AIG SUNAMERICA LIFE ASSURANCE CO - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY


Incorporated in Arizona		86-0198983 IRS Employer Identification No.

1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant’s telephone number, including area code: (310) 772-6000

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes /X/ No / /

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED BY RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934). Yes / / No /X/

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON AUGUST 13, 2004 WAS AS FOLLOWS:


Common Stock (par value $1,000 per share)		3,511 shares outstanding

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED BALANCE SHEET

(Unaudited)


	June 30,		December 31,
	2004		2003
	(in thousands)
ASSETS
Investments and cash:
Cash and short-term investments	$	142,180	$	133,105
Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: June 30, 2004, $5,246,857; December 31, 2003, $5,351,183)		5,314,581		5,505,800
Mortgage loans		701,808		716,846
Policy loans		191,903		200,232
Mutual funds		11,465		21,159
Common stocks available for sale, at fair value (cost: June 30, 2004, $5,125; December 31, 2003, $635)		5,143		727
Real estate		22,166		22,166
Securities lending collateral		1,122,766		514,145
Other invested assets		20,359		10,453

Total investments and cash		7,532,371		7,124,633

Variable annuity assets held in separate accounts		20,638,516		19,178,796
Accrued investment income		75,947		74,647
Deferred acquisition costs		1,316,696		1,264,321
Other deferred expenses		258,634		241,007
Income taxes currently receivable from Parent		19,321		13,856
Due from affiliates		827		—
Goodwill		14,038		14,038
Other assets		69,856		59,166

TOTAL ASSETS	$	29,926,206	$	27,970,464

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)


	June 30,		December 31,
	2004		2003
	(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts	$	4,233,103	$	4,274,329
Reserves for universal life insurance contracts		1,565,171		1,609,233
Reserves for guaranteed investment contracts		214,032		218,032
Reserve for guaranteed benefits		73,890		12,022
Securities lending payable		1,122,766		514,145
Due to affiliates		—		19,289
Payable to brokers		3,516		1,140
Other liabilities		209,443		248,258

Total reserves, payables and accrued liabilities		7,421,921		6,896,448

Variable annuity liabilities related to separate accounts		20,638,516		19,178,796

Subordinated notes payable to affiliates		41,498		41,520

Deferred income taxes		301,497		291,152

Total liabilities		28,403,432		26,407,916

Shareholder’s equity:
Common stock		3,511		3,511
Additional paid-in capital		1,224,885		1,224,885
Retained earnings		265,949		261,542
Accumulated other comprehensive income		28,429		72,610

Total shareholder’s equity		1,522,774		1,562,548

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	29,926,206	$	27,970,464

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

For the three months and six months ended June 30, 2004 and 2003

(Unaudited)


	Three months					Six months
	2004		2003			2004			2003
			(in thousands)
REVENUES
Fee income:
Variable annuity policy fees, net of reinsurance	$	90,350	$	66,945		$	178,560		$	128,979
Asset management fees		22,619		15,496			43,521			28,789
Universal life insurance policy fees, net of reinsurance		8,515		9,378			17,707			18,348
Surrender charges		6,492		6,784			13,491			14,354
Other fees		3,571		3,515			7,192			6,852

Total fee income		131,547		102,118			260,471			197,322

Investment income		97,921		102,155			185,091			199,063
Net realized investment gains (losses)		1,667		(5,358	)		(9,726	)		(8,630	)

Total revenues		231,135		198,915			435,836			387,755

BENEFITS AND EXPENSES
Interest expense:
Fixed annuity contracts		35,571		39,328			70,807			78,093
Universal life insurance contracts		18,524		18,737			37,005			37,839
Guaranteed investment contracts		1,379		2,031			2,714			4,047
Subordinated notes payable		538		660			1,098			1,502

Total interest expense		56,012		60,756			111,624			121,481

General and administrative expenses		35,409		28,345			71,633			58,332
Amortization of deferred acquisition costs and other deferred expenses		53,297		45,567			84,739			89,529
Annual commissions		15,117		15,995			30,131			30,173
Claims on universal life contracts, net of reinsurance recoveries		5,099		5,720			9,922			11,233
Guaranteed benefits, net of reinsurance		13,152		14,483			30,926			36,459

Total benefits and expenses		178,086		170,866			338,975			347,207

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		53,049		28,049			96,861			40,548

Income tax expense		15,169		7,445			27,365			9,326

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		37,880		20,604			69,496			31,222
Cumulative effect of accounting change, net of tax		—		—			(62,589	)		—

NET INCOME	$	37,880	$	20,604		$	6,907		$	31,222

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)

For the three months and six months ended June 30, 2004 and 2003

(Unaudited)


	Three months						Six months
	2004			2003			2004			2003
				(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 less related amortization of deferred acquisition costs and other deferred expenses	$	(140,220	)	$	78,406		$	(74,368	)	$	96,926

Less reclassification adjustment for net realized (gains) losses included in net income		(1,016	)		3,400			6,398			4,755

Income tax (expense) benefit		49,432			(28,633	)		23,789			(35,589	)

OTHER COMPREHENSIVE INCOME (LOSS)		(91,804	)		53,173			(44,181	)		66,092

COMPREHENSIVE INCOME (LOSS)	$	(53,924	)	$	73,777		$	(37,274	)	$	97,314

See accompanying notes to consolidated financial statements.


	2004			2003
	(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	6,907		$	31,222
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax		62,589			—
Interest credited to:
Fixed annuity contracts		70,807			78,093
Universal life insurance contracts		37,005			37,839
Guaranteed investment contracts		2,714			4,047
Net realized investment losses		9,726			8,630
Amortization of premium on securities		2,449			2,614
Amortization of deferred acquisition costs and other deferred expenses		84,739			89,529
Depreciation of fixed assets		833			235
Acquisition costs deferred		(135,410	)		(102,204	)
Other expenses deferred		(37,521	)		(31,816	)
Provision for deferred income taxes		67,837			42,360
Change in:
Accrued investment income		(1,300	)		(9,430	)
Other assets		(11,441	)		3,382
Income taxes currently payable to Parent		(5,465	)		(7,221	)
Due to affiliates		(20,116	)		(28,884	)
Other liabilities		(28,810	)		9,469
Other, net		8,038			8,675

NET CASH PROVIDED BY OPERATING ACTIVITIES		113,581			150,982

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(1,028,304	)		(1,328,167	)
Mortgage loans		(9,276	)		(29,883	)
Other investments, excluding short-term investments		(16,212	)		(14,849	)
Sales of:
Bonds, notes and redeemable preferred stocks		680,095			858,085
Other investments, excluding short-term investments		11,173			67
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		439,785			492,682
Mortgage loans		24,903			14,560
Other investments, excluding short-term investments		8,523			59,927

NET CASH PROVIDED BY INVESTING ACTIVITIES	$	110,687		$	52,422

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

For the six months ended June 30, 2004 and 2003

(Unaudited)


	2004			2003
	(in thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity contracts	$	787,396		$	803,595
Universal life insurance contracts		21,825			22,573
Net exchanges from the fixed accounts of variable annuity contracts		(654,495	)		(405,412	)
Withdrawal payments on:
Fixed annuity contracts		(200,687	)		(242,148	)
Universal life insurance contracts		(38,517	)		(33,365	)
Guaranteed investment contracts		(6,120	)		(6,240	)
Claims and annuity payments on:
Fixed annuity contracts		(55,694	)		(55,667	)
Universal life insurance contracts		(61,663	)		(62,153	)
Net payment related to a modified coinsurance transaction		(4,738	)		(11,347	)
Dividend paid to Parent		(2,500	)		(10,187	)

NET CASH USED IN FINANCING ACTIVITIES		(215,193	)		(351	)

NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		9,075			203,053

CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD		133,105			116,882

CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD	$	142,180		$	319,935

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness	$	1,098		$	1,502

Income taxes paid to Parent	$	47,424		$	51,087

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (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, retirement services and asset management. The Company is an Arizona-domiciled 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”).

The Company 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, at which time it began doing business under its new name.

Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $99,131,000. Included in the contribution of SAAMCo to the Company were tax benefits of $24,624,000 derived from losses incurred by SA Affordable Housing, L.L.C. through December 31, 2003, when it was no longer a subsidiary of SAAMCo. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $75,625,000 and $99,131,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the six months ended June 30, 2003 have been restated for the addition to pretax income of $2,216,000 to reflect the SAAMCo activity. Pretax income from the SAAMCo’s and its subsidiaries’ asset management operations totaled $7,686,000 for the second quarter of 2004 and $15,489,000 for the six months ended June 30, 2004.

SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS, are included in asset management segment (see Note 5). 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.

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of June 30, 2004 and December 31, 2003, the results of its consolidated operations for the three months and six months ended June 30, 2004 and 2003 and its consolidated cash flows for the six months ended June 30, 2004 and 2003. The results of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2. RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.

The Company issues variable annuities for which the investment risk is generally borne by the contract holder, except with respect to amounts invested in the fixed-rate account options. For many of the Company’s variable annuities, the Company offers contractual guarantees in the event of death, at specified dates during the accumulation period, upon certain withdrawals or at annuitization. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum account value benefits (“GMAV”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income benefits (“GMIB”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature.

The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, other services and certain features are included in variable annuity policy fees, net of reinsurance, in the consolidated statement of income and comprehensive income. Changes in liabilities for minimum guarantees are included in guaranteed benefits, net of reinsurance, in the consolidated statement of income and comprehensive income. Separate account net investment income, net investment gains and losses and the related liability charges are offset within the same line item in the consolidated statement of income and comprehensive income.

The Company offers GMDB options that guarantee for virtually all contract holders, upon the death, the contract holder’s beneficiary will receive the greater of (1) the contract holder’s account value, or (2) a guaranteed minimum death benefit that varies by product and election by policy owner. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, approximately 30% of in-force contracts with GMDB (calculated based on account value) have been reinsured.

If elected by the contract holder at the time of contract issuance, GMAV guarantees that the account value under the contract will at least equal the amount of initial principal invested during the first 90 days, adjusted for withdrawals, at the end of a ten-year waiting period. The Company purchases put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income.

The GMWB option provides a guaranteed annual withdrawal stream, regardless of market performance, equal to premiums invested during the first ninety days after issue adjusted for subsequent withdrawals (“Eligible Premium”). These annual withdrawals are available after either a three-year waiting period or a five-year waiting period and limited to 10% of Eligible Premiums annually without reducing the amount guaranteed. Additional incentives are earned by the contract holder if no withdrawals are taken prior to the end of the waiting period. The GMWB is considered to be a derivative under FAS 133 and is recognized

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2. RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income. In June 2004, variable annuity deposits with the GMWB option were immaterial.

If elected by the contract holder, GMIB provides a minimum fixed annuity payment guarantee after a seven, nine or ten-year waiting period. As there is a waiting period to annuitize using the GMIB, as of June 30, 2004, there are no policies eligible to receive this benefit. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004.

Details concerning the Company’s guaranteed benefit exposures as of June 30, 2004 are as follows:


				Highest Specified
	Return of Net			Anniversary Account
	Deposits			Value Minus
	Plus a			Withdrawals Post
	Minimum Return			Anniversary
	(dollars in thousands)
In the event of death (GMDB and EEB):
Account value	$	12,343,952		$	11,715,093
Net amount at risk (a)		1,118,520			1,412,543
Average attained age of contract holders		65			64
Range of guaranteed minimum return rates		0%-5	%		0	%

At annuitization (GMIB):
Account value	$	6,342,023
Net amount at risk (a)		3,997
Weighted average period remaining until expected annuitization	4.1 Years
Range of guaranteed minimum return rates		0%-6.5	%

Accumulation at specified date (GMAV):
Account value	$	1,165,910
Net amount at risk (a)		703
Weighted average period remaining until expected payout	9.2 Years
Range of guaranteed minimum return rates		0	%

(a) Net amount at risk represents the guaranteed benefit exposure in excess of the current account value, net of reinsurance, if all contract holders died, in the case of GMDB, annuitized, in the case of GMIB, or reached the specified date, in the case of GMAV, at the same balance sheet date.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

The following summarizes the reserve for guaranteed benefits, net of reinsurance, on variable contracts reflected in the general account:


	(in thousands)

Balance at January 1, 2004 (b)	$	65,423
Guaranteed benefits incurred, net of reinsurance		30,926
Guaranteed benefits paid, net of reinsurance		(22,459	)

Balance at June 30, 2004	$	73,890

(b)Includes amounts from the one-time cumulative accounting change resulting from the adoption of SOP 03-1.

The following assumptions and methodology were used to determine the reserve for guaranteed benefits at June 30, 2004:

• Data used was 5,000 stochastically generated investment performance scenarios.

• Mean investment performance assumption was 10%.

• Volatility assumption was 16%.

• Mortality was assumed to be 64 percent of the 75-80 ALB table.

• Lapse rates vary by contract type and duration and range from 1% to 30%.

• The discount rate was approximately 8%.

The Company currently offers enhanced crediting rates or bonus payments to contract holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $160.0 million from DAC to other deferred expenses, which is reported on the consolidated balance sheet. For the six months ended June 30, 2004, sales inducements of $20.7 million was deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs and other deferred expenses on the consolidated statement of income and comprehensive income. For the six months ended June 30, 2004, amortization of sales inducements was $4.5 million. Prior period consolidated balance sheet and consolidated statement of income and comprehensive income presentation has been reclassified to conform to the new presentation.

3. CONTINGENT LIABILITIES

The Company has entered into seven 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. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at June 30, 2004 is $480,490,000. In August 2004, these commitments decreased by $287,890,000 due to early redemption. The remaining commitments have contractual maturity dates as follows: $21,930,000 in the remainder of 2004 and $170,670,000 in 2005. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $61,521,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The Internal Revenue Service has completed its examinations into the transactions

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3. CONTINGENT LIABILITIES (Continued)

underlying these commitments, including the Company’s role in the transactions. The examination did not result in a material loss to the Company.

At June 30, 2004, the Company has commitments to purchase a total of approximately $28,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $19,000,000 in 2004 and $9,000,000 in 2006.

Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and regulatory and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

On April 5, 2004, a purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

4. RELATED-PARTY MATTERS

Subordinated notes (including accrued interest of $538,000) payable to affiliates totaled $41,498,000 at interest rates ranging from 4.00% to 9.5% at June 30, 2004, and require principal payments of $3,000,000 in 2004, $7,560,000 in 2005 and $30,400,000 in 2008.

On October 31, 2003, the Company entered into an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of $60,000,000. This commitment expires on October 30, 2004. There was no outstanding balance under this agreement at June 30, 2004.

On February 1, 2004, SAAMCo entered into an administrative services agreement with its affiliate, First SunAmerica Life Insurance Company (“FSA”), whereby SAAMCo will pay to FSA a fee based on a percentage of all assets invested through FSA’s variable annuity products in exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve as investment options for FSA’s variable annuity products. Amounts paid or accrued to FSA under this agreement totaled $0.9 million in 2004 and are included in asset management fees in the statement of income and comprehensive income. A fee of $0.8 million was paid under a different agreement in 2003.

The Company’s insurance policy obligations are guaranteed by American Home Assurance Company (“American Home”), a subsidiary of AIG, and a member of an AIG intercompany pool. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home.


		Page
		Number(s)
Part I - Financial Information
	Consolidated Balance Sheet (Unaudited) - June 30, 2004 and December 31, 2003	2 - 3
	Consolidated Statement of Income and Comprehensive Income (Unaudited) - Three Months and Six Months Ended June 30, 2004 and 2003	4 - 5
	Consolidated Statement of Cash Flows (Unaudited) - Six Months Ended June 30, 2004 and 2003	6 - 7
	Notes to Consolidated Financial Statements (Unaudited)	8 - 17
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 - 36
	Quantitative and Qualitative Disclosures About Market Risk	37
	Disclosure Controls and Procedures	37
Part II - Other Information		38
	Exhibits and Reports on 8-K	40
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Table of Contents

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Table of Contents

1.		BASIS OF PRESENTATION

		AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (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, retirement services and asset management. The Company is an Arizona-domiciled 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”).

		The Company 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, at which time it began doing business under its new name.

		Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $99,131,000. Included in the contribution of SAAMCo to the Company were tax benefits of $24,624,000 derived from losses incurred by SA Affordable Housing, L.L.C. through December 31, 2003, when it was no longer a subsidiary of SAAMCo. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $75,625,000 and $99,131,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the six months ended June 30, 2003 have been restated for the addition to pretax income of $2,216,000 to reflect the SAAMCo activity. Pretax income from the SAAMCo’s and its subsidiaries’ asset management operations totaled $7,686,000 for the second quarter of 2004 and $15,489,000 for the six months ended June 30, 2004.

		SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS, are included in asset management segment (see Note 5). 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.

		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of June 30, 2004 and December 31, 2003, the results of its consolidated operations for the three months and six months ended June 30, 2004 and 2003 and its consolidated cash flows for the six months ended June 30, 2004 and 2003. The results of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

2.		RECENTLY ISSUED ACCOUNTING STANDARDS

		In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

		and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.

		The Company issues variable annuities for which the investment risk is generally borne by the contract holder, except with respect to amounts invested in the fixed-rate account options. For many of the Company’s variable annuities, the Company offers contractual guarantees in the event of death, at specified dates during the accumulation period, upon certain withdrawals or at annuitization. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum account value benefits (“GMAV”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income benefits (“GMIB”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature.

		The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, other services and certain features are included in variable annuity policy fees, net of reinsurance, in the consolidated statement of income and comprehensive income. Changes in liabilities for minimum guarantees are included in guaranteed benefits, net of reinsurance, in the consolidated statement of income and comprehensive income. Separate account net investment income, net investment gains and losses and the related liability charges are offset within the same line item in the consolidated statement of income and comprehensive income.

		The Company offers GMDB options that guarantee for virtually all contract holders, upon the death, the contract holder’s beneficiary will receive the greater of (1) the contract holder’s account value, or (2) a guaranteed minimum death benefit that varies by product and election by policy owner. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, approximately 30% of in-force contracts with GMDB (calculated based on account value) have been reinsured.

		If elected by the contract holder at the time of contract issuance, GMAV guarantees that the account value under the contract will at least equal the amount of initial principal invested during the first 90 days, adjusted for withdrawals, at the end of a ten-year waiting period. The Company purchases put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income.

		The GMWB option provides a guaranteed annual withdrawal stream, regardless of market performance, equal to premiums invested during the first ninety days after issue adjusted for subsequent withdrawals (“Eligible Premium”). These annual withdrawals are available after either a three-year waiting period or a five-year waiting period and limited to 10% of Eligible Premiums annually without reducing the amount guaranteed. Additional incentives are earned by the contract holder if no withdrawals are taken prior to the end of the waiting period. The GMWB is considered to be a derivative under FAS 133 and is recognized

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

		at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income. In June 2004, variable annuity deposits with the GMWB option were immaterial.

		If elected by the contract holder, GMIB provides a minimum fixed annuity payment guarantee after a seven, nine or ten-year waiting period. As there is a waiting period to annuitize using the GMIB, as of June 30, 2004, there are no policies eligible to receive this benefit. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004.

		Details concerning the Company’s guaranteed benefit exposures as of June 30, 2004 are as follows:

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

		The following summarizes the reserve for guaranteed benefits, net of reinsurance, on variable contracts reflected in the general account:

	•		Data used was 5,000 stochastically generated investment performance scenarios.
	•		Mean investment performance assumption was 10%.
	•		Volatility assumption was 16%.
	•		Mortality was assumed to be 64 percent of the 75-80 ALB table.
	•		Lapse rates vary by contract type and duration and range from 1% to 30%.
	•		The discount rate was approximately 8%.

		The Company currently offers enhanced crediting rates or bonus payments to contract holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $160.0 million from DAC to other deferred expenses, which is reported on the consolidated balance sheet. For the six months ended June 30, 2004, sales inducements of $20.7 million was deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs and other deferred expenses on the consolidated statement of income and comprehensive income. For the six months ended June 30, 2004, amortization of sales inducements was $4.5 million. Prior period consolidated balance sheet and consolidated statement of income and comprehensive income presentation has been reclassified to conform to the new presentation.

3.		CONTINGENT LIABILITIES

		The Company has entered into seven 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. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at June 30, 2004 is $480,490,000. In August 2004, these commitments decreased by $287,890,000 due to early redemption. The remaining commitments have contractual maturity dates as follows: $21,930,000 in the remainder of 2004 and $170,670,000 in 2005. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $61,521,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The Internal Revenue Service has completed its examinations into the transactions

3.		CONTINGENT LIABILITIES (Continued)

		underlying these commitments, including the Company’s role in the transactions. The examination did not result in a material loss to the Company.

		At June 30, 2004, the Company has commitments to purchase a total of approximately $28,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $19,000,000 in 2004 and $9,000,000 in 2006.

		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and regulatory and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

		On April 5, 2004, a purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

4.		RELATED-PARTY MATTERS

		Subordinated notes (including accrued interest of $538,000) payable to affiliates totaled $41,498,000 at interest rates ranging from 4.00% to 9.5% at June 30, 2004, and require principal payments of $3,000,000 in 2004, $7,560,000 in 2005 and $30,400,000 in 2008.

		On October 31, 2003, the Company entered into an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of $60,000,000. This commitment expires on October 30, 2004. There was no outstanding balance under this agreement at June 30, 2004.

		On February 1, 2004, SAAMCo entered into an administrative services agreement with its affiliate, First SunAmerica Life Insurance Company (“FSA”), whereby SAAMCo will pay to FSA a fee based on a percentage of all assets invested through FSA’s variable annuity products in exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve as investment options for FSA’s variable annuity products. Amounts paid or accrued to FSA under this agreement totaled $0.9 million in 2004 and are included in asset management fees in the statement of income and comprehensive income. A fee of $0.8 million was paid under a different agreement in 2003.

		The Company’s insurance policy obligations are guaranteed by American Home Assurance Company (“American Home”), a subsidiary of AIG, and a member of an AIG intercompany pool. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home.