##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One)/X/
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]


For the fiscal year ended December 31, 2003

OR

/  /
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]For the transition period from       to


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
Registrants telephone number, including area code:
    
    90067-6022
(310) 772-6000


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None

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 IF DISCLOSURE OF DELINQUENT FILES PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. X

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.
Yes  /   /  No /X/

AS THE REGISTRANT IS AN INDIRECT WHOLLY OWNED SUBSIDIARY OF AMERICAN
INTERNATIONAL GROUP, INC., NONE OF THE REGISTRANTS COMMON STOCK IS HELD BY
NON-AFFILIATES OF THE REGISTRANT.

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MARCH
26, 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 I(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.





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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.ITEM 9A. DISCLOSURE CONTROLS & PROCEDURESPART IIIItem 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESReport of Independent AuditorsCONSOLIDATED BALANCE SHEETCONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOMECONSOLIDATED STATEMENT OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSEXHIBIT 10.AEXHIBIT 10.BEXHIBIT 10.CEXHIBIT 10.DEXHIBIT 10.EEXHIBIT 10.FEXHIBIT 10.GEXHIBIT 10.HEXHIBIT 10.IEXHIBIT 10.JEXHIBITY 31.1EXHIBITY 31.2EXHIBIT 32    Table of Contents  
 PART I 
 ITEM 1. BUSINESS GENERAL DESCRIPTION AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company), (the Company) was incorporated under the laws of the State of
Arizona on April 12, 1965. 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 and
retirement services and asset management. The Company changed its name to SunAmerica National Life Insurance Company
on October 5, 2001 and further 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, after which
time it began doing business under its new name. The Company maintains its principal executive offices at 1 SunAmerica
Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The
Company has no employees; however, employees of AIGRS and other affiliates of
the Company perform various services for the Company. AIGRS had approximately
1,800 employees at December 31, 2003, approximately 800 of whom perform
services for the Company as well as for certain of its affiliates. The Company is an Arizona-chartered company licensed in 49 states and the
District of Columbia. The Company is a 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) directed to the institutional marketplace. The Companys
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 income on the fixed-rate account
options. The Company ranks among the largest U.S. issuers of variable annuities.
The Company distributes its products and services through an extensive network
of independent broker-dealers, full-service securities firms and financial
institutions. In prior years, GICs were marketed directly to banks,
municipalities, asset management firms and direct plan sponsors and through
intermediaries, such as managers or consultants servicing these groups. The
Companys nine affiliated broker-dealers are among the largest networks of
independent registered representatives in the nation. Its affiliated
broker-dealers accounted for approximately one-fifth of the Companys total
annuity sales in 2003. The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of 45 to 64 grew
from 48 million to 67 million from 1992 to 2002, making this age group the
fastest-growing segment of the U.S. population. Between 1992 1




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and 2002, annual industry premiums from fixed and variable annuities and
fund deposits increased from $130.7 billion to $268.4 billion. Benefiting from continued strong growth of the retirement services market,
industry sales of tax-deferred savings products have represented, for a number
of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its life operations on
the sale of annuities. In recent years, the Company has enhanced its marketing
efforts and expanded its offerings of fee-based variable annuities. The
Companys variable annuity business entails no portfolio credit risk and
requires significantly less capital support than its fixed-rate business, which
generates net investment income. The Company and its affiliates have made significant investments in technology
over the past several years in order to lower operating costs and enhance
marketing efforts. Its use of optical disk imaging and artificial intelligence
has substantially reduced the more traditional paper-intensive life insurance
processing procedures, reducing annuity processing and servicing costs and
improving customer service. The Company has also implemented technology to
interface with both its affiliated and unaffiliated broker-dealers, which
enables the Company to more effectively market its products and help the
financial professionals to better serve their clients. There are
administrative risks involved in converting business operations to new
information technology systems; however, the Company believes these risks are
outweighed by the increased efficiencies and lower operating costs the Company
realizes from its investments in new technology. On January 1, 2002, the Company declared a distribution to the Parent of
100% of the outstanding capital stock of its then wholly owned subsidiary,
Saamsun Holdings Corp. (Saamsun). Saamsun held the Companys asset
management and broker-dealer operations. This distribution decreased the
Companys shareholders equity by $552.4 million. Subsequent to this
distribution, the Companys earnings no longer included the asset management
and broker-dealer operations (see Note 7 of Notes to Consolidated Financial
Statements). This distribution was approved by the Arizona Department of
Insurance. Prior to the distribution of Saamsun on January 1, 2002, the Company had
three business segments: annuity operations (as discussed above), asset
management operations and broker-dealer operations. The asset management
operations were conducted by the Companys former registered investment advisor
subsidiary, AIG SunAmerica Asset Management Corp. (SAAMCO), and its related
distributor, AIG SunAmerica Capital Services, Inc. (SACS). SAAMCO and SACS
earn fee income by distributing and managing a diversified family of mutual
funds, managing certain subaccounts within the Companys variable annuity
products and providing professional management of individual, corporate and
pension plan portfolios. The asset management operations also included SA
Affordable Housing, LLC (SAAH LLC), a direct wholly owned subsidiary of
SAAMCO. SAAH LLC was previously a direct wholly owned subsidiary of the
Parent, until January 1, 2001 at which time all of SAAH LLCs ownership
interests were contributed to the Company. All of SAAH LLCs ownership
interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was
formed as a limited liability company whose primary purpose is the generation
of rehabilitation tax credits, low-income housing credits and passive losses.
Realized tax credits are recognized by its direct parent, SAAMCO (see Note 7 of
Notes to Consolidated Financial Statements). The 2




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broker-dealer operations were conducted by the Companys former
broker-dealer subsidiary, Royal Alliance Associates, Inc. (Royal Alliance),
which sells proprietary annuities and mutual funds and non-proprietary
investment products. Royal Alliance earns income from commissions on sales of
these products, net of the portion that is passed on to the registered
representatives. The following table shows the Companys investment income, net realized
investment losses and fee income for the year ended December 31, 2003 by
primary product line or service: NET INVESTMENT AND FEE INCOME Amount
    
    Percent
    
    Primary Product or Service(In thousands)Fee income:Variable annuity
policy fees,
net of
reinsurance
    
    $
    290,132
    
    
    
    40.2
    %
    
    Variable annuitiesUniversal life
insurance fees,
net of reinsurance
    
    
    35,816
    
    
    
    5.0
    
    
    Fixed-rate universal life productsSurrender charges
    
    
    27,733
    
    
    
    3.8
    
    
    Fixed and variable annuitiesTotal fee income
    
    
    353,681
    
    
    
    49.0Investment income
    
    
    398,304
    
    
    
    55.2
    
    
    Fixed-rate products and fixed options of variable annuitiesNet realized
investment
losses
    
    
    (30,354
    )
    
    
    (4.2
    )
    
    Fixed-rate products and fixed options of variable annuitiesTotal
    
    $
    721,631
    
    
    
    100.0
    %
 ANNUITY OPERATIONS  SEPARATE ACCOUNT The variable annuity products of the Company 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 through
the sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features similar to those offered by fixed
annuities, but differ in that the contractholders rate of return is generally
dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the
contractholder. Because the investment risk is borne by the customer in all
but the fixed-rate account options, these products require significantly less
capital support than fixed annuities. The Companys flagship Polaris and Seasons variable annuity products are
multimanager variable annuities that offer investors a choice of several
variable funds and up to 5 fixed account options and 2 dollar cost averaging
fixed account options for different time periods. Seasons sales have 3




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increased significantly in recent years due to enhanced distribution efforts
and growing consumer demand for flexible retirement savings products that offer
a variety of equity, fixed-income and guaranteed fixed account investment
choices. In addition to distributing its variable annuity products through its nine
affiliated broker-dealers, the Company distributes its products through a vast
network of independent broker-dealers, full-service securities firms and
financial institutions. In total, more than 82,000 independent sales
representatives nationally are appointed to sell the Companys annuity
products. At December 31, 2003, total variable product liabilities were $22.90
billion, of which $19.18 billion were held in separate accounts and $3.72
billion were the liabilities of the fixed-rate account options, which are held
in the general account. The Companys variable annuity products incorporate
surrender charges to encourage persistency. At December 31, 2003, 75% of the
Companys variable annuity liabilities held in separate accounts were subject
to surrender penalties or other restrictions. The Companys variable annuity
products also generally limit the number of transfers made in a specified
period between account options without the assessment of a fee. The average
size of a new variable annuity contract sold by the Company in 2003 was
approximately $70,000. ANNUITY OPERATIONS  GENERAL ACCOUNT The Companys general account obligations are fixed-rate products,
principally fixed-rate options of its variable annuity contracts, but also
including fixed annuities, GICs and universal life contracts issued in prior
years. Such fixed-rate account options on its variable annuity contracts
provide interest rate guarantees of one, three, five, seven or ten years.
Although the Companys annuity contracts remain in force an average of seven to
ten years, a majority (approximately 81% at December 31, 2003) of the annuity
contracts, as well as the universal life contracts, reprice annually at
discretionary rates determined by the Company subject to 3% or 4% minimum rate
guarantees, depending on the contract. In repricing, the Company takes into
account yield characteristics of its investment portfolio, surrender
assumptions and competitive industry pricing, among other factors. The
Companys small block of fixed annuities is serviced by an affiliate of the
Company. The Companys universal life products are serviced by a third party
administrator whose activities are closely monitored by the Company. The Company in prior years augmented its retail annuity business with the
sale of institutional products. At December 31, 2003, the Company had $213.5
million of fixed-maturity, variable-rate GIC obligations that reprice
periodically based upon certain defined indices and $4.5 million of
fixed-maturity, fixed-rate GICs. 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 Managements Discussion and Analysis of Financial Condition and
Results of Operations for additional information on the calculation of
investment yield used by the Company. The trends experienced during the three
years ended December 31, 2003 in the Companys average yield on its portfolio
of bonds, notes, and redeemable preferred stocks (the Bond Portfolio) and
rate of interest credited on average interest-bearing 4




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liabilities, 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: 2003
    
    2002
    
    200110-year U.S. Treasury bond rate:
    
    
    4.01
    %
    
    
    4.61
    %
    
    
    5.02
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.75
    
    
    
    6.23
    
    
    
    6.82Rate paid on average interest-
bearing liabilities
    
    
    3.71
    
    
    
    3.93
    
    
    
    4.58
 The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration and cash flows of the assets
in its investment portfolio to its fixed-rate obligations. The Company seeks
to achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. The
Companys fixed annuity and universal life products incorporate surrender
charges and its GIC products incorporate other restrictions in order to
encourage persistency. Approximately 79% of the Companys fixed annuity,
universal life and GIC reserves had surrender penalties or other restrictions
at December 31, 2003. The Company believes a portfolio principally composed of fixed-rate
investments that generate predictable rates of return should back its
fixed-rate liabilities. 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. The majority of the Companys invested assets are
managed by a subsidiary of AIG. 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. For more information concerning the Companys investments, including the
risks inherent in such investments, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Capital Resources
and Liquidity. 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 5




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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 December 31,
2003. The federal government does not directly regulate the business of
insurance, however, the Company and its products are governed by federal
agencies, including the Securities and Exchange Commission and the Internal
Revenue Service. 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 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 at the SEC and on a
federal level which, if passed, could have an impact on the business of the
Company. COMPETITION The businesses conducted by the Company are highly competitive. The
Company competes with other life insurers, and also competes for customers
funds with a variety of investment products offered by financial services
companies other than life insurance companies, such as banks, investment
advisors, mutual fund companies and other financial institutions. In 2002, net
annuity premiums written among the top 100 companies ranged from approximately
$73 million to approximately $21 billion annually. The Company together with
its affiliates is the largest of this group. The Company believes the primary
competitive factors among life insurance companies for 6




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investment-oriented insurance products, such as annuities and GICs,
include product flexibility, net return after fees, innovation in product
design, the insurer financial strength rating and the name recognition of the
issuing company, the availability of distribution channels and service rendered
to the customer before and after a contract is issued. Other factors affecting
the annuity business include the benefits (including before-tax and after-tax
investment returns) and guarantees provided to the customer and the commissions
paid. 
 ITEM 2. PROPERTIES The Companys executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company,
through an affiliate, also leases office space in Woodland Hills, California. The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses. 
 ITEM 3. LEGAL PROCEEDINGS Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the quarter ending December 31, 2003 to a
vote of security-holders, through the solicitation of proxies or otherwise. 
 PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Not applicable. 7




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ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company for 2003 and 2002 and
the consolidated financial data of the Company and its subsidiaries for 2001
and prior periods should be read in conjunction with the consolidated financial
statements and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations, both of which are included
elsewhere herein. Years ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)RESULTS OF OPERATIONSREVENUES:Fee income, net of reinsurance
    
    $
    353,681
    
    
    $
    367,574
    
    
    $
    535,921
    
    
    $
    603,915
    
    
    $
    509,239Investment income
    
    
    398,304
    
    
    
    377,556
    
    
    
    374,268
    
    
    
    399,355
    
    
    
    516,001Net realized investment
losses
    
    
    (30,354
    )
    
    
    (65,811
    )
    
    
    (92,711
    )
    
    
    (15,177
    )
    
    
    (19,620
    )Total revenues
    
    
    721,631
    
    
    
    679,319
    
    
    
    817,478
    
    
    
    988,093
    
    
    
    1,005,620BENEFITS AND EXPENSES:Interest expense
    
    
    237,585
    
    
    
    234,261
    
    
    
    244,974
    
    
    
    264,853
    
    
    
    357,737General and administrative
expenses
    
    
    83,013
    
    
    
    79,287
    
    
    
    136,942
    
    
    
    164,215
    
    
    
    143,556Amortization of deferred
acquisition costs
    
    
    156,906
    
    
    
    187,860
    
    
    
    220,316
    
    
    
    158,007
    
    
    
    116,840Annual commissions
    
    
    55,661
    
    
    
    58,389
    
    
    
    58,278
    
    
    
    56,473
    
    
    
    40,760Claims on UL contracts, net
of reinsurance recoveries
    
    
    17,766
    
    
    
    15,716
    
    
    
    17,566
    
    
    
    19,914
    
    
    
    58,618Guaranteed minimum death
benefits, net of reinsurance
recoveries
    
    
    63,268
    
    
    
    67,492
    
    
    
    17,839
    
    
    
    614
    
    
    
    386Total benefits and expenses
    
    
    614,199
    
    
    
    643,005
    
    
    
    695,915
    
    
    
    664,076
    
    
    
    717,897Pretax income before
cumulative effect of
accounting change
    
    
    107,432
    
    
    
    36,314
    
    
    
    121,563
    
    
    
    324,017
    
    
    
    287,723Income tax expense
    
    
    (21,760
    )
    
    
    (2,063
    )
    
    
    (20,852
    )
    
    
    (108,445
    )
    
    
    (103,025
    )Income before cumulative
effect of accounting change
    
    
    85,672
    
    
    
    34,251
    
    
    
    100,711
    
    
    
    215,572
    
    
    
    184,698Cumulative effect of
accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (10,342
    )
    
    
    
    
    
    
    NET INCOME
    
    $
    85,672
    
    
    $
    34,251
    
    
    $
    90,369
    
    
    $
    215,572
    
    
    $
    184,698
 8




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In 2001, the Company adopted EITF 99-20 and FAS 133, the effect of which
was recorded as a cumulative effect of accounting change (See Note 2 of Notes
to Consolidated Financial Statements). On January 1, 2002, the Company distributed 100% of the outstanding
capital stock of its consolidated subsidiary, Saamsun Holdings Corp., to its
Parent, SunAmerica Life Insurance Company (the Parent) (See Note 7 of Notes
to Consolidated Financial Statements). Saamsun Holdings Corp. comprised two of
the Companys business segments. The Company also entered into a profit
sharing agreement with an affiliate of the Company whereby the affiliate
contributes to the Company its profits earned through the Companys variable
annuity contracts. The results of operations of the Company for 2003 and 2002
are affected by both the distribution of Saamsun Holdings Corp. and the profit
sharing agreement. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)FINANCIAL POSITIONInvestments and cash
    
    $
    7,073,372
    
    
    $
    7,193,704
    
    
    $
    6,751,326
    
    
    $
    5,262,734
    
    
    $
    5,554,701Variable annuity assets
held in separate accounts
    
    
    19,178,796
    
    
    
    14,758,642
    
    
    
    18,526,413
    
    
    
    20,393,820
    
    
    
    19,949,145Deferred acquisition costs
    
    
    1,424,317
    
    
    
    1,364,748
    
    
    
    1,419,498
    
    
    
    1,286,456
    
    
    
    1,089,979Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,445Other assets
    
    
    105,366
    
    
    
    221,738
    
    
    
    242,868
    
    
    
    246,468
    
    
    
    227,224TOTAL ASSETS
    
    $
    27,781,851
    
    
    $
    23,538,832
    
    
    $
    26,940,105
    
    
    $
    27,189,478
    
    
    $
    26,874,494Reserves for fixed
annuity contracts
    
    $
    4,274,329
    
    
    $
    4,285,098
    
    
    $
    3,498,917
    
    
    $
    2,778,229
    
    
    $
    3,254,895Reserves for universal
life insurance contracts
    
    
    1,609,233
    
    
    
    1,676,073
    
    
    
    1,738,493
    
    
    
    1,832,667
    
    
    
    1,978,332Reserves for guaranteed
investment contracts
    
    
    218,032
    
    
    
    359,561
    
    
    
    483,861
    
    
    
    610,672
    
    
    
    305,570Variable annuity liabilities related to
separate accounts
    
    
    19,178,796
    
    
    
    14,758,642
    
    
    
    18,526,413
    
    
    
    20,393,820
    
    
    
    19,949,145Other payables and
accrued liabilities
    
    
    756,645
    
    
    
    785,947
    
    
    
    828,641
    
    
    
    304,324
    
    
    
    413,610Subordinated notes
payable to affiliates
    
    
    
    
    
    
    
    
    
    
    58,814
    
    
    
    55,119
    
    
    
    37,816Deferred income taxes
    
    
    281,399
    
    
    
    351,872
    
    
    
    210,970
    
    
    
    85,978
    
    
    
    Shareholders equity
    
    
    1,463,417
    
    
    
    1,321,639
    
    
    
    1,593,996
    
    
    
    1,128,669
    
    
    
    935,126TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    27,781,851
    
    
    $
    23,538,832
    
    
    $
    26,940,105
    
    
    $
    27,189,478
    
    
    $
    26,874,494
 9




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##### Table of Contents



The financial position of the Company as of December 31, 2003 and
December 31, 2002 reflects the impact of the distribution of its consolidated
subsidiary, Saamsun Holdings Corp., to the Parent on January 1, 2002 (See Note
7 of the Notes to Consolidated Financial Statements). 
 ITEM 7. 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 (FKA Anchor National Life
Insurance Company) (the Company) for the three years ended December 31, 2003
(2003), 2002 (2002) and 2001 (2001) 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 among its most critical accounting policies those
policies with respect to valuation of certain financial instruments and
amortization of deferred acquisition costs. 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: 10




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##### Table of Contents



VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $60.1 million at
December 31, 2003 and $170.7 million at December 31, 2002. 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 our
investments in debt and marketable 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 $1.24 billion at December 31, 2003 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 may not be able 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: The Company amortizes
deferred acquisition costs (DAC) based on a percentage of expected gross
profits (EGPs) over the life of the underlying policies. 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 for policy
guarantees and the level of expenses necessary to maintain the policies. The
Company adjusts DAC amortization (a DAC unlocking) when estimates of current
or future gross profits to be realized from its annuity policies are revised.
Approximately 95% of the Companys DAC balance at December 31, 2003 related to
variable annuity products and 5% related to fixed annuity and universal life
products. DAC amortization 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 11




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##### Table of Contents



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. BUSINESS SEGMENTS On January 1, 2002, the Company declared a distribution to its parent,
SunAmerica Life Insurance Company (the Parent), of 100% of the outstanding
capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp.
(Saamsun). Saamsun was comprised of the Companys asset management and
broker-dealer segments. This distribution decreased the Companys
shareholders equity by approximately $552.4 million (see Note 7 of Notes to
Consolidated Financial Statements). Effective January 1, 2002, the Companys
earnings no longer include the asset management and broker-dealer operations.
This distribution was approved by the Arizona Department of Insurance. Effective January 1, 2002, the Company has one business segment, annuity
operations, which consists of the sale and administration of deposit-type
insurance contracts, principally variable annuities, but also including smaller
closed blocks of fixed annuities, universal life insurance contracts and
guaranteed investment contracts (GICs). However, the Company focuses
primarily on the marketing of variable annuity products and the administration
of a closed block of universal life business. The variable annuity products
offer investors a broad spectrum of fund alternatives, a choice of investment
managers and guaranteed fixed-rate account options. The Company earns fee
income on investments in the variable account options and investment income on
the fixed-rate account options. Prior to the distribution of Saamsun as discussed above, the Company had
three business segments: annuity operations (as discussed above), asset
management operations and broker-dealer operations (see Note 10 of Notes to
Consolidated Financial Statements). The asset management operations were
conducted by the Companys former registered investment advisor subsidiary, AIG
SunAmerica Asset Management Corp. (SAAMCO), and its related distributor, AIG
SunAmerica Capital Services, Inc. (SACS). SAAMCO and SACS earn fee income by
distributing and managing a diversified family of mutual funds, managing
certain subaccounts within the Companys variable annuity products and
providing professional management of individual, corporate and pension plan
portfolios. The asset management operations also included SA Affordable
Housing, LLC (SAAH LLC). SAAH LLC was previously a direct wholly owned
subsidiary of the Parent, until January 1, 2001, at which time all of SAAH
LLCs ownership interests were contributed to the Company. All of SAAH LLCs
ownership interests were subsequently contributed by the Company to SAAMCO.
SAAH LLC was formed as a limited liability company whose primary purpose is the
generation of rehabilitation tax credits, low-income housing credits and
passive losses. Realized tax credits are recognized by 12




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##### Table of Contents



its direct parent, SAAMCO. The broker-dealer operations were conducted by
the Companys former broker-dealer subsidiary, Royal Alliance Associates, Inc.
(Royal Alliance), which sells proprietary annuities and mutual funds and
non-proprietary investment products. Royal Alliance earns income from
commissions on sales of these products, net of the portion that is passed on to
the registered representatives. On June 10, 2002, the Company entered into a profit sharing agreement with
SAAMCO whereby SAAMCO contributes to the Company on a quarterly basis its
profits earned in connection with its role as investment advisor and/or
business manager to several open-end investment management companies registered
under the Investment Company Act of 1940, as amended, that fund the variable
investment options available to investors through the Companys variable
annuity contracts (the SAAMCO Agreement). The SAAMCO Agreement was
retroactive to January 1, 2002. Amounts paid to or accrued by the Company
under this agreement totaled $60.5 million in 2003 and $62.6 million in 2002. RESULTS OF OPERATIONS NET INCOME totaled $85.7 million in 2003, compared to $34.3 million in
2002 and $90.4 million in 2001. The operating results of 2001 include those of
the asset management and broker-dealer operations. Assuming the Saamsun
distribution had occurred on January 1, 2001, the beginning of the prior
periods discussed herein, net income would have been $99.9 million for 2001. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of EITF 99-20 in 2001. The Company recorded a loss of $10.3 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 year
ended December 31, 2001 (see Note 2 of Notes to Consolidated Financial
Statements). PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $107.4
million in 2003, compared to $36.3 million in 2002 and $121.6 million in 2001.
Assuming the Saamsun distribution had occurred on January 1, 2001, the
beginning of the prior periods discussed herein, pretax income before
cumulative effect of accounting change would have been $142.8 million for 2001.
The increase in 2003 compared to 2002 was primarily due to a reduction in net
realized investment losses. The decline in 2002 results compared to 2001
primarily resulted from lower fee income and increased guaranteed minimum death
benefits on variable annuities, partially offset by increased net investment
income. INCOME TAX EXPENSE totaled $21.8 million in 2003, $2.1 million in 2002 and
$20.9 million in 2001, representing effective tax rates of 20%, 6% and 17% in
2003, 2002 and 2001, respectively. The unusually low effective tax rate for
2002 is due primarily to the lower relative pretax income without corresponding
reductions in permanent tax differences. Assuming that the Saamsun
distribution had occurred on January 1, 2001, the beginning of the prior year
period discussed herein, income tax expense would have been $32.6 million for
2001, representing an effective tax rate of 23%. The lower tax rate in 2001 is
due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SAAMCO
which reduced the effective tax rate by approximately 13% (see Note 7 of Notes
to Consolidated Financial Statements). 13




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##### Table of Contents



As discussed above and in Note 10 of Notes to Consolidated Financial
Statements, effective January 1, 2002, the Company has one business segment,
annuity operations. ANNUITY OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $107.4
million in 2003, compared with $36.3 million in 2002 and $142.8 million in
2001. The increase in 2003 compared to 2002 was primarily due to lower net
realized investment losses and improved net investment income as customers
allocated more dollars to the fixed-rate portion of variable annuity contracts.
The decline in 2002 results compared to 2001 primarily resulted from increased
guaranteed minimum death benefits on variable annuities, increased amortization
of deferred acquisition costs, lower fee income, increased general and
administrative expenses and increased net realized investment losses partially
offset by higher net investment income. NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment
income earned on invested assets less interest credited to fixed 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
investment 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 the securities lending program, which is offset by a securities
lending payable in the same amount. As discussed in Note 2 of the accompanying
consolidated financial statements, 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 administer the program. 14




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##### Table of Contents



An analysis of net investment spread and a reconciliation to net income is
presented in the following table: Years ended December 31,2003
    
    2002
    
    2001(In Thousands)Investment income
    
    $
    398,304
    
    
    $
    377,556
    
    
    $
    358,710Interest credited to fixed annuity
contracts
    
    
    (153,636
    )
    
    
    (142,973
    )
    
    
    (133,647
    )Interest credited to universal life
insurance contracts
    
    
    (76,415
    )
    
    
    (80,021
    )
    
    
    (81,773
    )Interest credited to guaranteed
investment contracts
    
    
    (7,534
    )
    
    
    (11,267
    )
    
    
    (25,079
    )Net investment spread
    
    
    160,719
    
    
    
    143,295
    
    
    
    118,211Net realized investment losses
    
    
    (30,354
    )
    
    
    (65,811
    )
    
    
    (59,784
    )Fee income, net of reinsurance
    
    
    353,681
    
    
    
    367,574
    
    
    
    402,396General and administrative expenses,
net of deferrals
    
    
    (83,013
    )
    
    
    (79,287
    )
    
    
    (80,026
    )Amortization of DAC
    
    
    (156,906
    )
    
    
    (187,860
    )
    
    
    (144,273
    )Annual commissions
    
    
    (55,661
    )
    
    
    (58,389
    )
    
    
    (58,278
    )Claims on UL contracts, net of
reinsurance recoveries
    
    
    (17,766
    )
    
    
    (15,716
    )
    
    
    (17,566
    )Guaranteed minimum death benefits,
net of reinsurance recoveries
    
    
    (63,268
    )
    
    
    (67,492
    )
    
    
    (17,839
    )Income tax expense
    
    
    (21,760
    )
    
    
    (2,063
    )
    
    
    (32,639
    )Cumulative effect of accounting
change, net of tax
    
    
    
    
    
    
    
    
    
    
    (10,342
    )Net income
    
    $
    85,672
    
    
    $
    34,251
    
    
    $
    99,860
 Net investment spread totaled $160.7 million in 2003, $143.3 million in
2002 and $118.2 million in 2001. These amounts equal 2.41% on average invested
assets (computed on a daily basis) of $6.66 billion in 2003, 2.35% on average
invested assets of $6.09 billion in 2002 and 2.20% on average invested assets
of $5.38 billion in 2001. The increase in net investment spread in 2003 from
2002 resulted from substantial growth in average invested assets and effective
management of interest crediting rates to offset lower yields available on
invested assets. The components of net investment spread were as follows: Years ended December 31,2003
    
    2002
    
    2001(In Thousands)Net investment spread
    
    $
    160,719
    
    
    $
    143,295
    
    
    $
    118,211Average invested assets
    
    
    6,656,360
    
    
    
    6,086,517
    
    
    
    5,377,261Average interest-bearing liabilities
    
    
    (6,407,102
    )
    
    
    (5,962,521
    )
    
    
    (5,344,982
    )Yield on average invested assets
    
    
    5.98
    %
    
    
    6.20
    %
    
    
    6.67
    %Rate paid on average interest
bearing liabilities
    
    
    3.71
    
    
    
    3.93
    
    
    
    4.50Difference between yield and
interest rate paid
    
    
    2.27
    %
    
    
    2.27
    %
    
    
    2.17
    %Net investment spread as a
percentage of average invested
assets
    
    
    2.41
    %
    
    
    2.35
    %
    
    
    2.20
    %
 15




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##### Table of Contents



The growth in average invested assets principally resulted from sales of
the fixed account options of the Companys variable annuity products (Fixed
Annuities Deposits), and renewal deposits on its universal life product (UL
Deposits), partially offset by net exchanges from fixed accounts into the
separate accounts of variable annuity contracts. Sales of fixed annuities and
universal life product totaled $1.58 billion in 2003, $1.78 billion in 2002 and
$2.33 billion in 2001, and are largely deposits for the fixed accounts of
variable annuities. These deposits represent 27%, 34%, and 51%, respectively,
of the related reserve balances at the beginning of the respective periods.
Fixed Annuity Deposits were higher by approximately $550 million in 2001 due to
low margin Anchor Advisor sales allocated to one-year fixed accounts in 2001.
The one-year fixed account was discontinued from the product line in September
2001. 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 $249.3 million in 2003, compared with $124.0
million in 2002 and $32.3 million in 2001. The increase in 2003 principally
reflects the impact of a $200.0 million capital contribution from the Parent in
the third quarter of 2002. The increase in 2002 principally reflects $120.5
million of net income tax refunds received from the Parent in the fourth
quarter of 2001. The difference between the Companys yield on average
invested assets and the rate paid on average interest-bearing liabilities was
2.27% in 2003, 2.27% in 2002 and 2.17% in 2001. Investment income (and the related yields on average invested assets)
totaled $398.3 million (5.98%), compared with $377.6 million (6.20%) in 2002
and $358.7 million (6.67%) in 2001. The decrease in the investment yield in
2003 and 2002 primarily reflect a lower prevailing interest rate environment.
Expenses incurred to manage the investment portfolio amounted to $2.3 million
in 2003, $2.4 million in 2002 and $5.0 million in 2001. These expenses are
included as a reduction of investment income in the consolidated statement of
income and comprehensive income. Interest expense totaled $237.6 million in 2003, $234.3 million in 2002
and $240.5 million in 2001. The average rate paid on all interest-bearing
liabilities was 3.71% in 2003, compared with 3.93% in 2002 and 4.50% in 2001.
Interest-bearing liabilities averaged $6.41 billion during 2003, $5.96 billion
during 2002 and $5.34 billion during 2001. The decline in the overall rates
paid in 2003 compared to 2002 and 2001 resulted primarily from the impact of a
declining interest rate environment. NET REALIZED INVESTMENT LOSSES totaled $30.4 million in 2003, $65.8
million in 2002 and $59.8 million in 2001 and include impairment writedowns of
$54.1 million, $57.3 million and $68.0 million, respectively. Thus, net
realized gains from sales and redemptions of investments totaled $23.7 million
in 2003, compared with net realized losses of $8.5 million in 2002 and net
realized gains of $8.2 million in 2001. The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $2.21 billion in 2003, $1.60 billion in 2002 and $1.77 billion in
2001. 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 16




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##### Table of Contents



redemptions of investments fluctuate from period to period, and represent
0.36%, 0.14% and 0.15% of average invested assets for 2003, 2002 and 2001,
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 $54.1 million, $57.3 million and $68.0
million of provisions principally applied to bonds in 2003, 2002 and 2001,
respectively. Impairment writedowns represent 0.81%, 0.96% and 1.27% of
average invested assets for 2003, 2002 and 2001, respectively. For the five
years ended December 31, 2003, impairment writedowns as a percentage of average
invested assets have ranged from 0.08% to 1.27% and have averaged 0.67%. Such
writedowns are based upon estimates of the fair value of invested assets and
recorded when declines in value of such assets are considered to be other than
temporary. Actual realization will be dependent upon future events. The
Company recorded $15.9 million ($10.3 million, net of tax) of additional
impairments in 2001 pursuant to the implementation of EITF 99-20. This
adjustment was recorded as a cumulative effect of accounting change in the
accompanying consolidated statement of income and comprehensive income for
2001. VARIABLE ANNUITY FEES, NET OF REINSURANCE are based on the market value of
assets in separate accounts supporting variable annuity contracts. Such fees
totaled $290.1 million in 2003, $295.5 million in 2002 and $337.4 million in
2001 and are net of reinsurance premiums of $30.8 million, $22.5 million and
$13.2 million, respectively. The 2003 and 2002 amounts include $60.5 million
and $62.6 million attributable to the SAAMCO Agreement, respectively. In
consolidation, comparable fees totaling $63.2 million in 2001 were included in
the annuity operations segment. The decreased fees in 2003 as compared to 2002
reflect increased reinsurance premiums. The decreased fees in 2002 as compared
to 2001 primarily reflect the unfavorable equity market conditions in 2002 and
the early part of 2003, and the resulting unfavorable impact on market values
of the assets in the separate accounts. Variable annuity fees represent 1.8%
of average variable annuity assets in all periods presented. Variable annuity
assets averaged $16.32 billion, $16.46 billion and $18.87 billion during the
respective periods. Variable annuity deposits, which exclude deposits
allocated to the fixed accounts of variable annuity products, totaled $1.73
billion in 2003, $1.18 billion in 2002 and $1.41 billion in 2001. These
amounts represent 12%, 6% and 7% of separate account liabilities at the
beginning of the respective periods. The increase in variable annuity deposits
in 2003 reflected increased demand for the variable annuity products due to the
improved equity market conditions in the latter part of 2003. The decrease in
variable annuity deposits in 2002 reflected lower demand for the variable
account options of the Companys variable annuity products due to the
unfavorable equity market conditions discussed above. 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. 17




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##### Table of Contents



Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $3.27
billion, $2.92 billion and $3.69 billion in 2003, 2002 and 2001, respectively.
Such sales primarily reflect those of the Companys Polaris, Seasons and WM
Diversified Strategies family of variable annuity products. The Companys
variable annuity products are multi-manager variable annuities that offer
investors a choice of several variable funds as well as a number of 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 reflect improving market conditions in 2003.
Sales were higher by approximately $550 million in 2001 due to low margin
Anchor Advisor sales allocated to one year fixed accounts in the third quarter
of 2001 before the one year fixed account was discontinued from the product
line at the end of September 2001. 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 in Item 1). UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $35.8
million in 2003, $36.3 million in 2002 and $36.5 million in 2001 and are net of
reinsurance premiums of $33.7 million, $34.1 million and $34.0 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 represent 2.23%, 2.17% and 2.08% of average reserves
for universal life insurance contracts in the respective periods. SURRENDER CHARGES on variable annuity and universal life contracts totaled
$27.7 million in 2003, $32.5 million in 2002 and $24.9 million in 2001.
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 $83.0 million in 2003, $79.3
million in 2002 and $80.0 million in 2001. 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 totaled $156.9 million in 2003,
compared with $187.9 million in 2002 and $144.3 million in 2001. At December
31, 2003, DAC amortization was adjusted for a DAC unlocking that resulted in a
reduction of $18.0 million. The increase in amortization in 2002 was primarily
related to lower estimates of future gross profits on variable annuity
contracts compared to the prior years in light of the downturn in the equity
markets in 2002, and additional variable annuity product sales over the last
twelve months and the subsequent amortization of related deferred commissions
and other direct selling costs. 18




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##### Table of Contents



ANNUAL COMMISSIONS totaled $55.7 million in 2003, compared with $58.4
million in 2002 and $58.3 million in 2001. 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
$17.8 million in 2003, compared to $15.7 million in 2002 and $17.6 million in
2001 (net of reinsurance recoveries of $34.0 million in 2003, $29.2 million in
2002 and $31.6 million and 2001). The change in such claims resulted
principally from changes in the mortality experience. GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (Net
GMDB) on variable annuity contracts totaled $63.3 million in 2003, compared
with $67.5 million in 2002 and $17.8 million in 2001 (net of reinsurance
recoveries of $8.0 million in 2003, $8.4 million in 2002 and $3.8 million in
2001). Net GMDB consists primarily of guaranteed minimum death benefits as
well as immaterial amounts of earnings enhancement benefits, guaranteed minimum
income benefits and guaranteed minimum account value benefits. These
guarantees are described in more detail in the following paragraphs. The
decrease in Net GMDB in 2003 reflects the upturn in the equity markets in 2003.
The increase in Net GMDB related to the Companys variable annuity separate
account contracts in 2002 reflects the downturn in the equity markets in 2002.
Future downturns in the equity markets could increase these expenses. A majority of the Companys variable annuity products are issued with a
death benefit feature which provides that, upon the death of a contractholder,
the contractholders beneficiary will receive the greater of (1) the
contractholders account value, or (2) a guaranteed minimum death benefit that
varies by product (the GMDB). The Company bears the risk that death claims
following a decline in the equity markets may exceed contractholder account
balances, and that the fees collected under the contract are insufficient to
cover the costs of the benefit to be provided. At December 31, 2003, a portion
of the GMDB risk on approximately 33% of the account value with such features
had been reinsured. Approximately half of this reinsurance will cease at March
31, 2004. In 2003, a substantial majority of contracts sold have reinsurance
coverage. However, the Company does not currently have reinsurance coverage on
the majority of the contracts to be sold after December 2004. Reinsurance
coverage is subject to limitations such as caps and deductibles. In accordance
with Generally Accepted Accounting Principles, the Company expenses such
benefits in the period incurred, and therefore does not provide reserves for
future benefits. However, effective January 1, 2004, the Company will be
required to record a liability for GMDBs (See Note 2 of Notes to Consolidated
Financial Statements). EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional EEB feature. 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 19




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##### Table of Contents



to cover the costs of the benefit to be provided. At December 31, 2003,
approximately 8% (calculated based on current account value) of in-force
contracts include EEB coverage, with 95% of the EEB risk fully reinsured. GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain
variable annuity products that contain or offer a GMIB living benefit feature.
This feature provides a minimum 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. Substantially all of the
Companys products containing the GMIB feature have been reinsured;
furthermore, substantially all of the GMIB risk per individual reinsured
contract has been transferred to the reinsurer. However, the Company does not
have reinsurance coverage on contracts to be sold after July 2004. GUARANTEED MINIMUM ACCOUNT VALUE (GMAV): In the third quarter of 2002,
the Company began issuing certain variable annuity products which offer an
optional GMAV living benefit. If elected by the policyholder at the time of
contract issuance, this feature guarantees that the account value under the
contract will equal or exceed the amount of the initial principal invested,
adjusted for 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 contractholder 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 the GMAV benefit are recorded in investment income in the
accompanying consolidated statement of income and comprehensive income. 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 continuous monitoring of these
ratings of the reinsurers, such risks are considered to be minimal. Prior to the distribution of Saamsun on January 1, 2002, the Company had
asset management operations and broker-dealer operations. Operating results of
these two segments for 2001 are discussed in Note 10 of the accompanying
consolidated financial statements. 20




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##### Table of Contents



CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS EQUITY increased to $1.46 billion at December 31, 2003 from
$1.32 billion at December 31, 2002. The increase reflected net income of $85.7
million and other comprehensive income of $56.1 million. INVESTMENTS AND CASH at December 31, 2003 totaled $7.07 billion, compared
with $7.19 billion at December 31, 2002. The Companys invested assets are
managed by a subsidiary of AIG. The following table summarizes the Companys
Bond Portfolio and other investments and cash at December 31, 2003 and December
31, 2002: December 31, 2003
    
    December 31, 2002Carrying
    
    Percent of
    
    Carrying
    
    Percent ofValue
    
    Portfolio
    
    Value
    
    Portfolio(In thousands, except for percentages)Bond Portfolio:U.S. government securities
    
    $
    24,292
    
    
    
    0.3
    %
    
    $
    32,820
    
    
    
    0.5
    %Mortgage-backed securities
    
    
    1,191,817
    
    
    
    16.9
    
    
    
    1,547,568
    
    
    
    21.5Securities of public
utilities
    
    
    365,150
    
    
    
    5.2
    
    
    
    311,604
    
    
    
    4.3Corporate bonds and notes
    
    
    2,697,142
    
    
    
    38.1
    
    
    
    2,776,021
    
    
    
    38.6Redeemable preferred
stocks
    
    
    22,175
    
    
    
    0.3
    
    
    
    21,575
    
    
    
    0.3Other debt securities
    
    
    1,205,224
    
    
    
    17.1
    
    
    
    838,981
    
    
    
    11.7Total Bond Portfolio
    
    
    5,505,800
    
    
    
    77.9
    
    
    
    5,528,569
    
    
    
    76.9Mortgage loans
    
    
    716,846
    
    
    
    10.1
    
    
    
    738,601
    
    
    
    10.3Common stocks
    
    
    727
    
    
    
    0.0
    
    
    
    2,609
    
    
    
    0.0Cash and short-term
investments
    
    
    85,188
    
    
    
    1.2
    
    
    
    65,872
    
    
    
    0.9Other
    
    
    764,811
    
    
    
    10.8
    
    
    
    858,053
    
    
    
    11.9Total investments and cash
    
    $
    7,073,372
    
    
    
    100.0
    %
    
    $
    7,193,704
    
    
    
    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 78% of the Companys total
investment portfolio at December 31, 2003, had an aggregate fair value that was
$154.6 million greater than its amortized cost at December 31, 2003, compared
with an aggregate fair value that was $35.9 million greater than its amortized
cost at December 31, 2002. The increase in net unrealized gains on the Bond
Portfolio during 2003 principally reflected the impact of the decrease in
prevailing interest rates and the corresponding effect on the fair value of the
Bond Portfolio at December 31, 2003 as well as the impairment writedowns in
2003. 21




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##### Table of Contents



At December 31, 2003, the Bond Portfolio had an aggregate carrying value
(i.e. fair value) of $5.51 billion and an aggregate amortized cost of $5.35
billion. At December 31, 2003, the Bond Portfolio (excluding $22.2 million of
redeemable preferred stocks) included $5.21 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 $269.5 million of
bonds rated by the Company pursuant to statutory ratings guidelines established
by the NAIC. At December 31, 2003, approximately $5.14 billion of the Bond
Portfolio was investment grade, including $1.22 billion of mortgage-backed
securities (MBS) and U.S. government/agency securities. At December 31, 2003, the Bond Portfolio included $339.1 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.2% of the Companys total assets and approximately 4.8% 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 December 31, 2003,
the Companys non-investment-grade portfolio consisted of 102 issues with no
issuer representing more than 10% of the total non-investment grade portfolio.
These non-investment-grade securities are comprised of bonds spanning 11
industries with 21% of these assets concentrated in financial institutions, 17%
of these assets concentrated in utilities, 15% of these assets concentrated in
telecommunications, 11% of these assets concentrated in transportation and 10%
concentrated in noncyclical consumer products. No other industry concentration
constituted more than 10% of these assets. The table on the next page summarizes the Companys rated bonds by rating
classification as of December 31, 2003. 22




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##### Table of Contents



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
    
    TotalPercentEstimated
    
    NAIC
    
    
    
    
    
    Estimated
    
    
    
    
    
    Estimated
    
    of totalS&P/Moodys/Fitch
    
    Amortized
    
    fair
    
    category
    
    Amortized
    
    fair
    
    Amortized
    
    fair
    
    investedCategory (1)
    
    cost
    
    value
    
    (2)
    
    cost
    
    value
    
    cost
    
    value
    
    assetsAAA+ to A-(Aaa to A3)[AAA to A-]
    
    $
    2,937,751
    
    
    $
    3,039,213
    
    
    
    1
    
    
    $
    493,569
    
    
    $
    507,057
    
    
    $
    3,431,320
    
    
    $
    3,546,270
    
    
    
    50.14
    %BBB+ to BBB-(Baa1 to Baa3)[BBB+ to BBB-]
    
    
    1,235,038
    
    
    
    1,282,317
    
    
    
    2
    
    
    
    304,607
    
    
    
    315,919
    
    
    
    1,539,645
    
    
    
    1,598,236
    
    
    
    22.60
    %BB+ to BB-(Ba1 to Ba3)[BB+ to BB-]
    
    
    160,144
    
    
    
    145,749
    
    
    
    3
    
    
    
    33,722
    
    
    
    34,996
    
    
    
    193,866
    
    
    
    180,745
    
    
    
    2.56
    %B+ to B-(B1 to B3)[B+ to B-]
    
    
    109,415
    
    
    
    101,515
    
    
    
    4
    
    
    
    2,354
    
    
    
    2,113
    
    
    
    111,769
    
    
    
    103,628
    
    
    
    1.47
    %CCC+ to C(Caa to C)[CCC]
    
    
    22,386
    
    
    
    24,295
    
    
    
    5
    
    
    
    11,252
    
    
    
    10,864
    
    
    
    33,638
    
    
    
    35,159
    
    
    
    0.50
    %CI to D[DD]{D}
    
    
    6,120
    
    
    
    5,724
    
    
    
    6
    
    
    
    13,310
    
    
    
    13,863
    
    
    
    19,430
    
    
    
    19,587
    
    
    
    0.28

    %TOTAL RATED
ISSUES
    
    $
    4,470,854
    
    
    $
    4,598,813
    
    
    
    
    
    
    $
    858,814
    
    
    $
    884,812
    
    
    $
    5,329,668
    
    
    $
    5,483,625
 Footnotes appear on the following page. 23




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##### Table of Contents



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 range 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 $269.5 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines. 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; or (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. 24




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##### Table of Contents



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 $54.1 million in the 2003, $57.3 million in 2002 and $68.0
million in 2001. One individual impairment loss accounted for 14% of the Companys pre-tax
income in 2003 and no other individual impairment loss exceeded 10% of the
Companys pre-tax income for the year ended December 31, 2003. 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 December 31, 2003, the Companys Bond Portfolio had gross unrealized
gains of $214.7 million and gross unrealized losses of $60.1 million. One
issuer accounted for 16% of unrealized losses. No other single issuer
accounted for more than 10% of unrealized losses. At December 31, 2003, the fair value of the Companys Bond Portfolio
aggregated $5.51 billion. Of this aggregate fair value, approximately 1.1%
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 December 31, 2003, approximately $971.9 million, at amortized cost, of
the Companys Bond Portfolio had a fair value of $911.8 million resulting in an
aggregate unrealized loss of $60.1 million. The gross unrealized losses in the
Bond Portfolio included the following concentrations: GrossUnrealizedConcentration
    
    Losses(In thousands)Investment Grade:Finance companies
    
    $
    15,497Transportation
    
    
    4,929Non-corporate
    
    
    4,399Consumer products
    
    
    2,280Not Rated and Below Investment Grade:Finance companies
    
    
    13,621Transportation
    
    
    8,074Non-corporate
    
    
    5,027Consumer products
    
    
    2,818
 25




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##### Table of Contents



The amortized cost of the Bond Portfolio in an unrealized loss position at
December 31, 2003, by contractual maturity, is shown below. AmortizedCost(In thousands)Due in one year or less
    
    $
    6,467Due after one year through five years
    
    
    259,519Due after five years through ten years
    
    
    393,902Due after ten years
    
    
    312,002Total
    
    $
    971,890
 The aging of the Bond Portfolio in an unrealized loss position at December
31, 2003 is shown below: Less than or Equal to 20%
    
    Greater than 20% to 50%
    
    Greater than 50%of Amortized Cost
    
    of Amortized Cost
    
    of Amortized Cost
    
    Total(dollars in thousands)
    
    Amortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    Unrealized
    
    
    
    
    
    Amortized
    
    UnrealizedMonths
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    Items
    
    Cost
    
    Loss
    
    ItemsInvestment Grade Bonds0-6
    
    $
    635,215
    
    
    $
    (12,119
    )
    
    
    112
    
    
    $
    34,692
    
    
    $
    (11,503
    )
    
    
    6
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    669,907
    
    
    $
    (23,622
    )
    
    
    1187-12
    
    
    9,072
    
    
    
    (55
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,072
    
    
    
    (55
    )
    
    
    4>12
    
    
    89,140
    
    
    
    (4,864
    )
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,140
    
    
    
    (4,864
    )
    
    
    15Total
    
    $
    733,427
    
    
    $
    (17,038
    )
    
    
    131
    
    
    $
    34,692
    
    
    $
    (11,503
    )
    
    
    6
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    768,119
    
    
    $
    (28,541
    )
    
    
    137Below
Investment Grade Bonds0-6
    
    $
    137,716
    
    
    $
    (7,817
    )
    
    
    26
    
    
    $
    64,683
    
    
    $
    (23,235
    )
    
    
    14
    
    
    $
    45
    
    
    $
    (36
    )
    
    
    2
    
    
    $
    202,444
    
    
    $
    (31,088
    )
    
    
    427-12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    (469
    )
    
    
    1
    
    
    
    599
    
    
    
    (469
    )
    
    
    1>12
    
    
    728
    
    
    
    (18
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    (18
    )
    
    
    1Total
    
    $
    138,444
    
    
    $
    (7,835
    )
    
    
    27
    
    
    $
    64,683
    
    
    $
    (23,235
    )
    
    
    14
    
    
    $
    644
    
    
    $
    (505
    )
    
    
    3
    
    
    $
    203,771
    
    
    $
    (31,575
    )
    
    
    44Total Bonds0-6
    
    $
    772,931
    
    
    $
    (19,936
    )
    
    
    138
    
    
    $
    99,375
    
    
    $
    (34,738
    )
    
    
    20
    
    
    $
    45
    
    
    $
    (36
    )
    
    
    2
    
    
    $
    872,351
    
    
    $
    (54,710
    )
    
    
    1607-12
    
    
    9,072
    
    
    
    (55
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    (469
    )
    
    
    1
    
    
    
    9,671
    
    
    
    (524
    )
    
    
    5>12
    
    
    89,868
    
    
    
    (4,882
    )
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,868
    
    
    
    (4,882
    )
    
    
    16Total
    
    $
    871,871
    
    
    $
    (24,873
    )
    
    
    158
    
    
    $
    99,375
    
    
    $
    (34,738
    )
    
    
    20
    
    
    $
    644
    
    
    $
    (505
    )
    
    
    3
    
    
    $
    971,890
    
    
    $
    (60,116
    )
    
    
    181
 In 2003, the pretax realized losses incurred with respect to the sale of
fixed securities in the Bond Portfolio were $9.6 million. The aggregate fair
value of securities sold was $280.6 million, which was approximately 96% of
amortized cost. The average period of time that securities sold at a loss
during 2003 were trading continuously at a price below amortized cost was
approximately 11 months. As stated previously, 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, certain structured securities and limited partnerships.
The aggregate carrying value of these securities at December 31, 2003 was
approximately $1.57 billion. 26




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##### 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 $252.7 million at December 31, 2003. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
December 31, 2003, Secured Loans consisted of $194.4 million of privately
traded securities and $58.3 million of publicly traded securities. These
Secured Loans are composed of loans to 54 borrowers spanning 25 industries,
with 13% of these assets concentrated in foods, 12% concentrated in consumer
services, 11% concentrated in non-cable media, 10% concentrated in electric and
10% concentrated in transportation. 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 $716.8 million at December 31, 2003 and
consisted of 108 commercial first mortgage loans with an average loan balance
of approximately $6.6 million, collateralized by properties located in 31
states. Approximately 35% of this portfolio was office, 18% was multifamily
residential, 15% was manufactured housing, 11% was industrial, 11% was hotels,
5% was retail, and 5% was other types. At December 31, 2003, approximately
27%, 11% and 11% of this portfolio were secured by properties located in
California, Michigan and New York, respectively, and no more than 10% of this
portfolio was secured by properties located in any other single state. At
December 31, 2003, 16 mortgage loans have an outstanding balance of $10 million
or more, which collectively aggregated approximately 50% of this portfolio. At
December 31, 2003, approximately 18% of the mortgage loan portfolio consisted
of loans with balloon payments due before January 1, 2007. During 2003, 2002
and 2001, loans delinquent by more than 90 days, foreclosed loans and
restructured loans have not been significant in relation to the total mortgage
loan portfolio. 27




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##### Table of Contents



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. POLICY LOANS totaled $200.2 million at December 31, 2003, compared to
$215.8 million at December 31, 2002, and primarily represent loans taken
against universal life insurance policies. SEPARATE ACCOUNT SEED MONEY totaled $17.8 million at December 31, 2003,
compared to $25.4 million at December 31, 2002, and consists principally of
seed money for mutual funds used as investment vehicles for the Companys
variable annuity separate accounts. The decrease in 2003 is due primarily to
redemptions. SECURITIES LENDING COLLATERAL totaled $514.1 million at December 31, 2003,
compared to $585.8 million at December 31, 2002, 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. 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 79% of the
Companys fixed annuity, universal life and GIC reserves had surrender
penalties or other restrictions at December 31, 2003. 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 28




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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
December 31, 2003, these assets had an aggregate fair value of $6.56 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 December 31, 2003, these liabilities
had an aggregate fair value (determined by discounting future contractual cash
flows by related market rates of interest) of $6.25 billion with an
option-adjusted duration of 3.4 years. The Companys potential exposure due to
a relative 10% decrease in prevailing interest rates from its December 31, 2003
levels is a loss of approximately $0.1 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
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. The overall interest-credited rate environment has continued to decline in
2003. A significant portion of the Companys fixed annuity contracts
(including the fixed option of variable contracts) has reached or is near the
minimum contractual guaranteed rate (generally 3%). 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. The trends experienced during 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, 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: 29




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2003
    
    2002
    
    200110-year U.S. Treasury bond rate:
    
    
    4.01
    %
    
    
    4.61
    %
    
    
    5.02
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.75
    
    
    
    6.23
    
    
    
    6.82Rate paid on average interest
bearing liabilities
    
    
    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 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 MBSs. MBSs are generally investment-grade securities
collateralized by large pools of mortgage loans. MBSs 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
MBSs 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 30




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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 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 $49.6 million of bonds at
December 31, 2003, which constituted approximately 0.7% of total invested
assets. At December 31, 2002, defaulted investments totaled $15.6 million
($8.9 million of bonds and $6.7 million of mortgage loans), which constituted
approximately 0.2% 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, Dollar
Roll Repo capacity on invested assets and, if required, proceeds from invested
asset sales. The Companys liquidity is primarily derived from operating cash
flows. At December 31, 2003, approximately $4.59 billion of the Companys Bond
Portfolio had an aggregate unrealized gain of $214.7 million, while
approximately $911.8 million of the Bond Portfolio had an aggregate unrealized
loss of $60.1 million. In addition, the Companys investment portfolio
currently provides approximately $51.2 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 and GIC 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 Dollar Roll
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. 31




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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 entered into seven agreements 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
December 31, 2003 is $557.8 million. Related to each of these agreements are
participation agreements with the Companys Parent, under which the Parent will
share in $222.5 million of these liabilities in exchange for a proportionate
percentage of the fees received under these agreements. The expiration dates
of these commitments are as follows: $21.9 million in 2004, $385.9 million in
2005 and $150.0 million in 2006. The Internal Revenue Service has initiated
examinations into the transactions underlying these commitments, including the
Companys role in the transactions. The Company is fully cooperating with the
IRS. Management does not anticipate any material losses with respect to these
commitments. At December 31, 2003, the Company has future obligations to purchase
approximately $18 million of asset backed securities in the ordinary course of
business. The expiration dates of these commitments are as follows: $11
million in 2004 and $7 million in 2006. At December 31, 2003, the Company held reserves for GICs with maturity
dates as follows: $80.2 million in 2004, $105.2 million in 2005 and $32.6
million in years subsequent to 2006. RECENTLY ISSUED ACCOUNTING STANDARDS: On January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). This statement
requires the Company to recognize all derivatives in the balance sheet and
measure these derivatives at fair value. The recognition of the change in the
fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which it is effective as part
of a hedge transaction. The adoption of SFAS 133 on January 1, 2001 resulted
in an increase of $1.4 million, net of tax, in other comprehensive income. 32




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In January 2001, the Emerging Issues Task Force (EITF) issued EITF
99-20, Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 provides guidance on the calculation of interest income and the
recognition of impairments related to beneficial interests held in an
investment portfolio. The Companys beneficial interests are investments that
represent rights to receive specified cash flows from a pool of underlying
assets (i.e. collateralized debt obligations). The Company recorded $15.9
million of additional impairments ($10.3 million net of tax) pursuant to the
implementation of EITF 99-20. This adjustment was recorded as a cumulative
effect of accounting change in the consolidated statement of income and
comprehensive income for 2001. In June 2001, Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 142 requires the Company to discontinue
the amortization of goodwill on its consolidated statement of income and
comprehensive income and is effective as of January 1, 2002. SFAS 142 requires
goodwill to be subject to an assessment of impairment on an annual basis, or
more frequently if circumstances indicate that a possible impairment has
occurred. The assessment of impairment involves a two-step process prescribed
in SFAS 142, whereby an initial assessment for potential impairment is
performed, followed by a measurement of the amount of impairment, if any. SFAS
142 also requires the completion of a transitional impairment test in the year
of adoption, with any identified impairments recognized as a cumulative effect
of an accounting change. The Company has evaluated the impact of the
impairment provisions of SFAS 142 as of December 31, 2003, and has determined
that no impairment is required to be recorded to the carrying value of the
Companys goodwill balance. In November 2002, FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45), which requires that, for
guarantees within the scope of FIN 45 issued or amended by the Company after
December 31, 2002, a liability for the fair value of the obligation undertaken
in issuing the guarantee be recognized. FIN 45 also requires additional
disclosures in financial statements starting with the Companys 2002 year-end
financial statements. The adoption of FIN 45 did not have a significant impact
on the Companys results of operations or financial condition. In July 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and
for Separate Accounts (SOP-03-1). FASB did not object to the issuance of SOP
03-1. This statement is effective for the Company as of January 1, 2004.
Under SOP 03-1, variable annuity assets held in separate accounts will continue
to be measured at fair value and reported in summary total on the Companys
financial statements, with an equivalent summary total reported for related
liabilities, if the separate account arrangement meets certain specified
conditions. Assets underlying the Companys interest in a separate account
(separate account seed money) do not qualify for separate account accounting
and reporting. The Company will be required to look through the separate
account for purposes of accounting for its interest therein, and account for
and classify separate account seed money based on its nature as if the assets
of the separate account underlying the Companys interest were held directly by
the general account rather than through the separate account 33




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##### Table of Contents



structure. The adoption of SOP 03-1 on January 1, 2004 will not have a
material impact on the Companys separate accounts or separate account seed
money. In addition, SOP 03-1 will require the Company to recognize a liability
for guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits and modify certain disclosures and financial
statement presentations for these products. The Companys estimate of the
liability, including the impact of DAC, will result in a one-time cumulative
accounting charge upon adoption of approximately $52 million ($79 million
pre-tax) to be recorded in the first quarter of 2004. 
 ITEM 7A. 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 28 to 30
herein. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Companys financial statements begin on page F-3. Reference is made to
the Index to Consolidated Financial Statements on page F-1 herein. 
 ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. DISCLOSURE CONTROLS & PROCEDURES The Companys disclosure 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 fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 34




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##### Table of Contents



PART III Information called for by Items 10 through 13 of this part is omitted
pursuant to General Instruction I. of Form 10-K. 
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES As an indirect wholly-owned subsidiary of AIG, oversight functions
regarding our independent accountants, PricewaterhouseCoopers LLP, are included
in the duties of AIGs Audit Committee. The Company does not have its own
Audit Committee. AIGs Audit Committee has adopted pre-approval policies and
procedures regarding audit and non-audit services provided by
PricewaterhouseCoopers LLP for AIG and its consolidated subsidiaries, including
the Company. In accordance with the SECs definitions and rules, audit fees of
$1,048,000 and $784,000 were paid to PricewaterhouseCoopers LLP (PWC) for
professional services for the audits of our consolidated financial statements
included in Form 10-K, review of financial statements included in Forms 10-Q,
and for services that are normally provided in connection with statutory and
regulatory filings or engagements for 2003 and 2002, respectively. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the index set forth on page F-1 of this report. EXHIBITS Exhibit No.
    
    Description2(a)
    
    Purchase and Sale Agreement, dated as of July 15, 1998, by and among
the Company, AIGRS, First SunAmerica Life Insurance Company and MBL Life
Assurance Corporation, is incorporated herein by reference to Exhibit
2(e) to AIGRS 1998 Annual Report on Form 10-K, filed December 21, 1998.3(a)
    
    Articles of Amendment to the Amended and Restated Articles of
Incorporation, dated September 30, 2002, filed with the Arizona
Department of Insurance and the Arizona Corporation Commission on
October 20, 2002, is incorporated herein by reference to Exhibit 3(1) to
the Companys 2002 Annual Report on Form 10-K, filed March 28, 2003.3(b)
    
    Amended and Restated Articles of Incorporation, dated December 19,
2001, filed with the Arizona Department of Insurance and Arizona
Corporation Commission on January 23, 2002 and January 24, 2002,
respectively, is incorporated herein as Exhibit 3(a) to the Companys
2001 Annual Report on Form 10-K, filed March 29, 2002.3(c)
    
    Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance
on December 22, 1995, is incorporated herein by reference to
Exhibit 3(a) to the Companys quarterly report on Form 10-Q for the
quarter ended December 31, 1995, filed February 14, 1996.
 35




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Exhibit No.
    
    Description3(d)
    
    Amended and Restated Bylaws, as adopted January 1, 1996, is
incorporated herein by reference to Exhibit 3(b) to the Companys
quarterly report on Form 10-Q for the quarter ended December 31, 1995,
filed February 14, 1996.3(e)
    
    Amended and Restated Bylaws, as amended January 2, 2001, is
incorporated herein as Exhibit 3(d) to the Companys 2001 Annual Report
on Form 10-K, filed March 29, 2002.3(f)
    
    Amended and Restated Bylaws, dated as of December 19, 2001, is
incorporated herein as Exhibit 3(e) to the Companys 2001 Annual Report
on Form 10-K, filed March 29, 2002.4(a)
    
    Articles of Amendment to the Amended and Restated Articles of
Incorporation. See Exhibit 3(a).4(b)
    
    Amended and Restated Articles of Incorporation, dated December 19,
2001. See Exhibit 3(b).4(c)
    
    Amended and Restated Bylaws, dated December 19, 2001. See Exhibit
3(f).10(a)
    
    Amendment to Subordinated Loan Agreement for Equity Capital, dated as
of February 7, 2002, between the Companys affiliate, SACS, and AIGRS,
extending the maturity date to April 30, 2004 and adjusting the interest
rate to 4.75% per annum for the unpaid principal under the Subordinated
Loan Agreement for Equity Capital, dated as of March 17, 2000, defining
AIGRS rights with respect to the 8.75% due April 30, 2003.10(b)
    
    Second Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of February 27, 2003, between the Companys affiliate, SACS, and
AIGRS, extending the maturity date to April 30, 2005 and adjusting the
interest rate to 4.25% per annum for the unpaid principal under the
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
February 7, 2002, defining AIGRS rights with respect to the 4.75% notes
due April 30, 2004.10(c)
    
    Amendment to Subordinated Loan Agreement for Equity Capital, dated as
of January 15, 2002, between the Companys affiliate, SACS, and AIGRS,
extending the maturity date to March 31, 2004 and adjusting the interest
rate to 4.75% per annum for the unpaid principal under the Subordinated
Loan Agreement for Equity Capital, dated February 21, 2000, defining
AIGRS rights with respect to the 8.5% notes due March 31, 2003.10(d)
    
    Second Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of January 27, 2003, between the Companys affiliate, SACS, and
AIGRS, extending the maturity date to March 31, 2005 and adjusting the
interest rate to 4.25% per annum for the unpaid principal under the
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
January 15, 2002, defining AIGRS rights with respect to the 4.75% notes
due March 31, 2004.
 36




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Exhibit No.
    
    Description10(e)
    
    Second Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of March 8, 2002, between the Companys affiliate, SACS, and
AIGRS, extending the maturity date to April 30, 2004 and adjusting the
interest rate to 4.75% per annum for the unpaid principal under the
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
March 20, 2001, defining AIGRS rights with respect to the 8% notes due
April 30, 2003.10(f)
    
    Third Amendment to Subordinated Loan Agreement for Equity Capital, dated
as of February 27, 2003, between the Companys affiliate, SACS, and AIGRS
extending the maturity date to April 30, 2005 and adjusting the interest
rate to 4.25% per annum for the unpaid principal under the Second
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
March 8, 2002, defining AIGRS rights with respect to the 4.75% notes due
April 30, 2004.10(g)
    
    Third Amendment to Subordinated Loan Agreement for Equity Capital, dated
as of April 15, 2002, between the Companys affiliate, SACS, and AIGRS,
extending the maturity date to June 30, 2004 and adjusting the interest
rate to 4.75% per annum for the unpaid principal under the Second
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
April 30, 2001, defining AIGRS rights with respect to the 7.5% note due
June 30, 2003.10(h)
    
    Fourth Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of May 7, 2003, between the Companys affiliate, SACS, and
AIGRS, extending the maturity date to June 30, 2005 and adjusting the
interest rate to 4.25% per annum for the unpaid principal under the Third
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
April 15, 2002, defining AIGRS rights with respect to the 4.75% notes
due June 30, 2004.10(i)
    
    Third Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of May 28, 2002, between the Companys affiliate, SACS, and
AIGRS, extending the maturity date to July 30, 2004 and adjusting the
interest rate to 4.75% per annum for the unpaid principal under the
Second Amendment to Subordinated Loan Agreement for Equity Capital, dated
as of June 5, 2001, defining AIGRS rights with respect to the 7.5% notes
due July 30, 2003.10(j)
    
    Fourth Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of June 13, 2003, between the Companys affiliate, SACS, and
AIGRS extending the maturity date to July 30, 2005 and adjusting the
interest rate to 4.25% per annum for the unpaid principal under the Third
Amendment to Subordinated Loan Agreement for Equity Capital, dated as of
May 28, 2002,
defining AIGRS rights with respect to the 4.75% notes due July 30,
2004.
 37




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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Exhibit No.
    
    Description10(k)
    
    Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of September 30, 2000, between the Companys subsidiary,
SACS, and SAI, extending the maturity date to October 31, 2004
and changing the interest rate to 9.5% of a Subordinated Loan
Agreement for Equity Capital, dated as of August 25, 1998,
defining SAIs rights with respect to the 8.5% notes due October 30,
2001, is incorporated herein by reference to Exhibit 10(c) to the
Companys 2001 Annual report on Form 10-K, filed March 29,
2002.10(l)
    
    Amendment to Subordinated Loan Agreement for Equity Capital, dated as of July 23, 2001,
between the Companys affiliate, SACS, and AIGRS, extending the maturity date to September 30, 2005 and adjusting the
interest rate from 8% to 6.75% for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity
Capital, dated as of August 31, 1999, defining AIGRS rights with respect
to 8% notes due September 30, 2002, is incorporated herein by reference
to Exhibit 10(a) to the Companys quarterly report on
Form 10-Q for the quarter ended September 30, 2001, filed November 13,
2001.10(m)
    
    Asset Lease Agreement, dated June 26, 1998, between the Company and
Aurora National Life Assurance Company (Aurora), relating to a lease
from Aurora of certain information relating to single premium deferred
annuities, is incorporated herein by reference by Exhibit 10(h) to the
Companys Form 10-K, filed December 23, 1998.31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications
 REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the three months ended December
31, 2003. 38




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. AIG SUNAMERICA LIFE ASSURANCE COMPANYBy /S/ N. SCOTT GILLISN. Scott Gillis
Senior Vice President,
Chief Financial Officer
and Director
 March 29, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/
    
    JAY S. WINTROB
    
    Chief Executive Officer and Director (Principal Executive Officer)
    
    March 29, 2004Jay S. Wintrob/s/
    
    N. SCOTT GILLIS
    
    Senior Vice President, Chief Financial Officer & Director (Principal Financial Officer)
    
    March 29, 2004N. Scott Gillis/s/
    
    Stewart Polakov
    
    Senior Vice President & Controller (Principal Accounting Officer)
    
    March 29, 2004Stewart Polakov/s/
    
    JANA W. GREER
    
    President and Director
    
    March 29, 2004Jana W. Greer/s/
    
    JAMES R. BELARDI
    
    Senior Vice President and Director
    
    March 29, 2004James R. Belardi/s/
    
    MARC H. GAMSIN
    
    Senior Vice President and Director
    
    March 29, 2004Marc H. Gamsin/s/
    
    EDWIN R. RAQUEL
    
    Senior Vice President and Chief Actuary
    
    March 29, 2004Edwin R. Raquel
 39




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AIG SUNAMERICA LIFE ASSURANCE COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageNumber(s)Report of Independent Auditors
    
    
    F-2Consolidated Balance Sheet  December 31, 2003 and
December 31, 2002
    
    F-3 to F-4Consolidated Statement of Income and Comprehensive
Income  Years Ended December 31, 2003, 2002 and 2001
    
    F-5 to F-6Consolidated Statement of Cash Flows  Years Ended
December 31, 2003, 2002 and 2001
    
    F-7 to F-8Notes to Consolidated Financial Statements
    
    F-9 to F-36
 F-1




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Report of Independent Auditors To the Board of Directors and Shareholder of
AIG SunAmerica Life Assurance Company: In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income and of cash flows
present fairly, in all material respects, the financial position of AIG
SunAmerica Life Assurance Company and its subsidiaries (formerly, Anchor
National Life Insurance Company), an indirect wholly owned subsidiary of
American International Group, Inc., at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities and interest income and impairment of certain beneficial interests
in securitized financial assets in 2001. PricewaterhouseCoopers LLP
Los Angeles, California
March 29, 2004 F-2




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET December 31,
    
    December 31,2003
    
    2002(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    85,188
    
    
    $
    65,872Bonds, notes and redeemable
preferred stocks available for sale,
at market value (amortized cost: December 31,
2003, $5,351,183;
December 31, 2002, $5,492,677)
    
    
    5,505,800
    
    
    
    5,528,569Mortgage loans
    
    
    716,846
    
    
    
    738,601Policy loans
    
    
    200,232
    
    
    
    215,846Separate account seed money
    
    
    17,815
    
    
    
    25,366Common stocks available for sale, at
market value (cost: December 31, 2003,
$635; December 31, 2002, $4,111)
    
    
    727
    
    
    
    2,609Real estate
    
    
    22,166
    
    
    
    22,315Securities lending collateral
    
    
    514,145
    
    
    
    585,760Other invested assets
    
    
    10,453
    
    
    
    8,766Total investments and cash
    
    
    7,073,372
    
    
    
    7,193,704Variable annuity assets held in separate
accounts
    
    
    19,178,796
    
    
    
    14,758,642Accrued investment income
    
    
    74,647
    
    
    
    75,326Deferred acquisition costs
    
    
    1,424,317
    
    
    
    1,364,748Income taxes currently receivable from Parent
    
    
    
    
    
    
    100,123Due from affiliates
    
    
    
    
    
    
    26,304Goodwill
    
    
    4,603
    
    
    
    4,603Other assets
    
    
    26,116
    
    
    
    15,382TOTAL ASSETS
    
    $
    27,781,851
    
    
    $
    23,538,832
 See accompanying notes to consolidated financial statements F-3




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued) December 31,
    
    December 31,2003
    
    2002(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity contracts
    
    $
    4,274,329
    
    
    $
    4,285,098Reserves for universal life insurance
contracts
    
    
    1,609,233
    
    
    
    1,676,073Reserves for guaranteed investment
contracts
    
    
    218,032
    
    
    
    359,561Securities lending payable
    
    
    514,145
    
    
    
    585,760Income taxes currently payable to Parent
    
    
    394
    
    
    
    Modified coinsurance deposit liability
    
    
    4,738
    
    
    
    31,393Due to affiliates
    
    
    11,448
    
    
    
    Payable to brokers
    
    
    1,140
    
    
    
    8,529Other liabilities
    
    
    224,780
    
    
    
    160,265Total reserves, payables and accrued
liabilities
    
    
    6,858,239
    
    
    
    7,106,679Variable annuity liabilities related to
separate accounts
    
    
    19,178,796
    
    
    
    14,758,642Deferred income taxes
    
    
    281,399
    
    
    
    351,872Total liabilities
    
    
    26,318,434
    
    
    
    22,217,193Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    1,125,753
    
    
    
    1,125,753Retained earnings
    
    
    261,543
    
    
    
    175,871Accumulated other comprehensive income
    
    
    72,610
    
    
    
    16,504Total shareholders equity
    
    
    1,463,417
    
    
    
    1,321,639TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    27,781,851
    
    
    $
    23,538,832
 See accompanying notes to consolidated financial statements F-4




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31,2003
    
    2002
    
    2001(in thousands)REVENUES:Fee income:Variable annuity policy fees,
net of reinsurance
    
    $
    290,132
    
    
    $
    295,509
    
    
    $
    348,883Net retained commissions
    
    
    
    
    
    
    
    
    
    
    47,572Asset management fees
    
    
    
    
    
    
    
    
    
    
    63,529Universal life insurance fees,
net of reinsurance
    
    
    35,816
    
    
    
    36,253
    
    
    
    36,475Surrender charges
    
    
    27,733
    
    
    
    32,507
    
    
    
    24,911Other fees, net
    
    
    
    
    
    
    3,305
    
    
    
    14,551Total fee income
    
    
    353,681
    
    
    
    367,574
    
    
    
    535,921Investment income
    
    
    398,304
    
    
    
    377,556
    
    
    
    374,268Net realized investment losses
    
    
    (30,354
    )
    
    
    (65,811
    )
    
    
    (92,711
    )Total revenues
    
    
    721,631
    
    
    
    679,319
    
    
    
    817,478BENEFITS AND EXPENSES:Interest expense:Fixed annuity contracts
    
    
    153,636
    
    
    
    142,973
    
    
    
    133,647Universal life insurance contracts
    
    
    76,415
    
    
    
    80,021
    
    
    
    81,773Guaranteed investment contracts
    
    
    7,534
    
    
    
    11,267
    
    
    
    25,079Sub notes payable to affiliates
    
    
    
    
    
    
    
    
    
    
    4,475Total interest expense
    
    
    237,585
    
    
    
    234,261
    
    
    
    244,974General and administrative expenses
    
    
    83,013
    
    
    
    79,287
    
    
    
    136,942Amortization of deferred acquisition costs
    
    
    156,906
    
    
    
    187,860
    
    
    
    220,316Annual commissions
    
    
    55,661
    
    
    
    58,389
    
    
    
    58,278Claims on universal life contracts,
net of reinsurance recoveries
    
    
    17,766
    
    
    
    15,716
    
    
    
    17,566Guaranteed minimum death benefits,
net of reinsurance recoveries
    
    
    63,268
    
    
    
    67,492
    
    
    
    17,839Total benefits and expenses
    
    
    614,199
    
    
    
    643,005
    
    
    
    695,915PRETAX INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    107,432
    
    
    
    36,314
    
    
    
    121,563Income tax expense
    
    
    21,760
    
    
    
    2,063
    
    
    
    20,852INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    85,672
    
    
    
    34,251
    
    
    
    100,711Cumulative effect of accounting
change, net of tax
    
    
    
    
    
    
    
    
    
    
    (10,342
    )NET INCOME
    
    $
    85,672
    
    
    $
    34,251
    
    
    $
    90,369
 See accompanying notes to consolidated financial statements F-5




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued) Years Ended December 31,2003
    
    2002
    
    2001(in thousands)OTHER COMPREHENSIVE INCOME, NET OF TAX:Net unrealized gains (losses) on
fixed maturity and equity
securities available for sale
identified in the current period
less related amortization of
deferred acquisition costs
    
    $
    67,125
    
    
    $
    20,358
    
    
    $
    (10,418
    )Less reclassification adjustment
for net realized losses included
in net income
    
    
    19,194
    
    
    
    52,285
    
    
    
    64,062Cumulative effect of accounting
change, net of tax
    
    
    
    
    
    
    
    
    
    
    1,389Change related to cash flow hedges
    
    
    
    
    
    
    (2,218
    )
    
    
    81Income tax expense
    
    
    (30,213
    )
    
    
    (24,649
    )
    
    
    (18,804
    )OTHER COMPREHENSIVE INCOME
    
    
    56,106
    
    
    
    45,776
    
    
    
    36,310COMPREHENSIVE INCOME
    
    $
    141,778
    
    
    $
    80,027
    
    
    $
    126,679
 See accompanying notes to consolidated financial statements F-6




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31,2003
    
    2002
    
    2001(in thousands)CASH FLOW FROM OPERATING ACTIVITIES:Net income
    
    $
    85,672
    
    
    $
    34,251
    
    
    $
    90,369Adjustments to reconcile net income to net
cash provided by operating activities:Cumulative effect of accounting change,
net of tax
    
    
    
    
    
    
    
    
    
    
    10,342Interest credited to:Fixed annuity contracts
    
    
    153,636
    
    
    
    142,973
    
    
    
    133,647Universal life insurance contracts
    
    
    76,415
    
    
    
    80,021
    
    
    
    81,773Guaranteed investment contracts
    
    
    7,534
    
    
    
    11,267
    
    
    
    25,079Net
realized investment losses
    
    
    30,354
    
    
    
    65,811
    
    
    
    92,711Amortization of premium (discount) on
securities
    
    
    590
    
    
    
    (2,721
    )
    
    
    (6,284
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    1,452Amortization of deferred acquisition
costs
    
    
    156,906
    
    
    
    187,860
    
    
    
    220,316Acquisition costs deferred
    
    
    (250,475
    )
    
    
    (256,538
    )
    
    
    (359,158
    )Provision for deferred income taxes
    
    
    (100,685
    )
    
    
    128,748
    
    
    
    126,010Change in:Accrued
investment income
    
    
    679
    
    
    
    (10,099
    )
    
    
    (7,717
    )Separate account seed money
    
    
    (7,375
    )
    
    
    3,932
    
    
    
    10,838Other assets
    
    
    (10,734
    )
    
    
    2,433
    
    
    
    15,042Income taxes currently payable to/
receivable from Parent
    
    
    100,517
    
    
    
    (50,471
    )
    
    
    106Due from/to affiliates
    
    
    (26,248
    )
    
    
    16,153
    
    
    
    (68,844
    )Other liabilities
    
    
    46,987
    
    
    
    5,167
    
    
    
    9,697Other, net
    
    
    17,124
    
    
    
    17,475
    
    
    
    21,216NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    280,897
    
    
    
    376,262
    
    
    
    396,595CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred
stocks
    
    
    (2,078,310
    )
    
    
    (2,403,362
    )
    
    
    (2,178,830
    )Mortgage loans
    
    
    (44,247
    )
    
    
    (128,764
    )
    
    
    (70,295
    )Other investments, excluding short-term
investments
    
    
    (20,266
    )
    
    
    (65,184
    )
    
    
    (27,413
    )Sales of:Bonds, notes and redeemable preferred
stocks
    
    
    1,190,299
    
    
    
    849,022
    
    
    
    1,087,090Common stock
    
    
    3,920
    
    
    
    195
    
    
    
    164Other investments, excluding short-term
investments
    
    
    8,915
    
    
    
    630
    
    
    
    3,363Redemptions and maturities of:Bonds, notes and redeemable preferred
stocks
    
    
    994,014
    
    
    
    615,798
    
    
    
    549,638Mortgage loans
    
    
    67,506
    
    
    
    82,825
    
    
    
    63,960Other investments, excluding short-term
investments
    
    
    72,970
    
    
    
    114,347
    
    
    
    78,555NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES
    
    $
    194,801
    
    
    $
    (934,493
    )
    
    $
    (493,768
    )
 See accompanying notes to consolidated financial statements F-7




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Years Ended December 31,2003
    
    2002
    
    2001(in thousands)CASH FLOW FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity contracts
    
    $
    1,553,030
    
    
    $
    1,731,597
    
    
    $
    2,280,498Universal life insurance contracts
    
    
    45,657
    
    
    
    49,402
    
    
    
    52,469Guaranteed investment contracts
    
    
    
    
    
    
    
    
    
    
    40,000Net exchanges from the fixed accounts
of variable annuity contracts
    
    
    (1,148,030
    )
    
    
    (503,221
    )
    
    
    (1,368,527
    )Withdrawal payments on:Fixed annuity contracts
    
    
    (464,332
    )
    
    
    (529,466
    )
    
    
    (315,794
    )Universal life insurance contracts
    
    
    (61,039
    )
    
    
    (68,444
    )
    
    
    (55,361
    )Guaranteed investment contracts
    
    
    (148,719
    )
    
    
    (135,084
    )
    
    
    (191,919
    )Claims and annuity payments on:Fixed annuity contracts
    
    
    (109,412
    )
    
    
    (98,570
    )
    
    
    (52,685
    )Universal life insurance contracts
    
    
    (111,380
    )
    
    
    (100,995
    )
    
    
    (146,998
    )Net receipts from (repayments of)
other short-term financings
    
    
    14,498
    
    
    
    (8,025
    )
    
    
    15,920Net payment related to a modified
coinsurance transaction
    
    
    (26,655
    )
    
    
    (30,282
    )
    
    
    (35,972
    )Capital contribution received from
Parent
    
    
    
    
    
    
    200,000
    
    
    
    Dividends paid to Parent
    
    
    
    
    
    
    
    
    
    
    (94,095
    )Net cash and short-term investments
transferred to the Parent in
distribution of Saamsun
Holdings Corp.
    
    
    
    
    
    
    (82,873
    )
    
    
    NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES
    
    
    (456,382
    )
    
    
    424,039
    
    
    
    127,536NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS
    
    
    19,316
    
    
    
    (134,192
    )
    
    
    30,363CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    65,872
    
    
    
    200,064
    
    
    
    169,701CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD
    
    $
    85,188
    
    
    $
    65,872
    
    
    $
    200,064SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    
    
    
    $
    
    
    
    $
    780Net income taxes paid to (refunded by)
Parent
    
    $
    21,928
    
    
    $
    (76,214
    )
    
    $
    (120,504
    )
 See accompanying notes to consolidated financial statements F-8




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    NATURE OF OPERATIONSAIG SunAmerica Life Assurance Company (FKA 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 and 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 SunAmerica National Life Insurance Company on
October 5, 2001 and further 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.On January 1, 2002, the Company declared a distribution to the Parent of 100%
of the outstanding capital stock of its consolidated subsidiary, Saamsun
Holdings Corp. (Saamsun). Pursuant to this distribution, Saamsun became a
direct wholly owned subsidiary of the Parent. Prior to January 1, 2002,
Saamsun held the Companys asset management and broker-dealer segments (see
Note 10). This distribution had a material effect on the Companys
shareholders equity, reducing it by $552,384,000. This distribution had the
effect of reducing cash and short-term investments by $82,873,000, partnerships
by $443,369,000, deferred acquisition costs by $98,428,000, other assets by
$108,163,000, other liabilities by $121,635,000 and subordinated notes payable
to affiliates by $58,814,000. Pretax income in future periods will be reduced
by the earnings of the Companys asset management and broker-dealer operations,
substantially offset by a profit sharing agreement on fees earned on variable
annuity subaccounts through the asset management business. Pretax loss from
these operations, on a combined basis, totaled $21,278,000 for the year ended
December 31, 2001.The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government,
and policies of state and other regulatory authorities. The level of sales of
the Companys financial products is influenced by many factors, including
general market rates of interest, the strength, weakness and volatility of
equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities,
and engaging in a disciplined process F-9




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  1.
    
    NATURE OF OPERATIONS (Continued)of underwriting, reviewing and monitoring credit risk. The Company also is
exposed to market risk, as market volatility may result in reduced fee income
in the case of assets held in separate accounts.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of U.S. generally accepted accounting principles
(GAAP). Certain prior period amounts have been reclassified to conform to the
current periods presentation.Under GAAP, deposits collected on non-traditional life and annuity insurance
products, such as those sold by the Company, are not reflected as revenues in
the Companys consolidated statement of income and comprehensive income, as
they are recorded directly to policyholders liabilities upon receipt.The preparation of financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could differ
from those estimates.INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments and short-term bank participations.
All such investments are carried at cost plus accrued interest, which
approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to the accumulated other
comprehensive income or loss component of shareholders equity. Bonds, notes,
redeemable preferred stocks and common stocks are reduced to estimated net fair
value when declines in such values are considered to be other than temporary.
Estimates of net fair value are subjective and actual realization will be
dependent upon future events.Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Policy loans are carried at unpaid balances. Separate
account seed money consists of seed money for mutual funds used as investment
vehicles for the Companys variable annuity separate accounts and is carried at
market value. Real estate is carried at the lower of cost or net realizable
value.Securities lending collateral consist of securities provided as collateral with
respect to the Companys securities lending program. The Company has entered
into a securities lending agreement with an affiliated lending agent, which
authorizes the agent to lend securities held in the Companys portfolio to a
list of authorized borrowers. The Company receives primarily cash collateral
in an amount in excess of the market value of the securities loaned. The
affiliated lending agent monitors the daily market value of F-10




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)securities loaned with respect to the collateral value and obtains additional
collateral when necessary to ensure that collateral is maintained at a minimum
of 102% of the value of the loaned securities. Such collateral is not
available for the general use of the Company. Income earned on the collateral,
net of interest paid on the securities lending agreements and the related
management fees paid to administer the program, is recorded as investment
income in the consolidated statement of income and comprehensive income.Other invested assets consist principally of investments in limited
partnerships and put options on the S&P 500 index purchased to partially offset
the risk of Guaranteed Minimum Account Value (GMAV) benefits. Limited
partnerships are carried at equity or cost depending on the equity ownership
position. The put options do not qualify for hedge accounting and accordingly
are marked to market and changes in market value are recorded through
investment income.Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of
the investments.The Company regularly reviews its investments for possible impairment based on
criteria including economic conditions, market prices, past experience and
other issuer-specific developments among other factors. If there is a decline
in a securitys net realizable value, a determination is made as to whether
that decline is temporary or other than temporary. If it is believed that a
decline in the value of a particular investment is temporary, the decline is
recorded as an unrealized loss in accumulated other comprehensive income. If
it is believed that the decline is other than temporary, the Company writes
down the carrying value of the investment and records a realized loss in the
consolidated statement of income and comprehensive income.DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments primarily
used by the Company include interest rate swap agreements and put options on
the S&P 500 index entered into to partially offset the risk of certain
guarantees of annuity policy values. At December 31, 2003, the notional amount
was $226.4 million. The Company is neither a dealer nor a trader in derivative
financial instruments.The Company recognizes all derivatives in the consolidated balance sheet at
fair value. Hedge accounting requires a high correlation between changes in
fair values or cash flows of the derivative financial instrument and the
specific item being hedged, both at inception and throughout the life of the
hedge. For fair value hedges, gains and losses in the fair value of both the
derivative and the hedged item attributable to the risk being hedged are
recognized in earnings. For cash flow hedges, to the extent the hedge is
effective, gains and losses in the fair value of both the derivative and the
hedged item attributable to the risk being hedged are recognized as a component
of accumulated other comprehensive income in shareholders equity. F-11




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Any ineffective portion of cash flow hedges is reported in investment income.
On the date a derivative contract is entered into, the Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various
hedge transactions. This process includes linking all derivatives designated
as fair value or cash flow hedges to specific assets and liabilities on the
balance sheet.Interest rate swap agreements convert specific investment securities from a
floating-rate to a fixed-rate basis, or vice versa, and hedge against the risk
of declining rates on anticipated security purchases. Interest rate swaps in
which the Company agrees to pay a fixed rate and receive a floating rate are
accounted for as fair value hedges. Interest rate swaps in which the Company
agrees to pay a floating rate and receive a fixed rate are accounted for as
cash flow hedges. The difference between amounts paid and received on swap
agreements is recorded as an adjustment to investment income or interest
expense, as appropriate, on an accrual basis over the periods covered by the
agreements. The related amount payable to or receivable from counterparties is
included in other liabilities or other assets.The Company issues certain variable annuity products which offer an optional
Guaranteed Minimum Account Value (GMAV) living benefit. If elected by the
policyholder at the time of contract issuance, this feature guarantees that the
account value under the contract will equal or exceed the amount of the initial
principal invested, adjusted for withdrawals, at the end of a ten-year waiting
period. There is a separate charge to the contractholder for this feature.
The Company bears the risk that protracted under-performance of the financial
markets could result in GMAV benefits being higher than the underlying
contractholder account balance and that the fees collected under the contract
are insufficient to cover the costs of the benefit to be provided. As of
December 31, 2003, the premiums in force subject to guarantee totaled
approximately $652,647,000.Under SFAS 133, the GMAV benefit is considered an embedded derivative that
should be bifurcated and marked to market. Changes in the market value of the
estimated GMAV benefit are recorded through investment income.DEFERRED ACQUISITION COSTS (DAC): Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net investment income, net realized
investment gains and losses, variable annuity fees, universal life insurance
fees, guarantee costs, surrender charges, and direct administrative expenses.
DAC consists of commissions and other costs that vary with, and are primarily
related to, the production or acquisition of new business. The Company
capitalized DAC of $250,475,000, $256,538,000 and $359,158,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.As fixed maturity and equity securities available for sale are carried at
aggregate fair value, an adjustment is made to DAC equal to the change in F-12




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)amortization that would have been recorded if such securities had been sold at
their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on fixed maturity and equity securities
available for sale which is a component of accumulated other comprehensive
income (loss) and is credited or charged directly to shareholders equity. DAC
has been decreased by $43,000,000 at December 31, 2003 and $9,000,000 at
December 31, 2002, for this adjustment.AMORTIZATION OF DEFERRED ACQUISITION COSTS: DAC is amortized based on a
percentage of expected gross profits (EGPs) over the life of the underlying
policies. 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 for policy guarantees and the level of expenses necessary to maintain
the policies. The Company adjusts DAC amortization (a DAC unlocking) when
estimates of current or future gross profits to be realized from its annuity
policies are revised. At December 31, 2003, DAC amortization was adjusted for
a DAC unlocking that resulted in a reduction of $18.0 million.The assumption for the long-term annual net growth of the separate account
assets used by the Company 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 which
allows the Company 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 were 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
approximate 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 (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.The Company reviews the carrying value of DAC on at least an annual basis.
Management considers estimated future gross profit margins as well as expected
mortality, interest earned and credited rates, persistency and expenses in
determining whether the carrying amount is recoverable. Any amounts deemed
unrecoverable are charged to expense.VARIABLE ANNUITY ASSETS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS: The
assets and liabilities resulting from the receipt of variable annuity deposits
are segregated in separate accounts. The Company receives administrative fees
for managing the funds and other fees for assuming mortality and certain
expense risks. Such fees are included in Variable F-13




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Annuity Fees in the consolidated statement of income and comprehensive income.GOODWILL: Goodwill amounted to $4,603,000 (net of accumulated amortization of
$7,847,000) at both December 31, 2003 and 2002. Pursuant to the distribution
of Saamsun to the Parent on January 1, 2002, the Company transferred
$15,547,000 of goodwill belonging to the asset management operations and
broker-dealer operations to the Parent.In accordance with Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets (SFAS 142), the Company assesses
goodwill for impairment on an annual basis, or more frequently if circumstances
indicate that a possible impairment has occurred. The assessment of impairment
involves a two-step process whereby an initial assessment for potential
impairment is performed, followed by a measurement of the amount of the
impairment, if any. The Company has evaluated goodwill for impairment as of
December 31, 2003, and has determined that no impairment provision is
necessary. See Recently Issued Accounting Standards below for further
discussion of SFAS 142.RESERVES FOR FIXED ANNUITIES, UNIVERSAL LIFE INSURANCE AND GUARANTEED
INVESTMENT CONTRACTS (GICs): Reserves for fixed annuity, universal life
insurance and GIC contracts are accounted for in accordance with Statement of
Financial Accounting Standards No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments, and are recorded at accumulated value
(deposits received, plus accrued interest, less withdrawals and assessed fees).MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified
coinsurance transaction described in Note 5 is recorded as a deposit liability.
Deposits from the reinsured business are allocated to pay down the liability
pursuant to a repayment schedule.FEE INCOME: Variable annuity fees, asset management fees, universal life
insurance fees and surrender charges are recorded as income when earned. Net
retained commissions are recognized as income on a trade date basis.INCOME TAXES: The Company files as a life insurance company under the
provisions of the Internal Revenue Code of 1986. Its federal income tax return
is consolidated with those of the Parent and its affiliate, First SunAmerica
Life Insurance Company (FSA). Income taxes have been calculated as if the
Company filed a separate return. Deferred income tax assets and liabilities
are recognized based on the difference between financial statement carrying
amounts and income tax basis of assets and liabilities using enacted income tax
rates and laws.RECENTLY ISSUED ACCOUNTING STANDARDS: On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). This statement requires the
Company to recognize all derivatives in the balance sheet and measure these
derivatives at fair value. The recognition of the change in F-14




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)the fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which it is effective as
part of a hedge transaction. The adoption of SFAS 133 on January 1, 2001
resulted in an increase of $1,389,000, net of tax, in other comprehensive
income.In January 2001, the Emerging Issues Task Force (EITF) issued EITF 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 provides guidance on the calculation of interest income and the
recognition of impairments related to beneficial interests held in an
investment portfolio. Beneficial interests are investments that represent
rights to receive specified cash flows from a pool of underlying assets (i.e.
collateralized debt obligations). The Company recorded $15,910,000 of
additional impairments($10,342,000 net of tax) pursuant to the implementation
of EITF 99-20. This adjustment was recorded as a cumulative effect of
accounting change in the consolidated statement of income and comprehensive
income for 2001.In June 2001, Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires the Company to discontinue the amortization of
goodwill on its consolidated statement of income and comprehensive income and
is effective as of January 1, 2002. SFAS 142 requires goodwill to be subject
to an assessment of impairment on an annual basis, or more frequently if
circumstances indicate that a possible impairment has occurred. The assessment
of impairment involves a two-step process prescribed in SFAS 142, whereby an
initial assessment for potential impairment is performed, followed by a
measurement of the amount of impairment, if any. SFAS 142 also requires the
completion of a transitional impairment test in the year of adoption, with any
identified impairments recognized as a cumulative effect of an accounting
change. The Company has evaluated the impact of the impairment provisions of
SFAS 142 as of December 31, 2003, and has determined that no impairment is
required to be recorded to the carrying value of the Companys goodwill
balance.In November 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), which requires that, for guarantees within
the scope of FIN 45 issued or amended by the Company after December 31, 2002, a
liability for the fair value of the obligation undertaken in issuing the
guarantee be recognized. FIN 45 also requires additional disclosures in
financial statements starting with the Companys 2002 year-end financial
statements. The adoption of FIN 45 did not have a significant impact on the
Companys results of operations or financial condition.In July 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long-Duration Contracts and for
Separate Accounts (SOP-03-1). FASB did not object to the issuance of SOP
03-1. This statement is effective for the Company as of January 1, 2004. F-15




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Under SOP 03-1, variable annuity assets held in separate accounts will continue
to be measured at fair value and reported in summary total on the Companys
financial statements, with an equivalent summary total reported for related
liabilities, if the separate account arrangement meets certain specified
conditions. Assets underlying the Companys interest in a separate account
(separate account seed money) do not qualify for separate account accounting
and reporting. The Company will be required to look through the separate
account for purposes of accounting for its interest therein, and account for
and classify separate account seed money based on its nature as if the assets
of the separate account underlying the Companys interest were held directly by
the general account rather than through the separate account structure. The
adoption of SOP 03-1 will not have a material impact on the Companys separate
accounts or separate account seed money.In addition, SOP 03-1 will require the Company to recognize a liability for
guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits and modify certain disclosures and financial
statement presentations for these products. The Companys estimate of this
liability, including the impact on DAC, will result in a one-time cumulative
accounting charge upon adoption of approximately $52 million ($79 million
pre-tax) to be recorded in the first quarter of 2004.3.
    
    INVESTMENTSThe amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by major category follow: Amortized
    
    EstimatedCost
    
    Fair Value(In thousands)AT DECEMBER 31, 2003:Securities of the United States Government
    
    $
    22,393
    
    
    $
    24,292Mortgage-backed securities
    
    
    1,148,452
    
    
    
    1,191,817Securities of public utilities
    
    
    352,998
    
    
    
    365,150Corporate bonds and notes
    
    
    2,590,254
    
    
    
    2,697,142Redeemable preferred stocks
    
    
    21,515
    
    
    
    22,175Other debt securities
    
    
    1,215,571
    
    
    
    1,205,224Total
    
    $
    5,351,183
    
    
    $
    5,505,800
 F-16




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    
    INVESTMENTS (Continued) Amortized
    
    EstimatedCost
    
    Fair Value(In thousands)AT DECEMBER 31, 2002:Securities of the United States Government
    
    $
    32,531
    
    
    $
    32,820Mortgage-backed securities
    
    
    1,476,100
    
    
    
    1,547,568Securities of public utilities
    
    
    311,951
    
    
    
    311,604Corporate bonds and notes
    
    
    2,757,880
    
    
    
    2,776,021Redeemable preferred stocks
    
    
    21,515
    
    
    
    21,575Other debt securities
    
    
    892,700
    
    
    
    838,981Total
    
    $
    5,492,677
    
    
    $
    5,528,569
  The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by contractual maturity, as of December 31, 2003, follow: Amortized
    
    EstimatedCost
    
    Fair Value(In thousands)Due in one year or less
    
    $
    164,842
    
    
    $
    167,073Due after one year through five years
    
    
    2,050,327
    
    
    
    2,119,273Due after five years through ten years
    
    
    1,485,944
    
    
    
    1,522,642Due after ten years
    
    
    501,618
    
    
    
    504,995Mortgage-backed securities
    
    
    1,148,452
    
    
    
    1,191,817Total
    
    $
    5,351,183
    
    
    $
    5,505,800
  Actual maturities of bonds, notes and redeemable preferred stocks may differ
from those shown above due to prepayments and redemptions.  Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks by major category follow: Gross
    
    GrossUnrealized
    
    UnrealizedGains
    
    Losses(In thousands)AT DECEMBER 31, 2003:Securities of the United States Government
    
    $
    1,898
    
    
    $
    Mortgage-backed securities
    
    
    46,346
    
    
    
    (2,980
    )Securities of public utilities
    
    
    13,467
    
    
    
    (1,315
    )Corporate bonds and notes
    
    
    127,996
    
    
    
    (21,108
    )Redeemable preferred stocks
    
    
    660
    
    
    
    Other debt securities
    
    
    24,366
    
    
    
    (34,713
    )Total
    
    $
    214,733
    
    
    $
    (60,116
    )
 F-17




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    
    INVESTMENTS (Continued) Gross
    
    GrossUnrealized
    
    UnrealizedGains
    
    Losses(In thousands)AT DECEMBER 31, 2002:Securities of the United States Government
    
    $
    1,174
    
    
    $
    (885
    )Mortgage-backed securities
    
    
    72,364
    
    
    
    (896
    )Securities of public utilities
    
    
    11,514
    
    
    
    (11,861
    )Corporate bonds and notes
    
    
    109,067
    
    
    
    (90,926
    )Redeemable preferred stocks
    
    
    60
    
    
    
    Other debt securities
    
    
    10,797
    
    
    
    (64,516
    )Total
    
    $
    204,976
    
    
    $
    (169,084
    )
  Gross unrealized gains on equity securities aggregated $112,000 at December 31,
2003 and $76,000 at December 31, 2002. Gross unrealized losses on equity
securities aggregated $20,000 at December 31, 2003 and $1,578,000 at December
31, 2002.  The following table summarizes the Companys gross unrealized losses and
estimated fair values on investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position at December 31, 2003. Less than 12 Months
    
    12 Months or More
    
    Total(In thousands)
    
    Market
    
    Unrealized
    
    
    
    
    
    Market
    
    Unrealized
    
    
    
    
    
    Market
    
    UnrealizedDecember 31, 2003
    
    Value
    
    Losses
    
    Items
    
    Value
    
    Losses
    
    Items
    
    Value
    
    Losses
    
    ItemsMortgage-backed
securities
    
    $
    180,559
    
    
    $
    2,882
    
    
    
    49
    
    
    $
    13,080
    
    
    $
    98
    
    
    
    6
    
    
    $
    193,639
    
    
    $
    2,980
    
    
    
    55Securities of public
utilities
    
    
    67,626
    
    
    
    1,315
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,626
    
    
    
    1,315
    
    
    
    8Corporate bonds &
notes
    
    
    276,373
    
    
    
    17,086
    
    
    
    54
    
    
    
    30,383
    
    
    
    4,022
    
    
    
    5
    
    
    
    306,756
    
    
    
    21,108
    
    
    
    59Other debt
securities
    
    
    302,230
    
    
    
    33,951
    
    
    
    54
    
    
    
    41,523
    
    
    
    762
    
    
    
    5
    
    
    
    343,753
    
    
    
    34,713
    
    
    
    59Total  Debt
securities
    
    
    826,788
    
    
    
    55,234
    
    
    
    165
    
    
    
    84,986
    
    
    
    4,882
    
    
    
    16
    
    
    
    911,774
    
    
    
    60,116
    
    
    
    181Equity securities
    
    
    366
    
    
    
    20
    
    
    
    1
    
    
    
    250
    
    
    
    
    
    
    
    1
    
    
    
    616
    
    
    
    20
    
    
    
    2Total
    
    $
    827,154
    
    
    $
    55,254
    
    
    
    166
    
    
    $
    85,236
    
    
    $
    4,882
    
    
    
    17
    
    
    $
    912,390
    
    
    $
    60,136
    
    
    
    183
 F-18




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    
    INVESTMENTS (Continued)Gross realized investment gains and losses on sales of investments are as
follows: Years ended December 31,2003
    
    2002
    
    2001(In thousands)BONDS, NOTES AND REDEEMABLEPREFERRED STOCKS:Realized gains
    
    $
    28,691
    
    
    $
    24,681
    
    
    $
    34,026Realized losses
    
    
    (9,612
    )
    
    
    (32,532
    )
    
    
    (25,258
    )COMMON STOCKS:Realized gains
    
    
    561
    
    
    
    
    
    
    
    164Realized losses
    
    
    (117
    )
    
    
    (169
    )
    
    
    OTHER INVESTMENTS:Realized gains
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    
    
    
    
    
    
    
    
    (685
    )
  The sources and related amounts of investment income (losses) are as follows: Years ended December 31,2003
    
    2002
    
    2001(In thousands)Short-term investments
    
    $
    794
    
    
    $
    3,879
    
    
    $
    8,422Bonds, notes and redeemable
preferred stocks
    
    
    321,493
    
    
    
    305,480
    
    
    
    285,668Mortgage loans
    
    
    53,951
    

    
    
    55,417
    
    
    
    58,262Partnerships
    
    
    (3,890
    )
    
    
    1,281
    
    
    
    13,905Policy loans
    
    
    15,925
    
    
    
    18,796
    
    
    
    18,218Common stocks
    
    
    
    
    
    
    
    
    
    
    2Real estate
    
    
    (331
    )
    
    
    (276
    )
    
    
    (272
    )Other invested assets
    
    
    12,670
    
    
    
    (4,664
    )
    
    
    (4,975
    )Less: investment expenses
    
    
    (2,308
    )
    
    
    (2,357
    )
    
    
    (4,962
    )Total investment income
    
    $
    398,304
    
    
    $
    377,556
    
    
    $
    374,268
 F-19




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    
    INVESTMENTS (Continued)Investment income was attributable to the following products: Years Ended December 31,2003
    
    2002
    
    2001(In thousands)Fixed annuities
    
    $
    37,762
    
    
    $
    41,856
    
    
    $
    51,208Variable annuities
    
    
    239,863
    
    
    
    201,766
    
    
    
    164,422Guaranteed investment contracts
    
    
    20,660
    
    
    
    28,056
    
    
    
    36,073Universal life insurance contracts
    
    
    100,019
    
    
    
    105,878
    
    
    
    122,565Total
    
    $
    398,304
    
    
    $
    377,556
    
    
    $
    374,268
  At December 31, 2003, no investments in any one entity or its affiliates
exceeded 10% of the Companys shareholders equity.At December 31, 2003, bonds, notes and redeemable preferred stocks included
$339,119,000 of bonds that were not rated investment grade. These
non-investment-grade securities are comprised of bonds spanning 11 industries
with 21% of these assets concentrated in financial institutions, 17% of these
assets concentrated in utilities, 15% of these assets concentrated in
telecommunications, 11% of these assets concentrated in transportation and 10%
of these assets concentrated in noncyclical consumer products. No other
industry concentration constituted more than 10% of these assets.At December 31, 2003, mortgage loans were collateralized by properties located
in 31 states, with loans totaling approximately 27%, 11% and 11% of the
aggregate carrying value of the portfolio secured by properties located in
California, Michigan and New York. No more than 10% of the portfolio was
secured by properties in any other single state.At December 31, 2003, the carrying value, which approximates market value, of
all investments in default as to the payment of principal or interest totaled
$49,607,000 of bonds.As a component of its asset and liability management strategy, the Company
utilizes 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 typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments.At December 31, 2003, $10,245,000 of bonds, at amortized cost, was on deposit
with regulatory authorities in accordance with statutory requirements. F-20




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  4.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTSThe following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Companys financial instruments. The
disclosures do not address the value of the Companys recognized and
unrecognized nonfinancial assets (including its real estate investments and
other invested assets except for partnerships) and liabilities or the value of
anticipated future business. The Company does not plan to sell most of its
assets or settle most of its liabilities at these estimated fair values.The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Selling expenses and potential taxes are not
included. The estimated fair value amounts were determined using available
market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:CASH AND SHORT-TERM INSTRUMENTS: Carrying value is considered to be a
reasonable estimate of fair value.BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally
on independent pricing services, broker quotes and other independent
information. For securities which do not have readily determinable market
prices, we estimate their fair value with internally prepared valuations
(including those based on estimates of future profitability).Otherwise, we
use our 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.MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.SEPARATE ACCOUNT SEED MONEY: Fair value is considered to be the market value
of the underlying securities.COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.POLICY LOANS: Carrying value is considered a reasonable estimate of fair
value. F-21




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  4.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)PARTNERSHIPS: Fair value of partnerships that invest in debt and equity
securities is based upon the fair value of the net assets of the partnerships
as determined by the general partners.VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are
carried at the market value of the underlying securities.RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned
a fair value equal to current net surrender value. Annuitized contracts are
valued based on the present value of future cash flows at current pricing
rates.RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates.SECURITIES HELD/LOANED UNDER COLLATERAL AGREEMENTS: Carrying value is
considered to be a reasonable estimate of fair value.VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Variable annuity
liabilities are carried at the market value of the underlying securities of the
variable annuity assets held in separate accounts.The estimated fair values of the Companys financial instruments at December
31, 2003 and 2002 compared with their respective carrying values, are as
follows: Carrying
    
    FairValue
    
    Value(In thousands)DECEMBER 31, 2003:ASSETS:Cash and short-term investments
    
    $
    85,188
    
    
    $
    85,188Bonds, notes and redeemable
preferred stocks
    
    
    5,505,800
    
    
    
    5,505,800Mortgage loans
    
    
    716,846
    
    
    
    774,758Policy loans
    
    
    200,232
    
    
    
    200,232Separate account seed money
    
    
    17,815
    
    
    
    17,815Common stocks
    
    
    727
    
    
    
    727Partnerships
    
    
    1,312
    
    
    
    1,685Securities lending collateral
    
    
    514,145
    
    
    
    514,145Variable annuity assets held in
separate accounts
    
    
    19,178,796
    
    
    
    19,178,796LIABILITIES:Reserves for fixed annuity contracts
    
    $
    4,274,329
    
    
    $
    4,225,329Reserves for guaranteed investment
contracts
    
    
    218,032
    
    
    
    223,553Securities lending payable
    
    
    514,145
    
    
    
    514,145Variable annuity liabilities
related to separate accounts
    
    
    19,178,796
    
    
    
    19,178,796
 F-22




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  4.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Carrying
    
    FairValue
    
    Value(In thousands)DECEMBER 31, 2002:ASSETS:Cash and short-term investments
    
    $
    65,872
    
    
    $
    65,872Bonds, notes and redeemable
preferred stocks
    
    
    5,528,569
    
    
    
    5,528,569Mortgage loans
    
    
    738,601
    
    
    
    818,022Policy loans
    
    
    215,846
    
    
    
    215,846Separate account seed money
    
    
    25,366
    
    
    
    25,366Common stocks
    
    
    2,609
    
    
    
    2,609Partnerships
    
    
    8,766
    
    
    
    7,504Securities lending collateral
    
    
    585,760
    
    
    
    585,760Variable annuity assets held in
separate accounts
    
    
    14,758,642
    
    
    
    14,758,642LIABILITIES:Reserves for fixed annuity contracts
    
    $
    4,285,098
    
    
    $
    4,173,950Reserves for guaranteed investment
contracts
    
    
    359,561
    
    
    
    367,393Securities lending payable
    
    
    585,760
    
    
    
    585,760Variable annuity liabilities
related to separate accounts
    
    
    14,758,642
    
    
    
    14,758,642
  5.
    
    REINSURANCEGUARANTEED MINIMUM DEATH BENEFIT (GMDB): A majority of the Companys variable
annuity products are issued with a death benefit feature which provides that,
upon the death of a contractholder, the contractholders beneficiary will
receive the greater of (1) the contractholders account value, or (2) a
guaranteed minimum death benefit that varies by product (the GMDB). Depending
on the product, the GMDB may equal the principal invested, adjusted for
withdrawals; the principal invested, adjusted for withdrawals, accumulated at
up to 5% per annum (subject to certain caps); or an amount equal to the highest
account value in effect on any anniversary date under the contract. These
benefits have issue age and other restrictions to reduce mortality risk
exposure. The Company bears the risk that death claims following a decline in
the financial markets may exceed contractholder account balances, and that the
fees collected under the contract are insufficient to cover the costs of the
benefit to be provided. At December 31, 2003, a portion of the GMDB risk on
approximately 33% (calculated based on current account value) of the contracts
with such features had been reinsured. Approximately half of this reinsurance
will cease on March 31, 2004. In 2003, a substantial majority of contracts
sold have reinsurance coverage. However, the Company does not currently have
reinsurance coverage on the majority of the contracts to be sold after 2003.
Reinsurance coverage is subject to limitations such as caps and deductibles.
GMDB reinsurance premiums of $20,691,000, $15,544,000 and $8,200,000 were
netted against variable annuity policy fees in 2003, 2002 and 2001,
respectively. GMDB- F-23




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  5.
    
    REINSURANCE (Continued)related contractholder benefits incurred, net of related reinsurance, were
$63,268,000 (net of $8,042,000 of reinsurance recoveries), $67,492,000 (net of
$8,362,000 of reinsurance recoveries) and $17,839,000 (net of $3,767,000 of
reinsurance recoveries) for 2003, 2002 and 2001, respectively. In accordance
with Generally Accepted Accounting Principles, the Company expenses such
benefits in the period incurred, and therefore does not provide reserves for
future benefits. However, effective January 1, 2004, the company will be
required to record a liability for GMDBs (see Note 2).EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. This optional feature provides an additional death benefit, for which
the Company assesses a separate charge to contractholders 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
percentages vary by issue age and policy duration. 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
December 31, 2003, approximately 8% (calculated based on current account value)
of in-force contracts include EEB coverage, with 95% of the EEB risk fully
reinsured. EEB reinsurance premiums of $4,045,000 and $2,106,000 were netted
against variable annuity policy fees in 2003 and 2002, respectively. There
were no EEB reinsurance premium in 2001.GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain variable
annuity products that contain or offer a Guaranteed Minimum Income Benefit
(GMIB) living benefit feature. This feature provides a minimum annuity
payment guarantee for those contractholders 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. Substantially all of the Companys products containing the
GMIB feature have been reinsured; furthermore, substantially all of the GMIB
risk per individual reinsured contract has been transferred to the reinsurer.
However, the Company does not currently have reinsurance coverage on contracts
to be sold after the middle of 2004. GMIB reinsurance premiums of $6,059,000,
$4,902,000 and $5,047,000 were netted against variable annuity policy fees in
2003, 2002 and 2001, respectively.The universal life insurance contracts are subject to reinsurance ceded
agreements. In order to limit the exposure to loss on any single insured,
the Company entered into a reinsurance treaty effective January 1, 1999 under
which the Company retains no more than $100,000 of risk on any one insured
life. Reinsurance premiums of $33,710,000, $34,098,000 and $34,011,000 were
netted against universal life insurance fees in 2003, 2002 and 2001,
respectively. Reinsurance recoveries were $34,036,000, $29,171,000 and
$31,591,000 in 2003, 2002 and 2001, respectively. Total reserve credits of
$3,705,000 and $3,641,000 were taken against the life insurance reserves at
December 31, 2003 and 2002, respectively. F-24




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  5.
    
    REINSURANCE (Continued)On August 1, 1999, the Company entered into a modified coinsurance transaction,
approved by the Arizona Department of Insurance, which involved the ceding of
approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company
(Hawaii), a non-affiliated stock life insurer. As part of the transaction, the
Company received cash in the amount of $150,000,000 and recorded a
corresponding deposit liability. As payments are made to the reinsurer, the
deposit liability is relieved. For the year ended December 31, 2003, the
Company recorded income of $7,591,000 from this program, as compared to an
income of $6,418,000 for the year ended December 31, 2002 and a cost of
$6,909,000 for the year ended December 31, 2001. These amounts are reported as
a component of general and administrative expenses in the consolidated
statement of income and comprehensive income.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. However, due to the high credit ratings of the reinsurers, such
risks are considered to be minimal.6.
    
    COMMITMENTS AND CONTINGENT LIABILITIESThe Company has entered into seven agreements 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. The maximum liability under these guarantees at December 31,
2003 is $557,775,000. Related to each of these agreements are participation
agreements with the Parent under which the Parent will share in $222,524,000 of
these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The expiration dates of these commitments are
as follows: $21,930,000 in 2004, $385,845,000 in 2005 and $150,000,000 in 2006.
The Internal Revenue Service has initiated examinations into the transactions
underlying these commitments, including the Companys role in the transactions.
The Company is fully cooperating with the IRS. Management does not anticipate
any material losses with respect to these commitments.At December 31, 2003, the Company was obligated to purchase approximately
$18,000,000 of asset backed securities in the ordinary course of business. The
expiration dates of these commitments are as follows: $11,000,000 in 2004 and
$7,000,000 in 2006.Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company. F-25




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  6.
    
    COMMITMENTS AND CONTINGENT LIABILITIES (Continued)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, and the belief that the Company is viewed as a
strategically important member of AIG. This guarantee is unconditional and
irrevocable, and the Companys policyholders have the right to enforce the
guarantee directly against American Home.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.American Home does not publish financial statements, 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 publishes annual reports
on Form 10-K and quarterly reports on Form 10-Q, which are available from the
Securities and Exchange Commission. F-26




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    
    SHAREHOLDERS EQUITYThe Company is authorized to issue 4,000 shares of its $1,000 par value Common
Stock. At December 31, 2003 and 2002, 3,511 shares were outstanding.Changes in shareholders equity are as follows: Years ended December 31,2003
    
    2002
    
    2001(In thousands)ADDITIONAL PAID-IN CAPITAL:Beginning balances
    
    $
    1,125,753
    
    
    $
    925,753
    
    
    $
    493,010Capital contributions by Parent
    
    
    
    
    
    
    200,000
    
    
    
    Contribution of subsidiary by Parent
    
    
    
    
    
    
    
    
    
    
    432,743Ending balances
    
    $
    1,125,753
    
    
    $
    1,125,753
    
    
    $
    925,753RETAINED EARNINGS:Beginning balances
    
    $
    175,871
    
    
    $
    694,004
    
    
    $
    697,730Net income
    
    
    85,672
    
    
    
    34,251
    
    
    
    90,369Dividends paid to Parent
    
    
    
    
    
    
    
    
    
    
    (94,095
    )Distribution of subsidiary to Parent
    
    
    
    
    
    
    (552,384
    )
    
    
    Ending balances
    
    $
    261,543
    
    
    $
    175,871
    
    
    $
    694,004ACCUMULATED OTHER COMPREHENSIVE
INCOME(LOSS):Beginning balances
    
    $
    16,504
    
    
    $
    (29,272
    )
    
    $
    (65,582
    )Change in net unrealized gains (losses)
on debt securities available for sale
    
    
    118,725
    
    
    
    98,718
    
    
    
    59,844Change in net unrealized gains (losses)
on equity securities available for
sale
    
    
    1,594
    
    
    
    (1,075
    )
    
    
    (400
    )Change in adjustment to deferred
acquisition costs
    
    
    (34,000
    )
    
    
    (25,000
    )
    
    
    (5,800
    )Cumulative effect of accounting change,
net of tax
    
    
    
    
    
    
    
    
    
    
    1,389Net change related to cash flow hedges
    
    
    
    
    
    
    (2,218
    )
    
    
    81Tax effects of net changes
    
    
    (30,213
    )
    
    
    (24,649
    )
    
    
    (18,804
    )Ending balances
    
    $
    72,610
    
    
    $
    16,504
    
    
    $
    (29,272
    )
 F-27




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    
    SHAREHOLDERS EQUITY (Continued)Gross unrealized gains (losses) on fixed maturity and equity securities
included in accumulated other comprehensive income are as follows: December 31,
    
    December 31,2003
    
    2002(In thousands)Gross unrealized gains
    
    $
    214,845
    
    
    $
    205,052Gross unrealized losses
    
    
    (60,136
    )
    
    
    (170,662
    )Adjustment to DAC
    
    
    (43,000
    )
    
    
    (9,000
    )Deferred income taxes
    
    
    (39,099
    )
    
    
    (8,886
    )Accumulated other comprehensive
income
    
    $
    72,610
    
    
    $
    16,504
  On October 30, 2002, the Company received a capital contribution of
$200,000,000 in cash from the Parent.On January 1, 2002, the Company declared a distribution to its Parent of 100%
of the outstanding capital stock of its then consolidated subsidiary, Saamsun.
Pursuant to this distribution, Saamsun became a direct wholly owned subsidiary
of the Parent. Saamsun held the Companys asset management and broker-dealer
segments. This distribution reduced the Companys shareholders equity by
$552,384,000, cash and short term investments by $82,873,000, partnerships by
$443,369,000, deferred acquisition costs by $98,428,000, other assets by
$108,163,000, other liabilities by $121,635,000 and subordinated notes payable
to affiliates by $58,814,000. Pretax income in future periods will be reduced
by the earnings of the Companys asset management and broker-dealer operations,
substantially offset by a profit sharing agreement on fees earned on variable
annuity subaccounts (see Note 9). Net loss from these operations, on a
combined basis, totaled $9,491,000 for the year ended December 31, 2001.On January 1, 2001, the Parent contributed all of its ownership interests in SA
Affordable Housing, LLC (SAAH LLC), a wholly owned subsidiary, to the
Company. The Company subsequently contributed all of its ownership interests
in SAAH LLC to Saamsun. All of SAAH LLCs ownership interests were ultimately
contributed to SAAMCO. SAAH LLC has investments in limited partnership
interests whose primary purpose is the generation of rehabilitation tax
credits, low income housing credits and passive losses. Realized tax credits
are realized by its direct Parent, SAAMCO. At the time of the contribution,
SAAH LLC had partnership assets of $432,120,000, other assets of $623,000 and
shareholders equity of $432,743,000. SAAH LLCs results of operations are
included within the asset management operations. As a result of this transfer,
additional paid-in capital was increased by $432,743,000. This contribution
was approved by the Arizona Department of Insurance. F-28




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    
    SHAREHOLDERS EQUITY (Continued)Dividends that the Company may pay to its shareholder in any year without prior
approval of the Arizona Department of Insurance are limited by statute. The
maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior
approval of the Insurance Commissioner is limited to the lesser of either 10%
of the preceding years statutory surplus or the preceding years statutory net
gain from operations if, after paying the dividend, the Companys capital and
surplus would be adequate in the opinion of the Arizona Department of
Insurance. Accordingly, the maximum amount of dividends that can be paid to
stockholders in the year 2004 without obtaining prior approval is $59,884,000.
No dividends were paid in the years ended December 31, 2003 and 2002.
Dividends of $94,095,000 were paid on April 2, 2001.Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Companys net income totaled $89,071,000 for the
year ended December 31, 2003 and net losses of $180,737,000 and $122,322,000 for the years ended
December 31, 2002 and 2001, respectively. The Companys statutory capital and surplus totaled $602,348,000 at
December 31, 2003 and $463,905,000 at December 31, 2002.8.
    
    INCOME TAXESThe components of the provisions for federal income taxes on pretax income
consist of the following: Years ended December 31,2003
    
    2002
    
    2001(In thousands)Current
    
    $
    122,445
    
    
    $
    (126,685
    )
    
    $
    (105,158
    )Deferred
    
    
    (100,685
    )
    
    
    128,748
    
    
    
    126,010Total income tax expense
    
    $
    21,760
    
    
    $
    2,063
    
    
    $
    20,852
 F-29




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  8.
    
    INCOME TAXES (Continued)Income taxes computed at the United States federal income tax rate of 35% and
income taxes provided differ as follows: Years ended December 31,2003
    
    2002
    
    2001(In thousands)Amount computed at statutory rate
    
    $
    37,601
    
    
    $
    12,710
    
    
    $
    42,547Increases (decreases) resulting from:Amortization of differences between
book and tax bases of net assets
acquired
    
    
    
    
    
    
    
    
    
    
    613State income taxes, net of federal
tax benefit
    
    
    
    
    
    
    
    
    
    
    4,072Dividends received deduction
    
    
    (15,920
    )
    
    
    (10,117
    )
    
    
    (13,406
    )Tax credits
    
    
    
    
    
    
    
    
    
    
    (16,758
    )Other, net
    
    
    79
    
    
    
    (530
    )
    
    
    3,784Total income tax expense
    
    $
    21,760
    
    
    $
    2,063
    
    
    $
    20,852
  For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a policyholders surplus account and
are taxed only when distributed to shareholders or when such account exceeds
prescribed limits. The accumulated policyholders surplus was $14,304,000 at
December 31, 2003. The Company does not anticipate any transactions which
would cause any part of this surplus to be taxable.Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. F-30




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  8.
    
    INCOME TAXES (Continued)The significant components of the liability for Deferred Income Taxes are as
follows: December 31,
    
    December 31,2003
    
    2002(In thousands)DEFERRED TAX LIABILITIES:Deferred acquisition costs
    
    $
    455,151
    
    
    $
    423,823Other liabilities
    
    
    
    
    
    
    42,289Net unrealized gains on debt and equity
securities available for sale
    
    
    39,098
    
    
    
    8,885Total deferred tax liabilities
    
    
    494,249
    
    
    
    474,997DEFERRED TAX ASSETS:Investments
    
    
    (24,436
    )
    
    
    (13,591
    )Contractholder reserves
    
    
    (158,112
    )
    
    
    (84,943
    )Guaranty fund assessments
    
    
    (3,408
    )
    
    
    (3,774
    )Deferred income
    
    
    (21,881
    )
    
    
    (16,416
    )Other assets
    
    
    (5,013
    )
    
    
    (4,401
    )Total deferred tax assets
    
    
    (212,850
    )
    
    
    (123,125
    )Deferred income taxes
    
    $
    281,399
    
    
    $
    351,872
  In the Companys opinion, the deferred taxes will be fully realized and no valuation allowance
is necessary because the Company has the ability to generate sufficient future taxable income to realize the
tax benefits.9.
    
    RELATED-PARTY MATTERSAs discussed in Notes 1 and 7, the Company declared a distribution to the
Parent, effective January 1, 2002, of 100% of the outstanding common stock of
its consolidated subsidiary, Saamsun.For the years ended December 31, 2003 and December 31, 2002, the Company paid
commissions totaling $51,716,000 and $59,058,000 to nine affiliated
broker-dealers: Royal Alliance Associates, Inc.; SunAmerica Securities, Inc.;
Advantage Capital Corporation; FSC Services Corporation; Sentra Securities
Corporation; Spelman & Co., Inc.; VALIC Financial Advisors; American General
Financial Advisors and Franklin Financial Services Corporation, respectively.
Royal Alliance Associates, Inc. was a wholly owned subsidiary of the Company
prior to January 1, 2002. For the year ended December 31, 2001, the Company
paid commissions totaling $40,567,000 to six affiliated broker-dealers:
SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services
Corporation; Sentra Securities Corporation; Spelman & Co., Inc. and VALIC
Financial Advisors. These affiliated broker-dealers, distribute a significant
portion of the Companys variable annuity products, amounting to approximately
24.0%, 31.2% and 26.0% of deposits for each of the respective periods. Of the
Companys mutual fund sales, 26.3% was distributed by these affiliated
broker-dealers for the year ended December 31, 2001. F-31




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  9.
    
    RELATED-PARTY MATTERS (Continued)Pursuant to a cost allocation agreement, the Company purchases administrative,
investment management, accounting, marketing and data processing services from
its Parent, AIGRS and AIG. The allocation of such costs for investment
management services is based on the level of assets under management. The
allocation of costs for other services is based on estimated levels of usage,
transactions or time incurred in providing the respective services. Amounts
paid for such services totaled $126,531,000 for the year ended December 31,
2003, $119,981,000 for the year ended December 31, 2002 and $130,178,000 for
the year ended December 31, 2001. The component of such costs that relate to
the production or acquisition of new business during these periods amounted to
$48,733,000, $49,004,000 and $68,757,000, respectively, and is deferred and
amortized as part of deferred acquisition costs. The other components of such
costs are included in general and administrative expenses in the consolidated
statement of income and comprehensive income.The Company paid $500,000, $790,000 and $219,000 of management fees to an
affiliate of the Company to administer its securities lending program for the
years ended December 31, 2003, 2002 and 2001, respectively (see Note 2).The majority of the Companys invested assets are managed by an affiliate of
the Company. The investment management fees incurred were $2.3 million, $2.4
million and $5.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively.In December 2003, the Company purchased an affiliated bond with a carrying
value of $37,129,000.On June 10, 2002, the Company entered into a profit sharing agreement with AIG
SunAmerica Asset Management Corp. (SAAMCO), a former subsidiary of the
Company and registered investment advisor, whereby SAAMCO will contribute to
the Company on a quarterly basis its profits earned in connection with its role
as investment advisor and/or business manager to several open-end investment
management companies registered under the Investment Company Act of 1940, as
amended, that fund the variable investment options available to investors
through the Companys variable annuity contracts (the SAAMCO Agreement). The
SAAMCO Agreement is retroactive to January 1, 2002. Variable annuity fees of
$60,458,000 and $62,562,000 were included in the consolidated statement of
income and comprehensive income relating to the SAAMCO Agreement for the years
ended December 31, 2003 and 2002. Of this amount $54,753,000 and $57,745,000
has been paid to the Company in 2003 and 2002 and $5,705,000 and $4,817,000
remained receivables from SAAMCO at December 31, 2003 and 2002, respectively.On September 26, 2001, the Company entered into a short-term financing
arrangement with AIGRS, whereby the Company has the right to borrow up to
$500,000,000 from AIGRS. Any advances made by AIGRS under this agreement must
be repaid within 30 days. No borrowings were outstanding under this agreement
at December 31, 2003 or December 31, 2002.On December 19, 2001, the Company entered into a short-term financing
arrangement with AIGRS, whereby AIGRS has the right to borrow up to F-32




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  9.
    
    RELATED-PARTY MATTERS (Continued)$500,000,000 from the Company. Any advances made by the Company under this
agreement must be repaid within 30 days. No borrowings were outstanding under
this agreement at December 31, 2003. At December 31, 2002, $50,000,000 was due
to the Company under this agreement. This receivable was collected in January
2003 and was included in due from affiliates on the balance sheet at December
31, 2002.On September 26, 2001, the Company entered into a short-term financing
arrangement with an affiliate, SunAmerica Investments, Inc., whereby the
Company has the right to borrow up to $500,000,000 from SunAmerica Investments,
Inc. Any advances made by SunAmerica Investments, Inc. under this agreement
must be repaid within 30 days. At December 31, 2003, the Company owed
$14,000,000 under this agreement. This payable was paid in January 2004 and
was included in due to affiliates on the balance sheet at December 31, 2003.
No borrowings were outstanding under this agreement at December 31, 2002.On December 19, 2001, the Company entered into a short-term financing
arrangement with an affiliate, SunAmerica Investments, Inc., whereby SunAmerica
Investments, Inc. has the right to borrow up to $500,000,000 from the Company.
Any advances made by the Company under this agreement must be repaid within 30
days. No borrowings were outstanding under this agreement at December 31, 2003
or December 31, 2002.10.
    
    BUSINESS SEGMENTSAs a result of the distribution of Saamsun to the Parent on January 1, 2002,
the Company had one business segment in 2003 and 2002, annuity operations (see
Note 7). Prior to January 1, 2002, the Company had three business segments:
annuity operations, asset management operations and broker-dealer operations.
The accounting policies of the segments are the same as those described in Note
2. The Company evaluates performance based on profit or loss from operations
before income taxes. There were no intersegment revenues for the year ended
December 31, 2001. Substantially all of the Companys revenues are derived
from the United States. The Parent makes expenditures for long-lived assets
for the Company and allocates depreciation of such assets to the Company.Products for the annuity operations and asset management operations are
marketed through affiliated and independent broker-dealers, full-service
securities firms and financial institutions. One independent selling
organization in the annuity operations represented 14.6% of sales in the year
ended December 31, 2003, 11.9% of sales in the year ended December 31, 2002 and
12.2% of sales in the year ended December 31, 2001. No other independent
selling organization was responsible for 10% or more of sales for any such
period. For the year ended December 31, 2001, there was no single independent
selling organization that accounted for 10% or more of sales in the asset
management operations. Registered representatives sell products offered by the
broker-dealer operations. Revenue from any single registered representative or
group of registered representatives does not compose a material percentage of
total revenues in the broker-dealer operations for the year ended December 31,
2001. F-33




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    
    BUSINESS SEGMENTS (Continued)Summarized data for the Companys business segments follow: Asset
    
    Broker-Annuity
    
    Management
    
    DealerOperations
    
    Operations
    
    Operations
    
    Total(In thousands)YEAR ENDED DECEMBER 31, 2003:REVENUES:Fee income:Variable annuity fees
    
    $
    290,132
    
    
    $
    
    
    
    $
    
    
    
    $
    290,132Universal life
insurance fees
    
    
    35,816
    
    
    
    
    
    
    
    
    
    
    
    35,816Surrender charges
    
    
    27,733
    
    
    
    
    
    
    
    
    
    
    
    27,733Other fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fee income
    
    
    353,681
    
    
    
    
    
    
    
    
    
    
    
    353,681Investment income
    
    
    398,304
    
    
    
    
    
    
    
    
    
    
    
    398,304Net realized investment
losses
    
    
    (30,354
    )
    
    
    
    
    
    
    
    
    
    
    (30,354
    )Total revenues
    
    
    721,631
    
    
    
    
    
    
    
    
    
    
    
    721,631BENEFITS AND EXPENSES:Interest expense
    
    
    237,585
    
    
    
    
    
    
    
    
    
    
    
    237,585General and
administrative expenses
    
    
    83,013
    
    
    
    
    
    
    
    
    
    
    
    83,013Amortization of deferred
acquisition costs
    
    
    156,906
    
    
    
    
    
    
    
    
    
    
    
    156,906Annual commissions
    
    
    55,661
    
    
    
    
    
    
    
    
    
    
    
    55,661Claims on universal
life contracts, net
of reinsurance
    
    
    17,766
    
    
    
    
    
    
    
    
    
    
    
    17,766Guaranteed minimum death
benefits, net of
reinsurance recoveries
    
    
    63,268
    
    
    
    
    
    
    
    
    
    
    
    63,268Total benefits and
expenses
    
    
    614,199
    
    
    
    
    
    
    
    
    
    
    
    614,199Pretax income before
cumulative effect of
accounting change
    
    $
    107,432
    
    
    $
    
    
    
    $
    
    
    
    $
    107,432Total assets
    
    $
    27,781,851
    
    
    $
    
    
    
    $
    
    
    
    $
    27,781,851Expenditures for
long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 F-34




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    
    BUSINESS SEGMENTS (Continued) Asset
    
    Broker-Annuity
    
    Management
    
    DealerOperations
    
    Operations
    
    Operations
    
    Total(In thousands)YEAR ENDED DECEMBER 31, 2002:REVENUES:Fee income:Variable annuity fees
    
    $
    295,509
    
    
    $
    
    
    
    $
    
    
    
    $
    295,509Universal life
insurance fees
    
    
    36,253
    
    
    
    
    
    
    
    
    
    
    
    36,253Surrender charges
    
    
    32,507
    
    
    
    
    
    
    
    
    
    
    
    32,507Other fees
    
    
    3,305
    
    
    
    
    
    
    
    
    
    
    
    3,305Total fee income
    
    
    367,574
    
    
    
    
    
    
    
    
    
    
    
    367,574Investment income
    
    
    377,556
    
    
    
    
    
    
    
    
    
    
    
    377,556Net realized investment
losses
    
    
    (65,811
    )
    
    
    
    
    
    
    
    
    
    
    (65,811
    )Total revenues
    
    
    679,319
    
    
    
    
    
    
    
    
    
    
    
    679,319BENEFITS AND EXPENSES:Interest expense
    
    
    234,261
    
    
    
    
    
    
    
    
    
    
    
    234,261General and
administrative expenses
    
    
    79,287
    
    
    
    
    
    
    
    
    
    
    
    79,287Amortization of deferred
acquisition costs
    
    
    187,860
    
    
    
    
    
    
    
    
    
    
    
    187,860Annual commissions
    
    
    58,389
    
    
    
    
    
    
    
    
    
    
    
    58,389Claims on universal life
contracts, net of
reinsurance
    
    
    15,716
    
    
    
    
    
    
    
    
    
    
    
    15,716Guaranteed minimum death
benefits, net of
reinsurance recoveries
    
    
    67,492
    
    
    
    
    
    
    
    
    
    
    
    67,492Total benefits and
expenses
    
    
    643,005
    
    
    
    
    
    
    
    
    
    
    
    643,005Pretax income before
cumulative effect of
accounting change
    
    $
    36,314
    
    
    $
    
    
    
    $
    
    
    
    $
    36,314Total assets
    
    $
    23,538,832
    
    
    $
    
    
    
    $
    
    
    
    $
    23,538,832Expenditures for
long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 F-35




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    
    BUSINESS SEGMENTS (Continued) Asset
    
    Broker-Annuity
    
    Management
    
    DealerOperations
    
    Operations
    
    Operations
    
    Total(In thousands)YEAR ENDED DECEMBER 31, 2001:REVENUES:Fee income:Variable annuity fees
    
    $
    337,384
    
    
    $
    11,499
    
    
    $
    
    
    
    $
    348,883Net retained commissions
    
    
    
    
    
    
    2,210
    
    
    
    45,362
    
    
    
    47,572Asset management fees
    
    
    
    
    
    
    63,529
    
    
    
    
    
    
    
    63,529Universal life insurance
fees
    
    
    36,475
    
    
    
    
    
    
    
    
    
    
    
    36,475Surrender charges
    
    
    24,911
    
    
    
    
    
    
    
    
    
    
    
    24,911Other fees
    
    
    3,626
    
    
    
    9,350
    
    
    
    1,575
    
    
    
    14,551Total fee income
    
    
    402,396
    
    
    
    86,588
    
    
    
    46,937
    
    
    
    535,921Investment income
    
    
    358,710
    
    
    
    14,988
    
    
    
    570
    
    
    
    374,268Net realized investment
losses
    
    
    (59,784
    )
    
    
    (32,927
    )
    
    
    
    
    
    
    (92,711
    )Total revenues
    
    
    701,322
    
    
    
    68,649
    
    
    
    47,507
    
    
    
    817,478BENEFITS AND EXPENSES:Interest expense
    
    
    240,499
    
    
    
    4,115
    
    
    
    360
    
    
    
    244,974General and administrative
expenses
    
    
    80,026
    
    
    
    27,430
    
    
    
    29,486
    
    
    
    136,942Amortization of deferred
acquisition costs
    
    
    144,273
    
    
    
    76,043
    
    
    
    
    
    
    
    220,316Annual commissions
    
    
    58,278
    
    
    
    
    
    
    
    
    
    
    
    58,278Claims on universal life
contracts, net of
reinsurance
    
    
    17,566
    
    
    
    
    
    
    
    
    
    
    
    17,566Guaranteed minimum death
benefits, net of
reinsurance recoveries
    
    
    17,839
    
    
    
    
    
    
    
    
    
    
    
    17,839Total benefits and
Expenses
    
    
    558,481
    
    
    
    107,588
    
    
    
    29,846
    
    
    
    695,915Pretax income before
cumulative effect of
accounting change
    
    $
    142,841
    
    
    $
    (38,939
    )
    
    $
    17,661
    
    
    $
    121,563Total assets
    
    $
    26,207,279
    
    
    $
    659,876
    
    
    $
    72,950
    
    
    $
    26,940,105Expenditures for long-lived
assets
    
    $
    
    
    
    $
    614
    
    
    $
    608
    
    
    $
    1,222
 F-36