AIG SUNAMERICA LIFE ASSURANCE CO - 10-Q Quarterly Report

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 o

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 o No x

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON NOVEMBER 14, 2003 WAS AS FOLLOWS:

THE 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


		Page
		Number(s)
Part I — Financial Information
	Balance Sheet (Unaudited) — September 30, 2003 and December 31, 2002		3-4
	Statement of Income and Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2003 and 2002		5-6
	Statement of Cash Flows (Unaudited) - Nine Months Ended September 30, 2003 and 2002		7-8
	Notes to Financial Statements (Unaudited)		9-10
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-33
	Quantitative and Qualitative Disclosures About Market Risk		34
	Controls and Procedures		35
Part II — Other Information			36
	Exhibits and Reports on Form 8-K		38-41


		September 30,		December 31,
		2003		2002

		(in thousands)
ASSETS

Investments and cash:
	Cash and short-term investments	$	303,510	$	65,872
	Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: September 30, 2003, $5,547,707; December 31, 2002, $5,492,677)		5,714,691		5,528,569
	Mortgage loans		747,274		738,601
	Policy loans		202,894		215,846
	Separate account seed money		23,583		25,366
	Common stocks available for sale, at fair value (cost: September 30, 2003 and December 31, 2002, $4,111)		4,410		2,609
	Real estate		22,091		22,315
	Securities lending collateral		254,653		585,760
	Other invested assets		10,722		8,766

	Total investments and cash		7,283,828		7,193,704

Variable annuity assets held in separate accounts			17,136,593		14,758,642
Accrued investment income			82,764		75,326
Deferred acquisition costs			1,391,790		1,364,748
Income taxes currently receivable from Parent			67,379		100,123
Due from affiliates			—		26,304
Goodwill			4,603		4,603
Other assets			23,081		15,382

TOTAL ASSETS		$	25,990,038	$	23,538,832


		September 30,		December 31,
		2003		2002

		(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY

Reserves, payables and accrued liabilities:

	Reserves for fixed annuity contracts	$	4,437,537	$	4,285,098
	Reserves for universal life insurance contracts		1,623,191		1,676,073
	Reserves for guaranteed investment contracts		357,676		359,561
	Securities lending payable		254,653		585,760
	Modified coinsurance deposit liability		12,434		31,393
	Due to affiliates		13,418		—
	Payable to brokers		227,862		8,529
	Other liabilities		157,855		160,265

Total reserves, payables and accrued liabilities			7,084,626		7,106,679

Variable annuity liabilities related to separate accounts			17,136,593		14,758,642
Deferred income taxes			338,358		351,872

Total liabilities			24,559,577		22,217,193

Shareholder’s equity:
	Common stock		3,511		3,511
	Additional paid-in capital		1,125,753		1,125,753
	Retained earnings		222,363		175,871
	Accumulated other comprehensive income		78,834		16,504

	Total shareholder’s equity		1,430,461		1,321,639

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY		$	25,990,038	$	23,538,832

AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and nine months ended September 30, 2003 and 2002
(Unaudited)


		Three Months						Nine Months

		2003			2002			2003			2002

					(In thousands)
REVENUES

	Fee income:
	Variable annuity policy fees	$	74,490		$	67,999		$	207,516		$	229,758
	Universal life insurance policy fees		8,192			8,544			26,540			26,799
	Surrender charges		6,895			9,143			21,249			24,001
	Other fees		—			932			—			2,964

	Total fee income		89,577			86,618			255,305			283,522

	Investment income		99,845			98,633			300,116			289,853
	Net realized investment losses		(17,940	)		(17,478	)		(26,570	)		(31,192	)

	Total revenues		171,482			167,773			528,851			542,183

BENEFITS AND EXPENSES

	Interest expense:
	Fixed annuity contracts		38,482			36,689			116,575			104,524
	Universal life insurance contracts		19,303			20,658			57,142			60,292
	Guaranteed investment contracts		2,042			2,679			6,089			8,776
	Securities lending agreements		722			3,653			4,168			9,688

	Total interest expense		60,549			63,679			183,974			183,280

	General and administrative expenses		18,992			12,818			59,281			51,200
	Amortization of deferred acquisition costs		44,400			50,701			123,477			158,058
	Annual commissions		11,422			13,607			41,595			45,227
	Claims on universal life contracts, net of reinsurance recoveries		4,022			4,621			15,255			12,530
	Guaranteed minimum death benefits, net of reinsurance recoveries		14,723			30,935			51,182			48,687

Total benefits and expenses			154,108			176,361			474,764			498,982

PRETAX INCOME (LOSS)			17,374			(8,588	)		54,087			43,201

Income tax expense (benefit)			4,215			(2,544	)		7,595			5,225

NET INCOME (LOSS)		$	13,159		$	(6,044	)	$	46,492		$	37,976

AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)
For the three months and nine months ended September 30, 2003 and 2002
(Unaudited)


	Three Months						Nine Months

	2003			2002			2003			2002

				(In thousands)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:

Net unrealized (losses) gains on debt and equity securities available for sale identified in the current period	$	(17,432	)	$	50,111		$	79,494		$	70,898

Less reclassification adjustment for net realized losses included in net income		11,645			12,631			16,400			23,462

Change related to cash flow hedges		—			—			—			(2,218	)

Income tax benefit (expense)		2,025			(21,960	)		(33,564	)		(32,250	)

OTHER COMPREHENSIVE (LOSS) INCOME		(3,762	)		40,782			62,330			59,892

COMPREHENSIVE INCOME	$	9,397		$	34,738		$	108,822		$	97,868

AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2003 and 2002
(Unaudited)


			2003			2002

			(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income			$	46,492		$	37,976
Adjustments to reconcile net income to net cash provided by operating activities:
	Interest credited to:
		Fixed annuity contracts		116,575			104,524
		Universal life insurance contracts		57,142			60,292
		Guaranteed investment contracts		6,089			8,776
	Net realized investment losses			26,570			31,192
	Amortization of net premiums on investments			5,079			185
	Amortization of deferred acquisition costs			123,477			158,058
	Acquisition costs deferred			(187,519	)		(187,626	)
	Provision for deferred income taxes			(47,077	)		113,116
	Change in:
		Accrued investment income		(7,438	)		(10,822	)
		Other assets		(7,699	)		51
		Income taxes currently receivable from Parent		32,744			(53,341	)
		Due from/to affiliates		(10,278	)		(11,542	)
		Other liabilities		6,680			13,293
	Other, net			13,276			15,841

NET CASH PROVIDED BY OPERATING ACTIVITIES				174,113			279,973

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
	Bonds, notes and redeemable preferred stocks			(1,431,013	)		(1,679,989	)
	Mortgage loans			(42,859	)		(94,360	)
	Other investments, excluding short-term investments			(14,970	)		(12,741	)
Sales of:
	Bonds, notes and redeemable preferred stocks			803,180			684,746
	Other investments, excluding short-term investments			269			609
Redemptions and maturities of:
	Bonds, notes and redeemable preferred stocks			767,055			418,899
	Mortgage loans			35,215			71,964
	Other investments, excluding short-term investments			70,107			110,345

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			$	186,984		$	(500,527	)

AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the nine months ended September 30, 2003 and 2002
(Unaudited)


		2003			2002

		(In thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
Deposits received on:
	Fixed annuity contracts	$	1,181,329		$	1,259,701
	Universal life insurance contracts		34,176			36,658
Net exchanges from the fixed accounts of variable annuity contracts			(735,617	)		(281,274	)
Withdrawal payments on:
	Fixed annuity contracts		(349,241	)		(392,719	)
	Universal life insurance contracts		(45,307	)		(52,433	)
	Guaranteed investment contracts		(7,647	)		(83,119	)
Claims and annuity payments on:
	Fixed annuity contracts		(82,191	)		(72,794	)
	Universal life insurance contracts		(90,912	)		(76,362	)
Net repayments of other short-term financings			(9,090	)		6,929
Net payment related to a modified coinsurance transaction			(18,959	)		(23,511	)
Net cash and short-term investments transferred to the Parent in the distribution of Saamsun Holdings Corp.			—			(82,873	)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(123,459	)		238,203

NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS			237,638			17,649

CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD			65,872			200,064

CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD		$	303,510		$	217,713


SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid on indebtedness		$	4,168		$	9,688

Net income taxes (paid to) refunded by Parent		$	(21,928	)	$	54,550


	BALANCE SHEET
	STATEMENT OF INCOME AND COMPREHENSIVE INCOME
	STATEMENT OF CASH FLOWS
	NOTES TO FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	CONTROLS & PROCEDURES
OTHER INFORMATION
SIGNATURES
Exhibit Index
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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


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


Incorporated in Arizona		86-0198983 IRS Employer Identification No.


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