##### Table of Contents



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
 OR /   /
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 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 IN 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
NOVEMBER 12, 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.




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY INDEX PageNumber(s)Part I  Financial InformationConsolidated Balance Sheet (Unaudited)  September 30, 2004
and December 31, 2003
    
    
    2-3Consolidated Statement of Income and Comprehensive Income
(Unaudited)  Three Months and Nine Months Ended September 30,
2004 and 2003
    
    
    4-5Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2004 and 2003
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-18Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19-38Quantitative and Qualitative Disclosures About
Market Risk
    
    
    39Disclosure Controls and Procedures
    
    
    39Part II  Other Information
    
    
    40EX-31.1EX-31.2EX-32




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited) September 30,
    
    December 31,2004
    
    2003(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    261,815
    
    
    $
    133,105Bonds, notes and redeemable preferred stocks
available for sale, at fair value (amortized
cost: September 30, 2004, $5,115,272;
December 31, 2003, $5,351,183)
    
    
    5,267,874
    
    
    
    5,505,800Mortgage loans
    
    
    675,778
    
    
    
    716,846Policy loans
    
    
    188,150
    
    
    
    200,232Mutual funds
    
    
    10,089
    
    
    
    21,159Common stocks available for sale, at fair value
(cost: September 30, 2004, $4,875;
December 31, 2003, $635)
    
    
    4,889
    
    
    
    727Real estate
    
    
    20,091
    
    
    
    22,166Securities lending collateral
    
    
    1,327,722
    
    
    
    514,145Other invested assets
    
    
    32,724
    
    
    
    10,453Total investments and cash
    
    
    7,789,132
    
    
    
    7,124,633Variable annuity assets held in separate accounts
    
    
    20,586,997
    
    
    
    19,178,796Accrued investment income
    
    
    75,927
    
    
    
    74,647Deferred acquisition costs
    
    
    1,331,563
    
    
    
    1,264,321Other deferred expenses
    
    
    262,019
    
    
    
    241,007Income taxes currently receivable from Parent
    
    
    
    
    
    
    13,856Goodwill
    
    
    14,038
    
    
    
    14,038Other assets
    
    
    54,193
    
    
    
    59,166TOTAL ASSETS
    
    $
    30,113,869
    
    
    $
    27,970,464
 See accompanying notes to consolidated financial statements 2




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited) September 30,
    
    December 31,2004
    
    2003(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity contracts and fixed
accounts of variable annuity contracts
    
    $
    4,161,363
    
    
    $
    4,274,329Reserves for universal life insurance contracts
    
    
    1,549,073
    
    
    
    1,609,233Reserves for guaranteed investment contracts
    
    
    214,734
    
    
    
    218,032Reserves for guaranteed benefits
    
    
    77,977
    
    
    
    12,022Securities lending payable
    
    
    1,327,722
    
    
    
    514,145Income taxes currently payable to Parent
    
    
    181
    
    
    
    Due to affiliates
    
    
    9,095
    
    
    
    19,289Payable to brokers
    
    
    31,961
    
    
    
    1,140Other liabilities
    
    
    194,201
    
    
    
    248,258Total reserves, payables and accrued liabilities
    
    
    7,566,307
    
    
    
    6,896,448Variable annuity liabilities related to separate accounts
    
    
    20,586,997
    
    
    
    19,178,796Subordinated notes payable to affiliates
    
    
    41,483
    
    
    
    41,520Deferred income taxes
    
    
    312,234
    
    
    
    291,152Total liabilities
    
    
    28,507,021
    
    
    
    26,407,916Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    1,224,885
    
    
    
    1,224,885Retained earnings
    
    
    309,032
    
    
    
    261,542Accumulated other comprehensive income
    
    
    69,420
    
    
    
    72,610Total shareholders equity
    
    
    1,606,848
    
    
    
    1,562,548TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    30,113,869
    
    
    $
    27,970,464
 See accompanying notes to consolidated financial statements. 3




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and nine months ended September 30, 2004 and 2003
(Unaudited) Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003(in thousands)REVENUESFee income:Variable annuity policy fees, net of reinsurance
    
    $
    91,932
    
    
    $
    72,200
    
    
    $
    270,492
    
    
    $
    201,179Asset management fees
    
    
    23,000
    
    
    
    17,625
    
    
    
    66,521
    
    
    
    46,414Universal life insurance policy fees, net of
reinsurance
    
    
    7,481
    
    
    
    8,192
    
    
    
    25,188
    
    
    
    26,540Surrender charges
    
    
    6,482
    
    
    
    6,895
    
    
    
    19,973
    
    
    
    21,249Other fees
    
    
    3,857
    
    
    
    3,578
    
    
    
    11,049
    
    
    
    10,430Total fee income
    
    
    132,752
    
    
    
    108,490
    
    
    
    393,223
    
    
    
    305,812Investment income
    
    
    88,166
    
    
    
    100,103
    
    
    
    273,257
    
    
    
    299,166Net realized investment losses
    
    
    (15,151
    )
    
    
    (17,940
    )
    
    
    (24,877
    )
    
    
    (26,570
    )Total revenues
    
    
    205,767
    
    
    
    190,653
    
    
    
    641,603
    
    
    
    578,408BENEFITS AND EXPENSESInterest expense:Fixed annuity contracts and fixed accounts of
variable annuity contracts
    
    
    35,799
    
    
    
    38,482
    
    
    
    106,606
    
    
    
    116,575Universal life insurance contracts
    
    
    18,474
    
    
    
    19,303
    
    
    
    55,479
    
    
    
    57,142Guaranteed investment contracts
    
    
    1,550
    
    
    
    2,042
    
    
    
    4,264
    
    
    
    6,089Subordinated notes payable
    
    
    523
    
    
    
    542
    
    
    
    1,621
    
    
    
    2,044Total interest expense
    
    
    56,346
    
    
    
    60,369
    
    
    
    167,970
    
    
    
    181,850General and administrative expenses
    
    
    32,649
    
    
    
    26,275
    
    
    
    104,282
    
    
    
    84,607Amortization of deferred acquisition costs and
other deferred expenses
    
    
    29,266
    
    
    
    50,269
    
    
    
    114,005
    
    
    
    139,798Annual commissions
    
    
    15,114
    
    
    
    11,422
    
    
    
    45,245
    
    
    
    41,595Claims on universal life contracts, net of
reinsurance recoveries
    
    
    3,577
    
    
    
    4,022
    
    
    
    13,499
    
    
    
    15,255Guaranteed benefits, net of reinsurance recoveries
    
    
    17,314
    
    
    
    14,723
    
    
    
    48,240
    
    
    
    51,182Total benefits and expenses
    
    
    154,266
    
    
    
    167,080
    
    
    
    493,241
    
    
    
    514,287PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    51,501
    
    
    
    23,573
    
    
    
    148,362
    
    
    
    64,121Income tax expense
    
    
    8,418
    
    
    
    5,422
    
    
    
    35,783
    
    
    
    14,748INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    43,083
    
    
    
    18,151
    
    
    
    112,579
    
    
    
    49,373Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (62,589
    )
    
    
    NET INCOME
    
    $
    43,083
    
    
    $
    18,151
    
    
    $
    49,990
    
    
    $
    49,373
 See accompanying notes to consolidated financial statements. 4




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)
For the three months and nine months ended September 30, 2004 and 2003
(Unaudited) Three Months
    
    Nine Months2004
    
    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
    
    $
    50,076
    
    
    $
    (17,432
    )
    
    $
    (24,292
    )
    
    $
    79,494Less reclassification adjustment for
net realized losses included in net
income
    
    
    12,988
    
    
    
    11,645
    
    
    
    19,386
    
    
    
    16,400Income tax (expense) benefit
    
    
    (22,073
    )
    
    
    2,025
    
    
    
    1,716
    
    
    
    (33,564
    )OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    40,991
    
    
    
    (3,762
    )
    
    
    (3,190
    )
    
    
    62,330COMPREHENSIVE INCOME
    
    $
    84,074
    
    
    $
    14,389
    
    
    $
    46,800
    
    
    $
    111,703
 See accompanying notes to consolidated financial statements. 5




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2004 and 2003
(Unaudited) 2004
    
    2003(in thousands)CASH FLOW FROM OPERATING ACTIVITIES:Net income
    
    $
    49,990
    
    
    $
    49,373Adjustments 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 and fixed accounts of variable annuity contracts
    
    
    106,606
    
    
    
    116,575Universal life insurance contracts
    
    
    55,479
    
    
    
    57,142Guaranteed investment contracts
    
    
    4,264
    
    
    
    6,089Net realized investment losses
    
    
    24,877
    
    
    
    26,570Amoritization of premium on securities
    
    
    723
    
    
    
    48(Gain) loss on other invested assets
    
    
    (5,869
    )
    
    
    5,507Amortization of deferred acquisition costs and other deferred expenses
    
    
    114,005
    
    
    
    139,798Depreciation of fixed assets
    
    
    1,227
    
    
    
    898Acquisition costs deferred
    
    
    (190,437
    )
    
    
    (158,851
    )Other expenses deferred
    
    
    (51,312
    )
    
    
    (51,166
    )Provision (benefit) for deferred income taxes
    
    
    56,501
    
    
    
    (48,611
    )Change in:Accrued investment income
    
    
    (1,280
    )
    
    
    (7,438
    )Other assets
    
    
    3,746
    
    
    
    (7,656
    )Income taxes currently receivable from/payable to Parent
    
    
    14,037
    
    
    
    52,446Due to affiliates
    
    
    (10,194
    )
    
    
    (14,733
    )Other liabilities
    
    
    11,593
    
    
    
    (4,683
    )Other, net
    
    
    12,536
    
    
    
    11,617NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    259,081
    
    
    
    172,925CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (1,153,904
    )
    
    
    (1,431,013
    )Mortgage loans
    
    
    (25,760
    )
    
    
    (42,859
    )Other investments, excluding short-term investments
    
    
    (20,671
    )
    
    
    (14,970
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    755,843
    
    
    
    803,180Other investments, excluding short-term investments
    
    
    14,589
    
    
    
    269Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    633,620
    
    
    
    767,055Mortgage loans
    
    
    67,747
    
    
    
    35,215Other investments, excluding short-term investments
    
    
    12,308
    
    
    
    70,107NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    $
    283,772
    
    
    $
    186,984
 See accompanying notes to consolidated financial statements. 6




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended September 30, 2004 and 2003
(Unaudited) 2004
    
    2003(in thousands)CASH FLOW FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity contracts and fixed accounts of variable annuity contracts
    
    $
    1,082,777
    
    
    $
    1,181,329Universal life insurance contracts
    
    
    32,532
    
    
    
    34,176Net exchanges from the fixed accounts of variable annuity contracts
    
    
    (962,641
    )
    
    
    (732,102
    )Withdrawal payments on:Fixed annuity contracts and fixed accounts of variable annuity contracts
    
    
    (330,033
    )
    
    
    (349,241
    )Universal life insurance contracts
    
    
    (54,943
    )
    
    
    (45,307
    )Guaranteed investment contracts
    
    
    (6,673
    )
    
    
    (7,647
    )Claims and annuity payments on:Fixed annuity contracts and fixed accounts of variable annuity contracts
    
    
    (83,045
    )
    
    
    (82,191
    )Universal life insurance contracts
    
    
    (84,879
    )
    
    
    (90,912
    )Net payment related to a modified coinsurance transaction
    
    
    (4,738
    )
    
    
    (18,959
    )Dividend paid to Parent
    
    
    (2,500
    )
    
    
    (10,187
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (414,143
    )
    
    
    (121,041
    )NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS
    
    
    128,710
    
    
    
    238,868CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    133,105
    
    
    
    116,882CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD AT END OF PERIOD AT END OF PERIOD
    
    $
    261,815
    
    
    $
    355,750SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    1,621
    
    
    $
    2,044Income taxes paid to Parent
    
    $
    47,424
    
    
    $
    51,087
 See accompanying notes to consolidated financial statements. 7




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  1.
    
    BASIS OF PRESENTATIONAIG 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, at which time 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 nine months ended September 30, 2003 have been restated for
the addition to pretax income of $10,034,000 to reflect the SAAMCo activity.SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing
administrator, SFS, are included in the Companys asset management segment (see
Note 5). These companies earn fee income by 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.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 September 30, 2004 and December 31, 2003, the results of its
consolidated operations for the three months and nine months ended September
30, 2004 and 2003 and its consolidated cash flows for the nine months ended
September 30, 2004 and 2003. The results of operations for the three months
and nine months ended September 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. 8




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  2.
    
    RECENTLY ISSUED ACCOUNTING STANDARDSIn 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 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 certain other expenses.
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 that provides an additional death benefit amount equal to a fixed percentage of
earnings in the contract, subject to certain maximums.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, that upon 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 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 guaranteed benefits, net
of reinsurance recoveries, if actual
experience or other evidence suggests that earlier assumptions should be
revised. As of September 30, 2004, approximately 30% of in-force contracts
with GMDB (calculated based on account value) have been reinsured.GMAV is a feature offered on certain variable annuity products. If available
and 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 deposits invested during the first ninety days, adjusted
for any subsequent 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 and through investment income in the consolidated
statement of income and comprehensive income.GMWB is a feature offered on certain variable annuity
products. If available and elected by the contract holder at the time
of contract issuance, this feature provides a guaranteed annual withdrawal stream, regardless of
market performance, equal to deposits invested during the first ninety days
 adjusted for any subsequent withdrawals (Eligible
Premium). These guaranteed annual withdrawals of up to 10% of
Eligible Premiums, are available after either a three-year or a five-year 9




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  2.
    
    RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)waiting period as elected by the contract holder at time of
contract issuance, without reducing the future amounts guaranteed. If no withdrawals have been
made during
the waiting period of 3 or 5 years, the contract holder will realize an
additional 10% or 20%, respectively, of Eligible Premium after all
other amounts guaranteed under this benefit have been paid. GMWBs are considered to be
derivatives under FAS 133
and are recognized at fair value in the consolidated balance sheet and through
investment income in the consolidated statement of income and comprehensive
income.If available and 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, there are virtually no
policies eligible to receive this benefit at September 30,
2004. 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 guaranteed benefits, net of reinsurance recoveries, 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 sold after July 2004. 10




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  2.
    
    RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)Details concerning the Companys guaranteed benefit exposures as of September
30, 2004 are as follows: Highest SpecifiedAnniversary AccountReturn of Net
    
    Value MinusDeposits Plus a
    
    Withdrawals PostMinimum Return
    
    Anniversary(dollars in thousands)In the event of death (GMDB and EEB):Account value
    
    $
    12,161,430
    
    
    $
    11,795,514Net amount at risk (a)
    
    
    1,221,718
    
    
    
    1,488,877Average attained age of contract holders
    
    
    65
    
    
    
    64Range of guaranteed minimum return rates
    
    
    0%-5
    %
    
    
    0
    %At annuitization (GMIB):Account value
    
    $
    6,375,984Net amount at risk (a)
    
    
    4,841Weighted average period remaining until earliest
annuitization
    
    3.9 YearsRange of guaranteed minimum return rates
    
    
    0%-6.5
    %Accumulation at specified date (GMAV):Account value
    
    $
    1,313,412Net amount at risk (a)
    
    
    3,462Weighted average period remaining until guaranteed
payment
    
    9.1 YearsAnnual withdrawals at specified date (GMWB):Account value
    
    $
    135,316Net amount at risk (b)
    
    
    162Weighted average period remaining until expected payout
    
    14.1 Years
  (a)
    
    Net amount at risk represents the guaranteed benefit exposure in excess of the current account
value, net of applicable 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.(b)
    
    Net amount at risk represents the guaranteed benefit exposure in excess of the current account value
if all contract holders exercise the maximum withdrawal benefits at the same balance sheet date. If
no withdrawals have been made during the waiting period of 3 or 5 years, the contract holder will
realize an additional 10% or 20% of Eligible Premium, respectively,
after all other amounts guaranteed under this benefit have been paid.
The additional 10% or 20% enhancement increases the net amount at
risk by $17,814,000 payable no sooner than 13 or 15 years from
contract issuance for the 3 or 5 year waiting periods,
respectively. 11




---



##### Table of Contents



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 (c)
    
    $
    65,423Guaranteed benefits incurred, net of reinsurance recoveries
    
    
    48,240Guaranteed benefits paid, net of reinsurance recoveries
    
    
    (35,686
    )Balance at September 30, 2004
    
    $
    77,977
  (c)
    
    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 September 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% 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. Such amounts 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
expenses 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
$160.0 million of these expenses from DAC to other deferred expenses, which is
reported on the consolidated balance sheet. For the nine months ended
September 30, 2004, $29.1 million of these expenses were deferred. For the
nine months ended September 30, 2004, amortization of these deferred expenses
was $6.7 million. Amortization of other deferred expenses is reported as part
of amortization of deferred acquisition costs and other deferred expenses on
the consolidated statement of income and comprehensive income. 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 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, the Company guarantees the payment of these securities upon
redemption. The maximum liability under these guarantees at September 30, 2004
is $195,439,000. These commitments have contractual maturity dates as follows:
$20,500,000 in the remainder of 2004 and $174,939,000 in 2005. Related to each
of these agreements are participation agreements with the Parent under which
the Parent will share in $62,599,000 of these liabilities in exchange for a
proportionate percentage of the fees received under these agreements. The
Internal Revenue Service has completed 12




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  3.
    
    CONTINGENT LIABILITIES (Continued)its examinations into the transactions underlying these commitments, including
the Companyss role in the transactions. The examination did not result in a
material loss to the Company.At September 30, 2004, the Company has commitments to purchase a total of
approximately $24,000,000 of asset-backed securities in the ordinary course of
business. The expiration dates of these commitments are as follows:
$15,000,000 in 2004 and $9,000,000 in 2006.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 and 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 condition or operation.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 MATTERSSubordinated notes (including accrued interest of $523,000) payable to
affiliates totaled $41,483,000 at interest rates ranging from 4.00% to 9.5% at
September 30, 2004, and require principal payments of $3,000,000 in 2004 and
$37,960,000 in 2008.On October 31, 2003, the Company became a party to an existing credit agreement
under which the Company agreed to make loans to AIG in an aggregate amount of
up to $60,000,000. This commitment expires on October 28, 2005. There was no
outstanding balance under this agreement at September 30, 2004.At September 30, 2004, a receivable of $5,000,000 was included in due to
affiliates on the consolidated balance sheet. This balance is due from AIGRS
under the short-term financing arrangement that is discussed in the
Related-Party Matters footnote of the Consolidated Financial Statements
contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003.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 earned by FSA under this
agreement totaled $1.3 million in 2004 and are included in asset management
fees in the statement of income and comprehensive income. A fee of $1.2
million was paid to FSA under a different agreement in 2003.On October 1, 2001, SAAMCo entered into two administrative services agreements
with business trusts established by its affiliate, The Variable Annuity Life
Insurance Company (VALIC), whereby the trust pays to SAAMCo a fee based on a
percentage of average daily net assets invested through VALICs annuity
products in exchange for services performed. Amounts earned by SAAMCo under
this agreement totaled $6.7 million in 2004 and $5.4 million in 2003 and are
included in other fees in the consolidated statement of income and
comprehensive income.SAAMCo and VALIC have an agreement pursuant to which SAAMCo pays a fee based on a
percentage of each funds average daily net assets invested through VALICs
annuity products for certain administrative costs incurred by VALIC. Amounts
paid by SAAMCo totaled $1.9 million in 2004 and $1.6 million in 2003 and are
included in other fees in the consolidated statement of income and
comprehensive income. 13




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  4.
    
    RELATED-PARTY MATTERS (Continued)The Company has a support agreement in effect between the Company and AIG (the
Support Agreement), pursuant to which AIG has agreed that AIG will cause the
Company to maintain a policyholders surplus of not less than $1,000,000 or
such greater amount as shall be sufficient to enable the Company to perform its
obligations under any policy issued by it. The Support Agreement also provides
that if the Company needs funds not otherwise available to it to make timely
payment of its obligations under policies issued by it, AIG will provide such
funds at the request of the Company. The Support Agreement is not a direct or
indirect guarantee by AIG to any person of any obligations of the Company. AIG
may terminate the Support Agreement with respect to outstanding obligations of
the Company only under circumstances where the Company attains, without the
benefit of the Support Agreement, a financial strength rating equivalent to
that held by the Company with the benefit of the Support Agreement.
Policyholders have the right to cause the Company to enforce its rights against
AIG and, if the Company fails or refuses to take timely action to enforce the
Support Agreement or if the Company defaults in any claim or payment owed to
such policyholder when due, have the right to enforce the Support Agreement
directly against AIG.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.American Home does not publish financial statements prepared on the basis of
U.S. generally accepted accounting principles, although it files statutory
annual and quarterly reports with the New York State Insurance Department,
where such reports are available to the public. AIG is a reporting company
under the Securities Exchange Act of 1934, and files annual reports on Form
10-K and quarterly reports on Form 10-Q, which are available from the
Securities and Exchange Commission.5.
    
    SEGMENT INFORMATIONAs of January 1, 2004, the Company began conducting its business through two
business segments, annuity operations and asset management operations. Prior
to January 1, 2004, the Company conducted its business through one segment:
annuity operations. Annuity operations consists of the sale and administration
of deposit-type insurance contracts, including fixed and variable annuities,
universal life insurance contracts and GICs. Asset management operations,
which includes the management, distribution and administration of mutual funds, 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. 14




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  5.
    
    SEGMENT INFORMATION (Continued) AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)THREE MONTHS ENDED
SEPTEMBER 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    91,932
    
    
    $
    
    
    
    $
    91,932Asset management fees
    
    
    
    
    
    
    23,000
    
    
    
    23,000Universal life insurance policy
fees, net of reinsurance
    
    
    7,481
    
    
    
    
    
    
    
    7,481Surrender charges
    
    
    6,482
    
    
    
    
    
    
    
    6,482Other fees
    
    
    
    
    
    
    3,857
    
    
    
    3,857Total fee income
    
    
    105,895
    
    
    
    26,857
    
    
    
    132,752Investment income
    
    
    87,932
    
    
    
    234
    
    
    
    88,166Net realized investment losses
    
    
    (15,151
    )
    
    
    
    
    
    
    (15,151
    )Total revenues
    
    
    178,676
    
    
    
    27,091
    
    
    
    205,767BENEFITS AND EXPENSES:Interest expense
    
    
    55,823
    
    
    
    523
    
    
    
    56,346General and administrative expenses
    
    
    23,272
    
    
    
    9,377
    
    
    
    32,649Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    21,160
    
    
    
    8,106
    
    
    
    29,266Annual commissions
    
    
    15,114
    
    
    
    
    
    
    
    15,114Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    3,577
    
    
    
    
    
    
    
    3,577Guaranteed benefits, net of
reinsurance recoveries
    
    
    17,314
    
    
    
    
    
    
    
    17,314Total benefits and expenses
    
    
    136,260
    
    
    
    18,006
    
    
    
    154,266Pretax income before cumulative
effect of accounting change
    
    $
    42,416
    
    
    $
    9,085
    
    
    $
    51,501Total assets
    
    $
    29,917,921
    
    
    $
    195,948
    
    
    $
    30,113,869Expenditures for long-lived assets
    
    $
    
    
    
    $
    8
    
    
    $
    8
 15




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  5.
    
    SEGMENT INFORMATION (Continued) AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)THREE MONTHS ENDED
SEPTEMBER 30, 2003:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    72,200
    
    
    $
    
    
    
    $
    72,200Asset management fees
    
    
    
    
    
    
    17,625
    
    
    
    17,625Universal life insurance policy
fees, net of reinsurance
    
    
    8,192
    
    
    
    
    
    
    
    8,192Surrender charges
    
    
    6,895
    
    
    
    
    
    
    
    6,895Other fees
    
    
    
    
    
    
    3,578
    
    
    
    3,578Total fee income
    
    
    87,287
    
    
    
    21,203
    
    
    
    108,490Investment income
    
    
    99,123
    
    
    
    980
    
    
    
    100,103Net realized investment losses
    
    
    (17,940
    )
    
    
    
    
    
    
    (17,940
    )Total revenues
    
    
    168,470
    
    
    
    22,183
    
    
    
    190,653BENEFITS AND EXPENSES:Interest expense
    
    
    59,827
    
    
    
    542
    
    
    
    60,369General and administrative expenses
    
    
    18,992
    
    
    
    7,283
    
    
    
    26,275Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    44,400
    
    
    
    5,869
    
    
    
    50,269Annual commissions
    
    
    11,422
    
    
    
    
    
    
    
    11,422Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    4,022
    
    
    
    
    
    
    
    4,022Guaranteed benefits, net of
reinsurance recoveries
    
    
    14,723
    
    
    
    
    
    
    
    14,723Total benefits and expenses
    
    
    153,386
    
    
    
    13,694
    
    
    
    167,080Pretax income before cumulative
effect of accounting change
    
    $
    15,084
    
    
    $
    8,489
    
    
    $
    23,573Total assets
    
    $
    25,990,038
    
    
    $
    218,902
    
    
    $
    26,208,940Expenditures for long-lived assets
    
    $
    
    
    
    $
    48
    
    
    $
    48
 16




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  5.
    
    SEGMENT INFORMATION (Continued) AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)NINE MONTHS ENDED
SEPTEMBER 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    270,492
    
    
    $
    
    
    
    $
    270,492Asset management fees
    
    
    
    
    
    
    66,521
    
    
    
    66,521Universal life insurance policy
fees, net of reinsurance
    
    
    25,188
    
    
    
    
    
    
    
    25,188Surrender charges
    
    
    19,973
    
    
    
    
    
    
    
    19,973Other fees
    
    
    
    
    
    
    11,049
    
    
    
    11,049Total fee income
    
    
    315,653
    
    
    
    77,570
    
    
    
    393,223Investment income
    
    
    272,708
    
    
    
    549
    
    
    
    273,257Net realized investment losses
    
    
    (24,877
    )
    
    
    
    
    
    
    (24,877
    )Total revenues
    
    
    563,484
    
    
    
    78,119
    
    
    
    641,603BENEFITS AND EXPENSES:Interest expense
    
    
    166,349
    
    
    
    1,621
    
    
    
    167,970General and administrative expenses
    
    
    75,873
    
    
    
    28,409
    
    
    
    104,282Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    90,490
    
    
    
    23,515
    
    
    
    114,005Annual commissions
    
    
    45,245
    
    
    
    
    
    
    
    45,245Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    13,499
    
    
    
    
    
    
    
    13,499Guaranteed benefits, net of
reinsurance recoveries
    
    
    48,240
    
    
    
    
    
    
    
    48,240Total benefits and expenses
    
    
    439,696
    
    
    
    53,545
    
    
    
    493,241Pretax income before cumulative
effect of accounting change
    
    $
    123,788
    
    
    $
    24,574
    
    
    $
    148,362Total assets
    
    $
    29,917,921
    
    
    $
    195,948
    
    
    $
    30,113,869Expenditures for long-lived assets
    
    $
    
    
    
    $
    91
    
    
    $
    91
 17




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)  5.
    
    SEGMENT INFORMATION (Continued) AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)NINE MONTHS ENDED
SEPTEMBER 30, 2003:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    201,179
    
    
    $
    
    
    
    $
    201,179Asset management fees
    
    
    
    
    
    
    46,414
    
    
    
    46,414Universal life insurance policy
fees, net of reinsurance
    
    
    26,540
    
    
    
    
    
    
    
    26,540Surrender charges
    
    
    21,249
    
    
    
    
    
    
    
    21,249Other fees
    
    
    
    
    
    
    10,430
    
    
    
    10,430Total fee income
    
    
    248,968
    
    
    
    56,844
    
    
    
    305,812Investment income
    
    
    295,948
    
    
    
    3,218
    
    
    
    299,166Net realized investment losses
    
    
    (26,570
    )
    
    
    
    
    
    
    (26,570
    )Total revenues
    
    
    518,346
    
    
    
    60,062
    
    
    
    578,408BENEFITS AND EXPENSES:Interest expense
    
    
    179,806
    
    
    
    2,044
    
    
    
    181,850General and administrative expenses
    
    
    59,281
    
    
    
    25,326
    
    
    
    84,607Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    123,477
    
    
    
    16,321
    
    
    
    139,798Annual commissions
    
    
    41,595
    
    
    
    
    
    
    
    41,595Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    15,255
    
    
    
    
    
    
    
    15,255Guaranteed benefits, net of
reinsurance recoveries
    
    
    51,182
    
    
    
    
    
    
    
    51,182Total benefits and expenses
    
    
    470,596
    
    
    
    43,691
    
    
    
    514,287Pretax income before cumulative
effect of accounting change
    
    $
    47,750
    
    
    $
    16,371
    
    
    $
    64,121Total assets
    
    $
    25,990,038
    
    
    $
    218,902
    
    
    $
    26,208,940Expenditures for long-lived assets
    
    $
    
    
    
    $
    2,741
    
    
    $
    2,741
 18




---



##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Managements discussion and analysis of financial condition and results of
operations of AIG SunAmerica Life Assurance Company (formerly Anchor National
Life Insurance Company) (the Company) for the three months and nine months
ended September 30, 2004 and 2003 follows. Certain prior period amounts have
been reclassified to conform to the current periods presentation. In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with
the Securities and Exchange Commission (the SEC). Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as expect, anticipate, believe or words of similar
import generally involve forward-looking statements. Without limiting the
foregoing, forward-looking statements include statements which represent the
Companys beliefs concerning future levels of sales and redemptions of the
Companys products, investment spreads and yields, or the earnings and
profitability of the Companys activities. Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Companys control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing, competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Companys investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information. CRITICAL ACCOUNTING POLICIES The Company considers its most critical accounting policies those policies
with respect to valuation of certain financial instruments, amortization of
deferred acquisition costs and other deferred expenses and the reserve for
guaranteed benefits. In the implementation of each of the aforementioned
policies, management is required to exercise its judgment on both a
quantitative and qualitative basis. Further explanation of how management
exercises that judgment follows. VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $35.5 million at
September 30, 2004. In determining if and when a decline in fair value below
amortized cost is other than temporary, the Company evaluates at each reporting
period the market conditions, offering prices, trends of earnings, price
multiples, and other key measures for investments in debt and equity
securities. In particular, for debt securities, the Company assesses the
probability that all amounts due are collectible according to the contractual
terms of the obligation. When such a decline in value is deemed to be other
than temporary, the Company recognizes an impairment loss in the current period
operating results to the extent of the decline (See also discussion within
Capital Resources and Liquidity herein). Securities in the Companys portfolio with a carrying value of
approximately $892.1 million at September 30, 2004 do not have readily
determinable market prices. For these securities, the Company estimates the
fair value with internally prepared valuations (including those based on
estimates of future profitability).Otherwise, the Company uses its most
recent purchases and sales of similar unquoted securities, independent broker
quotes or comparison to similar securities with quoted prices when possible to
estimate the fair value of those securities. All such securities are
classified as available for sale. The Companys ability to liquidate its
positions in these securities will be impacted to a significant degree by the
lack of an actively traded market, and the Company may not be able 19




---



##### Table of Contents



to dispose of these investments in a timely manner. Although the Company
believes its estimates reasonably reflect the fair value of those securities,
the key assumptions about the risk-free interest rates, risk premiums,
performance of underlying collateral, if any, and other factors may not reflect
those of an active market. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES:
Approximately 79% of the amortization of deferred acquisition costs (DAC) and
other deferred expenses was attributed to policy acquisition costs deferred by
the annuity operations and 21% was attributed to the distribution costs
deferred by the asset management operations. For the annuity operations, the
Company amortizes DAC and other deferred
expenses based on a percentage of expected gross profits (EGPs) over the life
of the underlying policies over the estimated lives of the fund deposits on a
straight-line basis. EGPs are computed based on assumptions related to the
underlying policies written, including their anticipated duration, the growth
rate of the separate account assets (with respect to variable annuities) or
general account assets (with respect to fixed annuities, fixed options of
variable annuities and universal life contracts) supporting the annuity
obligations, costs of providing policy guarantees and the level of expenses
necessary to maintain the policies. The Company adjusts amortization of DAC
and other deferred expenses (a DAC unlocking) when current or estimates of
future gross profits to be realized from its annuity policies are revised.
Approximately 96% of the DAC balance attributed to annuity operations at
September 30, 2004 related to variable annuity products and 4% related to fixed
annuity and universal life products. DAC amortization on annuities is sensitive to surrender rates, claims
costs, and the actual and assumed future growth rate of the assets supporting
the Companys obligations under annuity policies. With respect to fixed
annuities, the growth rate depends on the yield on the general account assets
supporting those annuities. With respect to variable annuities, the growth
rate depends on the performance of the investment options available under the
annuity contract and the allocation of assets among these various investment
options. The assumption the Company uses for the long-term annual net growth of the
separate account assets in the determination of DAC amortization with respect
to its variable annuity policies is 10% (the long-term growth rate
assumption). The Company uses a reversion to the mean methodology that
allows it to maintain this 10% long-term growth rate assumption, while also
giving consideration to the effect of short-term swings in the equity markets.
For example, if performance was 15% during the first year following the
introduction of a product, the DAC model would assume that market returns for
the following five years (the short-term growth rate assumption) would be
approximately 9%, resulting in an average annual growth rate of 10% during the
life of the product. Similarly, following periods of below 10% performance,
the model will assume a short-term growth rate higher than 10%. A DAC
unlocking will occur if management deems the short-term growth rate assumption
(i.e., the growth rate required to revert to the mean 10% growth rate over a
five-year period) to be unreasonable. The use of a reversion to the mean
assumption is common within the industry; however, the parameters used in the
methodology are subject to judgment and vary within the industry. For the asset management operations, the Company defers distribution costs
that are directly related to the sale of mutual funds which have a 12b-1
distribution plan and/or a contingent deferred sales charge feature,
(collectively, Distribution Fee Revenue). These costs are amortized on a
straight-line basis, adjusted for redemptions, over a period ranging from one
year to eight years depending on share class. The carrying value of the
deferred asset is subject to continuous review based on projected Distribution
Fee Revenue. Amortization of deferred distribution costs is increased if at
any reporting period the value of the deferred amount exceeds the projected
Distribution Fee Revenue. The projected Distribution Fee Revenue is sensitive
to estimated future withdrawal rates and the rates of market return.
Management uses historical activity to estimate future withdrawal rates and
average annual performance of the equity markets to estimate the rates of
market return. RESERVE FOR GUARANTEED BENEFITS: Pursuant to the adoption of Statement of
Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1)
on January 1, 2004, the Company is required to recognize a liability for
guaranteed minimum death benefits (GMDB) and other guaranteed benefits. In
calculating the projected liability, five thousand stochastically generated
investment performance scenarios were developed using the Companys best
estimates. These assumptions included, among others, mean equity return and
volatility, mortality rates and lapse rates. The estimation of cash flow and
the determination of the assumptions used require judgment, which can, at
times, be subjective. 20




---



##### Table of Contents



Several of the guaranteed benefits are sensitive to equity market
conditions. The Company uses the purchase of reinsurance and capital market
hedging strategies to mitigate the risk of paying benefits in excess of account
values as a result of significant downturns in equity markets. Risk mitigation
may or may not reduce the volatility of net income resulting from equity market
volatility. Reinsurance or hedges are secured when the cost is less than the
risk reduction. The Company expects to use either additional reinsurance or
capital market hedges for risk mitigation on an opportunistic basis. Despite
the purchase of reinsurance or hedges, the reinsurance or hedge secured may be
inadequate to completely offset the effects of changes in equity markets. RESULTS OF OPERATIONS NET INCOME totaled $43.1 million in the third quarter of 2004, compared
with $18.2 million in the third quarter of 2003. For the nine months ended
September 30, 2004, net income amounted to $50.0 million, compared to $49.4
million in 2003. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of SOP 03-1 on January 1, 2004. The Company recorded a loss of $62.6 million,
net of tax, which is recognized in the consolidated statement of income and
comprehensive income as a cumulative effect of accounting change for the nine
months ended September 30, 2004. PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $51.5
million in the third quarter of 2004, compared with $23.6 million in the third
quarter of 2003. For the nine months, pretax income before cumulative effect
of accounting change totaled $148.4 million in 2004, compared to $64.1 million
in 2003. The increase in both the third quarter and the nine months of 2004
was primarily due to higher variable annuity and asset management fee income
and decreased amortization of deferred acquisition costs and other
deferred expenses partially offset by
lower investment income and higher general and administrative expenses. INCOME TAX EXPENSE totaled $8.4 million in the third quarter of 2004, $5.4
million in the third quarter of 2003, $35.8 million in the nine
months of 2004 and $14.7 million in the nine months of 2003, representing
effective tax rates of 16%, 23%, 24% and 23%, respectively. The decrease in
the third quarter of 2004 results from the recognition of certain tax credits
and a decrease in state taxes. BUSINESS SEGMENTS Effective January 1, 2004, SunAmerica Life Insurance Company (the
Parent) contributed to the Company 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). This
contribution increased the Companys shareholders equity by approximately
$99.1 million (see Note 1 of Notes to Consolidated Financial Statements).
Effective January 1, 2004, the Companys earnings include the asset management
operations of SAAMCo, SACS and SFS. Prior year results have been restated to
account for this contribution as if it had occurred at the beginning of the
earliest period presented. The Company has two business segments: annuity operations and asset
management operations. The annuity operations consist of the sale and
administration of deposit-type insurance contracts, such as variable and fixed
annuities, universal life insurance and guaranteed investment contracts. The Company focuses
primarily on the marketing of variable annuity products. The variable annuity
products offer investors a broad spectrum of fund alternatives, with a choice
of investment managers, as well as guaranteed fixed-rate account options. The
Company earns fee income on investments in the variable account options and net
investment spread on the fixed-rate account options. The asset management operations are conducted by the Companys registered
investment advisor subsidiary, SAAMCo, and its wholly owned distributor, SACS,
and its wholly owned servicing administrator, SFS. These companies earn fee
income by managing, distributing and administering a diversified family of
mutual funds, managing certain subaccounts offered within the Companys
variable annuity products and providing professional 21




---



##### Table of Contents



management of individual, corporate and pension plan portfolios. ANNUITY OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $42.4
million in the third quarter of 2004, compared with $15.1 million in the third
quarter of 2003. For the nine months, pretax income before cumulative effect
of accounting change totaled $123.8 million in 2004, compared to $47.8 million
in 2003. The increase in 2004 compared to 2003 was primarily due to higher
variable annuity policy fee income and lower amortization of deferred
acquisition costs and other deferred expenses partially offset by higher general and administrative and
other expenses. NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment
income earned on invested assets less interest credited to fixed annuity
contracts, fixed accounts of variable annuity contracts, universal life
insurance contracts and guaranteed investment contracts is a key measurement
used by the Company in evaluating the profitability of its business.
Accordingly, the Company presents an analysis of net investment spread because
the Company has determined this measure to be useful and meaningful. In evaluating its investment yield and net investment spread, the Company
calculates average invested assets using the amortized cost of bonds, notes and
redeemable preferred stocks. This basis does not include unrealized gains and
losses, which are reflected in the carrying value (i.e., fair value) of those
investments pursuant to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. In the
calculation of average invested assets, the Company excludes cash collateral
received from a securities lending program, which is offset by a securities
lending payable in the same amount. The Company participates in a securities
lending program with an affiliated agent, pursuant to which it lends its
securities and primarily takes cash as collateral with respect to the
securities lent. Participation in securities lending agreements provides
additional net investment income for the Company, resulting from investment
income earned on the collateral, less interest paid on the securities lending
agreements and the related management fees paid to an affiliate to administer
the program. 22




---



##### Table of Contents



An analysis of net investment spread and a reconciliation to pretax income
before cumulative effect of accounting change is presented in the following
table: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Investment income
    
    $
    87,932
    
    
    $
    99,123
    
    
    $
    272,708
    
    
    $
    295,948Interest credited to fixed
annuity contracts and fixed
accounts of variable annuity
contracts
    
    
    (35,799
    )
    
    
    (38,482
    )
    
    
    (106,606
    )
    
    
    (116,575
    )Interest credited to universal
life insurance contracts
    
    
    (18,474
    )
    
    
    (19,303
    )
    
    
    (55,479
    )
    
    
    (57,142
    )Interest credited to guaranteed
investment contracts
    
    
    (1,550
    )
    
    
    (2,042
    )
    
    
    (4,264
    )
    
    
    (6,089
    )Net investment spread
    
    
    32,109
    
    
    
    39,296
    
    
    
    106,359
    
    
    
    116,142Net realized investment losses
    
    
    (15,151
    )
    
    
    (17,940
    )
    
    
    (24,877
    )
    
    
    (26,570
    )Fee income, net of reinsurance
    
    
    105,895
    
    
    
    87,287
    
    
    
    315,653
    
    
    
    248,968General administrative expenses,
net of deferrals
    
    
    (23,272
    )
    
    
    (18,992
    )
    
    
    (75,873
    )
    
    
    (59,281
    )Amortization of DAC and other
deferred expenses
    
    
    (21,160
    )
    
    
    (44,400
    )
    
    
    (90,490
    )
    
    
    (123,477
    )Annual commissions
    
    
    (15,114
    )
    
    
    (11,422
    )
    
    
    (45,245
    )
    
    
    (41,595
    )Claims on UL contracts, net of
reinsurance recoveries
    
    
    (3,577
    )
    
    
    (4,022
    )
    
    
    (13,499
    )
    
    
    (15,255
    )Guaranteed benefits, net of
reinsurance recoveries
    
    
    (17,314
    )
    
    
    (14,723
    )
    
    
    (48,240
    )
    
    
    (51,182
    )Pretax income before cumulative
effect of accounting change
    
    $
    42,416
    
    
    $
    15,084
    
    
    $
    123,788
    
    
    $
    47,750
 Net investment spread totaled $32.1 million in the third quarter of 2004,
compared to $39.3 million in the third quarter of 2003. These amounts equal
2.06% on average invested assets (computed on a daily basis) of $6.23 billion
in the third quarter of 2004 and 2.35% on average invested assets of $6.69
billion in the third quarter of 2003. For the nine months, net investment
spread totaled $106.4 million in 2004 and $116.1 million in 2003, representing
2.27% of average invested assets of $6.25 billion in 2004 and 2.30% of average
invested assets of $6.72 billion in 2003 on an annualized basis. 23




---



##### Table of Contents



The components of net investment spread were as follows (percentages
represent annualized rates): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net investment spread
    
    $
    32,109
    
    
    $
    39,296
    
    
    $
    106,359
    
    
    $
    116,142Average invested assets
    
    
    6,225,262
    
    
    
    6,686,235
    
    
    
    6,254,328
    
    
    
    6,718,648Average interest-bearing liabilities
    
    
    5,966,369
    
    
    
    6,440,801
    
    
    
    5,986,790
    
    
    
    6,465,731Yield on average invested assets
    
    
    5.65
    %
    
    
    5.93
    %
    
    
    5.81
    %
    
    
    5.87
    %Rate paid on average
interest-bearing liabilities
    
    
    3.74
    
    
    
    3.72
    
    
    
    3.70
    
    
    
    3.71Difference between yield and
interest rate paid
    
    
    1.91
    %
    
    
    2.21
    %
    
    
    2.11
    %
    
    
    2.16
    %Net investment spread as a
percentage of average invested
assets
    
    
    2.06
    %
    
    
    2.35
    %
    
    
    2.27
    %
    
    
    2.30
    %
 The decline in average invested assets resulted primarily from net
exchanges from fixed accounts into the separate accounts of variable annuity
contracts, partially offset by sales of the fixed account options of the
Companys variable annuity products. Sales of fixed annuities and fixed
annuity options (Fixed Annuity Deposits) and renewal deposits on its
universal life product totaled $323.1 million in the third quarter of 2004,
$389.3 million in the third quarter of 2003, $1.12 billion in the nine months
of 2004 and $1.22 billion in the nine months of 2003, and are largely deposits
for the fixed account options of variable annuities. On an annualized basis,
Fixed Annuity Deposits represent 22%, 25%, 25% and 27%, respectively, of the related
reserve balances at the beginning of the respective periods. Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. Average invested assets exceeded average
interest-bearing liabilities by $258.9 million in the third quarter of 2004,
compared with $245.4 million in the third quarter of 2003. For the nine
months, average invested assets exceeded average interest-bearing liabilities
by $267.5 million in 2004, compared with $252.9 million in 2003. The
difference between the Companys yield on average invested assets and the rate
paid on average interest-bearing liabilities was 1.91% in the third quarter of
2004, 2.21% in the third quarter of 2003, 2.11% in the nine months of 2004 and
2.16% in the nine months of 2003. Investment income (and the related yields on average invested assets)
totaled $87.9 million (5.65%) in the third quarter of 2004, $99.1 million
(5.93%) in the third quarter of 2003, $272.7 million (5.81%) in the nine months
of 2004 and $295.9 million (5.87%) in the nine months of 2003. The decrease in
the investment yield primarily reflects the historically low prevailing
interest rate environment that has persisted throughout 2003 and 2004, as well
as $1.7 million in losses from the mark to market of the S&P 500 put options
and the GMAV embedded derivatives in the third quarter of 2004, compared to a
$1.5 million income in the third quarter of 2003. Excluding the impact of the
put options and embedded derivatives, investment income would have been $89.6
million (5.76%) and $97.6 (5.84%) in the third quarters of 2004 and 2003,
respectively. Expenses incurred to manage the investment portfolio amounted to
$0.5 million in the third quarter of 2004, $0.6 million in the third quarter of
2003, $1.8 million in the nine months of 2004 and $1.7 million in the nine
months of 2003. These expenses are included as a reduction of investment
income in the consolidated statement of income and comprehensive income. Interest expense totaled $55.8 million in the third quarter of 2004 and
$59.8 million in the third quarter of 2003. For the nine months, interest
expense aggregated $166.3 million in 2004, compared with $179.8 million in
2003. The average rate paid on all interest-bearing liabilities was 3.74% in
the third quarter of 2004, compared with 3.72% in the third quarter of 2003.
For the nine months, the average rate paid on all interest-bearing liabilities
was 3.70% in 2004 and 3.71% in 2003. Interest-bearing liabilities averaged
$5.97 billion during the third quarter of 2004, $6.44 billion during the third
quarter of 2003, $5.99 billion during the nine months of 2004 and $6.47 billion
during the nine months of 2003. 24




---



##### Table of Contents



NET REALIZED INVESTMENT LOSSES totaled $15.2 million in the third quarter
of 2004, compared with $17.9 million in the third quarter of 2003 and include
impairment writedowns of $15.4 million and $20.3 million, respectively. For
the nine months, net realized investment losses totaled $24.9 million in 2004,
compared with $26.6 million in 2003 and include impairment writedowns of $17.9
million and $35.9 million, respectively. Thus, net realized gains from sales
and redemptions of investments totaled $0.2 million in the third quarter of
2004 and $2.4 million in the third quarter of 2003. For the nine months, net
realized losses from sales and redemptions of investments totaled $7.0 million
in 2004, compared to net realized gains of $9.3 million in 2003. The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $320.3 million in the third quarter of 2004, $265.4 million in the
third quarter of 2003, $1.50 billion in the nine months of 2004 and $1.62
billion in the nine months of 2003. Sales of investments result from the
active management of the Companys investment portfolio. Because redemptions
of investments are generally involuntary and sales of investments are made in
both rising and falling interest rate environments, net gains and losses from
sales and redemptions of investments fluctuate from period to period, and
represent 0.01%, 0.14%, 0.15% and 0.17% of average invested assets in the third
quarter of 2004, the third quarter of 2003, the nine months of 2004 and the
nine months of 2003, respectively. Active portfolio management involves the
ongoing evaluation of asset sectors, individual securities within the
investment portfolio and the reallocation of investments from sectors that are
perceived to be relatively overvalued to sectors that are perceived to be
relatively undervalued. The intent of the Companys active portfolio
management is to maximize total returns on the investment portfolio, taking
into account credit, option, liquidity and interest-rate risk. Impairment writedowns include $15.4 million, $20.3 million, $17.9 million
and $35.9 million of provisions principally applied to bonds in the third
quarter of 2004, the third quarter of 2003, the nine months of 2004 and the
nine months of 2003, respectively. On an annualized basis, impairment
writedowns represent 0.99%, 1.21%, 0.38% and 0.71% of average invested assets
in the respective periods. For the twenty quarters ended September 30, 2004,
impairment writedowns as an annualized percentage of average invested assets
have ranged from 0.07% to 1.95% and have averaged 0.69%. Such writedowns are
based upon estimates of the fair value of invested assets and recorded when
declines in the value of such assets are considered to be other than temporary.
Actual realization will be dependent upon future events. VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are based on the market
value of assets in separate accounts supporting variable annuity contracts.
Such fees totaled $91.9 million in the third quarter of 2004 and $72.2 million
in the third quarter of 2003 and are net of reinsurance premiums of $6.7
million and $8.9 million, respectively. For the nine months, variable annuity
policy fees totaled $270.5 million in 2004 and $201.2 million in 2003 and are
net of reinsurance premiums of $21.7 million and $23.0 million, respectively.
The increased fees in 2004 as compared to 2003 primarily reflect the improved
equity market conditions in early 2004 and the latter part of 2003, and the
resulting favorable impact on market values of the assets in the separate
accounts. On an annualized basis, variable annuity policy fees represent 1.8%,
1.7%, 1.8% and 1.7% of average variable annuity assets in the third quarters
and nine months of 2004 and 2003, respectively. Variable annuity assets
averaged $20.13 billion, $16.88 billion, $20.03 billion and $15.68 billion
during the respective periods. Variable annuity deposits, which exclude
deposits allocated to the fixed accounts of variable annuity products, totaled
$586.0 million in the third quarter of 2004 and $484.1 million in the third
quarter of 2003. For the nine months, variable annuity deposits totaled $2.09
billion in 2004, compared with $1.21 billion in 2003. On an annualized basis,
these amounts represent 11%, 12%, 15% and 11% of variable annuity reserves at
the beginning of the respective periods. The increase in variable annuity
deposits in the nine months of 2004 reflected increased demand for variable
annuity products due to the improved equity market conditions in early 2004 and
the latter part of 2003. Transfers from the fixed accounts of the Companys
variable annuity products to the separate accounts are not classified as
variable annuity deposits. Accordingly, changes in variable annuity deposits
are not necessarily indicative of the ultimate allocation by customers among
fixed and variable account options of the Companys variable annuity products. Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $898.2
million, $863.2 million, $3.17 billion and $2.39 billion in the third quarters
and the nine months of 2004 and 2003, respectively. Such sales primarily
reflect those of the Companys Polaris and Seasons families of variable annuity
products. The Companys variable annuity products are primarily multi-manager
variable annuities that offer investors a choice of several variable funds as
well as a number of 25




---



##### Table of Contents



guaranteed fixed-rate funds. Investors can select from a choice of
several variable funds and up to 7 guaranteed fixed-rate funds, depending on
the product. The increase in Variable Annuity Product Sales for the nine
months reflects the generally improved equity market conditions in early 2004
and the latter part of 2003. The 23% decrease in Variable Annuity Product
Sales in the third quarter of 2004 compared to the prior quarter primarily
reflects generally difficult equity market conditions during the third quarter. The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time,
Federal initiatives are proposed that could affect the taxation of annuities
(see Regulation). UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $7.5
million in the third quarter of 2004 and $8.2 million in the third quarter of
2003 and are net of reinsurance premiums of $9.3 million and $9.1 million,
respectively. For the nine months, universal life insurance policy fees
totaled $25.2 million in 2004 and $26.5 million in 2003 and are net of
reinsurance premiums of $25.7 million and $25.4 million, respectively.
Universal life insurance policy fees consist of mortality charges, up-front
fees earned on deposits received and administrative fees, net of reinsurance
premiums. The administrative fees are assessed based on the number of policies
in force as of the end of each month. The Company acquired its universal life
contracts as part of the acquisition of business from MBL Life Assurance
Corporation on December 31, 1998 and does not actively market such contracts.
Such fees annualized represent 2.0%, 2.1%, 2.2% and 2.2% of average reserves
for universal life insurance contracts in the respective periods. SURRENDER CHARGES on variable annuity and universal life insurance contracts totaled
$6.5 million in the third quarter of 2004 and $6.9 million in the third quarter
of 2003. For the nine months, such surrender charges totaled $20.0 million in
2004 and $21.2 million in 2003. Surrender charge periods range from zero to
nine years from the date a deposit is received. Surrender charges generally
are assessed on withdrawals at declining rates during the first seven or nine
years following receipt of the deposit. GENERAL AND ADMINISTRATIVE EXPENSES totaled $23.3 million in the third
quarter of 2004 and $19.0 million in the third quarter of 2003. For the nine
months, general and administrative expenses totaled $75.9 million in 2004 and
$59.3 million in 2003. The increase in 2004 results from higher information
technology costs and payroll related expenses resulting from higher sales and
the servicing of such additional business. General and administrative expenses
remain closely controlled through a company-wide cost containment program and
continue to represent less than 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES
totaled $21.2 million in the third quarter of 2004, compared to $44.4 million
in the third quarter of 2003. For the nine months, such amortization totaled
$90.5 million in 2004 and $123.5 million in 2003. The prior year included
accelerated amortization due to impairments of certain products and higher than
anticipated surrenders on certain products with features which have been
discontinued. ANNUAL COMMISSIONS totaled $15.1 million in the third quarter of 2004,
compared with $11.4 million in the third quarter of 2003. For the nine months,
annual commissions totaled $45.2 million in 2004 and $41.6 million in 2003.
Annual commissions represent renewal commissions paid quarterly in arrears to
maintain the persistency of certain of the Companys variable annuity
contracts. Substantially all of the Companys currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. The vast majority of the Companys average
balances of its variable annuity products are currently subject to such annual
commissions. CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled
$3.6 million in the third quarter of 2004, compared to $4.0 million in the
third quarter of 2003 and are net of reinsurance recoveries of $5.9 million and
$9.0 million, respectively. For the nine months, such claims totaled $13.5
million in 2004 and $15.3 million in 2003 and are net of reinsurance recoveries
of $28.6 million and $26.8 million, respectively. The change in such claims
resulted principally from changes in mortality experience. GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity
contracts totaled $17.3 million in the third quarter of 2004, compared with
$14.7 million in the third quarter of 2003 and are 26




---



##### Table of Contents



net of reinsurance recoveries of $0.1 million and $1.3 million,
respectively. For the nine months, guaranteed benefits paid or accrued, net of
reinsurance recoveries amounted to $48.2 million in 2004 and $51.2 million in
2003 and are net of reinsurance recoveries of $2.5 million and $7.1 million,
respectively. These guaranteed benefits consist primarily of guaranteed
minimum death benefits as well as immaterial amounts of earnings enhancement
benefits and guaranteed minimum income benefits. These guarantees are
described in more detail in the following paragraphs. The decrease during the
nine months of 2004 reflects the generally improved equity market conditions in
early 2004 and the latter part of 2003. Downturns in the equity markets could
increase these expenses. Guaranteed minimum death benefits (GMDB) are issued on a majority of the
Companys variable annuity products. GMDB provides that, upon the death of a
contract holder, 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 contract holder. The Company
bears the risk that death claims following a decline in the equity markets may
exceed contract holder account balances and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. As
of September 30, 2004, the Company has reinsurance coverage on approximately
30% of in-force contracts with GMDB (calculated based on account value) and
will be ceding only a small number of new contracts through the end of 2004.
The Company does not currently have reinsurance coverage on any contracts to be
sold after December 2004. Reinsurance coverage is subject to limitations such
as caps and deductibles. On January 1, 2004, the Company recorded a liability
for GMDB (see Note 2 of Notes to Consolidated Financial Statements) pursuant to
adoption of a new accounting standard, SOP 03-1. Earnings enhancement benefit (EEB) is a feature the Company offers on
certain variable annuity products. For contract holders who elect the feature,
the EEB provides an additional death benefit amount equal to a fixed percentage
of earnings in the contract, subject to certain maximums. The Company bears
the risk that account values following favorable performance of the financial
markets will result in greater EEB death claims and that the fees collected
under the contract are insufficient to cover the costs of the benefit to be
provided. At September 30, 2004, based on current account value, approximately
8% of in-force contracts include EEB coverage and 86% of the contracts with EEB
are reinsured. Guaranteed minimum income benefit (GMIB) is a feature the Company offers
on certain variable annuity products. This feature provides a minimum fixed
annuity payment guarantee for those contract holders who choose to receive
fixed lifetime annuity payments after a seven, nine, or ten-year waiting period
in their deferred annuity contracts. The Company bears the risk that the
performance of the financial markets will not be sufficient for accumulated
policyholder account balances to support GMIB benefits and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. The majority of the Companys products containing the GMIB
feature have been reinsured. However, the Company does not have reinsurance
coverage on contracts sold after July 2004. As there is a waiting period to
annuitize using the GMIB, there are virtually no
policies eligible to receive this benefit at September 30, 2004. Guaranteed minimum account value (GMAV) is a feature the Company began
offering on certain variable annuity products in the third quarter of 2002. If
available and elected by the contract holder at the time of contract issuance,
this feature guarantees that the account value under the contract will at least
equal the amount of the deposits invested during the first ninety days of the
contract, adjusted for any subsequent withdrawals, at the end of a ten-year waiting period.
The Company bears the risk that protracted under-performance of the financial
markets could result in GMAV benefits being higher than the underlying contract
holder account balance and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. The Company
purchased put options on the S&P 500 index to partially offset this risk.
Changes in the market value of both the GMAV benefit and the put options are
recorded in investment income in the accompanying consolidated statement of
income and comprehensive income. Guaranteed minimum withdrawal benefit (GMWB) is a feature the Company
began offering on certain variable annuity products in May of 2004. If available and elected by the
contract holder at the time of contract issuance, this
feature provides a guaranteed annual withdrawal stream, regardless of market
performance, equal to deposits invested during the first ninety days adjusted for any subsequent withdrawals (Eligible Premium).
These guaranteed annual
withdrawals of up to 10% of Eligible Premium, are available after either a three-year or a
five-year waiting period, as elected by the contract holder at the
time of contract issuance,
without reducing the future amounts guaranteed. If no withdrawals have been
made during the waiting period of 3 or 5 years, the contract holder will 27




---



##### Table of Contents



realize an additional 10% or
20%, respectively, of Eligible Premium after all other amounts
guaranteed under this benefit have been paid. The Company bears the risk that
protracted under-performance of the financial markets could result in GMWB
benefits being higher than the underlying contract holder account balance and
that the fees collected under the contract are insufficient to cover the costs
of the benefit to be provided. The Company is in the process of
implementing a capital market hedging strategy for this feature. As of September 30, 2004, substantially all of the Companys near-term
exposure to guaranteed benefits relates to GMDB and EEB. However, as sales of
products with other guaranteed benefits increase, the Company expects these
newer guarantees to have a potential impact on operating results in periods
when equity market returns are inadequate to support those contractual
guarantees. With respect to its reinsurance agreements, the Company could become
liable for all obligations of the reinsured policies if the reinsurers were to
become unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. Due to the high credit ratings and periodic monitoring of these
ratings of the reinsurers, such risks are considered to be minimal. ASSET MANAGEMENT OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $9.1
million in the third quarter of 2004 compared to an $8.5 million in the third
quarter of 2003. For the nine months, pretax income before cumulative effect
of accounting change amounted to $24.6 million in 2004 and $16.4 million in
2003. The increases in the third quarter and nine months of 2004 from 2003
resulted from increased asset management fees, partially offset by increased
amortization of DAC and other deferred expenses. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SAAMCo. Such fees totaled $23.0 million on average assets managed of
$9.53 billion in the third quarter of 2004 and $17.6 million on average assets
managed of $8.42 billion in the third quarter of 2003. For the nine months,
asset management fees amounted to $66.5 million on average assets managed of
$9.59 billion in 2004 and $46.4 million on average assets managed of $7.88
billion in 2003. The increase in asset management fees is primarily the result
of a higher average asset base and higher margin on account servicing fees.
Mutual fund sales, excluding sales of money market accounts and private
accounts, totaled $466.6 million in the third quarter of 2004, compared to
$572.6 million in the third quarter of 2003. For the nine months, mutual fund
sales amounted to $1.70 billion in 2004 and $1.57 billion in 2003. Redemptions
of mutual funds, excluding redemptions of money market accounts, amounted to
$386.1 million in the third quarter of 2004, $340.8 million in the third
quarter of 2003, $1.13 billion in the nine months of 2004 and $1.11 billion in
the nine months of 2003, which, annualized, represent 20%, 21%, 19% and 25%,
respectively, of average related mutual fund assets. The increase in sales in
the nine months of 2004 principally reflects increasing demand for equity
products, due to generally improved equity market conditions in early 2004 and
the latter part of 2003. The 13% decrease in mutual fund sales in the third
quarter of 2004 compared to the prior quarter primarily reflects generally
difficult equity market conditions during the third quarter. GENERAL AND ADMINISTRATIVE EXPENSES totaled $9.4 million in the third
quarter of 2004, $7.3 million in the third quarter of 2003, $28.4 million in
the nine months of 2004 and $25.3 million in the nine months of 2003. General
and administrative expenses increased in 2004 due primarily to increased costs
associated with higher sales and the servicing of such additional business. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES
includes amortization of distribution costs which totaled $8.1 million in the
third quarter of 2004, compared with $5.9 million in the third quarter of 2003.
For the nine months, such amortization totaled $23.5 million in 2004 and $16.3
million in 2003. The increase in amortization was primarily due to additional
mutual fund sales since the third quarter of 2003 and amortization of the
deferred commissions thereon. 28




---



##### Table of Contents



CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS EQUITY increased to $1.61 billion at September 30, 2004 from
$1.56 billion at December 31, 2003. The increase reflected $50.0 million of
net income partially offset by $3.2 million decrease in unrealized gains, net
of the effect of taxes and DAC, and a $2.5 million dividend to the Parent. INVESTMENTS AND CASH at September 30, 2004 totaled $7.78 billion, compared
with $7.12 billion at December 31, 2003. The Companys invested assets are
managed by an affiliate. The following table summarizes the Companys
portfolio of bonds, notes and redeemable preferred stocks (the Bond
Portfolio) and other investments and cash at September 30, 2004 and December
31, 2003: September 30, 2004
    
    December 31, 2003Fair
    
    Percent of
    
    Fair
    
    Percent ofValue
    
    Portfolio
    
    Value
    
    Portfolio(in thousands, except for percentages)Bond Portfolio:U.S. government securities
    
    $
    30,329
    
    
    
    0.4
    %
    
    $
    19,651
    
    
    
    0.3
    %Mortgage-backed securities
    
    
    1,012,221
    
    
    
    13.0
    
    
    
    1,162,757
    
    
    
    16.3Securities of public utilities
    
    
    325,649
    
    
    
    4.2
    
    
    
    334,959
    
    
    
    4.7Corporate bonds and notes
    
    
    2,926,886
    
    
    
    37.5
    
    
    
    2,845,597
    
    
    
    39.9Redeemable preferred stocks
    
    
    21,550
    
    
    
    0.3
    
    
    
    22,175
    
    
    
    0.3Other debt securities
    
    
    951,239
    
    
    
    12.2
    
    
    
    1,120,661
    
    
    
    15.7Total Bond Portfolio
    
    
    5,267,874
    
    
    
    67.6
    
    
    
    5,505,800
    
    
    
    77.2Mortgage loans
    
    
    675,778
    
    
    
    8.7
    
    
    
    716,846
    
    
    
    10.1Common stocks
    
    
    4,889
    
    
    
    0.1
    
    
    
    727
    
    
    
    0.0Cash and short-term investments
    
    
    261,815
    
    
    
    3.4
    
    
    
    133,105
    
    
    
    1.9Securities lending collateral
    
    
    1,327,722
    
    
    
    17.0
    
    
    
    514,145
    
    
    
    7.2Other
    
    
    251,054
    
    
    
    3.2
    
    
    
    254,010
    
    
    
    3.6Total investments and cash
    
    $
    7,789,132
    
    
    
    100.0
    %
    
    $
    7,124,633
    
    
    
    100.0
    %
 The Companys general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of the Bond Portfolio is available
to be sold in response to changes in market interest rates, changes in relative
value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Companys
need for liquidity and other similar factors. THE BOND PORTFOLIO, which constituted 68% of the Companys total
investment portfolio at September 30, 2004, had an aggregate fair value that
was $152.6 million greater than its amortized cost at September 30, 2004,
compared with $154.6 million at December 31, 2003. At September 30, 2004, the Bond Portfolio had an aggregate fair value of
$5.27 billion and an aggregate amortized cost of $5.12 billion. At September
30, 2004, the Bond Portfolio (excluding $21.6 million of redeemable preferred
stocks) included $5.17 billion of bonds rated by Standard & Poors (S&P),
Moodys Investors Service (Moodys), Fitch (Fitch) or the National
Association of Insurance Commissioners (NAIC), and $71.5 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by
the NAIC. At September 30, 2004, approximately $4.86 billion of the Bond
Portfolio was investment grade, including $1.04 billion of mortgage-backed
securities and U.S. government/agency securities. 29




---



##### Table of Contents



At September 30, 2004, the Bond Portfolio included $383.4 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.3% of the Companys total assets and approximately 4.9% of its
invested assets. Non-investment-grade securities generally provide higher
yields and involve greater risks than investment-grade securities because their
issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment-grade issuers. In addition, the trading
market for these securities is usually more limited than for investment-grade
securities. An economic downturn could produce higher than average issuer
defaults on the non-investment-grade securities, which could cause the
Companys investment returns and net income to decline. At September 30, 2004,
the Companys non-investment-grade bond portfolio consisted of 174 issues with
no single issuer representing more than 10% of the total non-investment-grade
portfolio. These non-investment-grade securities are comprised of bonds
spanning 10 industries with 22% of these assets concentrated in
telecommunications, 19% concentrated in utilities, 14% concentrated in
financial services and 10% concentrated in noncyclical consumer products. No
other industry concentration constituted more than 10% of these assets. 30




---



##### Table of Contents



The table below summarizes the Companys rated bonds by rating
classification as of September 30, 2004. RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands) Issues not rated by S&P/Moody's/Issues rated by S&P/Moody's/Fitch
    
    Fitch, by NAIC category
    
    TotalPercent oftotalS&P/Moody's/Fitch
    
    Amortized
    
    Estimated
    
    NAIC
    
    Amortized
    
    Estimated
    
    Amortized
    
    Estimated
    
    investedCategory (1)
    Cost
    fair value
    
    category(2)
    
    Cost
    
    fair value
    
    Cost
    
    fair value
    
    assetsAAA+ to A-
(Aaa to A3)
[AAA to A-]
    
    $
    2,911,087
    
    
    $
    2,999,279
    
    
    
    1
    
    
    $
    297,954
    
    
    $
    305,611
    
    
    $
    3,209,041
    
    
    $
    3,304,890
    
    
    
    42.47
    %BBB+ to BBB-
(Baa to Baa3)
[BBB+ to BBB-]
    1,224,744
    
    
    
    1,260,101
    
    
    
    2
    
    
    
    290,260
    
    
    
    297,926
    
    
    
    1,515,004
    
    
    
    1,558,027
    
    
    
    20.02
    %BB+ to BB-
(Bal to Ba3)
[BB+ to BB-]
    
    
    139,007
    
    
    
    144,124
    
    
    
    3
    
    
    
    36,450
    
    
    
    36,885
    
    
    
    175,457
    
    
    
    181,009
    
    
    
    2.33
    %B+ to B-
(Bl to B3)
[B+ to B-]
    
    
    147,917
    
    
    
    152,185
    
    
    
    4
    
    
    
    1,600
    
    
    
    2,028
    
    
    
    149,517
    
    
    
    154,213
    
    
    
    1.98
    %CCC+ to CCC-
(Caal to Caa3)
[CCC+ to CCC-]
    31,919
    
    
    
    29,743
    
    
    
    5
    
    
    
    7,306
    
    
    
    6,695
    
    
    
    39,225
    
    
    
    36,438
    
    
    
    0.47
    %CC to D
(Ca to C)
[CC to D]
    
    
    2,686
    
    
    
    5,921
    
    
    
    6
    
    
    
    4,202
    
    
    
    5,826
    
    
    
    6,888
    
    
    
    11,747
    
    
    
    0.15
    %TOTAL RATED
ISSUES
    
    $
    4,457,360
    
    
    $
    4,591,353
    
    
    
    
    
    
    $
    637,772
    
    
    $
    654,971
    
    
    $
    5,095,132
    
    
    $
    5,246,324
 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 $71.5 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines. 31




---



##### Table of Contents



The valuation of invested assets involves obtaining a fair value for each
security. The source for the fair value is generally from market exchanges,
with the exception of non-traded securities. Another aspect of valuation pertains to impairment. As a matter of
policy, the determination that a security has incurred an other-than-temporary
decline in value and the amount of any loss recognition requires the judgment
of the Companys management and a continual review of its investments. In
general, a security is considered a candidate for impairment if it meets any of
the following criteria:  
    
    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. Once a security has been identified as potentially impaired, the amount of
such impairment is determined by reference to that securitys contemporaneous
market price. The Company has the ability to hold any security to its stated maturity.
Therefore, the decision to sell reflects the judgment of the Companys
management that the security sold is unlikely to provide, on a relative value
basis, as attractive a return in the future as alternative securities entailing
comparable risks. With respect to distressed securities, the sale decision
reflects managements judgment that the risk-discounted anticipated ultimate
recovery is less than the value achieved on sale. As a result of these policies, the Company recorded pretax impairment
writedowns of $17.9 million and $35.9 million in the nine months of 2004 and
2003, respectively. No individual impairment loss, net of DAC and taxes,
exceeded 10% of the Companys net income for the nine months ended September
30, 2004. Excluding the impairments noted above, the changes in fair value for the
Companys Bond Portfolio, which constitutes the vast majority of the Companys
investments, were recorded as a component of other comprehensive income in
shareholders equity as unrealized gains or losses. At September 30, 2004, the fair value of the Companys Bond Portfolio
aggregated $5.27 billion. Of this aggregate fair value, approximately 0.3%
represented securities trading at or below 75% of amortized cost. The impact
of unrealized losses on net income will be further mitigated upon realization,
because realization will result in current decreases in the amortization of
certain deferred acquisition costs and decreases in income taxes. At September 30, 2004, approximately $4.20 billion, at amortized cost, of
the Bond Portfolio had a fair value of $4.39 billion resulting in an aggregate
unrealized gain of $188.1 million. At September 30, 2004, approximately $915.8
million, at amortized cost, of the Bond Portfolio had a fair value of $880.3
million resulting in an aggregate unrealized loss of $35.5 million. One issuer
accounted for 11% of unrealized losses. No other single issuer accounted for
more than 10% of unrealized losses. Approximately 27%, 25% and 12% of
unrealized losses were from the financial services, transportation and
noncyclical consumer products industries, respectively. No other industry
accounted for more than 10% of unrealized losses. 32




---



##### Table of Contents



The amortized cost of the Bond Portfolio in an unrealized loss position at
September 30, 2004, by contractual maturity, is shown below. Amortized Cost(in thousands)Due in one year or less
    
    $
    11,739Due after one year through five years
    
    
    323,510Due after five years through ten years
    
    
    382,726Due after ten years
    
    
    197,792Total
    
    $
    915,767
 The aging of the Bond Portfolio in an unrealized loss position at
September 30, 2004 is shown below: (dollars
    

Less
than or Equal to 20%
    

Greater
than 20% to 50%
    

Greater
than 50%in thousands)
    
    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
    
    $
    441,204
    
    
    $
    (7,377
    )
    
    
    68
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    441,204
    
    
    $
    (7,377
    )
    
    
    687-12
    
    
    189,106
    
    
    
    (5,305
    )
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,106
    
    
    
    (5,305
    )
    
    
    23>12
    
    
    180,470
    
    
    
    (8,834
    )
    
    
    25
    
    
    
    14,714
    
    
    
    (4,112
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,184
    
    
    
    (12,946
    )
    
    
    27Total
    
    $
    810,780
    
    
    $
    (21,516
    )
    
    
    116
    
    
    $
    14,714
    
    
    $
    (4,112
    )
    
    
    2
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    825,494
    
    
    $
    (25,628
    )
    
    
    118Below
Investment
Grade Bonds0-6
    
    $
    34,796
    
    
    $
    (2,442
    )
    
    
    28
    
    
    $
    175
    
    
    $
    (61
    )
    
    
    1
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    34,971
    
    
    $
    (2,503
    )
    
    
    297-12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    620
    
    
    
    (162
    )
    
    
    1
    
    
    
    599
    
    
    
    (469
    )
    
    
    1
    
    
    
    1,219
    
    
    
    (631
    )
    
    
    2>12
    
    
    44,854
    
    
    
    (3,401
    )
    
    
    9
    
    
    
    9,229
    
    
    
    (3,313
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,083
    
    
    
    (6,714
    )
    
    
    11Total
    
    $
    79,650
    
    
    $
    (5,843
    )
    
    
    37
    
    
    $
    10,024
    
    
    $
    (3,536
    )
    
    
    4
    
    
    $
    599
    
    
    $
    (469
    )
    
    
    1
    
    
    $
    90,273
    
    
    $
    (9,848
    )
    
    
    42Total
Bonds0-6
    
    $
    476,000
    
    
    $
    (9,819
    )
    
    
    96
    
    
    $
    175
    
    
    $
    (61
    )
    
    
    1
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    476,175
    
    
    $
    (9,880
    )
    
    
    977-12
    
    
    189,106
    
    
    
    (5,305
    )
    
    
    23
    
    
    
    620
    
    
    
    (162
    )
    
    
    1
    
    
    
    599
    
    
    
    (469
    )
    
    
    1
    
    
    
    190,325
    
    
    
    (5,936
    )
    
    
    25>12
    
    
    225,324
    
    
    
    (12,235
    )
    
    
    34
    
    
    
    23,943
    
    
    
    (7,425
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249,267
    
    
    
    (19,660
    )
    
    
    38Total
    
    $
    890,430
    
    
    $
    (27,359
    )
    
    
    153
    
    
    $
    24,738
    
    
    $
    (7,648
    )
    
    
    6
    
    
    $
    599
    
    
    $
    (469
    )
    
    
    1
    
    
    $
    915,767
    
    
    $
    (35,476
    )
    
    
    160
 In 2004, the pretax realized losses incurred with respect to the sale of
fixed securities in the Bond Portfolio were $6.9 million. The aggregate fair
value of securities sold was $129.0 million, which was approximately 91.0% of
amortized cost. The average period of time that securities sold at a loss
during 2004 were trading continuously at a price below amortized cost was
approximately 21 months. The valuation for the Companys Bond Portfolio comes from market exchanges
or dealer quotations, with the exception of non-traded securities. The Company
considers non-traded securities to mean certain fixed income investments and
certain structured securities. The aggregate fair value of these securities at
September 30, 2004 was approximately $892.1 million. 33




---



##### Table of Contents



The methodology used to estimate fair value of non-traded fixed income
investments is by reference to traded securities with similar attributes and
using a matrix pricing methodology. This technique takes into account such
factors as the industry, the securitys rating and tenor, its coupon rate, its
position in the capital structure of the issuer and other relevant factors. The change in fair value is recognized
as a component of other comprehensive income. For certain structured securities, the carrying value is based on an
estimate of the securitys future cash flows pursuant to the requirements of
Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets. The change in carrying value is recognized in income. Each of these investment categories is regularly tested to determine if
impairment in value exists. Various valuation techniques are used with respect
to each category in this determination. Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $292.5 million at September 30, 2004. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
September 30, 2004, Secured Loans consisted of $197.1 million of privately
traded securities and $95.4 million of publicly traded securities. These
Secured Loans are composed of loans to 62 borrowers spanning 10 industries,
with 28% of these assets concentrated in utilities, 17% concentrated in
communications, 14% concentrated in transportation, 11% concentrated in
noncyclical consumer products and 10% concentrated in cyclical consumer
products. No other industry constituted more than 10% of these assets. While the trading market for the Companys privately traded Secured Loans
is more limited than for publicly traded issues, participation in these
transactions has enabled the Company to improve its investment yield. As a
result of restrictive financial covenants, these Secured Loans involve greater
risk of technical default than do publicly traded investment-grade securities.
However, management believes that the risk of loss upon default for these
Secured Loans is mitigated by such financial covenants and the collateral
values underlying the Secured Loans. The Companys Secured Loans are rated by
S&P, Moodys, Fitch, the NAIC or by the Company, pursuant to comparable
statutory ratings guidelines established by the NAIC. MORTGAGE LOANS aggregated $675.8 million at September 30, 2004 and
consisted of 100 commercial first mortgage loans with an average loan balance
of approximately $6.8 million, collateralized by properties located in 30
states. Approximately 37% of this portfolio was office, 16% was manufactured
housing, 15% was multifamily residential, 11% was industrial, 11% was hotels,
and 10% was other types. At September 30, 2004, approximately 25%, 12% and 11%
of this portfolio were secured by properties located in California, New York
and Michigan, respectively. No more than 10% of this portfolio was secured by
properties located in any other single state. At September 30, 2004, 14
mortgage loans have an outstanding balance of $10 million or more, which
collectively aggregated approximately 49% of this portfolio. At September 30,
2004, approximately 35% of the mortgage loan portfolio consisted of loans with
balloon payments due before October 1, 2007. During 2004 and 2003, loans
delinquent by more than 90 days, foreclosed loans and structured loans have not
been significant in relation to the total mortgage loan portfolio. Substantially all of the mortgage loan portfolio has been originated by
the Company under its underwriting standards. Commercial mortgage loans on
properties such as offices, hotels and shopping centers generally represent a
higher level of risk than do mortgage loans secured by multifamily residences.
This greater risk is due to several factors, including the larger size of such
loans and the more immediate effects of general economic conditions on these
commercial property types. However, due to the Companys underwriting
standards, the Company believes that it has prudently managed the risk
attributable to its mortgage loan portfolio while maintaining attractive
yields. SECURITIES LENDING COLLATERAL totaled $1.33 billion at September 30, 2004,
compared to $514.1 million at December 31, 2003, and consisted of cash
collateral invested in highly rated short-term securities received in
connection with the Companys securities lending program. Although the cash
collateral is currently invested in highly rated short-term securities, the
applicable collateral agreements permit the cash collateral to be invested in
highly liquid short and long-term investment portfolios. At least 75% of the
portfolios short-term investments must have external issue ratings of A-1/P-1,
one of the highest ratings for short-term credit quality. 34




---



##### Table of Contents



Long-term
investments include corporate notes with maturities of five years or less and a
credit rating by at least two nationally recognized statistical rating
organizations (NRSRO), with no less than a S&P rating of A or equivalent by
any other NRSRO. ASSET-LIABILITY MATCHING is utilized by the Company in an effort to
minimize the risks of interest rate fluctuations and disintermediation (i.e.
the risk of being forced to sell investments during unfavorable market
conditions). The Company believes that its fixed-rate liabilities should be
backed by a portfolio principally composed of fixed-rate investments that
generate predictable rates of return. The Company does not have a specific
target rate of return. Instead, its rates of return vary over time depending
on the current interest rate environment, the slope of the yield curve, the
spread at which fixed-rate investments are priced over the yield curve, default
rates and general economic conditions. Its portfolio strategy is constructed
with a view to achieve adequate risk-adjusted returns consistent with its
investment objectives of effective asset-liability matching, liquidity and
safety. The Companys fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 77% of the
Companys fixed annuity, universal life and GIC reserves had surrender
penalties or other restrictions at September 30, 2004. As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used interest rate scenarios. With the results of these
computer simulations, the Company can measure the potential gain or loss in
fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
and cash flows of the fixed-rate assets to that of its fixed-rate liabilities.
The fixed-rate assets in the Companys asset-liability modeling include: cash
and short-term investments; bonds, notes and redeemable preferred stocks;
mortgage loans; policy loans; and investments in limited partnerships that
invest primarily in fixed-rate securities. At September 30, 2004, these assets
had an aggregate fair value of $6.42 billion with an option-adjusted duration
of 3.3 years. The Companys fixed-rate liabilities include fixed options of
variable annuities, as well as universal life, fixed annuity and GIC contracts.
At September 30, 2004, these liabilities had an aggregate fair value
(determined by discounting future contractual cash flows by related market
rates of interest) of $5.87 billion with an option-adjusted duration of 3.6
years. The Companys potential exposure due to a relative 10% decrease in
prevailing interest rates from its September 30, 2004 levels is a loss of
approximately $1.6 million, representing an increase in fair value of its
fixed-rate liabilities that is not offset by an increase in fair value of its
fixed-rate assets. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss. Option-adjusted duration is a common measure for the price sensitivity of
a fixed-maturity portfolio to changes in interest rates. For example, if
interest rates increase 1%, the fair value of an asset with a duration of 5.0
years is expected to decrease in value by approximately 5%. The Company
estimates the option-adjusted duration of its assets and liabilities using a
number of different interest rate scenarios, assuming continuation of existing
investment and interest crediting strategies, including maintaining an
appropriate level of liquidity. Actual company and contract owner behaviors
may be different than was assumed in the estimate of option-adjusted duration
and these differences may be material. A significant portion of the Companys fixed annuity contracts (including
the fixed option of variable contracts) have reached or are near the minimum
contractual guaranteed rate (generally 3% or 4%). Continual declines in
interest rates could cause the spread between the yield on the portfolio and
the interest rate credited to policyholders to deteriorate. The Company has had the ability, limited by minimum interest rate
guarantees, to respond to the generally declining interest rate environment in
the last five years by lowering crediting rates in response to lower investment
returns. See the earlier discussion under Managements Discussion and
Analysis of Financial Condition and Results of Operations for additional
information on the calculation of investment yield and net investment spread
used by the Companys management as a key component in evaluating the
profitability of its annuity business. The trends experienced during the nine
months ended September 30, 2004 and the three years ended December 31, 2003 in
the Companys yield on average invested assets and rate of interest credited on
average interest-bearing liabilities, 35




---



##### Table of Contents



compared to the market trend in long-term
interest rates as illustrated by the average ten-year U.S. Treasury bond rate,
are presented in the following table: Nine months endedSeptember 30,
    
    Years ended December, 312004
    
    2003
    
    2002
    
    2001Average 10-year U.S. Treasury bond rate:
    
    
    4.29
    %
    
    
    4.01
    %
    
    
    4.61
    %
    
    
    5.02
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.62
    
    
    
    5.75
    
    
    
    6.23
    
    
    
    6.82Rate paid on average interest-bearing liabilities
    
    
    3.70
    
    
    
    3.71
    
    
    
    3.93
    
    
    
    4.58
 As a component of its asset-liability management strategy, the Company may
utilize interest rate swap agreements (Swap Agreements) to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company seeks to enhance its spread income with dollar roll repurchase
agreements (Dollar Roll Repos). Dollar Roll Repos involve a sale of
mortgage-backed securities (MBS) by the Company and an agreement to
repurchase substantially similar MBS at a later date at an agreed upon price.
The Company also seeks to provide liquidity by investing in MBS. MBS are
generally investment-grade securities collateralized by large pools of mortgage
loans. MBS generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans. There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Companys Dollar Roll Repos
and Swap Agreements is counterparty risk. The Company believes, however, that
the counterparties to its Dollar Roll Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions
is minimal. It is the Companys policy that these agreements are entered into
with counterparties who have a debt rating of A/A2 or better from both S&P and
Moodys. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Companys Swap Agreements are intended to
hedge variable-rate assets or liabilities. The primary risk associated with
MBS is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase. As part of its decision to purchase such a security, the
Company assesses the risk of prepayment by analyzing the securitys projected
performance over an array of interest-rate scenarios. Once such a security is
purchased, the Company monitors its actual prepayment experience monthly to
reassess the relative attractiveness of the security with the intent to
maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In conducting these reviews for bonds, management principally
considers the adequacy of any collateral, compliance with contractual
covenants, the borrowers recent financial performance, news reports and other
externally generated information concerning the creditors affairs. In the
case of publicly traded bonds, management also considers market value
quotations, if available. For mortgage loans, management generally considers
information concerning the mortgaged property and, among other things, factors
impacting the current and expected payment status of the loan and, if
available, the current fair value of the underlying collateral. For investments
in partnerships, management reviews the financial statements and other
information provided by the general partners. The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The 36




---



##### Table of Contents



provisions for impairment on mortgage loans are based on losses expected by management to
be realized on transfers of mortgage loans to real estate, on the disposition
and settlement of mortgage loans and on mortgage loans that management believes
may not be collectible in full. Accrual of interest is suspended when principal
and interest payments on mortgage loans are past due more than 90 days. Impairment
losses on securitized assets are recognized if the fair value of the security
is less than its book value, and the net present value of expected future cash
flows is less than the net present value of expected future cash flows at the
most recent (prior) estimation date. DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $40.2 million of bonds at
September 30, 2004, which constituted approximately 0.5% of total invested
assets. At December 31, 2003, defaulted investments totaled $49.6 million,
which constituted approximately 0.7% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term investments, repo
capacity on invested assets and, if required, proceeds from invested asset
sales. The Companys liquidity is primarily derived from operating cash flows
from annuity operations. At September 30, 2004, approximately $4.39 billion of
the Bond Portfolio had an aggregate unrealized gain of $188.1 million, while
approximately $880.3 million of the Bond Portfolio had an aggregate unrealized
loss of $35.5 million. In addition, the Companys investment portfolio
currently provides approximately $45.8 million of monthly cash flow from
scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Companys annuity products have been more
than sufficient in amount to satisfy the Companys liquidity needs. Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Companys average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or repos on the
Companys substantial MBS segment of the Bond Portfolio, thereby avoiding the
sale of fixed-rate assets in an unfavorable bond market. In a declining rate environment, the Companys cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market. If a substantial portion of the Companys Bond Portfolio diminished
significantly in value and/or defaulted, the Company would need to liquidate
other portions of its investment portfolio and/or arrange financing. Such
events that may cause such a liquidity strain could be the result of economic
collapse or terrorist acts. Management believes that the Companys liquid assets and its net cash
provided by operations will enable the Company to meet any foreseeable cash
requirements for at least the next twelve months. GUARANTEES AND OTHER COMMITMENTS 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
September 30, 2004 is $195.4 million. These commitments have contractual
maturity dates as follows: $20.5 million in the remainder of 2004 and $174.9
million in 2005. Related to each of these agreements are participation
agreements with the Parent, under which the Parent will share in $62.6 million
of these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The Internal Revenue Service has completed
examinations into the transactions underlying these commitments, including the
Companys role in the transactions. The examination did not result in a
material loss to the Company. 37




---



##### Table of Contents



At September 30, 2004, the Company held reserves for GICs with maturity
dates as follows: $186.1 million in 2005 and $28.6 million in 2006 and
thereafter. 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. (For further discussion see Note 2 of Notes to
Consolidated Financial Statements.) REGULATION The Company, in common with other insurers, is subject to regulation and
supervision by the states and jurisdictions in which it does business. Within
the United States, the method of such regulation varies but generally has its
source in statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily to
approval of policy forms and rates, the standards of solvency that must be met
and maintained, including risk-based capital measurements, the licensing of
insurers and their agents, the nature of and limitations on investments,
restrictions on the size of risks which may be insured under a single policy,
deposits of securities for the benefit of policyholders, methods of accounting,
periodic examinations of the affairs of insurance companies, the form and
content of reports of financial condition required to be filed, and reserves
for unearned premiums, losses and other purposes. In general, such regulation
is for the protection of policyholders rather than security holders. Risk-based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the
target level of statutory surplus varies not only as a result of the insurers
size, but also on the risk profile of the insurers operations. The RBC Model
Law provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control. The statutory capital
and surplus of the Company exceeded its RBC requirements as of September 30,
2004. The federal government does not directly regulate the business of
insurance, however, the Company and its products are governed by federal
agencies, including the SEC, the Internal Revenue Service and the
self-regulatory organization, the National Association of Securities Dealers,
Inc. (NASD). Federal legislation and administrative policies in several
areas, including financial services regulation, pension regulation and federal
taxation, can significantly and adversely affect the insurance industry. The
federal government has from time to time considered legislation relating to the
deferral of taxation on the accretion of value within certain annuities and
life insurance products, changes in ERISA regulations, the alteration of the
federal income tax structure and the availability of Section 401(k) and
individual retirement accounts. Although the ultimate effect of any such
changes, if implemented, is uncertain, both the persistency of our existing
products and our ability to sell products may be materially impacted in the
future. Recently there has been a significant increase in federal and state
regulatory activity relating to financial services companies, particularly
mutual fund companies and life insurers issuing variable annuity products.
These inquiries have focused on a number of issues including, among other
items, after-hours trading, short-term trading (sometimes referred to as market
timing), revenue sharing arrangements and greater transparency regarding
compensation arrangements. There are several rule proposals pending and or
adopted at the SEC, the NASD and on a federal level, which could
have an impact on the business of the Company and/or its subsidiaries. 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 and 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 condition or operation. 38




---



##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Managements Discussion
and Analysis of Financial Condition and Results of Operations on
pages 35 to 36
herein. 
 DISCLOSURE CONTROLS AND PROCEDURES The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Companys management, including the Companys Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, have evaluated
the effectiveness of the Companys disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the disclosure controls and procedures provide reasonable assurance of
effectiveness as of the end of the period covered by this report. In addition,
there has been no change in the Companys internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 39




---



##### Table of Contents



PART II  OTHER INFORMATION Item 1. Legal Proceedings  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. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  Not applicable. Item 3. Defaults Upon Senior Securities  Not applicable. Item 4. Submissions of Matters to a Vote of Security Holders  Not applicable. Item 5. Other Information  Not applicable. Item 6. Exhibits  See accompanying Exhibit Index. 40




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. AIG SUNAMERICA LIFE ASSURANCE COMPANY
RegistrantDate: November 12, 2004
    /s/ N. SCOTT GILLISN. Scott GillisSenior Vice President,
Chief Financial Officer
and Director Date: November 12, 2004
    /s/ STEWART POLAKOVStewart PolakovSenior Vice President and Controller
(Principal Accounting Officer) 41




---



##### Table of Contents



Exhibit Index Exhibit31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications
 42