompanying consolidated balance sheet. The income statement for the year ended December 31, 1999 includes the impact of the Acquisition. On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1996, the beginning of the prior-year periods discussed within, investment income would have been $517,606,000 and net income would have been $158,887,000 for the year ended September 30, 1998. For the year ended September 30, 1997, investment income would have been $506,399,000 and net income would have been $83,372,000. Included in the block of business acquired from MBL Life were policies whose owners are residents of New York State ("the New York Business"). On July 1, 1999, the New York Business was acquired by the Company's New York affiliate, First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance agreement, and the remainder of the business converted to assumption reinsurance in the Company, which superseded the coinsurance agreement. As part of this transfer, invested assets equal to $678,272,000, life reserves equal to $282,247,000, group pension reserves equal to $406,118,000, and other net assets of $10,093,000 were transferred to FSA. The $128,420,000 purchase price was allocated between the Company and FSA based on the estimated future gross profits of the two blocks of business. The portion allocated to FSA was $10,000,000. As part of the Acquisition, the Company received $242,473,000 from MBL to pay policy enhancements guaranteed by the MBL Life rehabilitation agreement to policyholders meeting certain requirements. A primary requirement was that annuity policyholders must have converted their MBL Life policy to a policy type currently offered by the Company or one of its affiliates by December 31, 1999. The enhancements are to be credited in four installments on January 1, 2000, June 30, 2001, June 30, 2002 and June 30, 2003, to eligible policies still active on each of those dates. On December 31, 1999 the enhancement reserve for such payments totaled $223,032,000, which includes interest accredited at 6.75% on the original reserve. Of this amount, $69,836,000 was credited to policyholders in February 2000 for the January 1, 2000 installment. F-12
ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENTS The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by major category follow: Estimated Amortized Fair Cost Value -------------- -------------- AT DECEMBER 31, 1999: Securities of the United States Government. . . . . . . . . . $ 24,688,000 $ 22,884,000 Mortgage-backed securities. . . 1,505,729,000 1,412,134,000 Securities of public utilities. 114,933,000 107,596,000 Corporate bonds and notes . . . 1,676,006,000 1,596,469,000 Redeemable preferred stocks . . 4,375,000 4,547,000 Other debt securities . . . . . 829,997,000 809,539,000 -------------- -------------- Total . . . . . . . . . . . . $4,155,728,000 $3,953,169,000 ============== ============== AT DECEMBER 31, 1998: Securities of the United States Government. . . . . . . . . . $ 6,033,000 $ 6,272,000 Mortgage-backed securities. . . 546,790,000 553,990,000 Securities of public utilities. 208,074,000 205,119,000 Corporate bonds and notes . . . 2,624,330,000 2,616,073,000 Redeemable preferred stocks . . 6,125,000 7,507,000 Other debt securities . . . . . 861,388,000 859,879,000 -------------- -------------- Total . . . . . . . . . . . . $4,252,740,000 $4,248,840,000 ============== ============== AT SEPTEMBER 30, 1998: Securities of the United States Government. . . . . . . . . . $ 84,377,000 $ 88,239,000 Mortgage-backed securities. . . 569,613,000 584,007,000 Securities of public utilities. 108,431,000 106,065,000 Corporate bonds and notes . . . 883,890,000 884,209,000 Redeemable preferred stocks . . 6,125,000 6,888,000 Other debt securities . . . . . 282,427,000 285,346,000 -------------- -------------- Total . . . . . . . . . . . . $1,934,863,000 $1,954,754,000 ============== ==============
F-13
ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENTS (Continued) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by contractual maturity, as of December 31, 1999, follow: Estimated Amortized Fair Cost Value -------------- -------------- Due in one year or less. . . $ 199,679,000 $ 199,198,000 Due after one year through five years . . . . . . . . 552,071,000 530,289,000 Due after five years through ten years. . . . . . . . . 1,243,298,000 1,187,044,000 Due after ten years. . . . . 654,951,000 624,504,000 Mortgage-backed securities . 1,505,729,000 1,412,134,000 -------------- -------------- Total. . . . . . . . . . . $4,155,728,000 $3,953,169,000 ============== ==============
Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above due to prepayments and redemptions. F-14 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENTS (Continued) 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 ----------- -------------- AT DECEMBER 31, 1999: Securities of the United States Government. . . . . . . . . . $ 47,000 $ (1,852,000) Mortgage-backed securities. . . 3,238,000 (96,832,000) Securities of public utilities. 13,000 (7,350,000) Corporate bonds and notes . . . 10,222,000 (89,758,000) Redeemable preferred stocks 172,000 --- Other debt securities . . . . . 4,275,000 (24,734,000) ----------- -------------- Total . . . . . . . . . . . . $17,967,000 $(220,526,000) =========== ============== AT DECEMBER 31, 1998: Securities of the United States Government $ 239,000 $ --- Mortgage-backed securities. . . 9,398,000 (2,198,000) Securities of public utilities. 926,000 (3,881,000) Corporate bonds and notes . . . 22,227,000 (30,484,000) Redeemable preferred stocks 1,382,000 --- Other debt securities . . . . . 2,024,000 (3,533,000) ----------- -------------- Total . . . . . . . . . . . . $36,196,000 $ (40,096,000) =========== ============== AT SEPTEMBER 30, 1998: Securities of the United States Government $ 3,862,000 $ --- Mortgage-backed securities. . . 15,103,000 (709,000) Securities of public utilities. 2,420,000 (4,786,000) Corporate bonds and notes . . . 31,795,000 (31,476,000) Redeemable preferred stocks 763,000 --- Other debt securities . . . . . 5,235,000 (2,316,000) ----------- -------------- Total . . . . . . . . . . . . $59,178,000 $ (39,287,000) =========== ==============
There were no gross unrealized gains on equity securities available for sale at December 31, 1999. Gross unrealized gains on equity securities available for sale aggregated $10,000 and $54,000 at December 31, 1998 and September 30, 1998, respectively. There were no unrealized losses at December 31, 1999, December 31, 1998, or September 30, 1998. F-15 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENTS (Continued) Gross realized investment gains and losses on sales of investments are as follows:
Year Ended Three Months Ended Years Ended September 30, --------------------------- December 31, 1999 December 31, 1998 1998 1997 ---------------------- ------------------- ------------ ------------- BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Realized gains . . . $ 8,333,000 $ 6,669,000 $ 28,086,000 $ 22,179,000 Realized losses. . . (26,113,000) (5,324,000) (4,627,000) (25,310,000) COMMON STOCKS: Realized gains . . . 4,239,000 12,000 337,000 4,002,000 Realized losses (11,000) (9,000) --- (312,000) OTHER INVESTMENTS: Realized gains --- 573,000 8,824,000 2,450,000 IMPAIRMENT WRITEDOWNS. (6,068,000) (1,650,000) (13,138,000) (20,403,000) ------------------- ------------ ------------- ------------- Total net realized investment gains and losses . . . . . $ (19,620,000) $ 271,000 $ 19,482,000 $(17,394,000) =================== ============ ============= =============
The sources and related amounts of investment income are as follows:
Year Ended Three Months Ended Years Ended September 30, ------------------------- December 31,1999 December 31, 1998 1998 1997 ----------------- ------------------- ----------- ------------- Short-term investments . $ 61,764,000 $ 4,649,000 $ 12,524,000 $ 11,780,000 Bonds, notes and redeemable preferred stocks . . . . . . . . 348,373,000 39,660,000 156,140,000 163,038,000 Mortgage loans . . . . . 47,480,000 7,904,000 29,996,000 17,632,000 Common stocks 7,000 --- 34,000 16,000 Real estate. . . . . . . (525,000) 13,000 (467,000) (296,000) Cost-method partnerships 6,631,000 352,000 24,311,000 6,725,000 Other invested assets. . 58,223,000 1,700,000 (572,000) 11,864,000 ------------------- ----------- ------------- ------------- Total investment income . . . . . . . $ 521,953,000 $54,278,000 $221,966,000 $210,759,000 =================== =========== ============= =============
Expenses incurred to manage the investment portfolio amounted to $10,014,000 for the year ended December 31, 1999, $500,000 for the three months ended December 31, 1998, $1,910,000 for the year ended September 30, 1998 and $2,050,000 for the year ended September 30, 1997, and are included in General and Administrative Expenses in the income statement. Investment expenses have increased significantly because the size of the portfolio increased as a result of the Acquisition. F-16
ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENTS (Continued) At December 31, 1999, the following investments exceeded 10% of the Company's consolidated shareholder's equity of $935,126,000: Amortized Fair Cost Value ------------ ------------ Provident Institutional Funds Inc. Del Treasury Trust Fund. . . . . 113,000,000 113,000,000 Salomon Smith Barney Repurchase Agreement. . . . . . . . . . . . 97,000,000 97,000,000 ------------ ------------ Total. . . . . . . . . . . . . . $210,000,000 $210,000,000 ============ ============
At December 31, 1999, mortgage loans were collateralized by properties located in 29 states, with loans totaling approximately 36% of the aggregate carrying value of the portfolio secured by properties located in California and approximately 11% by properties located in New York. No more than 8% of the portfolio was secured by properties in any other single state. At December 31, 1999, bonds, notes and redeemable preferred stocks included $377,149,000 of bonds and notes not rated investment grade. The Company had no material concentrations of non-investment-grade assets at December 31, 1999. At December 31, 1999, the carrying value of investments in default as to the payment of principal or interest was $1,529,000, composed of $870,000 of bonds and $659,000 of mortgage loans. Such nonperforming investments had an estimated fair value of $872,000. 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 December 31, 1999, the Company had one outstanding Swap Agreement with a notional principal amount of $21,538,000, which matures in December 2024. The net interest paid amounted to $215,000 for the year ended December 31, 1999, $54,000 for the three months ended December 31, 1998, $278,000 for the year ended September 30, 1998, and $125,000 for the year ended September 30, 1997, and is included in Interest Expense on Guaranteed Investment Contracts in the income statement. At December 31, 1999, $7,418,000 of bonds, at amortized cost, were on deposit with regulatory authorities in accordance with statutory requirements. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value disclosures are limited to F-17 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) 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 real estate investments and other invested assets except for cost-method partnerships) and liabilities or the value of anticipated future business. The Company does not plan to sell most of its assets or settle most of its liabilities at these estimated fair values. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Selling expenses and potential taxes are not included. The estimated fair value amounts were determined using available market information, current pricing information and various valuation methodologies. If quoted market prices were not readily available for a financial instrument, management determined an estimated fair value. Accordingly, the estimates may not be indicative of the amounts the financial instruments could be exchanged for in a current or future market transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a reasonable estimate of fair value. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. MORTGAGE LOANS: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. SEPARATE ACCOUNT SEED MONEY: Carrying value is the market value of the underlying securities. COMMON STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for by using the cost method is based upon the fair value of the net assets of the partnerships as determined by the general partners. VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are carried at the market value of the underlying securities. RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned a fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and F-18 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) single life premium life contracts are assigned a fair value equal to current net surrender value. 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 a hedging Swap Agreement, determined from independent broker quotes. RECEIVABLE FROM/PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent transactions of a short-term nature for which the carrying value is considered a reasonable estimate of fair value. MODIFIED COINSURANCE DEPOSIT LIABILITY: Fair value is based on discounting the liability by the appropriate cost of funds, and therefore approximates carrying value. VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of contracts in the accumulation phase are based on net surrender values. Fair values of contracts in the payout phase are based on the present value of future cash flows at assumed investment rates. SUBORDINATED NOTES PAYABLE TO AFFILIATES: Fair value is estimated based on the quoted market prices for similar issues. F-19 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The estimated fair values of the Company's financial instruments at December 31, 1999, December 31, 1998 and September 30, 1998 compared with their respective carrying values, are as follows:
Carrying Fair Value Value --------------- --------------- DECEMBER 31, 1999: ASSETS: Cash and short-term investments . . . $ 475,162,000 $ 475,162,000 Bonds, notes and redeemable preferred stocks. . . . . . . . . . 3,953,169,000 3,953,169,000 Mortgage loans. . . . . . . . . . . . 674,679,000 673,781,000 Separate account seed money . . . . . 141,499,000 141,499,000 Common stocks --- --- Cost-method partnerships. . . . . . . 4,009,000 9,114,000 Variable annuity assets held in separate accounts . . . . . . . . . 19,949,145,000 19,949,145,000 Receivable from brokers for sales of securities . . . . . . . . . . . 54,760,000 54,760,000 LIABILITIES: Reserves for fixed annuity contracts. 3,254,895,000 3,053,660,000 Reserves for universal life insurance contracts . . . . . . . . . . . . . 1,978,332,000 1,853,442,000 Reserves for guaranteed investment contracts . . . . . . . . . . . . . 305,570,000 305,570,000 Payable to brokers for purchases of securities . . . . . . . . . . . 139,000 139,000 Modified coinsurance deposit liability . . . . . . . . . . . . . 140,757,000 140,757,000 Variable annuity liabilities related to separate accounts. . . . . . . . 19,949,145,000 19,367,834,000 Subordinated notes payable to affiliates. . . . . . . . . . . . . 37,816,000 38,643,000 =============== =============== DECEMBER 31, 1998: ASSETS: Cash and short-term investments . . . $ 3,303,454,000 $ 3,303,454,000 Bonds, notes and redeemable preferred stocks. . . . . . . . . . 4,248,840,000 4,248,840,000 Mortgage loans. . . . . . . . . . . . 388,780,000 411,230,000 Separate account seed money --- --- Common stocks . . . . . . . . . . . . 1,419,000 1,419,000 Cost-method partnerships. . . . . . . 4,577,000 12,802,000 Variable annuity assets held in separate accounts . . . . . . . . . 13,767,213,000 13,767,213,000 Receivable from brokers for sales of securities . . . . . . . . . . . 22,826,000 22,826,000 LIABILITIES: Reserves for fixed annuity contracts. 5,500,157,000 5,437,045,000 Reserves for universal life insurance contracts . . . . . . . . 2,339,194,000 2,339,061,000 Reserves for guaranteed investment contracts . . . . . . . . . . . . . 306,461,000 306,461,000 Variable annuity liabilities related to separate accounts. . . . . . . . 13,767,213,000 13,287,434,000 Subordinated notes payable to affiliates. . . . . . . . . . . . . 209,367,000 211,058,000 =============== ===============
F-20 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Carrying Fair Value Value --------------- --------------- SEPTEMBER 30, 1998: ASSETS: Cash and short-term investments. . . $ 333,735,000 $ 333,735,000 Bonds, notes and redeemable preferred stocks . . . . . . . . . 1,954,754,000 1,954,754,000 Mortgage loans . . . . . . . . . . . 391,448,000 415,981,000 Separate account seed money --- --- Common stocks. . . . . . . . . . . . 169,000 169,000 Cost-method partnerships . . . . . . 4,403,000 12,744,000 Variable annuity assets held in separate accounts. . . . . . . . . 11,133,569,000 11,133,569,000 Receivable from brokers for sales of securities. . . . . . . . . . . 23,904,000 23,904,000 LIABILITIES: Reserves for fixed annuity contracts 2,189,272,000 2,116,874,000 Reserves for guaranteed investment contracts. . . . . . . . . . . . . 282,267,000 282,267,000 Payable to brokers for purchases of securities. . . . . . . . . . . 50,957,000 50,957,000 Variable annuity liabilities related to separate accounts . . . . . . . 11,133,569,000 10,696,607,000 Subordinated notes payable to affiliates . . . . . . . . . . . . 39,182,000 41,272,000 =============== ===============
7. SUBORDINATED NOTES PAYABLE TO AFFILIATES At December 31, 1998, Subordinated Notes Payable to Affiliates included a surplus note (the "Note") payable to its immediate parent, SunAmerica Life Insurance Company (the "Parent"), for $170,436,000. On June 30, 1999, the Parent cancelled the Note and forgave the interest earned. Funds received were reclassified to Additional Paid-in Capital in the accompanying consolidated balance sheet. Subordinated notes and accrued interest payable to affiliates totaled $37,816,000 at interest rates ranging from 8% to 9% at December 31, 1999, and require principal payments of $5,400,000 in 2000, $10,000,000 in 2001 and $22,060,000 in 2002. 8. REINSURANCE The business which was assumed from MBL Life is subject to existing reinsurance ceded agreements. At December 31, 1998, the maximum retention on any single life was $2,000,000, and a total credit of $5,057,000 was taken against the life insurance reserves, representing predominantly yearly renewable term reinsurance. In order to limit even further the exposure to loss on any single insured and to recover an additional portion of the benefits paid over such limits, the Company entered into a reinsurance treaty effective January 1, 1999 under which the Company retains no more than $100,000 of risk on any F-21 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. REINSURANCE (Continued) one insured life. At December 31, 1999, a total reserve credit of $3,560,000 was taken against the life insurance reserves. With respect to these coinsurance agreements, the Company could become liable for all obligations of the reinsured policies if the reinsurers were to become unable to meet the obligations assumed under the respective reinsurance agreements. The Company monitors its credit exposure with respect to these agreements. However, due to the high credit ratings of the reinsurers, such risks are considered to be minimal. On August 1, 1999, the Company entered into a modified coinsurance transaction, approved by the Arizona Department of Insurance, which involved the ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company (Hawaii), a non-affiliated stock life insurer. The transaction is accounted for as reinsurance for statutory reporting purposes. As part of the transaction, the Company received cash in the amount of $150,000,000 and recorded a corresponding deposit liability. As payments are made to the reinsurer, the deposit liability is relieved. The cost of this program, $3,621,000 in 1999, is classified as General and Administrative Expenses in the income statement. On August 11, 1998, the Company entered into a similar modified coinsurance transaction, approved by the Arizona Department of Insurance, which involved the ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company (Cayman), a Cayman Islands stock life insurance company, effective December 31, 1997. As a part of this transaction, the Company received cash amounting to approximately $188,700,000, and recorded a corresponding reduction of DAC related to the coinsured annuities. As payments were made to the reinsurer, the reduction of DAC was relieved. Certain expenses related to this transaction were charged directly to DAC amortization in the income statement. The net effect of this transaction in the income statement was not material. On December 31, 1998, the Company recaptured this business. As part of this recapture, the Company paid cash of $170,436,000 and recorded an increase in DAC of $167,202,000 with the balance of $3,234,000 being recorded as DAC amortization in the income statement. 9. CONTINGENT LIABILITIES The Company has entered into four agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees is $359,400,000. The Company's Parent currently shares in the liabilities and fees of two of these agreements. The Parent's share in these liabilities will increase by $150,000,000 subsequent to December 31, 1999, and the Company's share will decrease to $209,400,000. Management does not anticipate any material future losses with respect to these liquidity support facilities. F-22 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. CONTINGENT LIABILITIES (Continued) 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 relating to such litigation are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position, results of operations or cash flows. The Company's current financial strength and counterparty credit ratings from Standard & Poor's are based in part on a guarantee (the "Guarantee") of the Company's insurance policy obligations by American Home Assurance Company ("American Home"), a subsidiary of AIG, and a member of an AIG intercompany pool, and the belief that the Company is viewed as a strategically important member of AIG. The Guarantee is unconditional and irrevocable, and policyholders have the right to enforce the Guarantee directly against American Home. The Company's current financial strength rating from Moody's is based in part on a support agreement between the Company and AIG (the "Support Agreement"), pursuant to which AIG has agreed that AIG will cause the Company to maintain a policyholder's surplus of not less than $1 million or such greater amount as shall be sufficient to enable the Company to perform its obligations under any policy issued by it. The Support Agreement also provides that if the Company needs funds not otherwise available to it to make timely payment of its obligations under policies issued by it, AIG will provide such funds at the request of the Company. The Support Agreement is not a direct or indirect guarantee by AIG to any person of any obligation of the Company. AIG may terminate the Support Agreement with respect to outstanding obligations of the Company only under circumstances where the Company attains, without the benefit of the Support Agreement, a financial strength rating equivalent to that held by the Company with the benefit of the support agreement. Policyholders have the right to cause the Company to enforce its rights against AIG and, if the Company fails or refuses to take timely action to enforce the Support Agreement or if the Company defaults in any claim or payment owed to such policyholder when due, have the right to enforce the Support Agreement directly against AIG. American Home does not publish financial statements, although it files statutory annual and quarterly reports with the New York State Insurance Department, where such reports are available to the public. AIG is a reporting company under the Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and quarterly reports on Form 10-Q, which are available from the Securities and Exchange Commission. F-23 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. SHAREHOLDER'S EQUITY The Company is authorized to issue 4,000 shares of its $1,000 par value Common Stock. At December 31, 1999, December 31, 1998 and September 30, 1998, 3,511 shares were outstanding. Changes in shareholder's equity are as follows:
Year Ended Three Months Ended Years Ended September 30, ----------------------- December 31, 1999 December 31, 1998 1998 1997 -------------------- ------------------- ----------- ------------ ADDITIONAL PAID-IN CAPITAL: Beginning balances . . $ 378,674,000 $308,674,000 $308,674,000 $280,263,000 Reclassification of Note by the Parent 170,436,000 --- --- --- Return of capital (170,500,000) --- --- --- Capital contributions received 114,250,000 70,000,000 --- 28,411,000 Contribution of partnership investment 150,000 --- --- --- ------------------- ------------- ------------- ------------- Ending balances. . . . . $ 493,010,000 $378,674,000 $308,674,000 $308,674,000 =================== ============= ============= ============= RETAINED EARNINGS: Beginning balances . . $ 366,460,000 $332,069,000 $244,628,000 $207,002,000 Net income . . . . . . 184,698,000 34,391,000 138,641,000 63,126,000 Dividends paid --- --- (51,200,000) (25,500,000) ------------------- ------------- ------------- ------------- Ending balances. . . . . $ 551,158,000 $366,460,000 $332,069,000 $244,628,000 =================== ============= ============= ============= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Beginning balances . $ (1,619,000) $ 8,415,000 $ 18,405,000 $ (5,521,000) Change in net unrealized gains (losses) on debt securities available for sale (198,659,000) (23,791,000) (23,818,000) 57,463,000 Change in net unrealized gains (losses) on equity securities available for sale (10,000) (44,000) (950,000) (55,000) Change in adjustment to deferred acquisition costs. 28,000,000 8,400,000 9,400,000 (20,600,000) Tax effects of net changes. . . . . . $ 59,735,000 5,401,000 5,378,000 (12,882,000) ------------------- ------------- ------------- ------------- Ending balances. . . . . $ (112,553,000) $ (1,619,000) $ 8,415,000 $ 18,405,000 =================== ============= ============= =============
F-24 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. SHAREHOLDER'S EQUITY (Continued) Dividends that the Company may pay to its shareholder in any year without prior approval of the Arizona Department of Insurance are limited by statute. The maximum amount of dividends which can be paid to shareholders of insurance companies domiciled in the state of Arizona without obtaining the prior approval of the Insurance Commissioner is limited to the lesser of either 10% of the preceding year's statutory surplus or the preceding year's statutory net gain from operations less equity in undistributed income or loss of subsidiaries included in net investment income if, after paying the dividend, the Company's capital and surplus would be adequate in the opinion of the Arizona Department of Insurance. No dividends were paid in the year ended December 31, 1999 or the three months ended December 31, 1998. Dividends in the amounts of $51,200,000 and $25,500,000 were paid on June 4, 1998 and April 1, 1997, respectively. Dividends of $69,000,000 were paid on March 1, 2000. Under statutory accounting principles utilized in filings with insurance regulatory authorities, the Company's net income for the year ended December 31, 1999 was $261,539,000. The statutory net loss for the year ended December 31, 1998 was $98,766,000. The statutory net income for the year ended December 31, 1997 totaled $74,407,000. The Company's statutory capital and surplus totaled $694,621,000 at December 31, 1999, $443,394,000 at December 31, 1998 and $537,542,000 at September 30, 1998. On June 30, 1999, the Parent cancelled the Company's surplus note payable of $170,436,000 and funds received were reclassified to Additional Paid-in Capital in the accompanying consolidated balance sheet. On September 9, 1999, the Company paid $170,500,000 to its Parent as a return of capital. On September 14, 1999 and October 25, 1999, the Parent contributed additional capital to the Company in the amounts of $54,250,000 and $60,000,000, respectively. Also on December 31, 1999, the Parent made a $150,000 contribution of partnership investments. F-25 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES The components of the provisions for federal income taxes on pretax income consist of the following:
Net Realized Investment Gains (Losses) Operations Total --------------- ------------- -------------- YEAR ENDED DECEMBER 31, 1999: Currently payable . . . . . . . $ 6,846,000 $196,192,000 $ 203,038,000 Deferred. . . . . . . . . . . . (13,713,000) (86,300,000) (100,013,000) --------------- ------------- -------------- Total income tax expense (benefit) . . . . . . . . . $ (6,867,000) $109,892,000 $ 103,025,000 =============== ============= ============== THREE MONTHS ENDED DECEMBER 31, 1998: Currently payable . . . . . . . $ 740,000 $ 3,421,000 $ 4,161,000 Deferred. . . . . . . . . . . . (620,000) 16,565,000 15,945,000 --------------- ------------- -------------- Total income tax expense. . . $ 120,000 $ 19,986,000 $ 20,106,000 =============== ============= ============== YEAR ENDED SEPTEMBER 30, 1998: Currently payable . . . . . . . $ 4,221,000 $ 32,743,000 $ 36,964,000 Deferred. . . . . . . . . . . . (550,000) 34,637,000 34,087,000 --------------- ------------- -------------- Total income tax expense. . . $ 3,671,000 $ 67,380,000 $ 71,051,000 =============== ============= ============== YEAR ENDED SEPTEMBER 30, 1997: Currently payable . . . . . . . $ (3,635,000) $ 50,828,000 $ 47,193,000 Deferred. . . . . . . . . . . . (2,258,000) (13,766,000) (16,024,000) --------------- ------------- -------------- Total income tax expense (benefit) . . . . . . . . . $ (5,893,000) $ 37,062,000 $ 31,169,000 =============== ============= ==============
F-26 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (Continued) Income taxes computed at the United States federal income tax rate of 35% and income taxes provided differ as follows:
Year Ended Three Months Ended Years Ended September 30, --------------------------- December 31, 1999 December 31, 1998 1998 1997 --------------- ------------- ------------ ------------ Amount computed at statutory rate . . . . . $ 100,703,000 $19,074,000 $73,392,000 $33,003,000 Increases (decreases) resulting from: Amortization of differences between book and tax bases of net assets acquired . . . . . . 609,000 146,000 460,000 666,000 State income taxes, net of federal tax benefit. . . . . . . 7,231,000 1,183,000 5,530,000 1,950,000 Dividends-received deduction. . . . . . (3,618,000) (345,000) (7,254,000) (4,270,000) Tax credits. . . . . . (1,346,000) (1,296,000) (318,000) Other, net . . . . . . (554,000) 48,000 219,000 138,000 ------------------- ------------ ------------ ------------ Total income tax expense. . . . . . . $ 103,025,000 $20,106,000 $71,051,000 $31,169,000 =================== ============ ============ ============
For United States federal income tax purposes, certain amounts from life insurance operations are accumulated in a memorandum policyholders' surplus account and are taxed only when distributed to shareholders or when such account exceeds prescribed limits. The accumulated policyholders' surplus was $14,300,000 at December 31, 1999. The Company does not anticipate any transactions which would cause any part of this surplus to be taxable. F-27 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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:
December 31, December 31, September 30, 1999 1998 1998 -------------- -------------- -------------- DEFERRED TAX LIABILITIES: Investments. . . . . . . . . . $ 23,208,000 $ 18,174,000 $ 17,643,000 Deferred acquisition costs . . 272,697,000 222,943,000 223,392,000 State income taxes . . . . . . 5,203,000 3,143,000 2,873,000 Other liabilities. . . . . . . 18,658,000 13,906,000 144,000 Net unrealized gains on debt and equity securities available for sale --- --- 4,531,000 -------------- -------------- -------------- Total deferred tax liabilities $ 319,766,000 258,166,000 248,583,000 -------------- -------------- -------------- DEFERRED TAX ASSETS: Contractholder reserves. . . . (261,781,000) (148,587,000) (149,915,000) Guaranty fund assessments. . . (2,454,000) (2,935,000) (2,910,000) Deferred income (48,371,000) --- --- Other assets --- --- --- Net unrealized losses on debt and equity securities available for sale (60,605,000) ( 872,000) --- -------------- -------------- -------------- Total deferred tax assets. . . (373,211,000) (152,394,000) (152,825,000) -------------- -------------- -------------- Deferred income taxes. . . . . $ (53,445,000) $ 105,772,000 $ 95,758,000 ============== ============== ==============
12. COMPREHENSIVE INCOME Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") which requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The adoption of SFAS 130 did not have an impact on the Company's results of operations, financial condition or liquidity. Comprehensive income amounts for the prior year are disclosed to conform to the current year's presentation. F-28 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMPREHENSIVE INCOME (Continued) The before tax, after tax, and tax benefit (expense) amounts for each component of the increase or decrease in unrealized losses or gains on debt and equity securities available for sale for both the current and prior periods are summarized below:
Tax Benefit Before Tax (Expense) Net of Tax ------------- ----------- -------------- YEAR ENDED DECEMBER 31, 1999: Net unrealized losses on debt and equity securities available for sale identified in the current period. . . . . . . . . $(217,259,000) $ 76,041,000 $(141,218,000) Increase in deferred acquisition cost adjustment identified in the current period. . . . . . . 34,690,000 (12,141,000) 22,549,000 -------------- ------------- -------------- Subtotal. . . . . . . . . . . . . (182,569,000) 63,900,000 (118,669,000) -------------- ------------- -------------- Reclassification adjustment for: Net realized losses included in net income . . . . . . . . 18,590,000 (6,507,000) 12,083,000 Related change in deferred acquisition costs . . . . . . (6,690,000) 2,342,000 (4,348,000) -------------- ------------- -------------- Total reclassification adjustment. . . . . . . . . . 11,900,000 (4,165,000) 7,735,000 -------------- ------------- -------------- Total other comprehensive loss. . . . . . . . . . . . . . $(170,669,000) $ 59,735,000 $(110,934,000) ============== ============= ==============
THREE MONTHS ENDED DECEMBER 31, 1998: Net unrealized losses on debt and equity securities available for sale identified in the current period. . . . . . . . . $(24,345,000) $ 8,521,000 $(15,824,000) Increase in deferred acquisition cost adjustment identified in the current period. . . . . . . 8,579,000 (3,004,000) 5,575,000 ------------- ------------ ------------- Subtotal. . . . . . . . . . . . . (15,766,000) 5,517,000 (10,249,000) ------------- ------------ ------------- Reclassification adjustment for: Net realized losses included in net income . . . . . . . . 510,000 (179,000) 331,000 Related change in deferred acquisition costs . . . . . . . (179,000) 63,000 (116,000) ------------- ------------ ------------- Total reclassification adjustment. . . . . . . . . . 331,000 (116,000) 215,000 ------------- ------------ ------------- Total other comprehensive loss. . $(15,435,000) $ 5,401,000 $(10,034,000) ============= ============ =============
F-29 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMPREHENSIVE INCOME (Continued)
Tax Benefit Before Tax (Expense) Net of Tax ------------- ----------- ------------- YEAR ENDED SEPTEMBER 30, 1998: Net unrealized losses on debt and equity securities available for sale identified in the current period. . . . . . . . . $(10,281,000) $ 3,598,000 $(6,683,000) Increase in deferred acquisition cost adjustment identified in the current period. . . . . . . 4,086,000 (1,430,000) 2,656,000 ------------- ------------ ------------ Subtotal. . . . . . . . . . . . . (6,195,000) 2,168,000 (4,027,000) ------------- ------------ ------------ Reclassification adjustment for: Net realized losses included in net income . . . . . . . . (14,487,000) 5,070,000 (9,417,000) Related change in deferred acquisition costs . . . . . . . 5,314,000 (1,860,000) 3,454,000 ------------- ------------ ------------ Total reclassification adjustment. . . . . . . . . . (9,173,000) 3,210,000 (5,963,000) ------------- ------------ ------------ Total other comprehensive loss. . $(15,368,000) $ 5,378,000 $(9,990,000) ============= ============ ============
YEAR ENDED SEPTEMBER 30, 1997: Net unrealized gains on debt and equity securities available for sale identified in the current period. . . . . . . . . $ 40,575,000 $(14,201,000) $26,374,000 Decrease in deferred acquisition cost adjustment identified in the current period. . . . . . . (15,031,000) 5,262,000 (9,769,000) ------------- ------------- ------------ Subtotal. . . . . . . . . . . . . 25,544,000 (8,939,000) 16,605,000 ------------- ------------- ------------ Reclassification adjustment for: Net realized losses included in net income . . . . . . . . 16,832,000 (5,891,000) 10,941,000 Related change in deferred acquisition costs . . . . . . (5,569,000) 1,949,000 (3,620,000) ------------- ------------- ------------ Total reclassification adjustment. . . . . . . . . . 11,263,000 (3,942,000) 7,321,000 ------------- ------------- ------------ Total other comprehensive income. . . . . . . . . . . . . $ 36,807,000 $(12,881,000) $23,926,000 ============= ============= ============
F-30 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. RELATED-PARTY MATTERS The Company pays commissions to five affiliated companies: SunAmerica Securities, Inc.; Advantage Capital Corp.; Financial Services Corp.; Sentra Securities Corp.; and Spelman & Co. Inc. Commissions paid to these broker-dealers totaled $37,435,000 in the year ended December 31, 1999, $6,977,000 in the three months ended December 31, 1998, and $32,946,000 in the year ended September 30, 1998 and $25,492,000 in the year ended September 30, 1997. These broker-dealers, when combined with the Company's wholly owned broker-dealer, represent a significant portion of the Company's business, amounting to approximately 35.6% of premiums in the year ended December 31, 1999 and the three months ended December 31, 1998, 33.6% in the year ended September 30, 1998 and 36.1% in the year ended September 30, 1997. The Company purchases administrative, investment management, accounting, marketing and data processing services from its Parent and SunAmerica, an indirect parent. Amounts paid for such services totaled $105,059,000 for the year ended December 31, 1999, $21,593,000 for the three months ended December 31, 1998, $84,975,000 for the year ended September 30, 1998 and $86,116,000 for the year ended September 30, 1997. The marketing component of such costs during these periods amounted to $53,385,000, $9,906,000, $39,482,000 and $31,968,000, respectively, and are deferred and amortized as part of Deferred Acquisition Costs. The other components of such costs are included in General and Administrative Expenses in the income statement. At December 31, 1999 and 1998, the Company held bonds with a fair value of $50,000 and $84,965,000, respectively, which were issued by its affiliate, International Lease Finance Corp. The amortized cost of these bonds is equal to the fair value. At September 30, 1998 and 1997, the Company held no investments issued by any of its affiliates. During the year ended December 31, 1999, the Company transferred short-term investments and bonds to FSA with an aggregate fair value of $634,596,000 as part of the transfer of the New York Business from the Acquisition (See Note 7). The Company recorded a net realized loss of $5,144,000 on the transfer of these assets. During the year ended December 31, 1999, the Company purchased certain invested assets from SunAmerica for cash equal to their current market value of $161,159,000. For the three months ended December 31, 1998, the Company made no purchases or sales of invested assets from or to the Parent or its affiliates. During the year ended September 30, 1998, the Company sold various invested assets to SunAmerica for cash equal to their current market value of $64,431,000. The Company recorded a net gain aggregating $16,388,000 on such transactions. During the year ended September 30, 1998, the Company purchased certain invested assets from SunAmerica, the Parent and CalAmerica Life Insurance Company ("CalAmerica"), a wholly-owned subsidiary of the Parent that has since merged into the Parent, for cash equal to their current market value which aggregated $20,666,000, $10,468,000 F-31 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. RELATED-PARTY MATTERS (Continued) and $61,000, respectively. During the year ended September 30, 1997, the Company sold various invested assets to the Parent and CalAmerica for cash equal to their current market value of $15,776,000 and $15,000, respectively. The Company recorded a net gain aggregating $276,000 on such transactions. During the year ended September 30, 1997, the Company purchased certain invested assets from the Parent and CalAmerica for cash equal to their current market value of $8,717,000 and $284,000, respectively. 14. BUSINESS SEGMENTS Effective January 1, 1999, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, the Company has three business segments: annuity operations, asset management operations and broker-dealer operations. The annuity operations focus primarily on the marketing of variable annuity products and the administration of the universal life business acquired from MBL Life in 1998 (See Note 4). The Company's variable annuity products offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable options and net investment income on the fixed-rate options. The asset management operations are conducted by the Company's registered investment advisor subsidiary, SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), and its related distributor. SunAmerica Asset Management earns fee income by distributing and managing a diversified family of mutual funds, by managing certain subaccounts within the Company's variable annuity products and by providing professional management of individual, corporate and pension plan portfolios. The broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products. F-32 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. BUSINESS SEGMENTS (Continued) Summarized data for the Company's business segments follow:
Asset Broker Annuity Management Dealer Operations Operations Operations Total ------------ ----------- ----------- ---------- YEAR ENDED DECEMBER 31, 1999: Total assets . . . . . . . $26,649,310,000 $150,966,000 $74,218,000 $26,874,494,000 Expenditures for long- lived assets --- 2,563,000 2,728,000 5,291,000 Investment in subsidiaries --- --- --- --- Revenue from external customers. . . . . . . . 790,697,000 54,652,000 41,185,000 886,534,000 Intersegment revenue --- 62,998,000 8,193,000 71,191,000 ---------------- ------------- ------------ ---------------- Total revenue. . . . . . . 790,697,000 117,650,000 49,378,000 957,725,000 ================ ============= ============ ================ Investment income. . . . . 511,914,000 9,072,000 967,000 521,953,000 Interest expense . . . . . (354,263,000) (3,085,000) (389,000) (357,737,000) Depreciation and amortization expense . . (95,408,000) (23,249,000) (3,234,000) (121,891,000) Income from unusual transactions --- --- --- --- Pretax income. . . . . . . 199,333,000 67,779,000 20,611,000 287,723,000 Income tax expense . . . . (65,445,000) (28,247,000) (9,333,000) (103,025,000) Income from extraordinary items --- --- --- --- Net income . . . . . . . . $ 133,888,000 $ 39,532,000 $11,278,000 $ 184,698,000 ================ ============= ============ ================ Significant non-cash items $ --- $ --- $ --- $ --- ================ ============= ============ ================
F-33 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. BUSINESS SEGMENTS (Continued)
Asset Broker- Annuity Management Dealer Operations Operations Operations Total ------------ ----------- ----------- ---------- THREE MONTHS ENDED DECEMBER 31, 1998: Total assets . . . . . . . $22,982,323,000 $104,473,000 $59,537,000 $23,146,333,000 Expenditures for long- lived assets --- 328,000 1,005,000 1,333,000 Investment in subsidiaries --- --- --- --- Revenue from external customers. . . . . . . . 103,626,000 11,103,000 9,605,000 124,334,000 Intersegment revenue --- 11,871,000 1,674,000 13,545,000 ---------------- ------------- ------------ ---------------- Total revenue. . . . . . . 103,626,000 22,974,000 11,279,000 137,879,000 ================ ============= ============ ================ Investment income. . . . . 53,149,000 971,000 158,000 54,278,000 Interest expense . . . . . (26,842,000) (752,000) (101,000) (27,695,000) Depreciation and amortization expense . . (23,236,000) (4,204,000) (561,000) (28,001,000) Income from unusual transactions --- --- --- --- Pretax income. . . . . . . 36,961,000 13,092,000 4,444,000 54,497,000 Income tax expense . . . . (12,978,000) (5,181,000) (1,947,000) (20,106,000) Income from extraordinary items --- --- --- --- Net income . . . . . . . . $ 23,983,000 $ 7,911,000 $ 2,497,000 $ 34,391,000 ================ ============= ============ ================ Significant non-cash items $ --- $ --- $ --- $ --- ================ ============= ============ ================
F-34 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. BUSINESS SEGMENTS (Continued)
Asset Broker- Annuity Management Dealer Operations Operations Operations Total ------------ ----------- ----------- ---------- YEAR ENDED SEPTEMBER 30, 1998: Total assets . . . . . . . $14,389,922,000 $104,476,000 $ 55,870,000 $14,550,268,000 Expenditures for long- lived assets --- 477,000 5,289,000 5,766,000 Investment in subsidiaries --- --- --- --- Revenue from external customers. . . . . . . . 410,011,000 34,396,000 39,729,000 484,136,000 Intersegment revenue --- 40,040,000 7,634,000 47,674,000 ---------------- ------------- ------------- ---------------- Total revenue. . . . . . . 410,011,000 74,436,000 47,363,000 531,810,000 ================ ============= ============= ================ Investment income. . . . . 218,044,000 2,839,000 1,083,000 221,966,000 Interest expense . . . . . (131,980,000) (2,709,000) (405,000) (135,094,000) Depreciation and amortization expense . . (60,731,000) (14,780,000) (1,770,000) (77,281,000) Income from unusual transactions --- --- --- --- Pretax income. . . . . . . 148,084,000 39,207,000 22,401,000 209,692,000 Income tax expense . . . . (44,706,000) (15,670,000) (10,675,000) (71,051,000) Income from extraordinary items --- --- --- --- Net income . . . . . . . . $ 103,378,000 $ 23,537,000 $ 11,726,000 $ 138,641,000 ================ ============= ============= ================ Significant non-cash items $ --- $ --- $ --- $ --- ================ ============= ============= ================
F-35 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. BUSINESS SEGMENTS (Continued)
Asset Broker- Annuity Management Dealer Operations Operations Operations Total ------------ ------------ ----------- ---------- YEAR ENDED SEPTEMBER 30, 1997: Total assets . . . . . . . $12,440,311,000 $ 81,518,000 $51,400,000 $12,573,229,000 Expenditures for long- lived assets --- 804,000 4,527,000 5,331,000 Investment in subsidiaries --- --- --- --- Revenue from external customers. . . . . . . . 317,061,000 28,655,000 31,678,000 377,394,000 Intersegment revenue --- 22,790,000 6,327,000 29,117,000 ---------------- ------------- ------------ ---------------- Total revenue. . . . . . . 317,061,000 51,445,000 38,005,000 406,511,000 ================ ============= ============ ================ Investment income. . . . . 208,382,000 1,445,000 932,000 210,759,000 Interest expense . . . . . (134,416,000) (2,737,000) (405,000) (137,558,000) Depreciation and amortization expense . . (55,675,000) (16,357,000) (689,000) (72,721,000) Income from unusual transactions --- --- --- --- Pretax income. . . . . . . 58,291,000 19,299,000 16,705,000 94,295,000 Income tax expense . . . . (16,318,000) (7,850,000) (7,001,000) (31,169,000) Income from extraordinary items --- --- --- --- Net income . . . . . . . . $ 41,973,000 $ 11,449,000 $ 9,704,000 $ 63,126,000 ================ ============= ============ ================ Significant non-cash items $ --- $ --- $ --- $ --- ================ ============= ============ ================
Substantially all of the Company's revenues are derived from the United States. The accounting policies of the segments are as described in the summary of significant accounting policies (Note 2). The Parent makes expenditures for long-lived assets for the annuity operations segment and allocates depreciation of such assets to the annuity operations segment. The annuity operations and asset management operations pay commissions to Royal for sales of their proprietary products. Approximately 90% of these commission payments are in turn paid to registered representatives of Royal, with the remainder of the revenue reflected in Net Retained Commissions. In addition, premiums from variable annuity policies sold by the Company are held in trusts that are owned by the Company, although the assets directly support policyholder obligations. SunAmerica Asset Management is the Investment Advisor for all of the subaccounts of these trusts, for which service it receives fees which are direct expenses of the trusts. Such fees are reported as Variable Annuity Fees in the consolidated income statement and are shown as intersegment revenues in the business segments disclosure above, although there is no corresponding expense on the books of any segment. The annuity operations segment's products are marketed through over 800 independent broker-dealers, full-service securities firms and financial institutions, in addition to the Company's affiliated broker-dealers. Those independent selling organizations F-36 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. BUSINESS SEGMENTS (Continued) responsible for over 10% of sales represented 12.0% of sales in the year ended December 31, 1999, 14.7% in the three months ended December 31, 1998, 16.8% in the year ended September 30, 1998, and 18.4% and 10.2% in the year ended September 30, 1997. Registered representatives sell products for the Company's asset management operations and sell products offered by the broker-dealer operations. Revenue from any single registered representative or group of registered representatives do not compose a material percentage of total revenues in either the asset management operations or the broker-dealer operations. 15. SUBSEQUENT EVENTS On March 1, 2000, the Company paid dividends of $69,000,000 to the Parent. F-37 EX-10.1 2 EXHIBIT 10A REINSURANCE AGREEMENT between ANCHOR NATIONAL LIFE INSURANCE COMPANY Phoenix, Arizona, and ANLIC INSURANCE COMPANY (HAWAII), LTD. Honolulu, Hawaii Dated as of August 1, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Interpretation Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2. Other Definitional Provisions . . . . . . . . . . . . . . . 11 ARTICLE II General Provision Section 2.1. Risks Reinsured . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.2. Coverages and Exclusions. . . . . . . . . . . . . . . . . . 11 Section 2.3. Plan of Reinsurance; Modified Coinsurance . . . . . . . . . 11 Section 2.4. Plan of Reinsurance; Yearly Renewable Term. . . . . . . . . 12 Section 2.5. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.6. Extra-Contractual Liability . . . . . . . . . . . . . . . . 12 Section 2.7. Annuity Administration. . . . . . . . . . . . . . . . . . . 12 Section 2.8. Inspection. . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.10. Proxy Tax Reimbursement . . . . . . . . . . . . . . . . . . 12 Section 2.11. Election to Determine Specified Policy Acquisition Expenses 13 Section 2.12. Condition . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.13. Misunderstandings and Oversights. . . . . . . . . . . . . . 13 Section 2.14. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.15. Reinstatements. . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.16. Currency. . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.17. Maintenance of CG YRT Retrocession Agreement; Successor YRT Retrocession Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE III Payments by Anchor Section 3.1. Initial Consideration . . . . . . . . . . . . . . . . . . . 15 Section 3.2. Modco Reinsurance Premiums; Recapture Fee; YRT Reinsurance Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.3. Payment of Charges and Fixed Account Investment Spread. . . 15 Section 3.4. Net Separate Account Transfer CARVM Reserve Adjustment. . . 15 ARTICLE IV Payments by ANLIC (Hawaii): Commissions and Expenses Section 4.1. Ceding Commission . . . . . . . . . . . . . . . . . . . . . 16 Section 4.2. Premium Tax . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.3. Allowance for Commissions . . . . . . . . . . . . . . . . . 16 Section 4.4. Allowance for Expenses. . . . . . . . . . . . . . . . . . . 16 Section 4.5. Anchor YRT Expense Recovery . . . . . . . . . . . . . . . . 17 Section 4.6. Anchor YRT Reinsurance Premium Refund . . . . . . . . . . . 17 Section 4.7. Net Fixed Account Transfer CARVM Reserve Adjustment . . . . 17 Section 4.8. Negative Fixed Account Investment Spread. . . . . . . . . . 17
TABLE OF CONTENTS (Continued)
Page ---- ARTICLE V Payments by ANLIC (Hawaii): Benefit Payments Section 5.1. Death Benefit Claim . . . . . . . . . . . . . . 17 Section 5.2. Total Surrender . . . . . . . . . . . . . . . . 17 Section 5.3. Partial Withdrawal. . . . . . . . . . . . . . . 18 Section 5.4. Payout Annuity Payment; Annuity Benefit Payment 18 Section 5.5. Claims Settlements. . . . . . . . . . . . . . . 18 Section 5.6. Contested Death Benefit Claims. . . . . . . . . 18 ARTICLE VI Reserve Adjustments Section 6.1. Initial Reserve Adjustment. . . . . . . . . . . 19 Section 6.2. Modified Coinsurance Reserve Adjustment . . . . 19 ARTICLE VII [Reserved] ARTICLE VIII Accounting and Settlements Section 8.1. Monthly Accounting Periods. . . . . . . . . . . 20 Section 8.2. Reinsurance Servicer Reports. . . . . . . . . . 20 Section 8.3. Initial Settlement. . . . . . . . . . . . . . . 20 Section 8.4. Monthly Settlements . . . . . . . . . . . . . . 20 Section 8.5. Amounts Due . . . . . . . . . . . . . . . . . . 21 Section 8.6. Annual Accounting Reports . . . . . . . . . . . 21 Section 8.7. Estimations . . . . . . . . . . . . . . . . . . 21 Section 8.8. Delayed Payments. . . . . . . . . . . . . . . . 21 Section 8.9. Form of Payment; Offset . . . . . . . . . . . . 21 ARTICLE IX Duration and Recapture Section 9.1. ANLIC (Hawaii)'s Liability. . . . . . . . . . . 22 Section 9.2. Termination . . . . . . . . . . . . . . . . . . 22 Section 9.3. Recapture . . . . . . . . . . . . . . . . . . . 23 Section 9.4. Recapture Payment . . . . . . . . . . . . . . . 23 Section 9.5. Reduction of Reinsurance Percentage . . . . . . 23 Section 9.6. No Deemed Recapture . . . . . . . . . . . . . . 23
TABLE OF CONTENTS (Continued)
Page ---- ARTICLE X Terminal Accounting and Settlement Section 10.1. Terminal Accounting. . . . . . . . . . . . . . . . 23 Section 10.2. Date . . . . . . . . . . . . . . . . . . . . . . . 23 Section 10.3. Settlement . . . . . . . . . . . . . . . . . . . . 24 Section 10.4. Supplementary Accounting and Settlement. . . . . . 24 ARTICLE XI Insolvency Section 11.1. In General . . . . . . . . . . . . . . . . . . . . 24 ARTICLE XII Conditions to Effective Time Section 12.1. Effective Time . . . . . . . . . . . . . . . . . . 25 Section 12.2. Condition Precedent to Reinsurance . . . . . . . . 25 Section 12.3. Additional Conditions Precedent to Effective Time. 26 ARTICLE XIII Representation and Warranties Section 13.1. Representations and Warranties of Anchor . . . . . 26 Section 13.2. Representations and Warranties of ANLIC (Hawaii) . 29 ARTICLE XIV Covenants Section 14.1. Anchor Internal Replacements . . . . . . . . . . . 30 Section 14.2. Anchor Current Practices . . . . . . . . . . . . . 31 Section 14.3. Anchor Other Reinsurance . . . . . . . . . . . . . 31 Section 14.4. Affirmative General Covenants of Anchor. . . . . . 31 Section 14.5. Reporting Requirements of Anchor . . . . . . . . . 33 Section 14.6. Negative Covenants of Anchor . . . . . . . . . . . 35 Section 14.7. Anchor Changes in Investment Funds, etc. . . . . . 35 Section 14.8. Negative Covenants of ANLIC (Hawaii) . . . . . . . 36 ARTICLE XV Reserve Credit Section 15.1. Security . . . . . . . . . . . . . . . . . . . . . 37 Section 15.2. Letters of Credit. . . . . . . . . . . . . . . . . 37 Section 15.3. Letters of Credit; Return of Excess Security . . . 37
TABLE OF CONTENTS (Continued)
Page ---- ARTICLE XVI Events of Recapture Section 16.1. Definition . . . . . . . . . . 37 ARTICLE XVII Miscellaneous Section 17.1. Parties to this Agreement. . . 38 Section 17.2. Assignment . . . . . . . . . . 38 Section 17.3. Counterparts . . . . . . . . . 38 Section 17.4. Notices. . . . . . . . . . . . 38 Section 17.5. Further Assurances . . . . . . 39 Section 17.6. No Waiver; Cumulative Remedies 39 Section 17.6 Amendment and Waiver . . . . . 39 Section 17.8. Entire Agreement . . . . . . . 39 Section 17.9. Governing Law. . . . . . . . . 40 Section 17.10.Consent to Jurisdiction. . . . 40 Section 17.11.Special Service of Process . . 40 Section 17.12 WAIVER OF JURY TRIAL . . . . . 40 Section 17.13 Headings . . . . . . . . . . . 40
SCHEDULES 2.1 Annuities 3.3-1 Contractual Charges 4.1 Form of ANLIC (Hawaii) Note 4.3 Commission Schedule 8.2 Reinsurance Servicer Report 12.2 Opinion of Counsel for Anchor 13.1-1 Forms of Annuity Agreements 13.1-2 Standing Instructions 13.1-3 Methodology for Calculating CARVM Reserve 14.4 Fixed Account Segregated Asset Requirements and Procedures 14.6-1 Collection Procedures 14.6-2 Allocation Procedures REINSURANCE AGREEMENT, dated as of August 1, 1999 (the "Agreement"), --------- between Anchor National Life Insurance Company, an Arizona stock life insurance company ("Anchor"), and ANLIC Insurance Company (Hawaii), Ltd., a Hawaii stock ------ captive insurance company ("ANLIC (Hawaii)"). --------------- WHEREAS, Anchor desires to reinsure certain risks under the Annuities (such term and other capitalized terms are defined in Section 1.1), other than the Net Amount at Risk with respect to the Annuities, with ANLIC (Hawaii) on a modified coinsurance basis as set forth more fully in this Agreement; WHEREAS, Anchor desires to reinsure the Net Amount at Risk under the Annuities with ANLIC (Hawaii) on a yearly renewable term basis as set forth more fully in this Agreement; WHEREAS, ANLIC (Hawaii) intends to pay a Ceding Commission to Anchor by delivery of the ANLIC (Hawaii) Note referred to in Section 4.1; WHEREAS, ANLIC (Hawaii) intends to retrocede all the risks reinsured under this Agreement with respect to the Annuities pursuant to a retrocession agreement (the "AIC Retrocession Agreement") with Anchor Insurance Company ---------------------------- (Hawaii), Ltd. ("AIC"); --- WHEREAS, AIC will further retrocede the Net Amount at Risk reinsured under the AIC Retrocession Agreement with respect to the Annuities pursuant to a retrocession agreement (the "ANLIC (Hawaii) YRT Retrocession Agreement") with ----------------------------------------- ANLIC (Hawaii) on a yearly renewable term basis; WHEREAS, ANLIC (Hawaii) intends to further retrocede the risks reinsured under the ANLIC (Hawaii) YRT Retrocession Agreement pursuant to an agreement with Connecticut General Life Insurance Company on a yearly renewable term basis (the "CG YRT Retrocession Agreement") or a Successor YRT Retrocession Agreement; ----------------------------- WHEREAS, the Servicer will perform certain services pursuant to a servicing agreement dated as of the date hereof (the "Servicing Agreement"); -------------------- WHEREAS, ANLIC (Hawaii) will designate Citicorp North America, Inc. as its agent for certain purposes under this Agreement pursuant to a consent and agreement dated as of the date hereof; and WHEREAS, the foregoing transactions will take place at the same time and in the order in which they are described above. 1 NOW, THEREFORE, in consideration of the representations and warranties made herein and the mutual covenants contained herein, the Parties hereto agree as follows: ARTICLE I Definitions and Interpretation ------------------------------ Section 1.1. Definitions. As used herein for purposes of this Agreement ----------- and the Schedules hereto, the following terms have the following respective meanings: "Accounting Period": as defined in Section 8.1. ------------------ "Adverse Claim": any lien, pledge, hypothecation, security interest or -------------- other charge or encumbrance, any reinsurance agreement or any other type of preferential arrangement that prefers one creditor of a Person to another. "Affiliate": of a Person means a Person that directly or indirectly --------- controls, is con-trolled by, or is under common control with, the first Person. "Agreement": as defined in the recitals to this Agreement. --------- "AIC": as defined in the recitals to this Agreement. --- "AIC Retrocession Agreement": as defined in the recitals to this ---------------------------- Agreement. --- "Allocation Procedures": those administration procedures specified in ---------------------- Schedule 14.6-2 in effect on the date hereof as modified from time to time in compliance with Section 14.6(d). "Allowances for Commissions": the payment for reimbursement of commissions -------------------------- as set forth in Section 4.3. "Allowance for Expenses": the payment for Annuity servicing as set forth ------------------------ in Section 4.4. "Alternate Base Rate": for any period, a fluctuating interest rate per --------------------- annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time as Citibank's base rate; or (b) 1/2 of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank (i) on the basis of such rates reported by certificate of deposit dealers 2 to and published by the Federal Reserve Bank of New York or (ii) if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in the case of clause (i) or (ii), adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent. "Anchor": as defined in the introductory paragraph of this Agreement. ------ "Anchor Annual Reports": as defined in Section 13.1(e). ----------------------- "Anchor's Knowledge": the knowledge (other than imputed or constructive ------------------- knowledge) of any authorized officer of Anchor who has the title of vice president or higher or an officer performing substantially the same function of such officer. "Anchor Payment Amounts": the sum of (i) the amounts payable pursuant to ------------------------ Section 3.2(b), (ii) Charges payable pursuant to Section 3.3(i), (iii) any Fixed Account Investment Spread payable pursuant to Section 3.3(ii), (iv) any Recapture Payment payable pursuant to Section 9.4, and (v) any Replacement Fee payable pursuant to Section 14.1. "Anchor Quarterly Reports": as defined in Section 13.1(e). -------------------------- "Anchor Statutory Financial Statements": as defined in Section 13.1(e). ---------------------------------------- "Anchor YRT Expense Recovery": as defined in Section 2.6. ------------------------------ "Anchor YRT Reinsurance Premium Refund": as defined in Section 4.6 ----------------------------------------- "ANLIC (Hawaii)": as defined in the introductory paragraph of this --------------- Agreement. - "ANLIC (Hawaii) Note": as defined in Section 4.1. --------------------- "ANLIC (Hawaii) YRT Retrocession Agreement": as defined in the recitals to ----------------------------------------- this Agreement. "Annuities": the (i) individual variable annuity contracts and group --------- variable annuity certificates identified in Schedule 2.1, as such contracts and certificates are in effect and are reinsured hereunder from time to time, subject to Section 2.15, and (ii) the other annuity contracts reinsured pursuant to Section 14.1. "Annuity Benefit Payment": as defined in Section 5.4. ------------------------- "Annuity Benefits": amounts paid by Anchor on annuitization under an ----------------- Annuity. "Benefit Payments": the amounts paid by Anchor for (i) Death Benefit Claim ---------------- Payments, (ii) Total Surrender Payments, (iii) Partial Withdrawal Payments; (iv) Payout Annuity Payments; and (v) Annuity Benefit Payments. 3 "Business Day": each day on which (i) dealings are carried on in the ------------- London interbank market, and (ii) all of the following are open for business at their principal offices in the cities designated: (x) Anchor in Los Angeles; (y) the Custodian in North Quincy, Massachusetts, and (z) the New York Stock Exchange trading floor in New York City. "CARVM Reserve": the statutory Commissioners Annuity Reserve Valuation -------------- Method reserve required to be held by Anchor with respect to the Annuities under the laws of the State of Arizona. "Ceding Commission": as defined in Section 4.1. ------------------ "CG YRT Retrocession Agreement": as defined in the recitals to this -------------------------------- Agreement. "Change": as defined in Section 14.7. ------ "Charges": the charges and deductions relating to the Annuities identified ------- in Schedule 3.3-1 in the column labeled "Charges." "Citibank": Citibank, N.A., a national banking association. -------- "Code": the Internal Revenue Code of 1986, as amended. ---- "Collection Procedures": those administration procedures specified in ---------------------- Schedule 14.6-1 in effect on the date hereof as modified from time to time in compliance with Section 14.6(c). "Collections": with respect to any Charge, all cash collections and other ----------- cash proceeds of each Charge, provided that no amount earned or deemed to have -------- been earned by Anchor on or with respect to any Charges prior to their payment to ANLIC (Hawaii) pursuant to Section 8.4. shall be deemed to be "Collections." "Contract Change": as defined in Section 14.7. ---------------- "Contractholder": the Person who is the owner of an Annuity. -------------- "Contract Value": for an Annuity, the sum of the Fixed Account Value and --------------- the Separate Account Value. "Convention Statement": each annual and quarterly financial statement of --------------------- Anchor as filed with the appropriate Governmental Authority of its state of domicile, as such form may be amended from time to time pursuant to the requirements of such Governmental Authority. "Custodian": State Street Bank and Trust Company. --------- "Death Benefit Claim Payment": as defined in Section 5.1. ------------------------------ "Death Benefit Claim": a claim for death benefits during the accumulation -------------------- phase in respect of an Annuity. 4 "Death Benefit Surrender Value": the accumulation value of the Annuity -------------------------------- reduced by the surrender charge which would be applicable to the Annuity if the Annuity were surrendered on the same date the death benefit liability is incurred. "Department": the Governmental Authority responsible for the regulation of ---------- the insurance business of Anchor in its state of domicile. "Determination Date": as defined in the definition of Fixed Account ------------------- Coverage Percentage. "Effective Time": as defined in Section 12.1. --------------- "Event of Recapture": as defined in Section 16.1. -------------------- "Excess Fixed Account Transfers": in the event that the Fixed Account --------------------------------- Coverage Percentage changes from a zero to a positive number in an Accounting Period, an amount, determined at the end of such Accounting Period, equal to the product of (i) and (ii), where: (i) is the Reinsurance Percentage. (ii) equals the amount by which the aggregate Net Fixed Account Transfers for all Annuities from the Determination Date to the end of such Accounting Period is greater than zero. "Excess Separate Account Transfers": in the event that the Fixed Account ----------------------------------- Coverage Percentage changes from a positive number to zero in an Accounting Period, an amount, determined at the end of such Accounting Period, equal to (ii) minus (i), where: ----- (i) equals the product of (x) and (y), where: (x) equals the Fixed Account Coverage Percentage at the end of the next preceding Accounting Period. (y) equals the Fixed Account Values for all Annuities plus ---- (ii) equals the Net Separate Account Transfers for such Accounting Period. "Extra-Contractual Liability": liability (i) arising from the practices of --------------------------- Anchor, its agents or representatives, in the marketing, sale, issuance, cancellation or administration of any Annuity, including, liability arising from advertising claims, errors or omissions relating to annuity information disclosure, engaging in unfair methods of competition or deceptive acts or practices and replacement transactions, (ii) arising from the handling of claims by Anchor, including liability arising from failure by Anchor to settle within the limit of any Annuity, or by reason of alleged or actual negligence or bad faith, failure to exercise good faith or tortious conduct of Anchor in rejecting an offer of settlement or in the preparation of defense or in the trial of any action by or against any Contractholder or Person insured by Anchor or in the preparation or prosecution of an appeal consequent upon such action, 5 (iii) fine or other statutory penalties assessed against Anchor, its agents or representatives arising from items (i) and (ii), and (iv) consequential, compensatory, exemplary or punitive damages assessed against Anchor, its agents or representatives arising from items (i) and (ii). "Fixed Accounts": the accounts under the Annuities in which amounts are --------------- allocated to and made part of the general account of Anchor. "Fixed Account Coverage Percentage": an amount expressed as a percentage, ---------------------------------- equal to the greater of zero or (i) over (ii), where: ---- (i) equals (x) the product of (A) and (B), plus (y) (C), where ---- (A) is equal to the Fixed Account Coverage Percentage at the end of next preceding Accounting Period. (B) is equal to the Fixed Account Value for all Annuities determined at the end of the Accounting Period, less the Net Fixed Account Transfers for all ---- Annuities for the Accounting Period. (C) is equal to the Net Fixed Account Transfers for all Annuities for the Accounting Period; and (ii) equals the Fixed Account Value for all Annuities determined at the end of the Accounting Period; provided that from the later of (i) the Effective Time, or (ii) the end of the - -------- next Accounting Period in which the Fixed Account Coverage Percentage changes from a positive percentage to zero (the "Determination Date"), the Fixed Account - - ------------------ Coverage Percentage shall remain zero until the end of the next succeeding Accounting Period when the aggregate Net Fixed Account Transfers for all Annuities from the Determination Date to the end of such Accounting Period is greater than zero. The Fixed Account Coverage Percentage will be determined as of the end of each Accounting Period, except that the Fixed Account Coverage ------ Percentage will be determined as of the end of the next preceding Accounting Period for purposes of (i) determining any Benefit Payment, (ii) calculating the Fixed Account Investment Spread, and (iii) determining the Allowance for Expenses in Section 4.4. "Fixed Account Credited CARVM Reserve Interest": for all Annuities, the ------------------------------------------------ interest credited by Anchor on the Reinsurance Percentage of the Transferred Fixed Account CARVM Reserve for all Annuities. "Fixed Account Investment Spread": for all Annuities, the lesser of (i) ---------------------------------- the Fixed Account Net Investment Income less the Fixed Account Credited CARVM ---- Reserve Interest, or (ii) the product of .0152 per annum (computed on the basis of a 360-day year of twelve 30-day months) and the Reinsurance Percentage of the Transferred Fixed Account Value for all Annuities. "Fixed Account Net Investment Income": for all Annuities, the sum of all ------------------------------------- accrued investment income, including realized capital gains and 6 losses, as reflected in Anchor's Convention Statement and unrealized capital gains and losses, as reflected in Exhibit 4 of Anchor's Convention Statement, actually earned on the Fixed Account Segregated Assets, net of investment expenses. "Fixed Account Segregated Assets": those assets supporting the Reinsurance ------------------------------- Percentage of the Transferred Fixed Account CARVM Reserve for all Annuities, segregated by Anchor. "Fixed Account Transfer": any amount transferred from a Separate Account ------------------------ to a Fixed Account. "Fixed Account Value": for an Annuity, the accumulation value in any Fixed ------------------- Account allocated to such Annuity. "Fund": as defined in Section 14.7. ---- "Fundamental Investment Objectives and Policies": the investment -------------------------------------------------- restrictions set forth in the Prospectus dated (i) April 1, 1999 for the Polaris --- variable annuity under the headings "SunAmerica Series Trust; Trust Highlights; Q. What are the Portfolio's investment goals and principal investment strategies?," "SunAmerica Series Trust; More Information About the Portfolios," "Anchor Series Trust; Trust Highlights; Q. What are the Portfolio's investment goals and strategies?" and "Anchor Series Trust; More Information About the Portfolios; Investment Strategies," and (ii) January 29, 1999 for the American Pathway II variable annuity under the headings "American Pathway Fund; Fund Highlights; Q. What are the Series' investment goals and strategies?" and "American Pathway Fund; More Information About the Series; Investment Strategies," each as amended from time to time pursuant to Section 14.7. "GAAP": generally accepted accounting principles. ---- "Governmental Authority": any nation or government, any state or other ----------------------- political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of government. "Gross Amounts Payable": every amount payable to ANLIC (Hawaii) and its ----------------------- successors and assigns under this Agreement, including the Charges and Collections thereof and the Fixed Account Investment Spread, without regard to the netting provisions set forth in Article VIII of this Agreement. "Initial Accounting Period": as defined in Section 8.1. --------------------------- "Initial Consideration": as defined in Section 3.1. ---------------------- "Initial Reserve Adjustment": as defined in Section 6.1. ---------------------------- "Internal Replacement": any instance in which an Annuity or any portion --------------------- of the cash value of an Annuity is exchanged for another life 7 insurance policy or annuity contract, not reinsured under this Agreement, which is written by Anchor, its Affiliates, successors or assigns. "Modco Benefit Payments": as defined in Section 2.3. ------------------------ "Modco Reinsurance Premium": as defined in Section 3.2. --------------------------- "Modified Coinsurance Reserve": an amount equal to the Reinsurance ------------------------------ Percentage of the CARVM Reserve with respect to all Modco Benefit Payment - obligations of Anchor. "Modified Coinsurance Reserve Adjustment": the amount determined pursuant ---------------------------------------- to Section 6.2. "Modified Coinsurance Reserve Investment Credit": an amount equal to the ------------------------------------------------ sum of (i) the Reinsurance Percentage of the sum of all accrued investment income and capital gains and losses, realized and unrealized, on the assets held by Anchor equal to the CARVM Reserve with respect to the Separate Account Value for all Annuities for the current Accounting Period after deducting all costs, expenses and deductions of Funds and their respective advisors and subcontractors properly allocable to such assets to the extent that same have not been deducted at the Fund level, and (ii) the Fixed Account Credited CARVM Reserve Interest. For the Annuities, the Modified Coinsurance Reserve Investment Credit will be reduced for Charges for the current Accounting Period. The Modified Coinsurance Reserve Investment Credit may be positive, zero or negative. "Net Amount at Risk": in the case of a death benefit being payable under -------------------- an Annuity during the accumulation phase of an Annuity, an amount, if any, equal to (i) the minimum guaranteed death benefit under such Annuity, less (ii) the ---- Death Benefit Surrender Value of such Annuity. "Net Fixed Account Transfers": for each Accounting Period, an amount equal --------------------------- to the (i) the Fixed Account Transfers for all Annuities for such Accounting Period, over (ii) the Separate Account Transfers for all Annuities for such ---- Accounting Period, provided that, following any Determination Date, such an -------- amount will be accumulated for all Accounting Periods until the end of the next succeeding Accounting Period when such cumulative amount is greater than zero, and, provided further, that on any Determination Date, the Net Fixed Account ----------------- Transfers will be deemed to be equal to the negative of the amount of the Excess Separate Account Transfers, and provided further that, in the event that the ---------------- Fixed Account Coverage Percentage changes from a zero to a positive number in an Accounting Period, then the Net Fixed Account Transfers will be deemed to be equal to the amount of the Excess Fixed Account Transfers. The amount of Net Fixed Account Transfers may be positive, zero or negative. "Net Fixed Account Transfer CARVM Reserve Adjustment": as defined in Section 4.7. "Net Separate Account Transfers": for each Accounting Period, an amount, not less than zero, equal to the (i) Separate Account Transfers for all Annuities for such Accounting Period, minus (ii) the Fixed Account Transfers for all Annuities for such Accounting Period. 8 "Net Separate Account Transfer CARVM Reserve Adjustment": as defined in Section 3.4. "Obligor": each Person from whom Anchor has the right to receive any ------- Charges pursuant to an Annuity. "Other Charges": the charges and deductions relating to the Separate -------------- Accounts identified in Schedule 3.3-1 in the column labeled "Other Charges." "Partial Withdrawal Payment": as defined in Section 5.3. ---------------------------- "Party": Anchor or ANLIC (Hawaii). ----- "Payment Date": the twenty-third calendar day after the end of each ------------- Accounting Period if such day falls on a Business Day, if not, then the first Business Day thereafter. "Payout Annuity Payment": as defined in Section 5.4. ------------------------ "Person": an individual, a partnership, a corporation, a limited liability ------ company, a trust (including any beneficiary thereof) or other entity, including any unincorporated organization or government or agency or political subdivision thereof. The term "corporation" for the purposes of the preceding sentence shall mean a corporation, joint stock company, business trust or other similar association. "Policy Change": as defined in Section 14.7. -------------- "Prospectus": at any time, the prospectus (as such term is defined in the ---------- Securities Act of 1933, as amended) under which the Annuities are sold. "Recapture Payment": as defined in Section 9.4. ------------------ "Recapture Percentage": as defined in Section 9.3. --------------------- "Reinsurance Percentage": 100 percent, as adjusted pursuant to Section ----------------------- 9.5. "Reinsurance Servicer Report": as defined in Section 8.2. ----------------------------- "Replacement Fee": as defined in Section 14.1. ---------------- "SAP": statutory accounting practices prescribed or permitted by the state --- insurance regulator of the state of domicile of Anchor. "Separate Account": each segregated asset account of Anchor identified in ----------------- Schedule 2.1 to which amounts under the Annuities are allocated by Anchor. "Separate Account Transfer": any amount transferred from the Fixed Account ------------------------- to a Separate Account. 9 "Separate Account Value" for an Annuity, the sum of the values of the ------------------------ accumulation units in the Separate Account allocated to such Annuity. "Servicer": as defined in the Servicing Agreement. -------- "Standing Instructions": the irrevocable standing instructions in ---------------------- substantially the form of Schedule 13.1-2. -- "Subsidiary": a corporation of which more than 50% of the outstanding ---------- capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time capital stock of any class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by Anchor, by Anchor and one or more other Subsidiaries, or by one or more other Subsidiaries. "Successor Servicer": as defined in the Servicing Agreement. ------------------- "SunAmerica": SunAmerica Inc. ---------- "Successor YRT Retrocession Agreement": as defined in Section 2.17. --------------------------------------- "Terminal Accounting and Settlement": as defined in Section 10.1. ------------------------------------- "Terminal Accounting Date": as defined in Section 10.2. -------------------------- "Total Surrender Payment": as defined in Section 5.2. ------------------------- "Transferred Fixed Account Value": for an Annuity, an amount equal to the -------------------------------- product of (i) Fixed Account Coverage Percentage, and (ii) the Fixed Account Value of such Annuity. "Transferred Fixed Account CARVM Reserve": for an Annuity, the amount of ----------------------------------------- the CARVM Reserve with respect to the Transferred Fixed Account Value of such Annuity. "Unearned Ceding Commission Amount": an amount equal to (i) $155,000,000 ----------------------------------- reduced by (x) the amount of all prior Recapture Payments, and (y) the amount of --------- all prior Unearned Ceding Commission Reduction Amounts, and increased by (ii) an ------------ amount equal to the Unearned Ceding Commission Rate per annum on the amount in Item (i) above applied in arrears on Payment Date for the period from and including the later of the Effective Time or the most recent Payment Date to but excluding the Payment Date in which the amount determined under this Item (ii) is applied; provided that, on any Payment Date, the then Unearned Ceding -------- Commission Amount will first be increased by the application of Item (ii) above and then reduced for any Unearned Ceding Commission Reduction Amount. "Unearned Ceding Commission Rate": the percentage rate identified in Item -------------------------------- 173 of the Reinsurance Servicer Report. "Unearned Ceding Commission Reduction Amount": the amount identified in ---------------------------------------------- Item 182 of the Reinsurance Servicer Report, without regard to any Recapture Payment. 10 "Waiver Allowance": as defined in Section 14.2. ----------------- "YRT Reinsurance Premium": as defined in Section 3.2(c). ------------------------- Section 1.2. Other Definitional Provisions. (a) The headings of the ------------------------------- sections of this Agreement are solely for convenience of reference and shall not affect the meaning, construction or effect of this Agreement. (b) All terms defined in this Agreement shall have the defined meaning when used in any Schedule, certificate or other documents attached hereto or made or delivered pursuant hereto unless otherwise defined therein. (c) As used herein, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under SAP in effect on the date hereof. To the extent that the definitions of accounting terms are inconsistent with the meanings of such terms under SAP, the definitions contained herein shall control. The term "including" means "including but not limited to." (d) Any reference herein to any statute, agreement or document, or any section thereof, shall, unless otherwise expressly provided, be a reference to such statute, agreement, document or section as amended, modified or supplemented (including any successor section) and in effect from time to time. ARTICLE II General Provisions ------------------ Section 2.1. Risks Reinsured. ANLIC (Hawaii) will indemnify Anchor for, ---------------- and Anchor will reinsure with ANLIC (Hawaii), according to the terms and conditions hereof, the Benefit Payments under the Annuities. Section 2.2. Coverages and Exclusions. Only the Annuities are reinsured ------------------------- under this Agreement. Except for the Net Amount at Risk and except as provided in Article V, all liabilities in respect of the Fixed Accounts are excluded from this Agreement. Liabilities in respect of Separate Account Transfers and Net Fixed Account Transfers are reinsured under this Agreement. Section 2.3. Plan of Reinsurance; Modified Coinsurance. The portion of ------------------------------------------- this indemnity reinsurance with respect to all Benefit Payments other than payments with respect to the Net Amount at Risk portion of Death Benefit Claim Payments with respect to the Annuities (the "Modco Benefit Payments") will be on ----------------------- a modified coinsurance basis. Anchor will retain, control and own all assets held in relation to the Modified Coinsurance Reserve. ANLIC (Hawaii) agrees to establish a separate account governed by the laws of Hawaii and the obligations of ANLIC (Hawaii) under this Agreement with respect to the Separate Account portion of the Modco Benefit Payments will be obligations of such separate account. Furthermore, the obligations of ANLIC (Hawaii) under this Agreement with respect to the Fixed Account portion of the Modco Benefit Payments will be obligations of the 11 general account of ANLIC (Hawaii). Notwithstanding the preceding two sentences, all the assets of ANLIC (Hawaii) will be available to meet ANLIC (Hawaii)'s obligations under this Agreement. Section 2.4. Plan of Reinsurance; Yearly Renewable Term. The portion of ------------------------------------------- this indemnity reinsurance with respect to the Net Amount at Risk portion of Death Benefit Claim Payments with respect to the Annuities will be on a yearly renewable term reinsurance basis. Section 2.5. Expenses. ANLIC (Hawaii) will bear no part of the expenses -------- incurred in connection with the Annuities reinsured hereunder, except as specifically provided herein. Section 2.6. Extra-Contractual Liability. ANLIC (Hawaii) does not ---------------------------- indemnify Anchor for, and will not be liable for, any Extra-Contractual Liability, provided that ANLIC (Hawaii) shall be liable for costs and expenses -------- of Anchor with respect to the same liability for Extra-Contractual Liability of Anchor, its agents and representatives as are indemnified by the reinsurer pursuant to the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement but only to the extent payment is actually received by ANLIC (Hawaii) under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement, such payment is actually received by AIC under the ANLIC (Hawaii) YRT Retrocession Agreement and such payment is actually received by ANLIC (Hawaii) under the AIC Retrocession Agreement (the "Anchor YRT Expense Recovery"). --------------------------- Section 2.7. Annuity Administration. Anchor will administer the Annuities ---------------------- reinsured hereunder and will perform all accounting for such Annuities, all in accordance with Articles VIII, X, XIV and XV. Section 2.8. Inspection. At any time during normal business hours upon ---------- reasonable notice, ANLIC (Hawaii) and its agents and representatives shall each have the right to inspect, at the principal office of Anchor or such other location as Anchor designates in writing to ANLIC (Hawaii) and its agents and representatives, the original papers and any and all other books or documents relating to or affecting the Annuities and the reinsurance under this Agreement. Neither ANLIC (Hawaii) nor its agents and representatives will use any information obtained through any inspection pursuant to this Section 2.8 for any purpose not relating to the reinsurance hereunder. ANLIC (Hawaii) shall hold all such information derived from such records in confidence and shall not disclose it to any other Person without Anchor's prior written consent. Section 2.9. Taxes. Premium taxes will not be reimbursed in connection ----- with the Annuities reinsured hereunder but are included in the Ceding Commission. ANLIC (Hawaii) will not reimburse or be liable to Anchor for any other taxes payable by Anchor in connection with the Annuities reinsured hereunder. Anchor shall be liable for U.S. federal excise tax, if any, on the Initial Consideration, the Modco Reinsurance Premiums, the YRT Reinsurance Premiums and any other amounts paid by Anchor to ANLIC (Hawaii) under this Agreement. Section 2.10. Proxy Tax Reimbursement. Pursuant to Code Section 848, ------------------------- insurance companies are required to capitalize and amortize specified policy 12 acquisition expenses. The amount capitalized is determined by proxy based on a percentage of "net premiums" as defined in the regulations relating to Code Section 848. ANLIC (Hawaii) will not reimburse or be liable to Anchor for any costs which result from the application of Code Section 848. Section 2.11. Election to Determine Specified Policy Acquisition Expenses. ----------------------------------------------------------- Anchor and ANLIC (Hawaii) agree that the Party with net positive consideration for any tax year under this Agreement will capitalize specified policy acquisition expenses with respect to Annuities reinsured under this Agreement without regard to the general deductions limitation of Code Section 848(c)(1). Anchor and ANLIC (Hawaii) will exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency. Anchor will submit a schedule to ANLIC (Hawaii) by May 1 of each year presenting its calculation of the net consideration for the preceding taxable year. ANLIC (Hawaii) may contest the calculation in writing within 30 days of receipt of Anchor's schedule referred to in the preceding sentence. Any differences will be resolved between the Parties so that consistent amounts are reported on the respective tax returns for the preceding taxable year. This election to capitalize specified policy acquisition expenses without regard to the general deductions limitation is effective for all taxable years during which this Agreement remains in effect. Section 2.12. Condition. The reinsurance hereunder is subject to the same --------- limitations and conditions as the Annuities which are reinsured hereunder, except as otherwise provided in this Agreement. Section 2.13. Misunderstandings and Oversights. If any failure to pay ---------------------------------- amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, Anchor and ANLIC (Hawaii) will promptly adjust the situation to what it would have been had the misunderstanding or oversight not occurred. Section 2.14. Adjustments. If Anchor's liability under any of the ----------- Annuities is changed because of a misstatement of age, sex or any other material fact, ANLIC (Hawaii) will (i) assume that portion of any increase in Anchor's liability resulting from the change which corresponds to the Reinsurance Percentage of the risks reinsured under the Annuities hereunder, and (ii) receive credit for that portion of any decrease in Anchor's liability resulting from the change which corresponds to the Reinsurance Percentage of the risks reinsured under the Annuities hereunder. Section 2.15. Reinstatements. If an Annuity is surrendered and is -------------- subsequently reinstated while this Agreement is in effect, the reinsurance for such Annuity will not be reinstated. If an Annuity is surrendered, or is annuitized and is not reinsured under Section 5.4, then such contract shall no longer be deemed to be an "Annuity" for purposes of this Agreement. Section 2.16. Currency. All of the provisions of this Agreement are -------- expressed in terms of United States dollars and all amounts shall be paid in United States funds in same day funds. Section 2.17 Maintenance of CG YRT Retrocession Agreement; Successor YRT ------------------------------------------------------------ Retrocession Agreement. (a) ANLIC (Hawaii) has entered into and will ---------------------- 13 maintain in effect the CG YRT Retrocession Agreement until all obligations of ANLIC (Hawaii) hereunder have terminated, provided that: -------- (i) If the insurer financial strength rating assigned by Standard & Poor's Rating Services or Moody's Investors Service of the reinsurer under the CG YRT Retrocession Agreement (or the reinsurer under a Successor YRT Retrocession Agreement entered into pursuant to this Section 2.17(a)), to the extent so rated, drops below BBB- or Baa3, respectively, then (x) Anchor may, and if such a successor reinsurer is available, shall (A) designate a successor reinsurer to replace the reinsurer under the CG YRT Retrocession Agreement) that has an insurer financial strength rating assigned by Standard & Poor's Rating Services and Moody's Investors Service of a least A and that will provide reinsurance on substantially the same terms and conditions as the CG YRT Retrocession Agreement (the "Successor YRT Retrocession Agreement"), and (B) instruct ANLIC (Hawaii) in ------------------------------------ writing to terminate the CG YRT Retrocession Agreement (or such Successor YRT Retrocession Agreement) and enter into the Successor YRT Retrocession Agreement (or a new Successor YRT Retrocession Agreement), and (y) ANLIC (Hawaii) shall so terminate the CG YRT Retrocession Agreement (or such Successor YRT Retrocession Agreement) and enter into the Successor YRT Retrocession Agreement. (ii) During any period that ANLIC (Hawaii) may terminate the CG YRT Retrocession Agreement (or any Successor YRT Retrocession Agreement) without breach thereunder and enter into a Successor YRT Retrocession Agreement, then (x) Anchor may (A) designate a successor reinsurer to replace the reinsurer under the CG YRT Retrocession Agreement (or such Successor YRT Retrocession Agreement) that has an insurer financial strength rating assigned by Standard & Poor's Rating Services and Moody's Investors Service of a least A and that will enter into a Successor YRT Retrocession Agreement, and (B) instruct ANLIC (Hawaii) in writing to terminate the CG YRT Retrocession Agreement (or such Successor YRT Retrocession Agreement) and enter into the Successor YRT Retrocession Agreement, and (y) ANLIC (Hawaii) shall so terminate the CG YRT Retrocession Agreement (or such Successor YRT Retrocession Agreement) and enter into the Successor YRT Retrocession Agreement. (b) Anchor shall act as the agent of ANLIC (Hawaii) with respect to the CG YRT Retrocession Agreement and any Successor YRT Retrocession Agreement to the extent expressly provided therein, and ANLIC (Hawaii) shall have the right to cause Anchor to take such actions and maintain in effect such practices of Anchor as are expressly provided by the CG YRT Retrocession Agreement and any Successor YRT Retrocession Agreement or in this Agreement. (c) ANLIC (Hawaii) shall have the right pursuant to the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement to delegate to the reinsurer thereunder ANLIC (Hawaii)'s right of access to Anchor records, to the extent such records directly pertain to the CG YRT Retrocession Agreement and any Successor YRT Retrocession Agreement. (d) ANLIC (Hawaii) hereby assigns its rights and delegates its duties to Anchor with regard to arbitration against the reinsurer under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement. Anchor 14 hereby accepts such assignment and delegation. Anchor shall conduct any arbitration within its sole discretion and shall (i) have full power and right to prosecute, settle or abandon any such dispute, and (ii) bear all costs of arbitration incurred by it. (e) To the extent that ANLIC (Hawaii) is obligated to indemnify, defend and hold harmless the reinsurer under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement (other than for liability with respect to the Net Amount at Risk under the Annuities), Anchor shall so indemnify, defend and hold harmless ANLIC (Hawaii). (f) To the extent that ANLIC (Hawaii) is obligated to prepare and deliver accounting and premium reports under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement, Anchor or its agent or representative shall prepare and deliver such reports in the form and by the time required under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement, as the case may be. ARTICLE III Payments by Anchor ------------------ Section 3.1. Initial Consideration. At the Effective Time, Anchor will ---------------------- pay ANLIC (Hawaii) an initial consideration equal to 100 percent of the Modified Coinsurance Reserve calculated as of August 1, 1999 (the "Initial ------- Consideration"). Section 3.2. Modco Reinsurance Premiums; Recapture Fee; YRT Reinsurance ------------------------------------------------------------ Premiums. (a) Anchor will pay ANLIC (Hawaii) reinsurance premiums on all ------ Annuities in effect under this Agreement in an amount equal to the sum of (i) ---- the Reinsurance Percentage of that portion of the gross deposits and premiums collected by Anchor during an Accounting Period which are to be allocated to the Separate Accounts for the Annuities, and (ii) the Reinsurance Percentage of the Fixed Account Coverage Percentage of that portion of the gross deposits and premiums collected by Anchor during an Accounting Period which are to be allocated to the Fixed Accounts for the Annuities (the "Modco Reinsurance ----------------- Premium"). - (b) Anchor will also pay ANLIC (Hawaii) an amount equal to any recapture fee payable by ANLIC (Hawaii) under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement. (c) Included in the amount payable by Anchor to ANLIC (Hawaii) under Section 3.3 is an amount equal to the actual reinsurance premium required to be paid from time to time by ANLIC (Hawaii) under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement, including any interest due with respect thereto (the "YRT Reinsurance Premium"). ------------------------- Section 3.3. Payment of Charges and Fixed Account Investment Spread. ----------------------------------------------------------- Anchor will pay to ANLIC (Hawaii) (i) the Reinsurance Percentage of all Charges for all Annuities, and (ii) the Fixed Account Investment Spread if such amount is a positive amount. Section 3.4. Net Separate Account Transfer CARVM Reserve Adjustment. ---------------------------------------------------------- 15 In the event that (i) the Fixed Account Coverage Percentage is zero, and (ii) Net Separate Account Transfers is greater than zero, then Anchor will pay to ANLIC (Hawaii) an amount equal to the Reinsurance Percentage of the CARVM Reserve with respect to Net Separate Account Transfers (the "Net Separate ------------ Account Transfer CARVM Reserve Adjustment"), provided that, in the event that -------------------------------------- -------- the Fixed Account Coverage Percentage changes from a positive number to zero in an Accounting Period, then the Net Separate Account Transfer CARVM Reserve Adjustment shall be deemed to be an amount equal to the Reinsurance Percentage of the CARVM Reserve with respect the Excess Separate Account Transfers. ARTICLE IV Payments by ANLIC (Hawaii): Commissions and Expenses ---------------------------------------------------- Section 4.1. Ceding Commission. At the Effective Time and simultaneously ----------------- with the payment of the Initial Consideration, ANLIC (Hawaii) will pay a ceding commission (the "Ceding Commission") to Anchor by delivery of a note in the ------------------ principal amount of $155,000,000 in the form attached hereto as Schedule 4.1, with such changes therein as the Parties may agree upon prior to the Effective Time (the "ANLIC (Hawaii) Note"). --------------------- Section 4.2. Premium Tax. ANLIC (Hawaii) shall not reimburse Anchor for ------------ any premium taxes on the Modco Reinsurance Premiums or the YRT Reinsurance Premiums; these costs are included in the Ceding Commission. Section 4.3. Allowance for Commissions. ANLIC (Hawaii) will reimburse --------------------------- Anchor for all the Reinsurance Percentage of commissions (other than trail commissions) incurred on the Modco Reinsurance Premiums. Reimbursement of trail commissions on the Annuities is included in the amount paid under Section 4.4(i). No commission reimbursement shall be made for amounts paid by Anchor to ANLIC (Hawaii) or ANLIC (Hawaii) to Anchor for Separate Account Transfers or Fixed Account Transfers. Schedule 4.3 shows the commission schedules for the Annuities reinsured hereunder as of August 1, 1999. Section 4.4. Allowance for Expenses. ANLIC (Hawaii) will pay to Anchor as ---------------------- reimbursement for servicing the Annuities pursuant to Section 2.7 and for managing the assets in the Separate Accounts pursuant to Section 2.3, (i) the sum of (x) an amount equal to the product of the Reinsurance Percentage times 13 basis points per anum of the sum of (A) the aggregate average daily Separate Account Value of all Annuities, and (B) the aggregate Transferred Fixed Account Values of all Annuities determined at the end of the Accounting Period less the ---- Fixed Account Coverage Percentage of any Fixed Account Transfers for the Accounting Period plus the Fixed Account Coverage Percentage of any Separate ---- Account Transfers for the Accounting Period, and (y) the greater of (A) an amount equal to the product of the Reinsurance Percentage times 13 basis points per anum of the sum of (xx) the aggregate average daily Separate Account Value of all Annuities, and (yy) the aggregate Transferred Fixed Account Values of all Annuities determined at the end of the Accounting Period less the Fixed Account ---- Coverage Percentage of any Fixed Account Transfers for the Accounting Period plus the Fixed Account Coverage Percentage of any Separate Account Transfers for - the Accounting Period, or (B) $55.00 for each Annuity per anum, and (ii) the 16 Reinsurance Percentage of the amount of the Other Charges, provided, however, -------- ------- that in the event that a Successor Servicer is appointed pursuant to the Servicing Agreement and the Department approves a lower amount to be paid to Anchor by virtue of the responsibilities then being performed by the Successor Servicer, the amount payable to Anchor pursuant to Section 4.4(i) shall be the product of the Reinsurance Percentage times the lower amount approved by the Department. Section 4.5. Anchor YRT Expense Recovery. ANLIC (Hawaii) will pay to ------------------------------ Anchor the Anchor YRT Expense Recovery but only to the extent actually received under the AIC Retrocession Agreement. Section 4.6. Anchor YRT Reinsurance Premium Refund. In the event that ---------------------------------------- (i) the YRT Reinsurance Premium is less than (ii) an amount equal to the sum of (x) 8 basis points per annum of the Reinsurance Percentage of the aggregate average daily Separate Account Values of all Annuities, and (y) 8 basis points per annum (computed on the basis of a 360-day year of twelve 30-day months) of the Reinsurance Percentage of the Transferred Fixed Account Values of all Annuities, then ANLIC (Hawaii) will pay Anchor and amount equal to (ii) less (i) ---- (the "Anchor YRT Reinsurance Premium Refund"). ----------------------------------------- Section 4.7. Net Fixed Account Transfer CARVM Reserve Adjustment. In the --------------------------------------------------- event that (i) the Fixed Account Coverage Percentage is zero, and (ii) Net Fixed Account Transfers is greater than zero, then ANLIC (Hawaii) will pay to Anchor an amount equal to the Reinsurance Percentage of the CARVM Reserve with respect to Net Fixed Account Transfers (the "Net Fixed Account Transfer CARVM Reserve ---------------------------------------- Adjustment"), provided that, in the event that the Fixed Account Coverage -------- -------- Percentage changes from a zero to a positive number in an Accounting Period, ---- then the Net Fixed Account Transfer CARVM Reserve Adjustment shall be deemed to - be an amount equal to the Reinsurance Percentage of the CARVM Reserve with respect the Excess Fixed Account Transfers. Section 4.8. Negative Fixed Account Investment Spread. In the event that ---------------------------------------- the Fixed Account Investment Spread is negative, ANLIC (Hawaii) will pay Anchor the absolute value of such amount. ARTICLE V Payments by ANLIC (Hawaii): Benefit Payments -------------------------------------------- Section 5.1. Death Benefit Claim. ANLIC (Hawaii)'s obligation for a Death ------------------- Benefit Claim paid by Anchor on an Annuity reinsured hereunder will be satisfied in full by the payment to Anchor of the sum of (i) an amount equal to the Reinsurance Percentage of the CARVM Reserve with respect to the Separate Account Value of such Annuity, (ii) an amount equal to the Reinsurance Percentage of the Transferred Fixed Account CARVM Reserve with respect to such Annuity, and (iii) the Net Amount at Risk with respect to such Annuity, each determined as of the date the Death Benefit Claim is determined under such Annuity (the "Death ----- Benefit Claim Payment"). ----------------- Section 5.2. Total Surrender. On a complete surrender by the ---------------- Contractholder of an Annuity during the accumulation phase of such Annuity, ANLIC (Hawaii) will pay Anchor the Reinsurance Percentage of the sum of (i) 17 the Separate Account Value, and (ii) the Transferred Fixed Account Value of such Annuity, as paid by Anchor on an Annuity reinsured hereunder adjusted for any required market value adjustment under such Annuity, each less any applicable ---- charges and deductions (the "Total Surrender Payment"). ------------------------- Section 5.3. Partial Withdrawal. On a withdrawal by the Contractholder ------------------- under an Annuity during the accumulation phase of such Annuity of part but not all of the Separate Account Value or Fixed Account Value, ANLIC (Hawaii) will pay Anchor the Reinsurance Percentage of the sum of (i) such partial withdrawal in respect of the Separate Account Value, if any, and (ii) such partial withdrawal in respect of the Transferred Fixed Account Value, if any, as paid by Anchor on an Annuity reinsured hereunder adjusted for any required market value adjustment under such Annuity, each less any applicable charges and deductions ---- (the "Partial Withdrawal Payment"). ----------------------------- Section 5.4. Payout Annuity Payment; Annuity Benefit Payment. (a) ANLIC ------------------------------------------------ (Hawaii) will be liable for the Reinsurance Percentage of its portion (described below) of Annuity Benefits made on an Annuity reinsured hereunder if the Annuity Benefits are based on the fixed settlement options at terms guaranteed in such Annuity at the time of issue of such Annuity (the "Payout Annuity Payment"), ---------------------- provided that ANLIC (Hawaii) shall not be so liable if and to the extent that, ----- prior to or upon receiving notice of the decision by a Contractholder to choose such settlement option, Anchor notifies ANLIC (Hawaii) that it has elected to recapture such Annuity upon the effective date of such settlement option, at which time such Annuity will be considered surrendered and ANLIC (Hawaii)'s obligation for Annuity Benefits paid by Anchor on such an Annuity reinsured hereunder will be satisfied in full by the payment to Anchor of the Annuity Benefit Payment (as defined in Section 5.4(b)) therefore. The notice of election to recapture by Anchor referred to in the preceding sentence may provide that it applies to one or more Annuities or all the Annuities and may recite that the election to recapture will remain in effect until written notice is given by Anchor to ANLIC (Hawaii) revoking the prior election to recapture, in whole or in part with respect to future Annuity Benefits made on an Annuity reinsured hereunder. In the event that ANLIC (Hawaii) is liable for the Reinsurance Percentage of its portion of Annuity Benefits under this Section 5.4(a), then such portion shall be a percentage equal to (i) the Reinsurance Percentage of the sum of (x) the Separate Account Value of such Annuity and (y) the Transferred Fixed Account Value of such Annuity adjusted for any required market value adjustment under such Annuity, each less any applicable charges and ---- deductions (but not premium taxes), divided by (ii) the Contract Value of such Annuity adjusted for any required market value adjustment under such Annuity, each less any applicable charges and deductions (but not premium taxes), each ---- determined as of the date the proceeds of such Annuity are applied to purchase Annuity Benefits. (b) ANLIC (Hawaii) will not be liable for the reinsurance of an Annuity annuitizing at terms more favorable than those guaranteed at the time of issue of such Annuity. In the event that Anchor allows annuitization at terms more favorable than those guaranteed in an Annuity at the time of issue of such Annuity, such Annuity will be considered surrendered and ANLIC (Hawaii)'s obligation for Annuity Benefits paid by Anchor on such an Annuity reinsured hereunder will be satisfied in full by 18 the payment to Anchor of the "Annuity Benefit Payment," which shall be an amount ----------------------- equal to the Reinsurance Percentage of the sum of (i) the Separate Account Value of such Annuity, and (ii) the Transferred Fixed Account Value of such Annuity adjusted for any required market value adjustment under such Annuity, each less ---- any applicable charges and deductions, determined as of the date the proceeds of such Annuity are applied to pay for the Separate Account and Fixed Account amounts applied to purchase Annuity Benefits. Section 5.5. Claims Settlements. The procedures for settlement of claims ------------------ under this Agreement with respect to the Annuities shall conform to the procedures set forth in the CG YRT Retrocession Agreement (including Article VII thereunder) or any Successor YRT Retrocession Agreement so that ANLIC (Hawaii) may comply with all claim settlement procedures under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement. ANLIC (Hawaii) will accept the decision of Anchor with respect to Benefit Payments on Annuities reinsured hereunder. Except as specifically provided in this Agreement or otherwise provided under the Annuities reinsured hereunder, ANLIC (Hawaii) will pay the Benefit Payments in a lump sum to Anchor. Anchor must determine all Death Benefit Claims within the period of time specified under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement. Section 5.6. Contested Death Benefit Claims. Anchor hereby grants to --------------------------------- ANLIC (Hawaii) the same rights the reinsurer has under the CG YRT Retrocession Agreement (including Articles VII and X thereunder) or any Successor YRT Retrocession Agreement with respect to ANLIC (Hawaii) with respect to contested Death Benefit Claims. Such rights may be delegated by ANLIC (Hawaii) to such reinsurer. ARTICLE VI Reserve Adjustments ------------------- Section 6.1. Initial Reserve Adjustment. Simultaneously with the payment -------------------------- of the Initial Consideration by Anchor to ANLIC (Hawaii) at the Effective Time, ANLIC (Hawaii) will pay Anchor an initial reserve adjustment in an amount that is equal to the Modified Coinsurance Reserve determined as of August 1, 1999 (the "Initial Reserve Adjustment"). ---------------------------- Section 6.2. Modified Coinsurance Reserve Adjustment. (a) The Modified ----------------------------------------- -------- Coinsurance Reserve Adjustment" will be computed as of the end of each ------------------------------ Accounting Period equal to the result of (i) less (ii) less (iii), where: ------- ---- ---- (i) equals the Modified Coinsurance Reserve determined at the end of such Accounting Period; (ii) equals the Modified Coinsurance Reserve determined at the end of the preceding Accounting Period; and (iii) equals the Modified Coinsurance Reserve Investment Credit determined as of the end of such Accounting Period. (b) For any Accounting Period in which the amount computed in Section 19 6.2(a) is positive, ANLIC (Hawaii) will pay Anchor the absolute value of such amount. For any Accounting Period in which the amount computed in Section 6.2(a) is negative, Anchor will pay ANLIC (Hawaii) the absolute value of such amount. ARTICLE VII [Reserved] ---------- ARTICLE VIII Accounting and Settlements -------------------------- Section 8.1. Monthly Accounting Periods. Each accounting period under ---------------------------- this Agreement (an "Accounting Period") will be a calendar month, except that: ----------------- (i) the initial Accounting Period runs from August 1, 1999 through August 31, 1999 (the "Initial Accounting Period"), and (ii) the final Accounting Period --------------------------- runs from the end of the preceding Accounting Period until the Terminal Accounting Date. Section 8.2. Reinsurance Servicer Reports. A servicer report in the form ---------------------------- attached hereto as Schedule 8.2 (the "Reinsurance Servicer Report") will be --------------------------- provided by the Servicer to ANLIC (Hawaii) and Anchor for each Accounting Period as provided in the Servicing Agreement not later than two Business Days prior to the Payment Date immediately following such Accounting Period. Section 8.3. Initial Settlement. At the Effective Time: ------------------- (i) Anchor will settle its obligation to pay ANLIC (Hawaii) the Initial Consideration. (ii) ANLIC (Hawaii) will settle its obligation to pay Anchor: (x) the Initial Reserve Adjustment, and (y) the Ceding Commission. (iii) A settlement as provided in Section 8.4 will be computed for the Initial Accounting Period for each calendar month thereof. Section 8.4. Monthly Settlements. (a) On or prior to each Payment Date -------------------- immediately following each monthly Accounting Period, Anchor will settle its obligation to pay ANLIC (Hawaii) for such Accounting Period the sum of: (i) the Modco Reinsurance Premiums, determined in accordance with Section 3.2(a); plus ---- (ii) any Net Separate Account Transfer CARVM Reserve Adjustment, determined in accordance with Section 3.4; plus ---- (iii) any Modified Coinsurance Reserve Adjustment payable to ANLIC (Hawaii), determined in accordance with Section 6.2; plus ---- (iv) the Anchor Payment Amounts. 20 (b) Simultaneously with the payments in Section 8.4(a), ANLIC (Hawaii) will settle its obligation to pay Anchor the sum of: (i) the amount of Benefit Payments, as described in Article V; plus ---- (ii) the Allowance for Commissions, determined in accordance with Section 4.3; plus ---- (iii) the Allowance for Expense, determined in accordance with Section 4.4; plus - ---- (iv) the Anchor YRT Reinsurance Premium Refund, if any, determined in accordance with Section 4.6; plus ---- (v) any Net Fixed Account Transfer CARVM Reserve Adjustment, determined in accordance with Section 4.7; plus ---- (vi) any amount determined in accordance with Section 4.8; plus ---- (vii) any Modified Coinsurance Reserve Adjustment payable to Anchor, determined in accordance with Section 6.2; plus ---- (viii) any Anchor YRT Expense Recovery. Section 8.5. Amounts Due. Except as provided in Section 8.9 and as ------------ otherwise specifically provided in this Agreement, all amounts due to be paid to either Anchor or ANLIC (Hawaii) under this Agreement will be determined on a net basis as of the last day of each monthly Accounting Period and will be due as of such date and payable on or prior to the Payment Date immediately following such Accounting Period. Section 8.6. Annual Accounting Reports. Anchor will provide ANLIC --------------------------- (Hawaii) with annual accounting reports within 30 days after the end of the calendar year for which such reports are prepared. These reports will contain sufficient information about the portion of all Annuities reinsured hereunder to enable ANLIC (Hawaii) to prepare its annual financial reports and to verify the information reported in Anchor annual financial reports relating to the portion of all Annuities reinsured hereunder. Section 8.7. Estimations. If the amounts under Section 8.4 cannot be ----------- precisely determined by the date described in Section 8.5, such payments will be paid in accordance with a formula mutually agreed upon by the Parties in writing which will approximate the actual payments. Adjustments will then be made to reflect actual amounts promptly after they become available. Section 8.8. Delayed Payments. Interest shall accrue on the amounts ----------------- payable under Sections 8.4, 9.4 and 14.1 at the Alternate Base Rate, payable on demand, provided that (i) interest shall not accrue on the amounts payable by -------- ANLIC (Hawaii) to Anchor relating to reinsurance of the Fixed Account of all Annuities under this Agreement for any Accounting Period until ANLIC (Hawaii) receives a Reinsurance Servicer Report for the settlement of amounts relating to reinsurance of the Fixed Account of all Annuities under this Agreement for such Accounting Period, and (ii) interest 21 shall accrue on the amounts payable by Anchor to ANLIC (Hawaii) relating to reinsurance of the Fixed Account of all Annuities under this Agreement beginning August 1, 1999 unless ANLIC (Hawaii) receives the Reinsurance Servicer Reports for the settlement of amounts relating to reinsurance of the Fixed Account of all Annuities under this Agreement for all Accounting Periods from the Effective Time to the end of the Accounting Period ending November 30, 1999 within two Business Days prior to the Payment Date immediately following the Accounting Period ending November 30, 1999. Section 8.9. Form of Payment; Offset. Each Party hereto shall have, and ------------------------ may exercise at any time and from time to time, the right to offset any balance or balances due from such Party to the other Party under this Agreement. The Party asserting the right of offset shall have and may exercise such right whether the balance or balances due or to become due to such Party from the other Party are on account of indemnity payments, reinsurance premiums, allowances, commissions or otherwise and regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each Party acted under the agreement or, if more than one, the different agreements involved. The application of this Section 8.9 shall not be deemed to constitute diminution in the event of insolvency. ARTICLE IX Duration and Recapture ---------------------- Section 9.1. ANLIC (Hawaii)'s Liability. The liability of ANLIC (Hawaii) -------------------------- with respect to any Annuity will begin simultaneously with that of Anchor or as of 12:01 a.m., Los Angeles, California local time, August 1, 1999, whichever occurs later. ANLIC (Hawaii)'s liability with respect to each Annuity will terminate on the earliest of (i) the date such Annuity is recaptured in full in accordance with Section 9.3, (ii) the date Anchor's liability on such Annuity is terminated, (iii) the date this Agreement is terminated in accordance with Section 9.2, or (iv) the date such Annuity is recaptured in full under Section 14.1. Termination of ANLIC (Hawaii)'s liability under clause (i) or (iii) of the preceding sentence is subject to payments in respect of such liability in accordance with the provisions of Article X. Section 9.2. Termination. (a) If an Event of Recapture exists, ANLIC ----------- (Hawaii) may terminate this Agreement on no less than 5 day's prior written notice to Anchor. (b) This Agreement shall terminate automatically on the earlier of (i) the close of business on September 30, 1999 if the Effective Time has not yet occurred, and (ii) the date that ANLIC (Hawaii)'s liability terminates with respect to all Annuities. (c) Anchor may terminate this Agreement on prior written notice to ANLIC (Hawaii) on or after the date the Unearned Ceding Commission Amount is reduced to zero. (d) Prior to the date the Unearned Ceding Commission Amount is reduced to zero, this Agreement may be terminated by the mutual written agreement of Anchor and ANLIC (Hawaii). 22 (e) The obligation of Anchor to pay the Anchor Payment Amounts to ANLIC (Hawaii) in accordance with this Agreement shall survive the termination of this Agreement pursuant to Section 9.2(a) until all obligations of Anchor under this Agreement, including the obligation to pay Recapture Payments pursuant to Section 9.4, have been satisfied. Section 9.3. Recapture. (a) Anchor may at any time recapture all or any --------- percentage (the "Recapture Percentage") of the risks reinsured under the --------------------- Annuities upon not less than 10 days' prior written notice to ANLIC (Hawaii). (b) Any notice given pursuant to Section 9.3(a) shall specify the Recapture Percentage. (c) In the event that ANLIC (Hawaii) does not pay the entire amount due under the ANLIC (Hawaii) Note by September 15, 1999, then Anchor may recapture a Reinsurance Percentage of 100% of the risks reinsured under the Annuities as of August 1, 1999 upon delivery of the ANLIC (Hawaii) Note to ANLIC (Hawaii), without any additional payment by Anchor. Section 9.4. Recapture Payment. If this Agreement is terminated by ANLIC ----------------- (Hawaii) pursuant to Section 9.2(a) or if any portion of the Annuities are recaptured pursuant to Section 9.3(a), Anchor shall, on the effective date of such termination or recapture, remit by wire transfer to ANLIC (Hawaii) an amount (the "Recapture Payment") equal to the sum of a notional amount ------------------ determined by multiplying the Recapture Percentage by the Unearned Ceding Commission Amount on the effective date of termination or recapture (in the event of a termination, the Recapture Percentage shall be 100%). Section 9.5. Reduction of Reinsurance Percentage. Upon the effective date ----------------------------------- of any recapture in which the Recapture Percentage is less than 100%, the Reinsurance Percentage shall be reduced to that percentage equal to the product of (i) 100% less the Recapture Percentage, and (ii) the Reinsurance Percentage ---- in effect immediately before such recapture. Section 9.6. No Deemed Recapture. No transaction pursuant to Section 5.4 ------------------- shall be deemed to be a recapture pursuant to this Article IX. ARTICLE X Terminal Accounting and Settlement ---------------------------------- Section 10.1. Terminal Accounting. In the event that this Agreement is -------------------- terminated in accordance with Section 9.2, all reinsurance under this Agreement is recaptured in accordance with Section 9.3, or the Parties mutually agree to terminate this Agreement, a final accounting and settlement (the "Terminal -------- Accounting and Settlement") will take place in accordance with the provisions of -------------------- this Article X. Article X of this Agreement will remain in effect following termination until all obligations under Article X are satisfied in full. Section 10.2. Date. The terminal accounting date will be the earliest of: ---- (i) the effective date of recapture pursuant to any notice of 100% recapture given under this Agreement, (ii) the effective date of 23 termination pursuant to any notice of termination given under this Agreement, or (iii) or any other date mutually agreed to by the Parties in writing (the "Terminal Accounting Date"). --------------------- Section 10.3. Settlement. The Terminal Accounting and Settlement will ---------- consist of: (i) the monthly settlement as provided in Section 8.4, computed as of the Terminal Accounting Date as if this Agreement were still in effect; (ii) payment by Anchor to ANLIC (Hawaii) of a terminal reserve equal to the Modified Coinsurance Reserve as of the Terminal Accounting Date; and (iii) payment by ANLIC (Hawaii) to Anchor of a terminal reserve adjustment equal to the Modified Coinsurance Reserve as of the Terminal Accounting Date. If the calculation of the Terminal Accounting and Settlement produces an amount owing to Anchor, such amount will be paid by ANLIC (Hawaii) to Anchor. If the calculation of the Terminal Accounting and Settlement produces an amount owing to ANLIC (Hawaii), such amount will be paid by Anchor to ANLIC (Hawaii). Section 10.4. Supplementary Accounting and Settlement. In the event that, --------------------------------------- subsequent to the Terminal Accounting and Settlement as provided above, a change is made with respect to any amounts due, a supplementary accounting will be made by Anchor in the form of an accounting of the items specified in Section 10.3. Any amount owed to Anchor or to ANLIC (Hawaii) by reason of such supplementary accounting will be paid promptly upon the completion thereof. ARTICLE XI Insolvency ---------- Section 11.1. In General. In the event of Anchor's insolvency, any ----------- payments due Anchor from ANLIC (Hawaii) pursuant to the terms of this Agreement will be made directly to Anchor or its liquidator, receiver or statutory successor. The reinsurance will be payable by ANLIC (Hawaii) on the basis of the liability of Anchor under the Annuities reinsured without diminution because of the insolvency of Anchor. The liquidator, receiver or statutory successor of Anchor will give ANLIC (Hawaii) written notice of the pendency of a claim against Anchor on any Annuity reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of any such claim, ANLIC (Hawaii) may investigate such claim and interpose in Anchor's name (or in the name of Anchor's liquidator, receiver or statutory successor), in the proceeding where such claim is to be adjudicated, any defense or defenses which ANLIC (Hawaii) may deem available to Anchor or its liquidator, receiver or statutory successor. The expense thus incurred by ANLIC (Hawaii) will be chargeable, subject to court approval, against Anchor as a part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to Anchor solely as a result of the defense undertaken by ANLIC (Hawaii). 24 ARTICLE XII Conditions to Effective Time ---------------------------- Section 12.1. Effective Time. The obligation of ANLIC (Hawaii) to --------------- reinsure the Annuities and to perform its obligations hereunder relating thereto shall take effect as of August 1, 1999 at the time, which must occur prior to the close of business on September 30, 1999, at which all of the conditions set forth in Sections 12.2 and 12.3 have been satisfied or, in the discretion of ANLIC (Hawaii), waived (the "Effective Time"). --------------- Section 12.2. Condition Precedent to Reinsurance. (a) ANLIC (Hawaii) ------------------------------------- shall have received on or before the Effective Time the following, each (unless otherwise indicated) dated such date, in form and substance satisfactory to ANLIC (Hawaii): (i) Certified copies of the resolutions or rules adopted by the Board of Directors or an authorized committee thereof of Anchor granting the appropriate officers the authority to approve, execute and deliver this Agreement on behalf of Anchor. (ii) A certificate of the secretary or assistant secretary of Anchor certifying the names and true signatures of the officers of Anchor authorized to sign this Agreement and the other documents to be delivered by it hereunder. (iii) A certificate of an authorized officer of Anchor certifying as to satisfaction of the conditions set forth in Section 12.3. (iv) Favorable opinions of Barger & Wolen, Low & Childers, Char Hamilton Campbell & Thom, each counsel for Anchor, and Susan Harris, general counsel of SunAmerica, each substantially in the form attached hereto as Schedule 12.2, as to such matters as ANLIC (Hawaii) may reasonably request. (v) Evidence that authorization or approval or other action by, and notice to or filing with, the following Governmental Authorities shall have been obtained or made to the extent required for the due execution, delivery and performance by Anchor of this Agreement, or for the exercise by ANLIC (Hawaii) of its rights and remedies under this Agreement: the Department. (vi) Evidence that all conditions precedent to the obligations of all parties under the AIC Retrocession Agreement, the ANLIC (Hawaii) YRT Retrocession Agreement, the CG YRT Retrocession Agreement and the Servicing Agreement have been satisfied. (b) Anchor shall have received on or before the Effective Time the following, each (unless otherwise indicated) dated such date, in form and substance satisfactory to Anchor: (i) Evidence that authorization or approval or other action by, and notice to or filing with, the following Governmental Authorities shall have been obtained or made to the extent required for the due execution, 25 delivery and performance by ANLIC (Hawaii) of this Agreement: the Hawaii Insurance Commissioner. (ii) Evidence that all conditions precedent to the obligations of all parties under the AIC Retrocession Agreement, the ANLIC (Hawaii) YRT Retrocession Agreement, the CG YRT Retrocession Agreement and the Servicing Agreement have been satisfied and all covenants required to have been performed have been performed. Section 12.3. Additional Conditions Precedent to Effective Time. The ----------------------------------------------------- Effective Time shall be subject to the further conditions precedent that at the Effective Time the following statements shall be true (and the acceptance by Anchor of the Ceding Commission shall constitute a representation and warranty by Anchor that at the Effective Time such statements are true): (i) the representations and warranties contained in Section 13.1 are correct at, as of and immediately after the Effective Time, as though made on and as of the Effective Time; and (ii) no event has occurred and is continuing, or would result from the reinsurance hereunder or from the application of the proceeds therefrom, that constitutes an Event of Recapture or would constitute an Event of Recapture but for the requirement that notice be given or time elapse or both; and ANLIC (Hawaii) shall have received such other approvals, opinions or documents as ANLIC (Hawaii) may reasonably request. ARTICLE XIII Representations and Warranties ------------------------------ Section 13.1. Representations and Warranties of Anchor. Anchor represents ---------------------------------------- and warrants as of the date hereof as follows: (a) Anchor is a stock life insurance company duly incorporated, validly existing and in good standing under the laws of Arizona and is duly qualified and licensed in the District of Columbia and all states of the United States of America except for the State of New York and in good standing as a foreign insurer in each jurisdiction where the failure to be so qualified would have a material adverse effect on the interests of ANLIC (Hawaii) hereunder or the ability of ANLIC (Hawaii) to enforce its rights hereunder or the ability of Anchor to perform its obligations under the Annuities and this Agreement. (b) The execution, delivery and performance by Anchor of this Agreement and Anchor's use of the proceeds of the Ceding Commission, are within Anchor's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) Anchor's articles of incorporation or by-laws or (ii) law or any regulation or contractual restriction binding on or affecting Anchor, and do not result in or require the creation of any Adverse Claim (other than pursuant hereto) upon or with respect to the Separate Accounts or Annuities or any of its 26 properties; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law (other than California Civil Code 3440.1, which has been duly complied with). (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by Anchor of this Agreement, or for the exercise by ANLIC (Hawaii) of its rights and remedies under this Agreement, except for (i) those set forth in Section 12.2(a)(v), and (ii) such filings with and approvals of such Governmental Authorities as will have been duly made and obtained prior to the Effective Time. (d) This Agreement is the legal, valid and binding obligation of Anchor enforceable against Anchor in accordance with its terms. This Agreement has been duly executed and delivered by Anchor. (e)(i) The annual Convention Statement of Anchor, including the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities, as filed with the Department and delivered to ANLIC (Hawaii) prior to the execution and delivery of this Agreement, as of and for the years ended December 31, 1996, 1997 and 1998 (collectively, the "Anchor Statutory Financial Statements"), have been prepared ------------------------------------- in accordance with SAP applicable thereto applied on a consistent basis (except as noted therein). Each such Anchor Statutory Financial Statement was in compliance with applicable law when filed. According to the best of Anchor's information, knowledge and belief, the Anchor Statutory Financial Statements are a full and true statement of all the assets and liabilities and of the condition and affairs of Anchor as of the respective dates thereof and of its income and deductions therefrom for the respective years ended on such dates and have been completed in accordance with the NAIC annual statement instructions and accounting practices and procedures manuals except to the extent that state law may differ or that state rules or regulations require differences in reporting not related to accounting practices and procedures. (ii) Anchor has delivered to ANLIC (Hawaii) complete and correct copies of the annual reports for the fiscal years ended September 30, 1997 and 1998 on Form 10-K (collectively, the "Anchor Annual Reports") and all quarterly reports --------------------- on Form 10-Q of Anchor for periods ending after September 30, 1998, in each case as filed with the Securities and Exchange Commission (collectively, the "Anchor ------ Quarterly Reports"). The Anchor Annual Reports and the Anchor Quarterly Reports - ----------------- correctly describe, as of their respective dates, the business then conducted and proposed to be conducted by Anchor. There are included in the Anchor Quarterly Reports and the Anchor Annual Reports consolidated financial statements at and for the periods specified therein. Anchor has also delivered to ANLIC (Hawaii) complete and correct copies of all current reports on Form 8-K, proxy statements, registration statements and prospectuses, if any, filed by Anchor with the Securities and Exchange Commission since September 30, 1998. All financial statements delivered to ANLIC (Hawaii) in the foregoing materials (except as otherwise specified therein) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods specified with respect to each 27 consolidated entity, and present fairly the financial position of the corporation or corporations to which they relate as of the respective dates specified and the results of its or their operations and changes in financial position for the respective periods specified. (f)(i) The value of the assets of Anchor calculated in accordance with SAP is greater than the total amount of its liabilities, including contingent liabilities, (ii) the present fair salable value of the assets of Anchor calculated in accordance with SAP is not less than the amount that will be required to pay all probable liabilities of Anchor on its debts as they become absolute and matured, (iii) Anchor does not intend to, and does not believe that it will incur debts or liabilities beyond Anchor's ability to pay such debts and liabilities as they mature, (iv) Anchor is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which Anchor's property would constitute unreasonably small statutory surplus; and (v) Anchor's Total Adjusted Capital is greater than the product of 2.5 times Anchor's Authorized Control Level Risk-Based Capital (where "Total Adjusted Capital" and "Authorized Control Level Risk-Based Capital" have the meanings given those terms in the Risk-Based Capital (RBC) for Insurer Model Act adopted by the National Association of Insurance Commissioners). (g) There is no pending or, to the knowledge of Anchor, threatened action or proceeding against or involving Anchor before any court, Governmental Authority or arbitrator that may materially adversely affect (i) the financial condition or operations of Anchor or (ii) the ability of Anchor to perform its obligations under this Agreement, or that purports to affect the legality, validity or enforceability of this Agreement. (h) Anchor is the legal and beneficial owner of the right to receive payment of the Charges free and clear of any Adverse Claim. No effective financing statement or other instrument similar in effect covering any rights of Anchor in any Separate Account or Annuity or any Charges or the Collections with respect thereto or any proceeds thereof is on file in any recording office. (i) Each Prospectus, information, exhibit, financial statement, document, book, record or report (but in each case excluding any projections or forecasts contained therein) furnished or to be furnished at any time by Anchor to ANLIC (Hawaii) in connection with this Agreement is or will be accurate in all material respects as of its date, and (except as otherwise disclosed to ANLIC (Hawaii) at such time) as of the date so furnished, Anchor will have no knowledge of a material inaccuracy as of the date thereof contained therein, and no such document contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. (j) The chief place of business and chief executive office of Anchor and the office where Anchor keeps its records concerning the Annuities and Gross Amounts Payable, including the original copies of each of the 28 Annuities and the Charges are located at the address specified in Section 17.4 (or, solely with respect to where Anchor keeps such records, Storeretrieve, Inc, 1150 South Taylor Avenue, Montebello, California) or in each case at such other locations, notified to ANLIC (Hawaii) in accordance with Section 17.4. The Obligors are the Separate Account and the Funds. (k) All the Charges are Eligible Charges. (l) The Charges are legal, valid and binding as to the Obligors and the Contractholders and are enforceable in accordance with their terms against the Obligors and no payment of any charge is past due. (m) Schedule 13.1-1 contains true, correct and complete copies of each of the forms of Annuity agreements (including the form of each endorsement included in any Annuity) and such forms of Annuity contracts have been furnished to Connecticut General Life Insurance Company in connection with the CG YRT Retrocession Agreement. (n) Anchor, each Fund and the Separate Account have irrevocably instructed the Custodian to make all payments on account of Charges directly to ANLIC (Hawaii) as and when required in the Standing Instructions. (o) Schedule 13.1-3 sets forth the CARVM reserve methodology in use by Anchor, as approved by the Department and in use in other applicable jurisdictions. (p) All of the Annuities reinsured under this Agreement are non-participating. (q) None of the Annuities reinsured under this Agreement provide for policy loans. Section 13.2. Representations and Warranties of ANLIC (Hawaii). ANLIC ---------------------------------------------------- (Hawaii) represents and warrants as of the date hereof as follows: (a) ANLIC (Hawaii) is a stock captive insurance company duly incorporated, validly existing and in good standing under the corporate laws of Hawaii. (b) The execution, delivery and performance by ANLIC (Hawaii) of this Agreement are within ANLIC (Hawaii)'s corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) ANLIC (Hawaii)'s articles of incorporation or by-laws or (ii) law or any regulation or contractual restriction binding on or affecting ANLIC (Hawaii). (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by ANLIC (Hawaii) of this Agreement except for (i) those set forth in Section 12.2(b)(i), and (ii) such filings with, and approvals of such Governmental Authorities as will have been made and obtained prior to the Effective Time. 29 (d) This Agreement is the legal, valid and binding obligation of ANLIC (Hawaii) enforceable against ANLIC (Hawaii) in accordance with its terms. (e) ANLIC (Hawaii) has provided to Anchor a true and correct copy of the CG YRT Retrocession Agreement as the same will be in effect at the time provided in the recitals to this Agreement. ARTICLE XIV Covenants --------- Section 14.1. Anchor Internal Replacements. (a) Anchor will not permit an ---------------------------- Internal Replacement to occur except (i) an Internal Replacement made in the ordinary course of business that is not described in subparagraph (i) or (ii) of paragraph (b) of this Section 14.1, (ii) pursuant to paragraph (b) of this Section 14.1, and (iii) an Internal Replacement as to which Anchor has obtained the prior written consent of ANLIC (Hawaii). Anchor shall report all Internal Replacements in the Reinsurance Servicer Report. (b) If an Internal Replacement (i) results from a program of Internal Replacement initiated or promoted by (x) Anchor, its Affiliates, successors or assigns, or (y) an insurance agency, an insurance or securities broker, or a bank or other organization authorized by Anchor, its Affiliates, successors or assigns to sell fixed or variable life insurance policies or annuity contracts, or (ii) involves the issue, in substitution for or replacement of an Annuity, of a fixed or variable life insurance policy or annuity contract by Anchor or its Affiliates, successors or assigns that is not on a fixed or variable life insurance policy or annuity contract form available for sale in substantially all states in which Anchor is licensed to do an insurance business at the Effective Time, and if such new form contains significant features that are not features of the Annuity being replaced, then Anchor must elect one of the following options with respect to such Internal Replacement: Replacement Option A - Anchor reinsures the replacement policy or contract issued by Anchor with ANLIC (Hawaii) under this Agreement on terms and conditions specified and agreed to by ANLIC (Hawaii). Replacement Option B - (i) Anchor recaptures the Annuity subject to such an Internal Replacement prior to its surrender, (ii) Anchor remits to ANLIC (Hawaii) an amount (the "Replacement Fee") equal to the product of (x) an amount --------------- equal the Unearned Ceding Commission Amount as of the beginning of the current monthly Accounting Period, and (y) a fraction (A) the numerator of which is the sum of (xx) the aggregate Separate Account Values, and (yy) the aggregate Transferred Fixed Account Values for all Annuities so replaced during the period from the end of the last monthly Accounting Period when a Replacement Fee was last payable to the end of the current monthly Accounting Period (the "Replacement Period"), ----------- 30 and (B) the denominator of which is the sum of (xx) the Separate Account Values, and (yy) the Transferred Fixed Account Values of all Annuities at the end of the current monthly Accounting Period without deduction for the aggregate Separate Account Values and aggregate Transferred Fixed Account Values for all Annuities so replaced during the Replacement Period, provided that the fraction in Item -------- (ii)(y) is equal to or greater than 0.01 (one-one-hundredth), and provided -------- further that any Replacement Fee due on August 1, 2019 shall be remitted immediately notwithstanding the immediately preceding proviso, and (iii) the payment to be made by ANLIC (Hawaii) under Section 5.2 for an Annuity subject to such an Internal Replacement is reduced by the amount of any contingent deferred sales charge waived by Anchor. Section 14.2. Anchor Current Practices. While this Agreement is in -------------------------- effect, Anchor will not, without the prior written consent of ANLIC (Hawaii), (i) materially change or alter (x) its claims paying or administrative practices with respect to the Annuities, or (y) its reserving practices with respect to the Fixed Accounts or the Separate Accounts (including the methodology for calculating the CARVM Reserve as set forth on Schedule 13.1-3), other than as specifically required to satisfy the law or regulations of its state of domicile or the directive of the director, commissioner of equivalent official thereof, or with respect to any required filing in a non-domiciliary state, pursuant to the laws, regulations or directives thereof, and then only if it gives prior written notice to ANLIC (Hawaii), provided that such prior notice requirement -------- will not apply if inconsistent with compliance with such law, regulation or directive, or (ii) agree to adjust, settle, waive, compromise or make any change in the terms or conditions of any Annuity, allow a credit or discount thereon, or release wholly or partially the Custodian or any Obligor thereunder, provided -------- that Anchor may, in the ordinary course of business consistent with its administrative practices in effect at the Effective Time, adjust, settle, waive or compromise the amount or payment of any Charges, allow a credit or discount thereon, or release wholly or partially the Custodian or any Obligor thereunder in an aggregate amount not to exceed (x) $100,000 in any monthly Accounting Period, or (y) $500,000 in any calendar year, to be pro-rated for any portion of a calendar year this Agreement is in effect (the "Waiver Allowance"). ----------------- Section 14.3. Anchor Other Reinsurance. While this Agreement is in -------------------------- effect, Anchor will not reinsure any risks under the Annuities reinsured hereunder other than pursuant to the reinsurance provided under this Agreement. Section 14.4. Affirmative General Covenants of Anchor. Until the Terminal --------------------------------------- Accounting and Settlement, Anchor will, unless ANLIC (Hawaii) shall otherwise consent in writing: (a) Performance. Duly and punctually observe and perform each and every ----------- obligation on its part to be observed or performed under this Agreement, as modified or amended from time to time as permitted herein. (b) Compliance with Laws, Etc. Comply in all material respects with all --------------------------- applicable laws, rules. regulations and orders with respect to (i) it and its business and properties, except to the extent noncompliance would 31 not, individually or in the aggregate, have a material adverse effect on the interest of ANLIC (Hawaii) hereunder or in the Gross Amounts Payable, or the ability of Anchor to perform its obligations hereunder or under the Annuities and (ii) all Charges and related Annuities and Collections with respect thereto. (c) Preservation of Corporate Existence. Preserve and maintain its -------------------------------------- corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each other jurisdiction, where the failure to preserve and maintain such existence, rights, franchises, privileges and qualifications would materially adversely affect the interest of ANLIC (Hawaii) hereunder or in the Gross Amounts Payable, or the ability of Anchor to perform its obligations hereunder or under the Annuities. (d) Audits. At any time and from time to time during regular business ------ hours, permit ANLIC (Hawaii) or its agents or representatives (including any Successor Servicer), upon reasonable advance notice (i) to examine and make copies of and abstracts from all books, records and documents (including computer tapes and disks) in the possession or under control of Anchor relating to the Annuities and the Gross Amounts Payable, and (ii) to visit the offices and properties of Anchor for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to the Annuities and the Gross Amounts Payable or Anchor's performance hereunder or under the Annuities with any of the officers or employees of Anchor having knowledge of such matters, provided that by exercising any such rights ANLIC (Hawaii) agree that -------- they will hold in confidence all information so obtained and will use the same only for the purposes contemplated by this Agreement. (e) Maintenance of Separate Existence. Do all things reasonably necessary --------------------------------- to maintain its corporate existence separate and apart from SunAmerica and other Affiliates of Anchor, including (i) maintaining corporate records and books of account separate from those of its Affiliates; (ii) except as otherwise provided in this Agreement, not commingling its assets and funds with those of its Affiliates; (iii) holding such appropriate meetings or obtaining such appropriate consents of its board of directors as are necessary to authorize all Anchor's corporate actions required by law to be authorized by the board of directors, keeping minutes of such meetings and of meetings of its stockholder(s) and observing all other customary corporate formalities; and (iv) at all times holding itself out to the public under Anchor's own name as a legal entity separate and distinct from its Affiliates. (f) Keeping of Records and Books of Account. (i) Keep, or cause to be ------------------------------------------- kept, proper books of record and account, which shall be maintained or caused to be maintained by Anchor and shall be separate and apart from those of any Affiliate of Anchor, in which (x) full and correct entries shall be made of all financial transactions and the assets and business of Anchor in accordance with SAP, and (y) it is clearly shown that the Annuities have been reinsured under this Agreement, and (ii) maintain and implement administrative and operating procedures (including an ability to recreate records evidencing the Annuities and the Gross Amounts 32 Payable in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Gross Amounts Payable (including records adequate to permit the daily identification of each new Charge and all Collections of and adjustments to each existing Charge and all Gross Amounts Payable), and (iii) mark its master data processing records evidencing such the Annuities and the Gross Amounts Payable with a legend, acceptable to ANLIC (Hawaii), evidencing that such Gross Amounts Payable is subject to this Agreement. (g) Performance and Compliance. At its expense timely and fully perform ---------------------------- and comply with all material provisions, covenants and other promises required to be observed by it under the Annuities and the Gross Amounts Payable. (h) Location of Records. Keep its chief place of business and chief --------------------- executive office and the office where it keeps the originals of its records concerning the Annuities and the Gross Amounts Payable at the address of Anchor referred to in Section 13.1(j) or, upon 30 days' prior written notice to ANLIC (Hawaii), at any other locations in a jurisdiction where all action required by Section 17.5 shall have been taken. (i) Collection Procedures, Allocation Procedures and Standing Instructions. ---------------------------------------------------------------------- Implement and comply at all times with the Collection Procedures, the Allocation Procedures and the Standing Instructions. (j) Payment of Taxes, Etc. Pay promptly when due all taxes, assessments ----------------------- and governmental charges or levies imposed upon it or any Annuity or the Gross Amounts Payable (including any intangibles, property or similar tax), or in respect of its income or profits therefrom, any and all claims of any kind (including claims for labor, materials and supplies), except for such taxes, assessments, governmental charges or levies and claims as are being contested in good faith by proper proceedings and against which adequate reserves shall have been established, unless and until any Adverse Claim resulting from the failure to pay such taxes, assessments, governmental charges or levies and claims shall have attached and become enforceable against its other creditors. (k) Fixed Account Segregated Assets. Establish and maintain the Fixed ---------------------------------- Account Segregated Assets in accordance with the requirements and procedures set forth in Schedule 14.4. Section 14.5. Reporting Requirements of Anchor. Until the Terminal ----------------------------------- Accounting and Settlement, Anchor will, unless ANLIC (Hawaii) shall otherwise consent in writing, furnish to ANLIC (Hawaii): (a)(i)(x) promptly upon becoming available, but in any event within 75 days after the end of each calendar year, a copy of the annual Convention Statements of Anchor for such calendar year, and (y) promptly upon becoming available, but in any event within 60 days after the end of each of the first three calendar quarters, a copy of the quarterly Convention Statements of Anchor for such quarter, in each case as filed by Anchor 33 with the Department and executed by the appropriate officer under the laws of the state of domicile of Anchor, prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer or controller or treasurer of Anchor that such annual or quarterly Convention Statement presents, to the best of his or her information, knowledge and belief, a full and true statement of all the assets and liabilities and of the condition and affairs of Anchor as of the date thereof and of its income and deductions therefrom for the period ended on such date and have been completed in accordance with the NAIC statement instructions and accounting practices and procedures manuals except to the extent that state law may differ or that state rules or regulations require differences in reporting not related to accounting practices and procedures; (ii)(x) promptly upon becoming available, but in any event within 75 days after the end of each calendar year, a copy of the annual report on Form 10-K of Anchor for such calendar year, and (y) promptly upon becoming available, but in any event within 60 days after the end of each of the first three calendar quarters, a copy of the quarterly report on Form 10-Q of Anchor for such quarter, in each case prepared in accordance with GAAP and accompanied by the certification of the chief financial officer or chief executive officer or controller or treasurer of Anchor that such annual or quarterly financial statement presents fairly, in accordance with GAAP, the financial position and results of operations of Anchor as at and for the period ending on the date of such financial statement; (b) Within 90 days after the end of each calendar year, a copy of each "Statement of Actuarial Opinion" that is provided to the Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of aggregate reserves for life policies and contracts of Anchor; (c) as soon as possible and in any event within 5 Business Days after Anchor's Knowledge of the occurrence of each Event of Recapture or each event that, with the giving of notice or lapse of time or both, would constitute an Event of Recapture, the statement of an authorized officer of Anchor setting forth details of such Event of Recapture and the action that Anchor proposes to take with respect thereto; (d) as soon as possible and in any event within 5 Business Days after the occurrence of any adjustment, settlement, waiver, compromise or change in the terms or conditions of any Annuity or any credit, discount or release in respect thereof, other than (i) that which is permitted by the Waiver Allowance, and (ii) any adjustments, settlements, waivers, compromises or changes in the terms or conditions of any Charges or any credits, discounts or releases in respect thereof which, in the aggregate, exceeds $500,000 in excess of the Waiver Allowance in any calendar year (such amount to be pro-rated for any portion of a calendar year this Agreement is in effect), the statement of the general counsel or chief financial officer of Anchor setting forth details thereof; (e) promptly after the receipt thereof and in any event within 5 Business Days, copies of each communication received by Anchor from the 34 Securities and Exchange Commission or the National Association of Securities Dealers reporting the final results of, any audit or other investigation related to the Annuities or any aspect of the sale, maintenance, investment or administration thereof; and (f) promptly, from time to time, such other information, documents, records or reports respecting the Annuities the Gross Amounts Payable or the conditions or operations, financial or otherwise, of Anchor, as ANLIC (Hawaii) may from time to time reasonably request in writing in order to protect ANLIC (Hawaii)'s interests under or contemplated by this Agreement. Section 14.6. Negative Covenants of Anchor. Until the Terminal Accounting ---------------------------- and Settlement, Anchor will not, without the written consent of ANLIC (Hawaii): (a) Sales, Liens, Etc. Except as otherwise provided herein, (i) sell, ------------------- assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, or create or suffer to exist any Adverse Claim upon or with respect to, any interest in any Annuity or the Gross Amounts Payable, other than, in the case of a Contractholder's interest in an Annuity, a lien, encumbrance or assignment made or suffered by a Contractholder on such interest, or (ii) assign any right of Anchor to receive income in respect of any thereof. (b) Extension or Amendment of Annuities. Cancel or terminate any Annuity ------------------------------------ except pursuant to the request of a Contractholder (other than in connection with an Internal Replacement), or amend or otherwise modify or waive the terms of any Annuity, including any Charge, except as permitted by the Waiver Allowance. (c) Change in Collection Procedures. Make or consent to any change in the ------------------------------- Collection Procedures, which change would be reasonably likely to impair the collectibility of any Gross Amounts Payable, except as permitted by the Waiver Allowance. (d) Change in Allocation Procedures. Make or consent to any change in the ------------------------------- Allocation Procedures, except with the prior written consent of ANLIC (Hawaii). (e) Grant a Security Interest in the Gross Amounts Payable. Grant a ------------------------------------------------------------ security interest in the Annuities or the Gross Amounts Payable to any Person. Section 14.7. Anchor Changes in Investment Funds, etc. (a) Except as permitted by this Section 14.7, Anchor shall not agree to or permit to exist (i) any termination, modification or amendment (a "Change") in any investment ------ management or advisory agreement under which any of the assets of the Separate Accounts are managed (a "Contract Change"), or (ii) a Change in the Fundamental --------------- Investment Objectives and Policies of any fund in which the assets of the Separate Account are managed (a "Policy Change"), or (iii) the elimination of ------------- any portfolio in which the assets of the Separate Account are managed (a "Fund") ---- or the addition of any new Fund, all except as required by Section 15 of the Investment Company Act of 1940. 35 (b) Anchor may agree to or permit to exist any Contract Change or Policy Change (i) with the prior consent of ANLIC (Hawaii), or (ii) of which Anchor has given ANLIC (Hawaii) prior notice and which does not result in a reasonable probability of a material adverse change in the Charges (other than an increase in the payment of contingent deferred sales charges due to an increase in surrenders resulting from the Contract Change or Policy Change) to which the Contract Change or Policy Change relates, such probability to be measured as of the date of the Contract Change or Policy Change, or (iii) if Anchor elects to make a partial recapture under Section 14.7(d). (c) Anchor may agree to the addition or elimination of any Fund if Anchor has given ANLIC (Hawaii) prior notice of the circumstances of such addition or elimination and any replacement Fund, and (i) Anchor obtains the prior consent of ANLIC (Hawaii), or (ii) in the case of the elimination of any Fund, if such Fund is replaced contemporaneously by another Fund with substantially similar fundamental investment objectives and policies, or (iii) if such addition or elimination does not result in a reasonable probability of a material adverse change in the Charges (other than an increase in the payment of contingent deferred sales charges due to an increase in surrenders resulting from the Contract Change or Policy Change) to which the addition or elimination relates, such probability to be measured as of the date of such addition or elimination, or (iv) if Anchor elects to make a partial recapture under Section 14.7(d). (d) If Anchor elects to make a partial recapture under Section 14.7(b) or Section 14.7(c), it shall recapture under Section 9.3 (subject to the terms thereof) a Recapture Percentage of the risks reinsured hereunder equal to that percentage which the portion of the aggregate Separate Account Values of all Annuities attributable to the Fund to which the Contract Change, Policy Change or the addition or elimination of a Fund relates bears to the aggregate Separate Account Values of all Annuities, such values to be determined as of the close of business on the Business Day on which the notice of recapture is received by ANLIC (Hawaii). (e) Anchor shall inform ANLIC (Hawaii) and the reinsurer under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement of any change in any Fund, including the addition or elimination of any Fund. (f) Notwithstanding the provisions of this Section 14.7, Anchor shall not eliminate any Fund without adding another Fund except as permitted under the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement. Section 14.8. Negative Covenants of ANLIC (Hawaii). Until the Terminal -------------------------------------- Accounting and Settlement, ANLIC (Hawaii) will not, without the written consent of Anchor, make or consent to any change to the AIC Retrocession Agreement, the ANLIC (Hawaii) YRT Retrocession Agreement, the CG YRT Retrocession Agreement or any Successor YRT Retrocession Agreement that would either (i) increase an amount that is payable, directly or indirectly, by Anchor, or (ii) reduce any obligation to pay an amount that will be payable, directly or indirectly, to Anchor, by any party to such agreements. 36 ARTICLE XV Reserve Credit -------------- Section 15.1. Security. ANLIC (Hawaii) shall comply with Section 15.2 for -------- the purpose of qualifying the reinsurance provided under Section 2.4 for statutory financial statement credit by Anchor under the credit for reinsurance rules applicable in Arizona. Section 15.2. Letters of Credit. ANLIC (Hawaii) must apply for and ------------------- provide to Anchor one or more letters of credit that meet the requirements of Arizona laws and regulations in an amount equal to or greater than the reserves ceded by Anchor with respect to the reinsurance provided under Section 2.4. Such letter of credit may be drawn upon at any time and be used by Anchor or any successor by operation of law of Anchor, including any liquidator, rehabilitator, receiver or conservator of Anchor, without diminution because of insolvency of Anchor or ANLIC (Hawaii), for the following purposes but only as they relate to the reinsurance provided under Section 2.4: (a) to reimburse Anchor for ANLIC (Hawaii)'s share of premiums returned to the owners of the Annuities on account of cancellations of the Annuities; (b) to reimburse Anchor for ANLIC (Hawaii)'s share of surrenders and benefits paid by Anchor under the Annuities; (c) to fund an account with Anchor in an amount at least equal to the deduction, for reinsurance ceded, from Anchor's liabilities for the Annuities. Interest on the amount of funds in such account shall accrue to the benefit of ANLIC (Hawaii) at a rate not in excess of the prime rate of interest. Such an amount shall include, but not be limited to, amounts for policy reserves, reserves for claims and losses incurred (including losses incurred but not reported), loss adjustment expenses and unearned premiums; and (d) to pay any other amounts Anchor claims are due under this Agreement. Section 15.3. Letters of Credit; Return of Excess Security. Anchor shall -------------------------------------------- return any amounts drawn on letters of credit in excess of the actual amounts required under Sections 15.2(a) through 15.2(c) and amounts under Section 15.2(d) that are subsequently determined not to be due. ARTICLE XVI Events of Recapture ------------------- Section 16.1. Definition. If any of the following events shall occur and ---------- be continuing, an "Event of Recapture" shall exist: -------------------- (a) Anchor fails to perform or observe any material term or agreement hereunder (other than those terms and agreements set forth in Sections 3.3, 14.5(c) and 14.6(a)) on its part to be performed or observed and 37 such failure remains unremedied for 10 days. (b) Anchor fails to perform or observe any material term, covenant or agreement hereunder on its part to be performed or observed, other than those which constitute an Event of Recapture under Section 16.1(a) or Section 16.1(c). (c) Anchor fails to make any payment or deposit required under this Agreement when due except with respect to an adjustment made under Section 2.13, provided that payment by Anchor with respect to such adjustment is made within 3 - -------- Business Days after discovery thereof. (d) Any representation or warranty or statement made by Anchor under this Agreement was false in any material respect when made. (e) There shall occur, without the consent of ANLIC (Hawaii), any termination, modification or amendment in the terms and conditions applicable to the Charges, except as permitted by the Waiver Allowance. ARTICLE XVII Miscellaneous ------------- Section 17.1. Parties to this Agreement. This Agreement is solely between ------------------------- Anchor and ANLIC (Hawaii), and performance of the obligations of each Party under this Agreement shall be rendered solely to the other Party. In no instance shall anyone other than Anchor or ANLIC (Hawaii) and their respective successors and assigns have any rights under this Agreement. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between ANLIC (Hawaii) and the Contractholder, the insured or any beneficiary under any Annuity reinsured hereunder and Anchor shall be and remain solely liable to such Contractholder, insured or beneficiary under any such Annuity. Section 17.2. Assignment. Anchor may not assign any of its rights, duties ---------- or obligations under this Agreement without prior written consent of ANLIC (Hawaii), except as permitted hereby. ANLIC (Hawaii) may (i) grant a security interest in all its right, title and interest in this Agreement, and (ii) retrocede the risks reinsured hereunder but solely as contemplated by the AIC Retrocession Agreement and by Section 2.17. Section 17.3. Counterparts. This Agreement may be executed in any number ------------ of counterparts by the Parties on separate counterparts, each of which, when so executed and delivered, shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 17.4. Notices. (a) Except as otherwise expressly provided herein, ------- all notices, requests, demands, instructions, consents or other communications provided for hereunder shall be in writing and delivered or mailed by registered or certified mail or by overnight courier or by facsimile communication, in each case prepaid and addressed to the intended recipient at its address for notices specified in Section 17.4(b). 38 (b) All notices, requests, demands, consents, approvals or other communications under this Agreement shall be addressed as follows (or to any other address as may be designated in writing by the recipient): If to Anchor: Anchor National Life Insurance Company 1 SunAmerica Center Los Angeles, CA 90067-6022 Attention: Lawrence M. Goldman, Associate General Counsel and James R. Belardi, Senior Vice President Facsimile: 310-772-6574 Telephone: 310-772-6000 If to ANLIC (Hawaii): ANLIC Insurance Company (Hawaii), Ltd. c/o 50th State Risk Management Services, Inc. Six Waterfront Plaza, Room 405 500 Ala Moana Boulevard Honolulu, HI 96813 Attention: Ann Nakagawa Facsimile: 808-524-9526 Telephone: 808-543-9737 Section 17.5. Further Assurances. Anchor will do and perform, from time ------------------- to time, any and all acts and execute any and all further instruments required or reasonably requested by ANLIC (Hawaii) more fully to effect the purposes of this Agreement. Section 17.6. No Waiver; Cumulative Remedies. No failure to exercise and ------------------------------ no delay in exercising, on the part of ANLIC (Hawaii), any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges therein provided are cumulative and not exhaustive of any rights, remedies, powers and privileges provided by law. Section 17.7. Amendment and Waiver. No amendment, modification or ---------------------- discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the Party against whom enforcement of the amendment, modification, discharge or waiver is sought. Any waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the Party granting such waiver in any other respect or at any other time. Section 17.8. Entire Agreement. The terms expressed herein constitutes ----------------- the entire agreement between the Parties with respect to the Annuities reinsured hereunder. There are no understandings between the Parties with respect to the Annuities reinsured hereunder other than as expressed in this Agreement. 39 Section 17.9. Governing Law. This Agreement shall be governed by, -------------- interpreted, construed and enforced by and in accordance with the internal laws of the State of Arizona without regard to its choice-of-law rules. Section 17.10. Consent to Jurisdiction. (a) Each Party hereto hereby ------------------------- irrevocably submits to the exclusive jurisdiction of any State or Federal court sitting in the State of Delaware, or, if no court in Delaware will exercise jurisdiction, Arizona, and any appellate court from any thereof in any action or proceeding arising out of or relating to this Agreement or any other instrument or document furnished pursuant hereto, and each such Party hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Delaware or Arizona State court, as the case may be, or in such Federal court sitting in Delaware or Arizona, as the case may be. Each such Party hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. Each such Party irrevocably consents to the service of copies of the summons and complaint and any other process that may be served in any such action or proceeding by the mailing of copies of such process to such Party at its address specified pursuant to Section 17.4. Each such Party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section 17.10 shall affect the right of any such Party to serve legal process in any other manner permitted by law or affect the right of any such Party to bring any action or proceeding against any other such Party or their respective property in the courts of other jurisdictions other than the State of New York if no court in the States of Delaware or Arizona will exercise jurisdiction. Section 17.11. Special Service of Process. Pursuant to any statute of any -------------------------- state, territory or district of the United States which makes provision therefore, ANLIC (Hawaii) hereby designates the Superintendent, Commissioner or Director of Insurance, or other officer specified for that purpose in the statute, or the successor or successors in office as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of Anchor or any beneficiary hereunder arising out of this Agreement, and hereby designates the person specified for ANLIC (Hawaii) pursuant to Section 17.4 as the person to whom the said officer is authorized to mail such process or a true copy thereof. Section 17.12. WAIVER OF JURY TRIAL. ANCHOR AND ANLIC (HAWAII) HEREBY ----------------------- IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 17.13. Headings. The headings contained in this Agreement are for -------- purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. 40 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the date first above written. ANCHOR NATIONAL LIFE INSURANCE COMPANY By________________________________ Name: Title: ANLIC INSURANCE COMPANY (HAWAII), LTD. By_________________________________ Name: Title: 41 EX-10.2 3 EXHIBIT 10B EXECUTION COPY IRREVOCABLE STANDING INSTRUCTIONS These IRREVOCABLE STANDING INSTRUCTIONS, dated as of September 9, 1999 are given pursuant to this agreement by and among Anchor National Life Insurance Company ("Anchor"), ANLIC Insurance Company (Hawaii), Ltd. ("ANLIC (Hawaii)"), ------ -------------- Variable Separate Account of Anchor National Life Insurance Company ("Variable -------- Separate Account"), Anchor Pathway Fund, Anchor Series Trust, SunAmerica Series ---------------- Trust, and State Street Bank and Trust Company. RECITAL Anchor has entered into a Reinsurance Agreement, dated as of August 1, 1999 (said Agreement, as the same may be supplemented, amended, replaced or otherwise modified from time to time, the "Reinsurance Agreement"), with ANLIC (Hawaii), --------------------- pursuant to which Anchor will reinsure certain risks under the Annuities (as defined herein) with ANLIC (Hawaii). Section 1. Certain Defined Terms. Capitalized terms used herein shall --------------------- have the following meanings: "Annuities" shall mean (i) the individual variable annuity contracts and --------- group variable annuity certificates identified in Schedule 1.1 hereto, as such contracts and certificates are in effect and are reinsured under the Reinsurance Agreement from time to time, subject to reinstatement or surrender, and (ii) the other annuity contracts reinsured pursuant to the terms of the Reinsurance Agreement. "Business Day" shall mean each day on which (i) dealings are carried on in ------------- the London interbank market, and (ii) all of the following are open for business at their principal offices in the cities designated: (x) Anchor in Los Angeles; (y) the Custodian in North Quincy, Massachusetts; and (z) the New York Stock Exchange trading floor in New York City. "CDSC Fees" shall mean the Charges which are designated as "Contingent ---------- Deferred Sales Charges" in Schedule 1.2 hereto in the column labeled "Charges". "Charges" means the charges and deductions relating to the Annuities ------- identified in Schedule 1.2 hereto in the column labeled "Charges". "Custodian" shall mean State Street Bank and Trust Company, a Massachusetts --------- trust company. Page 1 "Daily Reinsurance Servicer Report" shall mean a report in substantially ------------------------------------ the form of Exhibit 2.2 hereto. "Delinquent Daily Reinsurance Servicer Report" shall mean a Daily ------------------------------------------------ Reinsurance Servicer Report which is not delivered to the Custodian on the --- Business Day to which it relates. "Fund" shall mean one or more of Anchor Pathway Fund, a Massachusetts ---- business trust, Anchor Series Trust, a Massachusetts business trust, SunAmerica Series Trust, a Massachusetts business trust, and any successor to any thereof and any other Person that executes a counterpart hereof. "Investment Company" shall mean any entity registered as a separate ------------------- investment company under the Investment Company Act. - "Investment Company Act" shall mean the Investment Company Act of 1940, as ----------------------- amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rule or regulation, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. "M&E Fees" shall mean all Charges other than CDSC Fees. --------- "Person" shall mean an individual, a partnership, a corporation, a limited ------ liability company, a trust (including any beneficiary thereof) or other entity, including any unincorporated organization or governmental agency or political subdivision thereof. The term "corporation" for purposes of the preceding sentence shall mean a corporation, joint stock company, business trust or other similar association. "Portfolio" shall mean a separate investment portfolio or series of an --------- Investment Company which is itself not an Investment Company. "Reinsurance Servicer Report" shall mean a report in substantially the form --------------------------- of Exhibit 2.3 hereto furnished by the servicer pursuant to the Servicing Agreement to ANLIC (Hawaii). "SEC" shall mean the Securities and Exchange Commission or any other --- governmental authority of the United States of America at the time administering the Securities Act of 1933, as amended, the Investment Company Act or the Securities Exchange Act of 1934, as amended. Section 2. Irrevocable Payment Instructions. The Custodian is hereby --------------------------------- irrevocably directed by Anchor, the Variable Separate Account and each of the Funds, upon receipt of a notice in substantially the form of Exhibit 2.1 attached hereto, to make all payments in respect of all Charges (hereinafter, "Payments") as follows: ------- Page 2 (i) in the case of all CDSC Fees Collected, as identified on Line 5 of the Daily Reinsurance Servicer Report, remit all Payments in respect thereof directly to Anchor; (ii) in the case of all M&E Fees, as identified as M&E Fees Collected on Line 3 of the Daily Reinsurance Servicer Report, accrue, segregate and hold such M&E Fees for the benefit of Anchor and ANLIC (Hawaii) and, then, no later than two Business Days following receipt of a Reinsurance Servicer Report, (i) remit all Payments that, pursuant to Line 199 of the Reinsurance Servicer Report, are allocable to Anchor directly to Anchor and (ii) wire all Payments that, pursuant to Line 198 of the Reinsurance Servicer Report, are allocable to ANLIC (Hawaii) directly and in immediately available funds to the non-interest-bearing cash collateral account with Citibank, N.A. at its office at 399 Park Avenue, New York, New York 10043, Account No. 40800176; and (iii) in the event the Custodian does not receive a Daily Reinsurance Servicer Report on any Business Day, the Custodian shall accrue, segregate and hold either (a) 110% of the amount of the M&E Fees withheld as indicated on Line 3 of the Daily Reinsurance Servicer Report last provided to the Custodian or (b) the maximum cash amount distributable to Anchor on that day by the Funds, whichever is less. Upon receiving such a Delinquent Daily Reinsurance Servicer Report, the Custodian shall remit to Anchor any amount withheld by the Custodian with respect to the M&E Fees in excess of that required to be withheld as indicated on Line 3 of such Delinquent Daily Reinsurance Servicer Report. Prior to any delivery of the above-referenced notice, however, the Custodian is to collect and remit Charges in accordance with the applicable custodial agreements then in effect. Section 3. Interest on Amounts Held by Custodian. All amounts ------------------------------------------ segregated and held by the Custodian for more than one Business Day pursuant to these Standing Instructions shall be held in a non-interest-bearing demand deposit account in the name of "State Street Bank and Trust Company as Custodian." Section 4. Miscellaneous. The Custodian and each of the Funds are ------------- further notified that: (a) These Irrevocable Standing Instructions are delivered on behalf of ANLIC (Hawaii) and are irrevocable and cannot be waived, amended or otherwise modified without the prior written consent of ANLIC (Hawaii). Page 3 (b) By its acknowledgment, the Custodian authorizes Anchor to deliver a copy of these Irrevocable Standing Instructions and the Custodian's acknowledgment to ANLIC (Hawaii) and its respective successors and assigns. (c) Any payment by the Custodian other than in compliance with the directions herein shall not be deemed to discharge its obligations in respect of the Payments. (d) THESE IRREVOCABLE STANDING INSTRUCTIONS SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE. (e) EACH FUND'S AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST IS ON FILE WITH THE SECRETARY OF THE COMMONWEALTH OF MASSACHUSETTS AND NOTICE IS HEREBY GIVEN THAT THIS AGREEMENT IS MADE AND EXECUTED ON BEHALF OF SUCH FUND, AND NOT BY THE TRUSTEES OR OFFICERS OF SUCH FUND INDIVIDUALLY, AND OBLIGATIONS OF OR ARISING OUT OF THIS AGREEMENT ARE NOT BINDING UPON THE TRUSTEES, OFFICERS OR SHAREHOLDERS OF SUCH FUND INDIVIDUALLY BUT ARE BINDING ONLY UPON THE ASSETS OF SUCH FUND. (f) Each Person which hereafter becomes a Fund party to these Irrevocable Standing Instructions by executing a counterpart hereof shall thereafter be bound by the terms hereof to the same extent as if these Irrevocable Standing Instructions had been addressed to and signed by such Fund. (g) ANLIC (Hawaii) has granted a security agreement in certain collateral, including, but not limited to, ANLIC (Hawaii)'s rights under these Irrevocable Standing Instructions. These Irrevocable Standing Instructions may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute but one and the same Irrevocable Standing Instructions. By its execution of these Irrevocable Standing Instructions the Custodian hereby acknowledges and agrees (i) to abide by the foregoing instructions, it being understood that such acknowledgment and waiver does not constitute a waiver of any defenses and (ii) that it has not received any prior notice from any other party that Anchor has granted a security interest in, or collaterally assigned, the Charges to such other party or that any other party has any interest in the Charges. Page 4 ANCHOR NATIONAL LIFE INSURANCE COMPANY By:------------------------------------ ANLIC NSURANCE COMPANY (HAWAII), LTD. By:---------------------------------- VARIABLE SEPARATE ACCOUNT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY by ANCHOR NATIONAL LIFE INSURANCE COMPANY By:--------------------------------- Authorized Signatory ANCHOR PATHWAY FUND By:--------------------------------- Authorized Signatory ANCHOR SERIES TRUST By:-------------------------------- Authorized Signatory Page 5 SUNAMERICA SERIES TRUST By:------------------------------- Authorized Signatory ---------------------------------- [Add name of any future Fund] By:------------------------------- Authorized Signatory Acknowledged and agreed to as of the date first written above: STATE STREET BANK AND TRUST COMPANY By:------------------------------- Authorized Signatory Page 6 EX-10.3 4 EXHIBIT 10C EXECUTION COPY ANCHOR CONSENT AND AGREEMENT CONSENT AND AGREEMENT dated as of August 1, 1999 among ANCHOR NATIONAL LIFE INSURANCE COMPANY, an Arizona stock life insurance corporation ("Anchor"), ANLIC ------ INSURANCE COMPANY (HAWAII), LTD., a Hawaii stock captive insurance company ("ANLIC (Hawaii)"), and CITICORP NORTH AMERICA, INC., as agent (the "Agent"). ------------ ----- RECITALS -------- A. Anchor and ANLIC (Hawaii) have entered into a Reinsurance Agreement dated as of August 1, 1999 (said Agreement, as it may be supplemented, amended, replaced or otherwise modified from time to time, being the "Reinsurance ----------- Agreement"; unless otherwise defined herein, terms defined in the Reinsurance -- Agreement and in the Servicing Agreement (as defined in the Reinsurance Agreement) are used herein as therein defined). B. To obtain financing necessary to perform its obligations in connection with the Reinsurance Agreement, ANLIC (Hawaii) will sell to Corporate Receivables Corporation (the "Purchaser") a promissory note owed to ANLIC --------- (Hawaii) and will grant to the Agent and to Citibank, N.A., respectively, security interests in all right, title and interest of ANLIC (Hawaii) in and to certain collateral (as described below). C. The execution and delivery of this Consent and Agreement is a condition precedent to ANLIC (Hawaii) obtaining such financing. D. This Consent and Agreement is intended to clarify the procedures by which Anchor will fulfill its payment obligations as set forth in the Reinsurance Agreement. NOW THEREFORE, to induce the Purchaser to purchase the promissory note being sold by ANLIC (Hawaii) and in consideration of the premises and of other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: Section 1. No Change in Reinsurance Agreement. Nothing in this Consent ---------------------------------- and Agreement shall amend or otherwise modify in any respect the Reinsurance Agreement, the terms of which (including but not limited to the netting provisions of Section 8.5 thereof) shall exclusively govern whether Anchor or ANLIC (Hawaii) shall at any time have any obligation to make any payment thereunder. The Agent agrees that, while assuming the power to enforce the rights and remedies of ANLIC (Hawaii), the Agent will not interfere with or impede the duties and obligations that ANLIC (Hawaii) owes to Anchor under the Reinsurance Agreement. Section 2. Notices and Acknowledgments. (a) Anchor hereby ----------------------------- acknowledges notice of and consents to the assignment and grant by ANLIC (Hawaii) to the Agent of a security interest in all right, title and interest of ANLIC (Hawaii) in and to certain collateral, including but not limited to all right, title and interest of ANLIC (Hawaii) in and to each of the agreements set forth on Schedule 1 hereto and the proceeds thereof (such agreements, as the same may be amended, supplemented or modified from time to time, being the "Assigned Agreements"). ---------------- (b) Anchor hereby acknowledges notice of and consents to the assignment and grant by ANLIC (Hawaii) to Citibank, N.A. of a security interest in all right, title and interest of ANLIC (Hawaii) in and to certain collateral, including but not limited to all right, title and interest of ANLIC (Hawaii) in and to each of the Assigned Agreements. Section 3. Appointment and Authorization of the Agent. (a) ANLIC ---------------------------------------------- (Hawaii) hereby appoints the Agent as ANLIC (Hawaii)'s attorney-in-fact, with full authority in the place and stead of ANLIC (Hawaii) and in the name of ANLIC (Hawaii) or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument that the Agent may deem necessary or advisable for the purpose of exercising or enforcing (or abstaining from exercising or enforcing) any right, remedy, power or privilege of ANLIC (Hawaii) under any Reinsurance Document or Assigned Agreement, including, without limitation: (i) to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Reinsurance Documents or Assigned Agreements, (ii) to receive, indorse and collect any drafts or other instruments, documents and chattel paper in connection with this Section 3(a), (iii) to file any claims or take any action or institute any proceedings that the Agent may deem necessary or desirable for the collection of any amounts payable under any Assigned Agreement or to enforce compliance with the terms of any Reinsurance Document or Assigned Agreement or the rights of ANLIC (Hawaii) or the Agent with respect thereto. (b) Anchor acknowledges and agrees that all rights of ANLIC (Hawaii) under the Reinsurance Documents and the Assigned Agreements will be exercised by the Agent. (c) Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Agent or attorney-in-fact under or in connection with any Reinsurance Document or Assigned Agreement (including the Agent's servicing, administering or collecting any amounts payable), except for its own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Agent: (i) may consult with legal counsel (including counsel for Anchor, ANLIC (Hawaii) or any of their respective Affiliates), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to Anchor, ANLIC (Hawaii) or any of their respective Affiliates, and shall not be responsible to Anchor, ANLIC (Hawaii) or any of their 2 respective Affiliates, for any statement, warranty or representation (whether written or oral) made in or in connection with this Consent and Agreement, any Reinsurance Document or Assigned Agreement or any instrument or document furnished pursuant to any of the foregoing (collectively, the "Consent ------- Documents"); (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Consent Document on the part of Anchor, ANLIC (Hawaii) or any other Person or to inspect the property (including the books and records) of Anchor, ANLIC (Hawaii) or any other Person; (iv) shall not be responsible to Anchor, ANLIC (Hawaii) or any other Person for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Consent Document; and (v) shall incur no liability under or in respect of any Consent Document by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. (d) CNAI and Affiliates. With respect to any right, remedy, privilege -------------------- or power of CNAI individually, CNAI shall have the same rights, remedies, privileges and powers and may exercise the same as though it were not the Agent and not the attorney-in fact of ANLIC (Hawaii). CNAI and its Affiliates may generally engage in any kind of business with Anchor, any of its Affiliates and any Person who may do business with or own securities of Anchor or any of its Affiliates, all as if CNAI were not the Agent and were not the attorney-in-fact of ANLIC (Hawaii) and without any duty to account therefore to Anchor, ANLIC (Hawaii) or any other Person. Section 4. Agreements. In furtherance of Anchor's consent to the grant ---------- by ANLIC (Hawaii) of the security interest referenced in Section 2, Anchor hereby agrees with the Agent as follows: (a) Anchor will make all payments to be made by it under or in connection with each Assigned Agreement (which shall at all times be subject to the netting provisions of Section 8.5 of the Reinsurance Agreement) directly to the non-interest bearing cash collateral account that ANLIC (Hawaii) has opened with Citibank, N.A. at its office at 399 Park Avenue, New York, New York 10043, Account No. 40800176 strictly in accordance with the terms of such Assigned Agreement. (b) Except solely to the extent set forth in Section 8.5 of the Reinsurance Agreement, the obligation of Anchor to make the payments referred to in Section 4(a) is absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right against Anchor, ANLIC (Hawaii) or any other Person for any reason whatsoever (whether in connection with the transactions contemplated in the Reinsurance Documents or in connection with any unrelated transaction), (ii) any insolvency, bankruptcy, reorganization or similar proceeding by or against Anchor, ANLIC (Hawaii), the Purchaser, the Agent or any other Person or (iii) any other circumstance, happening or event whatsoever, whether foreseen or unforeseen and whether or not similar to any of the foregoing. All such payments made by Anchor shall be final, and Anchor will not seek to recover from the Agent for any reason any such payment once made. 3 (c) The Agent shall be exclusively entitled to exercise any and all rights and remedies of ANLIC (Hawaii) under each and every Assigned Agreement in accordance with the terms of such Assigned Agreement, and Anchor shall comply in all respects with such exercise. The Agent shall not have any obligation to perform any duty of ANLIC (Hawaii) or any other Person under any Assigned Agreement or any Reinsurance Document. (d) Anchor will not (i) cancel or terminate any Assigned Agreement or consent to or accept any cancellation or termination thereof except pursuant to the terms thereof in effect on the date hereof, (ii) amend or otherwise modify any Reinsurance Document or any Assigned Agreement or this Consent and Agreement or (iii) make any payment of amounts to become due by it under or in connection with any Assigned Agreement except as expressly provided therein. Section 5. Representations and Warranties. Anchor represents and -------------------------------- warrants as of the date hereof: (a) Anchor is a stock life insurance company duly incorporated, validly existing and in good standing under the laws of Arizona. (b) The execution, delivery and performance by Anchor of this Consent and Agreement are within Anchor's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) Anchor's articles of incorporation or by-laws or (ii) law or any regulation or contractual restriction binding on or affecting Anchor. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by Anchor of this Consent and Agreement, or for the exercise by the Agent of its rights and remedies under this Consent and Agreement, except for such other filings with and approvals as have been duly made and obtained prior to the date hereof. (d) This Consent and Agreement has been duly executed and delivered by Anchor and is the legal, valid and binding obligation of Anchor enforceable against Anchor in accordance with its terms. Section 6. Governing Law, Etc. THIS CONSENT AND AGREEMENT (I) SHALL BE ------------------- GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, (ii) may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement, and (iii) shall be binding upon, and inure to the benefit of and be enforceable by, each of the parties hereto and their respective successors, transferees and assigns. 4 IN WITNESS WHEREOF, each of the undersigned has duly executed this Consent and Agreement as of the day and year first above written. ANCHOR NATIONAL LIFE INSURANCE COMPANY By:_______________________________________ Title: ANLIC INSURANCE COMPANY (HAWAII), LTD. By:_______________________________________ Title: CITICORP NORTH AMERICA, INC., as Agent By:_______________________________________ Title: Vice President 5 Schedule 1 Assigned Agreements ------------------- 1. Reinsurance Agreement, dated as of August 1, 1999, between Anchor National Life Insurance Company and ANLIC Insurance Company (Hawaii), Ltd., as such agreement is supplemented, amended, replaced or otherwise modified from time to time (the "Reinsurance Agreement"), including, without limitation, the --------------------- Allocation Procedures, Collection Procedures and Fixed Account Segregated Asset Requirements and Procedures, as the foregoing are defined in the Reinsurance Agreement. 2. Servicing Agreement, dated as of August 1, 1999, among ANLIC Insurance Company (Hawaii), Ltd., Anchor Insurance Company (Hawaii), Ltd., Anchor National Life Insurance Company and SunAmerica Life Insurance Company, as such agreement is supplemented, amended, replaced or otherwise modified from time to time (the "Servicing Agreement"), including, without limitation, the Daily Reinsurance -------------------- Servicer Report and the Reinsurance Servicer Report, as the foregoing are -- defined in the Servicing Agreement. -- 3. Irrevocable Standing Instructions among Anchor National Life Insurance Company, ANLIC Insurance Company (Hawaii), Ltd., State Street Bank and Trust Company, Variable Separate Account, Anchor Pathway Fund, Anchor Series Trust and SunAmerica Series Trust, as such instructions are supplemented, amended, replaced or otherwise modified from time to time, together with all Schedules and Exhibits thereto. 6 EX-10.4 5 EXHIBIT D SERVICING AGREEMENT Dated as of August 1, 1999 ANLIC INSURANCE COMPANY (HAWAII), LTD., a Hawaii stock captive insurance company ("ANLIC (Hawaii)"), ANCHOR NATIONAL LIFE INSURANCE COMPANY, an Arizona --------------- stock life insurance company ("Anchor"), ANCHOR INSURANCE COMPANY (HAWAII), ------ LTD., a Hawaii stock captive insurance company ("AIC") and SUNAMERICA LIFE --- INSURANCE COMPANY, an Arizona stock life insurance company, as Servicer, agree as follows: PRELIMINARY STATEMENTS. (1) Certain terms that are capitalized and used throughout this Agreement (in addition to those defined above) are defined in Article I of this Agreement. (2) ANLIC (Hawaii), AIC and Anchor have requested the Servicer to provide various services in connection with the Reinsurance Agreement (as defined below) between Anchor and ANLIC (Hawaii), and the Servicer is willing to furnish such services on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the terms --------------------- defined in the Reinsurance Agreement (as defined below) shall have the respective meanings specified therein, and the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means (i) as to any Person, any other Person that directly or --------- indirectly, is in control of, is controlled by or is under common control with such Person. "Agent's Account" means the special account (account number 38858088) in ---------------- the name of CNAI, as agent, maintained at the office of Citibank at 399 Park Avenue, New York, New York. "Allocation Procedures" means those allocation procedures in substantially ---------------------- the form of Schedule 14.6-2 of the Reinsurance Agreement. "Alternate Base Rate" means, for any period, a fluctuating interest rate --------------------- per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher of: 1 (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time as Citibank's base rate; or (b) of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank (i) on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or (ii) if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in the case of clause (i) or (ii), adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent. "Anchor" has the meaning specified in the first paragraph of this Agreement ------ and includes the Separate Account. "Anchor Parties" means SunAmerica, ANLIC (Hawaii) (but only so long as it --------------- is an Affiliate of Anchor) and the following other parties irrespective of their affiliation with SunAmerica: the Servicer, AIC and Anchor. "ANLIC (Hawaii) Security Agreement" means a Security Agreement dated the ------------------------------------ date hereof in favor of CNAI, as agent, as such agreement may be supplemented, amended, replaced or otherwise modified from time to time. "Cash Collateral Account" means a non-interest bearing cash collateral ------------------------- account (the "Cash Collateral Account") with Citibank, N.A. at its office at 399 ----------------------- Park Avenue, New York, New York 10043, Account No. 40800176. "Citibank" means Citibank, N.A., a national banking association. -------- "Citicorp Product Information" has the meaning specified in Section 6.08. ------------------------------ "CNAI" means Citicorp North America, Inc. ---- "Collection Procedures" means those administration procedures specified in ---------------------- Schedule 14.6-1 to the Reinsurance Agreement in effect on the date hereof relating to Annuities and Charges as modified in compliance with Section 14.6(c) of the Reinsurance Agreement. "Company Representatives" has the meaning specified in Section 6.08. ------------------------ "Daily Reinsurance Servicer Report" means a report substantially in the ------------------------------------ form of Exhibit 1.01A hereto, furnished by the Servicer to ANLIC (Hawaii) pursuant to Section 4.02. "Debt" means (i) indebtedness for borrowed money, (ii) obligations ---- evidenced by bonds, debentures, notes or other similar instruments, (iii) -- obligations to pay the deferred purchase price of property or services, (iv) 2 obligations as lessee under leases that shall have been or should be, in accordance with GAAP recorded as capital leases and (v) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv) above, excluding, however, obligations arising under --------- ------- the Reinsurance Documents and, in the case of Anchor, obligations arising under insurance, annuity and similar products sold by it in the ordinary course of its business. "Department" means the Governmental Authority responsible for the ---------- regulation of the insurance business of Anchor or the Initial Servicer, as the --- case may be, in their respective states of domicile. "Fixed Account Segregated Asset Requirements and Procedures" means the --------------------------------------------------------------- requirements and procedures set forth in Schedule 14.4 to the Reinsurance Agreement. "Fund" means each of the following: Pathway Fund, an open management ---- investment company organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts, SunAmerica Series Trust, an open management investment company organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts and Anchor Series Trust, an open management investment company organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts. "GAAP" means generally accepted accounting principles. ---- "Governmental Authority" means any nation or government, any state or other ---------------------- political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of government. "Initial Servicer" means SunAmerica Life Insurance Company, an Arizona ----------------- stock life insurance company. "Initial Servicer Statutory Financial Statements" has the meaning set forth ----------------------------------------------- in Section 2.02(e). "Investment Company" means a Person registered as a separate investment ------------------- company under the Investment Company Act of 1940, as amended. "Material Adverse Effect" means a material adverse effect on (a) the ------------------------- business or properties of any Anchor Party, (b) the rights, remedies or interests of ANLIC (Hawaii) under any Reinsurance Document or (c) the ability of any Anchor Party to perform its obligations under any Annuity or any Reinsurance Document. "Moody's" means Moody's Investors Service, Inc. ------- "Net Amounts Payable" means Gross Amounts Payable after application of the -------------------- netting provisions set forth in Article VIII of the Reinsurance Agreement. 3 "Obligor" means each Person from whom Anchor has the right to receive any ------- Charges pursuant to an Annuity. "Payment Date" shall mean the 23rd calendar day of each month if such day ------------- falls on a Business Day, if not, then the first Business Day thereafter. "Reinsurance Agreement" means the Reinsurance Agreement dated as of the ---------------------- date hereof between Anchor and ANLIC (Hawaii), as such agreement may be supplemented, amended, replaced or otherwise modified from time to time. "Reinsurance Documents" means this Agreement, the Reinsurance Agreement, ---------------------- the Standing Instructions, the Collection Procedures, the Allocation Procedures, the Daily Reinsurance Servicer Report, the Reinsurance Servicer Report, the AIC Retrocession Agreement, the ANLIC (Hawaii) YRT Retrocession Agreement, the CG YRT Retrocession Agreement, the Successor YRT Retrocession Agreement and the Fixed Account Segregated Asset Requirements and Procedures. "Reinsurance Servicer Report" means a report in substantially the form of ----------------------------- Exhibit 1.01B hereto, furnished by the Servicer to ANLIC (Hawaii) pursuant to Section 4.02. "Responsible Officer" means, in respect of any Person, any authorized -------------------- officer of such Person who has the title of vice president or higher or an officer performing substantially the same function of such officer. "S&P" means Standard & Poor's, a division of The McGraw Hill Companies. --- "SAP" means, with respect to any Person, statutory accounting practices --- prescribed or permitted by the insurance regulator of the jurisdiction of domicile of such Person. "Service Transfer" has the meaning assigned to that term in Section ----------------- 4.01(b). - "Servicer" has the meaning specified in Section 4.01(a) and on the date -------- hereof means the Initial Servicer. "Servicer Default" means any one or more of the following: ----------------- (a) a Servicer Remedy Event specified in Section 5.01(a); or (b) any action taken or omitted by the Initial Servicer or any Servicer that is an Affiliate of Anchor which has a Material Adverse Effect; or (c) a Servicer Remedy Event specified in Section 5.01(g) with respect to the Initial Servicer or any Servicer that is an Affiliate of Anchor. "Servicer Remedy Event" has the meaning specified in Section 5.01. ----------------------- "Standing Instructions" means the irrevocable standing instructions in ---------------------- 4 substantially the form of Schedule 13.1-2 of the Reinsurance Agreement. "Successor Servicer" means at any time the Person (including CNAI, as ------------------- agent, but excluding the Initial Servicer) then authorized pursuant to Article IV to service, administer and collect the Gross Amounts Payable. "Surrender" means, with respect to an Annuity, a total withdrawal of 100% --------- of the accumulated value of the Annuity (other than through the receipt of annuity payments during the Income Phase (as defined in the Prospectus) or the payment of a death benefit) which results in a cancellation of the Annuity. For purposes of this Agreement, partial withdrawals shall not be deemed Surrenders. "Surrendered Annuity" means an Annuity with respect to which a Surrender -------------------- has occurred. SECTION 1.02. Other Terms. As used herein, and in any certificate or ------------ other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.01, and accounting terms partly defined in Section 1.01 to the extent not defined, shall have the respective meanings given to them under GAAP or SAP, as applicable, in effect on the date hereof. To the extent that the definitions of accounting terms are inconsistent with the meanings of such terms under GAAP or SAP, as applicable, the definitions contained herein shall control. The term "including" means "including but not limited to". All terms used in Article 9 of the UCC, and not specifically defined herein, are used herein as defined in such Article 9. As used in any Reinsurance Document, the phrase "hold in trust" shall not require segregation of assets unless expressly set forth to the contrary. SECTION 1.03. Computation of Time Periods. Unless otherwise stated in ------------------------------ this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.04. Other Definitional Provisions. (a) The headings of the ------------------------------- sections of this Agreement are solely for convenience of reference and shall not affect the meaning, construction or effect of this Agreement. (b) All terms defined in this Agreement shall have the defined meaning when used in any certificate or other documents made or delivered pursuant hereto unless otherwise defined therein. (c) Any reference herein to any statute, agreement or document, or any section thereof, shall, unless otherwise expressly provided, be a reference to such statute, agreement, document or section as amended, modified or supplemented (including any successor section) and in effect from time to time. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.01. Representations and Warranties of Anchor. Anchor --------------------------------------------- 5 represents and warrants as of the date hereof as follows: (a) The execution, delivery and performance by Anchor of the Reinsurance Documents to which it is a party are within Anchor's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) Anchor's articles of incorporation or by-laws or (ii) law or any regulation or contractual restriction binding on or affecting Anchor, and do not result in or require the creation of any Adverse Claim (other than pursuant thereto) upon or with respect to the Separate Accounts or Annuities or any of its properties; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law (other than California Civil Code 3440.1, which has been duly complied with). (b) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by Anchor of any Reinsurance Document to which it is a party, or for the exercise by ANLIC (Hawaii) of its rights and remedies under any such Reinsurance Document, except for such other filings with and approvals of such Governmental Authorities as have been duly made and obtained prior to the date hereof. (c) Each Reinsurance Document to which it is a party is the legal, valid and binding obligation of Anchor enforceable against Anchor in accordance with its respective terms. The Reinsurance Documents to which it is a party have been duly executed and delivered by Anchor. (d) There is no pending or, to the knowledge of Anchor, threatened action or proceeding against or involving any Anchor Party before any court, Governmental Authority or arbitrator that may have a Material Adverse Effect or that purports to affect the legality, validity or enforceability of the Reinsurance Documents. (e) Schedule 2.01(e) hereof contains true, correct and complete copies of each of the forms of Annuity agreements (including but not limited to the form of each endorsement included in any Annuity) and such forms of Annuity contracts have been furnished to Connecticut General Life Insurance Company in connection with the CG YRT Retrocession Agreement. (f) Set forth on Schedule 2.01(f) hereto are the CARVM reserve methodology for the Polaris program and for the Pathway program in use by Anchor, as approved by the Arizona Department of Insurance and in use in other applicable jurisdictions. SECTION 2.02. Representations and Warranties of the Initial Servicer. The ------------------------------------------------------ Initial Servicer represents and warrants as of the date hereof as follows: (a) The Initial Servicer is a stock life insurance company duly incorporated, validly existing and in good standing under the laws of Arizona and is duly qualified and licensed in the District of Columbia and all States of the United States of America except the States of New York and Wyoming and in good standing as a foreign insurer in each jurisdiction where the failure to be so qualified would have a Material Adverse Effect. 6 (b) The execution, delivery and performance by the Initial Servicer of each Reinsurance Document to which it is a party are within the Initial Servicer's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Initial Servicer's articles of incorporation or by-laws or (ii) law or any regulation or contractual restriction binding on or affecting the Initial Servicer, and do not result in or require the creation of any Adverse Claim (other than pursuant thereto) upon or with respect to the Separate Account or Annuities or any of its properties; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law (other than California Civil Code 3440.1, which has been duly complied with). (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Initial Servicer of any Reinsurance Document to which it is a party, or for the exercise by ANLIC (Hawaii) of its rights and remedies under any such Reinsurance Document, except for such other filings with and approvals of such Governmental Authorities as have been duly made and obtained prior to the date hereof. (d) Each Reinsurance Document to which it is a party is the legal, valid and binding obligation of the Initial Servicer enforceable against the Initial Servicer in accordance with its terms. The Reinsurance Documents to which it is a party have been duly executed and delivered by the Initial Servicer. (e) The annual Convention Statement of the Initial Servicer including, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities, as filed with the Department and delivered to ANLIC (Hawaii) prior to the execution and delivery of this Agreement, as of and for the years ended December 31, 1996, 1997 and 1998 (collectively, the "Initial Servicer Statutory Financial Statements"), have ----------------------------------------------- been prepared in accordance with SAP applicable thereto applied on a consistent basis (except as noted therein). Each such Initial Servicer Statutory Financial Statement was in compliance with applicable law when filed. According to the best of the Initial Servicer's information, knowledge and belief, the Initial Servicer Statutory Financial Statements are a full and true statement of all the assets and liabilities and of the condition and affairs of the Initial Servicer as of the respective dates thereof and of its income and deductions therefrom for the respective years ended on such dates and have been completed in accordance with the NAIC annual statement instructions and accounting practices and procedures manuals except to the extent that state law may differ or that state rules or regulations require differences in reporting not related to accounting practices and procedures. (f) There is no pending or, to the knowledge of the Initial Servicer, threatened action or proceeding against or involving any Anchor Party before any court, Governmental Authority or arbitrator that may materially adversely affect (i) the financial condition or operations of the Initial Servicer or (ii) the ability of the Initial Servicer to perform its obligations under any Reinsurance Document to which it is a party, or that purports to affect the legality, validity or enforceability of any Reinsurance Document. 7 ARTICLE III GENERAL COVENANTS SECTION 3.01. Affirmative Covenants of Anchor. Until the Terminal ---------------------------------- Accounting Date, Anchor will, unless ANLIC (Hawaii) shall otherwise consent in writing: (a) Other Agreements. Duly and punctually observe and perform each and ---------------- every obligation on its part to be observed or performed under each Reinsurance Document to which it is a party, all of the terms of which (as the same may be modified or amended from time to time as permitted herein) are hereby incorporated herein by reference to the same extent as if set forth in full herein irrespective of any expiration or termination of the such Reinsurance Document. (b) Collections Received by Anchor. (i) Deposit to the Cash Collateral ------------------------------ Account on each Payment Date all Net Amounts Payable received from time to time by Anchor and (ii) if Anchor has a claim's payment rating below A by S&P or below A2 by Moody's, to the extent any distribution representing M&E Fees (as defined in the Standing Instructions) other than a distribution on a Payment Date pursuant to a Reinsurance Servicer Report shall be received by Anchor notwithstanding the Custodian's receipt of the notice delivered pursuant to the Standing Instructions, return such M&E Fees to the Custodian immediately upon receipt and, until the same are so returned, hold and segregate the same. (c) Notices. Furnish to Citicorp North America, Inc., at 399 Park ------- Avenue, 6th Floor/Zone #2, New York, NY 10043, Telecopy (212) 758-6272, Attn: Art Bovino, all notices delivered under the Reinsurance Agreement. SECTION 3.02. Negative Covenants of Anchor. Until the Terminal Accounting ---------------------------- Date, Anchor will not, unless ANLIC (Hawaii) shall otherwise consent in writing: (a) Waive, amend or otherwise modify in any respect any Reinsurance Document; (b) Waive, amend or otherwise modify in any respect the CARVM reserve methodology and pricing assumptions set forth on Schedule 2.01(f) hereto, except to the extent permitted by Section 14.2(i) of the Reinsurance Agreement; (c) Add any Fund pursuant to Section 14.7 of the Reinsurance Agreement unless Anchor shall have delivered to ANLIC (Hawaii) a counterpart of the Standing Instructions duly executed by such Fund; or (d) Make any change in the character of its business or consent to any change of the Collection Procedures, which change would be reasonably likely to impair the collectability of the Gross Amounts Payable. SECTION 3.03. Affirmative Covenants of the Initial Servicer. Until the ----------------------------------------------- payment in full in cash of all amounts payable under the Reinsurance Documents, 8 the Initial Servicer will, unless ANLIC (Hawaii) shall otherwise consent in writing: (a) Performance. Duly and punctually observe and perform each and ----------- every obligation on its part to be observed or performed under this Agreement, all of the terms of which (as the same may be modified or amended from time to time as permitted herein) are hereby incorporated herein by reference to the same extent as if set forth in full herein irrespective of any expiration or termination of the Reinsurance Agreement. (b) Performance and Compliance with Charges and Annuities. Timely and ------------------------------------------------------ fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Annuities. (c) Collections Received by the Initial Servicer. Deposit to the Cash --------------------------------------------- Collateral Account, on each date when such a deposit is required for the Servicer under Article IV of this Agreement or is required pursuant to the Standing Instructions, all Net Amounts Payable received from time to time by the Initial Servicer or by Anchor. (d) Collection Procedures, Allocation Procedures and Standing -------------------------------------------------------------- Instructions. Implement and comply at all times with the Collection Procedures, --- the Allocation Procedures and the Standing Instructions. (e) Audits. At any time and from time to time during regular business ------ hours, permit ANLIC (Hawaii), or its agents or representatives (including any Successor Servicer), upon reasonable advance notice (i) to examine and make copies of and abstracts from all books, records and documents (including computer tapes and disks) in the possession or under the control of Anchor relating to the Annuities and the Gross Amounts Payable and (ii) to visit the offices and properties of Anchor for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to the Annuities and the Gross Amounts Payable or Anchor's performance under the Reinsurance Documents or under the Annuities with any of the officers or employees of Anchor having knowledge of such matters, provided that by exercising any such rights ANLIC (Hawaii) agrees that it will hold in confidence all information so obtained and will use the same only for the purposes contemplated by the Reinsurance Documents. SECTION 3.04. Reporting Requirements of the Initial Servicer. Until the ----------------------------------------------- Terminal Accounting Date, the Initial Servicer will, unless ANLIC (Hawaii) shall otherwise consent in writing, furnish to ANLIC (Hawaii) (in addition to the Initial Servicer's obligations under Section 3.03(a)): (a) as soon as possible and in any event within five Business Days after the Initial Servicer's knowledge of the occurrence of (i) each Servicer Remedy Event or Servicer Default, (ii) each Recapture Event, (iii) each event that, with the giving of notice or lapse of time or both, would constitute a Servicer Remedy Event, Recapture Event or Servicer Default, or (iii) any Material Adverse Effect, a written statement of a Responsible Officer of the Initial Servicer setting forth details of such Servicer Remedy Event, Recapture Event, Servicer Default, Event of Default, other event or effect and the action that the Initial Servicer proposes to take with respect thereto; 9 (b) (A) promptly upon becoming available, but in any event within 75 days after the end of each calendar year, a copy of the annual Convention Statements of the Initial Servicer for such calendar year, and (B) promptly upon becoming available, but in any event within 60 days after the end of each of the first three calendar quarters, a copy of the quarterly Conventions Statements of the Initial Servicer for such quarter, in each case as filed by the Initial Servicer with the Department and executed by the appropriate officer under the laws of the state of domicile of the Initial Servicer, prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer or controller or treasurer of the Initial Servicer that such annual or quarterly Convention Statement presents, to the best of his or her information, knowledge and belief, a full and true statement of all the assets and liabilities and of the condition and affairs of the Initial Servicer as of the date thereof and of its income and deductions therefrom for the period ended on such date and have been completed in accordance with the NAIC statement instructions and accounting practices and procedures manuals except to the extent that state law may differ or that state rules or regulations require differences in reporting not related to accounting practices and procedures; (c) within 90 days after the end of each calendar year, a copy of each "Statement of Actuarial Opinion" that is provided to the Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of aggregate reserves for life policies and contracts of the Initial Servicer; (d) as soon as possible and in any event within five Business Days after the occurrence of any adjustment, settlement, waiver, compromise or change in the terms or conditions of any Annuity or any credit, discount or release in respect thereof, other than (i) that which is permitted by the Waiver Allowance, and (ii) any adjustments, settlements, waivers, compromises or changes in the terms or conditions of any charges or any credits, discounts or releases in respect thereof which, in the aggregate, exceeds $500,000 in excess of the Waiver Allowance in any calendar year, the statement of a Responsible Officer of the Initial Servicer setting forth details thereof; (e) promptly after the receipt thereof and in any event within five Business Days, copies of each communication received by the Initial Servicer from the Securities and Exchange Commission or the National Association of Securities Dealers to Anchor reporting the final results of, any audit or other investigation related to the Annuities or any aspect of the sale, maintenance, investment or administration thereof; and (f) promptly, from time to time, such other information, documents, records or reports respecting the Annuities and the Gross Amounts Payable or the conditions or operations, financial or otherwise, of the Initial Servicer, as ANLIC (Hawaii) may from time to time reasonably request in writing in order to protect ANLIC (Hawaii)'s interests under or contemplated by any Reinsurance Document. SECTION 3.05. Negative Covenants of the Initial Servicer. Until the ---------------------------------------------- 10 Terminal Accounting Date, the Initial Servicer will not, unless ANLIC (Hawaii) shall otherwise consent in writing: (a) Waive, amend or otherwise modify in any respect any Reinsurance Document; (b) Waive, amend or otherwise modify in any respect the CARVM reserve methodology and pricing assumptions set forth on Schedule 2.01(f) hereto, except to the extent permitted by Section 14.2(i) of the Reinsurance Agreement; and (c) Consolidate with or merge with or into any other Person, provided -------- that this Section 3.05(c) shall not apply to any merger of the Initial Servicer with another Person if both (i) the Initial Servicer is the corporation surviving to such merger and (ii) immediately after giving effect to such merger no event or condition shall have occurred and be continuing which constitutes, or with notice or lapse of time would constitute, a Servicer Remedy Event. SECTION 3.06. Reporting Requirements of ANLIC (Hawaii). Until the -------------------------------------------- Terminal Accounting Date, ANLIC (Hawaii) will, unless ANLIC (Hawaii) shall otherwise consent in writing, furnish to the Agent: (a) as soon as available and in any event within 60 days of the end of each of the first three quarters of each calendar year, balance sheets of ANLIC (Hawaii) prepared in accordance with GAAP as of the end of such quarter, and the related statement of operations and surplus of ANLIC (Hawaii) each prepared in accordance with GAAP for the period commencing at the end of the previous calendar year and ending with the end of such quarter, certified by the chief financial officer or chief accounting officer of ANLIC (Hawaii); (b) as soon as available and in any event within 90 days after the end of each calendar year, balance sheets of ANLIC (Hawaii) prepared in accordance with GAAP as at the end of such year, and the related statement of operations and surplus of ANLIC (Hawaii) for such year each prepared in accordance with GAAP and certified by the chief financial officer or chief accounting officer of ANLIC (Hawaii); (c) promptly, from time to time, such other information, documents, records or reports respecting the Annuities, the Gross Amounts Payable or the conditions or operations, financial or otherwise, of ANLIC (Hawaii), as the Agent may from time to time reasonably request in writing; and (d) promptly prepare the annual actuarial report required by the Insurance Division of the Department of Commerce & Consumer Affairs of the State of Hawaii. SECTION 3.07. Reporting Requirements of AIC. Until the Terminal -------------------------------- Accounting Date, AIC will, unless ANLIC (Hawaii) shall otherwise consent in writing, furnish to ANLIC (Hawaii): (a) as soon as available and in any event within 60 days of the end of 11 each of the first three quarters of each calendar year, balance sheets of AIC prepared in accordance with GAAP as of the end of such quarter, and the related statement of operations and surplus of AIC each prepared in accordance with GAAP for the period commencing at the end of the previous calendar year and ending with the end of such quarter, certified by the chief financial officer or chief accounting officer of AIC; (b) as soon as available and in any event within 90 days after the end of each calendar year, balance sheets of AIC prepared in accordance with GAAP as at the end of such year, and the related statement of operations and surplus of AIC for such year each prepared in accordance with GAAP and certified by the chief financial officer or chief accounting officer of AIC; (c) promptly, from time to time, such other information, documents, records or reports respecting the Reinsurance Documents or the conditions or operations, financial or otherwise, of Anchor, as CNAI may from time to time reasonably request in writing in order to protect ANLIC (Hawaii)'s interests under or contemplated by any Reinsurance Document; and (d) promptly prepare the annual actuarial report required by Insurance Division of the Department of Commerce & Consumer Affairs of the State of Hawaii. ARTICLE IV ADMINISTRATION AND COLLECTION SECTION 4.01. Designation of Servicer. (a) The Gross Amounts Payable shall be ----------------------- serviced, administered and collected by the Person (the "Servicer") designated -------- to do so from time to time in accordance with this Section 4.01. Until ANLIC (Hawaii) designates a new Servicer pursuant to this Section 4.01, SunAmerica Life Insurance Company is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms hereof. Anchor agrees to pay to the Initial Servicer on demand all of its fees, costs and expenses in connection with the performance of its obligation as Servicer. If any Servicer Default shall have occurred and be continuing, Anchor may designate as Servicer any Person (a "Successor Servicer") permitted hereby to succeed in ------------------ whole or in part the Initial Servicer or any successor, if such Person shall be approved by ANLIC (Hawaii) (which approval not to be unreasonably delayed or withheld) and shall agree in writing (and obtain all necessary licenses and regulatory approvals) to perform the duties and obligations of the Servicer pursuant to the terms hereof to the extent requested by Anchor and permitted by all applicable laws, rules and regulations. If Anchor is unable to obtain the consent of a third party to succeed the Initial Servicer or a Successor Servicer, as the case may be, as Servicer, ANLIC (Hawaii) hereby reserves the right to act as Servicer in whole or in part in accordance with the preceding sentence. Notwithstanding anything to the contrary in any Reinsurance Document and without limiting the scope of duties and obligations that may be performed by a Successor Servicer, the Successor Servicer may from time to time during regular business hours inspect records and oversee activities of the Initial Servicer in respect of its performance of obligations under the Reinsurance Documents, including but not 12 limited to taking all actions and reviewing all information appropriate to confirm compliance with the Collection Procedures, Allocation Procedures and Fixed Account Segregated Asset Requirements and Procedures. The Servicer may, with the prior written consent of ANLIC (Hawaii), subcontract with any other Person to service, administer or collect the Gross Amounts Payable if such Person is permitted to do so by all applicable laws, rules and regulations, provided that (i) the Person with whom the Servicer so subcontracts shall not ---- become the Servicer hereunder and the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof and (ii) the Initial Servicer is not required to obtain the prior written consent of ANLIC (Hawaii) to subcontract (A) with any Affiliate of the Initial Servicer or (B) with any other Person approved by the Department. (b) Upon the designation of any Successor Servicer pursuant to Section 4.01(a), all authority and power of the Servicer under this Agreement in respect of the duties and obligations to be performed by such Successor Servicer shall pass to and be vested in a Successor Servicer (a "Service Transfer"); provided, ---------------- -------- however, that the responsibilities and duties of the Servicer under this - ------- Agreement for Collections received prior to such designation of a Successor - ------- Servicer, and the responsibilities and duties of the Servicer which the - ---- Successor Servicer has not expressly agreed to perform, shall not terminate. - ---- Without limitation but solely to the extent permitted by applicable law, ANLIC - -- (Hawaii) is hereby authorized and empowered (upon the failure of the Servicer to cooperate) with full power of substitution to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments upon the failure of the Servicer to execute or deliver such documents or instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such Service Transfer. The Servicer agrees to cooperate with ANLIC (Hawaii) and such Successor Servicer in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing hereunder, including the transfer to such Successor Servicer of all authority of the Servicer to service the Gross Amounts Payable provided for under this Agreement to the extent requested for such Service Transfer, including all authority over all Collections that shall on the date of transfer be held by the Servicer for deposit, or that have been deposited by the Servicer, in the Cash Collateral Account or the Agent's Account, or that shall thereafter be received with respect to the Charges, and in assisting the Successor Servicer. To the extent requested by ANLIC (Hawaii) in connection with such Service Transfer, the Servicer shall promptly at its own expense (i) transfer its electronic records relating to the Gross Amounts Payable to the Successor Servicer in such electronic form as the Successor Servicer may reasonably request and (ii) transfer to the Successor Servicer copies (and, to the extent required for enforcement, originals) of all other records, correspondence and documents necessary for the continued servicing of the Annuities and the Gross Amounts Payable, in the manner and at such times as the Successor Servicer shall reasonably request. To the extent that compliance with this Section 4.01(b) shall require the Servicer to disclose to the Successor Servicer information of any kind that the Servicer reasonably deems to be confidential or subject to licensing restrictions, the Successor Servicer shall be required to enter into such customary licensing and confidentiality agreements as the Servicer shall deem necessary to protect its interest or to comply with the requirements of such licensing restrictions. The Initial Servicer, however, will continue 13 at all times to prepare and furnish in accordance with the Reinsurance Documents (1) a Reinsurance Servicer Report on or before the fifteenth (15th) Business Day of each month and (2) all reports as and when required by Section 3.06 for ANLIC (Hawaii) and Section 3.07 for AIC, and each Successor Servicer shall make available to the Initial Servicer any information in the possession of such Successor Servicer necessary for the Initial Servicer to prepare any Reinsurance Servicer Report. SECTION 4.02. Duties of Servicer. (a) ANLIC (Hawaii), AIC and Anchor -------------------- hereby appoint as their agent the Servicer, from time to time designated pursuant to Section 4.01, to perform the functions which the Servicer is to perform under the Reinsurance Documents. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect all Gross Amounts Payable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Reinsurance Documents. In addition, the Servicer shall prepare on behalf of ANLIC (Hawaii) and AIC the annual actuarial report required Insurance Division of the Department of Commerce & Consumer Affairs of the State of Hawaii. (b) Except as provided in Section 4.02(c), the Servicer will cause Anchor to deposit all Net Amounts Payable in the Cash Collateral Account (to the extent not previously so deposited) on each Payment Date. The Servicer shall, not later than two Business Days prior to each Payment Date, deliver to ANLIC (Hawaii) the Reinsurance Servicer Report. (c) Upon receipt by the Servicer of a request to do so from ANLIC (Hawaii) stating that an event or condition has occurred and is continuing which constitutes, or with notice or lapse of time or both would constitute, a Servicer Remedy Event or that the claims paying rating of Anchor or the Initial Servicer has become less than A2 by Moody's or A by S&P, the Servicer shall: (i) cause all Charges to be identified in the Daily Reinsurance Servicer Report in accordance with the Reinsurance Documents on each Business Day (A) in the case of contingent deferred sales charges, on the Business Day on which they accrue, and (B) in the case of all other Gross Amounts Payable, on the first Business Day after they accrue, (ii) provide to the Custodian and to the Agent on each Business Day a Daily Reinsurance Servicer Report, and (iii) to the extent any distribution representing M&E Fees (as defined in the Standing Instructions) other than a distribution on a Payment Date pursuant to a Reinsurance Servicer Report shall be received by the Initial Servicer notwithstanding the Custodian's receipt of the notice delivered pursuant to the Standing Instructions, return such M&E Fees to the Custodian immediately upon receipt and, until the same are so returned, hold in trust and segregate the same. ANLIC (Hawaii) may require compliance with this Section 4.02(c) whether or not ANLIC (Hawaii) shall have designated a Successor Servicer under Section 4.01. 14 (d) Upon the request of ANLIC (Hawaii) after a Servicer Default shall have occurred and be continuing, the Initial Servicer shall deliver to the Successor Servicer, and the Successor Servicer shall hold in trust for ANLIC (Hawaii) in accordance with their respective interests, copies (and, to the extent required for enforcement, originals) of all documents, instruments and records (including computer tapes or disks) that evidence or relate to the Net Amounts Payable. (e) The Servicer's authorization under this Agreement shall terminate upon the indefeasible payment in full in cash of amounts payable under the Reinsurance Documents and receipt by ANLIC (Hawaii) and the Servicer, respectively, of all other amounts owed to ANLIC (Hawaii) and the Servicer under this Agreement (unless otherwise agreed by ANLIC (Hawaii) and the Servicer). (f) No later than two Business Days prior to any Payment Date, the Servicer shall provide to ANLIC (Hawaii) a Reinsurance Servicer Report as of the last day of the immediately preceding calendar month. SECTION 4.03. Rights of ANLIC (Hawaii). At any time following the --------------------------- designation of a Servicer other than the Initial Servicer pursuant to Section 4.01 and subject at all times to compliance with applicable law: (a) Anchor and the Initial Servicer shall, at ANLIC (Hawaii)'s request, (i) assemble all of the documents, instruments and other records (including computer tapes and disks) that evidence the Annuities and the Gross Amounts Payable, or which are otherwise necessary or desirable to collect such Gross Amounts Payable, and shall make copies (and, to the extent required for enforcement, originals) of the same available to ANLIC (Hawaii) at a place selected by ANLIC (Hawaii) or its designee, and (ii) promptly upon receipt, segregate and remit all cash constituting Net Amounts Payable to ANLIC (Hawaii) or its designee. (b) ANLIC (Hawaii) may, to the maximum extent permitted by applicable law, take any and all steps in Anchor's or the Initial Servicer's name and on behalf of Anchor, the Initial Servicer and the other Anchor Parties necessary or desirable, in the determination of ANLIC (Hawaii), to collect all amounts due in respect of the Gross Amounts Payable. SECTION 4.04. Responsibilities of Anchor. Anything herein to the contrary -------------------------- notwithstanding: (a) Anchor shall perform all of its obligations under the Annuities in accordance with its customary practices and the exercise by ANLIC (Hawaii) of its rights hereunder shall not relieve Anchor from such obligations or its obligations with respect to Gross Amounts Payable. (b) ANLIC (Hawaii) shall not have any obligation or liability with respect to the Annuities or the Gross Amounts Payable. (c) Anchor will deposit to the Cash Collateral Account, on each date when such a deposit is required for the Servicer under Article IV of this Agreement or is required pursuant to the Standing Instructions, all Net 15 Amounts Payable received from time to time by Anchor. Anchor shall not adjust, settle or compromise the amount or payment of any Charges, release wholly or partly the Custodian or any obligor thereunder, or allow any credit or discount thereon, except for the Waiver Allowance. SECTION 4.05. Further Action. (a) ANLIC (Hawaii), AIC, Anchor and the --------------- Initial Servicer each agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that ANLIC (Hawaii) may reasonably request, in order to, protect or more fully evidence the interests of ANLIC (Hawaii) in the Reinsurance Documents, or to enable any of them to exercise and enforce any of their respective rights and remedies under the Reinsurance Documents. ARTICLE V SERVICER REMEDY EVENTS SECTION 5.01. Servicer Remedy Event. Each of the following events shall ---------------------- constitute a "Servicer Remedy Event": ----------------------- (a) The Servicer (i) shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in Section 3.04(b), (c) or (e) or clause (ii) of this Section 5.01(a)) on its part to be performed or observed and such failure shall remain unremedied for 3 Business Days or (ii) shall fail to make any payment or deposit to be made by it under any Reinsurance Document when due (or, upon the discovery of an unintentional error in a Reinsurance Servicer Report as to an amount to be so paid or deposited, within 3 Business Days after such discovery if (A) the amount erroneously stated in such Reinsurance Servicer Report was paid or deposited when due, (B) within such 3 Business Days the Servicer provides to ANLIC (Hawaii) a corrected Reinsurance Servicer Report and (C) such Reinsurance Servicer Report states a greater amount to be paid or deposited); or (b) Anchor shall fail to perform or observe any term, covenant or agreement contained in Section 3.01(b), Section 3.02, Section 14.4(g) of the Reinsurance Agreement, or Section 14.5(c) of the Reinsurance Agreement; or (c) Any representation or warranty or statement made by any Anchor Party (or any of their respective officers) in or furnished pursuant to any Reinsurance Document shall prove to have been incorrect in any material respect when made; or (d) Any Anchor Party shall fail to perform or observe any other term, covenant or agreement contained in any Reinsurance Document on its part to be performed or observed and any such failure shall remain unremedied for 10 days after written notice thereof shall have been given to such Anchor Party by ANLIC (Hawaii); or (e) Anchor shall fail to pay any principal of or premium or interest on any Debt which is outstanding in a principal amount of at least U.S. 16 $50,000,000 in the aggregate, within the applicable grace period (if any) for such payment after the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt which has not been effectively waived under such agreement or instrument if the effect of such event or condition (after the expiration of any grace or cure periods provided for therein) is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be accelerated or otherwise declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (f) Anchor shall fail for any reason to own all Annuities and Charges and rights therein free and clear of any Adverse Claim; or (g) There shall be a filing or entry of a decree or order for relief by a court, or the commencement of a delinquency proceeding by a Governmental Authority (including any insurance regulatory authority), having jurisdiction in the premises in respect of any Anchor Party or any substantial part of their respective property in an involuntary case or proceeding under any applicable bankruptcy, insolvency, rehabilitation, liquidation, reorganization, conservation, dissolution or other similar law now or hereafter in effect, or there shall be appointed a receiver, liquidator, rehabilitator, conservator, assignee, custodian, trustee, sequestrator or similar official for any Anchor Party or for any substantial part of its respective property, or there shall be ordered a winding-up, liquidation, rehabilitation, reorganization, conservation or dissolution of any Anchor Party's business, and (other than in a case or proceeding in which such case, proceeding, decree, order or appointment was instituted by an Affiliate of an Anchor Party or by a Governmental Authority (including any insurance regulatory authority)) where any of the foregoing matters shall remain unstayed and in effect for a period of 60 consecutive days; any Anchor Party shall commence a voluntary case or proceeding under any applicable bankruptcy, insolvency, rehabilitation, liquidation, reorganization, conservation, dissolution or other similar law now or hereafter in effect, or any Anchor Party shall consent to the entry of an order for relief in an involuntary case or proceeding under any such law or shall consent to the appointment of or taking possession by a receiver, liquidator, rehabilitator, conservator, assignee, custodian, trustee, sequestrator or similar official for such Anchor Party or for any substantial part of its property, or any Anchor Party shall make any general assignment for the benefit of creditors, or any Anchor Party shall fail generally to pay its debts as such debts become due or any Anchor Party shall admit in writing its inability to pay its debts generally; or any Anchor Party shall take any corporate action to authorize any of the actions set forth above in this subsection (g); or (h) Any "Event of Recapture" shall occur under and as defined in the Reinsurance Agreement or the AIC Retrocession Agreement; then, and in any such event, or in the event that Anchor has a claim's payment 17 rating below A by S&P or below A2 by Moody's, ANLIC (Hawaii) may at any time thereafter deliver the notice referred to in Section 2 of the Standing Instructions to the Custodian. The remedies herein provided are cumulative and not exclusive of any remedies provided by law or this or any other agreement. ARTICLE VI MISCELLANEOUS SECTION 6.01. Amendments, Etc. No amendment or waiver of any provision of --------------- this Agreement, and no consent to any departure by Anchor or the Initial Servicer herefrom, shall in any event be effective unless the same shall be in writing and signed by ANLIC (Hawaii), and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 6.02. Notices, Etc. All notices and other communications provided ------------ for hereunder shall, unless otherwise stated herein, be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered by hand or by overnight courier, as to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective when received. SECTION 6.03. No Waiver; Remedies. No failure on the part of ANLIC --------------------- (Hawaii) to exercise, and no delay in exercising, any of its rights hereunder or under any Reinsurance Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 6.04. Binding Effect; Assignability. This Agreement shall be ------------------------------- binding upon and inure to the benefit of ANLIC (Hawaii), Anchor, the Servicer and their respective assigns, except that neither the Servicer nor Anchor shall have the right to assign its rights hereunder or any interest herein without the prior written consent of ANLIC (Hawaii). This Agreement shall create and constitute the continuing obligation of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time, as all amounts payable under the Reinsurance Documents shall have been indefeasibly paid in full in cash. SECTION 6.05. Consent to Jurisdiction. (a) Each party hereto hereby ------------------------- irrevocably submits to the exclusive jurisdiction of any State or Federal court sitting in the State of Delaware, or, if no court in Delaware will exercise jurisdiction, Arizona, and any appellate court from any thereof in any action or proceeding arising out of or relating to any Reinsurance Document or any other instrument or document furnished pursuant hereto, and each such party hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Delaware or Arizona State court, as the case may be, or in such Federal court sitting in Delaware or Arizona, as the case may be. Each such party hereby irrevocably waives, to the fullest 18 extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. Each such party irrevocably consents to the service of copies of the summons and complaint and any other process that may be served in any such action or proceeding by the mailing of copies of such process to such party at its address specified pursuant to Section 6.02. Each such party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section 6.05 shall affect the right of any such party to serve legal process in any other manner permitted by law or affect the right of any such party to bring any action or proceeding against any other such party or their respective property in the courts of other jurisdictions other than the State of New York if no court in the States of Delaware or Arizona will exercise jurisdiction. SECTION 6.06. GOVERNING LAW. THIS AGREEMENT AND THE CERTIFICATE SHALL BE ------------- GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 6.07. No Proceedings. ANLIC (Hawaii), AIC, Anchor and the --------------- Servicer each hereby agrees that it will not institute against the Purchaser any proceeding of the type referred to in Section 5.01(g) so long as any commercial paper or other debt securities issued by the Purchaser shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such commercial paper or other debt securities shall have been outstanding. SECTION 6.08. Confidentiality. (a) The structure of the transactions --------------- contemplated by the Reinsurance Documents (as defined in this Agreement and the Servicing Agreement dated as of December 31, 1997 among ANLIC Insurance Company (Hawaii), Anchor, Anchor Insurance Company (Hawaii) and SunAmerica Life Insurance Company), any related analyses, computer models, information, tax, legal or accounting opinions or other documents and any related written information (collectively, "Citicorp Product Information") constitute CNAI's ------------------------------ proprietary information; provided that Citicorp Product Information shall not -------- include any information that: (i) is or becomes available to the public other than as a result of disclosure by the Company Representatives, ANLIC (Hawaii), the Initial Servicer or Anchor, or (ii) was known by or was in the possession of ANLIC (Hawaii), the Initial Servicer or Anchor prior to its disclosure by CNAI to ANLIC (Hawaii), the Initial Servicer or Anchor, or (iii) becomes available to ANLIC (Hawaii), the Initial Servicer or Anchor on a non-confidential basis from a source not known to be bound by a confidentiality agreement with or under other obligation of secrecy to CNAI. (b) ANLIC (Hawaii), the Initial Servicer and Anchor agree to maintain the confidentiality of the Citicorp Product Information (and all drafts thereof) and not to disclose the Citicorp Product Information, directly or 19 indirectly, without CNAI's consent, other than: (i) to their respective officers, directors, employees, agents, attorneys, accountants and advisors ("Company Representatives"), and then only ----------------------- on a confidential, need-to-know basis, (ii) as required by law, rule or regulation or judicial process or (iii) as requested or required by any state, local, federal or foreign authority or examiner regulating insurance or reinsurance companies or banking or otherwise having jurisdiction. (c) ANLIC (Hawaii), the Initial Servicer and Anchor agree to use the Citicorp Product Information only in connection with the transaction contemplated by the Reinsurance Documents and not for any other purpose. (d) ANLIC (Hawaii), the Initial Servicer and Anchor agree to cause the Company Representatives and the Anchor Parties to comply with these provisions and to be responsible for any failure of any such representatives and the Anchor Parties so to comply. (e) In the event that ANLIC (Hawaii), the Initial Servicer and Anchor are requested, compelled or required (by deposition, interrogatory, request for information or production of documents, subpoena, civil investigative demand or similar process) to disclose any Citicorp Product Information, then ANLIC (Hawaii), the Initial Servicer and Anchor shall, to the extent permitted by law and reasonably practicable under the circumstances, immediately give the other party notice of such request so that the other party may seek a protective order or other appropriate remedy. If, in the absence of a protective order or waiver, ANLIC (Hawaii), the Initial Servicer and Anchor are nonetheless compelled to disclose Citicorp Product Information, ANLIC (Hawaii), the Initial Servicer and Anchor may disclose such information without liability hereunder; provided that ANLIC (Hawaii), the Initial Servicer and Anchor exercise ------- reasonable efforts (at CNAI's sole cost and expense) to obtain assurance that ------- confidential treatment will be accorded to such disclosed information. ANLIC - (Hawaii), the Initial Servicer and Anchor shall not oppose any action by CNAI to - obtain a protective order or other assurance that confidential treatment will be accorded. (f) The parties agree that CNAI will suffer irreparable harm from and will not have an adequate remedy at law with respect to any breach of this Section. In addition to all other remedies, CNAI shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach. If the Anchor Parties obtain actual knowledge of any unauthorized disclosure of the Citicorp Product Information by any Company Representative, the Anchor Parties shall disclose to CNAI such unauthorized disclosure. (g) The provisions of this Section 6.08 shall survive termination of this Agreement. SECTION 6.09. Payments and Computations, Etc. (a) All amounts to be paid ------------------------------ or deposited by Anchor or the Servicer pursuant to the Reinsurance Documents shall be paid or deposited in accordance with the terms hereof no 20 later than 11:00 A.M. (New York City time) on the day when due in lawful money of the United States of America in same day funds to the Agent's Account (or, where a Reinsurance Document so specifies, to the Cash Collateral Account) for the account of ANLIC (Hawaii). (b) Anchor or the Initial Servicer shall, to the extent permitted by law, pay to ANLIC (Hawaii) interest on all amounts not paid or deposited when due by Anchor or the Initial Servicer under the Reinsurance Documents at 2% per annum above the Alternate Base Rate in effect from time to time, payable on demand; provided, however, that such interest rate shall not at any time exceed -------- ------- the maximum rate permitted by applicable law. All computations of interest and fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. SECTION 6.10. Execution in Counterparts; Severability. This Agreement may --------------------------------------- be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. In case any provision in or obligation under this Agreement should be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 6.11. Judgment. (a) If, for the purposes of obtaining judgment -------- in any court, it is necessary to convert a sum due under the Reinsurance Documents in United States dollars into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures CNAI could purchase United States dollars with such other currency in New York on the Business Day preceding that on which final judgment is given. (b) The transaction contemplated by the Reinsurance Documents is an international insurance transaction in which the specification of United States dollars and payment in New York, New York, is of the essence, and United States dollars shall be the currency of account in all events. The obligation of each Anchor Party party to any Reinsurance Document in respect of any sum due from it to any other party under any Reinsurance Document shall, notwithstanding any judgment in a currency other than United States dollars, be discharged only to the extent that on the Business Day following receipt by such party of any sum adjudged to be so due in such other currency such party may in accordance with normal banking procedures purchase United States dollars with such other currency; if the United States dollars so purchased are less than the sum originally due to such party in United States dollars, each Anchor Party party to this Agreement agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such party against such loss, and if the United States dollars so purchased exceed the sum originally due to any party in United States dollars, such party agrees to remit to such Anchor Party such excess. 21 SECTION 6.12. WAIVER OF JURY TRIAL. EACH OF ANLIC (Hawaii), ANCHOR AND --------------------- THE SERVICER, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY REINSURANCE DOCUMENT. 22 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ANCHOR INSURANCE COMPANY (HAWAII), LTD. By:____________________________________ Name Title Address for Notices: c/o Anchor Insurance Company (Hawaii), Ltd. c/o 50th State Risk Management Services, Inc. Six Waterfront Plaza, Room 405 500 Ala Moana Boulevard Honolulu, HI 96813 Attention: Ann Nakagawa Facsimile: (808) 524-9526 Telephone: (808) 543-9737 with a copy to: General Counsel SunAmerica Inc. 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Telephone: 310-772-6000 Telecopy: 310-772-6574 ANCHOR NATIONAL LIFE INSURANCE COMPANY By_____________________________________ Title: 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Attention: Jim Belardi Telephone: 310-772-6000 Telecopy: 310-772-6635 with a copy to: General Counsel SunAmerica Inc. 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Telephone: 310-772-6000 Telecopy: 310-772-6574 23 ANLIC INSURANCE COMPANY (HAWAII), LTD., as Seller By__________________________________ Title: c/o ANLIC Insurance Company (Hawaii), Ltd. c/o 50th State Risk Management Services, Inc. Six Waterfront Plaza, Room 405 500 Ala Moana Boulevard Honolulu, HI 96813 Attention: Ann Nakagawa Facsimile: (808) 524-9526 Telephone: (808) 543-9737 with a copy to: General Counsel SunAmerica Inc. 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Telephone: 310-772-6000 Telecopy: 310-772-6574 and Citicorp North America, Inc. 399 Park Avenue 6th Floor/Zone 2 New York, NY 10043 Attention: Art Bovino Telephone: (212) 559-6166 Telecopy: (212) 758-6272 SUNAMERICA LIFE INSURANCE COMPANY, as Servicer By__________________________________ Title: 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Attention: Jim Belardi Telephone: 310-772-6000 Telecopy: 310-772-6635 with a copy to: General Counsel SunAmerica Inc. 1 SunAmerica Center 1999 Avenue of the Stars Los Angeles, CA 90067 Telephone: 310-772-6000 Telecopy: 310-772-6574 24 EXECUTION COPY SERVICING AGREEMENT DATED AS OF AUGUST 1, 1999 AMONG ANLIC INSURANCE COMPANY (HAWAII), LTD., INDIVIDUALLY, ANCHOR INSURANCE COMPANY (HAWAII), LTD., INDIVIDUALLY, ANCHOR NATIONAL LIFE INSURANCE COMPANY, INDIVIDUALLY, AND SUNAMERICA LIFE INSURANCE COMPANY, AS SERVICER TABLE OF CONTENTS
PAGE ---- PRELIMINARY STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Terms . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 1.03. Computation of Time Periods . . . . . . . . . . . . . . 5 SECTION 1.04. Other Definitional Provisions . . . . . . . . . . . . . 5 ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.01. Representations and Warranties of Anchor. . . . . . . . 5 SECTION 2.02. Representations and Warranties of the Initial Servicer. 6 ARTICLE III GENERAL COVENANTS SECTION 3.01. Affirmative Covenants of Anchor . . . . . . . . . . . . 8 SECTION 3.02. Negative Covenants of Anchor. . . . . . . . . . . . . . 8 SECTION 3.03. Affirmative Covenants of the Initial Servicer . . . . . 8 SECTION 3.04. Reporting Requirements of the Initial Servicer. . . . . 9 SECTION 3.05. Negative Covenants of the Initial Servicer. . . . . . . 10 SECTION 3.06. Reporting Requirements of ANLIC (Hawaii). . . . . . . . 11 SECTION 3.07. Reporting Requirements of AIC . . . . . . . . . . . . . 11 ARTICLE IV ADMINISTRATION AND COLLECTION SECTION 4.01. Designation of Servicer . . . . . . . . . . . . . . . . 12 SECTION 4.02. Duties of Servicer. . . . . . . . . . . . . . . . . . . 14 SECTION 4.03. Rights of ANLIC (Hawaii). . . . . . . . . . . . . . . . 15 SECTION 4.04. Responsibilities of Anchor. . . . . . . . . . . . . . . 15 SECTION 4.05. Further Action. . . . . . . . . . . . . . . . . . . . . 16 ARTICLE V SERVICER REMEDY EVENTS SECTION 5.01. Servicer Remedy Event . . . . . . . . . . . . . . . . . 16 ARTICLE VI MISCELLANEOUS SECTION 6.01. Amendments, Etc.. . . . . . . . . . . . . . . . . . . . 18 SECTION 6.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . 18 SECTION 6.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . 18 SECTION 6.04. Binding Effect; Assignability . . . . . . . . . . . . . 18 SECTION 6.05. Consent to Jurisdiction . . . . . . . . . . . . . . . . 18 SECTION 6.06. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . 19 SECTION 6.07. No Proceedings. . . . . . . . . . . . . . . . . . . . . 19 SECTION 6.08. Confidentiality . . . . . . . . . . . . . . . . . . . . 19 SECTION 6.09. Payments and Computations, Etc. . . . . . . . . . . . . 20 SECTION 6.10. Execution in Counterparts; Severability . . . . . . . . 21 SECTION 6.11. Judgment. . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 6.12. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . 22
EXHIBITS & SCHEDULES EXHIBIT 1.01A Form of Daily Reinsurance Servicer Report EXHIBIT 1.01B Form of Reinsurance Servicer Report SCHEDULE 2.01(e) List of Annuity contracts together with a form of each Annuity agreement SCHEDULE 2.01(f) CARVM reserve methodology EX-21 6 EXHIBIT 21 ANCHOR NATIONAL LIFE INSURANCE COMPANY AND CONSOLIDATED SUBSIDIARIES LIST OF SUBSIDIARIES List of subsidiaries and certain other affiliates with percentage of voting securities owned by Anchor National Life Insurance Company or Anchor National Life Insurance Company or Anchor National Life Insurance Company's subsidiary which is the immediate parent. PERCENTAGE OF VOTING SECURITIES OWNED BY COMPANY OR COMPANY'S SUBSIDIARY WHICH IS THE IMMEDIATE PARENT -------------------- NAME OF COMPANY - ----------------- % CALIFORNIA CORPORATIONS: Sam Holdings Corporation 100 Sun Royal Holdings Corporation 100 DELAWARE CORPORATIONS: Saamsun Holdings Corp. 100 Royal Alliance Associates, Inc. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 SunAmerica Fund Services, Inc. 100 EX-27 7
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT INCOME FOR ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-K THE QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 3953169000 0 0 0 674679000 24000000 5551969000 475162000 0 1089979000 26874494000 5538797000 0 0 0 37816000 0 0 3511000 931615000 26874494000 0 518280000 (19620000) 455392000 (354064000) (116840000) (40760000) 287723000 (103025000) 184698000 0 0 0 184698000 0 0 0 0 0 0 0 0 0
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