10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 Commission File No. 33-47472 ANCHOR NATIONAL LIFE INSURANCE COMPANY Incorporated in Arizona 86-0198983 IRS Employer Identification No. 1 SunAmerica Center, Los Angeles, California 90067-6022 Registrant's telephone number, including area code: (310) 772-6000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No ___ -- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON AUGUST 15, 2000 WAS AS FOLLOWS: Common Stock (par value $1,000 per share) 3,511 shares outstanding
ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX Page Number(s) --------- Part I - Financial Information Consolidated Balance Sheet (Unaudited) - June 30, 2000 and December 31, 1999 . . . . . . . . . . 3-4 Consolidated Statement of Income and Comprehensive Income (Unaudited) - Three Months and Six Months Ended June 30, 2000 and 1999. . . . . . . . . . . . . . . . . 5-6 Consolidated Statement of Cash Flows (Unaudited) - Six Months Ended June 30, 2000 and 1999 . . . . . . . . 7-8 Notes to Consolidated Financial Statements (Unaudited). 9-12 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 13-28 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . 29 Part II - Other Information . . . . . . . . . . . . . . . . . 30
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, 2000 1999 --------------- --------------- ASSETS Investments: Cash and short-term investments. . . . . . . . . . . . . . $ 365,597,000 $ 462,915,000 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: June 2000, $4,066,917,000; December 1999, $4,155,728,000) . . . . . . . . . . . . . 3,826,556,000 3,953,169,000 Mortgage loans . . . . . . . . . . . . . . . . . . . . . . 674,396,000 674,679,000 Policy loans . . . . . . . . . . . . . . . . . . . . . . . 247,052,000 260,066,000 Separate account seed money. . . . . . . . . . . . . . . . 116,335,000 144,231,000 Partnerships . . . . . . . . . . . . . . . . . . . . . . . 3,216,000 4,009,000 Real estate. . . . . . . . . . . . . . . . . . . . . . . . 24,000,000 24,000,000 Other invested assets. . . . . . . . . . . . . . . . . . . 19,201,000 31,632,000 --------------- --------------- Total investments. . . . . . . . . . . . . . . . . . . . . 5,276,353,000 5,554,701,000 Variable annuity assets held in separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . 21,611,694,000 19,949,145,000 Accrued investment income. . . . . . . . . . . . . . . . . . 57,180,000 60,584,000 Deferred acquisition costs . . . . . . . . . . . . . . . . . 1,187,870,000 1,089,979,000 Receivable from brokers for sales of securities --- 54,760,000 Income taxes currently receivable 7,119,000 --- Deferred income taxes. . . . . . . . . . . . . . . . . . . . 36,964,000 53,445,000 Other assets . . . . . . . . . . . . . . . . . . . . . . . . 115,315,000 111,880,000 --------------- --------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $28,292,495,000 $26,874,494,000 =============== =============== See accompanying notes to consolidated financial statements
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ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) June 30, December 31, 2000 1999 --------------- ---------------- LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts. . . . . . . . . . . $ 2,857,688,000 $ 3,254,895,000 Reserves for universal life insurance contracts . . . . . . . . . . . . . . . . . . . . . . . 1,884,315,000 1,978,332,000 Reserves for guaranteed investment contracts . . . . . . . . . . . . . . . . . . . . . . . 560,635,000 305,570,000 Payable to brokers for purchases of securities --- 139,000 Income taxes currently payable --- 23,490,000 Modified coinsurance deposit liability. . . . . . . . . . 117,381,000 140,757,000 Other liabilities . . . . . . . . . . . . . . . . . . . . 258,597,000 249,224,000 ---------------- ---------------- Total reserves, payables and accrued liabilities . . . . . . . . . . . . . . . . 5,678,616,000 5,952,407,000 Variable annuity liabilities related to separate accounts . . . . . . . . . . . . . . . . . . . . 21,611,694,000 19,949,145,000 ---------------- ---------------- Subordinated notes payable to affiliates. . . . . . . . . . 53,514,000 37,816,000 ---------------- ---------------- Shareholder's equity: Common Stock. . . . . . . . . . . . . . . . . . . . . . . 3,511,000 3,511,000 Additional paid-in capital. . . . . . . . . . . . . . . . 493,010,000 493,010,000 Retained earnings . . . . . . . . . . . . . . . . . . . . 588,170,000 551,158,000 Accumulated other comprehensive loss. . . . . . . . . . . (136,020,000) (112,553,000) ---------------- ---------------- Total shareholder's equity. . . . . . . . . . . . . . . . 948,671,000 935,126,000 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. . . . . . . . . $28,292,495,000 $26,874,494,000 ================ ================ See accompanying notes to consolidated financial statements
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ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the three months and six months ended June 30, 2000 and 1999 (Unaudited) Three Months Six Months ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- Investment income . . . . . . . . . . . . . . . . . . . . . $ 98,941,000 $ 143,535,000 $ 206,228,000 $ 273,892,000 ------------- -------------- -------------- -------------- Interest expense on: Fixed annuity contracts . . . . . . . . . . . . . . . . . (33,298,000) (69,053,000) (71,018,000) (133,618,000) Universal life insurance contracts . . . . . . . . . . . . . . . . . . . . . . . (19,842,000) (30,018,000) (43,598,000) (60,189,000) Guaranteed investment contracts . . . . . . . . . . . . . (9,116,000) (4,608,000) (14,384,000) (9,766,000) Senior indebtedness --- --- --- (198,000) Subordinated notes payable to affiliates. . . . . . . . . . . . . . . . . . . . . . . (1,108,000) 1,684,000 (1,909,000) (1,769,000) ------------- -------------- -------------- -------------- Total interest expense. . . . . . . . . . . . . . . . . . (63,364,000) (101,995,000) (130,909,000) (205,540,000) ------------- -------------- -------------- -------------- NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . 35,577,000 41,540,000 75,319,000 68,352,000 ------------- -------------- -------------- -------------- NET REALIZED INVESTMENT LOSSES. . . . . . . . . . . . . . . (3,639,000) (7,688,000) (5,408,000) (6,804,000) ------------- -------------- -------------- -------------- Fee income: Variable annuity fees . . . . . . . . . . . . . . . . . . 99,397,000 74,319,000 196,016,000 141,264,000 Net retained commissions. . . . . . . . . . . . . . . . . 14,914,000 13,235,000 28,072,000 26,192,000 Asset management fees . . . . . . . . . . . . . . . . . . 17,750,000 10,385,000 34,818,000 19,664,000 Universal life insurance fees . . . . . . . . . . . . . . 1,969,000 11,577,000 6,740,000 20,750,000 Surrender charges . . . . . . . . . . . . . . . . . . . . 5,744,000 4,324,000 10,769,000 8,703,000 Other fees. . . . . . . . . . . . . . . . . . . . . . . . 2,135,000 2,991,000 4,897,000 3,941,000 ------------- -------------- -------------- -------------- TOTAL FEE INCOME. . . . . . . . . . . . . . . . . . . . . . 141,909,000 116,831,000 281,312,000 220,514,000 ------------- -------------- -------------- -------------- GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . . (42,971,000) (41,486,000) (84,233,000) (77,976,000) ------------- -------------- -------------- -------------- AMORTIZATION OF DEFERRED ACQUISITION COSTS . . . . . . . . . . . . . . . . . . . . (36,397,000) (28,272,000) (74,329,000) (55,876,000) ------------- -------------- -------------- -------------- ANNUAL COMMISSIONS. . . . . . . . . . . . . . . . . . . . . (11,352,000) (9,070,000) (26,796,000) (18,158,000) ------------- -------------- -------------- -------------- PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . 83,127,000 71,855,000 165,865,000 130,052,000 ------------- -------------- -------------- -------------- Income tax expense. . . . . . . . . . . . . . . . . . . . . (30,559,000) (25,891,000) (59,853,000) (46,900,000) ------------- -------------- -------------- -------------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 52,568,000 45,964,000 106,012,000 83,152,000 ------------- -------------- -------------- -------------- See accompanying notes to consolidated financial statements
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ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued) For the three months and six months ended June 30, 2000 and 1999 (Unaudited) Three Months Six Months --------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------- ------------- ------------- OTHER COMPREHENSIVE LOSS, NET OF TAX: Net unrealized losses on debt and equity securities available for sale identified in the current period (net of income tax benefit of $7,493,000 and $25,113,000 for the second quarter of 2000 and 1999, respectively, and $14,253,000 and $35,767,000 for the six months of 2000 and 1999, respectively). . . . . . . . . . . . . . (13,916,000) (46,639,000) (26,470,000) (66,421,000) Less reclassification adjustment for net realized losses included in net income (net of income tax expense of $1,099,000 and $1,262,000 for the second quarter of 2000 and 1999, respectively, and $1,617,000 and $1,253,000 for the six months of 2000 and 1999, respectively . . . . . . . . . . . . . . . . . . . . . . 2,041,000 2,344,000 3,003,000 2,326,000 ------------- ------------- ------------- ------------- OTHER COMPREHENSIVE LOSS . . . . . . . . . . . . . . . . . (11,875,000) (44,295,000) (23,467,000) (64,095,000) ------------- ------------- ------------- ------------- COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . $ 40,693,000 $ 1,669,000 $ 82,545,000 $ 19,057,000 ============= ============= ============= ============= See accompanying notes to consolidated financial statements
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ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended June 30, 2000 and 1999 (Unaudited) 2000 1999 ------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 106,012,000 $ 83,152,000 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts . . . . . . . . . . . . . . . 71,018,000 133,618,000 Universal life insurance contracts. . . . . . . . . . 43,598,000 60,189,000 Guaranteed investment contracts . . . . . . . . . . . 14,384,000 9,766,000 Net realized investment losses. . . . . . . . . . . . . 5,408,000 6,804,000 Accretion of net discounts on investments . . . . . . . . . . . . . . . . . . . . . (5,964,000) (2,707,000) Universal life insurance fees . . . . . . . . . . . . . (6,740,000) (20,750,000) Amortization of goodwill. . . . . . . . . . . . . . . . 727,000 714,000 Provision for deferred income taxes . . . . . . . . . . 29,116,000 (51,032,000) Change in: Accrued investment income . . . . . . . . . . . . . . . . 3,404,000 (10,496,000) Deferred acquisition costs. . . . . . . . . . . . . . . . (96,191,000) (109,219,000) Other assets. . . . . . . . . . . . . . . . . . . . . . . (3,309,000) 6,647,000 Income taxes currently payable. . . . . . . . . . . . . . (30,609,000) 910,000 Other liabilities . . . . . . . . . . . . . . . . . . . . 47,422,000 73,204,000 Other, net. . . . . . . . . . . . . . . . . . . . . . . . . 9,245,000 9,162,000 -------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . 187,521,000 189,962,000 -------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks. . . . . . . . . . . . . . . . . . . . . . . . . (430,682,000) (3,661,629,000) Mortgage loans. . . . . . . . . . . . . . . . . . . . . . (46,831,000) (250,751,000) Other investments, excluding short-term investments . . . . . . . . . . . . . . . . . . . . . . (18,350,000) (162,212,000) Sales of: Bonds, notes and redeemable preferred stocks. . . . . . . . . . . . . . . . . . . . . . . . . 330,321,000 1,564,138,000 Other investments, excluding short-term investments . . . . . . . . . . . . . . . . . . . . . . 793,000 6,705,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks. . . . . . . . . . . . . . . . . . . . . . . . . 240,882,000 590,792,000 Mortgage loans. . . . . . . . . . . . . . . . . . . . . . 47,968,000 20,531,000 Other investments, excluding short-term investments . . . . . . . . . . . . . . . . . . . . . . 74,304,000 18,099,000 Short-term investments transferred from First SunAmerica Life Insurance Company in assumption reinsurance transaction with MBL Life Assurance Corporation 16,741,000 --- -------------- ---------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . 215,146,000 (1,874,327,000) -------------- ---------------- See accompanying notes to consolidated financial statements
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ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the six months ended June 30, 2000 and 1999 (Unaudited) 2000 1999 --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts . . . . . . . . $ 852,080,000 $ 1,004,138,000 Universal life insurance contracts. . . 29,515,000 38,025,000 Guaranteed investment contracts 250,000,000 --- Net exchanges from the fixed accounts of variable annuity contracts . . . . . (1,087,093,000) (818,916,000) Withdrawal payments on: Fixed annuity contracts . . . . . . . . (228,382,000) (389,215,000) Universal life insurance contracts. . . (62,731,000) (38,877,000) Guaranteed investment contracts . . . . (8,246,000) (9,374,000) Claims and annuity payments on: Fixed annuity contracts . . . . . . . . (33,303,000) (49,984,000) Universal life insurance contracts. . . (80,357,000) (58,199,000) Net repayments of other short-term financings. . . . . . . . . . . . . . . (54,790,000) (4,516,000) Net payment related to a modified coinsurance transaction (23,376,000) --- Net receipt from issuances of subordinated notes payable to affiliate 15,698,000 --- Dividend paid to Parent (69,000,000) --- ---------------- ---------------- NET CASH USED BY FINANCING ACTIVITIES . . (499,985,000) (326,918,000) ---------------- ---------------- NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS . . . . . . . . . . . . . . (97,318,000) (2,011,283,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD . . . . . . . . . . 462,915,000 3,303,454,000 ---------------- ---------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD . . . . . . . . . . . . . $ 365,597,000 $ 1,292,171,000 ================ ================ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness . . . . . . $ 1,211,000 $ 833,000 ================ ================ Net income taxes paid . . . . . . . . . . $ 61,325,000 $ 74,499,000 ================ ================
See accompanying notes to consolidated financial statements 8 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION ----------------------- 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. The Company is engaged in the business of writing fixed and variable annuities directed to the market for tax-deferred, long-term savings products and guaranteed interest contracts ("GICs") directed to the institutional marketplace. Its subsidiaries are engaged in the broker-dealer and asset management businesses. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's consolidated financial position as of June 30, 2000 and December 31, 1999, the results of its consolidated operations for the three months and six months ended June 30, 2000 and 1999 and its consolidated cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the three months and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1999, contained in the Company's 1999 Annual Report on Form 10-K. Certain items have been reclassified to conform to the current period's presentation. 9 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. SEGMENT INFORMATION -------------------- Following is selected information pertaining to the Company's business segments.
Asset Broker- Annuity Management Dealer Operations Operations Operations Total ------------ ----------- ----------- ------------- THREE MONTHS ENDED JUNE 30, 2000: Revenue from external customers . . . . . $180,860,000 $21,350,000 $11,604,000 $213,814,000 Intersegment revenue --- 20,705,000 2,692,000 23,397,000 ------------- ------------ ------------ ------------- Total revenue . . . . $180,860,000 $42,055,000 $14,296,000 $237,211,000 ============= ============ ============ ============= Pretax income . . . . $52,558,000 $24,082,000 $ 6,487,000 $ 83,127,000 Income tax expense. . (17,696,000) (9,940,000) (2,923,000) (30,559,000) ------------- ------------ ------------ ------------- Net income. . . . . . $34,862,000 $14,142,000 $ 3,564,000 $ 52,568,000 ============= ============ ============ =============
THREE MONTHS ENDED JUNE 30, 1999: Revenue from external customers . . . . . $210,900,000 $13,811,000 $10,500,000 $235,211,000 Intersegment revenue --- 15,245,000 2,222,000 17,467,000 ------------- ------------ ------------ ------------- Total revenue . . . . $210,900,000 $29,056,000 $12,722,000 $252,678,000 ============= ============ ============ ============= Pretax income . . . . $ 49,403,000 $16,849,000 $ 5,603,000 $ 71,855,000 Income tax expense. . (16,424,000) (6,774,000) (2,693,000) (25,891,000) ------------- ------------ ------------ ------------- Net income. . . . . . $ 32,979,000 $10,075,000 $ 2,910,000 $ 45,964,000 ============= ============ ============ =============
10 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. SEGMENT INFORMATION (Continued) --------------------
Asset Broker- Annuity Management Dealer Operations Operations Operations Total ------------ ------------ ----------- ------------ SIX MONTHS ENDED JUNE 30, 2000: Revenue from external customers . . . . . $371,615,000 $ 42,613,000 $21,670,000 $435,898,000 Intersegment revenue --- 40,873,000 5,361,000 46,234,000 ------------- ------------- ------------ ------------- Total revenue . . . . $371,615,000 $ 83,486,000 $27,031,000 $482,132,000 ============= ============= ============ ============= Pretax income . . . . $104,391,000 $ 49,855,000 $11,619,000 $165,865,000 Income tax expense. . (33,654,000) (20,812,000) (5,387,000) (59,853,000) ------------- ------------- ------------ ------------- Net income. . . . . . $ 70,737,000 $ 29,043,000 $ 6,232,000 $106,012,000 ============= ============= ============ =============
SIX MONTHS ENDED JUNE 30, 1999: Revenue from external customers . . . . . $408,095,000 $ 25,291,000 $21,314,000 $454,700,000 Intersegment revenue --- 28,891,000 4,011,000 32,902,000 ------------- ------------- ------------ ------------- Total revenue . . . . $408,095,000 $ 54,182,000 $25,325,000 $487,602,000 ============= ============= ============ ============= Pretax income . . . . $ 87,643,000 $ 31,277,000 $11,132,000 $130,052,000 Income tax expense. . (28,441,000) (13,116,000) (5,343,000) (46,900,000) ------------- ------------- ------------ ------------- Net income. . . . . . $ 59,202,000 $ 18,161,000 $ 5,789,000 $ 83,152,000 ============= ============= ============ =============
3. 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 funds received were reclassified to Additional Paid-in Capital in the consolidated balance sheet. Also on June 30, 1999, the Parent forgave the total interest earned on the Note of $4,971,000, of which $2,983,000 was included in Interest Expense on Subordinated Notes Payable to Affiliates in the consolidated income statement in the quarter ended March 31, 1999. Accordingly, the accompanying consolidated income statement reflects a $2,983,000 reduction in Interest Expense on Subordinated Notes Payable to Affiliates in the quarter ended June 30, 1999. 11 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. CONTINGENT LIABILITIES ----------------------- The Company has entered into three 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 at June 30, 2000 is approximately $300,000,000. Management does not anticipate any material future losses with respect to these liquidity support facilities. 5. RECENTLY ISSUED ACCOUNTING STANDARD -------------------------------------- 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. 12 ANCHOR NATIONAL LIFE INSURANCE COMPANY 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 and its wholly owned subsidiaries (the "Company") for the three months and six months ended June 30, 2000 and June 30, 1999 follows. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based 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 $52.6 million in the second quarter of 2000, compared with $46.0 million in the second quarter of 1999. For the six months, net income amounted to $106.0 million in 2000, compared with $83.2 million in 1999. 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"). On June 30, 1999, the Company ceded the portion of this business consisting of New York policies to its affiliate, First SunAmerica Life Insurance Company. The results of operations for the three months and six months ended June 30, 2000 and June 30, 1999 include the impact of the Acquisition. 13 PRETAX INCOME totaled $83.1 million in the second quarter of 2000 and $71.9 million in the second quarter of 1999. For the six months, pretax income totaled $165.9 million in 2000, compared with $130.1 million in 1999. The 27.5% improvement in 2000 over 1999 primarily resulted from increased fee income and decreased net realized investment losses, partially offset by increased amortization of deferred acquisition costs ("DAC") and increased annual commissions. 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, totaled $35.6 million in the second quarter of 2000, down from $41.5 million in the second quarter of 1999. These amounts equal 2.58% on average invested assets (computed on a daily basis) of $5.51 billion in the second quarter of 2000 and 2.03% on average invested assets of $8.19 billion in the second quarter of 1999. The decrease in net investment income in the second quarter of 2000 is principally due to a decline in average assets, as fixed annuity policies acquired in the Acquisition have mostly surrendered or rolled over to a variable product of the Company since 1999. For the six months, net investment income increased to $75.3 million in 2000 from $68.4 million in 1999, representing 2.71% of average invested assets of $5.55 billion in 2000 and 1.66% of average invested assets of $8.25 billion in 1999. The improvement in 2000 net investment yields over the 1999 amounts reflects redeployment of the assets received in the Acquisition into higher yielding investment categories. Net investment spreads include the effect of income earned or interest paid on the difference between average invested assets and average interest-bearing liabilities. In the second quarter, average invested assets exceeded average interest-bearing liabilities by $173.6 million in 2000, compared with $148.4 million in 1999. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.43% in the second quarter of 2000 and 1.94% in the second quarter of 1999. For the six months, average invested assets exceeded average interest-bearing liabilities by $217.8 million in 2000, compared with $118.1 million in 1999. The Spread Difference was 2.52% in 2000 and 1.59% in 1999. Investment income (and the related yields on average invested assets) totaled $98.9 million (7.18%) in the second quarter of 2000, $143.5 million (7.01%) in the second quarter of 1999, $206.2 million (7.43%) in the six months of 2000 and $273.9 million (6.64%) in the six months of 1999. The decrease in investment income in 2000 compared to 1999 resulted primarily from the surrender or rollover into a variable product of most of the fixed annuities received in the Acquisition. The increase in the yield in 2000 compared to 1999 is due primarily to redeployment of the assets received in the Acquisition into higher yielding investment categories. Total interest expense equaled $63.4 million in the second quarter of 2000 and $102.0 million in the second quarter of 1999. For the six months, interest expense aggregated $130.9 million in 2000, compared with $205.5 million in 1999. The average rate paid on all interest-bearing liabilities was 4.75% in the second quarter of 2000, compared with 5.07% in the second quarter of 1999. For the six months, the average rate paid on all interest-bearing liabilities was 4.91% for 2000 and 5.05% for 1999. Interest-bearing liabilities averaged $5.34 billion during the second quarter of 2000, $8.05 14 billion during the second quarter of 1999, $5.34 billion during the six months of 2000 and $8.13 billion during the six months of 1999. The decrease in interest expense and interest-bearing liabilities in the second quarter and six months ended June 30, 2000 reflect the decline in fixed annuity liabilities related to the Acquisition. DECLINE IN AVERAGE INVESTED ASSETS reflects primarily the surrenders and rollovers to variable products of the fixed annuity liabilities related to 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. Since June 30, 1999, Fixed Annuity Premiums and UL Premiums have aggregated $1.94 billion. Fixed Annuity Premiums and UL Premiums totaled $486.6 million in the second quarter of 2000, $626.5 million in the second quarter of 1999, $881.6 million in the six months of 2000 and $1.04 billion in the six months of 1999 and are largely premiums for the fixed accounts of variable annuities. On an annualized basis, these premiums represent 40%, 32%, 34% and 27%, respectively, of the related reserve balances at the beginning of the respective periods. Guaranteed investment contract ("GIC") premiums totaled $100.0 million in the second quarter of 2000 and $250.0 million in the six months of 2000. There were no GIC premiums in 1999. GIC surrenders and maturities totaled $4.2 million in the second quarters of 2000 and 1999, $8.2 million in the six months of 2000 and $9.4 million in the six months of 1999. 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 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 $3.6 million in the second quarter of 2000, compared with $7.7 million in the second quarter of 1999 and include impairment writedowns of $5.8 million and $1.4 million, respectively. For the six months, net realized investment losses totaled $5.4 million in 2000, compared with $6.8 million in 1999 and include impairment writedowns of $8.4 million and $2.0 million, respectively. Thus, net gains from sales and redemptions of investments totaled $2.2 million and $3.0 million in the second quarter and six months of 2000, respectively, compared to net losses from sales and redemptions of investments of $6.3 million and $4.8 million in the second quarter and six months of 1999, respectively. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $212.5 million in the second quarter of 2000, $972.7 15 million in the second quarter of 1999, $621.5 million in the six months of 2000 and $2.18 billion in the six months of 1999. 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, on an annualized basis, 0.16%, 0.31%, 0.11% and 0.12% of average invested assets in the second quarter of 2000, the second quarter of 1999, the six months of 2000 and the six months of 1999, 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 provisions applied to bonds in 2000 and 1999. On an annualized basis, impairment writedowns represent 0.42%, 0.07%, 0.30% and 0.05% of related average invested assets in the second quarter of 2000, the second quarter of 1999, the six months of 2000 and the six months of 1999, respectively. For the twenty quarters beginning July 1, 1995, impairment writedowns as an annualized percentage of average invested assets have ranged up to 3.06% and have averaged 0.49%. 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 $99.4 million in the second quarter of 2000 and $74.3 million in the second quarter of 1999. For the six months, variable annuity fees totaled $196.0 million in 2000, compared with $141.3 million in 1999. The increased fees in 2000 compared to 1999 reflect growth in average variable annuity assets, principally due to increased market values, the receipt of variable annuity premiums and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders. On an annualized basis, variable annuity fees represent 1.9% of average variable annuity assets in all periods presented. Variable annuity assets averaged $21.00 billion during the second quarter of 2000 and $15.71 billion during the second quarter of 1999. For the six months, variable annuity assets averaged $20.71 billion in 2000, compared with $15.03 billion in 1999. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, have aggregated $1.73 billion since June 30, 1999. Variable annuity premiums totaled $498.0 million and $464.9 million in the second quarters of 2000 and 1999, respectively. For the six months, variable annuity premiums totaled $972.3 million in 2000, compared with $949.4 million in 1999. On an annualized basis, these amounts represent 9%, 12%, 10% and 14% of variable annuity reserves at the beginning of the respective periods. Transfers from the fixed accounts of the Company's variable annuity products to the separate accounts (see "Decline 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 16 the Company's variable annuity products. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $970.0 million, $1.03 billion, $1.83 billion and $1.91 billion in the second quarters of 2000 and 1999 and six months of 2000 and 1999, respectively. Variable Annuity Product Sales primarily reflect sales of the Company's flagship variable annuity line, Polaris. Polaris is a multimanager variable annuity that offers investors a choice of more than 25 variable funds and a number of guaranteed fixed-rate funds. 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 broker-dealer subsidiary, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $14.9 million in the second quarter of 2000 and $13.2 million in the second quarter of 1999. For the six months, net retained commissions amounted to $28.1 million and $26.2 million in 2000 and 1999, respectively. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $3.73 billion in the second quarter of 2000, $3.67 billion in the second quarter of 1999, $6.61 billion in the six months of 2000 and $7.15 billion in the six months of 1999. The increase in net retained commissions concurrent with the decrease in sales for the six months principally reflect 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., the Company's registered investment advisor. Such fees totaled $17.8 million on average assets managed of $6.33 billion in the second quarter of 2000 and $10.4 million on average assets managed of $3.99 billion in the second quarter of 1999. For the six months, asset management fees totaled $34.8 million on average assets managed of $6.18 billion in 2000, compared with $19.7 million on average assets managed of $3.83 billion in 1999. Asset management fees are not necessarily proportionate to average assets managed, principally due to changes in product mix. Sales of mutual funds, excluding sales of money market accounts, have aggregated $2.39 billion since June 30, 1999. Mutual fund sales totaled $727.2 million in the second quarter of 2000, compared to $354.3 million in the second quarter of 1999. For the six months, mutual fund sales amounted to $1.56 billion in 2000, compared with $650.0 million in 1999. The increases in sales in 2000 principally resulted 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 $562.6 million in the second quarter of 2000, $195.6 million in the second quarter of 1999, $1.19 billion 17 in the six months of 2000 and $938.5 million in the six months of 1999. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $185.7 million in the second quarter of 2000, $142.7 million in the second quarter of 1999, $405.8 million in the six months of 2000 and $283.5 million in the six months of 1999, which, annualized, represent 13.5%, 17.9%, 15.3% and 18.4%, 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 consist of mortality charges, up-front fees earned on premiums received and administrative fees, net of the excess mortality expense on these contracts. The Company does not actively market universal life insurance contracts. Universal life insurance fees amounted to $2.0 million and $11.6 million in the second quarters of 2000 and 1999, respectively. For the six months, universal life insurance fees totaled $6.7 million in 2000 and $20.8 million in 1999. Such fees annualized represent 0.41%, 1.99%, 0.70% and 1.78% of average reserves for universal life insurance contracts in the respective periods. The decreases in fees in 2000 result principally from the ceding to an affiliate on July 1, 1999 of approximately 12.2% of the universal life reserves received in the Acquisition and from a decrease in the cost of insurance charges as of June 30, 1999. SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $5.7 million in the second quarter of 2000 and $4.3 million in the second quarter of 1999. For the six months, such surrender charges totaled $10.8 million in 2000 and $8.7 million in 1999. 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 $532.3 million in 2000, compared with $454.6 million in 1999. For the six months, withdrawal payments totaled $1.19 billion in 2000 and $872.7 million in 1999. Annualized, these payments, when expressed as a percentage of average fixed and variable annuity and universal life reserves, represent 8.4%, 7.9%, 9.4% and 7.8% for the second quarters of 2000 and 1999 and six months of 2000 and 1999, respectively. Withdrawals include variable annuity withdrawals from the separate accounts totaling $408.9 million (7.8% of average variable annuity reserves), $305.0 million (7.8% of average variable annuity reserves), $903.9 million (8.8% of average variable annuity reserves) and $604.0. million (8.1% of average variable annuity reserves) in the second quarters of 2000 and 1999 and the six months of 2000 and 1999, respectively. Management anticipates that withdrawal rates will gradually increase for the foreseeable future. GENERAL AND ADMINISTRATIVE EXPENSES totaled $43.0 million in the second quarter of 2000 and $41.5 million in the second quarter of 1999. For the six months, general and administrative expenses totaled $84.2 million in 2000 and $78.0 million in 1999. The increases in 2000 over 1999 principally reflect expenses related to servicing the Company's growing blocks of variable annuity policies and mutual funds. 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. 18 AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $36.4 million in the second quarter of 2000, compared with $28.3 million in the second quarter of 1999. For the six months, such amortization totaled $74.3 million in 2000 and $55.9 million in 1999. The increases in amortization during 2000 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 $11.4 million in the second quarter of 2000, compared with $9.1 million in the second quarter of 1999. For the six months, annual commissions amounted to $26.8 million in 2000 and $18.2 million in 1999. The increases in annual commissions in 2000 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 approximately 58% of the average balances of its variable annuity products is currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods. INCOME TAX EXPENSE totaled $30.6 million in the second quarter of 2000, $25.9 million in the second quarter of 1999, $59.9 million in the six months of 2000 and $46.9 million in the six months of 1999. Such amounts represent effective annualized tax rates of 37%, 36%, 36% and 36%, respectively. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased to $948.7 million at June 30, 2000 from $935.1 million at December 31, 1999, due to $106.0 million of net income recorded in 2000, partially offset by a dividend of $69.0 million paid to the Parent and a $23.4 million increase in accumulated other comprehensive loss. INVESTED ASSETS at June 30, 2000 totaled $5.28 billion, compared with $5.55 billion at December 31, 1999. 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 73% of the Company's total investment portfolio at June 30, 2000, had an amortized cost that was $240.4 million greater than its aggregate fair value at June 30, 2000 and $202.6 million greater than its aggregate fair value at December 31, 1999. The net unrealized losses on the Bond Portfolio in 2000 principally reflect the recent increase in prevailing interest rates and the corresponding effect on 19 the fair value of the Bond Portfolio at June 30, 2000. At June 30, 2000, the Bond Portfolio (excluding $1.4 million of redeemable preferred stocks) included $3.79 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 $32.6 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At June 30, 2000, approximately $3.50 billion of the Bond Portfolio was investment grade, including $1.53 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At June 30, 2000, the Bond Portfolio included $329.6 million of bonds that were not investment grade. These non-investment-grade bonds accounted for 1.2% of the Company's total assets and 6.2% 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 June 30, 2000. The table on the following page summarizes the Company's rated bonds by rating classification as of June 30, 2000. 20
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-} . . . $2,778,444 $2,628,227 1 $ 255,315 $ 253,789 $3,033,759 $2,882,016 54.62% BBB+ to BBB- (Baal to Baa3) [BBB+ to BBB-] {BBB+ to BBB-}. . 508,926 477,901 2 140,264 135,696 649,190 613,597 11.63 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-} 68,831 61,000 3 --- --- 68,831 61,000 1.16 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-}. . . . 236,961 210,450 4 40,155 37,944 277,116 248,394 4.71 CCC+ to C (Caa to C) [CCC] {CCC+ to C-}. . . 25,433 10,693 5 10,732 9,310 36,165 20,003 0.38 CI to D [DD] {D} --- --- 6 481 171 481 171 0.00 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL RATED ISSUES. $3,618,595 $3,388,271 $ 446,947 $ 436,910 $4,065,542 $3,825,181 ========== ========== ========== ========== ========== ========== Footnotes appear on the following page.
21 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 $32.6 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. 22 Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $334.4 million at June 30, 2000. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At June 30, 2000, Secured Loans consisted of $71.1 million of publicly traded securities and $263.3 million of privately traded securities. These Secured Loans are composed of loans to 55 borrowers spanning 15 industries, with 17% of these assets concentrated in utilities and 7% concentrated in financial institutions. No other industry concentration constituted more than 5% of these assets. While the trading market for the Company's privately traded Secured Loans is more limited than for publicly traded issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory rating guidelines established by the NAIC. MORTGAGE LOANS aggregated $674.4 million at June 30, 2000 and consisted of 125 commercial first mortgage loans with an average loan balance of approximately $5.4 million, collateralized by properties located in 29 states. Approximately 36% of this portfolio was office, 17% was multifamily residential, 11% was manufactured housing, 10% was hotels, 9% was industrial, 5% was retail and 12% was other types. At June 30, 2000, approximately 38% and 10% 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 June 30, 2000, there were 14 mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 41% of this portfolio. At June 30, 2000, approximately 30% of the mortgage loan portfolio consisted of loans with balloon payments due before July 1, 2003. During 2000 and 1999, 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 June 30, 2000, 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 seasoned nature of the Company's mortgage loan portfolio and its strict underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields. 23 PARTNERSHIP INVESTMENTS totaled $3.2 million at June 30, 2000, constituting investments in 5 separate partnerships with an average size of approximately $0.6 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 approximately 7 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 $116.3 million at June 30, 2000, compared to $144.2 million at December 31, 1999, which consists of seed money for mutual funds used as investment vehicles for the Company's variable annuity separate accounts and for SunAmerica Asset Management's mutual funds. OTHER INVESTED ASSETS aggregated $19.2 million at June 30, 2000, compared with $31.6 million at December 31, 1999, and consist of collateralized bond obligations and other investments. 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 45% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at June 30, 2000. 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 June 30, 2000, these assets had an aggregate fair value of $5.19 billion with a duration of 3.1. The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes. At June 30, 2000, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by 24 related market rates of interest) of $4.77 billion with a duration of 4.1. The Company's potential exposure due to a relative 10% decrease in prevailing interest rates from their June 30, 2000 levels is a loss of approximately $21.0 million, representing the 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. 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 June 30, 2000, 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 25 agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody's. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable-rate liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. As part of its decision to purchase an MBS, the Company assesses the risk of prepayment by analyzing the security's projected performance over an array of interest-rate scenarios. Once an MBS is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $2.8 million ($0.6 million of mortgage loans and $2.2 million of bonds) at June 30, 2000, and constituted less than 0.1% of total invested assets. At December 31, 1999, defaulted investments totaled $0.9 million ($0.7 million of mortgage loans and $0.2 million of bonds), 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, 26 Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At June 30, 2000, approximately $2.97 billion of the Company's Bond Portfolio had an aggregate unrealized loss of $256.9 million, while approximately $853.8 million of the Bond Portfolio had an aggregate unrealized gain of $16.5 million. In addition, the Company's investment portfolio currently provides approximately $53.5 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company's annuity and GIC products have been more than sufficient in amount to satisfy the Company's liquidity needs. Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company's average cost of funds would increase over time as it prices its new and renewing annuities and GICs to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market. In a declining rate environment, the Company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities and GICs. Should increased liquidity be required for withdrawals, the Company believes that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market. 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 27 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 June 30, 2000. 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 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 also 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. 28 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 Discussion and Analysis of Financial Condition and Results of Operations on pages 24 to 26 herein. 29 ANCHOR NATIONAL LIFE INSURANCE COMPANY OTHER INFORMATION Item 1. Legal Proceedings ------------------ Not applicable. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------------- Not applicable. Item 3. Defaults Upon Senior Securities ---------------------------------- Not applicable. Item 4. Submissions of Matters to a Vote of Security Holders ------------------------------------------------------------ Not applicable. Item 5. Other Information ------------------ Not applicable. Item 6. Exhibits and Reports on Form 8-K ------------------------------------- EXHIBITS Exhibit No. Description ----- ----------- 27 Financial Data Schedule. REPORTS ON FORM 8-K There were no Current Reports on Form 8-K filed during the three months ended June 30, 2000. 30 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANCHOR NATIONAL LIFE INSURANCE COMPANY ------------------------------------------ Registrant Date: August 15, 2000 /s/ N. SCOTT GILLIS ------------------------ ---------------------- N. Scott Gillis Senior Vice President (Principal Financial Officer) Date: August 15, 2000 /s/ MAURICE S. HEBERT ------------------------ ------------------------ Maurice S. Hebert Vice President and Controller (Principal Accounting Officer) 31 ANCHOR NATIONAL LIFE INSURANCE COMPANY LIST OF EXHIBITS FILED Exhibit No. Description ----- ----------- 27 Financial Data Schedule 32