SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)
/X/		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]

Table of Contents

PART I

ITEM 1. BUSINESS

GENERAL DESCRIPTION

     AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company), (the “Company”) was incorporated under the laws of the State of Arizona on April 12, 1965. The Company is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”) (formerly AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company, which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and 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. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, after which time it began doing business under its new name.

     The Company maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The Company has no employees; however, employees of AIGRS and other affiliates of the Company perform various services for the Company. AIGRS had approximately 1,800 employees at December 31, 2003, approximately 800 of whom perform services for the Company as well as for certain of its affiliates.

     The Company is an Arizona-chartered company licensed in 49 states and the District of Columbia. The Company is a life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”) directed to the institutional marketplace. 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.

     The Company ranks among the largest U.S. issuers of variable annuities. The Company distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms and financial institutions. In prior years, GICs were marketed directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. The Company’s nine affiliated broker-dealers are among the largest networks of independent registered representatives in the nation. Its affiliated broker-dealers accounted for approximately one-fifth of the Company’s total annuity sales in 2003.

     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 48 million to 67 million from 1992 to 2002, making this age group the fastest-growing segment of the U.S. population. Between 1992

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and 2002, annual industry premiums from fixed and variable annuities and fund deposits increased from $130.7 billion to $268.4 billion.

     Benefiting from continued strong growth of the retirement services 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 operations on the sale of annuities. In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based variable annuities. The Company’s variable annuity business entails no portfolio credit risk and requires 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. The Company has also implemented technology to interface with both its affiliated and unaffiliated broker-dealers, which enables the Company to more effectively market its products and help the financial professionals to better serve their clients. There are administrative risks involved in converting business operations to new information technology systems; however, the Company believes these risks are outweighed by the increased efficiencies and lower operating costs the Company realizes from its investments in new technology.

     On January 1, 2002, the Company declared a distribution to the Parent of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun held the Company’s asset management and broker-dealer operations. This distribution decreased the Company’s shareholder’s equity by $552.4 million. Subsequent to this distribution, the Company’s earnings no longer included the asset management and broker-dealer operations (see Note 7 of Notes to Consolidated Financial Statements). This distribution was approved by the Arizona Department of Insurance.

     Prior to the distribution of Saamsun on January 1, 2002, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations. The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO 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. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”), a direct wholly owned subsidiary of SAAMCO. SAAH LLC was previously a direct wholly owned subsidiary of the 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 SAAMCO. 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, SAAMCO (see Note 7 of Notes to Consolidated Financial Statements). The

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broker-dealer operations were conducted by the Company’s former broker-dealer subsidiary, Royal Alliance Associates, Inc. (“Royal Alliance”), which sells proprietary annuities and mutual funds and non-proprietary investment products. Royal Alliance earns income from commissions on sales of these products, net of the portion that is passed on to the registered representatives.

     The following table shows the Company’s investment income, net realized investment losses and fee income for the year ended December 31, 2003 by primary product line or service:

NET INVESTMENT AND FEE INCOME

ANNUITY OPERATIONS — SEPARATE ACCOUNT

     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 several variable funds and up to 5 fixed account options and 2 dollar cost averaging fixed account options for different time periods. Seasons sales have

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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 nine affiliated broker-dealers, the Company distributes its products through a vast network of independent broker-dealers, full-service securities firms and financial institutions. In total, more than 82,000 independent sales representatives nationally are appointed to sell the Company’s annuity products.

     At December 31, 2003, total variable product liabilities were $22.90 billion, of which $19.18 billion were held in separate accounts and $3.72 billion were the liabilities of the fixed-rate account options, which are held in the general account. The Company’s variable annuity products incorporate surrender charges to encourage persistency. At December 31, 2003, 75% of the Company’s variable annuity liabilities held in 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 2003 was approximately $70,000.

ANNUITY OPERATIONS – GENERAL ACCOUNT

     The Company’s general account obligations are fixed-rate products, principally fixed-rate options of its variable annuity contracts, but also including fixed annuities, GICs and universal life contracts issued in prior years. Such fixed-rate account options on its variable annuity contracts provide interest rate guarantees of one, 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 81% at December 31, 2003) of the annuity contracts, as well as the universal life contracts, reprice annually at discretionary rates determined by the Company subject to 3% or 4% minimum rate guarantees, depending on the contract. In repricing, the Company takes into account yield characteristics of its investment portfolio, surrender assumptions and competitive industry pricing, among other factors. The Company’s small block of fixed annuities is serviced by an affiliate of the Company. The Company’s universal life products are serviced by a third party administrator whose activities are closely monitored by the Company.

     The Company in prior years augmented its retail annuity business with the sale of institutional products. At December 31, 2003, the Company had $213.5 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indices and $4.5 million of fixed-maturity, fixed-rate GICs.

     The Company has had the ability, limited by minimum interest rate guarantees, to respond to the generally declining interest rate environment in the last five years by lowering crediting rates in response to lower investment returns. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the calculation of investment yield used by the Company. The trends experienced during the three years ended December 31, 2003 in the Company’s average yield on its portfolio of bonds, notes, and redeemable preferred stocks (the “Bond Portfolio”) and rate of interest credited on average interest-bearing

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liabilities, compared to the market trend in long-term interest rates as illustrated by the average ten-year U.S. Treasury bond rate, are presented in the following table:

     The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration and cash flows of the assets in its investment portfolio to its fixed-rate 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 79% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2003.

     The Company believes a portfolio principally composed of fixed-rate investments that generate predictable rates of return should back its fixed-rate liabilities. 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 majority of the Company’s invested assets are managed by a subsidiary of AIG. 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.

     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 – Capital Resources and Liquidity.”

REGULATION

     The Company, in common with other insurers, is subject to regulation and supervision by the states and jurisdictions in which it does business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such

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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 as of December 31, 2003.

     The federal government does not directly regulate the business of insurance, however, the Company and its products are governed by federal agencies, including the Securities and Exchange Commission and the Internal Revenue Service. Federal legislation and administrative policies in several areas, including financial services regulation, pension regulation and federal taxation, can significantly and adversely affect the insurance industry. The federal government has from time to time considered legislation relating to the deferral of taxation on the accretion of value within certain annuities and life insurance products, changes in ERISA regulations, the alteration of the federal income tax structure and the availability of Section 401(k) and individual retirement accounts. Although the ultimate effect of any such changes, if implemented, is uncertain, both the persistency of our existing products and our ability to sell products may be materially impacted in the future.

     Recently there has been a significant increase in federal and state regulatory activity relating to financial services companies, particularly mutual fund companies and life insurers issuing variable annuity products. These inquiries have focused on a number of issues including after-hours trading, short-term trading (sometimes referred to as market timing), revenue sharing arrangements and greater transparency regarding compensation arrangements. There are several rule proposals pending at the SEC and on a federal level which, if passed, could have an impact on the business of the Company.

COMPETITION

     The businesses conducted by the Company are highly competitive. The Company competes with other life insurers, and also competes 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 2002, net annuity premiums written among the top 100 companies ranged from approximately $73 million to approximately $21 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

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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.

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 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

     No matters were submitted during the quarter ending December 31, 2003 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 FINANCIAL DATA

     The following selected financial data of the Company for 2003 and 2002 and the consolidated financial data of the Company and its subsidiaries for 2001 and prior periods 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.

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     In 2001, the Company adopted EITF 99-20 and FAS 133, the effect of which was recorded as a cumulative effect of accounting change (See Note 2 of Notes to Consolidated Financial Statements).

     On January 1, 2002, the Company distributed 100% of the outstanding capital stock of its consolidated subsidiary, Saamsun Holdings Corp., to its Parent, SunAmerica Life Insurance Company (the “Parent”) (See Note 7 of Notes to Consolidated Financial Statements). Saamsun Holdings Corp. comprised two of the Company’s business segments. The Company also entered into a profit sharing agreement with an affiliate of the Company whereby the affiliate contributes to the Company its profits earned through the Company’s variable annuity contracts. The results of operations of the Company for 2003 and 2002 are affected by both the distribution of Saamsun Holdings Corp. and the profit sharing agreement.

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     The financial position of the Company as of December 31, 2003 and December 31, 2002 reflects the impact of the distribution of its consolidated subsidiary, Saamsun Holdings Corp., to the Parent on January 1, 2002 (See Note 7 of the Notes to Consolidated Financial Statements).

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 (FKA Anchor National Life Insurance Company) (the “Company”) for the three years ended December 31, 2003 (“2003”), 2002 (“2002”) and 2001 (“2001”) 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.

CRITICAL ACCOUNTING POLICIES

     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:

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     VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $60.1 million at December 31, 2003 and $170.7 million at December 31, 2002. In determining if and when a decline in fair value below amortized cost is other-than-temporary, the Company evaluates 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, the Company recognizes an impairment loss in the current period operating results to the extent of the decline (See also discussion within “Capital Resources and Liquidity” herein).

     Securities in the Company’s portfolio with a carrying value of approximately $1.24 billion at December 31, 2003 do not have readily determinable market prices. For these securities, the Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, the Company uses its 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. The Company’s ability to liquidate its positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and may not be able to dispose of these investments in a timely manner. Although the Company believes its estimates reasonably reflect the fair value of those securities, the 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: The Company amortizes deferred acquisition costs (“DAC”) based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable annuities) or general account assets (with respect to fixed annuities, fixed options of variable annuities and universal life contracts) supporting the annuity obligations, costs of providing for policy guarantees and the level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised. Approximately 95% of the Company’s DAC balance at December 31, 2003 related to variable annuity products and 5% related to fixed annuity and universal life products.

     DAC amortization is sensitive to surrender rates, claims costs, and the actual and assumed future growth rate of the assets supporting the Company’s obligations under annuity policies. With respect to fixed annuities, the growth rate depends on the yield on the general account assets supporting those annuities. With respect to variable annuities, the growth rate depends on the performance of the investment options available under the annuity contract and the allocation of assets among these various investment options.

     The assumption the Company uses for the long-term annual net growth of the separate account assets in the determination of DAC amortization with respect to its variable annuity policies is 10% (the “long-term growth rate

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assumption”). The Company uses a “reversion to the mean” methodology that allows it to maintain this 10% long-term growth rate assumption, while also giving consideration to the effect of short-term swings in the equity markets. For example, if performance was 15% during the first year following the introduction of a product, the DAC model would assume that market returns for the following five years (the “short-term growth rate assumption”) would be approximately 9%, resulting in an average annual growth rate of 10% during the life of the product. Similarly, following periods of below 10% performance, the model will assume a short-term growth rate higher than 10%. A DAC unlocking will occur if management deems the short-term growth rate assumption (i.e., the growth rate required to revert to the mean 10% growth rate over a five-year period) to be unreasonable. The use of a reversion to the mean assumption is common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the industry.

BUSINESS SEGMENTS

     On January 1, 2002, the Company declared a distribution to its parent, SunAmerica Life Insurance Company (the “Parent”), of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun was comprised of the Company’s asset management and broker-dealer segments. This distribution decreased the Company’s shareholder’s equity by approximately $552.4 million (see Note 7 of Notes to Consolidated Financial Statements). Effective January 1, 2002, the Company’s earnings no longer include the asset management and broker-dealer operations. This distribution was approved by the Arizona Department of Insurance.

     Effective January 1, 2002, the Company has one business segment, annuity operations, which consists of the sale and administration of deposit-type insurance contracts, principally variable annuities, but also including smaller closed blocks of fixed annuities, universal life insurance contracts and guaranteed investment contracts (“GICs”). However, the Company focuses 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, a choice of investment managers and guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and investment income on the fixed-rate account options.

     Prior to the distribution of Saamsun as discussed above, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations (see Note 10 of Notes to Consolidated Financial Statements). The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO 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. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”). SAAH LLC was previously a direct wholly owned subsidiary of the 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 SAAMCO. 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

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its direct parent, SAAMCO. The broker-dealer operations were conducted by the Company’s former broker-dealer subsidiary, Royal Alliance Associates, Inc. (“Royal Alliance”), which sells proprietary annuities and mutual funds and non-proprietary investment products. Royal Alliance earns income from commissions on sales of these products, net of the portion that is passed on to the registered representatives.

     On June 10, 2002, the Company entered into a profit sharing agreement with SAAMCO whereby SAAMCO contributes to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement was retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $60.5 million in 2003 and $62.6 million in 2002.

RESULTS OF OPERATIONS

     NET INCOME totaled $85.7 million in 2003, compared to $34.3 million in 2002 and $90.4 million in 2001. The operating results of 2001 include those of the asset management and broker-dealer operations. Assuming the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior periods discussed herein, net income would have been $99.9 million for 2001.

     CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption of EITF 99-20 in 2001. The Company recorded a loss of $10.3 million, 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 $107.4 million in 2003, compared to $36.3 million in 2002 and $121.6 million in 2001. Assuming the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior periods discussed herein, pretax income before cumulative effect of accounting change would have been $142.8 million for 2001. The increase in 2003 compared to 2002 was primarily due to a reduction in net realized investment losses. The decline in 2002 results compared to 2001 primarily resulted from lower fee income and increased guaranteed minimum death benefits on variable annuities, partially offset by increased net investment income.

     INCOME TAX EXPENSE totaled $21.8 million in 2003, $2.1 million in 2002 and $20.9 million in 2001, representing effective tax rates of 20%, 6% and 17% in 2003, 2002 and 2001, respectively. The unusually low effective tax rate for 2002 is due primarily to the lower relative pretax income without corresponding reductions in permanent tax differences. Assuming that the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior year period discussed herein, income tax expense would have been $32.6 million for 2001, representing an effective tax rate of 23%. The lower tax rate in 2001 is due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SAAMCO which reduced the effective tax rate by approximately 13% (see Note 7 of Notes to Consolidated Financial Statements).

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     As discussed above and in Note 10 of Notes to Consolidated Financial Statements, effective January 1, 2002, the Company has one business segment, annuity operations.

ANNUITY OPERATIONS

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $107.4 million in 2003, compared with $36.3 million in 2002 and $142.8 million in 2001. The increase in 2003 compared to 2002 was primarily due to lower net realized investment losses and improved net investment income as customers allocated more dollars to the fixed-rate portion of variable annuity contracts. The decline in 2002 results compared to 2001 primarily resulted from increased guaranteed minimum death benefits on variable annuities, increased amortization of deferred acquisition costs, lower fee income, increased general and administrative expenses and increased net realized investment losses partially offset by higher net investment income.

     NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment income earned on invested assets less interest credited to fixed annuity contracts, universal life insurance contracts and guaranteed investment contracts is a key measurement used by the Company in evaluating the profitability of its business. Accordingly, the Company presents an analysis of net investment spread because the Company has determined this measure to be useful and meaningful.

     In evaluating its investment yield and net investment spread, the Company calculates average invested assets using the amortized cost of bonds, notes and redeemable preferred stocks. This basis does not include unrealized gains and losses, which are reflected in the carrying value (i.e., fair value) of those investment pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. In the calculation of average invested assets, the Company excludes cash collateral received from the securities lending program, which is offset by a securities lending payable in the same amount. As discussed in Note 2 of the accompanying consolidated financial statements, the Company participates in a securities lending program with an affiliated agent, pursuant to which it lends its securities and primarily takes cash as collateral with respect to the securities lent. Participation in securities lending agreements provides additional net investment income for the Company, resulting from investment income earned on the collateral, less interest paid on the securities lending agreements and the related management fees paid to administer the program.

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     An analysis of net investment spread and a reconciliation to net income is presented in the following table:

     Net investment spread totaled $160.7 million in 2003, $143.3 million in 2002 and $118.2 million in 2001. These amounts equal 2.41% on average invested assets (computed on a daily basis) of $6.66 billion in 2003, 2.35% on average invested assets of $6.09 billion in 2002 and 2.20% on average invested assets of $5.38 billion in 2001. The increase in net investment spread in 2003 from 2002 resulted from substantial growth in average invested assets and effective management of interest crediting rates to offset lower yields available on invested assets. The components of net investment spread were as follows:

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     The growth in average invested assets principally resulted from sales of the fixed account options of the Company’s variable annuity products (“Fixed Annuities Deposits”), and renewal deposits on its universal life product (“UL Deposits”), partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Sales of fixed annuities and universal life product totaled $1.58 billion in 2003, $1.78 billion in 2002 and $2.33 billion in 2001, and are largely deposits for the fixed accounts of variable annuities. These deposits represent 27%, 34%, and 51%, respectively, of the related reserve balances at the beginning of the respective periods. Fixed Annuity Deposits were higher by approximately $550 million in 2001 due to low margin Anchor Advisor sales allocated to one-year fixed accounts in 2001. The one-year fixed account was discontinued from the product line in September 2001.

     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 $249.3 million in 2003, compared with $124.0 million in 2002 and $32.3 million in 2001. The increase in 2003 principally reflects the impact of a $200.0 million capital contribution from the Parent in the third quarter of 2002. The increase in 2002 principally reflects $120.5 million of net income tax refunds received from the Parent in the fourth quarter of 2001. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.27% in 2003, 2.27% in 2002 and 2.17% in 2001.

     Investment income (and the related yields on average invested assets) totaled $398.3 million (5.98%), compared with $377.6 million (6.20%) in 2002 and $358.7 million (6.67%) in 2001. The decrease in the investment yield in 2003 and 2002 primarily reflect a lower prevailing interest rate environment. Expenses incurred to manage the investment portfolio amounted to $2.3 million in 2003, $2.4 million in 2002 and $5.0 million in 2001. These expenses are included as a reduction of investment income in the consolidated statement of income and comprehensive income.

     Interest expense totaled $237.6 million in 2003, $234.3 million in 2002 and $240.5 million in 2001. The average rate paid on all interest-bearing liabilities was 3.71% in 2003, compared with 3.93% in 2002 and 4.50% in 2001. Interest-bearing liabilities averaged $6.41 billion during 2003, $5.96 billion during 2002 and $5.34 billion during 2001. The decline in the overall rates paid in 2003 compared to 2002 and 2001 resulted primarily from the impact of a declining interest rate environment.

     NET REALIZED INVESTMENT LOSSES totaled $30.4 million in 2003, $65.8 million in 2002 and $59.8 million in 2001 and include impairment writedowns of $54.1 million, $57.3 million and $68.0 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $23.7 million in 2003, compared with net realized losses of $8.5 million in 2002 and net realized gains of $8.2 million in 2001.

     The Company sold or redeemed invested assets, principally bonds and notes, aggregating $2.21 billion in 2003, $1.60 billion in 2002 and $1.77 billion in 2001. 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

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redemptions of investments fluctuate from period to period, and represent 0.36%, 0.14% and 0.15% of average invested assets for 2003, 2002 and 2001, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

     Impairment writedowns include $54.1 million, $57.3 million and $68.0 million of provisions principally applied to bonds in 2003, 2002 and 2001, respectively. Impairment writedowns represent 0.81%, 0.96% and 1.27% of average invested assets for 2003, 2002 and 2001, respectively. For the five years ended December 31, 2003, impairment writedowns as a percentage of average invested assets have ranged from 0.08% to 1.27% and have averaged 0.67%. Such writedowns are based upon estimates of the fair 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. 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, NET OF REINSURANCE are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $290.1 million in 2003, $295.5 million in 2002 and $337.4 million in 2001 and are net of reinsurance premiums of $30.8 million, $22.5 million and $13.2 million, respectively. The 2003 and 2002 amounts include $60.5 million and $62.6 million attributable to the SAAMCO Agreement, respectively. In consolidation, comparable fees totaling $63.2 million in 2001 were included in the annuity operations segment. The decreased fees in 2003 as compared to 2002 reflect increased reinsurance premiums. The decreased fees in 2002 as compared to 2001 primarily reflect the unfavorable equity market conditions in 2002 and the early part of 2003, and the resulting unfavorable impact on market values of the assets in the separate accounts. Variable annuity fees represent 1.8% of average variable annuity assets in all periods presented. Variable annuity assets averaged $16.32 billion, $16.46 billion and $18.87 billion during the respective periods. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $1.73 billion in 2003, $1.18 billion in 2002 and $1.41 billion in 2001. These amounts represent 12%, 6% and 7% of separate account liabilities at the beginni