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Proc-Type: 2001,MIC-CLEAR
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SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C.
20549 FORM 10-K (Mark
One)
/X/ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES |
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EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] |
For the fiscal year ended December
31, 2001 OR
/ / |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES |
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EXCHANGE ACT OF 1934 [No Fee Required] |
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For the transition period from to |
Commission File No. 33-47472
AIG SUNAMERICA LIFE ASSURANCE COMPANY
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Incorporated in Arizona |
86-0198983 |
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IRS Employer |
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Identification No. |
1 SunAmerica Center, Los Angeles, California |
90067-6022 |
Registrant's telephone number, including area code: |
(310) 772-6000 |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes X No ___ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILES PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. X THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MARCH 27, 2002 WAS AS FOLLOWS: |
Common Stock (par value $1,000 per share) |
3,511 shares |
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PART I ITEM 1.
BUSINESS GENERAL
DESCRIPTION
AIG SunAmerica Life Assurance Company (DBA Anchor National Life Insurance
Company), including its wholly owned subsidiaries, (the "Company") is an
indirect wholly-owned subsidiary of SunAmerica Inc. ("SunAmerica"), which is a
wholly-owned subsidiary of American International Group, Inc. ("AIG"), a holding
company, which through its subsidiaries is engaged in a broad range of insurance
and insurance-related activities, financial services, retirement services and
asset management. The Company changed its name to SunAmerica National Life
Insurance Company on October 5, 2001 and further changed its name to AIG
SunAmerica Life Assurance Company on January 24, 2002. However, the Company is
continuing to do business as Anchor National Life Insurance Company. It is
currently anticipated that the Company will seek regulatory approval in each
state in which it does business to change its name to AIG SunAmerica Life
Assurance Company effective sometime in the first quarter of 2003.
The Company is incorporated in Arizona and maintains its principal executive
offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone
(310) 772-6000. The Company has no employees; however, employees of SunAmerica
and its other subsidiaries perform various services for the Company. SunAmerica
had approximately 2,300 employees at December 31, 2001, approximately 1,600 of
whom perform services for the Company as well as for certain of its affiliates.
Founded in 1965, the Company is an Arizona-chartered company licensed in 49
states and the District of Columbia. The Company is a life insurance company and
conducts its business through three segments: annuity operations, asset
management operations, and broker-dealer operations. Annuity operations focus
primarily on the marketing, sale and administration of deposit-type insurance
contracts such as fixed and variable annuity products, guaranteed investment
contracts ("GICs") and the administration of a closed block of universal life
business (See Note 3 of Notes to Consolidated Financial Statements). The
Company's variable annuity products offer investors a broad spectrum of fund
alternatives, with a choice of investment managers, as well as guaranteed
fixed-rate account options. The Company earns fee income on investments in the
variable account options and net investment income on the fixed-rate account
options. Asset management operations, which include the sale and management of
mutual funds, are conducted by SunAmerica Asset Management Corp. ("SunAmerica
Asset Management"), the Company's registered investment advisor subsidiary and
its related distributor, SunAmerica Capital Services, Inc. ("SACS"). These
companies earn fee income by distributing and managing a diversified family of
mutual funds, managing certain subaccounts within the Company's variable annuity
products and providing professional management of individual, corporate and
pension plan portfolios. SACS earns commissions and distribution fees by selling
proprietary mutual funds. Broker-dealer operations are conducted by the
Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal
Alliance"), which sells proprietary annuities and mutual funds, as well as a
full range of non-proprietary investment products. Net retained commissions are
derived from commissions on the sales of these products after deducting
approximately 90% of such commissions that is passed on to registered
representatives.
1
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The Company has declared a distribution to its Parent, effective January 1, 2002, of 100% of the outstanding capital stock of its consolidated subsidiary Saamsun Holdings Corp ("Saamsun"). This distribution was declared subject to the approval of the Arizona Department of Insurance. Saamsun is comprised of both the Company's asset management and broker-dealer segments. Upon approval of this distribution, the company will conduct its business through only one segment, Annuity operations (see Note 13 of Notes to consolidated financial statements). The Company ranks among the largest U.S. issuers of variable annuities. At December 31, 2001, the Company managed $34.92 billion of assets through its fixed-rate business and asset management operations, consisting of $26.94 billion of assets on its balance sheet and $7.97 billion of assets managed in mutual funds. Its asset management operations provide a broad range of financial planning and investment services through more than 10,700 independent registered representatives nationwide. The Company also distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms, independent general insurance agents, major financial institutions and, in the case of its GICs, by marketing directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 grew from 46 million to 62 million from 1990 to 2000, making this age group the fastest-growing segment of the U.S. population. Between 1990 and 2000, annual industry premiums from fixed and variable annuities and fund deposits increased from $129.3 billion to $303.8 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $149.1 billion to $1.63 trillion. Benefiting from continued strong growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs. In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based products such as variable annuities and mutual funds. The Company's fee-generating businesses entail no portfolio credit risk and require significantly less capital support than its fixed-rate business, which generates net investment income. The Company and its affiliates have made significant investments in technology over the past several years in order to lower operating costs and enhance marketing efforts. Its use of optical disk imaging and artificial intelligence has substantially reduced the more traditional paper-intensive life insurance processing procedures, reducing annuity processing and servicing costs and improving customer service. This has also enabled the Company to more efficiently assimilate acquired business. The Company has also implemented technology to interface with its wholly owned or affiliated broker-dealers, which enables the Company to more effectively market its products and help the affiliated financial professionals to better serve their clients. |
2
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On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life"), via a 100% coinsurance transaction ("the Acquisition"). The Company assumed reserves in this acquisition totaling $5,793,256,000, including $3,460,503,000 of fixed annuity contracts, $2,308,742,000 of universal life insurance contracts and $24,011,000 of guaranteed investment contracts. Policyholders of MBL annuity products were required to transfer their funds into an existing product of the Company or one of its affiliates by December 31, 1999 in order to receive the policy enhancements due under the MBL Life rehabilitation agreement. Over 92% of the deferred annuity reserves had either been transferred or surrendered by December 31, 1999. Included in the block of business acquired from MBL Life were policies whose owners are residents of New York State (the "New York Business"). On July 1, 1999, the New York Business was acquired by the Company's New York affiliate, First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance agreement, and the remainder of the business converted to assumption reinsurance, which superseded the coinsurance agreement. As part of this transfer, invested assets equal to $678,272,000, universal life reserves equal to $282,247,000, group pension reserves equal to $406,118,000, and other net assets of $10,093,000 were transferred to FSA. The following table shows the Company's net investment income and net realized investment losses and fee income for the year ended December 31, 2001 by business segment: |
NET INVESTMENT AND FEE INCOME | ||||||||||||||||||||
Annuity Operations | Asset Management Operations | Broker- Dealer Operations | Total | Total by Percent | ||||||||||||||||
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(In thousands) | ||||||||||||||||||||
Net investment income | ||||||||||||||||||||
and net realized | ||||||||||||||||||||
investment losses | $ | 58,427 | $ | (22,054 | ) | $ | 210 | $ | 36,583 | 6.4 | % | |||||||||
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Fee income: | ||||||||||||||||||||
Variable annuity fees | 350,378 | 11,499 | --- | 361,877 | 63.7 | |||||||||||||||
Net retained commissions | --- | 2,210 | 45,362 | 47,572 | 8.4 | |||||||||||||||
Asset management fees | --- | 63,529 | --- | 63,529 | 11.2 | |||||||||||||||
Universal life insurance | ||||||||||||||||||||
fees | 18,909 | --- | --- | 18,909 | 3.3 | |||||||||||||||
Surrender charges | 24,911 | --- | --- | 24,911 | 4.4 | |||||||||||||||
Other fees | 3,626 | 9,350 | 1,575 | 14,551 | 2.6 | |||||||||||||||
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Total fee income | 397,824 | 86,588 | 46,937 | 531,349 | 93.6 | |||||||||||||||
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Total | $ | 456,251 | $ | 64,534 | $ | 47,147 | $ | 567,932 | 100.0 | % | ||||||||||
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For additional financial information on the Company's business segments, see Note 12 of Notes to Consolidated Financial Statements. |
3
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ANNUITY OPERATIONS - VARIABLE ANNUITIES The variable annuity products of the Company offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income through the sale, administration and management of the variable account options of its variable annuity products. The Company also earns investment income on monies allocated to the fixed-rate account options of these products. Variable annuities offer retirement planning features similar to those offered by fixed annuities, but differ in that the contractholder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation fund selected by the contractholder. Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities. The Company's flagship Polaris and Seasons variable annuity products are multimanager variable annuities that offer investors a choice of 4 to 37 variable funds and up to 10 guaranteed fixed-rate funds. Seasons sales have increased significantly in recent years due to enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed-income and guaranteed fixed account investment choices. In addition to distributing its variable annuity products through its eight wholly-owned or affiliated broker-dealers, the Company distributes its products through a vast network of independent broker-dealers, full-service securities firms and financial institutions as well as through independent general insurance agents. In total, more than 60,000 independent sales representatives nationally are licensed to sell the Company's annuity products. At December 31, 2001, total variable product liabilities were $21.36 billion, of which $18.53 billion were held in separate accounts and $2.83 billion were the liabilities of the fixed-rate account options which are held in the general accounts. The Company's variable annuity products incorporate surrender charges to encourage persistency. At December 31, 2001, 80% of the Company's variable annuity liabilities held in the separate accounts were subject to surrender penalties or other restrictions. The Company's variable annuity products also generally limit the number of transfers made in a specified period between account options without the assessment of a fee. The average size of a new variable annuity contract sold by the Company in 2001 was approximately $70,000. ANNUITY OPERATIONS - FIXED ANNUITIES AND GICs The Company's general account obligations are fixed-rate products, including fixed annuities and universal life contracts issued in prior years and fixed-rate options of its variable annuity contracts. Such fixed-rate account options on its variable annuity contracts provide interest rate guarantees of one, two, three, five, seven or ten years. Although the Company's annuity contracts remain in force an average of seven to ten years, a majority (approximately 84% at December 31, 2001) of the annuity contracts, as well as all of the universal life contracts, reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, surrender assumptions and competitive industry pricing, among other factors. |
4
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The Company augments its retail annuity business with the sale of institutional products. At December 31, 2001, the Company had $477.9 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indices and $6.0 million of fixed-maturity, fixed-rate GICs. Of the total GIC portfolio at December 31, 2001, approximately 92% was sold to asset management firms, 7% was sold to state and local government entities and 1% was sold to corporations. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its fixed annuity, universal life and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed-rate securities. The Company's fixed annuity and universal life products incorporate surrender charges and its GIC products incorporate other restrictions in order to encourage persistency. Approximately 75% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2001. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. The Company manages most of its invested assets internally. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used stress-test interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting 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; policy loans, and investments in limited partnerships that invest primarily in fixed-rate securities. At December 31, 2001, these assets had an aggregate fair value of $6.21 billion with a duration of 3.3 (See further discussion of duration under Capital Resources and Liquidity - Asset Liability Matching). The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes. At December 31, 2001, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $5.83 billion with a duration of 2.7. For the years ended December 31, 2001, 2000, and 1999, the Company's yields on average invested assets were 6.63%, 7.15% and 6.95%, respectively; its average rates paid on all interest-bearing liabilities were 4.48%, 4.96% and 4.98%, respectively; and it realized net investment spreads on average invested assets of 2.18%, 2.35% and 2.08%, respectively. Net realized investment losses were 0.76%, 0.28% and 0.27% of average invested assets, respectively. |
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The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in credit quality outlook for certain securities, and the Company's need for liquidity and other similar factors. The following table summarizes the Company's investment portfolio at December 31, 2001: |
SUMMARY OF INVESTMENTS | ||||||||||||||||
Carrying |
Percent
of |
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(In thousands) | ||||||||||||||||
Cash and short-term investments | $ | 200,064 | 3.0 | % | ||||||||||||
U.S. government securities | 24,068 | 0.3 | ||||||||||||||
Mortgage-backed securities | 1,543,176 | 22.9 | ||||||||||||||
Other bonds, notes and redeemable preferred | ||||||||||||||||
stocks | 2,977,831 | 44.1 | ||||||||||||||
Mortgage loans | 692,392 | 10.3 | ||||||||||||||
Partnerships | 451,583 | 6.7 | ||||||||||||||
Policy loans | 226,961 | 3.4 | ||||||||||||||
Separate account seed money | 50,560 | 0.7 | ||||||||||||||
Common stocks | 861 | 0.0 | ||||||||||||||
Real estate | 20,091 | 0.3 | ||||||||||||||
Other invested assets | 563,739 | 8.3 | ||||||||||||||
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Total investments and cash | $ | 6,751,326 | 100.0 | % | ||||||||||||
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At December 31, 2001, the Bond Portfolio (excluding $21.5 million of redeemable preferred stocks) included $4.49 billion of bonds rated by S&P, Moody's, Fitch or the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), and $31.3 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 2001, approximately $4.31 billion of the Bond Portfolio was investment grade, including $1.57 billion of mortgage-backed securities and U.S. government/agency securities. At December 31, 2001, the Bond Portfolio included $215.5 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 0.8% of the Company's total assets and approximately 3.2% of its invested assets. |
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Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $158.8 million at December 31, 2001. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At December 31, 2001, Secured Loans consisted of loans to 41 borrowers spanning 17 industries, with 19% of these assets concentrated in paper manufacturing and distribution, 16% concentrated in energy, 16% concentrated in financial institutions and 11% concentrated in utilities. No other industry constituted more than 10% of these assets. Mortgage loans aggregated $692.4 million at December 31, 2001 and consisted of 125 commercial first mortgage loans with an average loan balance of approximately $5.5 million, collateralized by properties located in 29 states. Approximately 30% of this portfolio was office, 20% was manufactured housing, 19% was multifamily residential, 9% was hotels, 8% was industrial, 5% was retail and 9% was other types. At December 31, 2001, approximately 30% and 11% of this portfolio were secured by properties located in California and New York, respectively, and no more than 9% of this portfolio was secured by properties located in any other single state. At December 31, 2001, the carrying value, which approximates market value, of all investments in default as to the payment of principal or interest totaled $12.0 million ($9.8 million of bonds and $2.2 million of mortgage loans), which constituted less than 1% of total invested assets. For more information concerning the Company's investments, including the risks inherent in such investments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity." ASSET MANAGEMENT OPERATIONSThrough its registered investment advisor subsidiary, SunAmerica Asset Management, and its related distributor, SACS, the Company earns fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company's variable annuity products and providing professional management of individual, corporate and pension plan portfolios. The Company offers investors an array of equity, fixed-income, money market and tax-exempt mutual funds. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $9.45 billion of assets at December 31, 2001, including mutual fund assets, private accounts and certain of the variable annuity assets of the Company and its affiliates. SACS acts as a distributor for the Company's proprietary mutual funds and variable annuities and does not sell to the public. The SunAmerica mutual funds are distributed nationally through a network of approximately 500 financial institutions and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiary and affiliated broker-dealers. |
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BROKER-DEALER OPERATIONSBroker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance, which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products. Net retained commissions are derived from commissions on the sales of these products after deducting approximately 90% of such commissions that is passed on to registered representatives. Royal Alliance currently has a network of approximately 2,600 representatives. Royal Alliance, along with the Company's six affiliated broker-dealers, comprise the largest network of independent registered representatives in the nation and the fifth-largest securities sales force, based on industry data. Its wholly-owned or affiliated broker-dealers accounted for approximately one-third of the Company's total annuity sales in 2001. REGULATION The Company, in common with other insurers, is subject to regulation and supervision by the states and other jurisdictions in which it does business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to a state insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits on securities for the benefit of policyholders, methods of accounting, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than security holders. Risk-based capital ("RBC") standards are designed to measure the adequacy of an insurer's statutory capital and surplus in relation to the risks inherent in its business. The standards are intended to help identify inadequately capitalized companies and require specific regulatory actions in the event an insurer's RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer's size, but also on the risk profile of the insurer's operations. The RBC Model Law provides four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The statutory capital and surplus of the Company exceeded its RBC requirements by a considerable margin as of December 31, 2001. |
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In 1998, the NAIC adopted the codification of statutory accounting principles ("Codification") which replaced the NAIC's previous primary guidance on statutory accounting, which became effective January 1, 2001. Codification changed prescribed statutory accounting practices and has resulted in changes to the accounting practices that the Company uses to prepare its statutory basis financial statements. Codification has been adopted by all fifty states as the prescribed basis of accounting, including Arizona. The adoption of Codification resulted in an increase to the Company's statutory surplus of approximately $92.4 million. Privacy provisions of the Gramm-Leach-Bliley Act are fully effective in 2001 and establish new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The law also requires financial institutions to disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress and several states is designed to provide further privacy protections to consumers of financial products and services. These statutes and regulations may result in additional regulatory compliance costs, may limit the Company's ability to market its products, and may otherwise constrain the nature or scope of the Company's insurance and financial services operations. The Gramm-Leach-Bliley Act also allows combinations between insurance companies, banks and other entities. In addition, from time to time, Federal initiatives are proposed that could affect the Company's businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company's sales of affected products, and, consequently, on its results of operations, the Company believes these proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them. SunAmerica Asset Management is registered with the Securities and Exchange Commission ("SEC") as an investment adviser under the Investment Advisers Act of 1940. The mutual funds that it markets are subject to regulations under the Investment Company Act of 1940. SunAmerica Asset Management and the mutual funds are also subject to regulation and examination by the SEC. In addition, variable annuities and the related separate accounts of the Company are subject to regulation by the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. Royal Alliance is subject to regulation and supervision by the states in which its representatives transact business, as well as by the SEC and the National Association of Securities Dealers ("NASD"). The SEC and the NASD have broad administrative and supervisory powers relative to all aspects of broker-dealer business and may examine each subsidiary's business and accounts at any time. The SEC also has broad jurisdiction to oversee various activities of the Company and its other subsidiaries. |
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COMPETITION The businesses conducted by the Company are highly competitive. The Company competes with other life insurers, and also compete for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. In 2000, net annuity premiums written among the top 100 companies ranged from approximately $50 million to approximately $23 billion annually. The Company together with its affiliates is the largest of this group. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and GICs, include product flexibility, net return after fees, innovation in product design, the insurer financial strength rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting the annuity business include the benefits (including before-tax and after-tax investment returns) and guarantees provided to the customer and the commissions paid. Competitors of SunAmerica Asset Management include a large number of mutual fund organizations, both independent and affiliated with other financial service companies, including banks and insurance companies. Royal Alliance faces competition from regional firms and large, national full service and discount brokerage firms. ITEM 2. PROPERTIES The Company's executive offices and its principal office are in leased premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company, through an affiliate, also leases office space in Woodland Hills, California. The Company's asset management and broker-dealer subsidiaries lease office space in New York, New York. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company, with the potential exception of McMurdie et al. v. SunAmerica et al., Case No. BC 194082 [filed on July 10, 1998 in the Superior Court for the County of Los Angeles]. The lawsuit is a representative action wherein the plaintiffs allege violations of California's Business and Professions Code Sections 17200 et seq. The Company is vigorously defending the lawsuit. The probability of any particular outcome is not reasonably estimable at this time. |
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the quarter ending December 31, 2001 to a vote of security-holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Not applicable. |
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein. |
Years Ended December 31, | Three Months Ended | Years Ended September 30, | |||||||||||||||||
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2001 | 2000 | 1999 | December 31, 1998 | 1998 | 1997 | ||||||||||||||
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(In thousands) | |||||||||||||||||||
RESULTS OF OPERATIONS | |||||||||||||||||||
Net investment income | $ | 129,294 | $ | 134,502 | $ | 158,264 | $ | 25,858 | $ | 83,699 | $ | 70,048 | |||||||
Net realized investment | |||||||||||||||||||
gains (losses) | (92,711 | ) | (15,177 | ) | (19,620 | ) | 271 | 19,482 | (17,394 | ) | |||||||||
Fee income | 531,349 | 590,799 | 453,362 | 83,330 | 290,362 | 213,146 | |||||||||||||
General and administrative | |||||||||||||||||||
expenses | (146,169 | ) | (170,076 | ) | (146,297 | ) | (21,268 | ) | (92,929 | ) | (95,649 | ) | |||||||
Amortization of deferred | |||||||||||||||||||
acquisition costs | (220,316 | ) | (158,007 | ) | (116,840 | ) | (27,070 | ) | (72,713 | ) | (66,879 | ) | |||||||
Annual commissions | (58,278 | ) | (56,473 | ) | (40,760 | ) | (6,624 | ) | (18,209 | ) | (8,977 | ) | |||||||
Guaranteed minimum | |||||||||||||||||||
death benefits | (21,606 | ) | (1,551 | ) | (386 | ) | --- | --- | --- | ||||||||||
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Pretax income before | |||||||||||||||||||
cumulative effect of | |||||||||||||||||||
accounting change | 121,563 | 324,017 | 287,723 | 54,497 | 209,692 | 94,295 | |||||||||||||
Income tax expense | (20,852 | ) | (108,445 | ) | (103,025 | ) | (20,106 | ) | (71,051 | ) | (31,169 | ) | |||||||
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Net income before | |||||||||||||||||||
cumulative effect of | |||||||||||||||||||
accounting change | 100,711 | 215,572 | 184,698 | 34,391 | 138,641 | 63,126 | |||||||||||||
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Cumulative effect of | |||||||||||||||||||
accounting change, | |||||||||||||||||||
net of tax | (10,342 | ) | --- | --- | --- | --- | --- | ||||||||||||
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NET INCOME | $ | 90,369 | $ | 215,572 | $ | 184,698 | $ | 34,391 | $ | 138,641 | $ | 63,126 | |||||||
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Effective December 31, 1998, the Company changed its fiscal year end from September 30 to December 31. The results of operations of the Company for 1999 are affected by the acquisition of business from MBL Life on December 31, 1998 (See Note 3 of the accompanying consolidated financial statements). In 2001, the Company adopted EITF 99-20, which was recorded as a cumulative effect of accounting change (See Note 2 of the accompanying consolidated financial statements). |
12
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued) |
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Years Ended December 31, |
Three Months Ended |
Years Ended September 30, | ||||||||||||||||
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2001 |
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2000 |
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1999 |
December 31, 1998 |
1998 |
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1997 |
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(In thousands) | |||||||||||||||||||
FINANCIAL POSITION | |||||||||||||||||||
Investments and cash | $ | 6,751,326 | $ | 5,262,734 | $ | 5,554,701 | $ | 8,306,943 | $ | 2,734,742 | $ | 2,608,301 | |||||||
Variable annuity assets | |||||||||||||||||||
held in separate | |||||||||||||||||||
accounts | 18,526,413 | 20,393,820 | 19,949,145 | 13,767,213 | 11,133,569 | 9,343,200 | |||||||||||||
Deferred acquisition costs | 1,419,498 | 1,286,456 | 1,089,979 | 866,053 | 539,850 | 536,155 | |||||||||||||
Deferred income taxes | --- | --- | 53,445 | --- | --- | --- | |||||||||||||
Other assets | 244,351 | 246,468 | 227,224 | 206,124 | 142,107 | 85,573 | |||||||||||||
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TOTAL ASSETS | $ | 26,941,588 | $ | 27,189,478 | $ | 26,874,494 | $ | 23,146,333 | $ | 14,550,268 | $ | 12,573,229 | |||||||
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Reserves for fixed | |||||||||||||||||||
annuity contracts | $ | 3,498,917 | $ | 2,778,229 | $ | 3,254,895 | $ | 5,500,157 | $ | 2,189,272 | $ | 2,098,803 | |||||||
Reserves for universal life | |||||||||||||||||||
insurance contracts | 1,738,493 | 1,832,667 | 1,978,332 | 2,339,194 | --- | --- | |||||||||||||
Reserves for guaranteed | |||||||||||||||||||
investment contracts | 483,861 | 610,672 | 305,570 | 306,461 | 282,267 | 295,175 | |||||||||||||
Variable annuity liabilities | |||||||||||||||||||
related to separate | |||||||||||||||||||
accounts | 18,526,413 | 20,393,820 | 19,949,145 | 13,767,213 | 11,133,569 | 9,343,200 | |||||||||||||
Other payables and | |||||||||||||||||||
accrued liabilities | 830,124 | 304,324 | 413,610 | 171,143 | 157,551 | 157,546 | |||||||||||||
Subordinated notes payable | |||||||||||||||||||
to affiliates | 58,814 | 55,119 | 37,816 | 209,367 | 39,182 | 36,240 | |||||||||||||
Deferred income taxes | 210,970 | 85,978 | --- | 105,772 | 95,758 | 67,047 | |||||||||||||
Shareholder's equity | 1,593,996 | 1,128,669 | 935,126 | 747,026 | 652,669 | 575,218 | |||||||||||||
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TOTAL LIABILITIES AND | |||||||||||||||||||
SHAREHOLDER'S EQUITY | $ | 26,941,588 | $ | 27,189,478 | $ | 26,874,494 | $ | 23,146,333 | $ | 14,550,268 | $ | 12,573,229 | |||||||
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The financial position of the Company as of December 31, 1998 and thereafter is affected by the acquisition of business from MBL Life (See Note 3 of the accompanying consolidated financial statements). |
13
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company (DBA Anchor National Life Insurance Company) (the "Company") for the three years ended December 31, 2001 ("2001"), 2000 ("2000") and 1999 ("1999") follows. Certain prior period amounts have been reclassified to conform to the current period's presentation. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. RESULTS OF OPERATIONS The Company has three business segments, as presented in Note 12 of Notes to Consolidated Financial Statements: annuity operations, asset management operations and broker-dealer operations. Annuity operations consist of the sale and administration of deposit-type insurance contracts, such as fixed and variable annuities, universal life insurance contracts and guaranteed investment contracts ("GICs"). Annuity operations focus primarily on the marketing of variable annuity products and the administration of a closed block of universal life business. The variable annuity products offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and net investment income on the fixed-rate account options. |
14
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The asset management operations are conducted by the Company's registered investment advisor subsidiary, SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), and its related distributor, SunAmerica Capital Services, Inc. ("SACS"). Deposits from variable annuities sold by the Company are held in trusts that are owned by the Company, with the assets directly supporting policyholder obligations. SunAmerica Asset Management is the investment advisor for all of the trusts as well as trusts owned by its affiliates, Variable Annuity Life Insurance Company, AIG Life Insurance Company and First SunAmerica Life Insurance Company ("FSA"). SunAmerica Asset Management and SACS earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company's variable annuity products and providing professional management of individual, corporate and pension plan portfolios. Effective January 1, 2001, the asset management operations also included SA Affordable Housing LLC ("SAAH LLC"). SAAH LLC was previously a direct wholly owned subsidiary of SunAmerica Life Insurance Company, the Company's direct Parent, until January 1, 2001 at which time all of SAAH LLC's ownership interests were contributed to the Company. All of SAAH LLC's ownership interests were subsequently contributed by the Company to SunAmerica Asset Management. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low income housing credits and passive losses. Realized tax credits are recognized by its direct Parent, SunAmerica Asset Management (see Note 9 of Notes to Consolidated Financial Statements). The broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal Alliance"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products through approximately 2,600 independent registered representatives. Royal Alliance earns income from commissions on sales of these products, net of the portion that is passed on to the registered representatives. Royal Alliance is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers. The Company considers among its most critical accounting policies those policies with respect to valuation of certain financial instruments and amortization of deferred acquisition costs. In the implementation of each of the aforementioned policies, management is required to exercise its judgment on both a quantitative and qualitative basis. Further explanation of how management exercises that judgment follows: VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $109.6 million at December 31, 2001. In determining if and when a decline in fair value below amortized cost is other-than-temporary, we evaluate at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in debt and marketable equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according to the contractual terms of the obligation. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. |
15
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Securities in our portfolio with a carrying value of approximately $841.2 million at December 31, 2001 do not have readily determinable market prices. For these securities, we estimate their fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, we use our most recent purchases and sales of similar unquoted securities, independent broker quotes or comparison to similar securities with quoted prices when possible to estimate the fair value of those securities. All such securities are classified as available for sale. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral (if any), and other factors may not reflect those of an active market. AMORTIZATION OF DEFERRED ACQUISITION COSTS: We amortize our deferred acquisition costs (DAC) based on a percentage of our expected gross profits ("EGPs") over the life of the underlying policies. Our estimated EGPs are computed based on assumptions related to the underlying policies written, including the anticipated duration of the underlying policies, growth rate of the assets supporting the liabilities (management currently estimates a rate of 10% in projecting expected EGPs), and level of expenses necessary to maintain the policies over their entire life. We amortize deferred policy acquisition costs by estimating the present value of the EGPs over the lives of the insurance policies and then calculate a percentage of the policy acquisition cost deferred as compared to the present value of the EGPs. That percentage is used to amortize the deferred policy acquisition cost such that the amount amortized over the life of the policies results in a constant percentage of amortization when related to the actual and future gross profits. Because the EGPs are only an estimate of the profits we expect to recognize from these policies, the EGPs are adjusted at each balance sheet date to take into consideration the actual gross profits to date and any changes in the remaining expected future gross profits. When EGPs are adjusted, we also adjust the DAC amount on the balance sheet, with a corresponding charge or credit to current period operating results, to reflect our revised estimate of DAC amortization. NET INCOME totaled $90.4 million in 2001, compared with $215.6 million in 2000 and $184.7 million in 1999. On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation (the "Acquisition"). The results of operations for 2001, 2000 and 1999 include the impact of the Acquisition. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflects the adoption of EITF 99-20. The Company recorded a loss of $10,342,000, net of tax, which is recognized in the consolidated statement of income and comprehensive income as a cumulative effect of accounting change for the year ended December 31, 2001 (see Note 2 of Notes to Consolidated Financial Statements). PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $121.6 million in 2001, compared with $324.0 million in 2000 and $287.7 million in 1999. The decline in 2001 from 2000 primarily resulted from increased amortization of deferred acquisition costs, decreased fee income and increased net realized investment losses in the annuity operations. The 12.6% improvement in 2000 over 1999 primarily resulted from increased fee income from the Company's variable annuity and asset management operations, partially offset by increased amortization of deferred acquisition costs, increased operating expenses and decreased net investment income in the annuity operations. |
16
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INCOME TAX EXPENSE totaled $20.9 million in 2001, $108.4 million in 2000 and $103.0 million in 1999, representing effective tax rates of 17%, 33% and 36% in 2001, 2000 and 1999, respectively. The lower tax rate in 2001 is due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SunAmerica Asset Management which reduced the effective tax rate by approximately 13% (see Note 9 of Notes to Consolidated Financial Statements). ANNUITY OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $142.8 million in 2001, compared with $258.0 million in 2000 and $246.4 million in 1999. The decline in 2001 from 2000 primarily resulted from increased net realized investment losses, decreased variable annuity fee income, increased guaranteed minimum death benefits and increased amortization of deferred acquisition costs. The increase in 2000 over 1999 primarily resulted from increased variable annuity fee income, partially offset by increased amortization of deferred acquisition costs and decreased net investment income. NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, totaled $118.2 million in 2001, $127.7 million in 2000 and $151.7 million in 1999. These amounts equal 2.18% on average invested assets (computed on a daily basis) of $5.43 billion in 2001, 2.35% on average invested assets of $5.43 billion in 2000 and 2.08% on average invested assets of $7.28 billion in 1999. Net investment spreads include the effect of income earned or interest paid on the difference between average invested assets and average interest-bearing liabilities. Average invested assets exceeded average interest-bearing liabilities by $32.3 million in 2001, compared with $169.9 million in 2000 and $159.2 million in 1999. The decrease in 2001 reflects the impact of $94.1 million in dividends paid to SunAmerica Life Insurance Company (the "Parent") in the second quarter of 2001 and realized investment losses of $59.8 million in 2001. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.15% in 2001, 2.19% in 2000 and 1.97% in 1999. Investment income (and the related yields on average invested assets) totaled $359.7 million (6.63%) in 2001, compared with $388.4 million (7.15%) in 2000 and $506.0 million (6.95%) in 1999. The decrease in the investment yield in 2001 compared to 2000 is due to a lower prevailing interest rate environment in 2001. The increase in the investment yield in 2000 compared to 1999 was due primarily to a generally increasing interest rate environment. The decrease in investment income in 2000 compared to 1999 resulted primarily from the reduction in average invested assets. Expenses incurred to manage the investment portfolio amounted to $5.0 million in 2001, $7.1 million in 2000 and $6.0 million in 1999. These expenses are included as a reduction to investment income in the consolidated statement of income and comprehensive income. |
17
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Interest expense totaled $241.4 million in 2001, $260.7 million in 2000 and $354.3 million in 1999. The average rate paid on all interest-bearing liabilities was 4.48% in 2001, compared with 4.96% in 2000 and 4.98% in 1999. Interest-bearing liabilities averaged $5.39 billion during 2001, $5.26 billion during 2000 and $7.12 billion during 1999. The declines in the overall rates paid in 2001 compared to 2000 resulted primarily from the impact of a declining interest rate environment during 2001. The change in average invested assets in 2001 largely resulted from the surrenders of certain closed blocks of fixed annuity policies, as well as the impact of $94.1 million in dividends paid to the Parent and realized investment losses of $59.8 million. The decline in average invested assets in 2000 largely resulted from surrenders or rollovers of fixed annuities received in the Acquisition into variable annuity products. Changes in average invested assets also reflect net exchanges from fixed accounts into the separate accounts of variable annuity contracts, partially offset by sales of fixed annuities and the fixed account options of the Company's variable annuity products ("Fixed Annuity Deposits"), and renewal deposits on its universal life product ("UL Deposits"). Fixed Annuity Deposits and UL Deposits totaled $2.33 billion in 2001, $1.82 billion in 2000 and $2.10 billion in 1999, and are largely deposits for the fixed accounts of variable annuities. These deposits represent 51%, 35% and 27%, respectively, of the related reserve balances at the beginning of the respective periods. Fixed annuity deposits increased in 2001 due primarily to a one-month promotion on the Company's Advisor product which generated approximately $500 million in additional deposits during the third quarter. GIC deposits totaled $40.0 million in 2001 and $350.0 million in 2000. No GIC deposits were received in 1999. GIC surrenders and maturities totaled $191.9 million in 2001, $78.3 million in 2000 and $19.7 million in 1999. The GICs issued by the Company are generally variable rate contracts which guarantee the payment of principal and interest for a term of three to five years. GICs purchased by asset management firms for their short-term portfolios (which represent 92% of the Company's GIC liabilities) either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. GICs that are purchased by banks for their long-term portfolios or by state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. In pricing GIC, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity. NET REALIZED INVESTMENT LOSSES totaled $59.8 million in 2001, compared with $15.2 million in 2000 and $19.6 million in 1999 and include impairment writedowns of $68.0 million, $20.6 million and $6.1 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $8.2 million in 2001 and $5.4 million in 2000, compared with $13.5 million of net realized losses in 1999. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $1.77 billion in 2001, $1.14 billion in 2000 and $4.43 billion in 1999. Sales and redemptions in 1999 reflect the redeployment of $5.72 billion of assets received in the Acquisition. 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 0.15%, 0.10% and 0.19% of average invested assets for 2001, 2000 and 1999, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company's active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk. |
18
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Impairment writedowns include $68.0 million, $20.6 million and $6.1 million of provisions principally applied to bonds in 2001, 2000 and 1999, respectively. Impairment writedowns represent 1.25%, 0.38% and 0.08% of average invested assets for 2001, 2000 and 1999, respectively. For the five years ended December 31, 2001, impairment writedowns as a percentage of average invested assets have ranged from 0.06% to 1.25% and have averaged 0.52%. Such writedowns are based upon estimates of the net realizable value of invested assets and recorded when declines in value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events. The Company recorded $15.9 million ($10.3 million, net of tax) of additional impairments in 2001 pursuant to the implementation of EITF 99-20 (see Note 2 of Notes to Consolidated Financial Statements). This adjustment was recorded as a cumulative effect of accounting change in the accompanying consolidated statement of income and comprehensive income for 2001. VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $350.4 million in 2001, $385.4 million in 2000 and $296.1 million in 1999. The decreased fees in 2001 reflect the recent state of the equity markets, which have been in decline throughout much of 2000 and 2001, and the resulting impact on market values of assets in the separate accounts. The increased fees in 2000 reflect growth in average variable annuity assets, principally due to the receipt of variable annuity deposits and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders and declines in market values. Variable annuity fees represent 1.9% of average variable annuity assets in 2001 and 1.8% of average variable annuity assets in 2000 and 1999. Variable annuity assets averaged $18.87 billion, $21.07 billion and $16.15 billion during 2001, 2000 and 1999, respectively. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $1.41 billion in 2001, $1.88 billion in 2000 and $1.70 billion in 1999. These amounts represent 7%, 9% and 12% of variable annuity liabilities at the beginning of the respective periods. The decrease in variable annuity deposits in 2001 reflected lower demand for the variable account options of the Company's variable annuity products due to the unfavorable equity market conditions discussed above. Transfers from the fixed accounts of the Company's variable annuity products to the separate accounts are not classified as variable annuity deposits. Accordingly, changes in variable annuity deposits are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company's variable annuity products. |
19
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Sales of variable annuity products which include deposits allocated to the fixed accounts ("Variable Annuity Product Sales") amounted to $3.69 billion, $3.64 billion and $3.66 billion in 2001, 2000 and 1999, respectively. Such sales primarily reflect those of the Company's Polaris, Seasons and Advisor variable annuity product lines. The Company's variable annuity products are multi-manager variable annuities that offer investors a choice of several variable funds as well as a number of guaranteed fixed-rate funds. Investors can select from a choice of 4 to 37 variable funds and up to 10 guaranteed fixed-rate funds depending on the product. The Company has encountered increased competition in the variable annuity marketplace during recent years and anticipates that the market will remain highly competitive for the foreseeable future. Also, from time to time, Federal initiatives are proposed that could affect the taxation of variable annuities and annuities generally (See "Regulation" in Item 1). UNIVERSAL LIFE INSURANCE FEES, NET amounted to $18.9 million, $20.3 million and $28.9 million in 2001, 2000 and 1999, respectively. Universal life insurance fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of the excess mortality expense on these contracts. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life contracts as part of the Acquisition and does not actively market such contracts. Such fees represent 1.06%, 1.08% and 1.34% of average reserves for universal life insurance contracts in the respective periods. The decrease in fees in 2000 as compared to 1999 resulted principally from the ceding to an affiliate of approximately 12.2% of the universal life reserves received in the Acquisition (see Note 3 of Notes to Consolidated Financial Statements). SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $24.9 million in 2001, $21.0 million in 2000 and $17.1 million in 1999. Surrender charges generally are assessed on withdrawals at declining rates during the first seven years of a contract. Withdrawal payments, which exclude claims and lump-sum annuity benefits, totaled $2.10 billion in 2001, compared with $2.22 billion in 2000 and $3.65 billion in 1999 (including $1.58 billion attributable to the Acquisition). These payments when expressed as a percentage of average fixed and variable annuity and universal life reserves represent 9.0%, 8.7% and 16.2% (7.9% attributable to the Acquisition) for 2001, 2000, and 1999, respectively. The very high surrender rate in 1999 was due to the end of the coinsurance period of the Acquisition, which occurred on July 1, 1999 and provided these policyholders the ability to surrender their policies without a moratorium fee for the first time since 1991. Withdrawals include variable annuity payments from the separate accounts totaling $1.73 billion (9.2% of average variable annuity liabilities), $1.76 billion (8.4% of average variable annuity liabilities) and $1.34 billion (8.3% of average variable annuity liabilities) in 2001, 2000, and 1999, respectively. Management anticipates that withdrawal rates will gradually increase for the foreseeable future. GENERAL AND ADMINISTRATIVE EXPENSES totaled $89.3 million in 2001, $101.9 million in 2000 and $93.9 million in 1999. General and administrative expenses decreased in 2001 due to lower costs associated with servicing its fixed annuities and universal life policies. The increase in 2000 over 1999 principally reflects the expenses related to managing the Company's growing block of variable annuity policies. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets. |
20
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AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $144.3 million in 2001, compared with $125.0 million in 2000 and $94.9 million in 1999. The increases in amortization were primarily related to lower estimates of future gross profits on variable annuity contracts in light of the recent downturn in the equity markets, and additional fixed and variable annuity sales and the subsequent amortization of related deferred commissions and other direct selling costs. ANNUAL COMMISSIONS totaled $58.3 million in 2001, compared with $56.5 million in 2000 and $40.8 million in 1999. The increase in 2000 from 1999 reflect increased sales of annuities that offer this commission option. 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. The Company estimates that approximately 52% 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. GUARANTEED MINIMUM DEATH BENEFITS totaled $21.6 million in 2001, compared with $1.6 million in 2000 and $0.4 million in 1999. Guaranteed minimum death benefits represent the additional death benefits paid to fund minimum policy benefits in excess of the policyholder's separate account balance. The increases in guaranteed minimum death benefits paid pursuant to the Company's variable annuity separate account contracts reflect the recent downturn in the equity markets. Further downturns in the equity markets could increase these payments. ASSET MANAGEMENT OPERATIONS PRETAX (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled ($38.9) million in 2001, $36.5 million in 2000 and $20.7 million in 1999. The decrease in 2001 from 2000 primarily resulted from increased amortization of deferred acquisition costs, increased net realized investment losses and a reduction in fee income. The improvement in 2000 over 1999 primarily resulted from an increase in fee income, partially offset by corresponding increases in amortization of deferred acquisition costs and operating expenses. NET REALIZED INVESTMENT LOSSES totaled $32.9 million in 2001 and represent impairment writedowns applied to limited partnerships held by SAAH LLC (See Note 9 of Notes to Consolidated Financial Statements). There were no realized investment losses in 2000 or 1999. Such writedowns are recorded when the Company has determined that declines in net realizable value of the applicable assets are considered to be other than temporary. Actual realization will be dependent upon future events. VARIABLE ANNUITY FEES totaled $11.5 million in 2001, compared with $15.1 million in 2000 and $10.3 million in 1999. The decreased fees in 2001 reflect a decline in average variable annuity assets under management, principally resulting from a decline in market values. The increase in fees in 2000 as compared to 1999 represented the growth in variable annuity assets. |
21
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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. Such fees totaled $63.5 million on average
assets managed of $6.74 billion in 2001, $73.9 million on average assets managed
of $6.62 billion in 2000 and $43.5 million on average assets managed of $4.19
billion in 1999. Asset management fees are not necessarily proportionate to
average assets managed, principally due to changes in product mix. Mutual fund
sales, excluding sales of money market accounts, totaled $1.83 billion in 2001,
compared with $2.89 billion in 2000 and $1.48 billion in 1999. Redemptions of
mutual funds, excluding redemptions of money market accounts, amounted to $1.17
billion in 2001, $819.9 million in 2000 and $571.5 million in 1999, which
represent 20.5%, 14.3% and 16.8%, respectively, of average related mutual fund
assets. The decrease in sales and the increase in redemptions in 2001
principally reflect lower demand for growth-oriented mutual funds, which have
been out of favor with investors due to unfavorable equity market conditions
during 2001. The increase in sales in 2000 principally resulted from increased
sales of the Company's "Style Select Series" product. The "Style Select Series"
is a group of mutual funds that are each managed by three industry-recognized
fund managers. Sales of the "Style Select Series" products totaled $1.09 billion
in 2001, $2.05 billion in 2000 and $938.5 million in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.4 million in 2001, compared with
$36.1 million in 2000 and $24.0 million in 1999. The decrease in expenses in
2001 principally reflects lower sales of mutual funds and related marketing
costs. The increase in expenses in 2000 is consistent with the increased sales
of mutual funds.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $76.0 million in 2001,
compared with $33.0 million in 2000 and $21.9 million in 1999. The increase in
amortization in 2001 is principally due to a $34.0 million writedown of deferred
acquisition costs which was required following the recent downturn in the equity
markets, so that deferred costs would not exceed the estimated distribution fee
and contingent deferred sales charge revenues on certain mutual fund contracts.
The remaining increase in amortization in 2001 and the increase in amortization
in 2000 compared to 1999 was primarily due to increased mutual fund sales and
the impact of a full year of subsequent amortization of such related deferred
commissions and other direct selling costs.
BROKER DEALER OPERATIONS
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $17.7
million in 2001, $29.5 million in 2000 and $20.6 million in 1999. The decline in
2001 from 2000 primarily resulted from a decline in net retained commissions.
The increase in 2000 over 1999 primarily resulted from increased net retained
commissions, partially offset by increased operating expenses.
NET RETAINED COMMISSIONS totaled $45.4 million in 2001, $58.3 million in 2000
and $49.0 million in 1999. Net retained commissions are derived from commissions
on the sales of proprietary and nonproprietary investment products, after
deducting approximately 90% of such commissions that is passed on to registered
representatives. Such commissions have declined as a result of lower sales in
2001. Fluctuations in net retained commissions may not necessarily be related to
fluctuations in sales primarily due to changes in sales mix. Broker-dealer sales
(mainly sales of general securities, mutual funds and annuities) totaled $9.78
billion in 2001, $13.25 billion in 2000 and $13.40 billion in 1999. The
decreases in broker-dealer sales in 2001 and 2000 reflected lower demand for
mutual funds and other investments due to unfavorable equity market conditions.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $29.5 million in 2001, compared with
$32.1 million in 2000 and $28.4 million in 1999. The decrease in expenses in
2001 as compared to 2000 reflect lower marketing related expenses. The higher
expenses in 2000 over 1999 principally reflect increases in marketing expenses
and technology expenses.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $1.59 billion at December 31, 2001 from $1.13
billion at December 31, 2000, due principally to a $432.7 million capital
contribution from the Parent of its wholly-owned subsidiary, SAAH LLC, to the
Company (see Note 9 of Notes to Consolidated Financial Statements). In addition,
the Company recorded net income of $90.4 million and other comprehensive income
of $36.3 million, offset by dividends totaling $94.1 million paid to the Parent
on April 2, 2001. Upon approval of the distribution of Saamsun, the Company's
shareholder's equity will decrease by approximately $550 million. In the opinion
of management, subsequent to such distribution, the company's capital and
surplus will remain more than sufficient in relation to its outstanding
liabilities and more than adequate relative to its financial needs, and will
exceed its risk-based capital requirements by a considerable margin (see Note 13
of Notes to consolidated financial statements).
INVESTED ASSETS at December 31, 2001 totaled $6.75 billion, compared with $5.26
billion at December 31, 2000. The Company manages most of its invested assets
internally. The Company's general investment philosophy is to hold fixed-rate
assets for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of its portfolio of bonds, notes
and redeemable preferred stocks (the "Bond Portfolio") is available to be sold
in response to changes in market interest rates, changes in relative value of
asset sectors and individual securities, changes in prepayment risk, changes in
the credit quality outlook for certain securities, the Company's need for
liquidity and other similar factors.
THE BOND PORTFOLIO, which constituted 67% of the Company's total investment
portfolio at December 31, 2001, had an amortized cost that was $62.8 million
greater than its aggregate fair value at December 31, 2001 and $122.7 million
greater than its aggregate fair value at December 31, 2000. The decline in net
unrealized losses on the Bond Portfolio during 2001 principally reflects the
impact of impairment writedowns in 2001 as well as the decline in prevailing
interest rates and the corresponding effect on the fair value of the Bond
Portfolio at December 31, 2001.
At December 31, 2001, the Bond Portfolio (excluding $21.5 million of redeemable
preferred stocks) included $4.49 billion of bonds rated by Standard & Poor's
("S&P"), Moody's Investors Service ("Moody's"), Fitch ("Fitch") or the
Securities Valuation Office of the National Association of Insurance
Commissioners ("NAIC"), and $31.3 million of bonds rated by the Company pursuant
to statutory ratings guidelines established by the NAIC. At December 31, 2001,
approximately $4.31 billion of the Bond Portfolio was investment grade,
including $1.57 billion of mortgage-backed securities ("MBS") and U.S.
government/agency securities.
At December 31, 2001, the Bond Portfolio included $215.5 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for
approximately 0.8% of the Company's total assets and approximately 3.2% of its
invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. These
non-investment-grade securities are comprised of bonds spanning 35 industries
with 20% of these assets concentrated in telecommunications and 10% concentrated
in airlines. No other industry concentration constituted more than 6% of these
assets.
The table on the next page summarizes the Company's rated bonds by rating
classification as of December 31, 2001.
Footnotes to the table of Rated
Bonds by Rating Classification
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. Issues
are categorized based on the highest of the S&P, Moody's and Fitch ratings
if rated by multiple agencies.
Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for
non-defaulted bonds plus one category, 6, for bonds in or near default. These
six categories correspond with the S&P/Moody's/Fitch rating groups listed
above, with categories 1 and 2 considered investment grade. The NAIC categories
include $31.3 million of assets that were rated by the Company pursuant to
applicable NAIC rating guidelines.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio and
aggregated $158.8 million at December 31, 2001. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At
December 31, 2001, Secured Loans consisted of $20.9 million of publicly traded
securities and $137.9 million of privately traded securities. These Secured
Loans are composed of loans to 41 borrowers spanning 17 industries, with 19% of
these assets concentrated in paper manufacturing and distribution, 16%
concentrated in energy, 16% concentrated in financial institutions and 11%
concentrated in utilities. No other industry 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, Fitch, the NAIC or by the Company, pursuant
to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $692.4 million at December 31, 2001 and consisted of
125 commercial first mortgage loans with an average loan balance of
approximately $5.5 million, collateralized by properties located in 29 states.
Approximately 30% of this portfolio was office, 20% was manufactured housing,
19% was multifamily residential, 9% was hotels, 8% was industrial, 5% was
retail, and 9% was other types. At December 31, 2001, approximately 30% and 11%
of this portfolio were secured by properties located in California and New York,
respectively, and no more than 9% of this portfolio was secured by properties
located in any other single state. At December 31, 2001, there were 11 mortgage
loans with outstanding balances of $10 million or more, which collectively
aggregated approximately 35% of this portfolio. At December 31, 2001,
approximately 26% of the mortgage loan portfolio consisted of loans with balloon
payments due before January 1, 2005. During 2001, 2000 and 1999, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.
Substantially all of the mortgage loan portfolio has been originated by the
Company under strict underwriting standards. Commercial mortgage loans on
properties such as offices, hotels and shopping centers generally represent a
higher level of risk than do mortgage loans secured by multifamily residences.
This greater risk is due to several factors, including the larger size of such
loans and the more immediate effects of general economic conditions on these
commercial property types. However, due to the Company's strict underwriting
standards, the Company believes that it has prudently managed the risk
attributable to its mortgage loan portfolio while maintaining attractive yields.
POLICY LOANS totaled $227.0 million at December 31, 2001, compared to $244.4
million at December 31, 2000, and are primarily loans taken against universal
life policies.
SEPARATE ACCOUNT SEED MONEY totaled $50.6 million at December 31, 2001, compared
to $104.7 million at December 31, 2000, and consists of seed money for mutual
funds used as investment vehicles for the Company's variable annuity separate
accounts and for SunAmerica Asset Management's mutual funds. The decrease
reflects redemptions and a decline in the market value of such assets.
PARTNERSHIPS totaled $451.6 million at December 31, 2001, constituting
investments in 666 partnerships with an average size of approximately $0.7
million, most of which are partnership assets of SAAH LLC which was contributed
to the Company effective January 1, 2001 (see Note 9 of Notes to Consolidated
Financial Statements). This portfolio includes $443.4 million of partnerships
that make tax-advantaged investments in affordable housing properties, currently
involving approximately 660 multifamily projects in 46 states, and $8.2 million
of partnerships managed by independent money managers that invest in a broad
selection of equity and fixed-income securities, currently including 414
separate issuers. The risks generally associated with partnerships include those
related to their underlying investments (i.e., equity securities, debt
securities and real estate), plus a level of illiquidity, which is mitigated, to
some extent, for the affordable housing partnerships by the marketability of the
tax credits they generate, and in the case of many of the other partnerships, by
the existence of contractual termination provisions. Upon approval of the
distribution of Saamsun, the Company's investment in partnerships will decrease
by approximately $440 million (see Note 13 of Notes to consolidated financial
statements).
OTHER INVESTED ASSETS aggregated $563.7 million at December 31, 2001, compared
with $18.5 million at December 31, 2000, and consist of invested collateral with
respect to the Company's securities lending program, collateralized bond
obligations and mutual fund investments.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of
interest rate fluctuations and disintermediation. The Company believes that its
fixed-rate liabilities should be backed by a portfolio principally composed of
fixed-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed-rate investments are priced over the
yield curve, default rates and general economic conditions. Its portfolio
strategy is constructed with a view to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability matching,
liquidity and safety. The Company's fixed-rate products incorporate surrender
charges or other restrictions in order to encourage persistency. Approximately
75% of the Company's fixed annuity, universal life and GIC reserves had
surrender penalties or other restrictions at December 31, 2001.
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; policy loans; and investments in
limited partnerships that invest primarily in fixed-rate securities. At December
31, 2001, these assets had an aggregate fair value of $6.21 billion with a
duration of 3.3. The Company's fixed-rate liabilities include fixed annuity, GIC
and universal life reserves and subordinated notes. At December 31, 2001, these
liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $5.83 billion
with a duration of 2.7. The Company's potential exposure due to a 10% increase
in prevailing interest rates from their December 31, 2001 levels is a loss of
approximately $21.1 million, representing the decrease in the 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 (i.e. 1%), recognizing the changes in cash
flows resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the Company
will continue to utilize its existing strategies of pricing its fixed annuity,
universal life and GIC products, allocating its available cash flow amongst its
various investment portfolio sectors and maintaining sufficient levels of
liquidity. Because the calculation of duration involves estimation and
incorporates assumptions, potential changes in portfolio value indicated by the
portfolio's duration will likely be different from the actual changes
experienced under given interest rate scenarios, and the differences may be
material.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements ("Swap Agreements") to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate changes.
The Company typically utilizes Swap Agreements to create a hedge that
effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At December 31, 2001, the Company had two outstanding Swap
Agreements with a total notional principal of $128.0 million. These agreements
mature in June 2002 and 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.
22
23
24
RATED BONDS BY RATING
CLASSIFICATION
(Dollars in thousands)
Issues Rated
by S& P/Moody's/Fitch
Issues not rated by
S&P/Moody's/
Fitch, by NAIC Category
Total
S&P/(Moody's)
{Fitch}
category
(1)
Amortized
cost
Estimated
fair
value
NAIC
category
(2)
Amortized
cost
Estimated
fair
value
Amortized
cost
Estimated
fair
value
Percent of
invested
assets
AAA+ to
A-
(Aaa to A3)
[AAA to A-]
{AAA to A-}
$3,171,478
$3,170,477
1
$152,910
$153,162
$3,324,388
$3,323,639
49.23
%
BBB+ to
BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-}
887,298
868,664
2
115,661
115,729
1,002,959
984,393
14.58
%
BB+ to
BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}
93,177
79,177
3
4,067
3,613
97,244
82,790
1.23
%
B+ to
B-
(B1 to B3)
[B+ to B-]
{B+ to B-}
106,568
92,205
4
7,410
7,107
113,978
99,312
1.47
%
CCC+ to
C
(Caa to C)
[CCC]
{CCC+ to C-}
40,469
26,677
5
6,000
5,980
46,469
32,657
0.48
%
CI to
D
[DD]
{D}
1,348
769
6
0
0
1,348
769
0.01
%
TOTAL RATED
ISSUES
$4,300,338
$4,237,969
$286,048
$285,591
$4,586,386
$4,523,560
Footnotes appear on the following
page.
25
(1)
(2)
26
27
28
29
|
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, new reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. With the adoption of EITF 99-20, the Company recognizes impairment losses on securitized assets if the projected discounted cash flows are less than its carrying value. The adoption of EITF 99-20 resulted in a loss of $10.3 million, net of tax, which is being recognized and reported in the statement of income and comprehensive income as a cumulative effect of accounting change (see Note 2 of Notes to Consolidated Financial Statements). |
30
|
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $12.0 million ($9.8 million of bonds and $2.2 million of mortgage loans) at December 31, 2001, and constituted approximately 0.4% of total invested assets. At December 31, 2000, defaulted investments totaled $3.6 million of bonds and constituted less than 0.1% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company's liquidity is primarily derived from operating cash flows. At December 31, 2001, approximately $2.49 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $46.3 million, while approximately $2.06 billion of the Bond Portfolio had an aggregate unrealized loss of $109.1 million. In addition, the Company's investment portfolio currently provides approximately $46.2 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. If a substantial portion of the Company's Bond Portfolio diminished significantly in value and/or defaulted, the Company would need to liquidate other portions of its investment portfolio and/or arrange financing. Such events that may cause such a liquidity strain could be the result of economic collapse or terrorist acts. GUARANTEES AND OTHER COMMITMENTS: Subordinated notes (including accrued interest of $6.3 million) payable to affiliates totaled $58.8 million at interest rates ranging from 8% to 9.5% at December 31, 2001, and require principal payments of $21.5 million in 2002, $20.4 million in 2003, $3.0 million in 2004 and $7.6 million in 2005. |
31
|
The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at December 31, 2001 is $1.03 billion. Related to each of these agreements are participation agreements with the Company's Parent, under which the Parent will share in $497.9 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $470.0 million in 2004, $405.0 million in 2005 and $156.0 million in 2006. In the ordinary course of business, the Company is obligated to purchase approximately $46.0 million of asset backed securities as of December 31, 2001. The expiration dates of these commitments are as follows: $35.0 million in 2003 and $11.0 million in 2004. The Company has entered into an agreement whereby it is committed to purchase the remaining principal amount, $240.2 million as of December 31, 2001, of various mortgage backed securities at par value in March 2006. Reserves for GICs have maturity dates as follows: $309.3 million in 2002, $145.0 million in 2003 and $29.6 million in years subsequent to 2006. Under the various agreements with operating partnerships, SAAH LLC has capital contribution obligations to the operating partnerships of $211.2 million at December 31, 2001. Such obligations are funded by an affiliate of the Company. Conversely, any proceeds from syndications of operating partnerships are collected by this affiliate as well. Cash received as part of a modified coinsurance transaction is recorded as a deposit liability. Deposits from the reinsured business are allocated to pay down the liability pursuant to a repayment schedule. The remaining deposit liability of $61.7 million is expected to be fully paid down by 2003 (see Note 7 of Notes to consolidated financial statements). RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of the accompanying consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 28 to 29 herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements begin on page F-3. Reference is made to the Index to Financial Statements on page F-1 herein. ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. |
32
|
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and principal officers of Anchor National Life Insurance Company (the "Company") as of March 29, 2002 are listed below, together with information as to their ages, dates of election and principal business occupation during the last five years (if other than their present business occupation). |
|
|
|
|
Other Positions and |
|
|
|
|
Year |
Other Business |
|
|
|
Present |
Assumed |
Experience Within |
|
Name |
Age |
Position |
Position |
Last Five Years** |
From-To |
|
|
|
|
|
|
Jay S. Wintrob* |
45 |
President and |
2000 |
Vice Chairman and |
1998-2000 |
|
|
Chief Executive |
2001 |
Chief Operating |
|
|
|
Officer of the |
|
Officer of SAI |
|
|
|
Company |
|
(Joined SAI in 1987) |
|
|
|
President and |
2000 |
|
|
|
|
Chief Executive |
2001 |
|
|
|
|
Officer of |
|
|
|
|
|
SunAmerica Inc. |
|
|
|
|
|
("SAI") |
|
|
|
|
|
|
|
|
|
James R. Belardi* |
45 |
Senior Vice |
1992 |
(Joined SAI in 1986) |
|
|
|
President of |
|
|
|
|
|
the Company |
|
|
|
|
|
Executive Vice |
1995 |
|
|
|
|
President of |
|
|
|
|
|
SAI |
|
|
|
|
|
|
|
|
|
Marc H. Gamsin* |
46 |
Senior Vice |
1999 |
Senior Vice President, |
1998-2000 |
|
|
President of the |
|
of SAI |
|
|
|
Company |
|
Executive Vice President, |
1998 to |
|
|
Executive Vice |
2001 |
SunAmerica Investments, |
Present |
|
|
President of SAI |
|
Inc. (GA) |
|
|
|
|
|
Excutive Vice President, |
1997-1998 |
|
|
|
|
SunAmerica Investments, |
|
|
|
|
|
Inc. (DE) |
|
|
|
|
|
|
|
Jana W. Greer* |
49 |
Senior Vice |
1994 |
Senior Vice President |
1992-2000 |
|
|
President of the |
|
of SAI |
|
|
|
Company |
|
(Joined SAI in 1974) |
|
|
|
Executive Vice |
2001 |
|
|
|
|
President of |
|
|
|
|
|
SAI |
|
|
|
_______________________________ * Also serves as a director **Unless otherwise indicated, officers and positions are with SunAmerica Inc. |
33
|
|
|
|
|
Other Positions and |
|
|
|
|
Year |
Other Business |
|
|
|
Present |
Assumed |
Experience Within |
|
Name |
Age |
Position |
Position |
Last Five Years** |
From-To |
|
|
|
|
|
|
N. Scott Gillis* |
48 |
Senior Vice |
1994 |
Senior Vice President |
1994-1999 |
|
|
President |
|
and Controller, |
|
|
|
of the Company |
|
SunAmerica Life Insurance |
|
|
|
Vice President |
1997 |
Companies ("SLC") |
|
|
|
and Controller |
2000 |
(Joined SAI in 1985) |
|
|
|
of SAI |
|
|
|
|
|
|
|
|
|
Gregory M. Outcalt |
39 |
Senior Vice |
2000 |
Vice President, SLC |
1993-1999 |
|
|
President of the |
|
(Joined SAI in 1986) |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
Edwin R. Raquel |
44 |
Senior Vice |
1995 |
Joined SAI in 1990) |
|
|
|
President and |
|
|
|
|
|
Chief Actuary |
|
|
|
|
|
of the Company |
|
|
|
|
|
|
|
|
|
Mark A. Zaeske |
34 |
Treasurer of |
2001 |
Assistant Treasurer, |
1999-2000 |
|
|
the Company |
|
Citigroup |
|
|
|
Treasurer of |
2000 |
Associate Director, |
1996-1999 |
|
|
SAI |
|
Citigroup |
|
|
|
|
|
|
|
Lawrence M. Goldman |
40 |
Vice President, |
2000 |
Associate General |
1998-2000 |
|
|
Co-General Counsel |
|
Counsel of SAI |
|
|
|
and Assistant |
|
Senior Vice President, |
1995-1998 |
|
|
Secretary of |
|
Imperial Premium |
|
|
|
the Company |
|
Finance, Inc. |
|
|
|
Vice President, |
2000 |
|
|
|
|
Co-General Counsel |
|
|
|
|
|
and Assistant |
|
|
|
|
|
Secretary of SAI |
|
|
|
|
|
|
|
|
|
J. Franklin Grey |
50 |
Vice President |
1994 |
Vice President of |
1994 to |
|
|
of the Company |
|
Certain SLC |
Present |
|
|
|
|
|
|
Maurice S. Hebert |
39 |
Vice President |
2000 |
Vice President and |
1998-2000 |
|
|
and Controller |
|
Assistant Controller, |
|
|
|
of the Company |
|
SunAmerica Financial |
|
|
|
|
|
Director, Investment |
1997-1998 |
|
|
|
|
Accounting, SAI |
|
|
|
|
|
Manager, Investment |
1993-1997 |
|
|
|
|
Accounting, SAI |
|
|
|
|
|
|
|
_______________________________ * Also serves as a director **Unless otherwise indicated, officers and positions are with SunAmerica Inc. |
34
|
|
|
|
|
Other Positions and |
|
|
|
|
Year |
Other Business |
|
|
|
Present |
Assumed |
Experience Within |
|
Name |
Age |
Position |
Position |
Last Five Years** |
From-To |
|
|
|
|
|
|
Christine A. Nixon |
37 |
Vice President, |
2000 |
Associate General |
1997-2000 |
|
|
Co-General |
|
Counsel of SAI |
|
|
|
Counsel and |
|
Associate Counsel |
1993-1997 |
|
|
Secretary of |
|
of SAI |
|
|
|
the Company |
|
|
|
|
|
Vice President, |
2000 |
|
|
|
|
Co-General |
|
|
|
|
|
Counsel and |
|
|
|
|
|
Secretary |
|
|
|
|
|
of SAI |
|
|
|
|
|
|
|
|
|
Edward P. Nolan, Jr. |
52 |
Vice President |
1993 |
(Joined SAI in 1989) |
|
|
|
of the Company |
|
|
|
|
|
|
|
|
|
Stewart R. Polakov |
42 |
Vice President |
2000 |
Vice President, |
1997-1999 |
|
|
of the Company |
|
SunAmerica Financial, |
|
|
|
|
|
Director, Investment |
1994-1997 |
|
|
|
|
Accounting, SAI |
|
|
|
|
|
(Joined SAI in 1991) |
|
|
|
|
|
|
|
Scott H. Richland |
39 |
Vice President |
1994 |
Senior Vice President |
1997-1998 |
|
|
of the Company |
|
and Treasurer of SAI |
|
|
|
Senior Vice |
1997 |
Vice President and |
1995-1997 |
|
|
President of SAI |
|
Treasurer of SAI |
|
|
|
|
|
(Joined SAI in 1990) |
|
|
|
|
|
|
|
Ron H. Tani |
39 |
Vice President |
2000 |
Vice President, |
2000- |
|
|
of the Company |
|
SunAmerica Financial |
Present |
|
|
|
|
Director of Product |
1995-2000 |
|
|
|
|
Development, SLC |
|
_______________________________ * Also serves as a director **Unless otherwise indicated, officers and positions are with SunAmerica Inc. |
35
|
ITEM 11. EXECUTIVE COMPENSATION All of the executive officers of the Company also serve as employees of SunAmerica Inc. or its affiliates and receive no compensation directly from the Company. The following table shows the cash compensation paid or earned, based on these allocations, to the chief executive officer and top four executive officers of the Company whose allocated compensation exceeds $100,000 for services rendered in all capacities to the Company during 2000: |
Name of Individual or |
Capacities In |
Allocated Cash |
Number in Group |
Which Served |
Compensation |
|
|
|
Jay S. Wintrob |
President and Chief Executive |
$ 712,706 |
|
Officer |
|
Jana Waring Greer |
Senior Vice President |
$ 544,133 |
Eli Broad |
Chairman |
$ 287,848 |
N. Scott Gillis |
Senior Vice President |
$ 214,621 |
Ron H. Tani |
Vice President |
$ 147,598 |
Directors of the Company who are also employees of SunAmerica Inc. or its affiliates receive no compensation in addition to their compensation as employees of SunAmerica Inc. or its affiliates. ITEM 12. SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is an indirect wholly owned subsidiary of American International Group, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. |
36
|
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the index set forth on page F-1 of this report. |
EXHIBITS |
|
|
|
2(a) |
Purchase and Sale Agreement, dated as of July 15, 1998, by and among the Company, SunAmerica Inc. ("SAI"), First SunAmerica Life Insurance Company and MBL Life Assurance Corporation, is incorporated herein by reference to Exhibit 2(e) to SAI's 1998 Annual Report on Form 10-K, filed December 21, 1998. |
3(a) |
Amended and Restated Articles of Incorporation, dated December 19, 2001, filed with the Arizona Department of Insurance and Arizona Corporation Commission on January 23, 2002 and January 24, 2002, respectively. |
3(b) |
Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 22, 1995, is incorporated herein by reference to Exhibit 3(a) to the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996. |
3(c) |
Amended and Restated Bylaws, as adopted January 1, 1996, is incorporated herein by reference to Exhibit 3(b) to the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996. |
3(d) |
Amended and Restated Bylaws, as amended January 2, 2001. |
3(e) |
Amended and Restated Bylaws, dated as of December 19, 2001. |
4(a) |
Amended and Restated Articles of Amended and Restated Articles of Incorporation, dated December 19, 2001. See Exhibit 3(a). |
4(b) |
Amended and Restated Bylaws, dated as of December 19, 2001. See Exhibit 3(e). |
10(a) |
Subordinated Loan Agreement for Equity Capital, dated August 4, 1999, between the Company's subsidiary, Royal Alliance Associates, Inc., and SAI, defining SAI's rights with respect to the 8.0% notes due September 23, 2002. |
10(b) |
Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of September 13, 1999, between the Company's subsidiary, SunAmerica Asset Management Corp., and SAI, extending the maturity date to September 13, 2002 and adjusting the interest rate to 8% for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated September 3, 1996, with a maturity date of September 13, 1999. |
10(c) |
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of September 30, 2000, between the Company's subsidiary, SACS, and SAI, extending the maturity date to October 31, 2004 and changing the interest rate to 9.5% of a Subordinated Loan Agreement for Equity Capital, dated as of August 25, 1998, defining SAI's rights with respect to the 8.5% notes due October 30, 2001. |
37
|
EXHIBITS |
|
|
|
10(d) |
Subordinated Loan Agreement for Equity Capital, dated as of March 17, 2000, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.75% notes due April 30, 2003, is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed May 12, 2000. |
10(e) |
Subordinated Loan Agreement for Equity Capital, dated February 21, 2000, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 8.5% notes due March 31, 2003, is incorporated herein by reference to Exhibit 10(b) to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed May 12, 2000. |
10(f) |
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 20, 2001, between the Company's subsidiary, SACS, and SAI, extending the maturity date to April 30, 2003 and adjusting the interest rate to 8% of a Subordinated Loan Agreement for Equity Capital, dated as of March 19, 1999, defining SAI's rights with respect to the 8.5% notes due April 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001, filed May 14, 2001. |
10(g) |
Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of April 30, 2001, between the Company's subsidiary, SACS, and SAI, extending the maturity date to June 30, 2003 and adjusting the interest rate from 9.5% to 7.5% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 22, 2000, with a maturity date of June 30, 2002 is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2001, filed August 13, 2001. |
10(h) |
Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of June 5, 2001, between the Company's subsidiary, SACS, and SAI, extending the maturity date to July 30, 2003 and adjusting the interest rate from 9.5% to 7.5% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 22, 2000, with a maturity date of July 30, 2002 is incorporated herein by reference to Exhibit 10(b) to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2001, filed August 13, 2001. |
10(i) |
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of July 23, 2001, between the Company's subsidiary, SACS, and SAI, extending the maturity date to September 30, 2005 and adjusting the interest rate from 8% to 6.75% for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of August 31, 1999, defining SAI's rights with respect to 8% notes due September 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed November 13, 2001. |
38
|
EXHIBITS |
|
|
|
10(j) |
Asset Lease Agreement, dated June 26, 1998, between the Company and Aurora National Life Assurance Company ("Aurora"), relating to a lease from Aurora of certain information relating to single premium deferred annuities, is incorporated herein by reference by Exhibit 10(h) to the Company's Form 10-K, filed December 23, 1998. |
21 |
Subsidiaries of the Company |
REPORTS ON FORM 8-K No current report on Form 8-K was filed during the three months ended December 31, 2001. |
39
|
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
|
ANCHOR NATIONAL LIFE INSURANCE COMPANY |
|
|
|
|
|
|
|
BY /S/ N. SCOTT GILLIS |
|
N. Scott Gillis |
|
Senior Vice President and Director |
March 29, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated: |
Signature |
Title |
Date |
|
|
|
/s/ N. SCOTT GILLIS |
Senior Vice President and |
March 29, 2002 |
N. Scott Gillis |
Director (Principal |
|
|
Financial Officer) |
|
|
|
|
/s/ MAURICE S. HEBERT |
Vice President & Controller |
March 29, 2002 |
Maurice S. Hebert |
(Principal Accounting |
|
|
Officer) |
|
|
|
|
/s/ JAY S. WINTROB |
President, Chief Executive |
March 29, 2002 |
Jay S. Wintrob |
Officer and Director |
|
|
|
|
/s/ JAMES R. BELARDI |
Senior Vice President |
March 29, 2002 |
James R. Belardi |
and Director |
|
|
|
|
/s/ MARC H. GAMSIN |
Senior Vice President |
March 29, 2002 |
Marc H. Gamsin |
and Director |
|
|
|
|
/s/ JANA W. GREER |
Senior Vice President |
March 29, 2002 |
Jana W. Greer |
and Director |
|
|
|
|
/s/ EDWIN R. RAQUEL |
Senior Vice President |
March 29, 2002 |
Edwin R. Raquel |
and Chief Actuary |
|
40
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
|
Page |
|
Number(s) |
|
|
Report of Independent Accountants |
F-2 |
|
|
Consolidated Balance Sheet - December 31, 2001 and |
|
December 31, 2000 |
F-3 to F-4 |
|
|
Consolidated Statement of Income and Comprehensive |
|
Income - Years Ended December 31, 2001, 2000 and 1999 |
F-5 to F-6 |
|
|
Consolidated Statement of Cash Flows - Years Ended |
|
December 31, 2001, 2000 and 1999 |
F-7 to F-8 |
|
|
Notes to Consolidated Financial Statements |
F-9 to F-37 |
F-1
|
Report of Independent Accountants To the Board of Directors and Shareholder
of In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and comprehensive income and of cash flows present fairly, in all material respects, the financial position of AIG SunAmerica Life Assurance Company (formerly, Anchor National Life Insurance Company), an indirect wholly owned subsidiary of American International Group, Inc., and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits on these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities and interest income and impairment of certain beneficial interests in securitized financial assets in 2001.
PricewaterhouseCoopers LLP |
F-2
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET | |||||||||
|
December
31, 2001 |
December
31, 2000 |
|||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
ASSETS | |||||||||
Investments and cash: | |||||||||
Cash and short-term investments | $ | 200,064 | $ | 169,701 | |||||
Bonds, notes and redeemable | |||||||||
preferred stocks available for sale, | |||||||||
at fair value (amortized cost: | |||||||||
December 2001, $4,607;901; | |||||||||
December 2000, $4,130,570) | 4,545,075 | 4,007,902 | |||||||
Mortgage loans | 692,392 | 684,174 | |||||||
Partnerships | 451,583 | 8,216 | |||||||
Policy loans | 226,961 | 244,436 | |||||||
Separate account seed money | 50,560 | 104,678 | |||||||
Common stocks available for sale, | |||||||||
at fair value (cost: December 2001, | |||||||||
$1,288; December 2000, $1,001) | 861 | 974 | |||||||
Real estate | 20,091 | 24,139 | |||||||
Other invested assets | 563,739 | 18,514 | |||||||
|
|
|
|||||||
Total investments | 6,751,326 | 5,262,734 | |||||||
Variable annuity assets held in separate | |||||||||
accounts | 18,526,413 | 20,393,820 | |||||||
Accrued investment income | 65,272 | 57,555 | |||||||
Deferred acquisition costs | 1,419,498 | 1,286,456 | |||||||
Income taxes currently receivable from Parent | 61,435 | 60,992 | |||||||
Other assets | 117,644 | 127,921 | |||||||
|
|
|
|||||||
TOTAL ASSETS | $ | 26,941,588 | $ | 27,189,478 | |||||
|
|
See accompanying notes to consolidated financial statements |
F-3
|
AIG SUNAMERICA LIFE ASSURANCE
COMPANY CONSOLIDATED BALANCE SHEET (Continued) | |||||||||
|
December
31, 2001 |
December
31, 2000 |
|||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
LIABILITIES AND SHAREHOLDER'S EQUITY | |||||||||
Reserves, payables and accrued liabilities: | |||||||||
Reserves for fixed annuity contracts | $ | 3,498,917 | $ | 2,778,229 | |||||
Reserves for universal life insurance | |||||||||
contracts | 1,738,493 | 1,832,667 | |||||||
Reserves for guaranteed investment | |||||||||
contracts | 483,861 | 610,672 | |||||||
Securities lending agreements | 541,899 | --- | |||||||
Modified coinsurance deposit liability | 61,675 | 97,647 | |||||||
Other liabilities | 226,550 | 206,677 | |||||||
|
|
|
|||||||
Total reserves, payables and accrued | |||||||||
liabilities | 6,551,395 | 5,525,892 | |||||||
|
|
|
|||||||
Variable annuity liabilities related to | |||||||||
separate accounts | 18,526,413 | 20,393,820 | |||||||
|
|
|
|||||||
Subordinated notes payable to affiliates | 58,814 | 55,119 | |||||||
|
|
|
|||||||
Deferred income taxes | 210,970 | 85,978 | |||||||
|
|
|
|||||||
Shareholder's equity: | |||||||||
Common Stock | 3,511 | 3,511 | |||||||
Additional paid-in capital | 925,753 | 493,010 | |||||||
Retained earnings | 694,004 | 697,730 | |||||||
Accumulated other comprehensive loss | (29,272 | ) | (65,582 | ) | |||||
|
|
|
|||||||
Total shareholder's equity | 1,593,996 | 1,128,669 | |||||||
|
|
|
|||||||
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | $ | 26,941,588 | $ | 27,189,478 | |||||
|
|
See accompanying notes to consolidated financial statements |
F-4
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME |
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(In thousands) |
Investment income | $ | 375,213 | $ | 399,355 | $ | 516,001 |
|
|
|
Interest expense on: |
Fixed annuity contracts | (133,647 | ) | (140,322 | ) | (231,929 | ) |
Universal life insurance |
contracts | (81,773 | ) | (86,263 | ) | (102,486 | ) |
Guaranteed investment |
contracts | (25,079 | ) | (34,124 | ) | (19,649 | ) |
Senior indebtedness | (945 | ) | --- | (199 | ) |
Subordinated notes payable |
to affiliates | (4,475 | ) | (4,144 | ) | (3,474 | ) |
|
|
|
Total interest expense | (245,919 | ) | (264,853 | ) | (357,737 | ) |
|
|
|
NET INVESTMENT INCOME | 129,294 | 134,502 | 158,264 |
|
|
|
NET REALIZED INVESTMENT LOSSES | (92,711 | ) | (15,177 | ) | (19,620 | ) |
|
|
|
Fee income: |
Variable annuity fees | 361,877 | 400,495 | 306,417 |
Net retained commissions | 47,572 | 62,202 | 51,039 |
Asset management fees | 63,529 | 73,922 | 43,510 |
Universal life insurance fees, net | 18,909 | 20,258 | 28,932 |
Surrender charges | 24,911 | 20,963 | 17,137 |
Other fees | 14,551 | 12,959 | 6,327 |
|
|
|
TOTAL FEE INCOME | 531,349 | 590,799 | 453,362 |
|
|
|
GENERAL AND ADMINISTRATIVE EXPENSES | (146,169 | ) | (170,076 | ) | (146,297 | ) |
|
|
|
AMORTIZATION OF DEFERRED |
ACQUISITION COSTS | (220,316 | ) | (158,007 | ) | (116,840 | ) |
|
|
|
ANNUAL COMMISSIONS | (58,278 | ) | (56,473 | ) | (40,760 | ) |
|
|
|
GUARANTEED MINIMUM DEATH BENEFITS | (21,606 | ) | (1,551 | ) | (386 | ) |
|
|
|
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF |
ACCOUNTING CHANGE | 121,563 | 324,017 | 287,723 |
|
|
|
Income tax expense | (20,852 | ) | (108,445 | ) | (103,025 | ) |
|
|
|
NET INCOME BEFORE CUMULATIVE EFFECT OF |
ACCOUNTING CHANGE | (100,711 | ) | (215,572 | ) | (184,698 | ) |
|
|
|
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, |
NET OF TAX (NOTE 2) | (10,342 | ) | --- | --- |
|
|
|
NET INCOME | $ | 90,369 | $ | 215,572 | $ | 184,698 |
|
|
|
See accompanying notes to consolidated financial statements |
F-5
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued) |
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(In thousands) |
OTHER COMPREHENSIVE INCOME (LOSS) |
NET OF TAX: |
Net unrealized gains (losses) |
on debt and equity securities |
available for sale identified |
in the current period (net of |
income tax benefit of $3,646, |
income tax expense of $20,444 |
and income tax benefit of $63,900 |
for 2001, 2000 and 1999, respectively) | $ | (6,772 | ) | $ | 37,968 | $ | (118,669 | ) |
Less reclassification adjustment for |
net realized losses included in net |
income (net of income tax benefit |
of $22,422, $4,848 and $4,165 for |
2001, 2000 and 1999, respectively) | 41,640 | 9,003 | 7,735 |
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, |
NET OF TAX (NOTE 2) | 1,389 | --- | --- |
Net change related to cash flow hedges |
(net of income tax expense of $28 |
for 2001) | 53 | --- | --- |
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS) | 36,310 | 46,971 | (110,934 | ) |
|
|
|
NET INCOME | $ | 126,679 | $ | 262,543 | $ | 73,764 |
|
|
|
See accompanying notes to consolidated financial statements |
F-6
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS |
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(In thousands) |
CASH FLOW FROM OPERATING ACTIVITIES: | $ | 90,369 | $ | 215,572 | $ | 184,698 |
Net income |
Adjustments to reconcile net income to net |
cash provided by operating activities: |
Cumulative effect of accounting change, |
net of tax | 10,342 | --- | --- |
Interest credited to: |
Fixed annuity contracts | 133,647 | 140,322 | 231,929 |
Universal life insurance contracts | 81,773 | 86,263 | 102,486 |
Guaranteed investment contracts | 25,079 | 34,124 | 19,649 |
Net realized investment losses | 92,711 | 15,177 | 19,620 |
Amortization (accretion) of net |
premiums (discounts) on investments | 4,554 | (2,198 | ) | (18,343 | ) |
Universal life insurance fees | (18,909 | ) | (20,258 | ) | (28,932 | ) |
Amortization of goodwill | 1,452 | 1,455 | 776 |
Provision for deferred income taxes | 126,010 | 114,127 | (100,013 | ) |
Changes in: |
Accrued investment income | (7,717 | ) | 3,029 | 9,155 |
Deferred acquisition costs | (97,947 | ) | (171,500 | ) | (184,507 | ) |
Other assets | 15,042 | (16,628 | ) | (5,661 | ) |
Income taxes currently |
receivable/payable from Parent | 106 | (84,482 | ) | 12,367 |
Due from/to affiliates | (68,844 | ) | 27,763 | 27,381 |
Other liabilities | 9,697 | (40,283 | ) | 22,123 |
Other, net | (770 | ) | 10,799 | (2,992 | ) |
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | 396,595 | 313,282 | 289,736 |
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Purchases of: |
Bonds, notes and redeemable preferred stock | (2,178,830 | ) | (881,647 | ) | (4,130,682 | ) |
Mortgage loans | (70,295 | ) | (144,303 | ) | (331,398 | ) |
Other investments, excluding short-term |
investments | (27,413 | ) | (66,722 | ) | (227,268 | ) |
Sales of: |
Bonds, notes and redeemable preferred stock | 1,087,090 | 468,221 | 2,660,931 |
Other investments, excluding short-term |
investments | 3,527 | 60,538 | 65,395 |
Redemptions and maturities of: |
Bonds, notes and redeemable preferred stock | 549,638 | 429,347 | 1,274,764 |
Mortgage loans | 63,960 | 136,277 | 46,760 |
Other investments, excluding short-term |
investments | 78,555 | 122,195 | 21,256 |
Net cash and short-term investments transferred |
to affiliates in assumption reinsurance |
transaction with MBL Life Assurance Corporation | --- | (3,314 | ) | (371,634 | ) |
|
|
|
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (493,768 | ) | 120,592 | (991,876 | ) |
|
|
|
See accompanying notes to consolidated financial statements |
F-7
|
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(In thousands) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
Deposit and premium receipts on: |
Fixed annuity contracts | $ | 2,280,498 | $ | 1,764,600 | $ | 2,016,851 |
Universal life insurance contracts | 52,469 | 58,738 | 78,864 |
Guaranteed investment contracts | 40,000 | 350,000 | --- |
Net exchanges from the fixed accounts |
of variable annuity contracts | (1,368,527 | ) | (1,994,710 | ) | (1,821,324 | ) |
Withdrawal payments on: |
Fixed annuity contracts | (315,794 | ) | (320,778 | ) | (2,232,374 | ) |
Universal life insurance contracts | (55,361 | ) | (145,067 | ) | (81,634 | ) |
Guaranteed investment contracts | (191,919 | ) | (78,312 | ) | (19,742 | ) |
Claims and annuity payments on: |
Fixed annuity contracts | (52,685 | ) | (114,761 | ) | (46,578 | ) |
Universal life insurance contracts | (146,998 | ) | (118,302 | ) | (158,043 | ) |
Net receipts from (repayments of) |
other short-term financings | 15,920 | (33,689 | ) | 40,924 |
Net receipts (payments) related to a |
modified coinsurance transaction | (35,972 | ) | (43,110 | ) | 140,757 |
Net receipts from issuances of subordinated |
notes payable to affiliate | --- | 17,303 | --- |
Capital contributions received | --- | --- | 114,400 |
Return of capital by Parent | --- | --- | (170,500 | ) |
Dividends paid to Parent | (94,095 | ) | (69,000 | ) | --- |
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 127,536 | (727,088 | ) | (2,138,399 | ) |
|
|
|
NET INCREASE (DECREASE) IN CASH |
AND SHORT-TERM INVESTMENTS | 30,363 | (293,214 | ) | (2,840,539 | ) |
CASH AND SHORT-TERM INVESTMENTS |
AT BEGINNING OF PERIOD | 169,701 | 462,915 | 3,303,454 |
|
|
|
CASH AND SHORT-TERM INVESTMENTS |
AT END OF PERIOD | $ | 200,064 | $ | 169,701 | $ | 462,915 |
|
|
|
SUPPLEMENTAL CASH FLOW |
INFORMATION: |
Interest paid on indebtedness | $ | 1,725 | $ | 1,841 | $ | 3,787 |
|
|
|
Net income taxes received from (paid to) Parent | $ | 120,504 | $ | (78,796 | ) | $ | (190,126 | ) |
|
|
|
See accompanying notes to consolidated financial statements |
F-8
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. |
NATURE OF OPERATIONS |
The Company is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the "Parent"), which is an indirect wholly owned subsidiary of American International Group, Inc. ("AIG"), a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services, retirement services and asset management. The Company changed its name to SunAmerica National Life Insurance Company on October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. However, the Company is continuing to do business as Anchor National Life Insurance Company. It is currently anticipated that the Company will seek regulatory approval to change its name in each state in which it does business to AIG SunAmerica Life Assurance Company effective sometime in the first quarter of 2003. The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government, and policies of state and other regulatory authorities. The level of sales of the Company's financial products is influenced by many factors, including general market rates of interest, the strength, weakness and volatility of equity markets, and terms and conditions of competing financial products. The Company is exposed to the typical risks normally associated with a portfolio of fixed-income securities, namely interest rate, option, liquidity and credit risk. The Company controls its exposure to these risks by, among other things, closely monitoring and matching the duration of its assets and liabilities, monitoring and limiting prepayment and extension risk in its portfolio, maintaining a large percentage of its portfolio in highly liquid securities, and engaging in a disciplined process of underwriting, reviewing and monitoring credit risk. The Company also is exposed to market risk, as market volatility may result in reduced fee income in the case of assets managed in mutual funds and held in separate accounts. |
F-9
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Under GAAP, deposits collected on the non-traditional life and annuity insurance products, such as those sold by the Company, are not reflected as revenues in the Company's statement of earnings, as they are recorded directly to policyholders liabilities upon receipt. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. INVESTMENTS: Cash and short-term investments primarily include cash, commercial paper, money market investments and short-term bank participations. All such investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, notes and redeemable preferred stocks available for sale and common stocks are carried at aggregate fair value and changes in unrealized gains or losses, net of tax, are credited or charged directly to the accumulated other comprehensive income or loss component of shareholder's equity. Bonds, notes and redeemable preferred stocks are reduced to estimated net realizable value when declines in such values are considered to be other than temporary. Estimates of net realizable value are subjective and actual realization will be dependent upon future events. Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Policy loans are carried at unpaid balances. Separate account seed money consists of seed money for mutual funds used as investment vehicles for the Company's variable annuity separate accounts and is carried at market value. Partnership investments in affordable housing properties are generally carried at cost, and for certain of the properties, realized tax credits reduce the carrying value of the investment as an alternative to reducing income tax expense. Limited partnerships that are invested in real estate and fixed-income securities are accounted for by the cost method of accounting. Real estate is carried at the lower of cost or net realizable value. Common stock is carried at fair value. Other invested assets consist of invested collateral with respect to the Company's securities lending program, collateralized bond obligations and investments in mutual funds for the Company's asset management operations. |
F-10
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
The Company lends its securities and primarily takes cash as collateral with respect to the securities lent. This collateral is an amount in excess of the fair value of the securities lent. Collateral received that is other than cash also exceeds the fair value of the securities lent. The Company monitors daily the market value of securities that are on loan relative to the fair value of collateral held and obtains additional collateral when necessary. Income earned on the collateral is recorded as net investment income while interest paid on the securities lending agreements and the related management fees paid to administer the program are recorded as interest expense in the consolidated statement of income and comprehensive income. Realized gains and losses on the sale of investments are recognized in operations at the date of sale and are determined by using the specific cost identification method. Premiums and discounts on investments are amortized to investment income by using the interest method over the contractual lives of the investments. INTEREST RATE SWAP AGREEMENTS: 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 into fixed-rate instruments. At December 31, 2001, the Company had one outstanding Swap Agreement subject to the provisions of SFAS 133 (see "Recently Issued Accounting Standards") with a notional principal of $97,000,000 which matures in June 2002. This agreement effectively converts a $97,000,000 floating rate commercial mortgage to a fixed rate instrument. The agreement has been designated as a cash flow hedge and accordingly, the market value of the Swap Agreement, $2,218,000, has been recorded as an asset in the Company's consolidated balance sheet as of December 31, 2001. Changes in the market value of this Swap Agreement, net of taxes, are recognized as a component of other comprehensive income. There was no inefficiency associated with this Swap Agreement at adoption or in the year ended December 31, 2001. DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the annuity contracts. Estimated gross profits are composed of net investment income, net realized investment gains and losses, variable annuity fees, universal life insurance fees, surrender charges and direct administrative expenses. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. Deferred acquisition costs ("DAC") consist of commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. The Company capitalized DAC of $359,162,000 and $362,085,000 for the years ended December 31, 2001 and 2000, respectively. |
F-11
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued) |
As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to DAC equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains or losses on debt and equity securities available for sale which is a component of accumulated other comprehensive income (loss) and is credited or charged directly to shareholder's equity. DAC has been increased by $16,000,000 and $21,800,000 at December 31, 2001 and 2000, respectively, for this adjustment. VARIABLE ANNUITY ASSETS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS: The assets and liabilities resulting from the receipt of variable annuity deposits are segregated in separate accounts. The Company receives administrative fees for managing the funds and other fees for assuming mortality and certain expense risks. Such fees are included in Variable Annuity Fees in the income statement. GOODWILL: Goodwill amounted to $20,150,000 (including accumulated amortization of $19,852,000) and $21,604,000 (including accumulated amortization of $18,101,000) at December 31, 2001 and 2000, respectively. Goodwill is amortized by using the straight-line method over periods averaging 25 years and is included in Other Assets in the balance sheet. Goodwill is evaluated for impairment when events or changes in economic conditions indicate that the carrying amount may not be recoverable. See "Recently Issued Accounting Standards" below for discussion of future accounting for goodwill effective January 1, 2002. RESERVES FOR FIXED ANNUITIES, UNIVERSAL LIFE INSURANCE AND GUARANTEED INVESTMENT CONTRACTS ("GICs"): Reserves for fixed annuity, universal life insurance and GIC contracts are accounted for as investment-type contracts in accordance with Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," and are recorded at accumulated value (deposits received, plus accrued interest, less withdrawals and assessed fees). |
F-12
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
FEE INCOME: Variable annuity fees, asset management fees, universal life insurance fees and surrender charges are recorded in income as earned. Net retained commissions are recognized as income on a trade date basis. INCOME TAXES: The Company files as a "life insurance company" under the provisions of the Internal Revenue Code of 1986. Its federal income tax return is consolidated with those of its direct parent, SunAmerica Life Insurance Company (the "Parent"), and its affiliate, First SunAmerica Life Insurance Company ("FSA"). Income taxes have been calculated as if the Company filed a separate return. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). This statement requires the Company to recognize all derivatives in the consolidated balance sheet measuring these derivatives at fair value. The recognition of the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. SFAS 133 was postponed by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, and became effective for the Company on January 1, 2001. The adoption of SFAS 133 on January 1, 2001 resulted in an increase of $1,389,000, net of tax, in other comprehensive income. In January 2001, the Emerging Issues Task Force of the FASB ("EITF") issued EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"). EITF 99-20 provides guidance on the calculation of interest income and the recognition of impairments related to beneficial interests held in an investment portfolio. Beneficial interests are investments that represent rights to receive specified cash flows from a pool of underlying assets (i.e. collateralized debt obligations). In accordance with the transition provisions of EITF 99-20, the Company recorded in its consolidated statement of income and comprehensive income for 2001 a cumulative effect of an accounting change adjustment loss of $10,342,000 ($15,910,000 before tax). |
F-13
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
As of December 31, 2001, the Company recorded $20,150,000 million of goodwill on its consolidated balance sheet. The Company has evaluated the impact of the impairment provisions of SFAS 142, and has determined that the impact on its results of operations and financial condition will not be significant.
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment and Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 eliminates the exception to
consolidation for a subsidiary for which control is likely to be
temporary. As a result, this standard may impact the Company's financial
statements with respect to SA Affordable Housing LLC's ownership
interests in limited partnerships (see Note 9). SFAS 144 is effective for
the year commencing January 1, 2002. The Company is currently evaluating
the provisions of SFAS 144, and has not yet determined the impact on the
Company's consolidated balance sheet or its consolidated results of
operations. |
|
3. |
ACQUISITIONS |
On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life") (the "Acquisition"), via a 100% coinsurance transaction, for a cash purchase price of $128,420,000. As part of this transaction, the Company acquired assets having an aggregate fair value of $5,718,227,000, composed primarily of invested assets totaling $5,715,010,000. Liabilities assumed in this acquisition totaled $5,831,266,000, including $3,460,503,000 of fixed annuity reserves, $2,308,742,000 of universal life reserves and $24,011,000 of guaranteed investment contract reserves. The excess of the purchase price over the fair value of net assets received amounted to $83,737,000 at December 31, 2001, after adjustment for the transfer of the New York business to FSA (see below), and is included in Deferred Acquisition Costs in the accompanying consolidated balance sheet. The income statements for the years ended December 31, 2001, 2000 and 1999 include the impact of the Acquisition. |
F-14
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
3. |
ACQUISITIONS (Continued) |
Included in the block of business acquired from MBL Life were policies whose owners are residents of the State of New York ("the New York Business"). On July 1, 1999, the New York Business was acquired by the Company's New York affiliate, FSA, via an assumption reinsurance agreement, and the remainder of the business converted to assumption reinsurance in the Company, which superseded the coinsurance agreement. As part of this transfer, invested assets equal to $678,272,000, life reserves equal to $282,247,000, group pension reserves equal to $406,118,000, and other net assets of $10,093,000 were transferred to FSA. The $128,420,000 purchase price was allocated between the Company and FSA based on the estimated future gross profits of the two blocks of business. The portion allocated to FSA was $10,000,000. As part of the Acquisition, the Company received $242,473,000 from MBL Life to pay policy enhancements guaranteed by the MBL Life rehabilitation agreement to policyholders meeting certain requirements. Of this amount, the Company was required to transfer $20,055,000 to the Parent for enhancements on policies which customers elected to convert to fixed annuity policies of the Parent. Included in the Company's reserves transferred to FSA in 1999 were $34,657,000 of such policy enhancement reserves. Based upon final actuarial calculations performed in the first quarter of 2000, $16,741,000 of such reserves were returned to the Company by FSA. A primary requirement was that annuity policyholders must have converted their MBL Life policy to a policy type currently offered by the Company or one of its affiliates by December 31, 1999. Pursuant to the agreement, the enhancements were scheduled to be credited in four installments on January 1, 2000, June 30, 2001, June 30, 2002 and June 30, 2003, to eligible policies still active on each of those dates. The Company's portion of the payment due amounted to $52,093,000 and $58,329,000 on January 1, 2000 and June 30, 2001, respectively, and was either credited to the accounts of the policyholders or paid as benefits through withdrawals or accelerated death benefits. On December 31, 2001, the remaining enhancement reserve for such payments totaled $100,834,000. |
F-15
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
4. |
INVESTMENTS |
|
Amortized Cost |
Estimated Fair Value |
|||||||||||
| ||||||||||||
(In thousands) | ||||||||||||
| ||||||||||||
AT DECEMBER 31, 2001: | ||||||||||||
Securities of the United States | ||||||||||||
Government | $ | 24,279 | $ | 24,069 | ||||||||
Mortgage-backed securities | 1,582,155 | 1,543,175 | ||||||||||
Securities of public utilities | 223,006 | 222,815 | ||||||||||
Corporate bonds and notes | 2,059,160 | 2,002,981 | ||||||||||
Redeemable preferred stocks | 21,515 | 21,515 | ||||||||||
Other debt securities | 747,786 | 730,520 | ||||||||||
|
|
|||||||||||
Total | $ | 4,607,901 | $ | 4,545,075 | ||||||||
|
|
|||||||||||
AT DECEMBER 31, 2000: | ||||||||||||
Securities of the United States | ||||||||||||
Government | $ | 19,164 | $ | 18,868 | ||||||||
Mortgage-backed securities | 1,651,581 | 1,636,304 | ||||||||||
Securities of public utilities | 154,076 | 151,209 | ||||||||||
Corporate bonds and notes | 1,426,845 | 1,329,001 | ||||||||||
Redeemable preferred stocks | 1,375 | 1,375 | ||||||||||
Other debt securities | 877,529 | 871,145 | ||||||||||
|
|
|||||||||||
Total | $ | 4,130,570 | $ | 4,007,902 | ||||||||
|
|
The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by contractual maturity, as of December 31, 2001, follow: |
Amortized Cost |
Estimated Fair Value |
|||||||||||
| ||||||||||||
(In thousands) | ||||||||||||
| ||||||||||||
Due in one year or less | $ | 93,363 | $ | 94,251 | ||||||||
Due after one year through | ||||||||||||
five years | 1,122,253 | 1,110,755 | ||||||||||
Due after five year through | ||||||||||||
ten years | 1,371,336 | 1,321,277 | ||||||||||
Due after ten years | 488,794 | 475,617 | ||||||||||
Mortgage-backed securities | 1,532,155 | 1,543,175 | ||||||||||
|
|
|||||||||||
Total | $ | 4,607,901 | $ | 4,545,075 | ||||||||
|
|
|
F-16
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
4. |
INVESTMENTS (Continued) |
|
Gross Unrealized Gains |
Gross Unrealized Losses |
|||||||||||
| ||||||||||||
(In thousands) | ||||||||||||
| ||||||||||||
AT DECEMBER 31, 2001: | ||||||||||||
Securities of the United States | ||||||||||||
Government | $ | 105 | $ | (315 | ) | |||||||
Mortgage-backed securities | 16,573 | (5,553 | ) | |||||||||
Securities of public utilities | 1,885 | (2,076 | ) | |||||||||
Corporate bonds and notes | 21,540 | (77,719 | ) | |||||||||
Other debt securities | 6,226 | (23,492 | ) | |||||||||
|
|
|||||||||||
Total | $ | 46,329 | $ | (109,155 | ) | |||||||
|
|
|||||||||||
AT DECEMBER 31, 2000: | ||||||||||||
Securities of the United States | ||||||||||||
Government | $ | 17 | $ | (313 | ) | |||||||
Mortgage-backed securities | 10,000 | (25,277 | ) | |||||||||
Securities of public utilities | 267 | (3,134 | ) | |||||||||
Corporate bonds and notes | 12,682 | (110,526 | ) | |||||||||
Other debt securities | 11,482 | (17,866 | ) | |||||||||
|
|
|||||||||||
Total | $ | 34,448 | $ | (157,116 | ) | |||||||
|
|
Gross unrealized gains on equity securities aggregated $12,000 at December 31, 2001 and $18,000 at December 31, 2000. Gross unrealized losses on equity securities aggregated $439,000 at December 31, 2001 and $45,000 at December 31, 2000. |
F-17
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
4. |
INVESTMENTS (Continued) |
|
Years Ended December 31, | |||||||||||||||||
2001 | 2000 | 1999 | |||||||||||||||
(In thousands) | |||||||||||||||||
BONDS, NOTES AND REDEEMABLE | |||||||||||||||||
PREFERRED STOCKS | |||||||||||||||||
Realized gains | $ | 34,026 | $ | 9,608 | $ | 8,333 | |||||||||||
Realized losses | (25,258 | ) | (5,573 | ) | (26,113 | ) | |||||||||||
MORTGAGE LOANS: | |||||||||||||||||
Realized losses | --- | (276 | ) | --- | |||||||||||||
COMMON STOCKS: | |||||||||||||||||
Realized gains | 164 | 610 | 4,239 | ||||||||||||||
Realized losses | --- | --- | (11 | ) | |||||||||||||
OTHER INVESTMENTS: | |||||||||||||||||
Realized gains | --- | 1,091 | --- | ||||||||||||||
Realized losses | (685 | ) | --- | --- | |||||||||||||
IMPAIRMENT WRITEDOWNS | (100,958 | ) | (20,637 | ) | (6,068 | ) | |||||||||||
|
|
|
|||||||||||||||
Total net realized | |||||||||||||||||
investment losses | $ | (92,711 | ) | $ | (15,177 | ) | $ | (19,620 | ) | ||||||||
|
|
|
|
Years Ended December 31, | |||||||||||||||||
2001 | 2000 | 1999 | |||||||||||||||
(In thousands) | |||||||||||||||||
Short-term investments | $ | 9,430 | $ | 21,683 | $ | 61,764 | |||||||||||
Bonds, notes and redeemable | |||||||||||||||||
preferred stocks | 285,668 | 290,157 | 348,373 | ||||||||||||||
Mortgage loans | 58,262 | 60,608 | 47,480 | ||||||||||||||
Partnerships | 13,905 | 7,031 | 6,631 | ||||||||||||||
Policy loans | 18,218 | 20,200 | 22,284 | ||||||||||||||
Common stocks | 2 | --- | 7 | ||||||||||||||
Real estate | (272 | ) | 121 | (525 | ) | ||||||||||||
Other invested assets | (5,038 | ) | 6,668 | 35,939 | |||||||||||||
Less: investment expenses | (4,962 | ) | (7,113 | ) | (5,952 | ) | |||||||||||
|
|
|
|||||||||||||||
Total investment income | $ | 375,213 | $ | 399,355 | $ | 516,001 | |||||||||||
|
|
|
F-18
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
4. |
INVESTMENTS (Continued) |
At December 31, 2001, bonds, notes and redeemable preferred stocks included $215,528,000 of bonds and notes not rated investment grade. These non-investment-grade securities are comprised of bonds spanning 35 industries with 20% of these assets concentrated in telecommunications and 10% concentrated in airlines. No other industry concentration constituted more than 6% of these assets. At December 31, 2001, mortgage loans were collateralized by properties located in 29 states, with loans totaling approximately 30% of the aggregate carrying value of the portfolio secured by properties located in California and approximately 11% by properties located in New York. No more than 9% of the portfolio was secured by properties in any other single state. At December 31, 2001, the carrying value of investments in default as to the payment of principal or interest was $12,060,000 ($9,824,000 of bonds and $2,236,000 of mortgage loans). As a component of its asset and liability management strategy, the Company utilizes Swap Agreements to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities to fixed-rate instruments. At December 31, 2001, the Company had one outstanding asset Swap Agreement with a notional principal amount of $97,000,000 and one outstanding liability Swap Agreement with a notional principal amount of $30,954,000. The asset Swap Agreement was entered into in May 2000 and matures in June 2002. The liability Swap Agreement was entered into in December 1996 and matures in December 2024. The net interest received or paid on the asset Swap Agreement is included in Investment Income, while the net interest received or paid on the liability Swap Agreement is included in Interest Expense in the Consolidated Statement of Income and Comprehensive Income. The total net interest received (paid) amounted to $2,599,000 for the year ended December 31, 2001, $43,000 for the year ended December 31, 2000 and $(215,000) for the year ended December 31, 1999. At December 31, 2001, $8,635,000 of bonds, at amortized cost, were on deposit with regulatory authorities in accordance with statutory requirements. |
F-19
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
5. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Selling expenses and potential taxes are not included. The estimated fair value amounts were determined using available market information, current pricing information and various valuation methodologies. If quoted market prices were not readily available for a financial instrument, management determined an estimated fair value. Accordingly, the estimates may not be indicative of the amounts the financial instruments could be exchanged for in a current or future market transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INSTRUMENTS: Carrying value is considered to be a reasonable estimate of fair value. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. MORTGAGE LOANS: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. SEPARATE ACCOUNT SEED MONEY: Fair value is considered to be the market value of the underlying securities. COMMON STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. POLICY LOANS: Carrying value is considered a reasonable estimate of fair value. PARTNERSHIPS: Fair value of partnerships that invest in debt and equity securities is based upon the fair value of the net assets of the partnerships as determined by the general partners. |
F-20
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
5. |
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) |
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned a fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates. VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Variable annuity liabilities are carried at the market value of the underlying securities of the variable annuity assets held in separate accounts. SUBORDINATED NOTES PAYABLE TO AFFILIATES: Fair value is estimated based on the quoted market prices for similar issues. |
F-21
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
5. |
FAIR VALUE OF FINANCIAL STATEMENTS (Continued) |
|
Carrying Value |
Fair Value |
|||||||||||
(In thousands) | ||||||||||||
DECEMBER 31, 2001: | ||||||||||||
ASSETS: | ||||||||||||
Cash and short-term investments | $ | 200,064 | $ | 200,064 | ||||||||
Bonds, notes and redeemable | ||||||||||||
preferred stocks | 4,545,075 | 4,545,075 | ||||||||||
Mortgage loans | 692,392 | 732,393 | ||||||||||
Policy loans | 226,961 | 226,961 | ||||||||||
Separate account seed money | 50,560 | 50,560 | ||||||||||
Common stocks | 861 | 861 | ||||||||||
Partnerships | 8,214 | 7,527 | ||||||||||
Variable annuity assets held in | ||||||||||||
separate accounts | 18,526,413 | 18,526,413 | ||||||||||
LIABILITIES: | ||||||||||||
Reserves for fixed annuity contracts | $ | 3,498,917 | $ | 3,439,727 | ||||||||
Reserves for guaranteed investment | ||||||||||||
contracts | 483,861 | 490,718 | ||||||||||
Variable annuity liabilities related | ||||||||||||
to separate accounts | 18,526,413 | 18,526,413 | ||||||||||
Subordinated notes payable to | ||||||||||||
affiliates | 58,814 | 62,273 |
F-22
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
5. |
FAIR VALUE OF FINANCIAL STATEMENTS (Continued) |
Carrying Value |
Fair Value |
|||||||||||
(In thousands) | ||||||||||||
DECEMBER 31, 2000: | ||||||||||||
ASSETS: | ||||||||||||
Cash and short-term investments | $ | 169,701 | $ | 169,701 | ||||||||
Bonds, notes and redeemable | ||||||||||||
preferred stocks | 4,007,902 | 4,007,902 | ||||||||||
Mortgage loans | 684,174 | 711,543 | ||||||||||
Policy loans | 244,436 | 244,436 | ||||||||||
Separate account seed money | 104,678 | 104,678 | ||||||||||
Common stocks | 974 | 974 | ||||||||||
Partnerships | 8,216 | 9,915 | ||||||||||
Variable annuity assets held in | ||||||||||||
separate accounts | 20,393,820 | 20,393,820 | ||||||||||
LIABILITIES: | ||||||||||||
Reserves for fixed annuity contracts | $ | 2,778,229 | $ | 2,618,719 | ||||||||
Reserves for guaranteed investment | ||||||||||||
contracts | 610,672 | 610,672 | ||||||||||
Variable annuity liabilities related | ||||||||||||
to separate accounts | 20,393,820 | 20,393,820 | ||||||||||
Subordinated notes payable to | ||||||||||||
affiliates | 55,119 | 57,774 |
6. |
SUBORDINATED NOTES PAYABLE TO AFFILIATES |
|
F-23
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
7. |
REINSURANCE |
The Company guarantees a minimum level of death benefits for the majority of the Company's separate account contracts. If a policyholder death benefit notification is received and the assets in the respective policyholder separate accounts are insufficient to fund the required minimum policy benefits, the Company is obligated to pay the difference. This exposure was reinsured on approximately 27% of the liabilities as of December 31, 2001. During January 2002, the Company entered into additional reinsurance agreements which significantly limited its exposure for certain contracts entered into in 2001 through 2003. Certain of the Company's variable annuities provide for a Guaranteed Minimum Income Benefit in the form of guaranteed benefit payout upon annuitization. All of the annuitization benefit at risk has been reinsured as of December 31, 2001. The business which was assumed from MBL Life as part of the Acquisition is subject to existing reinsurance ceded agreements. At December 31, 1998, the maximum retention on any single life was $2,000,000, and a total credit of $5,057,000 was taken against the life insurance reserves, representing predominantly yearly renewable term reinsurance. In order to limit even further the exposure to loss on any single insured and to recover an additional portion of the benefits paid over such limits, the Company entered into a reinsurance treaty effective January 1, 1999 under which the Company retains no more than $100,000 of risk on any one insured life. At December 31, 2001, a total reserve credit of $3,781,000 was taken against the life insurance reserves. On August 1, 1999, the Company entered into a modified coinsurance transaction, approved by the Arizona Department of Insurance, which involved the ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company (Hawaii), a non-affiliated stock life insurer. The transaction is accounted for as reinsurance for statutory reporting purposes. As part of the transaction, the Company received cash in the amount of $150,000,000 and recorded a corresponding deposit liability. As payments are made to the reinsurer, the deposit liability is relieved. The cost of this program, which amounted to $6,909,000 for the year ended December 31, 2001, $12,026,000 for the year ended December 31, 2000 and $3,621,000 for the year ended December 31, 1999, is reported as a component of General and Administrative Expenses in the Consolidated Statement of Income and Comprehensive Income. |
F-24
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
8. |
COMMITMENTS AND CONTINGENT LIABILITIES |
In the ordinary course of business, the Company is obligated to purchase approximately $46,000,000 of asset backed securities as of December 31, 2001. The Company has entered into an agreement whereby it is committed to purchase the remaining principal amount, $240,158,000 as of December 31, 2001, of various mortgage-backed securities at par value in March 2006. At the present time, management does not anticipate any material losses with respect to this agreement. Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company, with the potential exception of McMurdie et al. v. SunAmerica et al., Case No. BC 194082. The lawsuit is a representative action wherein the plaintiffs allege violations of California's Business and Professions Code Sections 17200 et seq. The Company is vigorously defending the lawsuit. The probability of any particular outcome is not reasonably estimable at this time. Based on the information available at this time, management believes that the Company has not incurred material losses associated with the terrorist attacks of September 11, 2001. The Company's current financial strength and counterparty credit ratings from Standard & Poor's are based in part on a guarantee (the "Guarantee") of the Company's insurance policy obligations by American Home Assurance Company ("American Home"), a subsidiary of AIG, and a member of an AIG intercompany pool, and the belief that the Company is viewed as a strategically important member of AIG. The Guarantee is unconditional and irrevocable, and the Company's policyholders have the right to enforce the Guarantee directly against American Home. |
F-25
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
8. |
COMMITMENTS AND CONTINGENT LIABILITIES (Continued) |
American Home does not publish financial statements, although it files statutory annual and quarterly reports with the New York State Insurance Department, where such reports are available to the public. AIG is a reporting company under the Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and quarterly reports on Form 10-Q, which are available from the Securities and Exchange Commission. |
F-26
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
9. |
SHAREHOLDER'S EQUITY |
|
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(in thousands) |
ADDITIONAL PAID-IN CAPITAL: |
Beginning balances | $ | 493,010 | $ | 493,010 | $ | 378,674 |
Reclassification of note by Parent | --- | --- | 170,436 |
Return of capital | --- | --- | (170,500 | ) |
Capital contributions received | --- | --- | 114,250 |
Contribution of partnership investment | --- | --- | 150 |
Contribution of subsidiary by Parent | 432,743 | --- | --- |
|
|
|
Ending Balances | $ | 925,753 | $ | 493,010 | $ | 493,010 |
|
|
|
RETAINED EARNINGS: |
Beginning balances | $ | 697,730 | $ | 551,158 | $ | 366,460 |
Net income | 90,369 | 215,572 | 184,698 |
Dividends paid to parent | (94,095 | ) | (69,000 | ) | --- |
|
|
|
Ending balances | $ | 694,004 | $ | 697,730 | $ | 551,158 |
|
|
|
ACCUMULATED OTHER |
COMPREHENSIVE LOSS: |
Beginning balances | $ | (65,582 | ) | $ | (112,553 | ) | $ | (1,619 | ) |
Change in net unrealized |
gains (losses) on debt |
securities available for sale | 59,842 | 79,891 | (198,659 | ) |
Change in net unrealized |
gains (losses) on equity |
securities available for sale | (400 | ) | (27 | ) | (10 | ) |
Change in adjustment to deferred |
acquisition costs | (5,800 | ) | (7,600 | ) | 28,000 |
Tax effects of net changes | (18,774 | ) | (25,293 | ) | 59,735 |
Cumulative effect of accounting |
change, net of tax | 1,389 | --- | --- |
Net change related to cash flow hedges | 53 | --- | --- |
|
|
|
Ending balances | $ | (29,272 | ) | $ | (65,582 | ) | $ | (112,553 | ) |
|
|
|
|
F-27
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
9. |
SHAREHOLDER'S EQUITY (Continued) |
Under statutory accounting principles utilized in filings with insurance regulatory authorities, the Company's net loss for the year ended December 31, 2001 totaled $122,322,000. The Company's net income for the years ended December 31, 2000 and 1999 was approximately $168,367,000 and $261,539,000, respectively. The Company's statutory capital and surplus totaled approximately $1,009,267,000 at December 31, 2001 and $719,946,000 at December 31, 2000. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the codification of statutory accounting principles ("Codification") which replaced the NAIC's previous primary guidance on statutory accounting, which became effective January 1, 2001. Codification changed prescribed statutory accounting practices and has resulted in changes to the accounting practices that the Company uses to prepare its statutory basis financial statements. Codification has been adopted by all fifty states as the prescribed basis of accounting, including Arizona. The adoption of Codification resulted in an increase to the Company's statutory surplus of approximately $92,402,000. On June 30, 1999, the Parent cancelled the Company's surplus note payable of $170,436,000 and funds received were reclassified to Additional Paid-in Capital in the accompanying consolidated balance sheet. On September 9, 1999, the Company paid $170,500,000 to its Parent as a return of capital. On September 14, 1999 and October 25, 1999, the Parent contributed additional capital to the Company in the amounts of $54,250,000 and $60,000,000, respectively. Also on December 31, 1999, the Parent made a $150,000 contribution of partnership investments to the Company. |
F-28
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
10. |
INCOME TAXES |
|
Net
Realized Investment Gains (Losses) |
Operations |
Total |
|||||||||||||||
(In thousands) | |||||||||||||||||
YEAR ENDED DECEMBER 31, 2001: | |||||||||||||||||
Currently payable | $ | (18,317 | ) | $ | (86,841 | ) | $ | (105,158 | ) | ||||||||
Deferred | (17,180 | ) | 143,190 | 126,010 | |||||||||||||
|
|
|
|||||||||||||||
Total income tax expense | |||||||||||||||||
(benefit) | $ | (35,497 | ) | $ | 56,349 | $ | 20,852 | ||||||||||
|
|
|
|||||||||||||||
YEAR ENDED DECEMBER 31, 2000: | |||||||||||||||||
Currently payable | $ | 2,791 | $ | (8,473 | ) | $ | (5,682 | ) | |||||||||
Deferred | (8,103 | ) | 122,230 | 144,127 | |||||||||||||
|
|
|
|||||||||||||||
Total income tax expense | |||||||||||||||||
(benefit) | $ | (5,312 | ) | $ | 113,757 | $ | 108,445 | ||||||||||
|
|
|
|||||||||||||||
YEAR ENDED DECEMBER 31, 1999: | |||||||||||||||||
Currently payable | $ | 6,846 | $ | 196,192 | $ | 203,038 | |||||||||||
Deferred | (13,713 | ) | (86,300 | ) | (100,013 | ) | |||||||||||
|
|
|
|||||||||||||||
Total income tax expense | |||||||||||||||||
(benefit) | $ | (6,867 | ) | $ | 109,892 | $ | 103,025 | ||||||||||
|
|
|
F-29
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
10. |
INCOME TAXES (Continued) |
|
Years Ended December 31, |
2001 | 2000 | 1999 |
|
|
|
(In thousands) |
Amount computed at statutory rate | $ | 42,547 | $ | 113,406 | $ | 100,703 |
Increases (decreases) resulting from: |
Amortization of differences |
between book and tax |
bases of net assets acquired | 613 | 597 | 609 |
State income taxes, net of |
federal tax benefit | 4,072 | 9,718 | 7,231 |
Dividends received deduction | (13,406 | ) | (10,900 | ) | (3,618 | ) |
Tax credits | (16,758 | ) | (2,382 | ) | (1,346 | ) |
Other, net | 3,784 | (1,994 | ) | (554 | ) |
|
|
|
Total income tax expense | $ | 20,852 | $ | 108,445 | $ | 103,025 |
|
|
|
|
F-30
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
10. |
INCOME TAXES (Continued) |
|
December 31, 2001 |
December 31, 2001 |
|||||||||||
| ||||||||||||
(In thousands) | ||||||||||||
| ||||||||||||
DEFERRED TAX LIABILITIES: | ||||||||||||
Investments | $ | --- | $ | 18,738 | ||||||||
Deferred acquisition costs | 425,208 | 317,995 | ||||||||||
State income taxes | 5,978 | 9,640 | ||||||||||
Other liabilities | 24,247 | 55,101 | ||||||||||
|
|
|||||||||||
Total deferred tax liabilities | 455,433 | 401,474 | ||||||||||
|
|
|||||||||||
DEFERRED TAX ASSETS: | ||||||||||||
Investments | $ | (23,194 | ) | $ | --- | |||||||
Contractholder reserves | (184,890 | ) | (247,591 | ) | ||||||||
Guaranty fund assessments | (3,629 | ) | (3,610 | ) | ||||||||
Deferred income | (16,211 | ) | (28,982 | ) | ||||||||
Net unrealized losses on debt and equity | ||||||||||||
securities available for sale | (16,539 | ) | (35,313 | ) | ||||||||
|
|
|||||||||||
Total deferred tax assets | (244,463 | ) | (315,496 | ) | ||||||||
|
|
|||||||||||
Deferred income taxes | $ | 210,970 | $ | 85,978 | ||||||||
|
|
11. |
RELATED-PARTY MATTERS |
The Company purchases administrative, investment management, accounting, marketing and data processing services from its Parent and SunAmerica, an indirect parent. Amounts paid for such services totaled $130,178,000 for the year ended December 31, 2001, $132,034,000 for the year ended December 31, 2000 and $105,059,000 for the year ended December 31, 1999. The marketing component of such costs during these periods amounted to $68,757,000, $61,954,000 and $53,385,000, respectively, and are deferred and amortized as part of Deferred Acquisition Costs. The other components of such costs are included in General and Administrative Expenses in the income statement. |
F-31
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
11. |
RELATED-PARTY MATTERS (Continued) |
|
F-32
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
12. | BUSINESS SEGMENTS |
|
F-33
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
12. |
BUSINESS SEGMENTS (Continued) |
|
Annuity Operations |
Asset Management Operations |
Broker- Dealer Operations |
Total |
||||||||||||||||
(In thousands) | |||||||||||||||||||
YEAR ENDED | |||||||||||||||||||
DECEMBER 31, 2001: | |||||||||||||||||||
Investment income | $ | 359,655 | $ | 14,988 | $ | 570 | $ | 375,213 | |||||||||||
Interest expense | (241,444 | ) | (4,115 | ) | (360 | ) | (245,919 | ) | |||||||||||
|
|
|
|
||||||||||||||||
Net investment income | 118,211 | 10,873 | 210 | 129,294 | |||||||||||||||
Net realized investment | |||||||||||||||||||
losses | (59,784 | ) | (32,927 | ) | --- | (92,711 | ) | ||||||||||||
Variable annuity fees | 350,378 | 11,499 | --- | 361,877 | |||||||||||||||
Net retained commissions | --- | 2,210 | 45,362 | 47,572 | |||||||||||||||
Asset management fees | --- | 63,529 | --- | 63,529 | |||||||||||||||
Universal life insurance | |||||||||||||||||||
fees, net | 18,909 | --- | --- | 18,909 | |||||||||||||||
Surrender charges | 24,911 | --- | --- | 24,911 | |||||||||||||||
Other fees, net | 3,626 | 9,350 | 1,575 | 14,551 | |||||||||||||||
|
|
|
|
||||||||||||||||
Total fee income | 397,824 | 86,588 | 46,937 | 531,349 | |||||||||||||||
General and administrative | |||||||||||||||||||
expenses | (89,253 | ) | (27,430 | ) | (29,486 | ) | (146,169 | ) | |||||||||||
Amortization of deferred | |||||||||||||||||||
acquisition costs | (144,273 | ) | (76,043 | ) | --- | (220,316 | ) | ||||||||||||
Annual commissions | (58,278 | ) | --- | --- | (58,278 | ) | |||||||||||||
Guaranteed minimum | |||||||||||||||||||
death benefits | (21,606 | ) | ---- | --- | (21,606 | ) | |||||||||||||
|
|
|
|
||||||||||||||||
Pretax income (loss) | |||||||||||||||||||
before cumulative | |||||||||||||||||||
effect of accounting | |||||||||||||||||||
change | $ | 142,841 | $ | (38,939 | ) | $ | 17,661 | $ | 121,563 | ||||||||||
|
|
|
|
||||||||||||||||
Total assets | $ | 26,208,762 | $ | 659,876 | $ | 72,950 | $ | 26,941,588 | |||||||||||
|
|
|
|
||||||||||||||||
Expenditures for long- | |||||||||||||||||||
lived assets | $ | --- | $ | 614 | $ | 608 | $ | 1,222 | |||||||||||
|
|
|
|
F-34
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
12. |
BUSINESS SEGMENTS (Continued) |
Annuity Operations |
Asset Management Operations |
Broker- Dealer Operations |
Total |
||||||||||||||||
(In thousands) | |||||||||||||||||||
YEAR ENDED | |||||||||||||||||||
DECEMBER 31, 2000: | |||||||||||||||||||
Investment income | $ | 388,368 | $ | 9,800 | $ | 1,187 | $ | 399,355 | |||||||||||
Interest expense | (260,709 | ) | (3,784 | ) | (360 | ) | (264,853 | ) | |||||||||||
|
|
|
|
||||||||||||||||
Net investment income | 127,659 | 6,016 | 827 | 134,502 | |||||||||||||||
Net realized investment | |||||||||||||||||||
losses | (15,177 | ) | --- | --- | (15,177 | ) | |||||||||||||
Variable annuity fees | 385,436 | 15,059 | --- | 400,495 | |||||||||||||||
Net retained commissions | --- | 3,878 | 58,324 | 62,202 | |||||||||||||||
Asset management fees | --- | 73,922 | --- | 73,922 | |||||||||||||||
Universal life insurance | |||||||||||||||||||
fees, net | 20,258 | --- | --- | 20,258 | |||||||||||||||
Surrender charges | 20,963 | --- | --- | 20,963 | |||||||||||||||
Other fees, net | 3,832 | 6,708 | 2,419 | 12,959 | |||||||||||||||
|
|
|
|
||||||||||||||||
Total fee income | 430,489 | 99,567 | 60,743 | 590,799 | |||||||||||||||
General and administrative | |||||||||||||||||||
expenses | (101,912 | ) | (36,106 | ) | (32,058 | ) | (170,076 | ) | |||||||||||
Amortization of deferred | |||||||||||||||||||
acquisition costs | (125,035 | ) | (32,972 | ) | --- | (158,007 | ) | ||||||||||||
Annual commissions | (56,473 | ) | --- | --- | (56,473 | ) | |||||||||||||
Guaranteed minimum | |||||||||||||||||||
death benefits | (1,551 | ) | --- | --- | (1,551 | ) | |||||||||||||
|
|
|
|
||||||||||||||||
Pretax income before | |||||||||||||||||||
cumulative effect of | |||||||||||||||||||
accounting change | $ | 258,000 | $ | 36,505 | $ | 29,512 | $ | 324,017 | |||||||||||
|
|
|
|
||||||||||||||||
Total assets | $ | 26,908,888 | $ | 199,075 | $ | 81,515 | $ | 27,189,478 | |||||||||||
|
|
|
|
||||||||||||||||
Expenditures for long- | |||||||||||||||||||
lived assets | $ | --- | $ | 454 | $ | 1,600 | $ | 2,054 | |||||||||||
|
|
|
|
F-35
|
AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
12. |
BUSINESS SEGMENTS (Continued) |
Annuity Operations |
Asset Management Operations |
Broker- Dealer Operations |
Total |
||||||||||||||||
(In thousands) | |||||||||||||||||||
YEAR ENDED | |||||||||||||||||||
DECEMBER 31, 1999: | |||||||||||||||||||
Investment income | $ | 505,962 | $ | 9,072 | $ | 967 | $ | 516,001 | |||||||||||
Interest expense | (354,263 | ) | (3,085 | ) | (389 | ) | (357,737 | ) | |||||||||||
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Net investment income | 151,699 | 5,987 | 578 | 158,264 | |||||||||||||||
Net realized investment | |||||||||||||||||||
losses | (19,620 | ) | --- | --- | (19,620 | ) | |||||||||||||
Variable annuity fees | 296,112 | 10,305 | --- | 306,417 | |||||||||||||||
Net retained commissions | --- | 2,012 | 49,027 | 51,039 | |||||||||||||||
Asset management fees | --- | 43,510 | --- | 43,510 | |||||||||||||||
Universal life insurance | |||||||||||||||||||
fees, net | 28,932 | --- | --- | 28,932 | |||||||||||||||
Surrender charges | 17,137 | --- | --- | 17,137 | |||||||||||||||
Other fees, net | 2,139 | 4,804 | (616 | ) | 6,327 | ||||||||||||||
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Total fee income | 344,320 | 60,631 | 48,411 | 453,362 | |||||||||||||||
General and administrative | |||||||||||||||||||
expenses | (93,921 | ) | (23,998 | ) | (28,378 | ) | (146,297 | ) | |||||||||||
Amortization of deferred | |||||||||||||||||||
acquisition costs | (94,910 | ) | (21,930 | ) | --- | (116,840 | ) | ||||||||||||
Annual commissions | (40,760 | ) | --- | --- | (40,760 | ) | |||||||||||||
Guaranteed minimum | |||||||||||||||||||
death benefits | (386 | ) | --- | --- | (386 | ) | |||||||||||||
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Pretax income before | |||||||||||||||||||
cumulative effect of | |||||||||||||||||||
accounting change | $ | 246,422 | $ | 20,690 | $ | 20,611 | $ | 287,723 | |||||||||||
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Total assets | $ | 26,649,310 | $ | 150,966 | $ | 74,218 | $ | 26,874,494 | |||||||||||
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Expenditures for long- | |||||||||||||||||||
lived assets | $ | --- | $ | 2,271 | $ | 2,728 | $ | 4,999 | |||||||||||
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F-36
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AIG SUNAMERICA LIFE ASSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
13. | SUBSEQUENT EVENT |
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F-37
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AMENDED AND RESTATED OF SUNAMERICA NATIONAL LIFE INSURANCE COMPANY We the undersigned, acting as incorporators for the purpose of amending and restating the Articles of Incorporation of SunAmerica National Life Insurance Company, an Arizona corporation, do hereby adopt the following Amended and Restated Articles of Incorporation for said corporation. ARTICLE I The name of the corporation shall be AIG SunAmerica Life Assurance Company. ARTICLE II The corporation was incorporated in the State of California on April 12, 1965 and was given recognition as domestic corporation in the State of Arizona from and after April 12, 1965, and authorization to transact insurance business as a domestic insurer, effective January 1, 1996. Upon the approval of the Amended and Restated Articles of Incorporation of Anchor National Life Insurance Company by the Arizona Department of Insurance and the State of Arizona, Corporation Commission, effective October 4, 2001 and October 5, 2001, respectively, the name of the corporation was changed to "SunAmerica National Life Insurance Company." ARTICLE III The existence of the corporation shall be perpetual. ARTICLE IV Upon
the approval of the Amended and Restated Articles of Incorporation by the
necessary regulatory authorities, AIG SunAmerica Life Assurance Company shall be
and continue to be possessed of all privileges, franchises and powers to the
same extent as if it had been originally incorporated under the laws of the
State of Arizona; and all privileges, franchises and powers belonging to said
corporation, and all property, real, personal and mixed, and all debts due on
whatever account, all Certificates of Authority, agent appointments, and all
chooses in action, shall be and the same are hereby ratified(1) approved,
confirmed and assured to SunAmerica National Life Insurance Company with like
effect and to all intents and purposes as if it had been originally incorporated
under the laws of the State of Arizona. |
ARTICLE V The nature of the business to be transacted and the objects and purposes for which this corporation is organized include the transaction of any and all lawful business for which insurance corporations may be incorporated under the laws of the State of Arizona without limitation, and as said laws may be amended from time to time, and specifically said corporation shall be authorized to transact life insurance, disability insurance and annuities, as defined under Arizona Revised Statutes, Section 20-254, 20-253 and 20-254.01 respectively, together with such other kinds of insurance as the corporation may from time to time be authorized to transact, and to act as a reinsurer of business for which it is duly authorized. Consistent with the applicable federal and state requirements, the Company may issue funding agreements and guaranteed investment contracts as defined under Arizona Revised Statutes, Section 20-208. ARTICLE VI The authorized capital of the corporation shall be $4,000,000 and shall consist of 4,000 shares of voting common stock with a par value of $1,000.00 per share. No holders of stock of the corporation shall have any preferential right to subscription to any shares or securities convertible into shares of stock of the corporation, nor any right of subscription to any thereof other than such, if any, as the Board of Directors in its discretion may determine, and at such price as the Board of Directors in its discretion may fix; and any shares or convertible securities which the Board of Directors may determine to offer for subscription to the holders of stock at the time existing. Nothing herein contained shall be construed as prohibiting the corporation from issuing any shares of authorized but unissued common stock for such consideration as the Board of Directors may determine, provided such issuance is approved by the shareholders of the corporation by a majority of the votes entitled to be cast at any annual or special meeting of shareholders called for that purpose. No such authorized but unissued stock may, however, be issued to the shareholders of the corporation by way of a stock dividend, split-up or in any other manner of distribution unless the same ratable stock dividend, stock split-up or other distribution be declared or made in voting common stock to the holder of such voting common stock at the time outstanding. Each holder of common stock shall be entitled to participate share for share in any cash dividends which may be declared from time to time on the common stock of the corporation by the Board of Directors and to receive pro rata the net assets of the corporation on liquidation. ARTICLE VII The affairs of the corporation shall be conducted by a Board of Directors consisting of not less than five (5) nor more than fifteen (15) directors as fixed by the bylaws, and such officers as said directors may at any time elect or appoint. No officer or director need be a shareholder of this corporation. Five (5) directors shall constitute the initial Board of Directors. The names and addresses of the persons who are to serve as directors until the next annual meeting of shareholders or until their successors are |
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elected and qualified, and of the persons who
are to serve as officers until the next annual meeting of the directors or
until their successors are elected and qualify, are:
The directors shall have the power to adopt, amend, alter and repeal the Bylaws, to manage the corporate affairs and make all rules and regulations expedient for the management of the affairs of the corporation, to remove any officer and to fill all vacancies occurring in the Board of Directors and offices for any cause, and to appoint from their own number an executive committee and other committees and vest said committees with all the powers permitted by the Bylaws. ARTICLE VIII Subject to the further provisions hereof, the corporation shall indemnify any and all of its existing and former directors and officers and their spouses against all expenses incurred by them and each of them, including but not confined to legal fees, judgments and penalties which may be incurred, rendered or levied in any legal or administrative action brought against any of them, for or on account of any action or omission alleged to have been committed while acting within the scope of employment as a director or officer of the corporation to the fullest extent allowable pursuant to A.R.S. 10-120, et al. as my be amended from time to time. Whenever any such person has grounds to believe that he may incur any such aforementioned expense, he shall promptly make a full report of the matter to the President and the Secretary of the Corporation. Thereafter, the Board of Directors of the corporation shall, within a reasonable time, determine if such person acted, or failed to act, in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, and, |
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with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If the Board of Directors determines that such person acted, or failed to act, in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, then indemnification shall be mandatory and shall be automatically extended as specified herein, provided, however, that the corporation shall have the right to refuse indemnification, wholly or partially, in any instance in which the person to whom indemnification would otherwise have been applicable shall have unreasonably refused to permit the corporation, at its own expense and through counsel of its own choosing, to defend him in the action, or shall have unreasonably refused to cooperate in the defense of such action. ARTICLE IX All directors of the corporation shall be elected at the annual meeting of the shareholders, which shall be held on the third Thursday of March of each year or such other date and time as may be determined by the Board of Directors, unless such day falls on a holiday, in which event the regular annual meeting shall be held on the next succeeding business day. ARTICLE X The principal place of business of the corporation shall be located in the City of Phoenix, Maricopa County, Arizona, but it may have other places of business and transact business, and its Board of Directors or shareholders may meet for the transaction of business, at such other place or places within or without the State of Arizona which its Board of Directors may designate. ARTICLE XI The fiscal year of the corporation shall be the calendar year. ARTICLE XII In no event shall the corporation incur indebtedness in excess of the amount authorized by law. ARTICLE XIII The shares of the corporation, when issued, shall be non-assessable, except to the extent required by the Constitution, specifically, but not in limitation thereof, as provided by Article XIV, Section 11 of the Constitution of the State of Arizona and the laws of the State of Arizona. |
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ARTICLE XIV The private property of the shareholders, directors and officers of the corporation shall be forever exempt from debts and obligations of the corporation. ARTICLE XV The Bylaws of the corporation may be repealed, altered amended, or substitute Bylaws may be adopted, by the directors or the shareholders, in accordance with the provisions contained in said Bylaws. ARTICLE XVI J. Michael Low of 2999 North 44th Street, Suite 250, Phoenix, Arizona, 85018, having been a bona fide resident of Arizona for at least three (3) years, is hereby appointed the statutory agent of this corporation in the State of Arizona, upon whom notices and processes, including service of summons, may be served, and which, when so served shall have lawful personal service on the corporation. The Board of Directors may revoke this appointment at any time, and shall fill the vacancy in such position whenever one exists. ARTICLE XVII Shareholder action was not required to amend and restate the Articles. IN WITNESS WHEREOF, we hereunto affix our signatures as of the ____ day of ________ , 2001. |
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James R. Belardi |
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Marc H. Gamsin |
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N. Scott Gillis |
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Jana W. Greer |
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Jay S. Wintrob |
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APPOINTMENT OF STATUTORY AGENT I, J. Michael Low, being a resident of the State of Arizona for at least three (3) years preceding this appointment, do hereby accept appointment as Statutory Agent for AIG SunAmerica Life Assurance Company in accordance with the Arizona Revised Statutes until appointment of a successor Statutory Agent and removal. Dated this _______ day of ___________________________ , 2002. |
J. Michael Low Low & Childers, P.C. |
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AMENDED AND RESTATED Section 1. Annual Meetings. The annual meeting of the shareholders of the Corporation shall be held on the third Thursday in March of each year or such other dates and times as may be determined. Not less than ten (10) nor more than fifty (50) days' written or printed notice stating the place, day and hour of each annual meeting shall be given in the manner provided in Section 1 of Article IX hereof. The business to be transacted at the annual meeting shall include the election of directors, consideration and action upon the reports of officers and directors and any other business within the power of the Corporation. All annual meetings shall be general meetings. Section 2. Special Meetings Called by President or Board of Directors At any time in the interval between annual meetings, special meetings of shareholders may be called by the President, the Secretary or by two (2) or more directors, upon ten (10) days' written or printed notice, stating the place, day and hour of such meeting and the business proposed to be transacted thereat. Such notice shall be given in the manner provided in Section 1 of Article IX. No business shall be transacted at any special meeting except that named in the notice. Section 3. Special Meeting Called by Shareholders Upon the request in writing delivered to the President or Secretary of the Corporation by the holders of ten percent (10%) or more of all shares outstanding and entitled to vote, it shall be the duty of the President or Secretary of the Corporation to call forthwith a special meeting of the shareholders. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. The Secretary of the Corporation shall inform such shareholders of the reasonably estimated cost of preparing and mailing the notice of the meeting. If upon payment of such costs to the corporation, the person to whom such request in writing shall have been delivered shall fail to issue a call for such meeting within ten (10) days after the receipt of such request and payment of costs, then the shareholders owning ten percent (10%) or more of the voting shares may do so upon giving fifteen (15) days' notice of the time, place and object of the meeting in the manner provided in Section 1 of Article IX. |
Section 4. Removal of Directors. At any special meeting of the shareholders called in the manner provided for by this Article, the shareholders, by a vote of a majority of all shares of stock outstanding and entitled to vote, may remove any director or the entire Board of Directors from office and may elect a successor or successors to fill any resulting vacancies for the remainder of his or their terms. Section 5. Voting Proxies Record Date. At all meetings of shareholders any shareholder entitled to vote may vote by proxy. Such proxy shall be in writing and signed by the shareholder or by his duly authorized attorney in fact. It shall be dated, but need not be sealed, witnessed or acknowledged. The Board of Directors may fix the record date for the determination of shareholders entitled to vote in the manner provided in Section 4 of Article IX hereof Section 6. Quorum. The presence in person or by proxy of the persons entitled to vote a majority of the voting shares of any meeting shall constitute a quorum for the transaction of business. If at any annual or special meeting of shareholders a quorum shall fail to attend in person or by proxy, a majority in interest attending in person or by proxy may adjourn the meeting from time to time, not exceeding thirty (30) days in all, and thereupon any business may be transacted which might have been transacted at the meeting originally called had the same been held at the time so called. Section 7. Filing Proxies. At all meetings of shareholders, the proxies shall be filed with and be verified by the Secretary of the Corporation or, if the meeting shall so decide, by the Secretary of the meeting. Section 8. Place of Meetings. All meetings of shareholders shall be held at such place, either within or without the State of Arizona, on such date and at such time as may be determined from time to time by the Board of Directors. Section 9. Order of Business. The order of business at all meetings of shareholders shall be as determined by the Board of Directors. Section l0. Action Without Meeting. Directors may be elected without a shareholders' meeting by a consent in writing, setting forth the action so taken, signed by all persons entitled to vote for the election of directors; provided, however, that the foregoing shall not limit the power of directors to fill vacancies in the Board of Directors, and that a director may be elected to fill a vacancy not filled by the directors by written consent in the manner provided by the General Corporation Law. Any other action, which under any provision of the General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All written consents shall be filed with the Secretary of the Corporation. |
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Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares of a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing receiving by the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. ARTICLE II. Directors. Section 1. Powers. The Board of Directors shall have the control and management of the affairs, business and properties of the Corporation. They shall have and exercise in the name of the Corporation and on behalf of the Corporation all the rights and privileges legally exercisable by the Corporation, except as otherwise provided by law, by the Charter or by these Bylaws. A director need not be a shareholder or a resident of Arizona. Section 2. Number: Term of Office; Removal. The number of directors of the Corporation shall be not less than five (5) nor more than fifteen (15). The number to be elected at each annual meeting shall be fixed by resolution of the directors and stated in the notice of the meeting, subject, however, to approval by the shareholders voting at the meeting. The directors shall hold office for the term of one year, or until their successors are elected and qualify. A director may be removed from office as provided in Section 4 of Article I hereof. Section 3. Vacancies. If the office of a director becomes vacant, or if the number of directors is increased, such vacancy may be filled by the Board by a vote of a majority of directors then in office though not less than a quorum. The shareholders may, however, at any time during the term of such director, elect some other person to fill said vacancy and thereupon the election by the Board shall be superseded and such election by the shareholders shall be deemed a filling of the vacancy and not a removal and may be made at any special meeting called for that purpose. Section 4. Organization Meetings; Regular Meetings. The Board of Directors shall meet for the election of officers and any other business as soon as practicable after the adjournment of the annual meeting of the shareholders. No notice of the organization meeting shall be required if it is held at the same place and immediately following the annual meeting of the shareholders. Other regular meetings of the Board of Directors may be held at such intervals as the Board may from time to time prescribe. Any action required or permitted to be taken at a meeting of the Board of Directors or of a committee of the Board may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the |
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Board or committee and filed with the minutes of proceedings of the Board or committee. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of telephone conference or similar communications equipment by means of which are persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 5. Special Meetings. Special meetings of the Board may be called by the President or by a majority of the directors. At least twenty-four (24) hours' notice shall be given of all special meetings; with the consent of the majority of the directors, a shorter notice may be given. Section 6. Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business, but such number may be decreased and/or increased at any time or from time to time by vote of a majority of the entire Board to any number not less than two (2) directors or not less than one-third of the directors, whichever is greater. Section 7. Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Arizona, and at such time as may be determined from time to time by the Board of Directors Section 8. Rules and Regulations. The Board 0f Directors may adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the Corporation as the Board may deem proper and not inconsistent with the laws of the State of Arizona or these Bylaws or the Charter. Section 9. Compensation. The directors, as such, may receive a stated salary for their services and/or a fixed sum and expenses of attendance may be allowed for attendance at each regular or special meeting of the Board of Directors. Such stated salary and/or attendance fee shall be determined by resolution of the Board unless the shareholders have adopted a resolution relating thereto, provided that nothing herein contained shall be construed to preclude a director from serving in any other capacity and receiving compensation therefor. Section 10. Investment Committee There shall be an Investment Committee consisting of the President of the Corporation ex officio and such members of the Board of Directors and/or officers and employees as the Board may by resolution prescribe. No investments or loans (other than policy loans or annuity contract loans) shall be made unless the same be authorized or approved by the Board of Directors or the Investment Committee. The Investment Committee shall maintain minutes of its meetings and shall submit regular reports to the Board of Directors. |
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Section 11 Executive Committee. The Board of Directors may appoint from among its members an executive Committee composed of three (3) or more directors, and may delegate to such Committee, in the interval between the meetings of the Board of Directors, any and all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, except the power to declare dividends, issue stock, select directors to fill vacancies in the membership of the Board of Directors or any committee of the Board of Directors, amend or repeal the bylaws, or adopt new Bylaws, fix the compensation of directors for serving on the Board of Directors, or any committee of the board of Directors, or recommend to shareholders any action requiring shareholders' approval. The members of such Committee shall constitute a quorum for the transaction of business at any meeting and the act of a majority of the members present at any meeting at which the quorum requirement is satisfied shall be the act of the Board of Directors. In the absence of any member of the Executive Committee necessary to constitute a quorum, the members thereof present at any meeting, whether or not they constitute a quorum, may, with telephonic approval of one of the absent members of the Executive Committee, appoint a member of the Board of Directors to act in place of such absent member. Section 12 Other Committees The Board of Directors may appoint from its own members and, where permitted by law, from the Corporation's officers and/or employees, such standing, temporary, special or adhoc committee as the Board may determine, investing such committees with such powers, duties and functions as the Board may prescribe. All such committees shall include the President, ex officio Section 13 Advisory Board. The Board of Directors may elect an Advisory Board to serve until the next annual meeting of the Board of Directors or until their successors are elected and qualified. Such Board shall consist of a number as determined from time to time by the Board of Directors, and they shall be advised of the meetings of the Board of Directors and authorized to attend the meetings and counsel with them, but shall have no vote. The Board of Directors (and between meetings of the Board of Directors, the Executive Committee) shall have the authority to increase or decrease the number of members to the Advisory Board and to elect one or more members to the Advisory Board to serve until the next meeting of the Board of Directors and until their successors are elected and qualified, and may provide for the compensation and other rules and regulations with respect to such Board. Section 14 Procedures; Meetings. The Committees shall keep minutes of their proceedings and shall report the same to the Board of Directors at the meeting next succeeding, and any action by the Committees shall be subject to revision and alteration by the Board of Directors, provided that no rights of third persons shall be affected by any such revision or alteration. |
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ARTICLE III Officers Section 1. In General. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary, a Treasurer, and one or more Assistant Secretaries and as may be fixed pursuant to these Bylaws. The President, Vice Presidents, Secretary, and Treasurer shall be chosen by the Board of Directors and, except those persons holding contracts for fixed terms, shall hold office only at the pleasure of the Board or until their successors are chosen and qualified. The President may from time to time appoint Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other officers bearing such titles and exercising such authority as he may from time to time deem appropriate, and except those persons holdings contracts for fixed terms, those officers appointed by the President shall hold office only at his pleasure or until their successors are appointed and qualify. Any two (2) officers, except those of President, Executive Vice President and Secretary, may be held by the same persons, but no officer shall execute, acknowledge or verify any instrument in more than one capacity when such instrument is required to be executed, acknowledged, or verified by any two (a) or more officers. The Board of Directors or the President may from time to time appoint other agents and employees, with such powers and duties as they may deem proper. Section 2. President. The President shall be Chief Executive Officer of the Corporation and shall have the general management of the Corporation's business in all departments. The President shall preside at all meetings of the Board of Directors and shall call to order all meetings of shareholders. The President shall perform such other duties as the Board of Directors may direct. Section 3. Vice Presidents In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as designated by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws. Section 4. Treasurer. Unless there shall be a financial Vice President designated by the Board of Directors as the chief financial officer of the Corporation, having general supervision over its finances, the Treasurer shall be the chief financial officer with such authority. He shall also have authority to attest to the seal of the Corporation and shall perform such other duties as may be assigned to him by the Board of Directors. Section 5. Secretary of the Corporation. The Secretary of the Corporation shall keep the minutes of the meetings of the shareholders and of the Board of Directors, and shall attend to the giving and serving of all notices of the Corporation |
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required by law or these Bylaws. The Secretary shall maintain at all times in the principal office of the Corporation at least one copy of the Bylaws with all amendments to date, and shall make the same, together with the minutes of the meetings of the shareholders, the annual statement of the affairs of the Corporation and any voting trust agreement on file at the office of the Corporation, available for inspection by any officer, director, or shareholder during reasonable business hours. The Secretary shall have authority to attest to the seal of the Corporation and shall perform such other duties as may be assigned to the Secretary by the Board of Directors. Section 6. Other Secretaries, Assistant Treasurers and Assistant Secretaries. Secretaries other than the Secretary of the Corporation, the Assistant Treasurers and the Assistant Secretaries shall have authority to attest to the seal of the Corporation and shall perform such other duties as may from time to time be assigned to them by the Board of Directors or the President. Section 7. Substitutes. The Board of Directors may from time to time in the absence of any one of said officers or, at any other time, designate any other person or persons on behalf of the Corporation, to sign any contracts, deeds, notes, or other instruments in the place or stead of any of said officers, and designate any person to fill any one of said offices, temporarily or for any particular purpose; and any instruments so signed in accordance with a resolution of the Board shall be the valid act of this Corporation as fully as if executed by any regular officer. ARTICLE IV. Resignation. Any director or officer may resign his office at any time. Such resignation shall be made in writing and shall take effect from the time of its receipt by the Corporation, unless some time be fixed in the resignation, and then from that date. The acceptance of a resignation shall not be required to make it effective. ARTICLE V. Indemnification of Directors and Officers. The Corporation shall indemnify any and all of its existing and former directors and officers and their spouses against all expenses incurred by them and each of them, including but not confined to legal fees, judgments and penalties which may be incurred, rendered or levied in any legal or administrative action brought against any of then, for or on account of any action or omission alleged to have been committed while acting within the scope of employment as director of officer of the Corporation to the fullest extent allowable pursuant to the Arizona General Corporation Law as may be amended from time to time. Whenever any such person has grounds to believe that he may incur any such aforementioned expense, he shall promptly make a full report of the matter to the president and the Secretary of the Corporation. Thereafter, the Board of |
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Directors of the Corporation shall, within a reasonable time, determine if such person acted, or failed to act, in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If the Board of Directors determines that such person acted, or failed to act, in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, then indemnification shall be mandatory and shall be automatically extended as specified herein, provided, however, that the Corporation shall have the right to refuse indemnification, wholly or partially, in any instance in which the person to whom indemnification would. otherwise have been applicable shall have unreasonably refused to permit the Corporation, at its own expense and through counsel of its own choosing, to defend him in the action, or shall have unreasonably refused to cooperate in the defense of such action. ARTICLE VI. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. ARTICLE VII. Seal The seal of the Corporation shall be a circular disc inscribed with the name of the Corporation, "AIG SunAmerica Life Assurance Company," and the year the Corporation was incorporated. ARTICLE VIII. Miscellaneous Provisions - Stock. Section 1. Issue. All certificates of shares of the Corporation shall be signed by the manual or facsimile signatures of the President or any Vice President, and countersigned by the Treasurer or Secretary of the Corporation and sealed with the seal or facsimile seal of the Corporation. Any stock certificates bearing the facsimile signatures of the officers above named shall be manually signed by an authorized representative of the Corporation's duly constituted transfer agent. If an officer whose signature appears on a certificate ceases to be an officer before the certificate is issued, it may, nevertheless, be issued with the same effect as if such officer were still in office. Section 2. Transfers. No transfers of shares shall be recognized or binding upon the Corporation until recorded on the transfer books of the Corporation |
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upon surrender and cancellation of certificates for a like number of shares. All transfers shall be effected only by the holder of record of such shares or by his legal representative, or by his attorney thereunto authorized by power of attorney duly executed. The person in whose name shares shall stand on the books of the Corporation may be deemed by the Corporation the owner thereof for all purposes. The Corporation's transfer agent shall maintain a stock transfer book, shall record therein all stock transfers and shall forward copies of all transfer sheets at regular prompt intervals to the Corporation's registrar, if there be one, or, if not, then to the Corporation's principal office for transcription on the stock registry books. Section 3. Form of Certificates; Procedure. The Board of Directors shall have power and authority to determine the form of stock certificates (except insofar as prescribed by law) , and to make all such rules and regulations as the Board may deem expedient concerning the issue; transfer and registration of said certificates, and to appoint one or more transfer agents and/or registrars to countersign and register the same. The transfer agent and registrar may be the same party. Section 4. Record Dates for Dividends and Shareholders' Meetings. The Board of Directors may fix the time, not exceeding twenty (20) days preceding the date of any meeting of shareholders, any dividend payment date or any date for the allotment of rights, during which the books of the Corporation shall be closed against transfers of stock, or the Board of Directors may fix a date not exceeding forty (4o) days preceding the date of any meeting of shareholders, any dividend payment date or any date for the allotment of rights, as a record date for the determination of the shareholders entitled to notice of and to vote at such meeting, or entitled to receive such dividends or rights, as the case may be, and only shareholders of record on such date shall be entitled to notice of and to vote at such meeting or to receive such dividends or rights, as the case may be. In the case of a meeting of shareholders, the record date shall be fixed not less than ten (10) days prior to the date of the meeting. Section 5. Lost Certificates. In case any certificate of shares is lost, mutilated or destroyed, the Board of Directors may issue a new certificate in place thereof, upon indemnity to the Corporation against loss and upon such other terms and conditions as the Board of Directors may deem advisable. ARTICLE IX. Notice. Section 1. Notice to Shareholders. Whenever by law or these Bylaws notice is required to be given to any shareholder, such notice may be given to each shareholder, whether or not such shareholder is entitled to vote, by leaving the same with him or at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to him at his address as it appears on the books of the Corporation. Such leaving or mailing of notice shall be deemed the time of giving such notice. |
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Section 2. Notice to Directors and Officers. Whenever by law of these Bylaws notice is required to be given to any director or officer, such notice may be given in any one of the following ways: by personal notice to such director or officer; by telephone communication with such director or officer personally; by wire, addressed to such director or officer at his then address or at his address as it appears on the books of the Corporation; or by depositing the same in writing in the post office or in a letter box in a postage paid, sealed wrapper addressed to such director or officer at his then address or at his address as it appears on the books of the Corporation; and the time when such notice shall be mailed or consigned to a telegraph company for delivery shall be deemed to be the time of the giving of such notice. ARTICLE X. Voting of Securities in Other Corporations. Any stock or other voting securities in other corporations, which may from time to time be held by the Corporation, may be represented and voted at any meeting of shareholders of such other corporation by the President, any Vice President, or the Treasurer, or by proxy or proxies appointed by the President, any Vice President, or the Treasurer, or otherwise pursuant to authorization thereunto given by a resolution of the Board of Directors. ARTICLE XI. Amendments. These Bylaws may be added to, altered, amended or repealed by a majority vote of the entire Board of Directors at any regular meeting of the Board or at any special meeting called for that purpose. Any action of the Board of Directors in adding to, altering, amending or repealing these Bylaws shall be reported to the shareholders at the next annual meeting and may be changed or rescinded by majority vote of all of the stock then outstanding and entitled to vote, without, however, affecting the validity of any action taken in the meanwhile in reliance on these Bylaws so added to, altered, amended or repealed as aforesaid by the Board of Directors. In no event shall the Board of Directors have any power to amend this Article. |
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BYLAWS CERTIFICATION
I, the undersigned, do hereby certify that I am the duly elected and qualified
Assistant Secretary and keeper of the records and corporate seal of AIG
SunAmerica Life Assurance Company, a corporation organized under the laws of the
State of Arizona, and that the foregoing is a full, true and correct copy of the
Amended and Restated Bylaws, duly adopted by unanimous written consent of the
Board of Directors of the Corporation, effective as of the 19th day of December
2001, and that said Amended and Restated Bylaws supersede all Bylaws previously
adopted for the purpose stated and are in full force and effect.
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Laurence M. Goldman Assistant Secretary |
State of California ) |
) ss. |
County of Los Angeles ) |
On this ___ day of __________ , 2002, before me personally came Lawrence M. Goldman, known to me to be the person described in and who executed the foregoing certificate, who being duly sworn, did say that he is the assistant Secretary of AIG SunAmerica Life Assurance Company, the corporation named in and on behalf of which the foregoing certificate was made; that the statements contained in the foregoing certificate are true in substance and in fact; that said certificate was executed on behalf of said corporation by authority of its Board of Directors; and the said Lawrence M. Goldman acknowledged that she executed the same as her free ct and deed and acknowledge the same to be the free act and deed of said corporation. |
Notary Public |
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(Notary Seal) |
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