UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 33-47472
AIG SUNAMERICA LIFE ASSURANCE COMPANY
Incorporated in Arizona
|
86-0198983 | |
| I.R.S. 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 þ No o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). Yes o No þ
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF MAY 13, 2005: 3,511
AIG SUNAMERICA LIFE ASSURANCE COMPANY
INDEX
| Page | ||||||||
| Number(s) | ||||||||
Part I – Financial Information |
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Item 1. Financial Statements |
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| 2-3 | ||||||||
| 4-5 | ||||||||
| 6-7 | ||||||||
| 8-11 | ||||||||
| 12-29 | ||||||||
| 29 | ||||||||
| 29 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32 | ||||||||
1
AIG SUNAMERICA LIFE ASSURANCE COMPANY
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
ASSETS |
||||||||
Investments and cash: |
||||||||
Cash and short-term investments |
$ | 363,187 | $ | 201,117 | ||||
Bonds, notes and redeemable preferred stocks
available for sale, at fair value (amortized
cost: March 31, 2005, $4,846,125; December 31,
2004, $4,987,728) |
4,912,725 | 5,139,477 | ||||||
Mortgage loans |
638,870 | 624,179 | ||||||
Policy loans |
180,801 | 185,958 | ||||||
Mutual funds |
20,694 | 6,131 | ||||||
Common stocks available for sale, at fair value
(cost: March 31, 2005, $25,015; December 31,
2004, $25,015) |
27,513 | 26,452 | ||||||
Securities lending collateral |
825,030 | 883,792 | ||||||
Other invested assets |
38,191 | 58,880 | ||||||
Total investments and cash |
7,007,011 | 7,125,986 | ||||||
Variable annuity assets held in separate accounts |
22,291,190 | 22,612,451 | ||||||
Accrued investment income |
74,371 | 73,769 | ||||||
Deferred acquisition costs |
1,378,568 | 1,349,089 | ||||||
Other deferred expenses |
257,920 | 257,781 | ||||||
Income taxes currently receivable from Parent |
19,404 | 9,945 | ||||||
Goodwill |
14,038 | 14,038 | ||||||
Other assets |
52,317 | 52,956 | ||||||
TOTAL ASSETS |
$ | 31,094,819 | $ | 31,496,015 | ||||
See accompanying notes to consolidated financial statements.
2
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
||||||||
Reserves, payables and accrued liabilities: |
||||||||
Reserves for fixed annuity and fixed accounts of
variable annuity contracts |
$ | 3,860,908 | $ | 3,948,158 | ||||
Reserves for universal life insurance contracts |
1,517,159 | 1,535,905 | ||||||
Reserves for guaranteed investment contracts |
216,052 | 215,331 | ||||||
Reserves for guaranteed benefits |
77,182 | 76,949 | ||||||
Securities lending payable |
825,030 | 883,792 | ||||||
Due to affiliates |
19,621 | 21,655 | ||||||
Payable to
brokers |
118,922 | — | ||||||
Other liabilities |
168,383 | 190,198 | ||||||
Total reserves, payables and accrued liabilities |
6,803,257 | 6,871,988 | ||||||
Variable annuity liabilities related to separate accounts |
22,291,190 | 22,612,451 | ||||||
Deferred income taxes |
264,269 | 257,532 | ||||||
Total liabilities |
29,358,716 | 29,741,971 | ||||||
Shareholder’s equity: |
||||||||
Common stock |
3,511 | 3,511 | ||||||
Additional paid-in capital |
760,990 | 758,346 | ||||||
Retained earnings |
940,241 | 919,612 | ||||||
Accumulated other comprehensive income |
31,361 | 72,575 | ||||||
Total shareholder’s equity |
1,736,103 | 1,754,044 | ||||||
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY |
$ | 31,094,819 | $ | 31,496,015 | ||||
See accompanying notes to consolidated financial statements.
3
AIG SUNAMERICA LIFE ASSURANCE COMPANY
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
REVENUES |
||||||||
Fee income: |
||||||||
Variable annuity policy fees, net of reinsurance |
$ | 102,605 | $ | 87,015 | ||||
Asset management fees |
20,733 | 22,097 | ||||||
Universal life insurance policy fees, net of reinsurance |
8,558 | 9,192 | ||||||
Surrender charges |
6,555 | 6,999 | ||||||
Other fees |
3,718 | 3,621 | ||||||
Total fee income |
142,169 | 128,924 | ||||||
Investment income |
82,433 | 90,954 | ||||||
Net realized investment gains (losses) |
17,687 | (15,177 | ) | |||||
Total revenues |
242,289 | 204,701 | ||||||
BENEFITS AND EXPENSES |
||||||||
Interest expense: |
||||||||
Fixed annuity and fixed accounts of variable annuity contracts |
31,831 | 35,236 | ||||||
Universal life insurance contracts |
17,672 | 18,481 | ||||||
Guaranteed investment contracts |
1,971 | 1,335 | ||||||
Subordinated notes payable to affiliates |
— | 560 | ||||||
Total interest expense |
51,474 | 55,612 | ||||||
Amortization of bonus interest |
3,209 | 1,938 | ||||||
Claims on universal life contracts, net of reinsurance recoveries |
5,356 | 4,823 | ||||||
Guaranteed minimum death benefits, net of reinsurance recoveries |
11,203 | 17,774 | ||||||
General and administrative expenses |
33,690 | 36,224 | ||||||
Amortization of deferred acquisition costs and other deferred expenses |
51,997 | 29,504 | ||||||
Annual commissions |
18,353 | 15,014 | ||||||
Total benefits and expenses |
175,282 | 160,889 | ||||||
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE |
67,007 | 43,812 | ||||||
Income tax expense |
19,275 | 12,196 | ||||||
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
47,732 | 31,616 | ||||||
Cumulative effect of accounting change, net of tax |
— | (62,589 | ) | |||||
NET INCOME (LOSS) |
$ | 47,732 | $ | (30,973 | ) | |||
See accompanying notes to consolidated financial statements.
4
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
For the three months ended March 31, 2005 and 2004
(Unaudited)
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
OTHER COMPREHENSIVE INCOME, 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 |
$ | (56,489 | ) | $ | 65,852 | |||
Less reclassification adjustment for net realized
(gains) losses included in net income |
(6,602 | ) | 7,414 | |||||
Net unrealized losses on foreign currency |
(316 | ) | — | |||||
Income tax (expense) benefit |
22,193 | (25,643 | ) | |||||
OTHER COMPREHENSIVE INCOME (LOSS) |
(41,214 | ) | 47,623 | |||||
COMPREHENSIVE INCOME |
$ | 6,518 | $ | 16,650 | ||||
See accompanying notes to consolidated financial statements.
5
AIG SUNAMERICA LIFE ASSURANCE COMPANY
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 47,732 | $ | (30,973 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||
Cumulative effect of accounting change, net of tax |
— | 62,589 | ||||||
Interest credited to: |
||||||||
Fixed annuity and fixed accounts of variable annuity contracts |
31,831 | 35,236 | ||||||
Universal life insurance contracts |
17,672 | 18,481 | ||||||
Guaranteed investment contracts |
1,971 | 1,335 | ||||||
Net realized investment (gains) losses |
(17,687 | ) | 15,177 | |||||
Amortization of net premium/accretion of net discount on investments |
2,574 | (235 | ) | |||||
Amortization of deferred acquisition costs and other expenses |
55,206 | 31,442 | ||||||
Acquisition costs deferred |
(54,503 | ) | (65,611 | ) | ||||
Other expenses deferred |
(8,821 | ) | (10,614 | ) | ||||
Provision for deferred income taxes |
28,930 | (12,055 | ) | |||||
Change in: |
||||||||
Accrued investment income |
(602 | ) | (1,575 | ) | ||||
Other assets |
478 | (13,189 | ) | |||||
Income taxes currently payable to/receivable from Parent |
(9,459 | ) | 59,718 | |||||
Due from/to affiliates |
(2,034 | ) | (5,743 | ) | ||||
Other liabilities |
(11,184 | ) | (14,619 | ) | ||||
Other, net |
(1,369 | ) | 4,725 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
80,735 | 74,089 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of: |
||||||||
Bonds, notes and redeemable preferred stocks |
(214,823 | ) | (708,678 | ) | ||||
Mortgage loans |
(32,575 | ) | — | |||||
Other investments, excluding short-term investments |
(25,448 | ) | (88 | ) | ||||
Sales of: |
||||||||
Bonds, notes and redeemable preferred stocks |
266,714 | 592,988 | ||||||
Other investments, excluding short-term investments |
36,577 | 485 | ||||||
Redemptions and maturities of: |
||||||||
Bonds, notes and redeemable preferred stocks |
207,365 | 224,361 | ||||||
Mortgage loans |
18,120 | 17,469 | ||||||
Other investments, excluding short-term investments |
5,243 | 5,237 | ||||||
NET CASH PROVIDED BY INVESTING ACTIVITIES |
$ | 261,173 | $ | 131,774 | ||||
See accompanying notes to consolidated financial statements.
6
AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 2005 and 2004
(Unaudited)
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Deposits received on: |
||||||||
Fixed annuity and fixed accounts of variable annuity contracts |
$ | 296,835 | $ | 372,567 | ||||
Universal life insurance contracts |
10,814 | 11,252 | ||||||
Net exchanges from the fixed accounts of variable annuity
contracts
|
(260,709 | ) | (386,957 | ) | ||||
Withdrawal payments on: |
||||||||
Fixed annuity and fixed accounts of variable annuity contracts |
(134,730 | ) | (104,031 | ) | ||||
Universal life insurance contracts |
(17,233 | ) | (17,414 | ) | ||||
Guaranteed investment contracts |
(1,250 | ) | (5,583 | ) | ||||
Claims and annuity payments, net of reinsurance, on: |
||||||||
Fixed annuity and fixed accounts of variable annuity contracts |
(26,124 | ) | (28,281 | ) | ||||
Universal life insurance contracts |
(22,441 | ) | (31,097 | ) | ||||
Net payment related to a modified coinsurance transaction |
— | (4,738 | ) | |||||
Dividend paid to Parent |
(25,000 | ) | (2,500 | ) | ||||
NET CASH USED IN FINANCING ACTIVITIES |
(179,838 | ) | (196,782 | ) | ||||
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS |
162,070 | 9,081 | ||||||
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD |
201,117 | 133,105 | ||||||
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD |
$ | 363,187 | $ | 142,186 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Interest paid on indebtedness |
$ | — | $ | 560 | ||||
Income taxes (received from) paid to Parent |
$ | (196 | ) | $ | 47,424 | |||
See accompanying notes to consolidated financial statements.
7
AIG SUNAMERICA LIFE ASSURANCE COMPANY
| 1. | BASIS OF PRESENTATION | |||
| These statements are unaudited. In the opinion of management, all adjustments consisting only of normal recurring accruals have been made for a fair statement of the results presented herein. Certain amounts have been reclassified in the 2004 financial statements to conform to their 2005 presentation. For further information, refer to the Annual Report on Form 10-K of AIG SunAmerica Life Assurance Company (the “Company”) for the year ended December 31, 2004. | ||||
| 2. | COMMITMENTS AND CONTINGENT LIABILITIES | |||
| The Company has six agreements outstanding 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 March 31, 2005 is $195,442,000. The expiration dates of these commitments are as follows: $81,012,000 in the remainder of 2005 and $114,430,000 in 2006. Related to each of these agreements are participation agreements with SunAmerica Life Insurance Company, the Company’s immediate parent, (the “Parent”) under which the Parent will share in $62,590,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. | ||||
| At March 31, 2005, the Company has a commitment to purchase a total of approximately $4,000,000 of asset-backed securities in the ordinary course of business. This commitment has a contractual maturity date in 2006. | ||||
| 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 on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and is currently pending in the United States District Court for the District of Maryland, Case No. 04-md-15863, as part of a Multi-District Litigation proceeding. 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. | ||||
| Various federal, state and other regulatory agencies are reviewing certain transactions and practices of the Company and its subsidiaries in connection with industry-wide and other inquiries. In the opinion of the Company’s management, based on the current status of these inquiries, it is not likely that any of these inquiries will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows of the Company. | ||||
| Various lawsuits against the Company and its subsidiaries 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 consolidated financial position, results of operations or cash flows of the Company. | ||||
| 3. | RELATED PARTY TRANSACTION | |||
| On May 1, 2005, American International Group, Inc. (“AIG”), the Company’s ultimate parent, publicly expressed its intent to include in its restated financial statements for 2000 through 2003 and its financial statements for 2004 to be included in AIG’s Annual Report on Form 10-K for the year ended December 31, 2004 when filed, adjustments attributable to compensation expense related to the SICO Deferred Compensation Profit Participation Plan (the “SICO Plan”). As a result of AIG’s expressed intent to record such compensation expense, the Company has determined that, as a subsidiary of AIG, it is appropriate to record the compensation expense related to its employees’ participation in the SICO Plan. | ||||
| As total SICO compensation expense for each prior year would not have been material to any such prior year, in the first quarter of 2005, the Company has recorded the total amount of compensation expense related to the SICO Plan that would have been recorded in all prior periods through December 31, 2004 as a reduction of retained earnings on the consolidated balance sheet of $2,103,000, with a corresponding increase to additional paid-in capital, and with no effect on total shareholder’s equity or cash flows. Compensation expense related to the SICO Plan for the first quarter of 2005 was $541,000 and included in general and administrative expenses in the consolidated statement of operations and comprehensive income. The Company will record compensation expense related to the SICO Plan for all future periods. | ||||
| In making this determination, the Company has evaluated the impact that expense recognition would have had on all prior years to which SICO Plan compensation would have applied. In addition, these amounts have been calculated as variable stock awards, which consider the fair market value of AIG common stock at each measurement date, and would include any distributions made under the SICO Plan. | ||||
| In 1975, the voting shareholders and Board of Directors of Starr International Company (“SICO”), a private holding company whose principal asset consists of approximately 12% of AIG’s outstanding common stock as of January 31, 2005, decided that a portion of the capital value of SICO (AIG shares of their cash equivalent) should be used to provide an incentive plan for the current and succeeding managements of all AIG companies, including the Company. None of the costs of the various benefits provided under the SICO Plan were paid by the Company. | ||||
8
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| 4. | SUBSEQUENT EVENT | |||
| AIG has announced that it has delayed filing its Annual Report on form 10-K for the year ended December 31, 2004 to allow AIG’s Board of Directors and new management adequate time to complete an extensive review of AIG’s books and records. The review includes issues arising from pending investigations into non-traditional insurance products and certain assumed reinsurance transactions by the Office of the Attorney General for the State of New York and the Securities and Exchange Commission and from AIG’s decision to review the accounting treatment of certain additional items. AIG has announced that the findings of that review have resulted in AIG’s decision to restate its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. Circumstances affecting AIG can have an impact on the Company. For example, beginning in March 2005, the major rating agencies downgraded the ratings of AIG in a series of actions which resulted in downgrades and ratings actions being taken with respect to the Company’s financial strength ratings. Accordingly, management can give no assurance that any further changes in circumstances for AIG will not impact the Company. | ||||
| 5. | SEGMENT INFORMATION | |||
| The Company conducts its business through two business segments, annuity operations and asset management operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuity contracts, universal life insurance contracts and guaranteed investment contracts. Asset management operations, which includes the managing, distributing and administering a diversified family of mutual funds, managing certain subaccounts offered within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios, is conducted by AIG SunAmerica Asset Management Corp. and its subsidiary and distributor, AIG SunAmerica Capital Services, Inc., and its subsidiary and servicing administrator, AIG SunAmerica Fund Services, Inc.. Following is selected information pertaining to the Company’s business segments. | ||||
9
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| 5. | SEGMENT INFORMATION (Continued) |
| Asset | ||||||||||||
| Annuity | Management | |||||||||||
| Operations | Operations | Total | ||||||||||
| (in thousands) | ||||||||||||
THREE MONTHS ENDED
MARCH 31, 2005: |
||||||||||||
REVENUES: |
||||||||||||
Fee income: |
||||||||||||
Variable annuity policy fees, net of reinsurance |
$ | 102,605 | $ | — | $ | 102,605 | ||||||
Asset management fees |
— | 20,733 | 20,733 | |||||||||
Universal life insurance policy fees, net of reinsurance |
8,558 | — | 8,558 | |||||||||
Surrender charges |
6,555 | — | 6,555 | |||||||||
Other fees |
— | 3,718 | 3,718 | |||||||||
Total fee income |
117,718 | 24,451 | 142,169 | |||||||||
Investment income |
81,897 | 536 | 82,433 | |||||||||
Net realized investment gains (losses) |
17,841 | (154 | ) | 17,687 | ||||||||
Total revenues |
217,456 | 24,833 | 242,289 | |||||||||
BENEFITS AND EXPENSES: |
||||||||||||
Interest expense |
51,474 | — | 51,474 | |||||||||
Amortization of bonus interest |
3,209 | — | 3,209 | |||||||||
Claims on universal life contracts, net of reinsurance recoveries |
5,356 | — | 5,356 | |||||||||
Guaranteed benefits, net of reinsurance recoveries |
11,203 | — | 11,203 | |||||||||
General and administrative expenses |
24,296 | 9,394 | 33,690 | |||||||||
Amortization of deferred acquisition costs and other deferred expenses |
44,291 | 7,706 | 51,997 | |||||||||
Annual commissions |
18,353 | — | 18,353 | |||||||||
Total benefits and expenses |
158,182 | 17,100 | 175,282 | |||||||||
Pretax income before cumulative effect of accounting change |
$ | 59,274 | $ | 7,733 | $ | 67,007 | ||||||
Total assets |
$ | 30,886,653 | $ | 208,166 | $ | 31,094,819 | ||||||
Expenditures for long-lived assets |
$ | — | $ | 16 | $ | 16 | ||||||
10
AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| 5. | BUSINESS SEGMENTS (Continued) |
| Asset | ||||||||||||
| Annuity | Management | |||||||||||
| Operations | Operations | Total | ||||||||||
| (in thousands) | ||||||||||||
THREE MO | ||||||||||||