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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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.
 
 þ o
 o þ
 o þ




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PageNumber(s)Part I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet (Unaudited)  September 30, 2005 and December 31, 2004
    
    
    2-3Consolidated Statement of Income and Comprehensive Income (Unaudited)  Three Months and Nine Months Ended September 30, 2005 and 2004
    
    
    4-5Consolidated Statement of Cash Flows (Unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-14Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15-35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36Part II  Other InformationItem 1. Legal Proceedings
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32
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September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    393,729
    
    
    $
    201,117Bonds, notes and redeemable preferred stocks
available for sale, at fair value (amortized
cost: September 30, 2005, $4,766,520; December
31, 2004, $4,987,728)
    
    
    4,827,454
    
    
    
    5,139,477Mortgage loans
    
    
    524,468
    
    
    
    624,179Policy loans
    
    
    172,316
    
    
    
    185,958Mutual funds
    
    
    21,773
    
    
    
    6,131Common stocks available for sale, at fair value
(cost: September 30, 2005, $25,015; December 31,
2004, $25,015)
    
    
    27,583
    
    
    
    26,452Securities lending collateral, at cost
(approximates fair value)
    
    
    974,379
    
    
    
    883,792Other invested assets
    
    
    53,121
    
    
    
    58,880Total investments and cash
    
    
    6,994,823
    
    
    
    7,125,986Variable annuity assets held in separate accounts
    
    
    23,654,069
    
    
    
    22,612,451Accrued investment income
    
    
    71,295
    
    
    
    73,769Deferred acquisition costs
    
    
    1,376,059
    
    
    
    1,349,089Other deferred expenses
    
    
    256,497
    
    
    
    257,781Income taxes currently receivable from Parent
    
    
    44,110
    
    
    
    9,945Goodwill
    
    
    14,038
    
    
    
    14,038Other assets
    
    
    61,162
    
    
    
    52,956TOTAL ASSETS
    
    $
    32,472,053
    
    
    $
    31,496,015
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September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity and fixed accounts of
variable annuity contracts
    
    $
    3,707,473
    
    
    $
    3,948,158Reserves for universal life insurance contracts
    
    
    1,485,683
    
    
    
    1,535,905Reserves for guaranteed investment contracts
    
    
    116,888
    
    
    
    215,331Reserves for guaranteed benefits
    
    
    69,102
    
    
    
    76,949Securities lending payable
    
    
    974,379
    
    
    
    883,792Due to affiliates
    
    
    13,565
    
    
    
    21,655Payable to brokers
    
    
    109,660
    
    
    
    Other liabilities
    
    
    200,820
    
    
    
    190,198Total reserves, payables and accrued liabilities
    
    
    6,677,570
    
    
    
    6,871,988Variable annuity liabilities related to separate accounts
    
    
    23,654,069
    
    
    
    22,612,451Deferred income taxes
    
    
    312,090
    
    
    
    257,532Total liabilities
    
    
    30,643,729
    
    
    
    29,741,971Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    760,890
    
    
    
    758,346Retained earnings
    
    
    1,035,314
    
    
    
    919,612Accumulated other comprehensive income
    
    
    28,609
    
    
    
    72,575Total shareholders equity
    
    
    1,828,324
    
    
    
    1,754,044TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    32,472,053
    
    
    $
    31,496,015
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Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)REVENUESFee income:Variable annuity policy fees, net of reinsurance
    
    $
    109,803
    
    
    $
    93,225
    
    
    $
    316,457
    
    
    $
    274,380Asset management fees
    
    
    20,933
    
    
    
    21,707
    
    
    
    61,727
    
    
    
    62,633Universal life insurance policy fees, net of
reinsurance
    
    
    7,939
    
    
    
    7,481
    
    
    
    25,025
    
    
    
    25,188Surrender charges
    
    
    6,985
    
    
    
    6,482
    
    
    
    20,881
    
    
    
    19,973Other fees
    
    
    3,655
    
    
    
    3,857
    
    
    
    11,740
    
    
    
    11,049Total fee income
    
    
    149,315
    
    
    
    132,752
    
    
    
    435,830
    
    
    
    393,223Investment income
    
    
    93,018
    
    
    
    89,905
    
    
    
    263,873
    
    
    
    276,163Net realized investment gains (losses)
    
    
    857
    
    
    
    (16,890
    )
    
    
    21,653
    
    
    
    (27,783
    )Total revenues
    
    
    243,190
    
    
    
    205,767
    
    
    
    721,356
    
    
    
    641,603BENEFITS AND EXPENSESInterest expense:Fixed annuity and fixed accounts of variable
annuity contracts
    
    
    31,073
    
    
    
    35,799
    
    
    
    94,529
    
    
    
    106,606Universal life insurance contracts
    
    
    17,644
    
    
    
    18,474
    
    
    
    52,945
    
    
    
    55,479Guaranteed investment contracts
    
    
    1,548
    
    
    
    1,550
    
    
    
    4,952
    
    
    
    4,264Subordinated notes payable to affiliates
    
    
    
    
    
    
    523
    
    
    
    
    
    
    
    1,621Total interest expense
    
    
    50,265
    
    
    
    56,346
    
    
    
    152,426
    
    
    
    167,970Amortization of bonus interest
    
    
    5,963
    
    
    
    2,544
    
    
    
    13,093
    
    
    
    7,768Claims on universal life insurance contracts,
net of
reinsurance recoveries
    
    
    5,411
    
    
    
    3,577
    
    
    
    13,891
    
    
    
    13,499Guaranteed benefits, net of
reinsurance recoveries
    
    
    3,963
    
    
    
    17,314
    
    
    
    20,739
    
    
    
    48,240General and administrative expenses
    
    
    33,900
    
    
    
    32,649
    
    
    
    102,323
    
    
    
    104,282Amortization of deferred acquisition costs and
other deferred expenses
    
    
    61,893
    
    
    
    26,722
    
    
    
    165,943
    
    
    
    106,237Annual commissions
    
    
    18,710
    
    
    
    15,114
    
    
    
    56,127
    
    
    
    45,245Total benefits and expenses
    
    
    180,105
    
    
    
    154,266
    
    
    
    524,542
    
    
    
    493,241PRETAX INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
    
    
    63,085
    
    
    
    51,501
    
    
    
    196,814
    
    
    
    148,362Income tax expense
    
    
    15,111
    
    
    
    8,418
    
    
    
    54,550
    
    
    
    35,783INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    47,974
    
    
    
    43,083
    
    
    
    142,264
    
    
    
    112,579Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,589
    )NET INCOME
    
    $
    47,974
    
    
    $
    43,083
    
    
    $
    142,264
    
    
    $
    49,990
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Three Months
    
    
    Nine Months2005
    
    
    2004
    
    
    2005
    
    
    2004(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
    
    $
    (43,145
    )
    
    $
    50,076
    
    
    $
    (48,920
    )
    
    $
    (24,292
    )Less reclassification adjustment for net
realized (gains) losses included in net
income
    
    
    (2,358
    )
    
    
    12,988
    
    
    
    (17,361
    )
    
    
    19,386Net unrealized losses on foreign currency
    
    
    (477
    )
    
    
    
    
    
    
    (1,360
    )
    
    
    Income tax benefit (expense)
    
    
    16,094
    
    
    
    (22,073
    )
    
    
    23,675
    
    
    
    1,716OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (29,886
    )
    
    
    40,991
    
    
    
    (43,966
    )
    
    
    (3,190
    )COMPREHENSIVE INCOME
    
    $
    18,088
    
    
    $
    84,074
    
    
    $
    98,298
    
    
    $
    46,800
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2005
    
    
    2004(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    142,264
    
    
    $
    49,990Adjustments to reconcile net income to net cash provided by operating
activities:Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    62,589Interest credited to:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    94,529
    
    
    
    106,606Universal life insurance contracts
    
    
    52,945
    
    
    
    55,479Guaranteed investment contracts
    
    
    4,952
    
    
    
    4,264Net realized investment (gains) losses
    
    
    (21,653
    )
    
    
    27,783Amortization of net premium/(accretion of net discount) on investments
    
    
    6,380
    
    
    
    (890
    )Amortization of deferred acquisition costs and other expenses
    
    
    179,036
    
    
    
    114,005Acquisition costs deferred
    
    
    (149,187
    )
    
    
    (190,437
    )Other expenses deferred
    
    
    (32,435
    )
    
    
    (51,312
    )Provision for deferred income taxes
    
    
    78,233
    
    
    
    56,501Change in:Accrued investment income
    
    
    2,474
    
    
    
    (1,280
    )Income taxes currently payable to/receivable from Parent
    
    
    (34,165
    )
    
    
    14,037Other assets
    
    
    (8,367
    )
    
    
    4,973Due from/to affiliates
    
    
    (8,090
    )
    
    
    (10,194
    )Other liabilities
    
    
    2,550
    
    
    
    2,818Other, net
    
    
    6,197
    
    
    
    12,536NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    315,663
    
    
    
    257,468CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (1,510,343
    )
    
    
    (1,153,904
    )Mortgage loans
    
    
    (71,307
    )
    
    
    (25,760
    )Other investments, excluding short-term investments
    
    
    (35,191
    )
    
    
    (20,671
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    1,166,975
    
    
    
    755,843Other investments, excluding short-term investments
    
    
    56,523
    
    
    
    14,589Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    657,189
    
    
    
    633,620Mortgage loans
    
    
    171,905
    
    
    
    67,747Other investments, excluding short-term investments
    
    
    13,188
    
    
    
    13,921NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    $
    448,939
    
    
    $
    285,385
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2005
    
    
    2004(in thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity and fixed accounts of variable annuity contracts
    
    $
    981,372
    
    
    $
    1,082,777Universal life insurance contracts
    
    
    31,122
    
    
    
    32,532Net exchanges from the fixed accounts of variable annuity
contracts
    
    
    (822,367
    )
    
    
    (962,641
    )Withdrawal payments on:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    (435,145
    )
    
    
    (330,033
    )Universal life insurance contracts
    
    
    (46,044
    )
    
    
    (54,943
    )Guaranteed investment contracts
    
    
    (103,420
    )
    
    
    (6,673
    )Claims and annuity payments, net of reinsurance, on:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    (77,425
    )
    
    
    (83,045
    )Universal life insurance contracts
    
    
    (75,083
    )
    
    
    (84,879
    )Net payment related to a modified coinsurance transaction
    
    
    
    
    
    
    (4,738
    )Dividend paid to Parent
    
    
    (25,000
    )
    
    
    (2,500
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (571,990
    )
    
    
    (414,143
    )NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS
    
    
    192,612
    
    
    
    128,710CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    201,117
    
    
    
    133,105CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD
    
    $
    393,729
    
    
    $
    261,815SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    
    
    
    $
    1,621Income taxes paid to Parent
    
    $
    11,097
    
    
    $
    47,424
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1.
    
    BASIS OF PRESENTATIONAIG SunAmerica Life Assurance 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).The Company owns 100% of the outstanding capital stock of its consolidated subsidiary, AIG
SunAmerica Asset Management Corp. (SAAMCo) which in turn has two wholly owned subsidiaries: AIG
SunAmerica Capital Services, Inc. (SACS) and AIG SunAmerica Fund Services, Inc. (SFS).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 the Company for
the year ended December 31, 2004.2.
    
    RECENTLY ISSUED ACCOUNTING STANDARDSIn September 2005, the American Institute of Certified Public Accountants issued SOP
05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts (SOP 05-1). This statement provides guidance
on accounting by insurance enterprises for deferred acquisition costs on internal replacements of
insurance and investment contracts other than those specifically described in Statement of
Financial Accounting Standards No. 97. SOP 05-1 defines an internal replacement as a modification
in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a
new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal
years beginning after December 15, 2006. The Company is evaluating the provisions of SOP 05-1.
Based on current practices, management believes the adoption of SOP 05-1 will not have a material
impact on the consolidated financial position, results of operations or cash flows of the Company.3.
    
    COMMITMENTS AND CONTINGENT LIABILITIESThe 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, pursuant to these agreements the Company guarantees the
payment of these securities upon redemption. The maximum liability under these guarantees at
September 30, 2005 is $185,492,000. The expiration dates of these commitments are as follows:
$26,385,000 in the remainder of 2005 and $159,107,000 in 2006. Related to each of these agreements
are participation agreements under which the Parent will share in $58,610,000 of these liabilities
in exchange for a proportionate percentage of the fees received under these agreements.At September 30, 2005, the Company has a commitment to purchase a total of approximately $7,000,000
of asset-backed securities in the ordinary course of business. This commitment has a contractual
maturity date in November of 2005.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.
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3.
    
    COMMITMENTS AND CONTINGENT LIABILITIES (Continued)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 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.On May 26, 2005, the New York Attorney General and the New York Superintendent of Insurance filed a
civil complaint against AIG as well as its former Chairman and Chief Executive Officer and former
Vice Chairman and Chief Financial Officer, in the Supreme Court of the State of New York. The
complaint asserts claims under New Yorks Martin Act and Insurance Law, among others, and makes
allegations concerning certain transactions entered into by AIG and certain of its subsidiaries.
Although none of the Company or its subsidiaries are named in the complaint, nor does the complaint
seek any remedies against them, due to a provision in the law governing investment companies, if
the lawsuit results in an injunction being entered against AIG, then the Company, SAAMCo and SACS
will need to obtain permission from the Securities and Exchange Commission (SEC) to continue to
service its variable annuity and asset management operations. While the SEC has granted this type
of relief to others in the past in similar circumstances, there is no assurance that this
permission would be granted. Accordingly, no assurance can be given that any further changes in
circumstances for AIG will not impact the Company.4.
    
    RELATED PARTY TRANSACTIONStarr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation
Profit Participation Plans (SICO Plans) to certain employees of AIG, its subsidiaries and
affiliates. The SICO Plans came into being in 1975 when the voting shareholders and Board of
Directors of SICO, a private holding company whose principal asset is AIG common stock, decided
that a portion of the capital value of SICO should be used to provide an incentive plan for the
current and succeeding managements of all American International companies, including the Company.In the past, participation in the SICO Plans by any person, and the amount of such participation
was at the sole discretion of SICOs Board of Directors. None of the costs of the various benefits
provided under the SICO Plans has been paid by the Company, although the Company has recorded a
charge to reported earnings for the deferred compensation amounts paid to employees of the Company
or its subsidiaries and affiliates by SICO and allocated to the Company, with an offsetting entry
to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans
provide that shares currently owned by SICO may be set aside by SICO for the benefit of the
participant and distributed upon retirement. The SICO Board of Directors may permit an early
payout under certain circumstances. Prior to payout, the participant is not entitled to vote,
dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture
under certain conditions, including but not limited to the participants voluntary termination of
employment with AIG or its subsidiaries and affiliates prior to normal retirement age. In
addition, SICOs Board of Directors may elect to pay a participant cash in lieu of shares of AIG
common stockOn June 27, 2005, AIG entered into agreements pursuant to which AIG agrees, subject to certain
conditions, to make any payment that is not promptly paid with respect to the benefits accrued by
certain employees of AIG and its subsidiaries under the SICO Plans.
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4.
    
    RELATED PARTY TRANSACTION (Continued)As total compensation expense related to the SICO Plans 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 Plans 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 $1,562,000, with a corresponding increase to additional paid-in capital, and with no
effect on total shareholders equity, results of operations or cash flows. Compensation expense
with respect to the SICO Plans aggregated $269,000 and $982,000 for the quarter and nine months
ended September 30, 2005, respectively, and is included in general and administrative expenses in
the consolidated statement of income and comprehensive income.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 contract holders have the right to enforce the
guarantee directly against American Home. American Homes statutory financial statements are
contained in the Companys variable annuity registrations filed with the SEC. Additionally,
American Home files statutory annual and quarterly reports with the New York State Insurance
Department, through which such reports are available to the public. The Company expects that the
American Home guarantee will be terminated within the next year. However, the insurance
obligations on contracts issued prior to termination of the American Home guarantee would continue
to be covered by the guarantee, including obligations arising from purchase payments received after
termination, until satisfied in full.5.
    
    SEGMENT INFORMATIONThe 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 SAAMCo and its
subsidiary and distributor, SACS, and its subsidiary and servicing administrator, SFS. Following
is selected information pertaining to the Companys business segments.
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5.
    
    SEGMENT INFORMATION (Continued)
 AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)THREE MONTHS ENDED
SEPTEMBER 30, 2005:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    109,803
    
    
    $
    
    
    
    $
    109,803Asset management fees
    
    
    
    
    
    
    20,933
    
    
    
    20,933Universal life insurance policy
fees, net of reinsurance
    
    
    7,939
    
    
    
    
    
    
    
    7,939Surrender charges
    
    
    6,985
    
    
    
    
    
    
    
    6,985Other fees
    
    
    
    
    
    
    3,655
    
    
    
    3,655Total fee income
    
    
    124,727
    
    
    
    24,588
    
    
    
    149,315Investment income
    
    
    92,199
    
    
    
    819
    
    
    
    93,018Net realized investment gains
    
    
    794
    
    
    
    63
    
    
    
    857Total revenues
    
    
    217,720
    
    
    
    25,470
    
    
    
    243,190BENEFITS AND EXPENSES:Interest expense
    
    
    50,265
    
    
    
    
    
    
    
    50,265Amortization of bonus interest
    
    
    5,963
    
    
    
    
    
    
    
    5,963Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    5,411
    
    
    
    
    
    
    
    5,411Guaranteed benefits, net of
reinsurance recoveries
    
    
    3,963
    
    
    
    
    
    
    
    3,963General and administrative expenses
    
    
    23,253
    
    
    
    10,647
    
    
    
    33,900Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    54,237
    
    
    
    7,656
    
    
    
    61,893Annual commissions
    
    
    18,710
    
    
    
    
    
    
    
    18,710Total benefits and expenses
    
    
    161,802
    
    
    
    18,303
    
    
    
    180,105Pretax income before cumulative
effect of accounting change
    
    $
    55,918
    
    
    $
    7,167
    
    
    $
    63,085Total assets
    
    $
    32,236,426
    
    
    $
    235,627
    
    
    $
    32,472,053Expenditures for long-lived assets
    
    $
    
    
    
    $
    92
    
    
    $
    92
 11




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5.
    
    BUSINESS SEGMENTS (Continued)
 AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)THREE MONTHS ENDED
SEPTEMBER 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    93,225
    
    
    $
    
    
    
    $
    93,225Asset management fees
    
    
    
    
    
    
    21,707
    
    
    
    21,707Universal life insurance policy
fees, net of reinsurance
    
    
    7,481
    
    
    
    
    
    
    
    7,481Surrender charges
    
    
    6,482
    
    
    
    
    
    
    
    6,482Other fees
    
    
    
    
    
    
    3,857
    
    
    
    3,857Total fee income
    
    
    107,188
    
    
    
    25,564
    
    
    
    132,752Investment income
    
    
    89,671
    
    
    
    234
    
    
    
    89,905Net realized investment losses
    
    
    (16,890
    )
    
    
    
    
    
    
    (16,890
    )Total revenues
    
    
    179,969
    
    
    
    25,798
    
    
    
    205,767BENEFITS AND EXPENSES:Interest expense
    
    
    55,823
    
    
    
    523
    
    
    
    56,346Amortization of bonus interest
    
    
    2,544
    
    
    
    
    
    
    
    2,544Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    3,577
    
    
    
    
    
    
    
    3,577Guaranteed benefits, net of
reinsurance recoveries
    
    
    17,314
    
    
    
    
    
    
    
    17,314General and administrative expenses
    
    
    23,272
    
    
    
    9,377
    
    
    
    32,649Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    18,616
    
    
    
    8,106
    
    
    
    26,722Annual commissions
    
    
    15,114
    
    
    
    
    
    
    
    15,114Total benefits and expenses
    
    
    136,260
    
    
    
    18,006
    
    
    
    154,266Pretax income before cumulative
effect of accounting change
    
    $
    43,709
    
    
    $
    7,792
    
    
    $
    51,501Total assets
    
    $
    29,917,921
    
    
    $
    195,948
    
    
    $
    30,113,869Expenditures for long-lived assets
    
    $
    
    
    
    $
    8
    
    
    $
    8
 12




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5.
    
    BUSINESS SEGMENTS (Continued)
 AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)NINE MONTHS ENDED
SEPTEMBER 30, 2005:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    316,457
    
    
    $
    
    
    
    $
    316,457Asset management fees
    
    
    
    
    
    
    61,727
    
    
    
    61,727Universal life insurance policy
fees, net of reinsurance
    
    
    25,025
    
    
    
    
    
    
    
    25,025Surrender charges
    
    
    20,881
    
    
    
    
    
    
    
    20,881Other fees
    
    
    
    
    
    
    11,740
    
    
    
    11,740Total fee income
    
    
    362,363
    
    
    
    73,467
    
    
    
    435,830Investment income
    
    
    261,854
    
    
    
    2,019
    
    
    
    263,873Net realized investment gains
    
    
    21,550
    
    
    
    103
    
    
    
    21,653Total revenues
    
    
    645,767
    
    
    
    75,589
    
    
    
    721,356BENEFITS AND EXPENSES:Interest expense
    
    
    152,426
    
    
    
    
    
    
    
    152,426Amortization of bonus interest
    
    
    13,093
    
    
    
    
    
    
    
    13,093Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    13,891
    
    
    
    
    
    
    
    13,891Guaranteed benefits, net of
reinsurance recoveries
    
    
    20,739
    
    
    
    
    
    
    
    20,739General and administrative expenses
    
    
    73,360
    
    
    
    28,963
    
    
    
    102,323Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    142,907
    
    
    
    23,036
    
    
    
    165,943Annual commissions
    
    
    56,127
    
    
    
    
    
    
    
    56,127Total benefits and expenses
    
    
    472,543
    
    
    
    51,999
    
    
    
    524,542Pretax income before cumulative
effect of accounting change
    
    $
    173,224
    
    
    $
    23,590
    
    
    $
    196,814Total assets
    
    $
    32,236,426
    
    
    $
    235,627
    
    
    $
    32,472,053Expenditures for long-lived assets
    
    $
    
    
    
    $
    168
    
    
    $
    168
 13




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5.
    
    BUSINESS SEGMENTS (Continued)
 AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)NINE MONTHS ENDED
SEPTEMBER 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    274,380
    
    
    $
    
    
    
    $
    274,380Asset management fees
    
    
    
    
    
    
    62,633
    
    
    
    62,633Universal life insurance policy
fees, net of reinsurance
    
    
    25,188
    
    
    
    
    
    
    
    25,188Surrender charges
    
    
    19,973
    
    
    
    
    
    
    
    19,973Other fees
    
    
    
    
    
    
    11,049
    
    
    
    11,049Total fee income
    
    
    319,541
    
    
    
    73,682
    
    
    
    393,223Investment income
    
    
    275,614
    
    
    
    549
    
    
    
    276,163Net realized investment losses
    
    
    (27,783
    )
    
    
    
    
    
    
    (27,783
    )Total revenues
    
    
    567,372
    
    
    
    74,231
    
    
    
    641,603BENEFITS AND EXPENSES:Interest expense
    
    
    166,349
    
    
    
    1,621
    
    
    
    167,970Amortization of bonus interest
    
    
    7,768
    
    
    
    
    
    
    
    7,768Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    13,499
    
    
    
    
    
    
    
    13,499Guaranteed benefits, net of
reinsurance recoveries
    
    
    48,240
    
    
    
    
    
    
    
    48,240General and administrative expenses
    
    
    75,873
    
    
    
    28,409
    
    
    
    104,282Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    82,722
    
    
    
    23,515
    
    
    
    106,237Annual commissions
    
    
    45,245
    
    
    
    
    
    
    
    45,245Total benefits and expenses
    
    
    439,696
    
    
    
    53,545
    
    
    
    493,241Pretax income before cumulative
effect of accounting change
    
    $
    127,676
    
    
    $
    20,686
    
    
    $
    148,362Total assets
    
    $
    29,917,921
    
    
    $
    195,948
    
    
    $
    30,113,869Expenditures for long-lived assets
    
    $
    
    
    
    $
    91
    
    
    $
    91
 14




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.
   16




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Investment income
    
    $
    92,199
    
    
    $
    89,671
    
    
    $
    261,854
    
    
    $
    275,614Interest credited to fixed annuity contracts and
Fixed Options
    
    
    (31,073
    )
    
    
    (35,799
    )
    
    
    (94,529
    )
    
    
    (106,606
    )Interest credited to universal life insurance
contracts
    
    
    (17,644
    )
    
    
    (18,474
    )
    
    
    (52,945
    )
    
    
    (55,479
    )Interest credited to guaranteed investment
contracts
    
    
    (1,548
    )
    
    
    (1,550
    )
    
    
    (4,952
    )
    
    
    (4,264
    )Net investment spread
    
    
    41,934
    
    
    
    33,848
    
    
    
    109,428
    
    
    
    109,265Net realized investment gains (losses)
    
    
    794
    
    
    
    (16,890
    )
    
    
    21,550
    
    
    
    (27,783
    )Fee income, net of reinsurance
    
    
    124,727
    
    
    
    107,188
    
    
    
    362,363
    
    
    
    319,541Amortization of bonus interest
    
    
    (5,963
    )
    
    
    (2,544
    )
    
    
    (13,093
    )
    
    
    (7,768
    )Claims on UL insurance contracts, net of
reinsurance recoveries
    
    
    (5,411
    )
    
    
    (3,577
    )
    
    
    (13,891
    )
    
    
    (13,499
    )Guaranteed benefits, net of reinsurance recoveries
    
    
    (3,963
    )
    
    
    (17,314
    )
    
    
    (20,739
    )
    
    
    (48,240
    )General and administrative expenses
    
    
    (23,253
    )
    
    
    (23,272
    )
    
    
    (73,360
    )
    
    
    (75,873
    )Amortization of DAC
    
    
    (54,237
    )
    
    
    (18,616
    )
    
    
    (142,907
    )
    
    
    (82,722
    )Annual commissions
    
    
    (18,710
    )
    
    
    (15,114
    )
    
    
    (56,127
    )
    
    
    (45,245
    )Pretax income before cumulative effect of
accounting change
    
    $
    55,918
    
    
    $
    43,709
    
    
    $
    173,224
    
    
    $
    127,676
  19




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except for percentages)Net investment spread
    
    $
    41,934
    
    
    $
    33,848
    
    
    $
    109,428
    
    
    $
    109,265Average invested assets
    
    
    5,766,264
    
    
    
    6,225,262
    
    
    
    5,831,338
    
    
    
    6,254,328Average interest-bearing liabilities
    
    
    5,354,342
    
    
    
    5,966,369
    
    
    
    5,477,952
    
    
    
    5,986,790Yield on average invested assets
    
    
    6.40
    %
    
    
    5.76
    %
    
    
    5.99
    %
    
    
    5.88
    %Rate paid on average interest
bearing
liabilities
    
    
    3.76
    
    
    
    3.74
    
    
    
    3.71
    
    
    
    3.70Difference between yield and
interest
rate paid
    
    
    2.64
    %
    
    
    2.02
    %
    
    
    2.28
    %
    
    
    2.18
    %Net investment spread as a
percentage
of average invested assets
    
    
    2.91
    %
    
    
    2.17
    %
    
    
    2.50
    %
    
    
    2.33
    %
      20




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September 30, 2005
    
    December 31, 2004Fair
    
    Percent of
    
    Fair
    
    Percent ofValue
    
    Portfolio
    
    Value
    
    Portfolio(in thousands, except for percentages)Bond Portfolio:U.S. government securities
    
    $
    33,839
    
    
    
    0.5
    %
    
    $
    30,300
    
    
    
    0.4
    %Mortgage-backed securities
    
    
    1,040,167
    
    
    
    14.9
    
    
    
    956,567
    
    
    
    13.4Securities of public utilities
    
    
    278,554
    
    
    
    4.0
    
    
    
    332,038
    
    
    
    4.7Corporate bonds and notes
    
    
    2,722,305
    
    
    
    38.9
    
    
    
    2,902,829
    
    
    
    40.7Other debt securities
    
    
    752,589
    
    
    
    10.7
    
    
    
    917,743
    
    
    
    12.9Total Bond Portfolio
    
    
    4,827,454
    
    
    
    69.0
    
    
    
    5,139,477
    
    
    
    72.1Mortgage loans
    
    
    524,468
    
    
    
    7.5
    
    
    
    624,179
    
    
    
    8.8Common stocks
    
    
    27,583
    
    
    
    0.4
    
    
    
    26,452
    
    
    
    0.4Cash and short-term investments
    
    
    393,729
    
    
    
    5.6
    
    
    
    201,117
    
    
    
    2.8Securities lending collateral
    
    
    974,379
    
    
    
    13.9
    
    
    
    883,792
    
    
    
    12.4Other invested assets
    
    
    247,210
    
    
    
    3.6
    
    
    
    250,969
    
    
    
    3.5Total investments and cash
    
    $
    6,994,823
    
    
    
    100.0
    %
    
    $
    7,125,986
    
    
    
    100.0
    %
  25




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Issues not rated by
S&P/Moodys/Issues rated by S&P/Moody's/Fitch
    
    Fitch, by NAIC category
    
    TotalNAIC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent ofS&P/Moody's/Fitch
    
    Amortized
    
    Estimated fair
    
    category
    
    Amortized
    
    Estimated fair
    
    Amortized
    
    Estimated fair
    
    total investedCategory (1)
    
    Cost
    
    value
    
    (2)
    
    Cost
    
    value
    
    Cost
    
    value
    
    assetsAAA+ to A-
(Aaa to A3)
[AAA to A-]
    
    $
    3,077
    
    
    $
    3,096
    
    
    
    1
    
    
    $
    266
    
    
    $
    268
    
    
    $
    3,343
    
    
    $
    3,364
    
    
    
    48.09
    %BBB+ to BBB-
(Baa to Baa3)
[BBB+ to BBB-]
    
    
    952
    
    
    
    964
    
    
    
    2
    
    
    
    216
    
    
    
    218
    
    
    
    1,168
    
    
    
    1,182
    
    
    
    16.90
    %BB+ to BB-
(Bal to Ba3)
[BB+ to BB-]
    
    
    138
    
    
    
    140
    
    
    
    3
    
    
    
    14
    
    
    
    21
    
    
    
    152
    
    
    
    161
    
    
    
    2.30
    %B+ to B-
(Bl to B3)
[B+ to B-]
    
    
    50
    
    
    
    53
    
    
    
    4
    
    
    
    7
    
    
    
    7
    
    
    
    57
    
    
    
    60
    
    
    
    0.86
    %CCC+ to CCC-
(Caal to Caa3)
[CCC+ to CCC-]
    
    
    13
    
    
    
    11
    
    
    
    5
    
    
    
    13
    
    
    
    17
    
    
    
    26
    
    
    
    28
    
    
    
    0.40
    %CC to D
(Ca to C)
[CC to D]
    
    
    1
    
    
    
    4
    
    
    
    6
    
    
    
    20
    
    
    
    28
    
    
    
    21
    
    
    
    32
    
    
    
    0.46
    %TOTAL RATED
ISSUES
    
    $
    4,231
    
    
    $
    4,268
    
    
    
    
    
    
    $
    536
    
    
    $
    559
    
    
    $
    4,767
    
    
    $
    4,827
 Footnotes to the table of Rated Bonds by Rating Classification
 
 (1)
    
    S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D
(in payment default). A plus (+) or minus (-) indicates the debts relative standing within
the rating category. A security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debts relative standing within the rating category.
A security rated Baa3 or higher is considered investment grade. Issues are categorized based
on the highest of the S&P, Moodys and Fitch ratings if rated by multiple agencies.(2)
    
    Bonds and short-term promissory instruments are divided into six quality categories for NAIC
rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one
category 6, for bonds in or near default. These six categories correspond with the
S&P/Moodys/Fitch rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $45.5 million of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines. 27




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
    
    Trading at a significant discount to par, amortized cost (if lower) or cost for an
extended period of time;
    
    The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a
material outstanding obligation; (ii) the issuer seeking protection from creditors under
the bankruptcy laws or similar laws intended for the court supervised reorganization of
insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to
which creditors are asked to exchange their claims for cash or securities having a fair
value substantially lower than the par value of their claims; or
    
    In the opinion of the Companys management, it is unlikely the Company will realize a
full recovery on its investment, irrespective of the occurrence of one of the foregoing
events.
       28




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Amortized Cost(in thousands)Due in one year or less
    
    $
    74,975Due after one year through five years
    
    
    785,160Due after five years through ten years
    
    
    737,863Due after ten years
    
    
    595,015Total
    
    $
    2,193,013
  (dollars in thousands)
    
    Less than or Equal to 20%
    
    Greater than 20% to 50%
    
    Greater than 50%of Amortized Cost
    
    of Amortized Cost
    
    of Amortized Cost
    
    TotalAmortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    UnrealizedMonths
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    ItemsInvestment Grade
Bonds0-6
    
    $
    22,237
    
    
    $
    (619
    )
    
    
    8
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    7
    
    
    $
    (7
    )
    
    
    1
    
    
    $
    22,244
    
    
    $
    (626
    )
    
    
    97-12
    
    
    39,959
    
    
    
    (1,179
    )
    
    
    13
    
    
    
    78
    
    
    
    (28
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,037
    
    
    
    (1,207
    )
    
    
    14>12
    
    
    8,946
    
    
    
    (638
    )
    
    
    6
    
    
    
    6,469
    
    
    
    (1,809
    )
    
    
    3
    
    
    
    82
    
    
    
    (62
    )
    
    
    2
    
    
    
    15,497
    
    
    
    (2,509
    )
    
    
    11Total
    
    $
    71,142
    
    
    $
    (2,436
    )
    
    
    27
    
    
    $
    6,547
    
    
    $
    (1,837
    )
    
    
    4
    
    
    $
    89
    
    
    $
    (69
    )
    
    
    3
    
    
    $
    77,778
    
    
    $
    (4,342
    )
    
    
    34Below Investment
Grade Bonds0-6
    
    $
    1,301,882
    
    
    $
    (13,667
    )
    
    
    219
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,301,882
    
    
    $
    (13,667
    )
    
    
    2197-12
    
    
    486,329
    
    
    
    (9,773
    )
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486,329
    
    
    
    (9,773
    )
    
    
    81>12
    
    
    327,024
    
    
    
    (12,418
    )
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327,024
    
    
    
    (12,418
    )
    
    
    57Total
    
    $
    2,115,235
    
    
    $
    (35,858
    )
    
    
    357
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    2,115,235
    
    
    $
    (35,858
    )
    
    
    357Total Bonds0-6
    
    $
    1,324,119
    
    
    $
    (14,286
    )
    
    
    227
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    7
    
    
    $
    (7
    )
    
    
    1
    
    
    $
    1,324,126
    
    
    $
    (14,293
    )
    
    
    2287-12
    
    
    526,288
    
    
    
    (10,952
    )
    
    
    94
    
    
    
    78
    
    
    
    (28
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    526,366
    
    
    
    (10,980
    )
    
    
    95>12
    
    
    335,970
    
    
    
    (13,056
    )
    
    
    63
    
    
    
    6,469
    
    
    
    (1,809
    )
    
    
    3
    
    
    
    82
    
    
    
    (62
    )
    
    
    2
    
    
    
    342,521
    
    
    
    (14,927
    )
    
    
    68Total
    
    $
    2,186,377
    
    
    $
    (38,294
    )
    
    
    384
    
    
    $
    6,547
    
    
    $
    (1,837
    )
    
    
    4
    
    
    $
    89
    
    
    $
    (69
    )
    
    
    3
    
    
    $
    2,193,013
    
    
    $
    (40,200
    )
    
    
    391
   29




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Nine MonthsEndedSeptember 30,
    
    
    Years Ended December, 312005
    
    
    2004
    
    
    2003
    
    
    2002Average 10-year U.S. Treasury bond rate:
    
    
    4.21
    %
    
    
    4.26
    %
    
    
    4.01
    %
    
    
    4.61
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.55
    
    
    
    5.66
    
    
    
    5.75
    
    
    
    6.23Rate paid on average interest-bearing liabilities
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.93
       32




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35




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Quantitative and Qualitative Disclosures About Market Risk
  
 Controls and Procedures
   36




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Legal Proceedings
    
 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Defaults Upon Senior Securities
  
 Submissions of Matters to a Vote of Security Holders
  
 Other Information
  
 Exhibits
  37




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
RegistrantDate: November 8, 2005
    
    /s/ N. SCOTT GILLISN. Scott GillisSenior Vice President,Chief Financial Officer
and DirectorDate: November 8, 2005
    
    /s/ STEWART POLAKOVStewart PolakovSenior Vice President and Controller(Principal Accounting Officer)
 38




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Exhibit Index
 Exhibit
 31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications
 39