-----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, FRSAUrDT1A/GZjYOz20jsGnp4A6hvvwKPeSSbTfYy1rAjUhIBq/w3M/G1vbXX1Ez 8KYyAF2e+LaAX37DfsePIw== 0000006342-95-000026.txt : 19951214 0000006342-95-000026.hdr.sgml : 19951214 ACCESSION NUMBER: 0000006342-95-000026 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951213 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR NATIONAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000006342 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860198983 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-47472 FILM NUMBER: 95601147 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: C/O THOMAS B PHILLIPS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3107726056 MAIL ADDRESS: STREET 1: 1 SUN AMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: ANCHOR LIFE INSURANCE CO DATE OF NAME CHANGE: 19600201 10-K405 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 [Fee Required] For the fiscal year ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission File Number 33-47472 --------- ANCHOR NATIONAL LIFE INSURANCE COMPANY Incorporated in California 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 REGISTRANT'S COMMON STOCK ON DECEMBER 12, 1995 WAS AS FOLLOWS: Common Stock (par value $1,000.00 per share) 3,511 shares PART I ITEM 1. BUSINESS GENERAL DESCRIPTION Anchor National Life Insurance Company (the "Company"), a wholly owned indirect subsidiary of SunAmerica Inc. (the "Parent"), is a stock life insurance company organized under the laws of California. At September 30, 1995, the Company held $9.91 billion of assets, consisting of $7.78 billion of assets owned by the Company and $2.13 billion of assets managed in mutual funds and private accounts by its asset management subsidiary. The Company maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The Company has no employees and employees of the Parent or its other subsidiaries perform various services for the Company. The Parent has approximately 1,300 employees, approximately 750 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 ages 45 to 64 will grow from 47 million to 61 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1984 and 1994, annual industry sales of annuities, including sales of guaranteed investment contracts ("GICs"), increased from $43 billion to $154 billion. During the same period, annual industry sales of mutual funds, excluding money market and other short- term funds, rose from $46 billion to $474 billion. Focusing its operations on this expanding market, the Company specializes in the sale of tax-deferred long-term savings products and investments through its life insurance operations and its asset management and broker-dealer subsidiaries. The Company markets fee-generating variable annuities, GICs and mutual funds. Its annuity products are distributed through a broad spectrum of financial services distribution channels, including independent registered representatives of the Company's broker-dealer subsidiary and affiliated and unaffiliated broker-dealers, banks and financial institutions. As consumer demand for investment-oriented products has grown, the Company has broadened the array of fee income producing products and services it offers and has in recent years significantly increased its fee income. Over the last several years, the Company has enhanced its marketing of variable annuities and mutual funds. Fee income has also expanded through the receipt of broker-dealer net retained commissions. The Company's fee-generating businesses entail no portfolio credit risk and require significantly less capital support. 1 For the year ended September 30, 1995, the Company's net investment income (including net realized investment losses) and fee income by primary product line or service are as follows: NET INVESTMENT AND FEE INCOME Amount Percent Primary product or service --------- -------- -------------------------- (In thousands) Net investment income (including net realized investment losses) $ 45,720 25.4% Fixed-rate products Fee income: --------- ----- Variable annuity fees 84,171 46.7 Variable annuities Asset management fees 26,935 15.0 Mutual funds/private management accounts Net retained commissions 23,267 12.9 Broker-dealer sales --------- ----- Total fee income 134,373 74.6 --------- ----- Total $ 180,093 100.0% ========= ===== For financial information on the Company's business segments, see Part IV - "Notes to Consolidated Financial Statements - Note 9 - Business Segments." LIFE INSURANCE OPERATIONS Founded in 1965 and licensed in 49 states and the District of Columbia, the Company specializes in the sale of flexible premium variable annuities and GICs. It has a "AA-" (Excellent) claims-paying ability rating from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff & Phelps, Inc. ("Duff & Phelps") and an "A2" (Excellent) rating from Moody's Investors Service ("Moody's"). It also has an "A+" (Superior) rating from industry analyst A.M. Best Company. The Company ranks among the largest issuers of variable annuities in the nation, according to the latest published industry data. Benefitting from continued strong demographic growth of the pre- 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 exclusively on the sale of annuities and GICs. Because of its focus on annuity products, which generally have more contractholder transactions than traditional life insurance products, the Company utilizes computer-driven systems that employ optical disk imaging and artificial intelligence, in lieu of paper-intensive life insurance processing procedures. The Company believes its service support and associated cost structure to be among the most competitive in the industry. The Company markets its variable annuities through the following distribution channels: (i) independent registered representatives of SunAmerica Securities, Inc., an indirect wholly owned subsidiary of the Parent, and Royal 2 Alliance Associates, Inc. ("Royal Alliance"), an indirect wholly owned subsidiary of the Company; (ii) approximately 400 other securities firms; and (iii) over 100 banks and other financial institutions. Approximately 21,000 independent sales representatives nationally are licensed to sell the Company's variable annuity products. The Company markets its GICs principally through direct marketing to banks, municipalities, asset management firms and direct plan sponsors or through intermediaries, such as managers or consultants servicing these groups. FIXED ANNUITIES AND GICs The Company services a number of fixed-rate products, including fixed- rate annuities issued in prior years and fixed-rate account options of its variable annuity contracts. Although the Company's contracts remain in force an average of seven to ten years, a majority (approximately 83% at September 30, 1995) reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, annuity surrender assumptions and competitive industry pricing. During 1995 the Company began issuing GICs, an institutional product, which currently guarantees the payment of principal and interest at variable rates for a term of one year. At September 30, 1995, the Company had $275 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1995, approximately 75% was sold to asset management firms, including bank trust departments, and 25% was sold to banks. The average new GIC contract sold by the Company amounted to $34.4 million in 1995. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its annuity and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed maturities. The Company's fixed-rate products incorporate surrender charges or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 54% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1995. 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 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 and surrender charges similar to those offered by fixed annuities, but differ in that the annuity holder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation funds selected by the contractholder. Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less 3 capital support than fixed annuities. The average new variable annuity contract sold by the Company amounted to approximately $40,000 in 1995. INVESTMENT OPERATIONS The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed maturities 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 maturities are priced over the yield curve and general competitive conditions within the industry. The Company manages most of its invested assets internally. Its portfolio strategy is designed 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-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. For the years ended September 30, 1995, 1994 and 1993, the Company's yield on average invested assets was 7.62%, 8.20% and 8.05%, respectively, before net realized investment losses, and it realized net investment spreads of 2.95%, 3.78% and 2.86%, respectively, on average invested assets. At September 30, 1995, the weighted average life of the Company's investments was approximately four years and the duration was approximately three and one- fourth years. Weighted average life is defined as the average time to receipt of all principal, incorporating the effects of scheduled amortization and expected prepayments, weighted by book value. Duration is a common measure for the price sensitivity of a fixed-income security or portfolio to changes in interest rates. It is the weighted average time to receipt of all expected cash flows, both principal and interest, including the effects of scheduled amortization and expected prepayments, in which the weight attached to each year of receipt is the proportion of the present value of cash to be received during that year to the total present value of the portfolio. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. The Company carries the portion of its portfolio of bonds, notes and redeemable preferred stocks that is available for sale (the "Available for Sale Portfolio") at estimated fair value. The remaining portion of its portfolio of bonds, notes and redeemable preferred stocks is held for investment and is carried at amortized cost. 4 The following table summarizes the Company's investment portfolio at September 30, 1995: SUMMARY OF INVESTMENTS Amortized Percent of cost portfolio --------------- ---------- (In thousands) Fixed maturities: Cash and short-term investments $ 249,209,000 11.7 % U.S. Government securities 74,080,000 3.5 Mortgage-backed securities 1,153,023,000 54.2 Other bonds, notes and redeemable preferred stocks 430,860,000 20.3 Mortgage loans 94,260,000 4.4 --------------- ---------- Total 2,001,432,000 94.1 Real estate 55,798,000 2.6 Equity securities 6,576,000 0.3 Other invested assets 64,430,000 3.0 --------------- ---------- Total investments $ 2,128,236,000 100.0 % =============== ========== At September 30, 1995, approximately $1.65 billion or 99.8% (at amortized cost) of bonds, notes and redeemable preferred stocks, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), was rated by S&P, Moody's or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1995, approximately $1.51 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $1.21 billion of U.S. government/agency securities and MBSs. At September 30, 1995, the Bond Portfolio included $148.4 million (fair value, $143.8 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their September 30, 1995 amortized cost, these non- investment-grade bonds accounted for 1.90% of the Company's total assets and 6.97% of its invested assets. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $126.8 million at September 30, 1995. Secured Loans are senior to subordinated debt and equity, and virtually all are secured by assets of the issuer. At September 30, 1995, Secured Loans consisted of loans to 20 borrowers spanning 9 industries, with 37% of these assets (at amortized cost) concentrated in the leisure industry and with no other industry concentration constituting more than 12% of these assets. Mortgage loans aggregated $94.3 million at September 30, 1995 and consisted of 14 first mortgage loans with an average loan balance of approximately $6.7 million, collateralized by properties located in 8 states. Approximately 24% of the portfolio was office, 22% was hotel, 19% was retail, 18% was multifamily residential and 17% was other types. At September 30, 1995, there were no loans delinquent by more than 90 days. 5 Real estate aggregated $55.8 million at September 30, 1995 and consisted of non-income producing land in the Phoenix, Arizona metropolitan area. At September 30, 1995, the amortized cost of all investments in default as to the payment of principal or interest totaled $5.0 million (fair value, $3.5 million), constituting 0.2% of total invested assets at amortized cost. For more information concerning the Company's investments, including the risks inherent in such investments, see Item 7, "Management 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"), an indirect wholly owned subsidiary of the Company, and its related mutual fund 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. These mutual funds offer investors an array of equity, fixed- income, money market and tax-exempt portfolios. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $2.29 billion of assets at September 30, 1995, including mutual fund assets; assets of investment companies, individuals, corporations, trusts and pension and profit sharing plans; and certain of the Company's and affiliated variable annuity assets. These mutual funds are distributed nationally through a network of approximately 350 financial institutions and affiliated and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiary. BROKER-DEALER The Company owns a broker-dealer, Royal Alliance, acquired in January 1990. As a result of the Company's ongoing active recruitment of independent registered representatives, the Company has increased its network of representatives from approximately 2,600 at September 30, 1994 to approximately 3,200 at September 30, 1995. The Company believes that, through its ownership of Royal Alliance and the marketing arrangements with an affiliated broker- dealer, SunAmerica Securities, Inc., it has the largest network of independent registered representatives in the nation, based on industry data. REGULATION The Company is subject to regulation and supervision by the states in which it is authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, licensing agents, approving policy forms, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy 6 of statutory capital and surplus, regulating the type and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval and other related matters. During the last decade, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the NAIC. Various states have considered or enacted legislation that changes, and in many cases increases, the states' authority to regulate insurance companies. Legislation has been introduced from time to time in Congress that could result in the federal government assuming some role in the regulation of insurance companies. In recent years, the NAIC has approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. These initiatives include new investment reserve requirements, risk-based capital standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws to govern insurance company investments. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. SunAmerica Asset Management is registered with the Securities and Exchange Commission (the "Commission") as a registered 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 and the mutual funds are subject to regulation and examination by the Commission. In addition, variable annuities and the related separate accounts of the Company are subject to regulation by the Commission under the Securities Act of 1933 and the Investment Company Act of 1940. The Company's broker-dealer subsidiary is subject to regulation and supervision by the states in which it transacts business, as well as by the National Association of Securities Dealers, Inc. (the "NASD"). The NASD has broad administrative and supervisory powers relative to all aspects of business and may examine the subsidiary's business and accounts at any time. COMPETITION The businesses conducted by the Company are highly competitive. The Company's life insurance operations compete with other life insurers, and also compete for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, there are approximately 125 companies that individually collect in excess of $150 million of annuity premiums annually. Certain of these companies and other life insurers with which the Company competes are significantly larger and have available to them much greater financial and other resources. The Company believes the primary competitive factors among life insurance companies for the investment-oriented insurance products, such as annuities and GICs, include product flexibility, product pricing, 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 7 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. Competition in mutual fund sales is based on investment performance, service to clients and product design. 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 principal office is in leased premises at 1 SunAmerica Center, Los Angeles, California. The Company, through an affiliate, also leases office space in Torrance, California which is utilized for certain recordkeeping and data processing functions. 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. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the fourth quarter 1995 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. 8 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of Anchor National Life Insurance Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein.
Years ended September 30, ---------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In thousands) RESULTS OF OPERATIONS Net investment income $ 50,083 $ 58,996 $ 48,912 $ 36,499 $ 31,882 Net realized investment losses (4,363) (33,713) (22,247) (22,749) (12,744) Fee income 134,373 129,583 116,443 95,482 74,735 General and administrative expenses (61,629) (52,636) (55,142) (55,615) (58,364) Provision for future guaranty fund assessments --- --- (4,800) --- --- Amortization of deferred acquisition costs (57,005) (43,992) (30,825) (18,224) (19,010) Other income and expenses, net 3,538 9,082 11,171 10,741 14,473 -------- -------- -------- -------- -------- Pretax income 64,997 67,320 63,512 46,134 30,972 Income tax expense (25,739) (22,705) (21,794) (15,361) (11,847) -------- -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 39,258 44,615 41,718 30,773 19,125 Net income of subsidiaries sold to affiliates --- --- --- 1,312 7,000 -------- -------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 39,258 44,615 41,718 32,085 26,125 Cumulative effect of change in accounting for income taxes --- (20,463) --- --- --- -------- -------- -------- -------- -------- NET INCOME $ 39,258 $ 24,152 $ 41,718 $ 32,085 $ 26,125 ======== ======== ======== ======== ========
9 ITEM. 6 SELECTED CONSOLIDATED FINANCIAL DATA (continued)
At September 30, --------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments $ 2,114,908 $ 1,632,072 $ 2,093,100 $ 2,126,899 $ 1,917,719 Variable annuity assets 5,230,246 4,486,703 4,170,275 3,284,507 2,746,685 Deferred acquisition costs 383,069 416,289 336,677 288,264 226,192 Other assets 55,474 67,062 71,337 91,588 162,855 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS $ 7,783,697 $ 6,602,126 $ 6,671,389 $ 5,791,258 $ 5,053,451 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts $ 1,497,052 $ 1,437,488 $ 1,562,136 $ 1,735,565 $ 1,957,116 Variable annuity liabilities 5,230,246 4,486,703 4,170,275 3,284,507 2,746,685 Other reserves, payables and accrued liabilities 506,880 195,846 495,740 398,045 105,694 Subordinated notes payable to Parent 34,000 34,000 34,000 15,500 --- Deferred income taxes 73,459 64,567 38,145 35,163 16,536 Shareholder's equity 442,060 383,522 371,093 322,478 227,420 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,783,697 $ 6,602,126 $ 6,671,389 $ 5,791,258 $ 5,053,451 =========== =========== =========== =========== ===========
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of financial condition and results of operations of Anchor National Life Insurance Company (the "Company") for the three years in the period ended September 30, 1995. RESULTS OF OPERATIONS INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $39.3 million in 1995, compared with $44.6 million in 1994 and $41.7 million in 1993. The cumulative effect of the change in accounting for income taxes resulting from the 1994 implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of $20.5 million. Accordingly, net income amounted to $24.1 million in 1994. PRETAX INCOME totaled $65.0 million in 1995, $67.3 million in 1994, and $63.5 million in 1993. The $2.3 million decline in 1995 primarily resulted from additional amortization of deferred acquisition costs, increased general and administrative expenses and decreased net investment income, partially offset by decreased net realized investment losses. The $3.8 million improvement in 1994 over 1993 primarily resulted from increased net investment income and fee income, partially offset by increased net realized investment losses and additional amortization of deferred acquisition costs. In addition, 1993 results include a $4.8 million provision for future guaranty fund assessments. 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 $50.1 million in 1995, $59.0 million in 1994 and $48.9 million in 1993. These amounts represent net investment spreads of 2.95% on average invested assets (computed on a daily basis) of $1.70 billion in 1995, 3.78% on average invested assets of $1.56 billion in 1994 and 2.86% on average invested assets of $1.71 billion in 1993. Net investment spreads include the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.62% in 1995, 3.64% in 1994 and 2.76% in 1993. Investment income totaled $129.5 million in 1995, $127.8 million in 1994 and $137.6 million in 1993. Investment income increased modestly in 1995 as a result of a higher level of average invested assets, substantially offset by a decline in investment yield. The decline in investment income in 1994 over 1993 primarily resulted from a lower level of average invested assets. The yield on average invested assets declined to 7.62% in 1995 from 8.20% in 1994 and 8.05% in 1993. Over the last three fiscal years, the Company's quarterly investment yields on average invested assets have ranged from 7.17% to 8.79%; however, there can be no assurance that the Company will achieve similar yields in future periods. The decline in investment yield in 1995 is primarily due to lower contributions from the Company's investments in partnerships and a significant decline from the $3.7 million of investment yield enhancement recorded in 1994 through the Company's use of dollar roll transactions ("Dollar Rolls"). 11 Although the Company continues to use Dollar Rolls, their use did not have a significant impact on investment income in 1995. (See "Asset-Liability Matching" for additional discussion of Dollar Rolls). Income from investments in partnerships totaled $5.1 million in 1995, $9.5 million in 1994 and $12.1 million in 1993. This partnership income represents a yield of 10.60% on related average assets of $48.4 million in 1995, compared with 23.78% on related average assets of $39.9 million in 1994 and 42.94% on related average assets of $28.1 million in 1993. The modest improvement in investment yield in 1994 primarily resulted from a decrease in the average level of lower- yielding short-term investments. Total interest expense aggregated $79.4 million in 1995, $68.8 million in 1994 and $88.7 million in 1993. The average rate paid on all interest- bearing liabilities was 5.00% in 1995, compared with 4.56% in 1994 and 5.29% in 1993. Interest-bearing liabilities averaged $1.58 billion during 1995, compared with $1.51 billion during 1994 and $1.68 billion during 1993. The increase in the average rate paid on all interest-bearing liabilities during 1995 primarily resulted from increased average crediting rates on the Company's fixed annuity contracts. Average fixed annuity crediting rates were 4.90% in 1995, 4.50% in 1994 and 5.28% in 1993. During 1995, the Company increased its average crediting rates on fixed annuity contracts relative to those issued in 1994 to maintain a generally competitive market rate in a rising interest rate environment. This increase was reflected in a corresponding increase in the average crediting rate on fixed annuity contracts, the majority of which reprice annually as interest rate guarantees are renewed. The declines in average crediting rates in 1994 were primarily due to the decline in prevailing interest rates that began during the latter half of the 1992 fiscal year and continued into the first half of fiscal 1994. NET REALIZED INVESTMENT LOSSES totaled $4.4 million in 1995, $33.7 million in 1994 and $22.2 million in 1993, and represent 0.26%, 2.16% and 1.30%, respectively, of average invested assets. Net realized investment losses include impairment writedowns of $4.8 million in 1995, $14.2 million in 1994 and $37.7 million in 1993. Therefore, net gains from sales of investments totaled $0.4 million in 1995, compared with net losses of $19.5 million in 1994 and net gains of $15.5 million in 1993. Net losses in 1995 include $4.0 million of net losses realized on $1.11 billion of sales of bonds. These bond sales include $343.8 million of sales of U.S. Treasury securities, $343.1 million of sales of certain collateralized mortgage obligations ("CMOs") and asset-backed securities, $314.1 million of sales of mortgaged-backed securities ("MBS") and $85.2 million of sales of high yield investments, all of which were primarily made to maximize total return. Net losses in 1994 include $17.3 million of net losses realized on $673.6 million of sales of bonds. Bond sales include approximately $289.3 million of sales of MBSs made primarily to acquire other MBSs that were then used in Dollar Rolls. In addition, bond sales include $118.3 million of sales of high- yield investments and $158.9 million of sales of CMOs and asset-backed securities, that were made to maximize total return. Net gains in 1993 include $17.0 million of gains realized on $1.09 billion of sales of bonds. These bond sales include approximately $735.5 million of sales of MBSs made primarily to acquire other MBSs that were then 12 used in Dollar Rolls and $155.1 million of sales of high-yield investments, that were made primarily to maximize total return. Impairment writedowns in 1995 include $2.0 million of additional provisions applied to defaulted bonds and $1.8 million of additional provisions applied to certain interest-only strips ("IOs"). IOs, a type of MBS used as an asset-liability matching tool to hedge against rising interest rates, are investment grade securities that give the holder the right to receive only the interest payments on a pool of underlying mortgage loans. At September 30, 1995, the amortized cost of the IOs held by the Company was $5.7 million and their fair value was $7.2 million. Impairment writedowns in 1994 of $14.2 million reflect additional provisions applied to bonds, primarily made in response to the adverse impact of declining interest rates on certain MBSs. Impairment writedowns in 1993 include $5.6 million of provisions applied to mortgage loans that were reduced to the aggregate appraised value of the underlying real estate. Impairment writedowns in 1993 also include $30.3 million of additional provisions applied to bonds. These bond writedowns include $28.3 million applied to certain IOs. As would be anticipated in a lower interest rate environment, the amortized cost of these IOs became impaired as a result of increased prepayments of the underlying loans. VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $84.2 million in 1995, $79.1 million in 1994 and $67.2 million in 1993. Variable annuity fees have increased over the three years principally due to asset growth from the receipt of variable annuity premiums and, during 1995, from increased market values. Variable annuity assets averaged $4.65 billion during 1995, $4.40 billion during 1994 and $3.64 billion during 1993. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $577.2 million in 1995, $769.6 million in 1994 and $782.5 million in 1993. These declines in premiums can be attributed, in part, to a heightened demand for fixed-rate investment options, including the fixed accounts of variable annuities. The Company has encountered increased competition in the variable annuity marketplace during 1995 and 1994 and anticipates that the market will remain highly competitive for the foreseeable future. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds and private accounts by SunAmerica Asset Management Corp. Such fees totaled $26.9 million on average assets managed of $2.07 billion in 1995, $31.3 million on average assets managed of $2.39 billion in 1994 and $32.3 million on average assets managed of $2.46 billion in 1993. Asset management fees decreased over the three years principally due to declines in assets managed, primarily resulting from excesses of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market and other short-term accounts, amounted to $426.5 million in 1995, compared with $561.0 million in 1994 and $391.0 million in 1993. Sales of mutual funds, excluding sales of money market and other short-term accounts, amounted to $140.2 million in 1995, compared with $342.6 million in 1994 and $532.4 million in 1993. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer 13 subsidiary, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $23.3 million in 1995, $19.2 million in 1994 and $16.9 million in 1993. Broker- dealer sales (mainly mutual funds, general securities and annuities) totaled $5.67 billion in 1995, $5.21 billion in 1994 and $4.91 billion in 1993. Net retained commissions are not proportionate to sales primarily due to differences in sales mix. SURRENDER CHARGES on fixed and variable annuities totaled $5.9 million in 1995, compared with $5.0 million in 1994 and $5.3 million in 1993. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first five to seven years of the contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $908.9 million in 1995, $723.9 million in 1994 and $557.3 million in 1993. These payments represent 15.0%, 12.5% and 10.7%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the separate accounts totaling $646.4 million in 1995, $459.1 million in 1994 and $314.2 million in 1993. Variable annuity surrenders have increased over the three years primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace, while fixed annuity surrenders have remained relatively stable. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future and the Company's investment portfolio has been structured to provide sufficient liquidity for anticipated withdrawals. GENERAL AND ADMINISTRATIVE EXPENSES totaled $61.6 million in 1995, compared with $52.6 million in 1994 and $55.1 million in 1993. General and administrative expenses in 1995 include expenses related to a national advertising campaign. General and administrative expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets. PROVISION FOR FUTURE GUARANTY FUND ASSESSMENTS totaled $4.8 million in 1993. No such provision was recorded in 1995 or in 1994. Guaranty associations of the states in which the Company sells annuities assess insurance companies to pay policyholder claims relating to insurer insolvencies. This provision represents management's best estimate, based upon available industry data, of the Company's ultimate exposure to future assessments anticipated as a result of certain large insurance company failures that occurred prior to fiscal 1995. AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $57.0 million in 1995, $44.0 million in 1994 and $30.8 million in 1993. Such amortization has increased during the three-year period primarily due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other acquisition costs. Amortization also has been impacted by the substantial reduction in net realized capital losses during 1995. INCOME TAX EXPENSE totaled $25.7 million in 1995, $22.7 million in 1994 and $21.8 million in 1993, representing effective tax rates of 40% in 1995 and 34% in 1994 and 1993. The increase in the effective tax rate in 1995 is due to a prior year tax settlement. Without such payment, the effective tax rate would have been 33%. 14 FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased by $58.6 million to $442.1 million at September 30, 1995 from $383.5 million at September 30, 1994, primarily as a result of the $39.3 million of net income recorded in 1995 and a $19.3 million reduction of net unrealized losses on debt and equity securities available for sale charged directly to shareholder's equity. TOTAL ASSETS increased by $1.18 billion to $7.78 billion at September 30, 1995 from $6.60 billion at September 30, 1994, principally due to a $743.5 million increase in the separate account for variable annuities and a $482.8 million increase in invested assets. INVESTED ASSETS at year end totaled $2.11 billion in 1995, compared with $1.63 billion in 1994. This $482.8 million increase primarily resulted from sales of guaranteed investment contracts ("GICs") and fixed annuities and a $70.1 million decrease in net unrealized losses on debt and equity securities available for sale. The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. The Company carries the portion of its portfolio of bonds, notes and redeemable preferred stocks that is available for sale (the "Available for Sale Portfolio") at estimated fair value. The remaining portion of its portfolio of bonds, notes and redeemable preferred stocks is held for investment and is carried at amortized cost. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), at September 30, 1995, had an aggregate amortized cost that exceeded its fair value by $3.7 million (including net unrealized losses of $10.8 million on the Available for Sale Portfolio). The fair value of the Bond Portfolio was $77.8 million below its amortized cost at September 30, 1994 (including net unrealized losses of $82.2 million on the Available for Sale Portfolio). The decrease in net unrealized losses on the Bond Portfolio since September 30, 1994 principally reflects the lower relative prevailing interest rates at September 30, 1995 and their corresponding effect on the fair value of the Bond Portfolio. Approximately $1.65 billion or 99.8% of the Bond Portfolio (at amortized cost) at September 30, 1995 was rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1995, approximately $1.51 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $1.21 billion of U.S. government/agency securities and MBSs. At September 30, 1995, the Bond Portfolio included $148.4 million (fair value, $143.8 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their September 30, 1995 amortized cost, these non- investment-grade bonds accounted for 1.90% of the Company's total assets and 6.97% of invested assets. 15 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 intends that its holdings of such securities not exceed current levels, but its policies may change from time to time, including in connection with any possible acquisition. The Company had no material concentrations of non-investment-grade securities at September 30, 1995. The table on the following page summarizes the Company's rated bonds by rating classification as of September 30, 1995. 16 Summary of Rated Bonds (In thousands)
Issues not rated by S&P(Moody's) Issues Rated by S&P(Moody's) By NAIC Category Total - ---------------------------------------------- ----------------------------------- ---------------------------------- Estimated NAIC Estimated Percent of Estimated S&P (Moody's) Amortized fair category Amortized fair Amortized invested fair category(1) cost value (2) cost value cost assets(3) value - --------------- ----------- ----------- -------- ----------- ------------ ----------- --------- ----------- AAA+ to A- (Aaa to A3) $ 1,004,562 $ 1,003,214 1 $ 289,856 $ 293,037 $ 1,294,418 60.82% $ 1,296,251 BBB+ to BBB- (Baa1 to Baa3) 31,228 31,349 2 180,017 177,901 211,245 9.93 209,250 BB+ to BB- (Ba1 to Ba3) - - 3 13,711 12,859 13,711 0.64 12,859 B+ to B- (B1 to B3) 99,707 99,276 4 27,971 27,586 127,678 6.00 126,862 CCC+ to C- (Caa to C) 6,333 3,424 5 - - 6,333 0.30 3,424 D - - 6 633 633 633 0.03 633 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RATED ISSUES $ 1,141,830 $ 1,137,263 $ 512,188 $ 512,016 $ 1,654,018 $ 1,649,279 =========== =========== =========== =========== =========== =========== (1) S&P rates debt securities in eleven rating categories, 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 nine rating categories, from Aaa (the highest) to C (extremely poor prospects of attaining 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. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both 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) rating groups listed above, with categories 1 and 2 considered investment grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its implementation of NAIC rating guidelines. (3) At amortized cost.
17 SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $126.8 million at September 30, 1995. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1995, Secured Loans consisted of loans to 20 borrowers spanning 9 industries, with 37% of these assets (at amortized cost) concentrated in the leisure industry and with no other industry concentration constituting more than 12% of these assets. While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. Although, as a result of restrictive financial covenants, Secured Loans involve greater risk of technical default than do publicly traded investment grade securities, management believes that the risk of loss upon default for its Secured Loans is mitigated by their financial covenants and senior secured positions. The majority of the Company's Secured Loans are not rated by S&P or Moody's. MORTGAGE LOANS aggregated $94.3 million at September 30, 1995 and consisted of 14 first mortgage loans with an average loan balance of approximately $6.7 million, collateralized by properties located in 8 states. Approximately 24% of the portfolio was office, 22% was hotel, 19% was retail, 18% was multifamily residential and 17% was other types. At September 30, 1995, approximately 22% of the portfolio was secured by properties located in Colorado, approximately 18% by properties located in California and approximately 17% by properties in New Jersey. No more than 13% of the portfolio was secured by properties in any other single state. At September 30, 1995, there was one loan with an outstanding balance of $20 million or more, which loan aggregated approximately 22% of the portfolio. At September 30, 1995, approximately 33% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1998. At September 30, 1995, there were no loans delinquent by more than 90 days. There were no loans foreclosed upon and transferred to real estate in the balance sheet during 1995. Approximately 64% of the mortgage loans in the portfolio at September 30, 1995 were seasoned loans underwritten to the Company's standards and purchased at or near par from another financial institution which was downsizing its portfolio. 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 for the industry 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 effects of general economic conditions on these commercial properties. However, due to the seasoned nature of the Company's mortgage loans and its strict underwriting standards, the Company believes that it has reduced the risk attributable to its mortgage loan portfolio while maintaining attractive yields. At September 30, 1995, one mortgage loan having an aggregate carrying value of $8.0 million had been restructured in 1992. No mortgage loans were restructured during the 1995, 1994 or 1993 fiscal years. REAL ESTATE aggregated $55.8 million at September 30, 1995 and consisted of non-income producing land in the Phoenix, Arizona metropolitan area. The Company has undertaken to dispose of this Phoenix-area land during the next one 18 to two years, either to affiliated or nonaffiliated parties; and SunAmerica Inc., the ultimate parent, has guaranteed that the Company will receive its statutory carrying value of these assets. OTHER INVESTED ASSETS aggregated $64.4 million at September 30, 1995, including $48.2 million of investments in limited partnerships and an aggregate of $16.2 million of miscellaneous investments, including policy loans, CMO residuals and leveraged leases. The Company's limited partnership interests primarily include partnerships, accounted for by using the cost method of accounting, that invest mainly in equity securities. ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed maturities 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 maturities are priced over the yield curve and general competitive conditions within the industry. Its portfolio strategy is designed to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its annuity and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed maturities. The Company's fixed-rate products incorporate surrender charges or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 54% of the Company's fixed annuity reserves had surrender penalties or other restrictions at September 30, 1995. During 1995 the Company began issuing GICs which currently guarantee the payment of principal and interest at variable rates for a term of one year. The Company's GICs purchased by asset management firms permit withdrawals with notice of 90 days. Contracts purchased by bank or state and local governmental authorities may permit scheduled book value withdrawals subject to terms of the underlying indenture or agreement. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity. The Company expects to increase its participation in the GIC marketplace over the coming year. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. At September 30, 1995 the weighted average life of the Company's investments was approximately four years and the duration was approximately three and one-fourth years. The Company also seeks to provide liquidity by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs. It also seeks to enhance its spread by using Reverse Repos and Dollar Rolls. Reverse 19 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. Dollar Rolls are similar to Reverse Repos except that the repurchase involves securities that are only substantially the same as the securities sold and the arrangement is not collateralized, nor is it governed by a repurchase agreement. 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 enhance its spread income and match its assets and liabilities. The primary risk associated with Dollar Rolls and Reverse Repos is the risk associated with counterparty nonperformance. The Company believes, however, that the counterparties to its Dollar Rolls and Reverse Repos are financially responsible and that the counterparty risk associated with those transactions is minimal. Counterparty risk associated with Dollar Rolls is further mitigated by the Company's participation in an MBS trading clearinghouse. The sell and buy transactions that are submitted to this clearinghouse are marked to market on a daily basis and each participant is required to over- collateralize its net loss position by 30% with either cash, letters of credit or government securities. 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. INVESTED ASSETS EVALUATION routinely includes a review by the Company of its portfolio of debt securities. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. The carrying values of bonds that are determined to have declines in value that are other than temporary are reduced to net realizable value and no further accruals of interest are made. The valuation allowances on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments (at amortized cost) that are in default as to the payment of principal or interest, totaled $5.0 million (fair value, $3.5 million) at September 30, 1995. At September 30, 1995, defaulted investments constituted 0.2% of total invested assets at amortized cost. At September 30, 1994, defaulted investments totaled $4.4 20 million. At September 30, 1994, defaulted investments constituted 0.3% of total invested assets at amortized cost and their fair value was equal to the amortized cost. SOURCES OF LIQUIDITY are readily available to the Company in the form of existing cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1995, approximately $1.15 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $26.1 million, while approximately $510.8 million of the Bond Portfolio had an aggregate unrealized loss of $29.8 million. In addition, the Company's investment portfolio also currently provides approximately $20.5 million of monthly cash flow from scheduled principal and interest payments. 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. 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. 21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and principal officers of Anchor National Life Insurance Company (the "Company") as of December 12, 1995 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(s) Position(s) Last Five Years** From-To - ------------- --- ----------- ----------- ------------------ ------- Eli Broad* 62 Chairman, Chief 1994 Cofounded SunAmerica Executive Officer Inc. ("SAI") in 1957 and President of the Company Chairman, Chief 1986 Executive Officer and President of SAI Jay S. Wintrob* 38 Executive Vice 1991 Senior Vice President 1989-1991 President of the (Joined SAI in 1987) Company Vice Chairman of 1995 SAI James R. Belardi* 38 Senior Vice 1992 Vice President and 1989-1992 President and Treasurer (Joined SAI Treasurer of the in 1986) Company Executive Vice 1995 President of SAI Jana W. Greer* 43 Senior Vice 1994 Vice President 1981-1991 President of the (Joined SAI in 1974) Company and SAI Peter McMillan, III* 38 Executive Vice 1994 Senior Vice President, 1989-1994 President and SunAmerica Investments, Chief Investment Inc. Officer of SunAmerica Investments, Inc. - -------------------------------------- * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
22
Other Positions and Year Other Business Present Assumed Experience Within Name Age Position(s) Position(s) Last Five Years** From-To - ------------- --- ----------- ----------- ----------------- ------- Gary W. Krat* 48 Senior Vice 1992 Chairman, Royal 1991 to President of the Alliance Associates, present Company and SAI Inc. Chief Executive 1990 to Officer, Royal present Alliance Associates, Inc. President, Integrated 1986-1990 Resources Equity Corp. Scott L. Robinson* 49 Senior Vice 1991 Vice President and 1986-1991 President of the Controller (Joined Company SAI in 1978) Senior Vice President and Controller of SAI Lorin M. Fife* 42 Senior Vice 1994 Vice President and 1994-1995 President, General Counsel- General Counsel Regulatory Affairs and Assistant of SAI Secretary of Vice President and 1989-1994 the Company Associate General Senior Vice 1995 Counsel of SAI President and (Joined SAI in 1989) General Counsel- Regulatory Affairs of SAI Susan L. Harris* 38 Senior Vice 1994 Vice President, 1994-1995 President and General Counsel- Secretary of the Corporate Affairs and Company Secretary of SAI Senior Vice 1995 Vice President, 1989-1994 President, Associate General General Counsel- Counsel and Secretary Corporate Affairs of SAI (Joined SAI and Secretary of in 1985) SAI N. Scott Gillis 42 Senior Vice 1994 Vice President and 1989-1994 President and Controller, SunAmerica Controller of the Life Companies Company (Joined SAI in 1985) Edwin R. Reoliquio 38 Senior Vice 1995 Vice President and 1990-1995 President and Actuary, SunAmerica Chief Actuary Life Companies of the Company - -------------------------------------- * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
23 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 and to all executive officers of the Company as a group for services rendered in all capacities in the Company during 1995: Name of Individual or Capacities In Allocated Cash Number in Group Which Served Compensation --------------------- ------------------------- -------------- Eli Broad Chairman, Chief Executive $ 1,048,897 Officer and President Jay S. Wintrob Executive Vice President 593,495 Gary W. Krat Senior Vice President 441,926 Jana Greer Senior Vice President 257,500 James R. Belardi Senior Vice President and 218,533 Treasurer All Executive Officers as a Group (12) $ 3,417,815 =========== 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 No shares of the Company are owned by any executive officer or director. The Company is an indirect wholly-owned subsidiary of SunAmerica Inc. Except for Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any director does not exceed one percent of the class outstanding. At November 30, 1995, Mr. Broad was the beneficial owner of 2,149,694 shares of Common Stock (approximately 4.7% of the class outstanding) and 8,857,081 shares of Class B Common Stock (approximately 86.5% of the class outstanding). Of the Common Stock, 250,659 shares represent restricted shares granted under the Company's employee stock plans as to which Mr. Broad has no investment power; 506,250 shares are held by a trust formed by Mr. Broad of which he is a beneficiary; and 1,344,234 shares represent employee stock options held by Mr. Broad which are or will become exercisable on or before February 2, 1996 and as to which he has no voting or investment power. Of the Class B Stock, 843,750 shares are held by a trust formed by Mr. Broad of which he is a beneficiary; 32,568 shares are held by a foundation of which Mr. Broad is a director and as to which he has shared voting and investment power; and 2,902,500 shares are registered in the name of a corporation as to which Mr. Broad exercises voting and investment power. At December 11, 1995, all directors and officers as a group beneficially owned 3,645,981 shares of Common Stock (approximately 8% of the class outstanding) and 8,857,081 shares of Class B Common Stock (approximately 86.5% of the class outstanding). Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 24 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 - ------- ----------- 3(a) Restated Articles of Incorporation dated July 24, 1969 are incorporated herein by reference to Exhibit 3(a) to the Company's Form 10-K, filed December 21, 1993. 3(b) Certificate of Amendment of Articles of Incorporation dated December 29, 1970 is incorporated herein by reference to Exhibit 3(b) to the Company's Form 10-K, filed December 21, 1993. 3(c) Certificate of Amendment of Articles of Incorporation dated December 22, 1971 is incorporated herein by reference to Exhibit 3(c) to the Company's Form 10-K, filed December 21, 1993. 3(d) Certificate of Amendment of Articles of Incorporation dated January 16, 1975 is incorporated herein by reference to Exhibit 3(d) to the Company's Form 10-K, filed December 21, 1993. 3(e) Certificate of Amendment of Articles of Incorporation dated November 8, 1977 is incorporated herein by reference to Exhibit 3(e) to the Company's Form 10-K, filed December 21, 1993. 3(f) Certificate of Amendment of Articles of Incorporation dated July 27, 1978 is incorporated herein by reference to Exhibit 3(f) to the Company's Form 10-K, filed December 21, 1993. 3(g) Certificate of Amendment of Articles of Incorporation dated October 1, 1984 is incorporated herein by reference to Exhibit 3(g) to the Company's Form 10-K, filed December 21, 1993. 3(h) Certificate of Amendment of Articles of Incorporation dated October 11, 1984 is incorporated herein by reference to Exhibit 3(h) to the Company's Form 10-K, filed December 21, 1993. 3(i) Certificate of Ownership merging Anchor National Properties, Inc., an Arizona corporation into Anchor National Life Insurance Company dated June 30, 1985 is incorporated herein by reference to Exhibit 3(i) to the Company's Form 10-K, filed December 21, 1993. 3(j) Certificate of Amendment of Articles dated February 18, 1986 is incorporated herein by reference to Exhibit 3(j) to the Company's Form 10-K, filed December 21, 1993. 3(k) Certificate of Amendment of Articles of Incorporation dated March 1, 1994. 3(l) Bylaws, as revised on January 21, 1994. 4(a) Restated Articles of Incorporation dated July 24, 1969. See Exhibit 3(j). 4(b) Certificate of Amendment of Articles of Incorporation dated December 29, 1970. See Exhibit 3(j). 4(c) Certificate of Amendment of Articles of Incorporation dated December 22, 1971. See Exhibit 3(j). 4(d) Certificate of Amendment of Articles of Incorporation dated November 8, 1977. See Exhibit 3(j). 4(e) Certificate of Amendment of Articles of Incorporation dated October 11, 1984. See Exhibit 3(j). 4(f) Certificate of Amendment of Articles of Incorporation dated March 1, 1994. See Exhibit 3(k). 25 EXHIBITS - CONTINUED Exhibit No. Description - ------- ----------- 10(a) Subordinated Loan Agreement for Equity Capital, dated as of September 13, 1993, between the Company's subsidiary, SunAmerica Asset Management and SAI defining SAI's rights of the 7% notes due September 16, 1996 is incorporated herein by reference to Exhibit 10(a) to the Company's Form 10-K, filed December 21, 1993. 10(b) Subordinated Loan Agreement for Equity Capital, dated as of August 23, 1993, between the Company's subsidiary, Royal Alliance and SAI defining SAI's rights of the 7% notes due August 22, 1996 is incorporated herein by reference to Exhibit 10(b) to the Company's Form 10-K, filed December 21, 1993. 10(c) Subordinated Loan Agreement for Equity Capital, dated as of September 30, 1992, between the Company's subsidiary, SunAmerica Capital Services, Inc. ("SACS") and SAI defining SAI's rights of the 7% notes due September 29, 1995 is incorporated herein by reference to Exhibit 10(c) to the Company's Form 10-K, filed December 21, 1993. 10(d) Subordinated Loan Agreement for Equity Capital, dated as of June 30, 1992, between the Company's subsidiary, SACS and SAI defining SAI's rights of the 7% notes due June 29, 1995 is incorporated herein by reference to Exhibit 10(d) to the Company's Form 10-K, filed December 21, 1993. 10(e) Subordinated Loan Agreement for Equity Capital, dated as of May 29, 1992, between the Company's subsidiary, SACS and SAI defining SAI's rights of the 7% notes due May 28, 1995 is incorporated herein by reference to Exhibit 10(e) to the Company's Form 10-K, filed December 21, 1993. 10(f) Subordinated Loan Agreement for Equity Capital, dated as of March 16, 1992, between the Company's subsidiary, SACS and SAI defining SAI's rights of the 7% notes due March 15, 1995 is incorporated herein by reference to Exhibit 10(f) to the Company's Form 10-K, filed December 21, 1993. 10(g) Subordinated Loan Agreement for Equity Capital, dated as of January 14, 1992, between the Company's subsidiary, SACS and SAI defining SAI's rights of the 7% notes due January 13, 1995 is incorporated herein by reference to Exhibit 10(g) to the Company's Form 10-K, filed December 21, 1993. 10(h) Subordinated Loan Agreement Amendment extending the maturity date as of September 15, 1994, between the Company's subsidiary, SACS, and SAI, extending the maturity date of the Subordinated Loan Agreement, dated as of September 30, 1992 with a maturity date of September 29, 1995, to September 29, 1996. 10(i) Subordinated Loan Agreement for Equity Capital, dated as of December 14, 1994, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due January 13, 1998. 10(j) Subordinated Loan Agreement for Equity Capital, dated as of April 20, 1995, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due May 27, 1998. 10(k) Subordinated Loan Agreement for Equity Capital, dated as of June 30, 1995, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due June 29, 1998. 21 Subsidiaries of the Company. 27 Financial Data Schedule. 26 REPORTS ON FORM 8-K No Current Report on Form 8-K was filed during the three months ended September 30, 1995. 27 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/ SCOTT L. ROBINSON -------------------------------------- Scott L. Robinson December 12, 1995 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 December 12, 1995 - ------------------------------ Officer and President ----------------- Eli Broad (Principal Executive Officer) /s/ SCOTT L. ROBINSON Senior Vice President and December 12, 1995 - ------------------------------ Director (Principal ----------------- Scott L. Robinson Financial Officer) /s/ N. SCOTT GILLIS Senior Vice President and December 12, 1995 - ------------------------------ Controller (Principal ----------------- N. Scott Gillis Accounting Officer) /s/ JAY S. WINTROB Executive Vice President December 12, 1995 - ------------------------------ and Director ----------------- Jay S. Wintrob /s/ JAMES R. BELARDI Senior Vice President, December 12, 1995 - ------------------------------ Treasurer and Director ----------------- James R. Belardi /s/ LORIN M. FIFE Senior Vice President, December 12, 1995 - ------------------------------ General Counsel, Assistant ----------------- Lorin M. Fife Secretary and Director /s/ JANA W. GREER Senior Vice President December 12, 1995 - ------------------------------ and Director ----------------- Jana W. Greer /s/ SUSAN L. HARRIS Senior Vice President, December 12, 1995 - ------------------------------ Secretary and Director ----------------- Susan L. Harris /s/ GARY W. KRAT Senior Vice President December 12, 1995 - ------------------------------ and Director ----------------- Gary W. Krat /s/ EDWIN R. REOLIQUIO Senior Vice President December 12, 1995 - ------------------------------ and Chief Actuary ----------------- Edwin R. Reoliquio. /s/ PETER McMILLAN Director December 12, 1995 - ------------------------------ ----------------- Peter McMillan
ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX TO FINANCIAL STATEMENTS Page(s) ------- Report of Independent Accountants F-2 Consolidated Balance Sheet as of September 30, 1995 and 1994 F-3 Consolidated Income Statement for the years ended September 30, 1995, 1994 and 1993 F-4 Consolidated Statement of Cash Flows for the years ended September 30, 1995, 1994 and 1993 F-5 through F-6 Notes to Consolidated Financial Statements F-7 through F-21 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 income statement and statement of cash flows present fairly, in all material respects, the financial position of Anchor National Life Insurance Company and its subsidiaries at September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 7, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994. Price Waterhouse LLP Los Angeles, California November 6, 1995 F-2 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET
September 30, September 30, 1995 1994 --------------- --------------- ASSETS Investments: Cash and short-term investments $ 249,209,000 $ 157,438,000 Bonds, notes and redeemable preferred stocks: Available for sale, at fair value (amortized cost: 1995, $1,500,062,000; 1994, $1,108,271,000) 1,489,213,000 1,026,120,000 Held for investment, at amortized cost (fair value: 1995, $165,004,000; 1994, $180,247,000) 157,901,000 175,885,000 Mortgage loans 94,260,000 108,332,000 Common stocks, at fair value (cost: 1995, $6,576,000; 1994, $8,789,000) 4,097,000 7,550,000 Real estate 55,798,000 89,539,000 Other invested assets 64,430,000 67,208,000 --------------- --------------- Total investments 2,114,908,000 1,632,072,000 Variable annuity assets 5,230,246,000 4,486,703,000 Accrued investment income 14,192,000 17,565,000 Deferred acquisition costs 383,069,000 416,289,000 Other assets 41,282,000 49,497,000 --------------- --------------- TOTAL ASSETS $ 7,783,697,000 $ 6,602,126,000 =============== =============== LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts $ 1,497,052,000 $ 1,437,488,000 Reserves for guaranteed investment contracts 277,095,000 --- Payable to brokers for purchases of securities 155,861,000 124,624,000 Income taxes currently payable 15,720,000 12,331,000 Other liabilities 58,204,000 58,891,000 --------------- --------------- Total reserves, payables and accrued liabilities 2,003,932,000 1,633,334,000 --------------- --------------- Variable annuity liabilities 5,230,246,000 4,486,703,000 --------------- --------------- Subordinated notes payable to Parent 34,000,000 34,000,000 --------------- --------------- Deferred income taxes 73,459,000 64,567,000 --------------- --------------- Shareholder's equity: Common Stock 3,511,000 3,511,000 Additional paid-in capital 252,876,000 252,876,000 Retained earnings 191,346,000 152,088,000 Net unrealized losses on debt and equity securities available for sale (5,673,000) (24,953,000) --------------- --------------- Total shareholder's equity 442,060,000 383,522,000 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,783,697,000 $ 6,602,126,000 =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
F-3 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED INCOME STATEMENT
Years ended September 30, ------------------------------------------ 1995 1994 1993 ------------- ------------- ------------- Investment income $ 129,466,000 $ 127,758,000 $ 137,591,000 ------------- ------------- ------------- Interest expense on: Fixed annuity contracts (72,975,000) (66,311,000) (87,479,000) Guaranteed investment contracts (3,733,000) --- --- Senior indebtedness (227,000) (71,000) (34,000) Subordinated notes payable to Parent (2,448,000) (2,380,000) (1,166,000) ------------- ------------- ------------- Total interest expense (79,383,000) (68,762,000) (88,679,000) ------------- ------------- ------------- NET INVESTMENT INCOME 50,083,000 58,996,000 48,912,000 ------------- ------------- ------------- NET REALIZED INVESTMENT LOSSES (4,363,000) (33,713,000) (22,247,000) ------------- ------------- ------------- Fee income: Variable annuity fees 84,171,000 79,101,000 67,222,000 Asset management fees 26,935,000 31,302,000 32,293,000 Net retained commissions 23,267,000 19,180,000 16,928,000 ------------- ------------- ------------- TOTAL FEE INCOME 134,373,000 129,583,000 116,443,000 ------------- ------------- ------------- Other income and expenses: Surrender charges 5,889,000 5,034,000 5,306,000 General and administrative expenses (61,629,000) (52,636,000) (55,142,000) Provision for future guaranty fund assessments --- --- (4,800,000) Amortization of deferred acquisition costs (57,005,000) (43,992,000) (30,825,000) Other, net (2,351,000) 4,048,000 5,865,000 ------------- ------------- ------------- TOTAL OTHER INCOME AND EXPENSES (115,096,000) (87,546,000) (79,596,000) ------------- ------------- ------------- PRETAX INCOME 64,997,000 67,320,000 63,512,000 Income tax expense (25,739,000) (22,705,000) (21,794,000) ------------- ------------- ------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 39,258,000 44,615,000 41,718,000 Cumulative effect of change in accounting for income taxes --- (20,463,000) --- ------------- ------------- ------------- NET INCOME $ 39,258,000 $ 24,152,000 $ 41,718,000 ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
F-4 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, ----------------------------------------- 1995 1994 1993 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 39,258,000 $ 24,152,000 $ 41,718,000 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts 72,975,000 66,311,000 87,479,000 Guaranteed investment contracts 3,733,000 --- --- Net realized investment losses 4,363,000 33,713,000 22,247,000 Accretion of net discounts on investments (6,865,000) (2,050,000) (9,149,000) Amortization of goodwill 1,168,000 1,169,000 1,167,000 Provision for deferred income taxes (1,489,000) 19,395,000 2,982,000 Cumulative effect of change in accounting for income taxes --- 20,463,000 --- Change in: Deferred acquisition costs (7,180,000) (34,612,000) (48,413,000) Other assets 7,047,000 5,133,000 3,017,000 Income taxes receivable/payable 3,389,000 6,559,000 23,479,000 Other liabilities 2,231,000 46,000 11,596,000 Other, net 3,380,000 (950,000) 466,000 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 122,010,000 139,329,000 136,589,000 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts 245,320,000 138,526,000 63,796,000 Guaranteed investment contracts 275,000,000 --- --- Net exchanges to (from) the fixed accounts of variable annuity contracts 10,475,000 (29,286,000) (45,516,000) Withdrawal payments on: Fixed annuity contracts (237,977,000) (269,412,000) (245,250,000) Guaranteed investment contracts (1,638,000) --- --- Claims and annuity payments on fixed annuity contracts (31,237,000) (31,146,000) (33,938,000) Net increase in subordinated notes payable to Parent --- --- 18,500,000 Net receipts from (repayments of) other short-term financings 5,034,000 (166,685,000) 38,857,000 ------------ ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 264,977,000 (358,003,000) (203,551,000) ------------ ------------ ------------
F-5 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Years ended September 30, ------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks available for sale $(1,556,586,000) $(1,197,743,000) $(1,254,755,000) Bonds, notes and redeemable preferred stocks held for investment --- (209,000) (64,167,000) Mortgage loans --- (10,666,000) (39,100,000) Other investments, excluding short-term investments (13,028,000) (26,108,000) (31,674,000) Sales of: Bonds, notes and redeemable preferred stocks available for sale 1,026,078,000 877,068,000 878,277,000 Bonds, notes and redeemable preferred stocks held for investment --- --- 82,014,000 Real estate 36,813,000 33,443,000 38,333,000 Other investments, excluding short-term investments 5,130,000 2,353,000 21,616,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks available for sale 157,195,000 139,691,000 255,787,000 Bond, notes and redeemable preferred stocks held for investment 21,493,000 34,072,000 184,925,000 Investment in real estate separate account --- --- 92,130,000 Mortgage loans 14,403,000 10,087,000 17,614,000 Other investments, excluding short-term investments 13,286,000 13,500,000 6,962,000 Payment of holdback liability for 1990 purchase of annuity business --- --- (14,250,000) --------------- --------------- --------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (295,216,000) (124,512,000) 173,712,000 NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 91,771,000 (343,186,000) 106,750,000 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 157,438,000 500,624,000 393,874,000 --------------- --------------- --------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 249,209,000 $ 157,438,000 $ 500,624,000 =============== =============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness $ 3,235,000 $ 1,175,000 $ 34,000 =============== =============== =============== Income taxes paid (recovered) $ 23,656,000 $ (3,328,000) $ (6,736,000) =============== =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
F-6 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL: Anchor National Life Insurance Company (the "Company") is a wholly owned indirect subsidiary of SunAmerica Inc. (the "Parent"). The consolidated financial statements include the accounts of the Company and all significant subsidiaries, including Anchor Investment Advisor, Inc.; SunAmerica Asset Management Corp.; SunAmerica Capital Services, Inc.; Saamsun Holdings Corp.; SAM Holdings Corporation; SunRoyal Holding Corporation; and Royal Alliance Associates, Inc. All significant intercompany transactions have been eliminated. Certain items have been reclassified to conform to the current year's presentation. INVESTMENTS: 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. It is management's intent, and the Company has the ability, to hold the remainder of bonds, notes and redeemable preferred stocks until maturity, and therefore, these investments are carried at amortized cost. Bonds, notes and redeemable preferred stocks, whether available for sale or held for investment, 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 dependant upon future events. Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Real estate is carried at the lower of cost or fair value. Other invested assets include investments in limited partnerships, most of which are accounted for by using the cost method of accounting; separate account investments; leveraged leases; policy loans, which are carried at unpaid balances; and collateralized mortgage obligation residuals. Realized gains and losses on the sale of investments are recognized in operations at the date of sale and are determined using the specific cost identification method. Premiums and discounts on investments are amortized to investment income using the interest method over the contractual lives of the investments. DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and amortized, with interest, over the estimated lives of the contracts in relation to the present value of estimated gross profits, which are composed of net interest income, net realized investment gains and losses, variable annuity fees, surrender charges and direct administrative expenses. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. Deferred acquisition costs consist of commissions and other costs which vary with, and are primarily related to, the production or acquisition of new business. As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to deferred acquisition costs equal to the change in amortization that would have been recorded if such F-7 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains or losses on debt and equity securities available for sale that is credited or charged directly to shareholder's equity. At September 30, 1995 and 1994, deferred acquisition costs have been increased by $4,600,000 and $45,000,000, respectively, 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 $20,647,000 at September 30, 1995, is amortized by using the straight-line method over a period averaging 25 years and is included in Other Assets in the balance sheet. CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts and guaranteed investment contracts are accounted for as investment-type contracts in accordance with Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," and are recorded at accumulated value (premiums received, plus accrued interest, less withdrawals and assessed fees). FEE INCOME: Variable Annuity fees and asset management fees are recognized in income as earned. Net retained commissions are recognized on a trade date basis. INCOME TAXES: The Company is included in the consolidated federal income tax return of the Parent and files as a "life insurance company" under the provisions of the Internal Revenue Code of 1986. Income taxes have been calculated as if the Company filed a separate return. Effective October 1, 1993 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. F-8 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale and held for investment by major category follow: Estimated Amortized fair cost value --------------- --------------- AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government $ 63,701,000 $ 65,195,000 Mortgage-backed securities 1,144,645,000 1,134,361,000 Securities of public utilities 792,000 774,000 Corporate bonds and notes 290,924,000 288,883,000 --------------- --------------- Total available for sale $ 1,500,062,000 $ 1,489,213,000 --------------- --------------- HELD FOR INVESTMENT: Securities of the United States Government $ 10,379,000 $ 10,797,000 Mortgage-backed securities 8,378,000 8,378,000 Corporate bonds and notes 105,980,000 112,665,000 Other debt securities 33,164,000 33,164,000 --------------- --------------- Total held for investment $ 157,901,000 $ 165,004,000 =============== =============== AT SEPTEMBER 30, 1994: AVAILABLE FOR SALE: Securities of the United States Government $ 16,623,000 $ 16,379,000 Mortgage-backed securities 833,445,000 765,946,000 Securities of public utilities 13,423,000 12,837,000 Corporate bonds and notes 243,405,000 229,411,000 Redeemable preferred stocks 1,375,000 1,547,000 --------------- --------------- Total available for sale $ 1,108,271,000 $ 1,026,120,000 =============== =============== HELD FOR INVESTMENT: Securities of the United States Government $ 10,370,000 $ 10,320,000 Mortgage-backed securities 8,831,000 8,725,000 Corporate bonds and notes 126,333,000 130,851,000 Other debt securities 30,351,000 30,351,000 --------------- --------------- Total held for investment $ 175,885,000 $ 180,247,000 =============== ===============
F-9 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS (Continued) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale and held for investment by contractual maturity, as of September 30, 1995, follow:
Estimated Amortized fair cost value --------------- --------------- AVAILABLE FOR SALE: Due in one year or less $ 10,243,000 $ 11,285,000 Due after one year through five years 52,644,000 52,922,000 Due after five years through ten years 223,820,000 222,362,000 Due after ten years 68,710,000 68,283,000 Mortgage-backed securities 1,144,645,000 1,134,361,000 --------------- --------------- Total available for sale $ 1,500,062,000 $ 1,489,213,000 =============== =============== HELD FOR INVESTMENT: Due in one year or less $ 500,000 $ 500,000 Due after one year through five years 33,465,000 35,103,000 Due after five years through ten years 67,109,000 70,970,000 Due after ten years 48,449,000 50,053,000 Mortgage-backed securities 8,378,000 8,378,000 --------------- --------------- Total held for investment $ 157,901,000 $ 165,004,000 =============== =============== Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above because of prepayments and redemptions.
F-10 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS (Continued) Gross unrealized gains and losses on bonds, notes and redeemable preferred stocks available for sale and held for investment by major category follow:
Gross Gross unrealized unrealized gains losses -------------- --------------- AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government $ 1,545,000 $ (51,000) Mortgage-backed securities 12,117,000 (22,401,000) Securities of public utilities --- (18,000) Corporate bonds and notes 5,344,000 (7,385,000) -------------- --------------- Total available for sale $ 19,006,000 $ (29,855,000) ============== =============== HELD FOR INVESTMENT: Securities of the United States Government $ 432,000 $ (14,000) Corporate bonds and notes 6,685,000 --- -------------- --------------- Total held for investment $ 7,117,000 $ (14,000) ============== =============== AT SEPTEMBER 30, 1994: AVAILABLE FOR SALE: Securities of the United States Government $ --- $ (244,000) Mortgage-backed securities 2,852,000 (70,351,000) Securities of public utilities --- (586,000) Corporate bonds and notes 753,000 (14,747,000) Redeemable preferred stocks 172,000 --- -------------- --------------- Total available for sale $ 3,777,000 $ (85,928,000) ============== =============== HELD FOR INVESTMENT: Securities of the United States Government $ 85,000 $ (135,000) Mortgage-backed securities 7,000 (113,000) Corporate bonds and notes 4,619,000 (101,000) -------------- --------------- Total held for investment $ 4,711,000 $ (349,000) ============== ===============
F-11 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS (Continued) At September 30, 1995, gross unrealized gains on equity securities aggregated $1,082,000 and gross unrealized losses aggregated $3,561,000. At September 30, 1994, gross unrealized gains on equity securities aggregated $878,000 and gross unrealized losses aggregated $2,117,000. Gross realized investment gains and losses on sales of all types of investments are as follows:
Years ended September 30, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Bonds, notes and redeemable preferred stocks: Available for sale: Realized gains $ 15,983,000 $ 12,760,000 $ 20,193,000 Realized losses (21,842,000) (31,066,000) (8,132,000) Held for investment: Realized gains 2,413,000 890,000 5,194,000 Realized losses (586,000) (1,913,000) (257,000) Equities: Realized gains 994,000 467,000 2,445,000 Realized losses (114,000) (303,000) (2,653,000) Other investments: Realized gains 3,561,000 --- 255,000 Realized losses (12,000) (358,000) (1,573,000) Impairment writedowns (4,760,000) (14,190,000) (37,719,000) ------------- ------------- ------------- Total net realized investment losses $ (4,363,000) $ (33,713,000) $ (22,247,000) ============= ============= ============= The net realized gains and losses included in bonds, notes and redeemable preferred stocks held for investment in 1995 and 1994 reflect net gains and losses realized upon redemptions, the net of which amounted to gains of $1,827,000 in 1995 and losses of $1,023,000 in 1994. In 1993, the net gains of $4,937,000 were realized on sales of securities totaling $77,077,000.
F-12 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS (Continued) The sources and related amounts of investment income are as follows:
Years ended September 30, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Short-term investments $ 8,308,000 $ 4,648,000 $ 7,278,000 Bonds, notes and redeemable preferred stocks 107,643,000 98,935,000 106,013,000 Mortgage loans 7,419,000 12,133,000 9,418,000 Common stocks 3,000 1,000 15,000 Real estate (51,000) 1,379,000 302,000 Limited partnerships 5,128,000 9,487,000 12,064,000 Other invested assets 1,016,000 1,175,000 2,501,000 ------------- ------------- ------------- Total investment income $ 129,466,000 $ 127,758,000 $ 137,591,000 ============= ============= =============
Expenses incurred to manage the investment portfolio amounted to $1,983,000 for the year ended September 30, 1995, $1,714,000 for the year ended September 30, 1994, and $1,478,000 for the year ended September 30, 1993 and are included in General and Administrative Expenses in the income statement. At September 30, 1995, no investment exceeded 10% of the Company's consolidated shareholder's equity. At September 30, 1995, mortgage loans were collateralized by properties located in 8 states, with loans totaling approximately 22% of the aggregate carrying value of the portfolio secured by properties located in Colorado, approximately 18% by properties located in California and approximately 17% by properties located in New Jersey. No more than 13% of the portfolio was secured by properties in any other single state. At September 30, 1995, bonds, notes and redeemable preferred stocks included $148,355,000 (at amortized cost, with fair value of $143,778,000) of investments not rated investment grade by either Standard & Poor's Corporation, Moody's Investors Service or under National Association of Insurance Commissioners' guidelines. The Company had no material concentrations of non-investment grade assets at September 30, 1995. At September 30, 1995, the amortized cost of investments in default as to the payment of principal or interest was $4,958,000 and the fair value was $3,500,000, all of which are unsecured non-investment grade bonds. At September 30, 1995, $5,108,000 of bonds, at amortized cost, were on deposit with regulatory authorities in accordance with statutory requirements. The Company has undertaken to dispose of certain real estate investments, having an aggregate carrying value of $55,798,000, during the next one to two years, to affiliated or nonaffiliated parties, and the Parent has F-13 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS (Continued) guaranteed that the Company will receive its current carrying value for these assets. 3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value disclosures are limited to the 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 other invested assets, equity investments and real estate investments) 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. VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market value of the underlying securities. RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single premium life contracts are assigned 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 GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates. PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent net transactions of a short-term nature for which the carrying value is considered a reasonable estimate of fair value. F-14 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation phase are based on net surrender values. Fair values of contracts in the payout phase are based on the present value of future cash flows at assumed investment rates. SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the quoted market prices for similar issues. The estimated fair values of the Company's financial instruments at September 1995 and 1994, compared with their respective carrying values are as follows: Carrying Fair value value --------------- --------------- 1995: Assets: Cash and short-term investments $ 249,209,000 $ 249,209,000 Bonds, notes and redeemable preferred stocks 1,647,114,000 1,654,217,000 Mortgage loans 94,260,000 95,598,000 Variable annuity assets 5,230,246,000 5,230,246,000 Liabilities: Reserves for fixed annuity contracts 1,497,052,000 1,473,757,000 Reserves for guaranteed investment contracts 277,095,000 277,095,000 Payable to brokers for purchases of securities 155,861,000 155,861,000 Variable annuity liabilities 5,230,246,000 5,077,257,000 Subordinated notes payable to Parent 34,000,000 34,620,000 =============== =============== 1994: Assets: Cash and short-term investments $ 157,438,000 $ 157,438,000 Bonds, notes and redeemable preferred stocks 1,202,005,000 1,206,367,000 Mortgage loans 108,332,000 104,835,000 Variable annuity assets 4,486,703,000 4,486,703,000 Liabilities: Reserves for fixed annuity contracts 1,437,488,000 1,411,117,000 Payable to brokers for purchases of securities 124,624,000 124,624,000 Variable annuity liabilities 4,486,703,000 4,335,753,000 Subordinated notes payable to Parent 34,000,000 33,897,000 =============== =============== F-15 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUBORDINATED NOTES PAYABLE TO PARENT Subordinated notes payable to Parent bear interest at a weighted average rate of 7.20% (with rates ranging from 7.00% to 9.00%) and require principal payments of $22,500,000 in 1996, $4,000,000 in 1997 and $7,500,000 in 1998. 5. CONTINGENT LIABILITIES The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. 6. SHAREHOLDER'S EQUITY The Company is authorized to issue 4,000 shares of its $1,000 par value Common Stock. At September 30, 1995, 1994 and 1993, 3,511 shares are outstanding. Changes in shareholder's equity are as follows:
Years ended September 30, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- RETAINED EARNINGS: Beginning balance $ 152,088,000 $ 127,936,000 $ 86,218,000 Net income 39,258,000 24,152,000 41,718,000 ------------- ------------- ------------- Ending balance $ 191,346,000 $ 152,088,000 $ 127,936,000 ============= ============= ============= NET UNREALIZED GAINS (LOSSES) ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance $ (24,953,000) $ (13,230,000) $ (20,127,000) Change in net unrealized gains (losses) on debt securities available for sale 71,302,000 (69,407,000) 4,998,000 Change in net unrealized gains (losses) on equity securities available for sale (1,240,000) (753,000) 1,899,000 Change in adjustment to deferred acquisition costs (40,400,000) 45,000,000 --- Tax effects of net changes (10,382,000) 13,437,000 --- ------------- ------------- ------------- Ending balance $ (5,673,000) $ (24,953,000) $ (13,230,000) ============= ============= =============
F-16 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. SHAREHOLDER'S EQUITY (Continued) Dividends which the Company may pay to its shareholder in any year without prior approval of the California Insurance Commissioner are limited by statute. Under California insurance law, without prior approval of the insurance commissioner, dividends and distributions to shareholders are limited to the greater of (i) 10% of the preceding December 31 balance of statutory surplus as regards policyholders or (ii) the prior calendar year's net statutory gain from operations. In addition, new law requires prior notice of any dividend and grants the commissioner authority to order that a dividend not be paid. No dividends were paid in fiscal years 1995, 1994 or 1993. Under statutory accounting principles utilized in filings with insurance regulatory authorities, the Company's net income for the nine months ended September 30, 1995 was $34,477,000. The statutory net income for the year ended December 31, 1994 was $35,060,000 and for the year ended December 31, 1993 was $51,686,000. The Company's statutory capital and surplus was $260,454,000 at September 30, 1995, $219,577,000 at December 31, 1994 and $199,082,000 at December 31, 1993. 7. 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 ------------ ------------ ------------ 1995: Currently payable $ 4,248,000 $ 22,980,000 $ 27,228,000 Deferred (6,113,000) 4,624,000 (1,489,000) ------------ ------------ ------------ Total income tax expense $ (1,865,000) $ 27,604,000 $ 25,739,000 ============ ============ ============ 1994: Currently payable $ (6,825,000) $ 10,135,000 $ 3,310,000 Deferred (1,320,000) 20,715,000 19,395,000 ------------ ------------ ------------ Total income tax expense $ (8,145,000) $ 30,850,000 $ 22,705,000 ============ ============ ============ 1993: Currently payable $ (836,000) $ 19,648,000 $ 18,812,000 Deferred (6,819,000) 9,801,000 2,982,000 ------------ ------------ ------------ Total income tax expense $ (7,655,000) $ 29,449,000 $ 21,794,000 ============ ============ ============
F-17 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAXES (Continued) Income taxes computed at the United States federal income tax rate of 35% for 1995 and 1994 and 34.75% for 1993 and income taxes provided differ as follows:
Years ended September 30, -------------------------------------------- 1995 1994 1993 ------------- ------------- -------------- Amount computed at statutory rate $ 22,749,000 $ 23,562,000 $ 22,000,000 Increases (decreases) resulting from: Amortization of differences between book and tax bases of net assets acquired 3,049,000 465,000 1,423,000 State income taxes, net of federal tax benefit 437,000 (662,000) (223,000) Tax credits (168,000) (612,000) (1,849,000) Other (328,000) (48,000) 443,000 -------------- -------------- -------------- Total income tax expense $ 25,739,000 $ 22,705,000 $ 21,794,000 ============== ============== ============== 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 September 30, 1995. The Company does not anticipate any transactions which would cause any part of this surplus to be taxable.
F-18 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAXES (Continued) Effective October 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, the cumulative effect of this change in accounting for income taxes was recorded during the quarter ended December 31, 1993 to increase the liability for deferred income taxes by $20,463,000. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability for deferred income taxes are as follows:
September 30, September 30, 1995 1994 ------------- ------------- Deferred tax liabilities: Investments $ 14,181,000 $ 17,079,000 Deferred acquisition costs 118,544,000 117,200,000 State income taxes 1,847,000 2,917,000 ------------- ------------- Total deferred tax liabilities 134,572,000 137,196,000 ------------- ------------- Deferred tax assets: Contractholder reserves (55,910,000) (54,819,000) Guaranty fund assessments (1,123,000) (1,197,000) Deferred expenses (1,025,000) (3,177,000) Net unrealized losses on certain debt and equity securities (3,055,000) (13,436,000) ------------- ------------- Total deferred tax assets (61,113,000) (72,629,000) ------------- ------------- Deferred income taxes $ 73,459,000 $ 64,567,000 ============= ============= F-19 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. RELATED PARTY MATTERS The Company pays commissions to two affiliated companies, SunAmerica Securities, Inc. and Royal Alliance Associates, Inc. These broker- dealers represent a significant portion of the Company's business, amounting to approximately 28.2%, 28.3% and 30.6% of premiums in 1995, 1994 and 1993, respectively. Commissions paid to these broker-dealers totaled $19,828,000 in 1995, $18,725,000 in 1994 and $17,541,000 in 1993. The Company purchases administrative, investment management, accounting, marketing and data processing services from SunAmerica Financial, Inc., whose purpose is to provide services to the SunAmerica companies. Amounts paid for such services totaled $42,083,000 for the year ended September 30, 1995, $36,934,000 for the year ended September 30, 1994 and $32,711,000 for the year ended September 30, 1993. During the year ended September 30, 1994, the Company sold to the Parent real estate for cash equal to its carrying value of $29,761,000. During the year ended September 30, 1993, the Company sold to the Parent various invested assets for cash equal to their carrying values of $88,488,000 (including real estate of $45,668,000). During the year ended September 30, 1993, the Company sold to SunAmerica Life Insurance Company various invested assets with carrying values of $46,332,000 for cash of $46,334,000 and recorded net gains of $2,000. F-20 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. BUSINESS SEGMENTS The Company has three business segments: annuity operations, asset management, and broker-dealer operations. Respectively, these include the sale of fixed and variable annuities; the management and marketing of mutual funds; and the sale of securities and financial services products. Summarized data for the years ended September 30, 1995, 1994 and 1993 follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ------------- ------------- --------------------------- 1995: Annuity operations $ 205,698,000 $ 36,642,000 $ 55,462,000$7,667,946,000 Asset management 30,253,000 24,069,000 510,000 86,510,000 Broker-dealer operations 23,525,000 411,000 9,025,000 29,241,000 ------------- ------------- --------------------------- Total $ 259,476,000 $ 61,122,000 $ 64,997,000$7,783,697,000 ============= ============= =========================== 1994: Annuity operations $ 171,553,000 $ 26,298,000 $ 52,284,000$6,473,065,000 Asset management 32,803,000 19,330,000 7,916,000 102,192,000 Broker-dealer operations 19,272,000 408,000 7,120,000 26,869,000 ------------- ------------- --------------------------- Total $ 223,628,000 $ 46,036,000 $ 67,320,000$6,602,126,000 ============= ============= =========================== 1993: Annuity operations $ 181,057,000 $ 23,634,000 $ 42,682,000$6,545,966,000 Asset management 33,826,000 8,853,000 14,806,000 98,137,000 Broker-dealer operations 16,904,000 440,000 6,024,000 27,286,000 ------------- ------------- --------------------------- Total $ 231,787,000 $ 32,927,000 $ 63,512,000$6,671,389,000 ============= ============= ===========================
F-21 ANCHOR NATIONAL LIFE INSURANCE COMPANY LIST OF EXHIBITS FILED Exhibit No. Description - ------- ----------- 10(h) Subordinated Loan Agreement Amendment extending the maturity date as of September 15, 1994, between the Company's subsidiary, SACS, and SAI, extending the maturity date of the Subordinated Loan Agreement, dated as of September 30, 1992 with a maturity date of September 29, 1995, to September 29, 1996. 10(i) Subordinated Loan Agreement for Equity Capital, dated as of December 14, 1994, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due January 13, 1998. 10(j) Subordinated Loan Agreement for Equity Capital, dated as of April 20, 1995, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due May 27, 1998. 10(k) Subordinated Loan Agreement for Equity Capital, dated as of June 30, 1995, between the Company's subsidiary SACS and SAI defining SAI's rights of the 9% notes due June 29, 1998. 21 Subsidiaries of the Company. 27 Financial Data Schedule. EX-10.(H) 2 NASD EXHIBIT 10(h) SUBORDINATED LOAN AGREEMENT AMENDMENT EXTENDING THE MATURITY DATE SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 11601 Wilshire Boulevard (Street Address) Los Angeles California 90025- 1748 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 10 Union Square East (Street Address) New York New York 10003 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: September 23, 1994 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: /s/ JAMES R. BELARDI Dated: September 15, 1994 JAMES R. BELARDI L.S. (Lender) CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, on September 15, 1994 adopted the following resolutions and that said resolutions have not been amended or rescinded from the date of their adoption and are in full force and effect as of the date hereof: 1. Authorization of Subordinated Loan Agreement Amendment Extending the Maturity Date entered into with SunAmerica Capital Services, Inc. WHEREAS, pursuant to the terms of a Subordinated Loan Agreement for Equity Capital dated September 9, 1992 and effective September 30, 1992, this Corporation made a loan to SunAmerica Capital Services, Inc. in the amount of $4 million (the "Subordinated Loan Agreement"); WHEREAS, the Executive Committee of this Corporation desires to extend the maturity date of the Subordinated Loan Agreement from September 29, 1995 to September 29, 1996; NOW, THEREFORE, BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes that the maturity date of the Subordinated Loan Agreement be extended form September 29, 1995 to September 29, 1996 in conformance with the Subordinated Loan Agreement Amendment Extending the Maturity Date dated as of September 15, 1994 ("Amendment"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Amendment on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Amendment as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all action that may have been taken by the officers of this Corporation in connection with the foregoing resolutions and authorizes the officers of this Corporation to take any and all such further actions as may be deemed appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 21st day of September, 1994. /s/ SUSAN L. HARRIS Susan L. Harris, Secretary (SEAL) (Secretary) NASD District No. 10 National Association of Securities Dealers, Inc. - NASD Financial Center 33 Whitehall Street - New York, NY 10004 - 212/858-4000 December 2, 1994 Mr. Anthony J. Da Prato SunAmerica Capital Services, Inc. 733 Third Avenue New York, New York 10017 Re: Subordinated Loan Agreement File No.: 10-E-SLA-11125 Lender: Broad Inc. Amount: $4,000,000 Dear Mr. Da Prato: The amendment extending the maturity date of the above referenced Agreement from September 29, 1995 to September 29, 1996 is accepted by the National Association of Securities Dealers, Inc. It is important to note that the limitations required by paragraph 1, which covers Permissive Prepayments, will run from the effective date of the original agreement, not from the date of this amendment. Any questions which you have regarding this Agreement or the amendment should be addressed to the District Office in New York. Very truly yours, /s/ JOHN J. LAFOND John J. Lafond Assistant Director JJL:rf cc: Frances Giardina EX-10.(I) 3 NASD EXHIBIT 10(h) SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: December 19, 1994 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated December 14, 1994 to be effective January 14, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $3,000,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on January 13, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 14th day of December, 1994. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: L.S. /s/ STEVE ROTHSTEIN (Authorized Person) SunAmerica Inc. L.S. (Lender) By:/s/ JAMES R. BELARDI (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ JOHN J. LAFOND (Name) (Title) EFFECTIVE DATE: January 14, 1995 LOAN NUMBER: 10-E-SLA-0140 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. /s/ JAMES R. BELARDI Dated: December 14, 1994 JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated December 14, 1994, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica Capital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes a $3 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of December 14, 1994, to be effective on January 14, 1995 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 15th day of December 1994. /s/ SUSAN L. HARRIS Susan L. Harris, Secretary (SEAL) SUNAMERICA CAPITAL SERVICES, INC. FOCUS REPORT AS OF NOVEMBER 30, 1994 ALLOWABLE NON-ALLOWABLE TOTAL PAGE 1 CASH 16,004,374.69 16,004,374.69 PROPERTY, FURNITURE & EQUIP. 0.00 0.00 INVESTS&REC- INTERCOMPANY 0.00 0.00 0.00 OTHER ASSETS 1,624,212.09 38,644,682.00 40,268,894.09 TOTAL ASSETS 17,628,586.78 38,644,682.00 56,273,268.78 RECONCILIATION TOTAL ASSETS PER ABOVE 56,273,268.78 TOTAL ASSETS PER G/L 56,273,268.78 DIFFERENCE 0.00 ADJUSTMENTS 0.00 ADJUSTED DIFFERENCE 0.00 PAGE 2 AGGREGATE NON-AGGREGATE INDEBTNESS INDEBTNESS TOTAL TOTAL LIABILITIES (5,529,046.82)(12,497,613.00) (18,026,659.82) OWNERSHIP EQUITY COMMON STOCK (25,000.00) ADDITIONAL PAID IN CAPITAL (19,482,783.70) RETAINED EARNINGS (497,119.26) SUBORDINATED DEBT (18,241,706.00) TOTAL (38,246,608.96) TOTAL LIABILITIES & S/H EQUITY (56,273,268.78) RECONCILIATION: TOTAL PER ABOVE (56,273,268.78) TOTAL PER G/L (56,273,268.78) TOTAL 0.00 ADJUSTMENTS 0.00 DIFFERENCE 0.00 PAGE 3 LINE 1 TOTAL OWNERSHIP EQUITY 20,004,902.96 LINE 3 SAME AS ABOVE 20,004,902.96 LINE 4A SUBORDINATED LIABILITY 18,241,706.00 LINE 4B DEFERRED TAX LIABILITY 12,497,613.00 LINE 5 TOTAL CAPITAL AND ALLOWABLE SUBLOANS 50,744,221.96 LINE 6A TOTAL NON-ALLOW. ASSETS (38,644,682.00) LINE 6D OTHER DEDUCTIONS - FIDELITY BOND 0.00 LINE 8 NET CAPITAL BEFORE ... 12,099,539.96 LINE 10 SAME AS ABOVE 12,099,539.96 HAIRCUT 425,768.78 PAGE 4 11,673,771.18 LINE 11 MINIMUM NET CAPITAL REQ. 6.667 PERCENT OF LINE 19 368,603.12 LINE 12 MINIMUM DOLLAR NET CAPITAL 25,000.00 LINE 13 NET CAPITAL REQ. (GREATER OF LINE 11 OR 12) 368,603.12 LINE 14 EXCESS NET CAPITAL (LINE 10 LESS 13) 11,305,168.06 LINE 15 EXCESS NET CAPITAL AT 1000 PERCENT (LINE 10-10 PERCENT OF LINE 19) 11,120,866.50 LINE 16 TOTAL LIABILITIES 18,026,659.82 LINE 19 TOTAL AGGREGATE INDEBTEDNESS 5,529,046.82 LINE 20 PERCENT OF AGGREGATE INDEBT. TO NET CAPITAL 0.47 LINE 21 N/A EX-10.(J) 4 NASD EXHIBIT 10(j) SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: April 27, 1995 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated April 20, 1995 to be effective May 28, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $2,000,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on May 27, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 20th day of April, 1994. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: L.S. /s/ STEVE ROTHSTEIN (Authorized Person) SunAmerica Inc. L.S. (Lender) By: /s/ JAMES R. BELARDI (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ JOHN J. LAFOND (Name) (Title) EFFECTIVE DATE: May 28, 1995 LOAN NUMBER: 10-E-SLA-0268 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. /s/ JAMES R. BELARDI Dated: April 20, 1995 JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated April 20, 1995, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica Capital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes a $2 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of April 20, 1995, to be effective on May 28, 1995 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 20th day of April, 1995. /s/ SUSAN L. HARRIS Susan L. Harris, Secretary (SEAL) EX-10.(K) 5 NASD EXHIBIT 10(k) SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: June 7, 1995 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated May 30, 1995 to be effective June 30, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $2,500,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on June 29, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 30th day of May, 1995. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: L.S. /s/ STEVE ROTHSTEIN (Authorized Person) SunAmerica Inc. L.S. (Lender) By: /s/ JAMES R. BELARDI (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ JOHN J. LAFOND (Name) (Title) EFFECTIVE DATE: June 29, 1995 LOAN NUMBER: 10-E-SLA-0316 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. /s/ JAMES R. BELARDI Dated: May 30, 1995 JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated May 30, 1995, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica Capital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes a $2.5 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of May 30, 1995, to be effective on June 30, 1995 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 30th day of May, 1994. /s/ SUSAN L. HARRIS Susan L. Harris, Secretary (SEAL) 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 the Company's subsidiary which is the immediate parent. PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR ITS SUBSIDIARY WHICH IS THE NAME OF COMPANY IMMEDIATE PARENT - --------------- ------------------------ CALIFORNIA CORPORATIONS: SAM Holdings Corporation 100 Sun Royal Holdings Corporation 100 DELAWARE CORPORATIONS: Capitol Life Mortgage Corp. 100 Royal Alliance Associates, Inc. 100 SAAMSUN Holding Corp. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 MARYLAND CORPORATIONS: Anchor Investment Adviser, Inc. 100 MASSACHUSETTS BUSINESS TRUSTS: Anchor Pathway Fund* 100 Anchor Series Trust* 100 SunAmerica Series Trust* 100 * Shares of these entities are owned by a separate account of Anchor National Life Insurance Company. EX-27 7
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS SEP-30-1995 SEP-30-1995 1,489,213,000 157,901,000 165,004,000 4,097,000 94,260,000 55,798,000 2,114,908,000 249,209,000 0 383,069,000 7,783,697,000 1,774,147,000 0 0 0 34,000,000 3,511,000 0 0 438,549,000 7,783,697,000 0 126,791,000 (4,363,000) 134,373,000 76,708,000 57,005,000 (3,538,000) 64,997,000 25,739,000 39,258,000 0 0 0 39,258,000 0 0 0 0 0 0 0 0 0
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