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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 33-47472
 AIG SUNAMERICA LIFE ASSURANCE COMPANY
 Incorporated in Arizona
    
    86-0198983
I.R.S. Employer
Identification No.
 
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PageNumber(s)Part I  Financial InformationItem 1.
Financial StatementsConsolidated Balance Sheet (Unaudited)  June 30, 2005 and December 31, 2004
    
    
    2-3Consolidated Statement of Income and Comprehensive Income
(Unaudited)  Three Months and Six Months Ended June 30, 2005 and 2004
    
    
    4-5Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2005 and 2004
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14-34Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35Part II  Other InformationItem 1. Legal Proceedings
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32Exhibit 99(a)Exhibit 99(b)
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June 30,
    
    December 31,2005
    
    2004(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    278,034
    
    
    $
    201,117Bonds, notes and redeemable preferred stocks
available for sale, at fair value (amortized
cost: June 30, 2005, $4,942,301; December 31,
2004, $4,987,728)
    
    
    5,064,204
    
    
    
    5,139,477Mortgage loans
    
    
    600,714
    
    
    
    624,179Policy loans
    
    
    176,189
    
    
    
    185,958Mutual funds
    
    
    21,490
    
    
    
    6,131Common stocks available for sale, at fair value
(cost: June 30, 2005, $25,015; December 31,
2004, $25,015)
    
    
    27,929
    
    
    
    26,452Securities lending collateral, at cost
(approximates market value)
    
    
    987,879
    
    
    
    883,792Other invested assets
    
    
    61,391
    
    
    
    58,880Total investments and cash
    
    
    7,217,830
    
    
    
    7,125,986Variable annuity assets held in separate accounts
    
    
    22,726,628
    
    
    
    22,612,451Accrued investment income
    
    
    73,394
    
    
    
    73,769Deferred acquisition costs
    
    
    1,368,218
    
    
    
    1,349,089Other deferred expenses
    
    
    256,294
    
    
    
    257,781Income taxes currently receivable from Parent
    
    
    62,115
    
    
    
    9,945Goodwill
    
    
    14,038
    
    
    
    14,038Other assets
    
    
    57,258
    
    
    
    52,956TOTAL ASSETS
    
    $
    31,775,775
    
    
    $
    31,496,015
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June 30,
    
    December 31,2005
    
    2004(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity and fixed accounts of
variable annuity contracts
    
    $
    3,820,488
    
    
    $
    3,948,158Reserves for universal life insurance contracts
    
    
    1,499,328
    
    
    
    1,535,905Reserves for guaranteed investment contracts
    
    
    116,206
    
    
    
    215,331Reserves for guaranteed benefits
    
    
    72,255
    
    
    
    76,949Securities lending payable
    
    
    987,879
    
    
    
    883,792Due to affiliates
    
    
    20,636
    
    
    
    21,655Payable to brokers
    
    
    199,557
    
    
    
    Other liabilities
    
    
    188,349
    
    
    
    190,198Total reserves, payables and accrued liabilities
    
    
    6,904,698
    
    
    
    6,871,988Variable annuity liabilities related to separate accounts
    
    
    22,726,628
    
    
    
    22,612,451Deferred income taxes
    
    
    334,482
    
    
    
    257,532Total liabilities
    
    
    29,965,808
    
    
    
    29,741,971Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    760,621
    
    
    
    758,346Retained earnings
    
    
    987,340
    
    
    
    919,612Accumulated other comprehensive income
    
    
    58,495
    
    
    
    72,575Total shareholders equity
    
    
    1,809,967
    
    
    
    1,754,044TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    31,775,775
    
    
    $
    31,496,015
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Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004(in thousands)REVENUESFee income:Variable annuity policy fees, net of reinsurance
    
    $
    104,049
    
    
    $
    91,644
    
    
    $
    206,654
    
    
    $
    181,155Asset management fees
    
    
    20,061
    
    
    
    21,325
    
    
    
    40,794
    
    
    
    40,926Universal life insurance policy fees, net of
reinsurance
    
    
    8,528
    
    
    
    8,515
    
    
    
    17,086
    
    
    
    17,707Surrender charges
    
    
    7,341
    
    
    
    6,492
    
    
    
    13,896
    
    
    
    13,491Other fees
    
    
    4,367
    
    
    
    3,571
    
    
    
    8,085
    
    
    
    7,192Total fee income
    
    
    144,346
    
    
    
    131,547
    
    
    
    286,515
    
    
    
    260,471Investment income
    
    
    88,422
    
    
    
    95,304
    
    
    
    170,855
    
    
    
    186,258Net realized investment gain (loss)
    
    
    3,109
    
    
    
    4,284
    
    
    
    20,796
    
    
    
    (10,893
    )Total revenues
    
    
    235,877
    
    
    
    231,135
    
    
    
    478,166
    
    
    
    435,836BENEFITS AND EXPENSESInterest expense:Fixed annuity and fixed accounts of variable
annuity contracts
    
    
    31,625
    
    
    
    35,571
    
    
    
    63,456
    
    
    
    70,807Universal life insurance contracts
    
    
    17,629
    
    
    
    18,524
    
    
    
    35,301
    
    
    
    37,005Guaranteed investment contracts
    
    
    1,433
    
    
    
    1,379
    
    
    
    3,404
    
    
    
    2,714Subordinated notes payable to affiliates
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    1,098Total interest expense
    
    
    50,687
    
    
    
    56,012
    
    
    
    102,161
    
    
    
    111,624Amortization of bonus interest
    
    
    3,921
    
    
    
    3,286
    
    
    
    7,130
    
    
    
    5,224Claims on universal life insurance contracts,
net of
reinsurance recoveries
    
    
    3,124
    
    
    
    5,099
    
    
    
    8,480
    
    
    
    9,922Guaranteed benefits, net of
reinsurance recoveries
    
    
    5,573
    
    
    
    13,152
    
    
    
    16,776
    
    
    
    30,926General and administrative expenses
    
    
    34,733
    
    
    
    35,409
    
    
    
    68,423
    
    
    
    71,633Amortization of deferred acquisition costs and
other deferred expenses
    
    
    52,053
    
    
    
    50,011
    
    
    
    104,050
    
    
    
    79,515Annual commissions
    
    
    19,064
    
    
    
    15,117
    
    
    
    37,417
    
    
    
    30,131Total benefits and expenses
    
    
    169,155
    
    
    
    178,086
    
    
    
    344,437
    
    
    
    338,975PRETAX INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
    
    
    66,722
    
    
    
    53,049
    
    
    
    133,729
    
    
    
    96,861Income tax expense
    
    
    20,164
    
    
    
    15,169
    
    
    
    39,439
    
    
    
    27,365INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    46,558
    
    
    
    37,880
    
    
    
    94,290
    
    
    
    69,496Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,589
    )NET INCOME
    
    $
    46,558
    
    
    $
    37,880
    
    
    $
    94,290
    
    
    $
    6,907
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Three Months
    
    Six Months2005
    
    2004
    
    2005
    
    2004(in thousands)OTHER COMPREHENSIVE INCOME (LOSS), NET
OF TAX:Net unrealized gains (losses) on debt
and equity securities available for sale
identified in the current period, less
related amortization of deferred
acquisition costs and other deferred
expenses
    
    $
    50,714
    
    
    $
    (140,220
    )
    
    $
    (5,775
    )
    
    $
    (74,368
    )Less reclassification adjustment for net
realized (gains) losses included in net
income
    
    
    (8,401
    )
    
    
    (1,016
    )
    
    
    (15,003

    )
    
    
    6,398Net unrealized losses on foreign currency
    
    
    (567
    )
    
    
    
    
    
    
    (883
    )
    
    
    Income tax (expense) benefit
    
    
    (14,612
    )
    
    
    49,432
    
    
    
    7,581
    
    
    
    23,789OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    27,134
    
    
    
    (91,804
    )
    
    
    (14,080
    )
    
    
    (44,181
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    73,692
    
    
    $
    (53,924
    )
    
    $
    80,210
    
    
    $
    (37,274
    )
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2005
    
    2004(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    94,290
    
    
    $
    6,907Adjustments to reconcile net income to net cash
provided by operating activities:Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    62,589Interest credited to:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    63,456
    
    
    
    70,807Universal life insurance contracts
    
    
    35,301
    
    
    
    37,005Guaranteed investment contracts
    
    
    3,404
    
    
    
    2,714Net realized investment (gains) losses
    
    
    (20,796
    )
    
    
    10,893Amortization of net premium/accretion of net discount on investments
    
    
    4,298
    
    
    
    (60
    )Amortization of deferred acquisition costs and other expenses
    
    
    111,180
    
    
    
    84,739Acquisition costs deferred
    
    
    (100,992
    )
    
    
    (135,410
    )Other expenses deferred
    
    
    (20,330
    )
    
    
    (37,521
    )Provision for deferred income taxes
    
    
    84,531
    
    
    
    67,837Change in:Accrued investment income
    
    
    375
    
    
    
    (1,300
    )Income taxes currently payable to/receivable from Parent
    
    
    (52,170
    )
    
    
    (5,465
    )Other assets
    
    
    (4,463
    )
    
    
    (10,608
    )Due from/to affiliates
    
    
    (1,019
    )
    
    
    (20,116
    )Other liabilities
    
    
    (11,673
    )
    
    
    11,192Other, net
    
    
    3,239
    
    
    
    8,038NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    188,631
    
    
    
    152,241CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (588,920
    )
    
    
    (1,012,532
    )Mortgage loans
    
    
    (32,575
    )
    
    
    (9,276
    )Other investments, excluding short-term investments
    
    
    (32,289
    )
    
    
    (16,212
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    399,044
    
    
    
    680,095Other investments, excluding short-term investments
    
    
    47,186
    
    
    
    11,173Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    422,486
    
    
    
    439,785Mortgage loans
    
    
    56,525
    
    
    
    24,903Other investments, excluding short-term investments
    
    
    9,892
    
    
    
    8,523NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    $
    281,349
    
    
    $
    126,459
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2005
    
    2004(in thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity and fixed accounts of variable annuity contracts
    
    $
    637,902
    
    
    $
    726,689Universal life insurance contracts
    
    
    20,797
    
    
    
    21,825Net exchanges from the fixed accounts of variable annuity
contracts
    
    
    (504,543
    )
    
    
    (638,639
    )Withdrawal payments on:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    (282,289
    )
    
    
    (210,268
    )Universal life insurance contracts
    
    
    (32,706
    )
    
    
    (38,517
    )Guaranteed investment contracts
    
    
    (102,529
    )
    
    
    (6,120
    )Claims and annuity payments, net of reinsurance, on:Fixed annuity and fixed accounts of variable annuity contracts
    
    
    (54,384
    )
    
    
    (55,694
    )Universal life insurance contracts
    
    
    (50,311
    )
    
    
    (61,663
    )Net payment related to a modified coinsurance transaction
    
    
    
    
    
    
    (4,738
    )Dividend paid to Parent
    
    
    (25,000
    )
    
    
    (2,500
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (393,063
    )
    
    
    (269,625
    )NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS
    
    
    76,917
    
    
    
    9,075CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    201,117
    
    
    
    133,105CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD
    
    $
    278,034
    
    
    $
    142,180SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    
    
    
    $
    1,098Income taxes paid to Parent
    
    $
    7,694
    
    
    $
    47,424
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1.
    
    BASIS OF PRESENTATIONAIG SunAmerica Life Assurance Company (the
Company) is a direct wholly owned subsidiary of
SunAmerica Life Insurance Company (the Parent), which is a
wholly owned subsidiary of AIG Retirement Services, Inc.
(AIGRS) (formerly AIG SunAmerica Inc.), a wholly owned
subsidiary of American International Group, Inc. (AIG).These statements are unaudited. In the opinion of management, all adjustments, consisting only of
normal recurring accruals, have been made for a fair statement of the results presented herein.
Certain amounts have been reclassified in the 2004 financial statements to conform to their 2005
presentation. For further information, refer to the Annual Report on
Form 10-K of the Company for the year ended December 31, 2004.2.
    
    COMMITMENTS AND CONTINGENT LIABILITIESThe Company has six agreements outstanding in which it has provided liquidity support for certain
short-term securities of municipalities and non-profit organizations by agreeing to purchase such
securities in the event there is no other buyer in the short-term marketplace. In return the
Company receives a fee. In addition, pursuant to these agreements the Company guarantees the payment of these securities upon
redemption. The maximum liability under these guarantees at June 30, 2005 is $185,492,000. The
expiration dates of these commitments are as follows: $71,062,000 in the remainder of 2005 and
$114,430,000 in 2006. Related to each of these agreements are participation agreements with
SunAmerica Life Insurance Company, the Companys immediate
parent (the Parent), under which the
Parent will share in $58,610,000 of these liabilities in exchange for a proportionate percentage of
the fees received under these agreements.At June 30, 2005, the Company has a commitment to purchase a total of approximately $5,000,000 of
asset-backed securities in the ordinary course of business. This commitment has a contractual
maturity date in November of 2006.A purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG
SunAmerica Life Assurance Company, Case 04L0199, was filed on April 5, 2004 in the Circuit Court,
Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and
is currently pending in the United States District Court for the District of Maryland, Case No.
04-md-15863, as part of a Multi-District Litigation proceeding. The lawsuit alleges certain
improprieties in conjunction with alleged market timing activities. The probability of any
particular outcome cannot be reasonably estimated at this time.Various federal, state and other regulatory agencies are reviewing certain transactions and
practices of the Company and its subsidiaries in connection with industry-wide and other inquiries.
In the opinion of the Companys management, based on the current status of these inquiries, it is
not likely that any of these inquiries will have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.Various lawsuits against the Company and its subsidiaries have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and regulatory and other
matters are not considered material in relation to the consolidated financial position, results of
operations or cash flows of the Company.On May 31, 2005, AIG filed its Annual Report on Form 10-K for the year ended December 31,
2004, which included a restatement of its previously reported financial information for the years
2000-2003 and the adjustment of its previously announced results in 2004. Circumstances affecting
AIG can have an impact on the Company. For example, the recent downgrades and ratings actions
taken by the major rating agencies with respect to AIG resulted in corresponding downgrades and
ratings actions being taken with respect to the Companys ratings. There can be no assurance that
such rating agencies will not take further action with respect to such ratings.On May 26, 2005, the New York Attorney General and the New York Superintendent of Insurance
filed a civil complaint against AIG as well as its former Chairman and Chief Executive Officer and
former Vice Chairman and Chief Financial Officer, in the Supreme Court of the State of New York.
The complaint asserts claims under New Yorks Martin Act and Insurance Law, among others, and makes
allegations concerning certain transactions entered into by AIG and certain of its subsidiaries.
Although none of the Company or its subsidiaries are named in the complaint, nor does the complaint
seek any remedies against them, due to a provision in the law governing investment companies, if
the lawsuit results in an injunction being entered against AIG, then
the Company, AIG SunAmerica Asset Management Corp.
(SAAMCo) and AIG SunAmerica Capital Services, Inc.
(SACS)
will need to obtain permission from the Securities and Exchange
Commission (SEC) to continue to service its variable annuity and asset
management operations. While the SEC has granted this type of relief to others in the past in
similar circumstances, there is no assurance that this permission would be granted. Accordingly,
no assurance can be given that any further changes in circumstances for AIG will not impact the
Company.3.
    
    RELATED PARTY TRANSACTIONStarr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation
Profit Participation Plans (SICO Plans) to certain
employees of AIG, its subsidiaries and affiliates. The SICO Plans came into being in 1975 when the voting
shareholders and Board of Directors of SICO, a private holding company whose principal asset is AIG
common stock, decided that a portion of the capital value of SICO should be used to provide an
incentive plan for the current and succeeding managements of all American International companies,
including the Company.In the past, participation in the SICO Plans by any person,
and the amount of such participation, was at the
sole discretion of SICOs Board of Directors. None of the costs of the various benefits provided
under the SICO Plans has been paid by the Company although the Company has recorded a charge to
reported earnings for the deferred compensation amounts paid to employees of the Company or its affiliates by SICO
and allocated to the Company, with an
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3.
    
    RELATED PARTY TRANSACTION (Continued)offsetting entry to additional paid-in capital reflecting amounts deemed contributed by SICO. The
SICO Plans provide that shares currently owned by SICO may be set aside by SICO for the benefit of
the participant and distributed upon retirement. The SICO Board of Directors may permit
an early payout of units under certain circumstances. Prior to payout, the participant is not
entitled to vote, dispose of or receive dividends with respect to such shares, and shares are
subject to forfeiture under certain conditions, including but not limited to the participants
voluntary termination of employment with AIG or its subsidiaries or affiliates prior to normal retirement age. In
addition, SICOs Board of Directors may elect to pay a participant cash in lieu of shares
of AIG common stock.On June 27, 2005, AIG entered into agreements pursuant to which AIG agrees, subject to certain
conditions, to make any payment that is not promptly paid with respect to the benefits accrued by
certain employees of AIG and its subsidiaries under the SICO Plans.As total compensation expense related to the SICO Plans for each prior year would not have been
material to any such prior year, in the first quarter of 2005 the Company has recorded the total
amount of compensation expense related to the SICO Plans that would have been recorded in all prior
periods through December 31, 2004, as a reduction of retained earnings on the consolidated balance
sheet of $1,562,000, with a corresponding increase to additional paid-in capital, and with no
effect on total shareholders equity, results of operations or cash flows. Compensation expense
with respect to the SICO Plans aggregated $172,000 and $713,000 for the quarter and six months ended June 30,
2005, respectively, and is included in general and administrative expenses in the consolidated
statement of income and comprehensive income.4.
    
    SEGMENT INFORMATIONThe Company conducts its business through two business segments, annuity operations and asset
management operations. Annuity operations consists of the sale and administration of deposit-type
insurance contracts, including fixed and variable annuity contracts, universal life insurance
contracts and guaranteed investment contracts. Asset management operations, which includes the
managing, distributing and administering a diversified family of mutual funds, managing certain
subaccounts offered within the Companys variable annuity products and providing professional
management of individual, corporate and pension plan portfolios, is
conducted by SAAMCo and its subsidiary and distributor, SACS,
and its subsidiary and servicing administrator, AIG SunAmerica Fund Services, Inc.. Following is
selected information pertaining to the Companys business segments.
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4.
    
    SEGMENT INFORMATION (Continued)
 AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)THREE MONTHS ENDED
JUNE 30, 2005:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    104,049
    
    
    $
    
    
    
    $
    104,049Asset management fees
    
    
    
    
    
    
    20,061
    
    
    
    20,061Universal life insurance policy
fees, net of reinsurance
    
    
    8,528
    
    
    
    
    
    
    
    8,528Surrender charges
    
    
    7,341
    
    
    
    
    
    
    
    7,341Other fees
    
    
    
    
    
    
    4,367
    
    
    
    4,367Total fee income
    
    
    119,918
    
    
    
    24,428
    
    
    
    144,346Investment income
    
    
    87,758
    
    
    
    664
    
    
    
    88,422Net realized investment gain
    
    
    2,915
    
    
    
    194
    
    
    
    3,109Total revenues
    
    
    210,591
    
    
    
    25,286
    
    
    
    235,877BENEFITS AND EXPENSES:Interest expense
    
    
    50,687
    
    
    
    
    
    
    
    50,687Amortization of bonus interest
    
    
    3,921
    
    
    
    
    
    
    
    3,921Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    3,124
    
    
    
    
    
    
    
    3,124Guaranteed benefits, net of
reinsurance recoveries
    
    
    5,573
    
    
    
    
    
    
    
    5,573General and administrative expenses
    
    
    25,811
    

    
    
    8,922
    
    
    
    34,733Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    44,379
    
    
    
    7,674
    
    
    
    52,053Annual commissions
    
    
    19,064
    
    
    
    
    
    
    
    19,064Total benefits and expenses
    
    
    152,559
    
    
    
    16,596
    
    
    
    169,155Pretax income before cumulative
effect of accounting change
    
    $
    58,032
    
    
    $
    8,690
    
    
    $
    66,722Total assets
    
    $
    31,489,390
    
    
    $
    287,236
    
    
    $
    31,776,626Expenditures for long-lived assets
    
    $
    
    
    
    $
    60
    
    
    $
    60
 10




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4.
    
    BUSINESS SEGMENTS (Continued)
 AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)THREE MONTHS ENDED
JUNE 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    91,644
    
    
    $
    
    
    
    $
    91,644Asset management fees
    
    
    
    
    
    
    21,325
    
    
    
    21,325Universal life insurance policy
fees, net of reinsurance
    
    
    8,515
    
    
    
    
    
    
    
    8,515Surrender charges
    
    
    6,492
    
    
    
    
    
    
    
    6,492Other fees
    
    
    
    
    
    
    3,571
    
    
    
    3,571Total fee income
    
    
    106,651
    
    
    
    24,896
    
    
    
    131,547Investment income
    
    
    95,166
    
    
    
    138
    
    
    
    95,304Net realized investment gain
    
    
    4,284
    
    
    
    
    
    
    
    4,284Total revenues
    
    
    206,101
    
    
    
    25,034
    
    
    
    231,135BENEFITS AND EXPENSES:Interest expense
    
    
    55,474
    
    
    
    538
    
    
    
    56,012Amortization of bonus interest
    
    
    3,286
    
    
    
    
    
    
    
    3,286Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    5,099
    
    
    
    
    
    
    
    5,099Guaranteed benefits, net of
reinsurance recoveries
    
    
    13,152
    
    
    
    
    
    
    
    13,152General and administrative expenses
    
    
    25,273
    
    
    
    10,136
    

    
    
    35,409Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    42,043
    
    
    
    7,968
    
    
    
    50,011Annual commissions
    
    
    15,117
    
    
    
    
    
    
    
    15,117Total benefits and expenses
    
    
    159,444
    
    
    
    18,642
    
    
    
    178,086Pretax income before cumulative
effect of accounting change
    
    $
    46,657
    
    
    $
    6,392
    
    
    $
    53,049Total assets
    
    $
    29,740,719
    
    
    $
    185,487
    
    
    $
    29,926,206Expenditures for long-lived assets
    
    $
    
    
    
    $
    37
    
    
    $
    37
 11




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4.
    
    BUSINESS SEGMENTS (Continued)
 AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)SIX MONTHS ENDED
JUNE 30, 2005:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    206,654
    
    
    $
    
    
    
    $
    206,654Asset management fees
    
    
    
    
    
    
    40,794
    
    
    
    40,794Universal life insurance policy
fees, net of reinsurance
    
    
    17,086
    
    
    
    
    
    
    
    17,086Surrender charges
    
    
    13,896
    
    
    
    
    
    
    
    13,896Other fees
    
    
    
    
    
    
    8,085
    
    
    
    8,085Total fee income
    
    
    237,636
    
    
    
    48,879
    
    
    
    286,515Investment income
    
    
    169,655
    
    
    
    1,200
    
    
    
    170,855Net realized investment gain
    
    
    20,756
    
    
    
    40
    
    
    
    20,796Total revenues
    
    
    428,047
    
    
    
    50,119
    
    
    
    478,166BENEFITS AND EXPENSES:Interest expense
    
    
    102,161
    
    
    
    
    
    
    
    102,161Amortization of bonus interest
    
    
    7,130
    
    
    
    
    
    
    
    7,130Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    8,480
    
    
    
    
    
    
    
    8,480Guaranteed benefits, net of
reinsurance recoveries
    
    
    16,776
    
    
    
    
    
    
    
    16,776General and administrative expenses
    
    
    50,107
    
    
    
    18,316
    
    
    
    68,423Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    88,670
    
    
    
    15,380
    
    
    
    104,050Annual commissions
    
    
    37,417
    
    
    
    
    
    
    
    37,417Total benefits and expenses
    
    
    310,741
    
    
    
    33,696
    
    
    
    344,437Pretax income before cumulative
effect of accounting change
    
    $
    117,306
    
    
    $
    16,423
    
    
    $
    133,729Total assets
    
    $
    31,489,390
    
    
    $
    287,236
    
    
    $
    31,776,626Expenditures for long-lived assets
    
    $
    
    
    
    $
    76
    
    
    $
    76
 12




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AssetAnnuity
    
    ManagementOperations
    
    Operations
    
    Total(in thousands)SIX MONTHS ENDED JUNE 30, 2004:REVENUES:Fee income:Variable annuity policy fees, net
of reinsurance
    
    $
    181,155
    
    
    $
    
    
    
    $
    181,155Asset management fees
    
    
    
    
    
    
    40,926
    
    
    
    40,926Universal life insurance policy
fees, net of reinsurance
    
    
    17,707
    
    
    
    
    
    
    
    17,707Surrender charges
    
    
    13,491
    
    
    
    
    
    
    
    13,491Other fees
    
    
    
    
    
    
    7,192
    
    
    
    7,192Total fee income
    
    
    212,353
    
    
    
    48,118
    
    
    
    260,471Investment income
    
    
    185,943
    
    
    
    315
    
    
    
    186,258Net realized investment loss
    
    
    (10,893
    )
    
    
    
    
    
    
    (10,893
    )Total revenues
    
    
    387,403
    
    
    
    48,433
    
    
    
    435,836BENEFITS AND EXPENSES:Interest expense
    
    
    110,526
    
    
    
    1,098
    
    
    
    111,624Amortization of bonus interest
    
    
    5,224
    
    
    
    
    
    
    
    5,224Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    9,922
    
    
    
    
    
    
    
    9,922Guaranteed benefits, net of
reinsurance recoveries
    
    
    30,926
    
    
    
    
    
    
    
    30,926General and administrative expenses
    
    
    52,601
    
    
    
    19,032
    
    
    
    71,633Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    64,106
    
    
    
    15,409
    
    
    
    79,515Annual commissions
    
    
    30,131
    
    
    
    
    
    
    
    30,131Total benefits and expenses
    
    
    303,436
    
    
    
    35,539
    
    
    
    338,975Pretax income before cumulative
effect of accounting change
    
    $
    83,967
    
    
    $
    12,894
    
    
    $
    96,861Total assets
    
    $
    29,740,719
    
    
    $
    185,487
    
    
    $
    29,926,206Expenditures for long-lived assets
    
    $
    
    
    
    $
    83
    
    
    $
    83
 13




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.
  15




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Investment income
    
    $
    87,758
    
    
    $
    95,166
    
    
    $
    169,655
    
    
    $
    185,943Interest credited to fixed annuity contracts and
Fixed Options
    
    
    (31,625
    )
    
    
    (35,571
    )
    
    
    (63,456
    )
    
    
    (70,807
    )Interest credited to universal life insurance
contracts
    
    
    (17,629
    )
    
    
    (18,524
    )
    
    
    (35,301
    )
    
    
    (37,005
    )Interest credited to guaranteed investment
contracts
    
    
    (1,433
    )
    
    
    (1,379
    )
    
    
    (3,404
    )
    
    
    (2,714
    )Net investment spread
    
    
    37,071
    
    
    
    39,692
    
    
    
    67,494
    
    
    
    75,417Net realized investment gain (loss)
    
    
    2,915
    
    
    
    4,284
    
    
    
    20,756
    
    
    
    (10,893
    )Amortization of bonus interest
    
    
    (3,921
    )
    
    
    (3,286
    )
    
    
    (7,130
    )
    
    
    (5,224
    )Claims on UL insurance contracts, net of
reinsurance recoveries
    
    
    (3,124
    )
    
    
    (5,099
    )
    
    
    (8,480
    )
    
    
    (9,922
    )Guaranteed benefits, net of reinsurance recoveries
    
    
    (5,573
    )
    
    
    (13,152
    )
    
    
    (16,776
    )
    
    
    (30,926
    )Fee income, net of reinsurance
    
    
    119,918
    
    
    
    106,651
    
    
    
    237,636
    
    
    
    212,353General and administrative expenses
    
    
    (25,811
    )
    
    
    (25,273
    )
    
    
    (50,107
    )
    
    
    (52,601
    )Amortization of DAC and other deferred expenses
    
    
    (44,379
    )
    
    
    (42,043
    )
    
    
    (88,670
    )
    
    
    (64,106
    )Annual commissions
    
    
    (19,064
    )
    
    
    (15,117
    )
    
    
    (37,417
    )
    
    
    (30,131
    )Pretax income before cumulative effect of
accounting change
    
    $
    58,032
    
    
    $
    46,657
    
    
    $
    117,306
    
    
    $
    83,967
  18




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except for percentages)Net investment spread
    
    $
    37,071
    
    
    $
    39,692
    
    
    $
    67,494
    
    
    $
    75,417Average invested assets
    
    
    5,803,678
    
    
    
    6,259,041
    
    
    
    5,864,414
    
    
    
    6,269,022Average interest-bearing liabilities
    
    
    5,460,144
    
    
    
    5,987,837
    
    
    
    5,540,783
    
    
    
    5,997,113Yield on average invested assets
    
    
    6.05
    %
    
    
    6.08
    %
    
    
    5.79
    %
    
    
    5.93
    %Rate paid on average interest bearing
liabilities
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.69
    
    
    
    3.69Difference between yield and interest
rate paid
    
    
    2.34
    %
    
    
    2.37
    %
    
    
    2.10
    %
    
    
    2.24
    %Net investment spread as a percentage
of average invested assets
    
    
    2.56
    %
    
    
    2.54
    %
    
    
    2.30
    %
    
    
    2.41
    %
     19




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June 30, 2005
    
    December 31, 2004Fair
    
    Percent of
    
    Fair
    
    Percent ofValue
    
    Portfolio
    
    Value
    
    Portfolio(in thousands, except for percentages)Bond Portfolio:U.S. government securities
    
    $
    34,087
    

    
    
    0.5
    %
    
    $
    30,300
    
    
    
    0.4
    %Mortgage-backed securities
    
    
    983,344
    
    
    
    13.6
    
    
    
    956,567
    
    
    
    13.4Securities of public utilities
    
    
    305,899
    
    
    
    4.2
    
    
    
    332,038
    
    
    
    4.7Corporate bonds and notes
    
    
    2,862,371
    
    
    
    39.7
    
    
    
    2,902,829
    
    
    
    40.8Other debt securities
    
    
    878,503
    
    
    
    12.2
    
    
    
    917,743
    
    
    
    12.9Total Bond Portfolio
    
    
    5,064,204
    
    
    
    70.2
    
    
    
    5,139,477
    
    
    
    72.2Mortgage loans
    
    
    600,714
    
    
    
    8.3
    
    
    
    624,179
    
    
    
    8.7Common stocks
    
    
    27,929
    
    
    
    0.4
    
    
    
    26,452
    
    
    
    0.4Cash and short-term investments
    
    
    278,034
    
    
    
    3.8
    
    
    
    201,117
    
    
    
    2.8Securities lending collateral
    
    
    987,879
    
    
    
    13.7
    
    
    
    883,792
    
    
    
    12.4Other invested assets
    
    
    259,070
    
    
    
    3.6
    
    
    
    250,969
    
    
    
    3.5Total investments and cash
    
    $
    7,217,830
    
    
    
    100.0
    %
    
    $
    7,125,986
    
    
    
    100.0
    %
 24




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Issues not rated by
S&P/Moodys/Issues
rated by S&P/Moodys /Fitch
    
    Fitch, by NAIC category
    
    TotalNAIC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent ofS&P/Moodys/Fitch
    
    
    
    
    
    Estimated fair
    
    category
    
    Amortized
    
    Estimated fair
    
    
    
    
    
    Estimated fair
    
    total investedCategory(1)
    
    Amortized Cost
    
    value
    
    (2)
    
    Cost
    
    value
    
    Amortized Cost
    
    value
    
    assetsAAA+ to A-
(Aaa to A3)
[AAA to A-]
    
    $
    2,978
    
    
    $
    3,037
    
    
    
    1
    
    
    $
    287
    
    
    $
    292
    
    
    $
    3,265
    
    
    $
    3,329
    
    
    
    46.12
    %BBB+ to BBB-
(Baa to Baa3)
[BBB+ to BBB-]
    
    
    1,118
    
    
    
    1,141
    
    
    
    2
    
    
    
    224
    
    
    
    234
    
    
    
    1,342
    
    
    
    1,375
    
    
    
    19.05
    %BB+ to BB-
(Bal to Ba3)
[BB+ to BB-]
    
    
    159
    
    
    
    162
    
    
    
    3
    
    
    
    28
    
    
    
    30
    
    
    
    187
    
    
    
    192
    
    
    
    2.66
    %B+ to B-
(Bl to B3)
[B+ to B-]
    
    
    77
    
    
    
    86
    
    
    
    4
    
    
    
    7
    
    
    
    7
    
    
    
    84
    
    
    
    93
    
    
    
    12.9
    %CCC+ to CCC-
(Caal to Caa3)
[CCC+ to CCC-]
    
    
    13
    
    
    
    11
    
    
    
    5
    
    
    
    12
    
    
    
    19
    
    
    
    25
    
    
    
    30
    
    
    

    0.42
    %CC to D
(Ca to C)
[CC to D]
    
    
    2
    
    
    
    4
    
    
    
    6
    
    
    
    37
    
    
    
    41
    
    
    
    39
    
    
    
    45
    
    
    
    0.62
    %TOTAL RATED
ISSUES
    
    $
    4,347
    
    
    $
    4,441
    
    
    
    
    
    
    $
    595
    
    
    $
    623
    
    
    $
    4,942
    
    
    $
    5,064
 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 $37.1 million of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines. 26




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
    
    Trading at a significant discount to par, amortized cost (if lower) or cost for an
extended period of time;
    
    The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a
material outstanding obligation; (ii) the issuer seeking protection from creditors under
the bankruptcy laws or similar laws intended for the court supervised reorganization of
insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to
which creditors are asked to exchange their claims for cash or securities having a fair
value substantially lower than the par value of their claims; or
    
    In the opinion of the Companys management, it is unlikely the Company will realize a
full recovery on its investment, irrespective of the occurrence of one of the foregoing
events.
       27




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Amortized Cost(in thousands)Due in one year or less
    
    $
    42,804Due after one year through five years
    
    
    641,487Due after five years through ten years
    
    
    387,329Due after ten years
    
    
    236,030Total
    
    $
    1,307,650
  (dollars in
    
    Less than or Equal to 20%
    
    Greater than 20% to 50%
    
    Greater than 50%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
    
    $
    449,840
    
    
    $
    (2,344
    )
    
    
    75
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    449,840
    
    
    $
    (2,344
    )
    
    
    757-12
    
    
    345,243
    
    
    
    (5,123
    )
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345,243
    
    
    
    (5,123
    )
    
    
    52>12
    
    
    421,845
    
    
    
    (10,523
    )
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421,845
    
    
    
    (10,523
    )
    
    
    60Total
    
    $
    1,216,928
    
    
    $
    (17,990
    )
    
    
    187
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,216,928
    
    
    
    (17,990
    )
    
    
    187Below Investment
Grade Bonds0-6
    
    $
    35,533
    
    
    $
    (881
    )
    
    
    21
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    35,533
    
    
    $
    (881
    )
    
    
    217-12
    
    
    22,380
    
    
    
    (313
    )
    
    
    5
    
    
    
    1,502
    
    
    
    (343
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,882
    
    
    
    (656
    )
    
    
    7>12
    
    
    26,091
    
    
    
    (2,003
    )
    
    
    7
    
    
    
    5,216
    
    
    
    (1,335
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,307
    
    
    
    (3,338
    )
    
    
    9Total
    
    $
    84,004
    
    
    $
    (3,197
    )
    
    
    33
    
    
    $
    6,718
    
    
    $
    (1,678
    )
    
    
    4
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    90,722
    
    
    $
    (4,875
    )
    
    
    37Total Bonds0-6
    
    $
    485,373
    
    
    $
    (3,225
    )
    
    
    96
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    485,373
    
    
    $
    (3,225
    )
    
    
    967-12
    
    
    367,623
    
    
    
    (5,436
    )
    
    
    57
    
    
    
    1,502
    
    
    
    (343
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    369,125
    
    
    
    (5,779
    )
    
    
    59>12
    
    
    447,936
    
    
    
    (12,526
    )
    
    
    67
    
    
    
    5,216
    
    
    
    (1,335
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453,152
    
    
    
    (13,861
    )
    
    
    69Total
    
    $
    1,300,932
    
    
    $
    (21,187
    )
    
    
    220
    
    
    $
    6,718
    
    
    $
    (1,678
    )
    
    
    4
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,307,650
    
    
    $
    (22,865
    )
    
    
    224
   28




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Six MonthsEnded June 30,
    
    Years Ended December, 312005
    
    2004
    
    2003
    
    2002Average 10-year U.S. Treasury bond rate:
    
    
    4.22
    %
    
    
    4.26
    %
    
    
    4.01
    %
    
    
    4.61
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.62
    
    
    
    5.66
    
    
    
    5.75
    
    
    
    6.23Rate paid on average interest-bearing liabilities
    
    
    3.69
    
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.93
       31




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Quantitative and Qualitative Disclosures About Market Risk
  
 Controls and Procedures
  35




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Legal Proceedings
   
 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Defaults Upon Senior Securities
  
 Submissions of Matters to a Vote of Security Holders
  
 Other Information
  
 Exhibits
  36




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
Registrant/s/ N. SCOTT GILLISDate: August 12, 2005
    N. Scott GillisSenior Vice President,
Chief Financial Officer
and Director Date: August 12, 2005
    /s/ STEWART POLAKOVStewart PolakovSenior Vice President and Controller
(Principal Accounting Officer) 37




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Exhibit Index
 Exhibit31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications99(a)
    
    General Guarantee Agreement, dated
January 4, 1999, between the Company and American Home Assurance
Company (American Home), relating to the guarantee of the
Companys obligations to each policy holder of the Company.99(b)
    
    Agreement between American
International Group, Inc. and Anchor National Life Insurance Company,
dated January 4, 1999, whereby AIG agrees to maintain the
necessary balance of the policyholders surplus for the Company to perform its obligations
under any policy it has issued.
 38