-----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, MZCtYIfAKvcu1FTUNrWtmXo1rvstX19yDbrtzSKYYWWXWmnxwUq8AS/fNTo3TxAo Nv8UzvtgVyXYbeF4pT8+cA== 0000006342-98-000011.txt : 19980817 0000006342-98-000011.hdr.sgml : 19980817 ACCESSION NUMBER: 0000006342-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR NATIONAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000006342 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860198983 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-47472 FILM NUMBER: 98688652 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: C/O THOMAS B PHILLIPS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3107726056 MAIL ADDRESS: STREET 1: 1 SUN AMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: ANCHOR LIFE INSURANCE CO DATE OF NAME CHANGE: 19600201 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 33-47472 ANCHOR NATIONAL LIFE INSURANCE COMPANY Incorporated in 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 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes x No --- --- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON August 13, 1998 WAS AS FOLLOWS: Common Stock (par value $1,000 per share) 3,511 shares outstanding ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX Page Number(s) Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheet (Unaudited) - June 30, 1998 and September 30, 1997 3 - 4 Consolidated Income Statement (Unaudited) - Three Months and Nine Months Ended June 30, 1998 and 1997 5 Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended June 30, 1998 and 1997 6 - 7 Notes to Consolidated Financial Statements (Unaudited) 8 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 24 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25 Part II - Other Information 26 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (In thousands - unaudited)
June 30, September 30, 1998 1997 --------------- --------------- ASSETS Investments: Cash and short-term investments $ 186,129,000 $ 113,580,000 Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: June 1998, $2,111,864,000; September 1997, $1,942,485,000) 2,147,159,000 1,986,194,000 Mortgage loans 376,974,000 339,530,000 Common stocks available for sale, at fair value (cost: June 1998, $115,000; September 1997, $271,000) 251,000 1,275,000 Real estate 24,000,000 24,000,000 Other invested assets 38,503,000 143,722,000 --------------- --------------- Total investments 2,773,016,000 2,608,301,000 Variable annuity assets held in separate accounts 11,958,475,000 9,343,200,000 Accrued investment income 27,249,000 21,759,000 Deferred acquisition costs 639,078,000 536,155,000 Other assets 82,384,000 61,524,000 --------------- --------------- TOTAL ASSETS $15,480,202,000 $12,570,939,000 =============== ===============
See accompanying notes 3 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Continued) (In thousands - unaudited)
June 30, September 30, 1998 1997 --------------- --------------- LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts $ 2,128,688,000 $ 2,098,803,000 Reserves for guaranteed investment contracts 302,074,000 295,175,000 Payable to brokers for purchases of securities 14,190,000 263,000 Income taxes currently payable 62,270,000 32,265,000 Other liabilities 95,387,000 122,728,000 --------------- --------------- Total reserves, payables and accrued liabilities 2,602,609,000 2,549,234,000 --------------- --------------- Variable annuity liabilities related to separate accounts 11,958,475,000 9,343,200,000 --------------- --------------- Subordinated notes payable to Parent 35,950,000 36,240,000 --------------- --------------- Deferred income taxes 62,249,000 67,047,000 --------------- --------------- Shareholder's equity: Common Stock 3,511,000 3,511,000 Additional paid-in capital 509,083,000 308,674,000 Retained earnings 293,680,000 244,628,000 Net unrealized gains on debt and equity securities available for sale 14,645,000 18,405,000 --------------- --------------- Total shareholder's equity 820,919,000 575,218,000 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $15,480,202,000 $12,570,939,000 =============== ===============
See accompanying notes 4 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED INCOME STATEMENT FOR THE THREE MONTHS AND NINE MONTHS ENDED June 30, 1998 AND 1997 (In thousands - unaudited)
Three Months Nine Months ------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ------------ ------------ Investment income $47,869,000 $56,272,000 $162,226,000 $153,703,000 ----------- ----------- ------------ ------------ Interest expense on: Fixed annuity contracts (28,214,000) (28,732,000) (82,894,000) (81,078,000) Guaranteed investment contracts (4,544,000) (6,196,000) (13,586,000) (18,182,000) Senior indebtedness (237,000) (1,016,000) (582,000) (1,754,000) Subordinated notes payable to Parent (752,000) (809,000) (2,325,000) (2,333,000) ----------- ----------- ------------ ------------ Total interest expense (33,747,000) (36,753,000) (99,387,000) (103,347,000) ----------- ----------- ------------ ------------ NET INVESTMENT INCOME 14,122,000 19,519,000 62,839,000 50,356,000 ----------- ----------- ------------ ------------ NET REALIZED INVESTMENT GAINS (LOSSES) 2,674,000 (2,400,000) 25,906,000 (22,690,000) ----------- ----------- ------------ ------------ Fee income: Variable annuity fees 53,850,000 35,229,000 145,512,000 98,168,000 Net retained commissions 13,066,000 10,344,000 35,765,000 27,917,000 Surrender charges 2,150,000 1,339,000 5,305,000 3,794,000 Asset management fees 7,707,000 6,202,000 21,753,000 18,925,000 Other fees 1,103,000 904,000 2,732,0000 2,649,000 ----------- ----------- ------------ ------------ TOTAL FEE INCOME 77,876,000 54,018,000 211,067,000 151,453,000 ----------- ----------- ------------ ------------ GENERAL AND ADMINISTRATIVE EXPENSES (24,103,000) (24,483,000) (71,573,000) (71,679,000) ----------- ----------- ------------ ------------ AMORTIZATION OF DEFERRED ACQUISITION COSTS (24,896,000) (21,495,000) (60,475,000) (48,753,000) ----------- ----------- ------------ ------------ ANNUAL COMMISSIONS (5,027,000) (2,508,000) (12,701,000) (5,942,000) ----------- ----------- ------------ ------------ PRETAX INCOME 40,646,000 22,651,000 155,063,000 52,745,000 Income tax expense (15,053,000) (7,531,000) (54,811,000) (18,034,000) ----------- ----------- ------------ ------------ NET INCOME $25,593,000 $15,120,000 $100,252,000 $ 34,711,000 =========== =========== ============ ============
See accompanying notes 5 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands - unaudited)
Nine Months Ended June 30, --------------------------------- 1998 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 100,252,000 $ 34,711,000 Adjustments to reconcile net income to cash provided by operating activities: Interest credited to: Fixed annuity contracts 82,894,000 81,078,000 Guaranteed investment contracts 13,586,000 18,182,000 Net realized investment losses (gains) (25,906,000) 22,690,000 Amortization (accretion) of net premiums/discounts on investments 1,136,000 (9,025,000) Amortization of goodwill 907,000 876,000 Provision for deferred income taxes (2,775,000) (20,960,000) Change in: Accrued investment income (5,490,000) (4,068,000) Deferred acquisition costs (99,423,000) (82,110,000) Other assets (21,767,000) (10,064,000) Income taxes currently payable 30,005,000 7,865,000 Other liabilities (8,834,000) 9,403,000 Other, net 110,000 273,000 -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 64,695,000 48,851,000 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks (1,569,915,000) (2,220,070,000) Mortgage loans (92,114,000) (187,265,000) Other investments, excluding short-term investments --- (71,684,000) Sales of: Bonds, notes and redeemable preferred stocks 1,016,824,000 1,960,229,000 Other investments, excluding short-term investments 42,141,000 1,233,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks 415,148,000 308,659,000 Mortgage loans 55,590,000 15,371,000 Other investments, excluding short-term investments 69,575,000 16,838,000 -------------- -------------- NET CASH USED BY INVESTING ACTIVITIES (62,751,000) (176,689,000) -------------- --------------
See accompanying notes 6 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (In thousands - unaudited)
Nine Months Ended June 30, ---------------------------------- 1998 1997 -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts $1,047,024,000 $877,884,000 Guaranteed investment contracts 5,619,000 55,000,000 Net exchanges from the fixed accounts of variable annuity contracts (917,393,000) (402,933,000) Withdrawal payments on: Fixed annuity contracts (152,058,000) (188,979,000) Guaranteed investment contracts (12,305,000) (67,111,000) Claims and annuity payments on fixed annuity contracts (30,694,000) (25,837,000) Net receipts from (repayments of) other short-term financings (18,797,000) 24,970,000 Capital contributions received 200,409,000 28,411,000 Dividends paid (51,200,000) (25,500,000) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 70,605,000 275,905,000 ------------ ------------ NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 72,549,000 148,067,000 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 113,580,000 122,058,000 ------------ ------------ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 186,129,000 $270,125,000 ============== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid on indebtedness $ 1,921,000 $ 3,454,000 ============== ============ Net income taxes paid $ 27,586,000 $ 31,133,000 ============== ============
See accompanying notes 7 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands - unaudited) 1. Basis of Presentation --------------------- Anchor National Life Insurance Company (the "Company") is an indirect wholly owned subsidiary of SunAmerica Inc. (the "Parent"). In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 1998 and September 30, 1997, the results of its consolidated operations for the three months and nine months ended June 30, 1998 and 1997 and its consolidated cash flows for the nine months ended June 30, 1998 and 1997. The results of operations for the three months and nine months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 30, 1997, contained in the Company's Annual Report on Form 10-K. 2. Surplus Note ------------ On May 27, 1998, SunAmerica agreed to contribute $200,000,000 of capital to the Company's parent, which in turn agreed to contribute such amount to the Company. Each contribution is subject to the provisions of a surplus note in favor of the contributing company. A significant provision of each surplus note is that each contributing company may withdraw its respective surplus contribution (up to an amount equal to the economic effect of the coinsurance transaction described in Note 3 below), upon closure of that coinsurance transaction. Such capital is expected to be withdrawn in August 1998. 3. Subsequent Events ----------------- On August 11, 1998, the Company entered into a modified coinsurance transaction, approved by the Arizona Department of Insurance, which involves the ceding of approximately $5,000,000,000 of variable annuities to ANLIC Insurance Company (Cayman), a Cayman Islands stock life insurance company. As a part of this transaction, the Company received cash amounting to approximately $188,700,000, and recorded a corresponding reduction of deferred acquisition costs related to the coinsured annuities. On July 15, 1998, the Company entered into a definitive agreement to acquire the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life") via a 100% coinsurance transaction for approximately $130,000,000 in cash. The transaction will include approximately $2,000,000,000 of universal life reserves and $3,000,000,000 of fixed annuity reserves. The Company plans to reinsure a large portion of the mortality risk associated with the acquired block of universal life business. Completion of this acquisition is expected by the end of calendar year 1998 and is subject 8 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands - unaudited) 3. Subsequent Events (Continued) ---------------------------- to customary conditions and required approvals. Included in this block of business is approximately $250,000,000 of individual life business and $500,000,000 of group annuity business whose contractowners are residents of New York State ("the New York Business"). Approximately six months subsequent to completion of the transaction, the New York Business will be acquired by the Company's New York affiliate, First SunAmerica Life Insurance Company, and the remainder of the business will be acquired by the Company via assumption reinsurance agreements between MBL Life and the respective companies, which will supersede the coinsurance agreement. The $130,000,000 purchase price will be allocated between the Company and its affiliate based on their respective assumed reserves. 9 ANCHOR NATIONAL LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of Anchor National Life Insurance Company (the "Company") for the three months and nine months ended June 30, 1998 and June 30, 1997 follows. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. RESULTS OF OPERATIONS NET INCOME totaled $25.6 million in the third quarter of 1998, compared with $15.1 million in the third quarter of 1997. For the nine months, net income amounted to $100.3 million in 1998, compared with $34.7 million in 1997. PRETAX INCOME totaled $40.6 million in the third quarter of 1998 and $22.7 million in the third quarter of 1997. For the nine months, pretax income totaled $155.1 million in 1998, compared with $52.7 million in 1997. The significant improvements in the current periods over the prior periods primarily resulted from increased fee income and net realized investment gains. 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, decreased to $14.1 million in the third quarter of 1998 from $19.5 million in the third quarter of 1997. These amounts equal 2.18% of average invested assets (computed on a daily basis) of $2.59 billion in the third quarter of 1998 and 2.82% of average invested assets of $2.77 10 billion in the third quarter of 1997. For the nine months, net investment income increased to $62.8 million in 1998 from $50.4 million in 1997, equalling 3.29% of average invested assets of $2.55 billion in 1998 and 2.52% of average invested assets of $2.66 billion in 1997. Net investment spreads include the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. This excess amounted to $139.5 million in the third quarter of 1998, $95.8 million in the third quarter of 1997, $109.1 million in the nine months of 1998 and $131.2 million in the nine months of 1997. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 1.88% in the third quarter of 1998, 2.63% in the third quarter of 1997, 3.06% in the nine months of 1998 and 2.25% in the nine months of 1997. Investment income (and the related yields on average invested assets) totaled $47.9 million (7.38%) in the third quarter of 1998, $56.3 million (8.12%) in the third quarter of 1997, $162.2 million (8.49%) in the nine months of 1998, and $153.7 million (7.70%) in the nine months of 1997. The declines in investment income and the related yield in the third quarter of 1998 reflect losses from the Company's investments in limited partnerships. Investment income and the related yield in the nine months of 1998 primarily reflect the higher returns realized in the first quarter of 1998 on the Company's investments in limited partnerships. Partnership losses totaled $0.7 million (a yield of -21.17% on related average assets of $14.0 million) in the third quarter of 1998, compared with partnership income of $2.8 million (a yield of 26.42% on related average assets of $42.8 million) in the third quarter of 1997. For the nine months, partnership income amounted to $21.4 million (a yield of 197.19% on related average assets of $14.5 million) in 1998, compared with $5.0 million (a yield of 15.32% on related average assets of $43.4 million) in 1997. Partnership income is based primarily upon cash distributions received from limited partnerships, the operations of which the Company does not influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future. Total interest expense equalled $33.7 million in the third quarter of 1998 and $36.8 million in the third quarter of 1997. For the nine months, interest expense aggregated $99.4 million in 1998, compared with $103.3 million in 1997. The average rate paid on all interest-bearing liabilities was 5.50% in the third quarter of 1998 and 5.49% in the third quarter of 1997. For the nine months, the average rate paid on all interest-bearing liabilities was 5.43% for 1998 and 5.45% for 1997. Interest-bearing liabilities averaged $2.45 billion during the third quarter of 1998, $2.68 billion during the third quarter of 1997, $2.44 billion during the nine months of 1998 and $2.53 billion during the nine months of 1997. The modest decline in average invested assets in the 1998 periods, which results from the net effect of increased sales of the Company's fixed rate products and net exchanges from fixed accounts into the separate accounts of variable annuity contracts, reflects a similar modest decline in average interest-bearing liabilities. Fixed annuity premiums (comprised primarily of premiums for the fixed accounts of variable annuities) totaled $417.1 million in the third quarter of 1998, $188.9 million in the third quarter of 1997, $1.05 billion in the nine months of 1998 and $877.9 million in the nine months of 1997. On an annualized basis, these amounts represent 79%, 35%, 67% and 65% 11 of fixed annuity reserves at the beginning of the respective periods. A substantial proportion of the fixed premiums received on Polaris annuity contracts were allocated to the one-year fixed fund under an option to dollar cost average into the variable funds. Accordingly, a large portion of these premiums have transferred into the separate accounts, resulting in the modest decline in average interest-bearing liabilities. There were no guaranteed investment contract ("GIC") premiums received during the third quarters of 1998 and 1997. For the nine months, GIC premiums totaled $5.6 million in 1998 and $55.0 million in 1997. On an annualized basis, for the nine months of 1998 and 1997, these amounts represent 3% and 18% of GIC reserves at the beginning of the respective periods. The Company does not actively market GICs; consequently, premiums may vary substantially from period to period. The GICs issued by the Company generally guarantee the payment of principal and interest at fixed or variable rates for a term of three to five years. Contracts that are purchased by banks for their long-term portfolios or by state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. GICs purchased by asset management firms for their short-term portfolios either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity. NET REALIZED INVESTMENT GAINS totaled $2.7 million in the third quarter of 1998, compared with net realized investment losses of $2.4 million in the third quarter of 1997 and include impairment writedowns of $0.7 million and $3.9 million, respectively. Thus, net gains from sales and redemptions of investments totaled $3.4 million in the third quarter of 1998 and $1.5 million in the third quarter of 1997. For the nine months, net realized investment gains totaled $25.9 million in 1998, compared with $22.7 million of net losses realized in 1997, and include impairment writedowns of $2.2 million and $20.0 million, respectively. Thus, for the nine months, net gains from sales and redemptions of investments totaled $28.1 million in 1998, compared with net losses of $2.7 million in 1997. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $498.4 million in the third quarter of 1998, $609.8 million in the third quarter of 1997, $1.58 billion in the nine months of 1998 and $2.19 billion in the nine months of 1997, respectively. Sales of investments result from the active management of the Company's investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.52%, 0.21%, 1.47% and 0.14% of average invested assets on an annualized basis for the third quarter of 1998, the third quarter of 1997, the nine months of 1998 and the nine months of 1997, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company's active portfolio management is to maximize total returns on the investment portfolio, taking into account credit and interest- rate risk. Impairment writedowns in the nine months of 1997 reflect $15.7 million of provisions applied to non-income producing land owned in Arizona. The 12 statutory carrying value of this land had been guaranteed by the Company's ultimate Parent, SunAmerica Inc. ("SunAmerica"). SunAmerica made a capital contribution of $28.4 million on December 31, 1996 to the Company through the Company's direct parent in exchange for the termination of its guaranty with respect to this land. Accordingly, the Company reduced the carrying value of this land to estimated fair value to reflect the termination of the guaranty. Impairment writedowns, on an annualized basis, represent 0.11%, 0.56%, 0.11% and 1.00% of average invested assets for the third quarter of 1998, the third quarter of 1997, the nine months of 1998 and the nine months of 1997, respectively. For the 19 fiscal quarters beginning October 1, 1993, impairment writedowns as a percentage of average invested assets have ranged up to 3.64% and have averaged 0.80%. Such writedowns are based upon estimates of the net realizable value of the applicable assets. Actual realization will be dependent upon future events. VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $53.9 million in the third quarter of 1998 and $35.2 million in the third quarter of 1997. For the nine months, variable annuity fees totaled $145.5 million in 1998, compared with $98.2 million in 1997. These increased fees reflect growth in average variable annuity assets, due to increased market values, the receipt of variable annuity premiums and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders. On an annualized basis, variable annuity fees represent 2% of average variable annuity assets for each of the third quarters of 1998 and 1997 and the nine months of 1998 and 1997. Variable annuity assets averaged $11.51 billion during the third quarter of 1998 and $7.62 billion during the third quarter of 1997. For the nine months, variable annuity assets averaged $10.38 billion in 1998, compared with $7.11 billion in 1997. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, have aggregated $1.76 billion since June 30, 1997. Variable annuity premiums increased to $517.3 million in the third quarter of 1998 from $328.6 million in the third quarter of 1997. For the nine months, variable annuity premiums increased to $1.35 billion in 1998, compared with $859.6 million in 1997. On an annualized basis, these amounts represent 19%, 19%, 19% and 18% of variable annuity reserves at the beginning of the respective periods. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $934.3 million, $517.5 million, $2.40 billion and $1.74 billion in the third quarters of 1998 and 1997 and the nine months of 1998 and 1997, respectively, and primarily reflect sales of the Company's flagship variable annuity, Polaris. Polaris is a multi-manager variable annuity that offers investors a choice of 26 variable funds and 7 guaranteed fixed-rate funds. Increases in Variable Annuity Product Sales in the 1998 periods over those in the 1997 periods are due, in part, to market share gains through enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed income and guaranteed fixed account investment choices. The Company has encountered increased competition in the variable annuity marketplace during recent years and anticipates that the market will remain highly competitive for the foreseeable future. Also, from time to time, Federal initiatives are proposed which could affect the taxation of variable annuities and annuities generally (See "Regulation"). 13 NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiary, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $13.1 million in the third quarter of 1998 and $10.3 million in the third quarter of 1997. For the nine months, net retained commissions totaled $35.8 million in 1998 and $27.9 million in 1997. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $3.05 billion in the third quarter of 1998 and $2.98 billion in the third quarter of 1997. For the nine months, such sales totaled $11.19 billion in 1998 and $7.69 billion in 1997. The increases in sales and net retained commissions in the 1998 periods over those in the 1997 periods reflect a greater number of registered representatives, higher average production per representative and generally favorable market conditions. Increases in net retained commissions may not be proportionate to increases in sales primarily due to differences in sales mix. SURRENDER CHARGES on fixed and variable annuities totaled $2.2 million in the third quarter of 1998 and $1.3 million in the third quarter of 1997. For the nine months, surrender charges on fixed and variable annuities totaled $5.3 million in 1998, compared with $3.8 million in 1997. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of an annuity contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $309.4 million in the third quarter of 1998, compared with $262.3 million in the third quarter of 1997. These payments, annualized, represent 9.2% and 10.9%, respectively, of average fixed and variable annuity reserves. For the nine months, withdrawal payments totaled $878.4 million in 1998 and $778.2 million in 1997 and, annualized, represent 9.5% and 11.5%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity withdrawals from the separate accounts totaling $258.8 million (9.0% of average variable annuity reserves), $197.9 million (10.4% of average variable annuity reserves), $726.4 million (9.4% of average variable annuity reserves) and $589.3 million (11.1% of average variable annuity reserves) in the third quarters of 1998 and 1997 and the nine months of 1998 and 1997, respectively. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SunAmerica Asset Management Corp. Such fees totaled $7.7 million on average assets managed of $3.01 billion in the third quarter of 1998 and $6.2 million on average assets managed of $2.31 billion in the third quarter of 1997. For the nine months, asset management fees totaled $21.8 million on average assets managed of $2.83 billion in 1998, compared with $18.9 million on average assets managed of $2.27 billion in 1997. Asset management fees are not proportionate to average assets managed, principally due to changes in product mix. Sales of mutual funds, excluding sales of money market accounts, have aggregated $759.4 million since June 30, 1997. Mutual fund sales totaled $241.5 million in the third quarter of 1998, up 111% from $114.4 million in the third quarter of 1997. For the nine months, such sales totaled $601.3 million in 1998, more than double the $296.7 million in 1997. The significant increases in sales during the 1998 periods principally resulted from the sales of the Company's "Style Select Series" product, and the introduction in June 1998 of the "Dogs" of Wall Street fund and the Style Select Focus Fund. The "Style Select Series" is a group of mutual funds which are each managed by three industry recognized fund managers. The "Dogs" of Wall Street fund contains 30 large capitalization value stocks which are selected by strict 14 criteria. The Style Select Focus Fund also limits itself to 30 large capitalization stocks primarily but holds only growth stocks. Sales of these products totaled $181.1 million, $76.1 million, $425.8 million and $161.1 million for the third quarters of 1998 and 1997 and the nine months of 1998 and 1997, respectively, reflecting the addition of five new Style Select funds, which more than doubled the number of Style Select funds to nine, and generally favorable market conditions. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $112.5 million in the third quarter of 1998 and $102.1 million in the third quarter of 1997. For the nine months, such redemptions amounted to $313.3 million in 1998 and $316.3 million in 1997. GENERAL AND ADMINISTRATIVE EXPENSES totaled $24.1 million in the third quarter of 1998 and $24.5 million in the third quarter of 1997. For the nine months, general and administrative expenses totaled $71.6 million in 1998 and $71.7 million in 1997. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $24.9 million in the third quarter of 1998, compared with $21.5 million in the third quarter of 1997. For the nine months, such amortization totaled $60.5 million in 1998, compared with $48.8 million in 1997. The increase in amortization was primarily due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other direct selling costs. ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company's variable annuity contracts. Substantially all of the Company's currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. Annual commissions totaled $5.0 million in the third quarter of 1998, $2.5 million in the third quarter of 1997, $12.7 million in the nine months of 1998 and $5.9 million in the nine months of 1997. The increase in annual commissions reflects increased sales of annuities that offer this commission option. The Company estimates that approximately 50% of the average balances of its variable annuity products is currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods. INCOME TAX EXPENSE totaled $15.1 million in the third quarter of 1998, compared with $7.5 million in the third quarter of 1997, and $54.8 million in the nine months of 1998, compared with $18.0 million in the nine months of 1997, representing effective tax rates of 37%, 33%, 35% and 34%, respectively. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased 42.7% to $820.9 million at June 30, 1998 from $575.2 million at September 30, 1997, primarily due to the $200.4 million capital contribution received by the Company in June 1998 and the $100.3 million of net income recorded in the six months of 1998, partially offset by the $51.2 million dividend paid in June 1998. It is anticipated that a substantial portion of the $200.4 million capital contribution will be withdrawn during the fourth quarter of fiscal year 1998. INVESTED ASSETS at June 30, 1998 totaled $2.77 billion, compared with $2.61 billion at September 30, 1997. The Company manages most of its invested 15 assets internally. The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company's need for liquidity and other similar factors. THE BOND PORTFOLIO, which constitutes 77% of the Company's total investment portfolio (at amortized cost), had an aggregate fair value that exceeded its amortized cost by $35.3 million at June 30, 1998, compared with an excess of $43.7 million at September 30, 1997. The net unrealized gains on the Bond Portfolio since September 30, 1997 principally reflect the lower prevailing interest rates at June 30, 1998 and the corresponding effect on the fair value of the Bond Portfolio. At June 30, 1998, the Bond Portfolio (at amortized cost, excluding $6.1 million of redeemable preferred stocks) included $2.01 billion of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC") and $100.1 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At June 30, 1998, approximately $1.90 billion of the Bond Portfolio was investment grade, including $792.1 million of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At June 30, 1998, the Bond Portfolio included $202.0 million (at amortized cost with a fair value of $202.0 million) of bonds that were not investment grade. Based on their June 30, 1998 amortized cost, these non- investment-grade bonds accounted for 1.3% of the Company's total assets and 7.4% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. The Company had no material concentrations of non-investment-grade securities at June 30, 1998. The table on the following page summarizes the Company's rated bonds by rating classification as of June 30, 1998 (dollars in thousands): 16 RATED BONDS BY RATING CLASSIFICATION (dollars in thousands)
Issues not rated by S&P/Moody's/ Issues Rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC Category Total - ---------------------------------------------- ----------------------------------- ----------------------------------- S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated [DCR]/{Fitch} Amortized fair category Amortized fair Amortized invested fair category (1) cost value (2) cost value cost assets(3) value - --------------- ----------- ----------- -------- ----------- ------------ ----------- --------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] {AAA to A-} $ 1,102,727 $ 1,120,327 1 $ 196,687 $ 205,329 $ 1,299,414 47.47% $ 1,325,656 BBB+ to BBB- (Baal to Baa3) [BBB+ to BBB-] {BBB+ to BBB-} 460,073 466,960 2 144,245 146,271 604,318 22.07 613,231 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-} 46,189 44,859 3 8,189 8,640 54,378 1.99 53,499 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-} 119,987 120,062 4 25,531 26,260 145,518 5.32 146,322 CCC+ to C (Caa to C) [CCC] {CCC+ to C-} 510 502 5 1,500 1,551 2,010 0.07 2,053 C1 to D [DD] {D} --- --- 6 101 101 101 0.00 101 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RATED ISSUES $ 1,729,486 $ 1,752,710 $ 376,253 $ 388,152 $ 2,105,739 $ 2,140,862 =========== =========== =========== =========== =========== =========== Footnotes appear on the following page.
17 Footnotes to the table of rated bonds by rating classification -------------------------------------------------------------- (1) S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. DCR rates debt securities in rating categories ranging from AAA (the highest) to DD (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody's, DCR or Fitch ratings if rated by multiple agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $100.1 million (at amortized cost) of assets that were rated by the Company pursuant to applicable NAIC rating guidelines. (3) At amortized cost. 18 Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $178.3 million at June 30, 1998. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At June 30, 1998, Secured Loans consisted of $83.7 million of publicly traded securities and $94.6 million of privately traded securities. These Secured Loans are composed of loans to 63 borrowers spanning 20 industries, with 36% of these assets (at amortized cost) concentrated in financial institutions. No other industry concentration constituted more than 10% of these assets. While the trading market for the Company's privately traded Secured Loans is more limited than for publicly traded issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC. MORTGAGE LOANS aggregated $377.0 million at June 30, 1998 and consisted of 134 commercial first mortgage loans with an average loan balance of approximately $2.8 million, collateralized by properties located in 28 states. Approximately 20% of this portfolio was office, 19% was multifamily residential, 15% was hotel, 13% was manufactured housing, 10% was industrial and 23% was other types. At June 30, 1998, approximately 17% and 16% of this portfolio were secured by properties located in California and New York, respectively, and no more than 8% of this portfolio was secured by properties located in any other single state. At June 30, 1998, there were three mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 11% of this portfolio. At June 30, 1998, approximately 28% of the mortgage loan portfolio consisted of loans with balloon payments due before July 1, 2001. During the third quarters and nine months of 1998 and 1997, loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio. At June 30, 1998, approximately 11% of the mortgage loans were seasoned loans underwritten to the Company's standards and purchased at or near par from other financial institutions. Such loans generally have higher average interest rates than loans that could be originated today. The balance of the mortgage loan portfolio has been originated by the Company under strict underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the more immediate effects of general economic conditions on these commercial property types. However, due to its emphasis on multifamily loans and its strict underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields. OTHER INVESTED ASSETS aggregated $38.5 million at June 30, 1998, including $12.3 million of investments in limited partnerships and an aggregate of $26.2 million of miscellaneous investments, including policy loans, 19 residuals and leveraged leases. The Company's limited partnership interests, accounted for by using the cost method of accounting, are invested primarily in a combination of debt and equity securities. ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company's fixed-rate products incorporate surrender charges or other restrictions in order to encourage persistency. Approximately 77% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at June 30, 1998. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used stress-test interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed- rate products and conducting its investment operations to closely match the duration of the fixed-rate assets to that of its fixed-rate liabilities. The Company's fixed-rate assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; and investments in limited partnerships that invest primarily in fixed-rate securities and are accounted for by using the cost method. At June 30, 1998, these assets had an aggregate fair value of $2.66 billion with a duration of 3.9. The Company's fixed-rate liabilities include fixed annuities, subordinated notes and GICs. At June 30,1998, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $2.41 billion with a duration of 1.1. The Company's potential exposure due to a 10% increase in prevailing interest rates from their June 30, 1998 levels is a loss of $41.8 million in fair value of its fixed-rate assets that is not offset by a decrease in the fair value of its fixed-rate liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss. Duration is a common option-adjusted measure for the price sensitivity of a fixed-maturity portfolio to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio if interest rates change by 100 basis points, recognizing the changes in cash flows resulting from embedded options such as policy surrenders, investment prepayments and bond calls. It also incorporates the assumption that the Company will continue to utilize its existing strategies of pricing its fixed annuity and GIC products, allocating its available cash flow amongst its various investment portfolio sectors and maintaining sufficient levels of liquidity. Because the calculation of duration involves estimation and incorporates assumptions, potential changes in portfolio value indicated by the portfolio's duration will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. 20 As a component of its asset and liability management strategy, the Company utilizes interest rate swap agreements ("Swap Agreements") to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At June 30, 1998, the Company had one outstanding Swap Agreement with a notional principal amount of $21.5 million. This agreement matures in December 2024. The Company also seeks to provide liquidity from time to time by using reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It also seeks to enhance its spread income by using Reverse Repos. Reverse Repos involve a sale of securities and an agreement to repurchase the same securities at a later date at an agreed upon price and are generally over- collateralized. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans. There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company's Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Reverse Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company's policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody's. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable- rate assets or reduced interest expense paid on the variable-rate liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. As part of its decision to purchase an MBS, the Company assesses the risk of prepayment by analyzing the security's projected performance over an array of interest- rate scenarios. Once an MBS is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information 21 concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $2.4 million at June 30, 1998 (at amortized cost, with a fair value of $2.4 million), including $1.5 million of bonds and notes and $0.9 million of mortgage loans. At June 30, 1998, defaulted investments constituted 0.1% of total invested assets. At September 30, 1997, defaulted investments totaled $1.4 million, including $0.5 million of bonds and notes and $0.9 million of mortgage loans, and constituted 0.1% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At June 30, 1998, approximately $1.67 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $44.6 million, while approximately $446.0 million of the Bond Portfolio had an aggregate unrealized loss of $9.3 million. In addition, the Company's investment portfolio currently provides approximately $24.1 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company's annuity and GIC products have been more than sufficient in amount to satisfy the Company's liquidity needs. Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company's average cost of funds would increase over time as it prices its new and renewing annuities and GICs to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market. In a declining rate environment, the Company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities and GICs. Should increased liquidity be required for withdrawals, the Company believes that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market. The Company relies significantly on computer systems and applications in its daily operations. Many of these systems and applications are not presently 22 year 2000 compliant. The Company's business, financial condition and results of operations could be materially and adversely affected by the failure of the Company's systems and applications (and those operated by third parties interfacing with the Company's systems and applications) to properly operate or manage dates beyond the year 1999. The Company has a coordinated plan to repair or replace these noncompliant systems and to obtain similar assurances from third parties interfacing with the Company's systems and applications. In Fiscal year 1997, the Company recorded a $6.2 million provision for estimated programming costs to make necessary repairs of certain specific noncompliant systems. Management also expects to make expenditures totaling $5.0 million to replace certain other specific noncompliant systems, which expenditures will be capitalized as software costs and amortized over future periods. Both phases of the project are currently proceeding in accordance with the plan and management expects them to be substantially completed by the end of 1998. Testing of both the repaired and replacement systems will be conducted during calendar 1999. REGULATION The Company is subject to regulation and supervision by the insurance regulatory agencies of the states in which it is authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers. Principal among these powers are granting and revoking licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, licensing agents, approving policy forms, regulating certain premium rates, regulating insurance holding company systems, establishing reserve and valuation requirements, prescribing the form and content of required financial statements and reports, performing financial, market conduct and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, defining acceptable accounting principles, regulating the type, valuation and amount of investments permitted, and limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval. During the last decade, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the National Association of Insurance Commissioners ("NAIC"). Various states have considered or enacted legislation that changes, and in many cases increases, the states' authority to regulate insurance companies. Legislation has been introduced from time to time in Congress that could result in the federal government assuming some role in the regulation of insurance companies or allowing combinations between insurance companies, banks and other entities. In recent years, the NAIC has developed several model laws and regulations designed to reduce the risk of insurance company insolvencies and market conduct violations. These initiatives include investment reserve requirements, risk-based capital ("RBC") standards, codification of insurance accounting principles, new investment standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws or regulations relating to product design, product reserving standards and illustrations of annuity products. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. The RBC standards consist of formulas which establish capital requirements relating to insurance, business, assets and interest rate risks, 23 and which help to identify companies which are under-capitalized and require specific regulatory actions in the event an insurer's RBC falls below specified levels. The Company has more than enough statutory capital to meet the NAIC's RBC requirements as of the most recent calendar year-end. Arizona, the Company's domicile state, has adopted these RBC standards, and the Company is in compliance with such laws. Further, for statutory reporting purposes, the annuity reserves of the Company are calculated in accordance with statutory requirements and are adequate under current cash-flow testing models. SunAmerica Asset Management Corp., a subsidiary of the Company, is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. The mutual funds that it markets are subject to regulation under the Investment Company Act of 1940. SunAmerica Asset Management Corp. and the mutual funds are subject to regulation and examination by the SEC. In addition, variable annuities and the related separate accounts of the Company are subject to regulation by the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. The Company's broker-dealer subsidiary, Royal Alliance Associates, Inc., is subject to regulation and supervision by the states in which it transacts business, as well as by the SEC and the National Association of Securities Dealers ("NASD"). The SEC and the NASD have broad administrative and supervisory powers relative to all aspects of business and may examine the subsidiary's business and accounts at any time. From time to time, Federal initiatives are proposed that could affect the Company's businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company's sales of affected products, and consequently on its results of operations, the Company believes such proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them. 24 ANCHOR NATIONAL LIFE INSURANCE COMPANY QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 20 and 21 herein. 25 ANCHOR NATIONAL LIFE INSURANCE COMPANY OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable. Item 4. Submissions of Matters to a Vote of Security Holders ---------------------------------------------------- Not applicable. Item 5. Other Information ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K -------------------------------- EXHIBITS Exhibit No. Description - ------- ----------- 10(a) Subordinated Loan Agreement for Equity Capital, dated as of April 29, 1998, between the Company's subsidiary, SunAmerica Capital Services, Inc. ("SACS"), and SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.5% notes due June 27, 2001. 10(b) Subordinated Loan Agreement for Equity Capital, dated as of June 3, 1998, between the Company's subsidiary, SACS, and SAI defining SAI's rights with respect to the 8.5% notes due July 30, 2001. 27 Financial Data Schedule REPORTS ON FORM 8-K No current report on Form 8-K was filed during the three months ended June 30, 1998. However, on July 15, 1998, the Company filed a current report on Form 8-K concerning its proposed acquisition of MBL Life Assurance Corporation. 26 SIGNATURES 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: ANCHOR NATIONAL LIFE INSURANCE COMPANY -------------------------------------- Signature Title Date - --------- ----- ---- /s/ SCOTT L. ROBINSON Senior Vice President and August 13, 1998 - ------------------------ Director (Principal Financial --------------- Scott L. Robinson Officer) /s/ N. SCOTT GILLIS Senior Vice President and August 13, 1998 - ------------------------ Controller (Principal --------------- N. Scott Gillis Accounting Officer) 27 ANCHOR NATIONAL LIFE INSURANCE COMPANY LIST OF EXHIBITS FILED Exhibit No. Description - ------- ----------- 10(a) Subordinated Loan Agreement for Equity Capital, dated as of April 29, 1998, between the Company's subsidiary, SunAmerica Capital Services, Inc. ("SACS"), and SunAmerica Inc. ("SAI"), defining SAI's rights with respect to the 8.5% notes due June 27, 2001. 10(b) Subordinated Loan Agreement for Equity Capital, dated as of June 3, 1998, between the Company's subsidiary, SACS, and SAI defining SAI's rights with respect to the 8.5% notes due July 30, 2001. 27 Financial Data Schedule 28 EX-27 2
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS SEP-30-1998 JUN-30-1998 2,147,159,000 0 0 251,000 376,974,000 24,000,000 2,773,016,000 186,129,000 0 639,078,000 15,480,202,000 2,430,762,000 0 0 0 35,950,000 3,511,000 0 0 817,408,000 15,480,202,000 0 159,319,000 25,906,000 211,067,000 96,480,000 60,475,000 12,701,000 155,063,000 54,811,000 100,252,000 0 0 0 100,252,000 0 0 0 0 0 0 0 0 0
EX-10.A 3 EXHIBIT 10(a) NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica, Inc. (Name) 1 SunAmerica Center (Street Address) Los Angeles California 90067-6022 (City) (State) (Zip) AND Borrower Capital Services Inc. (Name) 733 Third Avenue (Street Address) New York New York 10017 (City) (State) (Zip) NASD IDNO: 13158 Date Filed: May 14, 1998 NASD RECEIVED: May 15, 1998 NASD Regulation, Inc. District 10 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT DATED April 29, 1998 to be effective May 28, 1998 between SunAmerica, Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $3,500,00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promises to pay to the Lender or assigns on June 27, 2001 (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 8.5* % 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-d 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 provision 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. * Interest to be paid quarterly from the effective date of this Agreement. 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, but in no event may any prepayment be made before the expiration of one year from the date this Agreement Became effective. No prepayment shall be made if, after giving effect thereto (and to all payments for 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 a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (a)(1)(ii) 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 than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (a)(1)(ii), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or 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 (a)(1)(ii), 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 (a)(1)(ii) 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, 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 (a)(1)(ii), 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 from 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 and any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawals, advances or loans, either aggregate indebtedness of any of the consolidated entities exceeds 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (a)(1)(ii) 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 (a)(1)(ii), 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-DEALERS 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 Broker-Dealer 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. 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 inconsistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-d. The 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, rule 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 Borrower 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 29th day of April, 1998. SunAmerica Capital services, Inc. (Name of Broker-Dealer) By: /s/ Debbi Potash-Turner L.S. (Authorized Person) By: /s/ SunAmerica, Inc. L.S. (Lender) By: /s/ James R. Belardi L.S. Executive Vice President FOR NASD USE ONLY ACCEPTED BY: /s/ Joseph M. McCarthy (Name) Assistant Director (Title) EFFECTIVE DATE: 5/28/98 LOAN NUMBER: 10-E-SLA-10749 SUBORDINATED LOAN AGREEMENT LOAN 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 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: ultimate parent of the Broker-Dealer; continuously monitors the fiscal status and reports of the Broker-Dealer. 6. If not a partner or stockholder is not 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/oroperational 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:_______________. Dated: April 29, 1998 /s/ James R. Belardi L.S. (Lender) Executive Vice President CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation), do hereby certify that 91) the Executive Committee of the Board of Directors of this corporation as of August 22, 1996, adopted the following resolutions, (2) that such resolutions have not been amended or rescinded from the date of their resolution and are in full force and effect as of the date hereof, (3) the principal amount limits set forth in the following resolutions are not exceeded by that certain $3,500,000 Subordinated Loan Agreement for Equity Capital dated April 29, 1998, and effective May 28, 1998 between this Corporation and SunAmerica Capital Services, Inc. Blanket Authorization of Subordinated Loan Agreements for Equity Capital WHEREAS, this Corporation, from time to time, reviews the net capital infusion needs of its wholly-owned subsidiaries which are broker-dealers registered with the Securities and Exchange Commission and members of the National Association of Securities Dealers, Inc., including SunAmerica Capital Services, Inc., Advantage Capital Corporation, SunAmerica Securities, Inc. and Royal Alliance Associates, Inc., and in conjunction with such review, has provided subordinated loans to such subsidiaries pursuant to Subordinated Loan Agreements for Equity Capital; WHEREAS, it is in the best interests of this Corporation to provide blanket authorization for such subordinated loan transactions; NOW, THEREFORE, BE IT RESOLVED that the Chairman, any Vice Chairman, any Executive Vice President, or the Treasurer (the "Designated Officers"), acting alone, be, and each hereby is authorized to effect subordinated loans to the wholly-owned broker-dealer subsidiaries of the Corporation, in an aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000), and to make, execute and deliver such loan agreements and other documents evidencing such loans, including any Subordinated Loan Agreement for Equity Capital, as deemed necessary or appropriate; RESOLVED FURTHER that each of the Designated Officers are hereby authorized to make such changes in the terms and conditions of such Subordinated Loan Agreements 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 29th day of April, 1998. /s/ Susan L. Harris SUSAN L. HARRIS (SEAL) EX-10.B 4 EXHIBIT 10(b) NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica, Inc. (Name) 1 SunAmerica Center (Street Address) Los Angeles California 90067-6022 (City) (State) (Zip) AND Borrower Capital Services Inc. (Name) 733 Third Avenue (Street Address) New York New York 10017 (City) (State) (Zip) NASD IDNO: 13158 Date Filed: June 9, 1998 NASD RECEIVED: June 10, 1998 NASD Regulation, Inc. District 10 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT DATED June 3, 1998 to be effective June 30, 1998 between SunAmerica, Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $3,500,00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promises to pay to the Lender or assigns on July 30, 2001 (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 8.5* % 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-d 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 provision 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. * Interest to be paid quarterly from the effective date of this Agreement. 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, but in no event may any prepayment be made before the expiration of one year from the date this Agreement Became effective. No prepayment shall be made if, after giving effect thereto (and to all payments for 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 a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (a)(1)(ii) 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 than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (a)(1)(ii), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or 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 (a)(1)(ii), 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 (a)(1)(ii) 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, 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 (a)(1)(ii), 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 from 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 and any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawals, advances or loans, either aggregate indebtedness of any of the consolidated entities exceeds 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (a)(1)(ii) 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 (a)(1)(ii), 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-DEALERS 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 Broker-Dealer 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. 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 inconsistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-d. The 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, rule 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 Borrower 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 3rd day of June 1998. SunAmerica Capital services, Inc. (Name of Broker-Dealer) By: /s/ Debbi Potash-Turner L.S. (Authorized Person) By: /s/ SunAmerica, Inc. L.S. (Lender) By: /s/ James R. Belardi L.S. Executive Vice President FOR NASD USE ONLY ACCEPTED BY: /s/ Deborah Davis (Name) Assistant Director (Title) EFFECTIVE DATE: 5/28/98 LOAN NUMBER: 10-E-SLA-10749 SUBORDINATED LOAN AGREEMENT LOAN 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 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: ultimate parent of the Broker-Dealer; continuously monitors the fiscal status and reports of the Broker-Dealer. 6. If not a partner or stockholder is not 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/oroperational 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:_______________. Dated: June 3,1998 /s/ James R. Belardi L.S. (Lender) Executive Vice President CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation), do hereby certify that (1) the Executive Committee of the Board of Directors of this corporation as of August 22, 1996, adopted the following resolutions, (2) that such resolutions have not been amended or rescinded from the date of their resolution and are in full force and effect as of the date hereof, (3) the principal amount limits set forth in the following resolutions are not exceeded by that certain $3,500,000 Subordinated Loan Agreement for Equity Capital dated April 29, 1998, and effective May 28, 1998 between this Corporation and SunAmerica Capital Services, Inc. Blanket Authorization of Subordinated Loan Agreements for Equity Capital WHEREAS, this Corporation, from time to time, reviews the net capital infusion needs of its wholly-owned subsidiaries which are broker-dealers registered with the Securities and Exchange Commission and members of the National Association of Securities Dealers, Inc., including SunAmerica Capital Services, Inc., Advantage Capital Corporation, SunAmerica Securities, Inc. and Royal Alliance Associates, Inc., and in conjunction with such review, has provided subordinated loans to such subsidiaries pursuant to Subordinated Loan Agreements for Equity Capital; WHEREAS, it is in the best interests of this Corporation to provide blanket authorization for such subordinated loan transactions; NOW, THEREFORE, BE IT RESOLVED that the Chairman, any Vice Chairman, any Executive Vice President, or the Treasurer (the "Designated Officers"), acting alone, be, and each hereby is authorized to effect subordinated loans to the wholly-owned broker-dealer subsidiaries of the Corporation, in an aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000), and to make, execute and deliver such loan agreements and other documents evidencing such loans, including any Subordinated Loan Agreement for Equity Capital, as deemed necessary or appropriate; RESOLVED FURTHER that each of the Designated Officers are hereby authorized to make such changes in the terms and conditions of such Subordinated Loan Agreements 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 3rd day of June, 1998. /s/ Susan L. Harris SUSAN L. HARRIS (SEAL) -----END PRIVACY-ENHANCED MESSAGE-----