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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One) þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from               to Commission File Number 33-47472 AIG SUNAMERICA LIFE ASSURANCE COMPANY Incorporated in Arizona86-0198983
I.R.S. Employer
Identification No.
 1 SunAmerica Center, Los Angeles, California 90067-6022
Registrants telephone number, including area code: (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 þ No o INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS 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. þ INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED BY RULE
12b-2 OF THE ACT). Yes o No þ 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. AS
OF APRIL 15, 2005, THERE WERE OUTSTANDING 3,511 SHARES OF COMMON STOCK, $1,000 PAR VALUE
PER SHARE, OF THE REGISTRANT.




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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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEX-21Exhibit 31.1Exhibit 31.2Exhibit 32    Table of Contents  
 PART I 
 ITEM 1. BUSINESS GENERAL DESCRIPTION AIG SunAmerica Life Assurance Company (the Company) was incorporated as Anchor National Life
Insurance Company under the laws of the State of Arizona on April 12, 1965 while the Company
changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The Company
continued to do business as Anchor National Life Insurance Company until February 28, 2003, after
which time it began doing business under its new name, AIG SunAmerica Life Assurance Company. The Company is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the
Parent), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (AIGRS) (formerly
AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (AIG). 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 has no employees; however, employees of AIGRS and other affiliates of the Company
perform various services for the Company. AIGRS had approximately 1,900 employees at December 31,
2004, approximately 1,100 of whom perform services for the Company as well as for certain of its
affiliates. The Companys primary activities are retirement services, herein discussed as annuity
operations and asset management operations. The annuity operations consist of the sale and
administration of deposit-type insurance contracts, such as variable and fixed annuity contracts,
universal life insurance contracts and guaranteed investment contracts (GICs). The asset
management operations are conducted by the Companys registered investment advisor subsidiary, AIG
SunAmerica Asset Management Corp (SAAMCo), and its wholly owned distributor, AIG SunAmerica
Capital Services, Inc. (SACS), and its wholly owned servicing administrator, AIG SunAmerica Fund
Services, Inc. (SFS). See Note 13 of Notes
to the Consolidated Financial Statements for operating results by segment. The Company ranks among the largest U.S. issuers of variable annuity contracts. 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. 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 84,000 independent sales representatives are
appointed to sell the Companys annuity products. The Companys nine affiliated broker-dealers are
among the largest networks of registered representatives in the nation. Sales through
affiliated broker-dealers accounted for approximately a quarter of the Companys total annuity
sales in 2004. 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 51 million to 69 million from 1994 to 2003,
making this age group the fastest-growing segment of the U.S. population. Between 1994 and 2003,
annual industry premiums from fixed and variable annuities increased from $155 billion to $267
billion. Benefiting from continued strong growth of the retirement savings 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 variable annuity contracts. In recent years, the Company has enhanced its marketing
efforts and expanded its offerings of fee-based variable annuity contracts. Variable accounts
within the Companys variable annuity business entail no portfolio credit risk and requires
significantly less capital support than the fixed accounts of variable annuity contracts (Fixed
Options), which generate net investment income. 1




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The following table shows the Companys investment income, net realized investment losses and
fee income for the year ended December 31, 2004 by primary product line or service: NET INVESTMENT AND FEE INCOME Amount
    
    
    Percent(in thousands, except forpercentages)
    
    
Primary Product or ServiceFee income:Variable annuity policy fees,
net of
reinsurance
    
    $
    369,141
    
    
    
    42.2
    %
    
    Variable annuity contractsAsset management fees
    
    
    89,569
    
    
    
    10.2
    
    
    Asset managementUniversal life policy fees,
net of reinsurance
    
    
    33,899
    
    
    
    3.9
    
    
    Universal life productsSurrender charges
    
    
    26,219
    
    
    
    3.0
    
    
    Fixed and variable annuity contractsOther fees
    
    
    15,753
    
    
    
    1.8
    
    
    Asset managementTotal fee income
    
    
    534,581
    
    
    
    61.1Investment income
    
    
    363,594
    
    
    
    41.6
    
    
    Fixed annuity contracts and Fixed OptionsNet realized investment losses
    
    
    (23,807
    )
    
    
    (2.7
    )
    
    Fixed annuity contracts and Fixed OptionsTotal net investment and fee
income
    
    $
    874,368
    
    
    
    100.0
    %
 ANNUITY OPERATIONS  SEPARATE ACCOUNT The annuity operations principally engaged in the business of issuing variable annuity
contracts directed to the market for tax-deferred, long-term savings products. It also administers
closed blocks of fixed annuity contracts, universal life insurance contracts and 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 Fixed Options. The Company earns fees on the
amounts earned in variable account options of its variable annuity products held in separate
accounts and net investment income on the Fixed Options held in the general account. Variable
annuity contracts offer retirement planning features similar to those offered by fixed annuity
contracts, but differ in that the contract holder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 contract holder. Because the investment risk is generally borne by the
customer in all but the Fixed Options, these products require significantly less capital support
than fixed annuity contracts. At December 31, 2004, variable product liabilities were $26.04 billion, of which $22.61
billion were held in separate accounts and $3.43 billion were the liabilities of the Fixed Options,
held in the Companys general account. The Companys variable annuity products incorporate
incentives, surrender charges and/or other restrictions to encourage persistency. At December 31,
2004, 71% 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
2004 was approximately $74,000. 2




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ANNUITY OPERATIONS  GENERAL ACCOUNT The Companys general account obligations are fixed-rate products, principally Fixed Options,
but also including fixed annuity contracts, GICs and universal life insurance contracts
(Fixed-Rate Products) issued in prior years. The Fixed Options provide interest rate guarantees
of certain periods ranging up to ten years. Although the Companys annuity contracts remain in
force an average of seven to ten years, approximately 77% of the reserves for fixed annuity
contracts and Fixed Options, as well as the universal life insurance contracts, reprice annually at
discretionary rates determined by the Company subject to a minimum rate guarantee ranging from 1.5%
to 4.0%, 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. In prior years, the Company augmented its retail annuity business with the sale of
institutional products. At December 31, 2004, the Company had $211.4 million of fixed-maturity,
variable-rate GIC obligations that reprice periodically based upon certain defined indices and $3.9
million of fixed-maturity, fixed-rate GICs. 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-Rate Products incorporate incentives, surrender charges and other restrictions
in order to encourage persistency. Approximately 77% of the Companys reserves for Fixed-Rate
Products had incentives, surrender penalties and/or other restrictions at December 31, 2004. INVESTMENT OPERATIONS The Company believes a portfolio principally composed of fixed-rate investments that generate
predictable rates of return should back its liabilities for Fixed-Rate Products. 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 an affiliate 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. ASSET MANAGEMENT OPERATIONS Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding
capital stock of its consolidated subsidiary, SAAMCo, which in turn has two wholly owned
subsidiaries: SACS and SFS. Pursuant to this contribution, SAAMCo became a direct wholly owned
subsidiary of the Company. This contribution increased the Companys shareholders equity by
$150,653,000. Assets, liabilities and shareholders equity at December 31, 2003 were restated to
include $190,605,000, $39,952,000 and $150,653,000, respectively, of SAAMCo balances. Similarly,
the results of operations and cash flows have been restated for the years ended December 31, 2003
and 2002 for the addition and subtraction to pretax income of $16,345,000 and $4,464,000,
respectively, to reflect the SAAMCo activity. The asset management operations are conducted by the Companys registered investment advisor
subsidiary, SAAMCo, and its wholly owned distributor, SACS, and its wholly owned servicing
administrator, SFS. These companies earn fee income by managing, distributing and administering a
diversified family of mutual funds, serving as investment advisor to certain variable investment
portfolios offered within the Companys variable annuity products and providing professional
management of individual, corporate and pension plan portfolios. 3




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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
contract, deposits of securities for the benefit of contract holders, methods of accounting,
periodic examinations of the affairs of insurance companies, the form and content of reports of
financial condition required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of contract holders 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, 2004. The federal government does not directly regulate the business of insurance, however, the
Company, its subsidiaries and its products are governed by federal agencies, including the
Securities and Exchange Commission (SEC), the Internal Revenue Service and the self-regulatory
organization, National Association of Securities Dealers, Inc. (NASD). Federal legislation and
administrative policies in several areas, including financial services regulation, pension
regulation and federal taxation, can significantly and adversely affect the insurance industry.
The federal government has from time to time considered legislation relating to the deferral of
taxation on the accretion of value within certain annuities and life insurance products, changes in
the Employee Retirement Income Security Act regulations, the alteration of the federal income tax
structure and the availability of Section 401(k) and individual retirement accounts. Although the
ultimate effect of any such changes, if implemented, is uncertain, both the persistency of our
existing products and our ability to sell products may be materially impacted in the future. Recently there has been a significant increase in federal and state regulatory activity
relating to financial services companies, particularly mutual fund companies and life insurers
issuing variable annuity products. These inquiries have focused on a number of issues including,
among other items, after-hours trading, short-term trading (sometimes referred to as market
timing), suitability, revenue sharing arrangements and greater transparency regarding compensation
arrangements. There are several rule proposals pending at the SEC, the NASD and on a federal
level, which, if passed, could have an impact on the business of the Company and/or its
subsidiaries. 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 4




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other financial institutions. In 2003, net annuity premiums written among the top 100 companies
ranged from approximately $79 million to approximately $20 billion annually. The Company together
with its affiliates ranked third largest of this group. The Company believes the primary
competitive factors among life insurance companies for investment-oriented insurance products, such
as annuities 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. AVAILABLE INFORMATION AIG SunAmerica Life Assurance
Company (the Company) files annual, quarterly, and
current reports and other information with the Securities and
Exchange Commission (the SEC). The SEC maintains a
website that contains annual, quarterly, and current reports and
other information that issuers (including the Company) file
electronically with the SEC. The SECs website is
http://www.sec.gov. Additionally, any materials the Company
files with the SEC may be read and copied at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Company does
not maintain a website. The Company makes available
free of charge, Annual Reports on Form 10-K, quarterly Reports
of Form 10-Q and Current Reports of Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable
after such materials are electronically filed with, or furnished to
the SEC. 
 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 and Jersey City, New Jersey. 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 and its subsidiaries have arisen in the ordinary course
of business. Contingent liabilities arising from litigation, income taxes and regulatory and other
matters are not considered material in relation to the consolidated financial position, results of
operations or cash flows of the Company. On April 5, 2004, a purported class action captioned Nitika Mehta, as Trustee of the N.D.
Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the
Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges
certain improprieties in conjunction with alleged market timing activities. The probability of any
particular outcome cannot be reasonably estimated at this time. The Companys ultimate parent, AIG, has announced that it has delayed filing its Annual
Report on Form 10-K for the year ended December 31,2004 to allow AIGs Board of Directors and new
management adequate time to complete an extensive review of AIGs books and records. The review
includes issues arising from pending investigations into non-traditional insurance products and
certain assumed reinsurance transactions by the Office of the Attorney General for the State of New
York and the SEC and from AIGs decision to review the accounting treatment of certain additional
items. Circumstances affecting AIG can have an impact on the Company. For example, the recent
downgrades and ratings actions taken by the major rating agencies with respect to AIG, resulted in
corresponding downgrades and ratings actions being taken with respect to the Companys ratings.
Accordingly, we can give no assurance that any further changes in circumstances for AIG will not
impact us. While the outcome of this investigation is not determinable at this time, management
believes that the ultimate outcome will not have a material adverse effect on Company operating
results, cash flows or financial position. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the quarter ending December 31, 2004 to a vote of
security-holders, through the solicitation of proxies or otherwise. 
 PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable. 5




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ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company 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. The following selected financial date of the Company for years prior to December 31, 2004 have
been restated as if the contribution of SAAMCo and its related subsidiaries were effective as of
the earliest period reported below. The following amounts include
only the subsidiaries of SAAMCo as of December 31, 2004. Years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)RESULTS OF OPERATIONSREVENUES:Fee income, net of reinsurance
    
    $
    534,581
    
    
    $
    427,091
    
    
    $
    444,002
    
    
    $
    481,945
    
    
    $
    549,970Investment income
    
    
    363,594
    
    
    
    402,923
    
    
    
    387,355
    
    
    
    370,198
    
    
    
    398,168Net realized investment losses
    
    
    (23,807

    )
    
    
    (30,354
    )
    
    
    (65,811
    )
    
    
    (59,784
    )
    
    
    (15,177
    )Total revenues
    
    
    874,368
    
    
    
    799,660
    
    
    
    765,546
    
    
    
    792,359
    
    
    
    932,961BENEFITS AND EXPENSES:Interest expense
    
    
    222,749
    
    
    
    240,213
    
    
    
    238,129
    
    
    
    244,614
    
    
    
    264,493Amortization of bonus interest
    
    
    10,357
    
    
    
    19,776
    
    
    
    16,277
    
    
    
    11,938
    
    
    
    3,824General and administrative expenses
    
    
    131,612
    
    
    
    119,093
    
    
    
    115,210
    
    
    
    99,232
    
    
    
    138,955Amortization of deferred acquisition costs
and other deferred expenses
    
    
    157,650
    
    
    
    160,106
    
    
    
    222,484
    
    
    
    208,378
    
    
    
    154,183Annual commissions
    
    
    64,323
    
    
    
    55,661
    
    
    
    58,389
    
    
    
    58,278
    
    
    
    56,473Claims on universal life contracts, net of
reinsurance recoveries
    
    
    17,420
    
    
    
    17,766
    
    
    
    15,716
    
    
    
    17,566
    
    
    
    19,914Guaranteed minimum death benefits, net of
reinsurance recoveries
    
    
    58,756
    
    
    
    63,268
    
    
    
    67,492
    
    
    
    17,839
    
    
    
    614Total benefits & expenses
    
    
    662,867
    
    
    
    675,883
    
    
    
    733,697
    
    
    
    657,845
    
    
    
    638,456Pretax income before cumulative effect of
accounting change
    
    
    211,501
    
    
    
    123,777
    
    
    
    31,849
    
    
    
    134,514
    
    
    
    294,505Income tax expense
    
    
    6,410
    
    
    
    30,247
    
    
    
    160
    
    
    
    21,824
    
    
    
    94,400Net income before cumulative effect of
accounting change
    
    
    205,091
    
    
    
    93,530
    
    
    
    31,689
    
    
    
    112,690
    
    
    
    200,105Cumulative effect of accounting change,
net of tax
    
    
    (62,589
    )
    
    
    
    
    
    
    
    
    
    
    (10,342
    )
    
    
    NET INCOME
    
    $
    142,502
    
    
    $
    93,530
    
    
    $
    31,689
    
    
    $
    102,348
    
    
    $
    200,105
 In
2004, the Company adopted AICPA Statement of Position 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts  (SOP 03-01), which was recorded as a cumulative effect of accounting
change. (See Note 2 of Notes to Consolidated Financial Statements). In
2001, the Company adopted EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets and Statement of
Financial Accounting Standard 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133), which were recorded as a cumulative
effect of accounting change. 6




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ITEM 6. SELECTED FINANCIAL DATA (continued) December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)FINANCIAL POSITIONInvestments and cash
    
    $
    7,125,986
    
    
    $
    7,124,633
    
    
    $
    7,248,324
    
    
    $
    6,294,148
    
    
    $
    5,249,827Variable annuity assets held in
separate accounts
    
    
    22,612,451
    
    
    
    19,178,796
    
    
    
    14,758,642
    
    
    
    18,526,413
    
    
    
    20,393,820Deferred acquisition costs and other
deferred expenses
    
    
    1,606,870
    
    
    
    1,505,328
    
    
    
    1,436,801
    
    
    
    1,419,498
    
    
    
    1,286,456Other assets
    
    
    150,708
    
    
    
    162,970
    
    
    
    309,222
    
    
    
    258,446
    
    
    
    177,468TOTAL ASSETS
    
    $
    31,496,015
    
    
    $
    27,971,727
    
    
    $
    23,752,989
    
    
    $
    26,498,505
    
    
    $
    27,107,571Reserves for fixed annuity and fixed
accounts of variable annuity contracts
    
    $
    3,948,158
    
    
    $
    4,274,329
    
    
    $
    4,285,098
    
    
    $
    3,498,917
    
    
    $
    2,778,229Reserves for universal life insurance
contracts
    
    
    1,535,905
    
    
    
    1,609,233
    
    
    
    1,676,073
    
    
    
    1,738,493
    
    
    
    1,832,667Reserves for guaranteed investment
contracts
    
    
    215,331
    
    
    
    218,032
    
    
    
    359,561
    
    
    
    483,861
    
    
    
    610,672Variable annuity liabilities related to
separate accounts
    
    
    22,612,451
    
    
    
    19,178,796
    
    
    
    14,758,642
    
    
    
    18,526,413
    
    
    
    20,393,820Other payables and accrued liabilities
    
    
    1,172,594
    
    
    
    794,031
    
    
    
    831,138
    
    
    
    839,032
    
    
    
    268,201Subordinated notes payable to affiliates
    
    
    
    
    
    
    40,960
    
    
    
    40,960
    
    
    
    47,960
    
    
    
    55,119Deferred income taxes
    
    
    257,532
    
    
    
    242,556
    
    
    
    341,935
    
    
    
    211,242
    
    
    
    81,989Shareholders equity
    
    
    1,754,044
    
    
    
    1,613,790
    
    
    
    1,459,582
    
    
    
    1,152,587
    
    
    
    1,086,874TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    31,496,015
    
    
    $
    27,971,727
    
    
    $
    23,752,989
    
    
    $
    26,498,505
    
    
    $
    27,107,571




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##### Table of Contents



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 (the Company) for the years ended December 31, 2004 (2004),
2003 (2003) and 2002 (2002) follows. Certain prior period amounts have been reclassified to
conform to the current periods presentation. In connection with the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in
this report and in any other statements made by, or on behalf of, the Company, whether or not in
future filings with the Securities and Exchange Commission (the SEC). Forward-looking statements
are statements not based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using verbs such as expect,
anticipate, believe or words of similar import generally involve forward-looking statements.
Without limiting the foregoing, forward-looking statements include statements which represent the
Companys beliefs concerning future levels of sales and redemptions of the Companys products,
investment spreads and yields, or the earnings and profitability of the Companys activities. Forward-looking statements are necessarily based on estimates and assumptions that are
inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Companys control and many of which are subject to
change. These uncertainties and contingencies could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether
or not actual results differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable developments. Some may be national in scope, such as general
economic conditions, changes in tax law and changes in interest rates. Some may be related to the
insurance industry generally, such as pricing, competition, regulatory developments and industry
consolidation. Others may relate to the Company specifically, such as credit, volatility and other
risks associated with the Companys investment portfolio. Investors are also directed to consider
other risks and uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information. CRITICAL ACCOUNTING POLICIES The Company considers its most critical accounting policies those policies with respect to
valuation of certain financial instruments, amortization of deferred acquisition costs (DAC) and
other deferred expenses and the reserve for guaranteed benefits. In the implementation of each of
the aforementioned policies, management is required to exercise its judgment on both a quantitative
and qualitative basis. Further explanation of how management exercises that judgment follows. VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity
securities available for sale amounted to $27.1 million at December 31, 2004. In determining if
and when a decline in fair value below amortized cost is other than temporary, the Company
evaluates at each reporting period the market conditions, offering prices, trends of earnings,
price multiples, and other key measures for investments in debt and equity securities. In
particular, for debt securities, the Company assesses the probability that all amounts due are
collectible according to the contractual terms of the obligation. When such a decline in value is
deemed to be other than temporary, the Company recognizes an impairment loss in the current period
operating results to the extent of the decline (See also discussion within Capital Resources and
Liquidity herein). Securities in the Companys portfolio with a carrying value of approximately $813.0 million at
December 31, 2004 do not have readily determinable market prices. For these securities, the
Company estimates the fair value with internally prepared valuations (including those based on
estimates of future profitability).Otherwise, the Company uses its most recent purchases and
sales of similar unquoted securities, independent broker quotes or comparison to similar securities
with quoted prices when possible to estimate the fair value of those securities. All such
securities are classified as available for sale. The Companys ability to liquidate its positions
in these securities will be impacted to a significant degree by the lack of an actively traded
market, and the Company may not be able to dispose of these investments in a timely manner.
Although the Company believes its estimates reasonably reflect 8




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the fair value of those securities, the key assumptions about the risk-free interest rates,
risk premiums, performance of underlying collateral, if any, and other factors may not reflect
those of an active market. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES: Policy acquisition
costs include commissions and other costs that vary with, and are primarily related to, the
production or acquisition of new business. Such costs are deferred and amortized over the
estimated lives of the annuity contracts. Approximately 81% of the amortization of DAC and other
deferred expenses was attributed to policy acquisition costs deferred by the annuity operations and
19% was attributed to the distribution costs deferred by the asset management operations. For the
annuity operations, the Company amortizes DAC and other deferred expenses based on a percentage of
expected gross profits (EGPs) over the life of the underlying policies. 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 options of the variable annuity contracts) or
general account assets (with respect to fixed annuity contracts, Fixed Options and universal life
insurance contracts) supporting these obligations, costs of providing contract guarantees and
the level of expenses necessary to administer the policies. The Company adjusts amortization of
DAC and other deferred expenses (a DAC unlocking) when current or estimates of future gross
profits to be realized from its annuity contracts are revised as more fully described below.
Substantially all of the DAC balance attributed to annuity operations at December 31, 2004 related
to variable annuity contracts. DAC amortization on annuities is impacted by 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 Options, the growth rate depends on the yield on the general
account assets supporting those annuity contracts. With respect to the variable options of the
variable annuity contracts, 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 rate of the separate
account assets in the determination of DAC amortization with respect to its variable annuity
contracts is 10% (the long-term growth rate assumption). The Company uses a reversion to the
mean methodology that allows it to maintain this 10% long-term growth rate assumption, while also
giving consideration to the effect of short-term swings in the equity markets. For example, if
performance was 15% during the first year following the introduction of a product, the DAC model
would assume that market returns for the following five years (the short-term growth rate
assumption) would be approximately 9%, resulting in an average annual growth rate of 10% during
the life of the product. Similarly, following periods of below 10% performance, the model will
assume a short-term growth rate higher than 10%. A DAC unlocking will occur if management deems
the short-term growth rate assumption (i.e., the growth rate required to revert to the mean 10%
growth rate over a five-year period) to be unreasonable. The use of a reversion to the mean
assumption is common within the industry; however, the parameters used in the methodology are
subject to judgment and vary within the industry. For the asset management operations, the Company defers distribution costs that are directly
related to the sale of mutual funds that have a 12b-1 distribution plan and/or a contingent
deferred sales charge feature (collectively, Distribution Fee Revenue). These costs are
amortized on a straight-line basis, adjusted for redemptions, over a period ranging from one year
to eight years depending on share class. The carrying value of the deferred asset is subject to
continuous review based on projected Distribution Fee Revenue. Amortization of deferred
distribution costs is increased if at any reporting period the value of the deferred amount exceeds
the projected Distribution Fee Revenue. The projected Distribution Fee Revenue is impacted by
estimated future withdrawal rates and the rates of market return. Management uses historical
activity to estimate future withdrawal rates and average annual performance of the equity markets
to estimate the rates of market return. RESERVE FOR GUARANTEED BENEFITS: Pursuant to the adoption of Statement of Position 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts (SOP 03-1) which was adopted on January 1, 2004, the Company
is required to recognize a liability for guaranteed minimum death benefits and other guaranteed
benefits. In calculating the projected liability, five thousand stochastically generated
investment performance scenarios were developed using the Companys bestestimates. These
assumptions included, among others, mean equity return and volatility, mortality rates and lapse 9




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rates. The estimation of cash flow and the determination of the assumptions used require
judgment, which can, at times, be subjective. Several of the guaranteed benefits are sensitive to equity market conditions. The Company
uses the purchase of reinsurance and capital market hedging strategies to mitigate the risk of
paying benefits in excess of account values as a result of significant downturns in equity markets.
Risk mitigation may or may not reduce the volatility of net income resulting from equity market
volatility. Reinsurance or hedges are secured when the cost is less than the risk reduction. The
Company expects to use either additional reinsurance or capital market hedges for risk mitigation
on an opportunistic basis. Despite the purchase of reinsurance or hedges, the reinsurance or hedge
secured may be inadequate to completely offset the effects of changes in equity markets. BUSINESS SEGMENTS Effective January 1, 2004, SunAmerica Life Insurance Company (the Parent), the parent of the
Company, contributed to the Company 100% of the outstanding capital stock of its consolidated
subsidiary, AIG SunAmerica Asset Management Corp. (SAAMCo), which in turn has two wholly owned
subsidiaries: AIG SunAmerica Capital Services, Inc. (SACS) and AIG SunAmerica Fund Services, Inc.
(SFS). This contribution increased the Companys shareholders equity by approximately $150.7 million (see Note 1 of Notes to Consolidated Financial Statements). Effective January 1, 2004, the
Companys earnings include the asset management operations of SAAMCo, SACS and SFS. Prior year
results have been restated to account for this contribution as if it had occurred at the beginning
of the earliest period presented. The Company has two business segments: annuity operations and asset management operations.
The annuity operations consist of the sale and administration of deposit-type insurance contracts,
such as variable and fixed annuity contracts, universal life insurance contracts and guaranteed
investment contracts. The Company focuses primarily on the marketing of variable annuity products.
The variable annuity products offer investors a broad spectrum of fund alternatives, with a choice
of investment managers, as well as Fixed Options. The Company earns fee income on amounts invested
in the variable account options and net investment spread on the Fixed Options. The asset management operations are conducted by the Companys registered investment advisor
subsidiary, SAAMCo, and its wholly owned distributor, SACS, and its wholly owned servicing
administrator, SFS. These companies earn fee income by managing, distributing and administering a
diversified family of mutual funds, servicing as investment advisor to certain variable investment
portfolios offered within the Companys variable annuity products and providing professional
management of individual, corporate and pension plan portfolios. RESULTS OF OPERATIONS NET INCOME totaled $142.5 million in 2004, compared with $93.5 million in 2003 and $31.7
million in 2002. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption of SOP 03-1 on
January 1, 2004. The Company recorded a loss of $62.6 million, net of tax, which is recognized in
the consolidated statement of income and comprehensive income as a cumulative effect of accounting
change for the year ended December 31, 2004. PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $211.5 million in 2004,
compared with $123.8 million in 2003 and $31.8 million in 2002. The increase in 2004 compared to
2003 was primarily due to higher variable annuity policy fee and asset management fee income,
partially offset by lower investment income and higher general and administrative and other
expenses. The increase in 2003 compared to 2002 was primarily due to reductions in net realized
investment losses and amortization of DAC and other expenses. 10




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INCOME TAX EXPENSE totaled $6.4 million in 2004, $30.2 million in 2003 and $0.2 million in
2002 representing effective tax rates of 3%, 24% and 1%, respectively. The tax expense in 2004
included the benefit of $39.7 million resulting from the reduction of the prior year tax liability
based on additional information becoming available. Excluding this benefit the effective tax rate
is 22% in 2004. The unusually low effective tax rate for 2002 is due primarily to the lower
relative pretax income without corresponding reductions in permanent tax differences. See Note 11
of the Notes to Consolidated Financial Statements for a reconciliation of income tax expense to the
federal statutory rate. ANNUITY OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $176.9 million in 2004,
compared with $98.7 million in 2003 and $27.7 million in 2002. The increase in 2004 compared to
2003 was primarily due to higher variable annuity policy fee income and lower amortization of
deferred acquisition costs and other deferred expenses partially offset by higher general and
administrative and other expenses. 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. NET INVESTMENT SPREAD, a non-GAAP measure, represents investment income less interest credited
to Fixed-Rate Products is a key measurement used by the Company in evaluating the profitability of
its annuity business. Investment income includes income earned on invested assets, as well as the
mark-to-market on both purchased derivatives and embedded derivatives inherent in certain product
guarantees. Accordingly, the Company presents an analysis of net investment spread because the
Company has determined this measure to be useful and meaningful. In evaluating its investment yield and net investment spread, the Company calculates average
invested assets using the amortized cost of bonds, notes and redeemable preferred stocks. This
basis does not include unrealized gains and losses, which are reflected in the carrying value
(i.e., fair value) of those investments pursuant to Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. In the calculation of
average invested assets, the Company excludes collateral received from a securities lending
program, which is offset by a securities lending payable in the same amount. The Company
participates in a securities lending program with an affiliated agent, pursuant to which it lends
its securities and primarily takes cash as collateral with respect to the securities lent.
Participation in securities lending agreements provides additional net investment income for the
Company, resulting from investment income earned on the collateral, less interest paid on the
securities lending agreements and the related management fees paid to an affiliate to administer
the program. 11




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##### Table of Contents



An analysis of net investment spread and a reconciliation to pretax income before cumulative
effect of accounting change is presented in the following table: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Investment income
    
    $
    362,631
    
    
    $
    398,304
    
    
    $
    377,556Interest credited to fixed annuity contracts and Fixed Options
    
    
    (140,889
    )
    
    
    (153,636
    )
    
    
    (142,973
    )Interest credited to universal life insurance contracts
    
    
    (73,745
    )
    
    
    (76,415
    )
    
    
    (80,021
    )Interest credited to guaranteed investment contracts
    
    
    (6,034
    )
    
    
    (7,534
    )
    
    
    (11,267
    )Net investment spread
    
    
    141,963
    
    
    
    160,719
    
    
    
    143,295Net realized investment losses
    
    
    (24,100
    )
    
    
    (30,354
    )
    
    
    (65,811
    )Fee income, net of reinsurance
    
    
    429,259
    
    
    
    344,908
    
    
    
    358,983Amortization of bonus interest
    
    
    (10,357
    )
    
    
    (19,776
    )
    
    
    (16,277
    )General and administrative expenses
    
    
    (93,188
    )
    
    
    (83,013
    )
    
    
    (79,287
    )Amortization of DAC and other deferred expenses
    
    
    (126,142
    )
    
    
    (137,130
    )
    
    
    (171,583
    )Annual commissions
    
    
    (64,323
    )
    
    
    (55,661
    )
    
    
    (58,389
    )Claims on UL contracts, net of reinsurance recoveries
    
    
    (17,420
    )
    
    
    (17,766
    )
    
    
    (15,716
    )Guaranteed benefits, net of reinsurance recoveries
    
    
    (58,756
    )
    
    
    (63,268
    )
    
    
    (67,492
    )Pretax income before cumulative effect of accounting change
    
    $
    176,936
    
    
    $
    98,659
    
    
    $
    27,723
 Net investment spread totaled $142.0 million in 2004, compared to $160.7 million in 2003 and
$143.3 million in 2002. These amounts equal 2.28% on average invested assets (computed on a daily
basis) of $6.22 billion in 2004, 2.37% on average invested assets of $6.66 billion in 2003 and
2.41% on average invested assets of $6.09 billion in 2002. The decrease in net investment spread
in 2004 from 2003 reflected results from lower average invested assets as discussed below and
reinvesting in the historically low prevailing interest rate environment that has persisted
throughout 2003 and 2004. 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 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Net investment spread
    
    $
    141,963
    
    
    $
    160,719
    
    
    $
    143,295Average invested assets
    
    
    6,216,792
    
    
    
    6,656,360
    
    
    
    6,086,517Average interest-bearing liabilities
    
    
    (5,942,627
    )
    
    
    (6,407,102
    )
    
    
    (5,962,521
    )Yield on average invested assets
    
    
    5.83
    %
    
    
    5.98
    %
    
    
    6.20
    %Rate paid on average interest-bearing liabilities
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.93Difference between yield and interest rate paid
    
    
    2.12
    %
    
    
    2.27
    %
    
    
    2.27
    %Net investment spread as a percentage of
average invested assets
    
    
    2.28
    %
    
    
    2.41
    %
    
    
    2.35
    %
 The decline in average invested assets resulted primarily from net exchanges from Fixed
Options into the separate accounts of variable annuity contracts, partially offset by new deposits
of Fixed Options. Deposits of Fixed Options and renewal deposits on its universal life insurance
contracts totaled $1.41 billion 2004, $1.58 billion in 2003 and $1.78 billion in 2002, and are
primarily deposits for the Fixed Options. Deposits of Fixed Options 12




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represent 24% in 2004, 27% in 2003 and 34% in 2002, of the related reserve balances at the beginning of the respective periods. Net investment spread includes 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 $274.2 million in 2004, compared with $249.3
million in 2003 and $124.0 million in 2002. The difference between the Companys yield on
average invested assets and the rate paid on average interest-bearing liabilities was 2.12% in 2004
and 2.27% in 2003 and 2.27% in 2002. Investment income (and the related yields on average invested assets) totaled $362.6 million
(5.83%) in 2004, compared with $398.3 million (5.98%) in 2003 and $377.6 million (6.20%) in 2002.
The decrease in the investment yield primarily reflects the reinvesting in the historically low
prevailing interest rate environment that has persisted throughout 2002, 2003 and 2004, as well as
a $4.3 million reduction in income from the mark to market of the S&P 500 put options and the
guaranteed minimum account value and guaranteed minimum withdrawal benefit embedded derivatives in
2004. Excluding the impact of the put options and embedded derivatives, investment income would
have been $361.6 million (5.82%) and $393.0 million (5.90%) in 2004 and 2003, respectively. Expenses
incurred to manage the investment portfolio amounted to $2.5 million in 2004, $2.3 million in 2003
and $2.4 million in 2002. These expenses are included as a reduction of investment income in the
consolidated statement of income and comprehensive income. Interest expense (and the related rate paid on average interest-bearing liabilities) totaled
$220.7 million (3.71%) in 2004, $237.6 million (3.71%) in 2003 and $234.3 million (3.93%) in 2002.
Interest-bearing liabilities averaged $5.94 billion during 2004, $6.41 billion during 2003 and
$5.96 billion during 2002. NET REALIZED INVESTMENT LOSSES totaled $24.1 million in 2004, $30.4 million in 2003 and $65.8
million in 2002 and include impairment writedowns of $21.1 million, $54.1 million and $57.3
million, respectively. Thus, net realized losses from sales and redemptions of investments
totaled $3.0 million in 2004, compared with net realized gains of $23.7 million in 2003 and net
realized losses of $8.5 million in 2002. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $1.97
billion in 2004, $2.21 billion in 2003 and $1.60 billion in 2002. Sales of investments result from
the active management of the Companys investment portfolio. Because redemptions of investments
are generally involuntary and sales of investments are made in both rising and falling interest
rate environments, net gains and losses from sales and redemptions of investments fluctuate from
period to period, and represent 0.05%, 0.36% and 0.14% of average invested assets for 2004, 2003
and 2002, 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 $21.1 million, $54.1 million and $57.3 million of provisions
principally applied to bonds in 2004, 2003 and 2002, respectively. Impairment writedowns represent
0.34%, 0.81% and 0.96% of average invested assets in the respective periods. For the five years
ended December 31, 2004, impairment writedowns as a percentage of average invested assets have
ranged from 0.34% to 1.27% and have averaged 0.75%. Such writedowns are based upon estimates of
the fair value of invested assets and recorded when declines in the value of such assets are
considered to be other than temporary. Actual realization will be dependent upon future events. VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are generally based on the market value of
assets in the separate accounts supporting variable annuity contracts. Such fees totaled $369.1
million in 2004, $281.4 million in 2003 and $286.9 million in 2002 and are net of reinsurance
premiums of $28.6 million, $30.8 million and $22.5 million, respectively. The increased fees in
2004 compared to 2003 primarily reflect the improved equity market conditions in 2004 and the
latter part of 2003, and the resulting favorable impact on market values of the assets in the
separate accounts. The decreased fees in 2003 as compared to 2002 reflected increased reinsurance
premiums. Variable annuity policy fees represent 1.8%, 1.7% and 1.7% of average variable annuity
assets in 2004, 2003 and 2002, respectively. Variable annuity assets averaged $20.41 billion,
$16.32 billion and 13




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##### Table of Contents



$16.45 billion during the respective periods. Variable annuity deposits, which exclude
deposits allocated to the Fixed Options, totaled $2.65 billion in 2004, $1.73 billion in 2003 and
$1.18 billion in 2002. These amounts represent 14%, 12% and 6% of variable annuity reserves at the
beginning of the respective periods. The increase in variable annuity deposits in 2004 and 2003
reflected increased demand for variable annuity products due to the improved equity market
conditions in 2004 and the latter part of 2003. Transfers from the Fixed Options to the separate
accounts are not classified as variable annuity deposits. Accordingly, changes in variable annuity
deposits are not necessarily indicative of the ultimate allocation by customers among fixed and
variable account options of the Companys variable annuity products. Sales of variable annuity products (which include deposits allocated to the Fixed Options)
(Variable Annuity Product Sales) amounted to $4.01 billion, $3.27 billion and $2.92 billion in
2004, 2003 and 2002, respectively. Such sales primarily reflect those of the Companys Polaris and
Seasons families of variable annuity products. The Companys variable annuity products are
primarily multi-manager variable annuities that offer investors a choice of several variable funds
as well as up to seven fixed funds, depending on the product. The increase in Variable Annuity
Product Sales in 2004 and 2003 reflects the generally improved equity market conditions in 2004 and
the latter part of 2003. 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). With respect to all reinsurance agreements, the Company could become liable for all
obligations of the reinsured policies if the reinsurers were to become unable to meet the
obligations assumed under the respective reinsurance agreements. The Company monitors its credit
exposure with respect to these agreements. Due to the high credit ratings and periodic monitoring
of these ratings of the reinsurers, such risks are considered to be minimal. UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $33.9 million in 2004,
$35.8 million in 2003 and $36.3 million in 2002 and are net of reinsurance premiums of $34.3
million, $33.7 million and $34.1 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 insurance 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 2.20%, 2.23% and 2.17% of average
reserves for universal life insurance contracts in the respective periods. SURRENDER CHARGES on variable annuity and universal life insurance contracts totaled $26.2
million in 2004, $27.7 million in 2003 and 32.5 million in 2002. 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. GENERAL AND ADMINISTRATIVE EXPENSES totaled $93.2 million in 2004, $83.0 million in 2003 and
$79.3 million in 2002. The increase in 2004 results from higher information technology costs and
payroll related expenses resulting from the servicing of a larger block of annuity contracts.
General and administrative expenses remain closely controlled through a company-wide cost
containment program and continue to represent less than 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES totaled $126.1 million
in 2004, compared with $137.1 million in 2003 and $171.6 million in 2002. DAC amortization in 2003
reflected a declining market which led to higher DAC amortization (i.e. impairments on specific
products) during the first nine months of 2003 and is partially offset by an $18.0 million DAC
unlocking. The higher 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. 14




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ANNUAL COMMISSIONS totaled $64.3 million in 2004, compared with $55.7 million in 2003 and
$58.4 million in 2002. Annual commissions generally 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 $17.4 million in
2004, compared with $17.8 million in 2003 and $15.7 million in 2002 (net of reinsurance recoveries
of $34.2 million in 2004, $34.0 million in 2003 and $29.2 million in 2002). The change in such
claims resulted principally from changes in mortality experience and the reinsurance recoveries
there on. GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity contracts totaled $58.8
million in 2004, compared with $63.3 million in 2003 and $67.5 million in 2002 and are net of
reinsurance recoveries of $2.7 million, $8.0 million and $8.4 million, respectively. These
guaranteed benefits consist primarily of guaranteed minimum death benefits as well as immaterial
amounts of earnings enhancement benefits and guaranteed minimum income benefits. These guarantees
are described in more detail in the following paragraphs. The decrease during 2004 reflects the
generally improved equity market conditions in 2004 and the latter part of 2003. Downturns in the
equity markets could increase these expenses. Guaranteed minimum death benefits (GMDB) are issued on a majority of the Companys variable
annuity products. GMDB provides that, upon the death of a contract holder, the contract holders
beneficiary will receive the greater of (1) the contract holders account value, or (2) a
guaranteed minimum death benefit that varies by product and election by the contract holder. The
Company bears the risk that death claims following a decline in the debt and equity markets may
exceed contract holder account balances and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. On January 1, 2004, the Company
recorded a liability for guaranteed benefits including GMDB (see Note 2 of Notes to Consolidated
Financial Statements) pursuant to adoption of a new accounting standard, SOP 03-1. Earnings enhancement benefit (EEB) is a feature the Company offers on certain variable
annuity products. For contract holders who elect the feature, the EEB provides an additional death
benefit amount equal to a fixed percentage of earnings in the contract, subject to certain
maximums. The Company bears the risk that account values following favorable performance of the
financial markets will result in greater EEB death claims and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. Guaranteed minimum income benefit (GMIB) is a feature the Company offers on certain variable
annuity products. This feature provides a minimum fixed annuity payment guarantee for those
contract holders who choose to receive fixed lifetime annuity payments after a seven, nine, or
ten-year waiting period in their deferred annuity contracts. The Company bears the risk that the
performance of the financial markets will not be sufficient for accumulated contract holder 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. As there is a waiting period to annuitize using
the GMIB, there are no policies eligible to receive this benefit at December 31, 2004. The Company
has eliminated offering a GMIB feature that guarantees a return in excess of the amount to be
annuitized in order to mitigate its exposure. Guaranteed minimum account value (GMAV) is a feature the Company offers on certain variable
annuity products in the third quarter of 2002. If available and elected by the contract holder at
the time of contract issuance, this feature guarantees that the account value under the contract
will at least equal the amount of the deposits invested during the first ninety days of the
contract, adjusted for any subsequent withdrawals, at the end of a ten-year waiting period. The
Company bears the risk that protracted under-performance of the financial markets could result in
GMAV benefits being higher than the underlying contract holder account balance and that the fees
collected under the contract are insufficient to cover the costs of the benefit to be provided.
The Company purchased put options on the S&P 500 index to partially offset this risk. Changes in
the market value of both the GMAV benefit and the put options are recorded in investment income in
the accompanying consolidated statement of income and comprehensive income. 15




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##### Table of Contents



Guaranteed minimum withdrawal benefit (GMWB) is a feature the Company began offering on
certain variable annuity products in May of 2004. If available and elected by the contract holder
at the time of contract issuance, this feature provides a guaranteed annual withdrawal stream,
regardless of market performance, equal to deposits invested during the first ninety days adjusted
for any subsequent withdrawals (Eligible Premium). These guaranteed annual withdrawals of up to
10% of Eligible Premium are available after either a three-year or a five-year waiting period, as
elected by the contract holder at the time of contract issuance, without reducing the future
amounts guaranteed. If no withdrawals have been made during the waiting period of 3 or 5 years,
the contract holder will realize an additional 10% or 20%, respectively, of Eligible Premium after
all other amounts guaranteed under this benefit have been paid. The Company bears the risk that
protracted under-performance of the financial markets could result in GMWB benefits being higher
than the underlying contract holder account balance and that the fees collected under the contract
are insufficient to cover the costs of the benefit to be provided. The Company purchased put
options on the S&P 500 index to partially offset this risk. Changes in the market value of both the
GMWB benefit and the put options are recorded in investment income in the accompanying consolidated
statement of income and comprehensive income. Management expects substantially all of the Companys near-term exposure to guaranteed
benefits will relate to GMDB and EEB. As sales of products with other guaranteed benefits
increase, the Company expects these other guarantees to have an increasing impact on operating
results, under current hedging strategies. ASSET MANAGEMENT OPERATIONS PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $34.6 million in 2004,
compared to $25.1 million in 2003 and $4.1 million in 2002. The increases in 2004 from 2003
resulted from the impact of higher average asset base and higher margin on account servicing fees,
partially offset by increased amortization of DAC and other deferred expenses. The increase in
2003 from 2002 resulted from decreased amortization
of DAC and other deferred expenses. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are
based on the market value of assets managed by SAAMCo in its mutual funds and certain variable
annuity portfolios. Such fees totaled $89.6 million on average assets managed of $9.65 billion in
2004, $66.7 million on average assets managed of $8.15 billion in 2003 and $66.4 million on average
assets managed of $7.64 billion in 2002. The increase in asset management fees is primarily the
result of a higher average asset base and higher margin on account servicing fees. Mutual fund
sales, excluding sales of money market accounts and private accounts, totaled $2.14 billion in
2004, compared to $2.23 billion in 2003 and $1.67 billion in 2002. Redemptions of mutual funds,
excluding redemptions of money market accounts, amounted to $1.56 billion in 2004, $1.55 billion in
2003 and $1.55 billion in 2002, which represent 20%, 25% and 25%, respectively, of average related
mutual fund assets. The 4% decrease in mutual fund sales in 2004 compared to 2003 primarily
reflects generally difficult equity market conditions in the second and third quarters of 2004.
The increase in sales in 2003 principally reflects increasing demand for equity products, due to
generally improved equity market conditions in the latter part of 2003. GENERAL AND ADMINISTRATIVE EXPENSES totaled $38.4 million in 2004, $36.1 million in 2003 and
$35.9 million in 2002. General and administrative expenses increased in 2004 due primarily to
higher employee-related costs. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES includes amortization
of distribution costs that totaled $31.5 million in 2004, compared with $23.0 million in 2003 and
$35.9 million in 2002. The increased amortization in 2004 was primarily due to additional mutual
fund sales and amortization of the deferred commissions thereon. In 2002, amortization of deferred
acquisition costs and other deferred expenses included additional amortization of $24.2 million,
resulting from certain distribution costs whose carrying value exceeded projected revenue. 16




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##### Table of Contents



CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS EQUITY increased to $1.75 billion at December 31, 2004 from $1.61 billion at
December 31, 2003 due to $142.5 million of net income and
$49.1 million of capital contribution from Parent partially
offset by a $49.1 million tax effect on a distribution of investment and a $2.5 million dividend
to the Parent. INVESTMENTS AND CASH at December 31, 2004 totaled $7.13 billion, compared with $7.14 billion
at December 31, 2003. The Companys invested assets are managed by an affiliate. The following
table summarizes the Companys portfolio of bonds, notes and redeemable preferred stocks (the Bond
Portfolio) and other investments and cash at December 31, 2004 and 2003: December 31, 2004
    
    
    December 31, 2003Fair
    
    
    Percent of
    
    
    Fair
    
    
    Percent ofValue
    
    
    Portfolio
    
    
    Value
    
    
    Portfolio(in thousands, except for percentages)Bond Portfolio:U.S. government securities
    
    $
    30,300
    
    
    
    0.4
    %
    
    $
    24,292
    
    
    
    0.3
    %Mortgage-backed securities
    
    
    956,567
    
    
    
    13.4
    
    
    
    1,191,817
    
    
    
    16.3Securities of public utilities
    
    
    332,038
    
    
    
    4.7
    
    
    
    365,150
    
    
    
    4.7Corporate bonds and notes
    
    
    2,902,829
    
    
    
    40.8
    
    
    
    2,697,142
    
    
    
    39.9Redeemable preferred stocks
    
    
    21,550
    
    
    
    0.3
    
    
    
    22,175
    
    
    
    0.3Other debt securities
    
    
    917,743
    
    
    
    12.9
    
    
    
    1,205,224
    
    
    
    15.7Total Bond Portfolio
    
    
    5,161,027
    
    
    
    72.5
    
    
    
    5,505,800
    
    
    
    77.2Mortgage loans
    
    
    624,179
    
    
    
    8.7
    
    
    
    716,846
    
    
    
    10.1Common stocks
    
    
    4,902
    
    
    
    0.1
    
    
    
    727
    
    
    
    0.0Cash and short-term investments
    
    
    201,117
    
    
    
    2.8
    
    
    
    133,105
    
    
    
    1.9Securities lending collateral
    
    
    883,792
    
    
    
    12.4
    
    
    
    514,145
    
    
    
    7.2Other invested assets
    
    
    250,969
    
    
    
    3.5
    
    
    
    254,010
    
    
    
    3.6Total investments and cash
    
    $
    7,125,986
    
    
    
    100.0
    %
    
    $
    7,124,633
    
    
    
    100.0
    %
 The Companys general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company has determined that
all of the Bond Portfolio is available to be sold in response to changes in market interest rates,
changes in relative value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Companys need for liquidity and
other similar factors. THE BOND PORTFOLIO, which constituted 72% of the Companys total investment portfolio at
December 31, 2004, had an aggregate fair value that was $153.2 million greater than its amortized
cost at December 31, 2004, compared with $154.6 million at December 31, 2003. At December 31, 2004, the Bond Portfolio had an aggregate fair value of $5.16 billion and an
aggregate amortized cost of $5.01 billion. At December 31, 2004, the Bond Portfolio (excluding
$21.6 million of redeemable preferred stocks) included $4.50 billion of bonds rated by Standard &
Poors (S&P), Moodys Investors Service (Moodys) or Fitch (Fitch) and $638.1 million of
bonds rated by the National Association of Insurance Commissioners (NAIC) or the Company pursuant
to statutory ratings guidelines established by the NAIC. At December 31, 2004, approximately $4.75
billion of the Bond Portfolio was investment grade, including $986.8 million of mortgage-backed
securities (MBS) and U.S. government/agency securities. At December 31, 2004, the Bond Portfolio included $386.4 million of bonds that were not
investment grade. These non-investment-grade bonds accounted for approximately 1% of the Companys
total assets and 17




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##### Table of Contents



approximately 5% 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, 2004, the Companys non-investment-grade bond portfolio
consisted of 171 issues with no single issuer representing more than 10% of the total
non-investment-grade portfolio. These non-investment-grade securities are comprised of bonds
spanning 10 industries with 19%, 16%, 16% and 10% concentrated in telecommunications, utilities,
financial services and noncyclical consumer products industries, respectively. No other industry
concentration constituted more than 10% of these assets. 18




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##### Table of Contents



The table below summarizes the Companys rated bonds by rating classification as of December
31, 2004. RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands) Issues not rated by
S & P/Moodys/Issues
rated by S & P/Moodys/Fitch,
    
    
    Fitch, by NAIC category
    
    
    TotalNAIC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent ofS & P/Moodys/Fitch
    
    
    
    
    
    Estimated fair
    
    
    category
    
    
    Amortized
    
    
    Estimated fair
    
    
    
    
    
    
    Estimated fair
    
    
    totalCategory (1)
    
    Amortized Cost
    
    
    value
    
    
    (2)
    
    
    Cost
    
    
    value
    
    
    Amortized Cost
    
    
    value
    
    
    invested assetsAAA+ to A-(Aaa to A3)[AAA to A-]
    
    $
    2,888,647
    
    
    $
    2,964,803
    
    
    
    1
    
    
    $
    266,034
    
    
    $
    270,334
    
    
    $
    3,154,681
    
    
    $
    3,235,137
    
    
    
    45.40
    %BBB+ to BBB-(Baa to Baa3)[BBB+ to BBB-]
    
    
    1,203,109
    
    
    
    1,233,692
    
    
    
    2
    
    
    
    276,973
    
    
    
    284,221
    
    
    
    1,480,082
    
    
    
    1,517,913
    
    
    
    21.30
    %BB+ to BB-(Bal to Ba3)[BB+ to BB-]
    
    
    133,070
    
    
    
    138,091
    
    
    
    3
    
    
    
    36,371
    
    
    
    36,462
    
    
    
    169,441
    
    
    
    174,553
    
    
    
    2.45
    %B+ to B-(Bl to B3)[B+ to B-]
    
    
    129,347
    
    
    
    140,699
    
    
    
    4
    
    
    
    11,600
    
    
    
    11,524
    
    
    
    140,947
    
    
    
    152,223
    
    
    
    2.14
    %CCC+ to CCC-(Caal to Caa3)[CCC+ to CCC-]
    
    
    18,954
    
    
    
    19,353
    
    
    
    5
    
    
    
    7,305
    
    
    
    6,695
    
    
    
    26,259
    
    
    
    26,048
    
    
    
    0.37
    %CC to D(Ca to C)[CC to D]
    
    
    1,842
    
    
    
    4,722
    
    
    
    6
    
    
    
    14,476
    
    
    
    28,880
    
    
    
    16,318
    
    
    
    33,602
    
    
    
    0.47
    %TOTAL RATED
ISSUES
    
    $
    4,374,969
    
    
    $
    4,501,360
    
    
    
    
    
    
    $
    612,759
    
    
    $
    638,116
    
    
    $
    4,987,728
    
    
    $
    5,139,476
 Footnotes to the table of Rated Bonds by Rating Classification   (1)
    
    S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D
(in payment default). A plus (+) or minus (-) indicates the debts relative standing within
the rating category. A security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the
highest and 3 the lowest) indicates the debts relative standing within the rating category.
A security rated Baa3 or higher is considered investment grade. Issues are categorized based
on the highest of the S&P, Moodys and Fitch ratings if rated by multiple agencies.(2)
    
    Bonds and short-term promissory instruments are divided into six quality categories for NAIC
rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one
category 6, for bonds in or near default. These six categories correspond with the
S&P/Moodys/Fitch rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $131.5 million of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines. 19




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##### Table of Contents



The valuation of invested assets involves obtaining a fair value for each security. The
source for the fair value is generally from market exchanges, with the exception of non-traded
securities. Another aspect of valuation pertains to impairment. As a matter of policy, the determination
that a security has incurred an other-than-temporary decline in value and the amount of any loss
recognition requires the judgment of the Companys management and a continual review of its
investments. In general, a security is considered a candidate for impairment if it meets any of
the following criteria:  
    Trading at a significant discount to par, amortized cost (if lower) or cost for an
extended period of time;
    The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a
material outstanding obligation; (ii) the issuer seeking protection from creditors under
the bankruptcy laws or similar laws intended for the court supervised reorganization of
insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to
which creditors are asked to exchange their claims for cash or securities having a fair
value substantially lower than the par value of their claims; or
    In the opinion of the Companys management, it is unlikely the Company will realize a
full recovery on its investment, irrespective of the occurrence of one of the foregoing
events. Once a security has been identified as potentially impaired, the amount of such impairment is
determined by reference to that securitys contemporaneous market price. The Company has the ability to hold any security to its stated maturity. Therefore, the
decision to sell reflects the judgment of the Companys management that the security sold is
unlikely to provide, on a relative value basis, as attractive a return in the future as alternative
securities entailing comparable risks. With respect to distressed securities, the sale decision
reflects managements judgment that the risk-discounted anticipated ultimate recovery is less than
the value achieved on sale. As a result of these policies, the Company recorded pretax impairment writedowns of $21.1
million, $54.1 million and $57.3 million in 2004, 2003 and 2002, respectively. No individual
impairment loss, net of DAC and taxes, during the year exceeded 10% of the Companys net income for
the year ended December 31, 2004. Excluding the impairments noted above, the changes in fair value for the Companys Bond
Portfolio, which constitutes the vast majority of the Companys investments, were recorded as a
component of other comprehensive income in shareholders equity as unrealized gains or losses. At December 31, 2004, the fair value of the Companys Bond Portfolio aggregated $5.16 billion.
Of this aggregate fair value, approximately 0.03% 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 DAC and
decreases in income taxes. At December 31, 2004, approximately $3.91 billion, at amortized cost, of the Bond Portfolio
had a fair value of $4.09 billion resulting in an aggregate unrealized gain of $180.3 million. At
December 31, 2004, approximately $1.10 billion, at amortized cost, of the Bond Portfolio had a fair
value of $1.07 billion resulting in an aggregate unrealized loss of $27.1 million. No single
issuer accounted for more than 10% of unrealized losses. Approximately 36%, 15% and 11% of
unrealized losses were from the financial services, transportation and noncyclical consumer
products industries, respectively. No other industry accounted for more than 10% of unrealized
losses. 20




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##### Table of Contents



The amortized cost of the Bond Portfolio in an unrealized loss position at December 31, 2004,
by contractual maturity, is shown below. Amortized Cost(in thousands)Due in one year or less
    
    $
    46,250Due after one year through five years
    
    
    422,237Due after five years through ten years
    
    
    389,073Due after ten years
    
    
    243,973Total
    
    $
    1,101,533
 The aging of the Bond Portfolio in an unrealized loss position at December 31, 2004 is shown
below: Less than or Equal to 20%
    
    
    Greater than 20% to 50%
    
    
    Greater than 50%(dollars in
    
    of Amortized Cost
    
    
    of Amortized Cost
    
    
    of Amortized Cost
    
    
    Totalthousands)
    
    Amortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    UnrealizedMonths
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    ItemsInvestment
Grade
Bonds0-6
    
    $
    455,818
    
    
    $
    (4,128
    )
    
    
    73
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    455,818
    
    
    $
    (4,128
    )
    
    
    737-12
    
    
    387,123
    
    
    
    (6,808
    )
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,123
    
    
    
    (6,808
    )
    
    
    57>12
    
    
    171,695
    
    
    
    (7,108
    )
    
    
    22
    
    
    
    17,477
    
    
    
    (4,046
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,172
    
    
    
    (11,154
    )
    
    
    25Total
    
    $
    1,014,636
    
    
    $
    (18,044
    )
    
    
    152
    
    
    $
    17,477
    
    
    $
    (4,046
    )
    
    
    3
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,032,113
    
    
    $
    (22,090
    )
    
    
    155Below
Investment
Grade
Bonds0-6
    
    $
    28,496
    
    
    $
    (1,806
    )
    
    
    13
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    452
    
    
    $
    (292
    )
    
    
    3
    
    
    $
    28,948
    
    
    $
    (2,098
    )
    
    
    167-12
    
    
    8,773
    
    
    
    (489
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,773
    
    
    
    (489
    )
    
    
    8>12
    
    
    31,699
    
    
    
    (2,467
    )
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    31,699
    
    
    
    (2,467
    )
    
    
    11Total
    
    $
    68,968
    
    
    $
    (4,762
    )
    
    
    32
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    452
    
    
    $
    (292
    )
    
    
    3
    
    
    $
    69,420
    
    
    $
    (5,054
    )
    
    
    35Total
Bonds0-6
    
    $
    484,314
    
    
    $
    (5,934
    )
    
    
    86
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    452
    
    
    $
    (292
    )
    
    
    3
    
    
    $
    484,766
    
    
    $
    (6,226
    )
    
    
    897-12
    
    
    395,896
    
    
    
    (7,297
    )
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    395,896
    
    
    
    (7,297
    )
    
    
    65>12
    
    
    203,394
    
    
    
    (9,575
    )
    
    
    33
    
    
    
    17,477
    
    
    
    (4,046
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,871
    
    
    
    (13,621
    )
    
    
    36Total
    
    $
    1,083,604
    
    
    $
    (22,806
    )
    
    
    184
    
    
    $
    17,477
    
    
    $
    (4,046
    )
    
    
    3
    
    
    $
    452
    
    
    $
    (292
    )
    
    
    3
    
    
    $
    1,101,533
    
    
    $
    (27,144
    )
    
    
    190
 In 2004, the pretax realized losses incurred with respect to the sale of fixed-rate securities
in the Bond Portfolio was $12.6 million. The aggregate fair value of securities sold was $140.3
million, which was 21




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##### Table of Contents



approximately 92% of amortized cost. The average period of time that securities
sold at a loss during 2004 were trading continuously at a price below amortized cost was
approximately 21 months. The valuation for the Companys Bond Portfolio comes from market exchanges or dealer
quotations, with the exception of non-traded securities. The Company considers non-traded
securities to mean certain fixed income investments and certain structured securities. The
aggregate fair value of these securities at December 31, 2004 was approximately $813.0 million. 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. 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
$277.2 million at December 31, 2004. Secured Loans are senior to subordinated debt and equity and
are secured by assets of the issuer. At December 31, 2004, Secured Loans consisted of $190.1
million of privately traded securities and $87.1 million of publicly traded securities. These
Secured Loans are composed of loans to 59 borrowers spanning 10 industries, with 26%, 18%, 15%, 12%
and 11% from the utilities, telecommunications, transportation, noncyclical consumer products and
cyclical consumer products industries, respectively. 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. MORTGAGE LOANS aggregated $624.2 million at December 31, 2004 and consisted of 100 commercial
first mortgage loans with an average loan balance of approximately $6.2 million, collateralized by
properties located in 30 states. Approximately 32% of this portfolio was office, 17% was
manufactured housing, 17% was multifamily residential, 11% was industrial, 11% was hotels, and 12%
was other types. At December 31, 2004, approximately 27%, 11% and 10% of this portfolio were
secured by properties located in California, Michigan and Massachusetts, respectively. No more
than 10% of this portfolio was secured by properties located in any other single state. At
December 31, 2004, 13 mortgage loans have an outstanding balance of $10 million or more, which
collectively aggregated approximately 45% of this portfolio. At December 31, 2004, approximately
42% of the mortgage loan portfolio consisted of loans with balloon payments due before January 1,
2008. During 2004 and 2003, loans delinquent by more than 90 days, foreclosed loans and structured
loans have not been significant in relation to the total mortgage loan portfolio. Substantially all of the mortgage loan portfolio has been originated by the Company under its
underwriting standards. Commercial mortgage loans on properties such as offices, hotels and
shopping centers generally represent a higher level of risk than do mortgage loans secured by
multifamily residences. This greater risk is due to several factors, including the larger size of
such loans and the more immediate effects of general economic conditions on these commercial
property types. However, due to the Companys underwriting standards, the Company believes that it
has prudently managed the risk attributable to its mortgage loan portfolio while maintaining
attractive yields. SECURITIES LENDING COLLATERAL totaled $883.8 million at December 31, 2004, compared to $514.1
million at December 31, 2003, and consisted of cash collateral invested in highly rated short-term
securities 22




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##### Table of Contents



received in connection with the Companys securities lending program. The increase in
securities lending collateral in 2004 results from increased demand for securities in the Companys
portfolio. 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

incentives, surrender charges and/or other restrictions in order to encourage persistency.
Approximately 77% of the Companys reserves for Fixed-Rate Products had surrender penalties or
other restrictions at December 31, 2004. As part of its asset-liability matching discipline, the Company conducts detailed computer
simulations that model its fixed-rate assets and liabilities under commonly used interest rate
scenarios. With the results of these computer simulations, the Company can measure the potential
gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its invested assets and
what it pays on its liabilities by designing its Fixed-Rate Products and conducting its investment
operations to closely match the duration and cash flows of the fixed-rate assets to that of its
fixed-rate liabilities. The fixed-rate assets in the Companys asset-liability modeling include:
cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans;
policy loans; and investments in limited partnerships that invest primarily in fixed-rate
securities. At December 31, 2004, these assets had an aggregate fair value of $6.17 billion with
an option-adjusted duration of 3.2 years. The Companys fixed-rate liabilities include Fixed
Options, as well as universal life insurance, fixed annuity and GIC contracts. At December 31,
2004, these liabilities had an aggregate fair value (determined by discounting future contractual
cash flows by related market rates of interest) of $5.54 billion with an option-adjusted duration
of 3.6 years. The Companys potential exposure due to a relative 10% decrease in prevailing
interest rates from its December 31, 2004 levels is a loss of approximately $0.3 million,
representing an increase in fair value of its fixed-rate liabilities that is not offset by an
increase in fair value of its fixed-rate assets. Because the Company actively manages its assets
and liabilities and has strategies in place to minimize its exposure to loss as interest rate
changes occur, it expects that actual losses would be less than the estimated potential loss. Option-adjusted duration is a common measure for the price sensitivity of a fixed-maturity
portfolio to changes in interest rates. For example, if interest rates increase 1%, the fair
value of an asset with a duration of 5.0 years is expected to decrease in value by approximately
5%. The Company estimates the option-adjusted duration of its assets and liabilities using a
number of different interest rate scenarios, assuming continuation of existing investment and
interest crediting strategies, including maintaining an appropriate level of liquidity. Actual
company and contract owner behaviors may be different than was assumed in the estimate of
option-adjusted duration and these differences may be material. A significant portion of the Companys fixed annuity contracts (including the Fixed Options)
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. See the earlier discussion under Managements
Discussion and Analysis of Financial Condition and Results of Operations for additional
information on the calculation of investment yield and net investment spread 23




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##### Table of Contents



used by the Companys
management as a key component in evaluating the profitability of its annuity business. The trends
experienced during 2004, 2003 and 2002 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: 2004
    
    
    2003
    
    
    2002Average 10-year U.S. Treasury bond rate:
    
    

    4.26
    %
    
    
    4.01
    %
    
    
    4.61
    %AIG SunAmerica Life Assurance Company:Average yield on Bond Portfolio
    
    
    5.66
    
    
    
    5.75
    
    
    
    6.23Rate paid on average interest-bearing liabilities
    
    
    3.71
    
    
    
    3.71
    
    
    
    3.93
 Since the Companys investing strategy is to hold fixed-rate assets for long-term investment,
the Companys average yield tends to trail movements in the average U.S. treasury yield. For
further discussion on average yield on the bond portfolio and the rate paid on average
interest-bearing liabilities, see discussion on Investment Spread. 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 exchange interest rate payments of differing character (for example, variable-rate
payments exchanged for fixed-rate payments) with a counterparty, 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. No Dollar Roll Repos
were outstanding at December 31, 2004. The Company also seeks to provide liquidity by investing in
MBS. MBS are generally investment-grade securities collateralized by large pools of mortgage
loans. MBS generally pay principal and interest monthly. The amount of principal and interest
payments may fluctuate as a result of prepayments of the underlying mortgage loans. There are risks associated with some of the techniques the Company uses to provide liquidity,
enhance its spread income and match its assets and liabilities. The primary risk associated with
the Companys Dollar Roll Repos and Swap Agreements is counterparty risk. The Company believes,
however, that the counterparties to its Dollar Roll Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is minimal. It is
the Companys policy that these agreements are entered into with counterparties who have a debt
rating of A/A2 or better from both S&P and Moodys. The Company continually monitors its credit
exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also
have interest rate risk. However, the Companys Swap Agreements are intended to hedge
variable-rate assets or liabilities. The primary risk associated with MBS is that a changing
interest rate environment might cause prepayment of the underlying obligations at speeds slower or
faster than anticipated at the time of their purchase. As part of its decision to purchase such a
security, the Company assesses the risk of prepayment by analyzing the securitys projected
performance over an array of interest-rate scenarios. Once such a security is purchased, the
Company monitors its actual prepayment experience monthly to reassess the relative attractiveness
of the security with the intent to maximize total return. INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies
monthly those investments that require additional monitoring and carefully reviews the carrying
values of such investments at least quarterly to determine whether specific investments should be
placed on a nonaccrual basis and to determine declines in value that may be other than temporary.
In conducting these reviews for bonds, management principally considers the adequacy of any
collateral, compliance with contractual covenants, the borrowers recent financial performance,
news reports and other externally generated information concerning the creditors affairs. In the
case of publicly traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the mortgaged property
and, among other things, factors impacting the current and expected payment status of the loan and,
if available, the current fair value of the underlying collateral. For investments in partnerships,
management reviews the financial statements and other information provided by the general partners. 24




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##### Table of Contents



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 $40.1 million of bonds at December 31, 2004, and constituted
approximately 0.6% of total invested assets. At December 31, 2003, defaulted investments totaled
$49.6 million of bonds, which constituted approximately 0.7% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Companys
existing portfolio of cash and short-term investments, reverse repurchase agreement capacity on
invested assets and, if required, proceeds from invested asset sales. The Companys liquidity is
primarily derived from operating cash flows from annuity operations. At December 31, 2004,
approximately $4.09 billion of the Bond Portfolio had an aggregate unrealized gain of $180.3
million, while approximately $1.07 billion of the Bond Portfolio had an aggregate unrealized loss
of $27.1 million. In addition, the Companys investment portfolio currently provides approximately
$44.0 million of monthly cash flow from scheduled principal and interest payments. Historically,
cash flows from operations and from the sale of the Companys annuity products have been more than
sufficient in amount to satisfy the Companys liquidity needs. Management is aware that prevailing market interest rates may shift significantly and has
strategies in place to manage either an increase or decrease in prevailing rates. In a rising
interest rate environment, the Companys average cost of funds would increase over time as it
prices its new and renewing Fixed-Rate Products 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. In a declining interest rate environment, the Companys cost of funds would decrease over
time, reflecting lower interest crediting rates on its Fixed-Rate Products. Should increased
liquidity be required for withdrawals, the Company believes that a significant portion of its
investments could be sold without adverse consequences in light of the general strengthening that
would be expected in the bond market. If a substantial portion of the Companys Bond Portfolio diminished significantly in value
and/or defaulted, the Company would need to liquidate other portions of its investment portfolio
and/or arrange financing. Such events that may cause such a liquidity strain could be the result
of economic collapse or terrorist acts. Management believes that the Companys liquid assets and its net cash provided by operations
will enable the Company to meet any foreseeable cash requirements for at least the next twelve
months. GUARANTEES AND OTHER COMMITMENTS The Company has six agreements outstanding in which it has provided liquidity support for
certain short-term securities of municipalities and non-profit organizations by agreeing to
purchase such securities in the event there is no other buyer in the short-term marketplace. In
return the Company receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at December 31, 2004 is
$195.4 million. These commitments have contractual maturity dates in 2005. Related to each of
these agreements are participation agreements with the Parent, under which the Parent will share in
$62.6 million of these liabilities in exchange for a proportionate percentage of the fees received
under these agreements. The Internal Revenue Service examined the transactions underlying these
commitments, including the Companys role in the transactions. The examination did not result in a
material loss to the Company. 25




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##### Table of Contents



At December 31, 2004, the Company held reserves for GICs with maturity dates as follows:
$186.5 million in 2005 and $28.8 million in 2024. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2003, the American Institute of Certified Public Accountants issued Statement of
Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts. (For further discussion see Note 2 of Notes to
Consolidated Financial Statements.) 
 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 22 to 23 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. None. 
 ITEM 9A. CONTROLS AND PROCEDURES The Companys disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of
the Companys disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures provide reasonable assurance of
effectiveness as of the end of the period covered by this report. In addition, there has been no
change in the Companys internal control over financial reporting that occurred during the fourth
fiscal quarter covered by this report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 26




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors are elected for one year terms at the annual meeting of the shareholder. They
receive no additional compensation for serving as directors. The board of directors elects
executive officers to one year terms subject to removal at the boards discretion. The directors
and principal officers of AIG SunAmerica Life Assurance Company (the Company) as of March 31,
2005 are listed below, together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present business occupations). Year
    
    Other Positions and OtherAssumed
    
    Business Experience Within
    
    
    DirectorName
    
    Age
    
    Present Position
    
    Position
    
    Last Five Years
    
    From - To
    SinceJay S. Wintrob *
    
    
    48
    
    
    Chairman and
    
    
    2001
    
    
    Chief Executive Officer, AIGRS
    
    2001-
    1990Chief Executive Officer
    
    
    
    
    
    SunAmerica
Life Insurance Company (SALIC)
    
    2001-and First
SunAmerica Life Insurance Company (FSA)President, FSAPresident, AIGRS
Life
Insurance
    
    2001-Chief Operating Officer, AIGRS
    
    2000-Vice Chairman, AIGRS (Joined
    
    1998-2000AIGRS in 1987)
    
    1995-2000James R. Belardi *
    
    
    48
    
    
    Senior Vice President
    
    
    1994
    
    
    President, SALIC
    
    2002-
    1990Executive Vice President,
AIGRS
    
    1995-(Joined AIGRS in 1986)Marc H. Gamsin *
    
    
    49
    
    
    Senior Vice President
    
    
    1999
    
    
    Executive Vice President,
AIGRS
    
    2001-
    2000Senior Vice President,
    
    1999-SALIC and FSAExecutive Vice President
    
    1998-SunAmerica Investments, Inc.N. Scott Gillis *
    
    
    51
    
    
    Senior Vice President and
    
    
    2003
    
    
    Chief Financial Officer,
AIGRS
    
    2003-
    2000Chief Financial Officer
    
    
    
    
    
    SALIC and FSASenior Vice President, AIGRS
    
    2002-Controller, AIGRS
    
    2000-Vice President, AIGRS (Joined
AIGRS in 1985)
    
    1998-2002
 27




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##### Table of Contents



Year
    
    Other Positions and OtherAssumed
    
    Business Experience Within
    
    
    DirectorName
    
    Age
    
    Present Position
    
    Position
    
    Last Five Years
    
    From - To
    SinceJana W. Greer *
    
    
    53
    
    
    President
    
    
    2002
    
    
    Executive Vice President,
AIGRS
    
    
    2001-
    
    1993President, SunAmerica Retirement
Markets, Inc.
    
    
    1996-Senior Vice President,
    
    
    1994-SALIC and FSASenior Vice President, AIGRS
    
    
    1992-2000(Joined AIGRS in 1974)Michael J. Akers
    
    
    55
    
    
    Senior Vice President
    
    
    2003
    
    
    Chief Actuary, AIGRS
    
    
    2003-
    
    ---Senior Vice President,
    
    
    2003-SALIC and FSA
Senior Vice President, AIGRS
    
    
    2002-Senior Vice President and Chief
    
    
    1999-2002Actuary, The Variable
Annuity Life Insurance CompanyChristine A. Nixon
    
    
    40
    
    
    Senior Vice President,
    
    
    2003
    
    
    Senior Vice President, General
    
    
    2003-
    
    ---General Counsel and
Secretary
    
    
    
    
    
    Counsel and
Secretary, SALIC and FSA
    
    
    2003Chief Compliance Officer,
    
    
    2003
    
    ---AIGRSSecretary and Deputy Chief Legal
    
    
    2002-Counsel, AIGRS
Vice President, AIGRS
(Joined AIGRS in 1993)
    
    
    2000-Associate General Counsel,
    
    
    1997-2000AIGRSGregory M. Outcalt
    
    
    42
    
    
    Senior Vice President
    
    
    2000
    
    
    Vice President, SunAmerica
    
    
    2002-
    
    ---Investments, Inc.Senior Vice President,
    
    
    2000-SALIC and FSA
(Joined AIGRS in 1986)Stewart Polakov
    
    
    45
    
    
    Senior Vice President
    
    
    2003
    
    
    Senior Vice President and
    
    
    2003-
    
    ---and Controller
    
    
    
    
    
    Controller, FSA and SALICVice President, SALIC and FSA
    
    
    1997-2003(Joined AIGRS in 1991)Edwin R. Raquel
    
    
    47
    
    
    Senior Vice President
    
    
    1995
    
    
    Senior Vice President and Chief
    
    
    1995-

    
    ---and Chief Actuary
    
    
    
    
    
    Actuary, SALIC and FSA
(Joined AIGRS in 1990)
 28




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##### Table of Contents



Other Positions and OtherYear Assumed
    
    Business Experience Within
    
    
    
    
    DirectorName
    
    Age
    
    Present Position
    
    Position
    
    Last Five Years
    
    
    From - To
    
    SinceMallary L. Reznik
    
    
    36
    
    
    Vice President
    
    
    2005
    
    
    Vice President, FSA
    
    
    2005-
    
    ---Associate General Counsel,
    
    
    1998-AIGRSStephen J. Stone
    
    
    46
    
    
    Vice President
    
    
    2005
    
    
    Vice President, FSA
    
    
    2005-
    
    ---Senior Portfolio Manager, Allstate
    
    
    1989-2004Insurance CompanyEdward T. Texeria
    
    
    40
    
    
    Vice President
    
    
    2003
    
    
    Vice President, SALIC and FSA
    
    
    2003-
    
    ---Assistant Controller, AIGRS
    
    
    2003-Assistant Controller,
    
    
    2000-2003SALIC and FSASenior Manager, Assurance and
    
    
    1994-2000Advisory Business Services,
Ernst & Young LLP
   *
    
    Also serves as a director The Company does not have an audit committee and relies on the Audit Committee of the Board of
Directors of AIG. CODE OF ETHICS AND CONDUCT The Companys employees are subject to AIGs Code of Conduct designed to ensure that all
employees perform their duties with honesty and integrity. In the second quarter of 2004, AIG
adopted the AIG Director, Executive Officer and Senior Financial Officer Code of Business Conduct
and Ethics, which covers such directors and officers of AIG and its subsidiaries, including the
Company and the Companys Chief Executive Officer (principal executive officer), Chief Financial
Officer (principal financial officer) and Controller (principal accounting officer). Both of these
codes appear in the Corporate Governance section of www.aigcorporate.com. 
 ITEM 11. EXECUTIVE COMPENSATION The Companys executive officers provide services for the Company, its subsidiaries and, for
certain officers, its affiliates. Allocations have been made to the Company and its subsidiaries based
upon each individuals time devoted to his or her duties for the Company and its subsidiaries. All
compensation information provided under this Item 11 is based on these allocations. The following table sets forth allocable compensation awarded to, earned by or paid to the
Companys chief executive officer and four other most highly compensated executive officers for the
years ended December 31, 2004, 2003 and 2002: 29




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##### Table of Contents



SUMMARY COMPENSATION TABLE Long TermAnnual Compensation
    
    
    CompensationOther
    
    
    SecuritiesName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    
    Underlying
    
    
    LTIP
    
    
    All Other
    
    
    SICO LTIPPrincipal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    

Compensation
    
    

Options (#)(2)
    
    
    Payouts (3)
    
    
    Compensation (4)
    
    
    Awards (5)Jay S. Wintrob
    
    
    2004
    
    
    $
    84,500
    
    
    $
    104,000
    
    
    $
    21,580
    
    
    
    6,500
    
    
    $
    194,526
    
    
    $
    5,068
    
    
    $
    341,484Chief Executive
    
    
    2003
    
    
    
    86,125
    
    
    
    71,500
    
    
    
    18,330
    
    
    
    10,400
    
    
    
    183,365
    
    
    
    3,041
    
    
    
    Officer
    
    
    2002
    
    
    
    316,050
    
    
    
    215,600
    
    
    
    56,840
    
    
    
    19,600
    
    
    
    719,992
    
    
    
    2,467,413
    
    
    
    907,088Jana W. Greer
    
    
    2004
    
    
    
    329,648
    
    
    
    517,634
    
    
    
    
    
    
    
    6,762
    
    
    
    417,973
    
    
    
    18,109
    
    
    
    695,051President
    
    
    2003
    
    
    
    318,000
    
    
    
    371,353
    
    
    
    
    
    
    
    10,560
    
    
    
    327,366
    
    
    
    17,208
    
    
    
    2002
    
    
    
    220,789
    
    
    
    111,250
    
    
    
    
    
    
    
    4,005
    
    
    
    363,902
    
    
    
    2,014,889
    
    
    
    556,054Peter A. Harbeck
    
    
    2004
    
    
    
    254,567
    
    
    
    442,500
    
    
    
    
    
    
    
    7,500
    
    
    
    364,920
    
    
    
    14,475
    
    
    
    531,927President &
Chief Executive
Officer,
    
    
    2003
    
    
    
    331,250
    
    
    
    390,000
    
    
    
    
    
    
    
    13,000
    
    
    
    389,782
    
    
    
    18,950
    
    
    
    Asset Management
    
    
    2002
    
    
    
    223,269
    
    
    
    160,000
    
    
    
    
    
    
    
    6,500
    
    
    
    444,581
    
    
    
    1,512,950
    
    
    
    590,070N. Scott Gillis
    
    
    2004
    
    
    
    69,863
    
    
    
    65,138
    
    
    
    
    
    
    
    1,782
    
    
    
    36,437
    
    
    
    5,360
    
    
    
    170,217Senior Vice President and
    
    
    2003
    
    
    
    69,317
    
    
    
    58,050
    
    
    
    
    
    
    
    3,240
    
    
    
    24,726
    
    
    
    6,448
    
    
    
    Chief Financial Officer
    
    
    2002
    
    
    
    61,027
    
    
    
    71,750
    
    
    
    
    
    
    
    2,460
    
    
    
    49,230
    
    
    
    169,465
    
    
    
    104,361Christine A. Nixon
    
    
    2004
    
    
    
    92,250
    
    
    
    50,840
    
    
    
    
    
    
    
    2,009
    
    
    
    20,997
    
    
    
    7,558
    
    
    
    64,619Senior Vice President, General
    
    
    2003
    
    
    
    89,038
    
    
    
    39,600
    
    
    
    
    
    
    
    3,600
    
    
    
    15,860
    
    
    
    7,889
    
    
    
    Counsel & Secretary
    
    
    2002
    
    
    
    46,142
    
    
    
    27,900
    
    
    
    
    
    
    
    1,395
    
    
    
    14,839
    
    
    
    65,863
    
    
    
    57,387
   (1)
    
    Amounts represent year-end and bonuses paid quarterly pursuant to
a quarterly bonus program sponsored by AIG and marketing incentives.(2)
    
    Amounts represent the number of shares of common stock of AIG subject to
options granted during the year indicated.(3)
    
    Amounts shown represent payments under the
Companys 2000 and 2001 Five-Year Deferred Bonus
Plans. Awards were granted under these plans in 2000 and 2001 and
additional grants are not anticipated. Each award pays out in 20%
installments over five years of continued employment. The last
installment is to be paid in 2006.(4)
    
    Amounts shown primarily represent Company matching contributions under the
401(k) Plan and the Executive Savings Plan. Additionally, the 2002 amounts shown for Mr. Wintrob, Ms. Greer, Mr.
Harbeck, Mr. Gillis and Ms. Nixon include allocated retention bonuses awarded
in connection with the acquisition of
SunAmerica Inc. by AIG consummated on January 1, 1999.(5)
    
    The SICO LTIP awards were granted by Starr International Company, Inc. pursuant to
its Deferred Compensation Profit Participation Plan (the SICO
Plan). 30




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##### Table of Contents



The following table summarizes certain information with respect to the allocable portion of
grants of options to purchase AIG common stock which were granted during 2004 to the individuals
named in the Summary Compensation Table. OPTION GRANTS IN 2004 Percentage of
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value* atNumber of
    
    
    Total Options
    
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates ofSecurities
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
    Stock Appreciation forDate
    
    
    Underlying
    
    
    AIG Employees
    
    
    Price
    
    
    Expiration
    
    
    Option TermName
    
    of Grant
    
    
    Options (1)
    
    
    During 2004 (2)
    
    
    Per Share
    
    
    Date
    
    
    5 Percent (3)
    
    
    10 Percent (4)Jay S. Wintrob
    
    
    12/16/2004
    
    
    
    6,500
    
    
    
    0.19
    %
    
    $
    64.47
    
    
    
    12/16/14
    
    
    $
    263,510
    
    
    $
    667,875Jana W. Greer
    
    
    12/16/2004
    
    
    
    6,762
    
    
    
    0.20
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    274,131
    
    
    
    694,795Peter A. Harbeck
    
    
    12/16/2004
    
    
    
    7,500
    
    
    
    0.22
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    304,050
    
    
    
    770,625N. Scott
Gillis
    
    
    12/16/2004
    
    
    
    1,782
    
    
    
    0.05
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    72,242
    
    
    
    183,101Christine A. Nixon
    
    
    12/16/2004
    
    
    
    2,009
    
    
    
    0.06
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    81,445
    
    
    
    206,425
   *
    
    Options would have no realizable value if there were no appreciation or if
there were depreciation from the price at which options were granted.(1)
    
    All options relate to shares of common stock of AIG and were granted pursuant
to AIGs Amended and Restated 1999 Stock Option Plan at an exercise price equal to the
fair market value of such stock at the date of grant. The option grants in 2004
provide that 25 percent of the options granted on any date become exercisable on each
anniversary date in each of the successive four years and expire ten years from the
date of grant.(2)
    
    It is impractical to determine the percent the grant represents of total
options granted to the Companys employees, since the Company has no employees. The
percentage is provided with regard to options granted to employees of AIG and its
subsidiaries.(3)
    
    The appreciated price per share at 5 percent is $105.01 per share.(4)
    
    The appreciated price per share at 10 percent is $167.22 per share. The following table summarizes certain information with respect to the allocable exercise of
options to purchase AIG common stock during 2004 by the individuals named in the Summary
Compensation Table and the allocable unexercised options to purchase AIG common stock held by such
individuals at December 31, 2004 based on the allocations described above. 31




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##### Table of Contents



AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2004
AND DECEMBER 31, 2004 OPTION VALUES Number ofSecurities Underlying
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Unexercised Options at
    
    
    In-the-Money Options atAcquired on
    
    
    Value
    
    
    December 31, 2004
    
    
    December 31, 2004 (2)Name
    
    Exercise
    
    
    Realized (1)
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    

    
    UnexercisableJay S. Wintrob
    
    
    21,101
    
    
    $
    1,368,055
    
    
    
    95,143
    
    
    
    21,288
    
    
    $
    4,474,328
    
    
    $
    98,683Jana W. Greer
    
    
    53,023
    
    
    
    3,315,702
    
    
    
    259,354
    
    
    
    61,642
    
    
    
    11,565,498
    
    
    
    87,719Peter A. Harbeck
    
    
    14,428
    
    
    
    710,616
    
    
    
    57,373
    
    
    
    45,471
    
    
    
    1,464,499
    
    
    
    94,203N. Scott Gillis
    
    
    1,144
    
    
    
    50,969
    
    
    
    12,170
    
    
    
    8,937
    
    
    
    275,270
    
    
    
    30,452Christine A. Nixon
    
    
    3,549
    
    
    
    203,628
    
    
    
    12,983
    
    
    
    9,364
    
    
    
    377,754
    
    
    
    34,657
   (1)
    
    Aggregate market value on date of exercise (closing sale price as reported in
the New York Stock Exchange Composite Transactions Report) less aggregate exercise
price.(2)
    
    Aggregate market value on December 31, 2004 (closing sale price as reported in
the New York Stock Exchange Composite Transactions Report) less aggregate exercise
price. The following table summarizes certain information with respect to benefits granted under the
SICO Plan which were granted during 2002 (with respect to the 2003-2004 period) to the individuals
named in the Summary Compensation Table. SICO LONG-TERM INCENTIVE PLANS (1) Unit AwardName
    
    Number of Units
    
    
    Period
    
    
    Estimated Future PayoutsJay S. Wintrob
    
    
    325
    
    
    Two years
    

5,200
sharesJana W. Greer
    
    
    882
    
    
    Two years
    
    10,584 sharesPeter A. Harbeck
    
    
    675
    
    
    Two years
    
    8,100 sharesN. Scott
Gillis
    
    
    216
    
    
    Two years
    
    2,592 sharesChristine A.
Nixon
    
    
    123
    
    
    Two years
    
    984 shares
   (1)
    
    Awards represent grants of units under the SICO Plan with respect to the
two-year period from January 1, 2003 through December 31, 2004. The SICO Plan contains
neither threshold amounts nor maximum payout limitations. The number of shares of AIG
common stock, if any, allocated to a unit for the benefit of a participant in the SICO
Plan is primarily dependent upon two factors: the growth in future earnings of AIG
during the unit award period and the book value of AIG at the end of the award period. Prior to
earning the right to payout, the participant is not entitled to any equity interest
with respect to such shares, and the shares are subject to forfeiture under certain
conditions, including but not limited to the participants voluntary termination of
employment with AIG or its subsidiaries prior to normal retirement age other than by death or disability. 32




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##### Table of Contents



EMPLOYEE BENEFIT PLANS The Company participates in several employee benefit plans sponsored by AIG. RETIREMENT
PLANS: The American International Group, Inc. Retirement Plan (the
AIG Plan) is a non-contributory,
qualified, defined benefit plan. For employees of AIGRS and its
subsidiaries, the formula equals .925% times Average Final
Compensation (defined as the average annual compensation, which includes base pay and sales
commissions, subject to limitations for certain highly compensated employees imposed by law, during
the three consecutive years in the last ten years of credited service affording the highest such
average) up to 150% of the employees covered compensation (the average of the Social Security
Wage Bases during the 35 years preceding the Social Security retirement age), plus 1.425% times
Average Final Compensation in excess of 150% of the employees covered compensation times years
of credited service up to 35 years; plus 1.425% times Average Final Compensation times years of credited service
in excess of 35 years but limited to 44 years. AIG also has in place the AIG
Excess Retirement Income Plan (AIG Excess Plan) for employees participating in the AIG Plan
whose benefits under the AIG Plan are limited by applicable tax laws. The AIG Excess Plan
provides benefits in excess of the AIG Plan benefits determined as if the
benefit under the AIG Plan has been calculated without the limitations imposed by applicable tax laws.
The AIG Excess Plan is a nonqualified, unfunded plan. AIG also has approved a
Supplemental Executive Retirement Plan (AIG SERP) which provides annual
benefits to certain employees of AIGRS and its
subsidiaries, not to
exceed 60% of Average Final Compensation, that accrue at a rate of 2.4% of Average Final
Compensation for each year of service or fraction thereof for each full month of active employment.
The benefit payable under the AIG SERP is reduced by payments from the AIG Plan,
the AIG Excess Plan, Social Security and any payments from a qualified pension plan of a prior employer. Annual amounts of normal retirement pension commencing at normal retirement age of 65 based
upon Average Final Compensation and credited service under the AIG Plan and the AIG Excess Plan are illustrated in the following table: Estimated Annual Pension at Age 65 AverageFinal Compensation
    
    10 Years
    
    
    15 Years
    
    
    20 Years
    
    
    25 Years
    
    
    30 Years
    
    
    35 Years
    
    
    40 Years$   125,000
    
    $
    14,341
    
    
    $
    21,512
    
    
    $
    28,682
    
    
    $
    35,853
    
    
    $
    43,024
    
    
    $
    50,194
    
    
    $
    59,100$   150,000
    
    
    17,904
    
    
    
    26,856
    
    
    
    35,807
    
    
    
    44,759
    
    
    
    53,711
    
    
    
    62,663
    
    
    
    73,350$   175,000
    
    
    21,466
    
    
    
    32,199
    
    
    
    42,932
    
    
    
    53,666
    
    
    
    64,399
    
    
    
    75,132
    
    
    
    87,600$   200,000
    
    
    25,029
    
    
    
    37,543
    
    
    
    50,057
    
    
    
    62,572
    
    
    
    75,086
    
    
    
    87,600
    
    
    
    101,850$   225,000
    
    
    28,591
    
    
    
    42,887
    
    
    
    57,182
    
    
    
    71,478
    
    
    
    85,774
    
    
    
    100,069
    
    
    
    116,100$   250,000
    
    
    32,154
    
    
    
    48,231
    
    
    
    64,307
    
    
    
    80,384
    
    
    
    96,461
    
    
    
    112,538
    
    
    
    130,350$   300,000
    
    
    39,279
    
    
    
    58,918
    
    
    
    78,557
    
    
    
    98,197
    
    
    
    117,836
    
    
    
    137,475
    
    
    
    158,850$   375,000
    
    
    49,966
    
    
    
    74,949
    
    
    
    99,932
    
    
    
    124,916
    
    
    
    149,899
    
    
    
    174,882
    
    
    
    201,600$   400,000
    
    
    53,529
    
    
    
    80,293
    
    
    
    107,057
    
    
    
    133,822
    
    
    
    160,586
    
    
    
    187,350
    
    
    
    215,850$   500,000
    
    
    67,779
    
    
    
    101,668
    
    
    
    135,557
    
    
    
    169,447
    
    
    
    203,336
    
    
    
    237,225
    
    
    
    272,850$   750,000
    
    
    103,404
    
    
    
    155,106
    
    
    
    206,807
    
    
    
    258,509
    
    
    
    310,211
    
    
    
    361,913
    
    
    
    415,350$1,000,000
    
    
    139,029
    
    
    
    208,543
    
    
    
    278,057
    
    
    
    347,572
    
    
    
    417,086
    
    
    
    486,600
    
    
    
    557,850$1,200,000
    
    
    167,529
    
    
    
    251,293
    
    
    
    335,057
    
    
    
    418,822
    
    
    
    502,586
    
    
    
    586,350
    
    
    
    671,850$1,400,000
    
    
    196,029
    
    
    
    294,043
    
    
    
    392,057
    
    
    
    490,072
    
    
    
    588,086
    
    
    
    686,100
    
    
    
    785,850$1,600,000
    
    
    224,529
    
    
    
    336,793
    
    
    
    449,057
    
    
    
    561,322
    
    
    
    673,586
    
    
    
    785,850
    
    
    
    899,850$1,800,000
    
    
    253,029
    
    
    
    379,543
    
    
    
    506,057
    
    
    
    632,572
    
    
    
    759,086
    
    
    
    885,600
    
    
    
    1,013,850$2,000,000
    
    
    281,529
    
    
    
    422,293
    
    
    
    563,057
    
    
    
    703,822
    
    
    
    844,586
    
    
    
    985,350
    
    
    
    1,127,850
 33




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Each
of the individuals named in the Summary Compensation Table have 2.0 years of credited service
(under both plans) through December 31, 2004. Pensionable salary includes the regular salary paid
by AIG and its subsidiaries and does not include amounts attributable to supplementary bonuses or
overtime pay. For such named individuals, pensionable salary allocable to the Company during 2004
was as follows: Mr. Wintrob$84,500; Ms. Greer$329,648; Mr. Harbeck$339,423;
Mr. Gillis$69,863; and Ms. Nixon$92,250. Employees
of AIGRS and its subsidiaries
participate in the American International Group,
Inc. Incentive Savings Plan (the Incentive Savings Plan), a 401(k) plan established by AIG which
includes salary reduction contributions by employees and matching contributions. Matching
contributions vary based on the number of years the employee has been employed. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors of the Company does not have a Compensation Committee. Compensation
decisions regarding the Chief Executive Officer are made by AIG. Compensation decisions regarding
other executive officers are made by the Chief Executive Officer. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is an indirect wholly owned subsidiary of American International Group, Inc. The number of shares of AIG common stock beneficially owned as of January 31, 2005, by
directors, executive officers named in the Summary Compensation Table (as set forth in Item 11) and
directors and executive officers as a group were as follows: AIG Common StockAmount and Nature ofBeneficial OwnershipDirector or Executive Officer
    
    (1)(2)(3)(5)Jay S. Wintrob (4)
    
    2,087,506James R. Belardi
    
    861,222Marc H. Gamsin
    
    140,616N. Scott Gillis
    
    47,439Jana W. Greer
    
    304,877Peter A. Harbeck
    
    132,846Christine A. Nixon
    
    33,003All Directors and Executive Officers
as a Group
    
    3,607,509
   (1)
    
    The number of shares of AIG common stock owned by each individual and by all
directors and executive officers as a group represents less than 1% of the outstanding
shares of AIG common stock.(2)
    
    The number of shares of AIG common stock shown includes shares with respect to
which the individual shares voting and investment power as follows:
Mr. Belardi  237 shares with his spouse;
Ms. Greer  39,105 shares with co-trustee.(3)
    
    The number of shares of AIG common stock shown includes shares subject to
options which may be exercised within 60 days as follows:
Mr. Wintrob  741,870; Mr. Belardi  305,397;
Ms. Greer  265,772; Mr. Gillis  46,575;
Mr. Gamsin  140,216; Mr. Harbeck  78,122;
Ms. Nixon  32,790; and all directors and
executive officers as a group  1,610,742.(4)
    
    Mr. Wintrob holds equity
securities of C.V. Starr and Co., Inc. of 750 shares of Common Stock and
3,750 shares of various series of Preferred Stock 34




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##### Table of Contents



(5)
    
    The number of shares of AIG common stock shown excludes the following shares
owned by members of the named individuals immediate family as to which such individual
has disclaimed beneficial ownership: Mr. Wintrob - 4,009 shares held
by various family members. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 2004, the Company paid cash dividends to its shareholder aggregating $2.5 million and
received a capital contribution of 100% of the outstanding capital stock of its consolidated
subsidiary, AIG SunAmerica Asset Management Corp. (SAAMCo) (formerly SunAmerica Asset Management
Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc.
(SACS) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc.
(SFS) (formerly SunAmerica Fund Services, Inc.). This capital contribution increased the
Companys equity by $150,653,000. Beginning
in 2004, the Company and its subsidiaries are included in the
consolidated federal income tax return of its
ultimate parent, AIG. The Company is a party to a written agreement (the Tax Sharing Agreement)
with AIG setting forth the manner in which the total consolidated U.S. Federal income tax is
allocated to each entity that joins in the consolidated return. The Tax Sharing Agreement provides
that AIG agrees not to charge us a greater portion of the consolidated tax liability than would
have been paid by us had the Company filed a separate federal income tax return. Additionally, AIG
agrees to reimburse the Company for any tax benefits arising out of net losses or tax credits, if
any, within ninety days after the filing of the consolidated federal income tax return for the year
in which such losses or tax credits are utilized by AIG. The Company paid commissions totaling $60,674,000 in 2004 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 Equity Securities Corporation and American General Securities Inc. These
affiliated broker-dealers distribute a significant portion of the Companys variable annuity
products amounting to approximately 23% of deposits in 2004. Of the Companys mutual fund sales,
approximately 25% were distributed by these affiliated broker-dealers in 2004. On February 1, 2004, SAAMCo entered into an administrative services agreement with FSA whereby
SAAMCo will pay to FSA a fee based on a percentage of all assets invested through FSAs variable
annuity products in exchange for services performed. SAAMCo is the investment advisor for certain
trusts that serve as investment options for FSAs variable annuity products. Amounts incurred by
the Company under this agreement totaled $1,537,000 in 2004. On October 1, 2001, SAAMCo entered into two administrative services agreements with business
trusts established by its affiliate, The Variable Annuity Life Insurance Company (VALIC), whereby
the trust pays to SAAMCo a fee based on a percentage of average daily net assets invested through
VALICs annuity products in exchange for services performed. Amounts earned by SAAMCo under this
agreement totaled $9,074,000 in 2004 and are net of certain administrative costs incurred by VALIC
of $2,593,000. Pursuant to a cost allocation agreement, the Company purchases administrative, investment
management, accounting, legal, marketing and data processing services
from the 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 $148,554,000 in 2004. The majority of the Companys invested assets are managed by an affiliate of the Company. The
investment management fees incurred were $3,712,000 in 2004. Additionally, the Company incurred
$1,113,000 of management fees to an affiliate of the Company to administer its securities lending
program for 2004. 35




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##### Table of Contents



ITEM
14. PRINCIPAL ACCOUNTANT 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 $1,346,000 and $1,048,000
were paid to PricewaterhouseCoopers LLP 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 2004 and 2003, respectively. 36




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 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(a) 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, 1996.3(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).21
    
    Subsidiaries of AIG SunAmerica Life
Assurance Company31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications
 37




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FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the index set forth on page F-1 of this report. REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the three months ended December 31, 2004. 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 GillisSenior Vice President andChief Financial Officer
 April 14, 2005 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
    
    April 15, 2005Jay S. Wintrob
    
    and Director (PrincipalExecutive Officer)/s/ N. SCOTT GILLIS
    
    Senior Vice President and
    
    April 15, 2005N. Scott Gillis
    
    Chief Financial Officer(Principal FinancialOfficer)/s/ STEWART POLAKOV
    
    Senior Vice President &
    
    April 15, 2005Stewart Polakov
    
    Controller (PrincipalAccounting Officer)/s/ JANA W. GREER
    
    President and Director
    
    April 15, 2005Jana W. Greer/s/ JAMES R. BELARDI
    
    Senior Vice President
    
    April 15, 2005James R. Belardi
    
    and Director/s/ MARC H. GAMSIN
    
    Senior Vice President
    
    April 15, 2005Marc H. Gamsin
    
    and Director/s/ EDWIN R. RAQUEL
    
    Senior Vice President
    
    April 15, 2005Edwin R. Raquel
    
    and Chief Actuary
 39




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AIG SUNAMERICA LIFE ASSURANCE COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageNumber(s)Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheet  December 31, 2004 and
December 31, 2003
    
    F-3 to F-4Consolidated Statement of Income and Comprehensive
Income  Years Ended December 31, 2004, 2003 and 2002
    
    F-5 to F-6Consolidated Statement of Cash Flows  Years Ended
December 31, 2004, 2003 and 2002
    
    F-7 to F-8Notes to Consolidated Financial Statements
    
    F-9 to F-38
 F- 1




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Report of Independent Registered Public Accounting Firm 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, in all material respects, the
financial position of AIG SunAmerica Life Assurance Company (the Company), an indirect wholly
owned subsidiary of American International Group, Inc., at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards 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 and reporting for certain nontraditional long-duration contracts in 2004. PricewaterhouseCoopers LLP
Los Angeles, California
April 15, 2005 F- 2




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET December 31,
    
    
    December 31,2004
    
    
    2003(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    201,117
    
    
    $
    133,105Bonds, notes and redeemable preferred stocks
available for sale, at fair value (amortized
cost: December 31, 2004, $5,007,868; December
31, 2003, $5,351,183)
    
    
    5,161,027
    
    
    
    5,505,800Mortgage loans
    
    
    624,179
    
    
    
    716,846Policy loans
    
    
    185,958
    
    
    
    200,232Mutual funds
    
    
    6,131
    
    
    
    21,159Common stocks available for sale, at fair value
(cost: December 31, 2004, $4,876; December 31,
2003, $635)
    
    
    4,902
    
    
    
    727Real estate
    
    
    20,091
    
    
    
    22,166Securities lending collateral
    
    
    883,792
    
    
    
    514,145Other invested assets
    
    
    38,789
    
    
    
    10,453Total investments and cash
    
    
    7,125,986
    
    
    
    7,124,633Variable annuity assets held in separate accounts
    
    
    22,612,451
    
    
    
    19,178,796Accrued investment income
    
    
    73,769
    
    
    
    74,647Deferred acquisition costs
    
    
    1,349,089
    
    
    
    1,268,621Other deferred expenses
    
    
    257,781
    
    
    
    236,707Income taxes currently receivable from Parent
    
    
    9,945
    
    
    
    15,455Receivable from brokers for sales of securities
    
    
    161
    
    
    
    Goodwill
    
    
    14,038
    
    
    
    14,038Other assets
    
    
    52,795
    
    
    
    58,830TOTAL ASSETS
    
    $
    31,496,015
    
    
    $
    27,971,727
 See accompanying notes to consolidated financial statements. F- 3




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued) December 31,
    
    
    December 31,2004
    
    
    2003(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity and fixed accounts of
variable annuity contracts
    
    $
    3,948,158
    
    
    $
    4,274,329Reserves for universal life insurance contracts
    
    
    1,535,905
    
    
    
    1,609,233Reserves for guaranteed investment contracts
    
    
    215,331
    
    
    
    218,032Reserves for guaranteed benefits
    
    
    76,949
    
    
    
    12,022Securities lending payable
    
    
    883,792
    
    
    
    514,145Due to affiliates
    
    
    21,655
    
    
    
    19,289Payable to brokers
    
    
    
    
    
    
    1,140Other liabilities
    
    
    190,198
    
    
    
    247,435Total reserves, payables and accrued liabilities
    
    
    6,871,988
    
    
    
    6,895,625Variable annuity liabilities related to separate accounts
    
    
    22,612,451
    
    
    
    19,178,796Subordinated notes payable to affiliates
    
    
    
    
    
    
    40,960Deferred income taxes
    
    
    257,532
    
    
    
    242,556Total liabilities
    
    
    29,741,971
    
    
    
    26,357,937Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    758,346
    
    
    
    709,246Retained earnings
    
    
    919,612
    
    
    
    828,423Accumulated other comprehensive income
    
    
    72,575
    
    
    
    72,610Total shareholders equity
    
    
    1,754,044
    
    
    
    1,613,790TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    31,496,015
    
    
    $
    27,971,727
 See accompanying notes to consolidated financial statements. F - 4




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)REVENUES:Fee income:Variable annuity policy fees, net of reinsurance
    
    $
    369,141
    
    
    $
    281,359
    
    
    $
    286,919Asset management fees
    
    
    89,569
    
    
    
    66,663
    
    
    
    66,423Universal life insurance fees, net of reinsurance
    
    
    33,899
    
    
    
    35,816
    
    
    
    36,253Surrender charges
    
    
    26,219
    
    
    
    27,733
    
    
    
    32,507Other fees
    
    
    15,753
    
    
    
    15,520
    
    
    
    21,900Total fee income
    
    
    534,581
    
    
    
    427,091
    
    
    
    444,002Investment income
    
    
    363,594
    
    
    
    402,923
    
    
    
    387,355Net realized investment losses
    
    
    (23,807
    )
    
    
    (30,354
    )
    
    
    (65,811
    )Total revenues
    
    
    874,368
    
    
    
    799,660
    
    
    
    765,546BENEFITS AND EXPENSES:Interest expense:Fixed annuity and fixed accounts of variable
annuity contracts
    
    
    140,889
    
    
    
    153,636
    
    
    
    142,973Universal life insurance contracts
    
    
    73,745
    
    
    
    76,415
    
    
    
    80,021Guaranteed investment contracts
    
    
    6,034
    
    
    
    7,534
    
    
    
    11,267Subordinated notes payable to affiliates
    
    
    2,081
    
    
    
    2,628
    
    
    
    3,868Total interest expense
    
    
    222,749
    
    
    
    240,213
    
    
    
    238,129Amortization of bonus interest
    
    
    10,357
    
    
    
    19,776
    
    
    
    16,277General and administrative expenses
    
    
    131,612
    
    
    
    119,093
    
    
    
    115,210Amortization of deferred acquisition costs and other
deferred expenses
    
    
    157,650
    
    
    
    160,106
    
    
    
    222,484Annual commissions
    
    
    64,323
    
    
    
    55,661
    
    
    
    58,389Claims on universal life contracts, net of
reinsurance recoveries
    
    
    17,420
    
    
    
    17,766
    
    
    
    15,716Guaranteed minimum death benefits, net of
reinsurance recoveries
    
    
    58,756
    
    
    
    63,268
    
    
    
    67,492Total benefits and expenses
    
    
    662,867
    
    
    
    675,883
    
    
    
    733,697PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
    
    
    211,501
    
    
    
    123,777
    
    
    
    31,849Income tax expense
    
    
    6,410
    
    
    
    30,247
    
    
    
    160NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
    
    
    205,091
    
    
    
    93,530
    
    
    
    31,689Cumulative effect of accounting change, net of tax
    
    
    (62,589
    )
    
    
    
    
    
    
    NET INCOME
    
    $
    142,502
    
    
    $
    93,530
    
    
    $
    31,689
 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 31,2004
    
    
    2003
    
    
    2002(in thousands)OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:Net unrealized gains (losses) on debt and equity
securities available for sale identified in the
current period less related amortization of
deferred acquisition costs and other deferred
expenses
    
    $
    (20,487
    )
    
    $
    67,125
    
    
    $
    20,358Less reclassification adjustment for net
realized losses included in net income
    
    
    19,263
    
    
    
    19,194
    
    
    
    52,285Net unrealized gains (losses) on foreign currency
    
    
    1,170
    
    
    
    
    
    
    
    Change related to cash flow hedges
    
    
    
    
    
    
    
    
    
    
    (2,218
    )Income tax (benefit) expense
    
    
    19
    
    
    
    (30,213
    )
    
    
    (24,649
    )OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (35
    )
    
    
    56,106
    
    
    
    45,776COMPREHENSIVE INCOME
    
    $
    142,467
    
    
    $
    149,636
    
    
    $
    77,465
 See accompanying notes to consolidated financial statements. F - 6




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)CASH FLOW
FROM OPERATING ACTIVITIES:Net income
    
    $
    142,502
    
    
    $
    93,530
    
    
    $
    31,689Adjustments to reconcile net income to net cash
provided by operating activities:Cumulative effect of accounting change, net of tax
    
    
    62,589
    
    
    
    
    
    
    
    Interest credited to:Fixed annuity and fixed accounts of variable
annuity contracts
    
    
    140,889
    
    
    
    153,636
    
    
    
    142,973Universal life insurance contracts
    
    
    73,745
    
    
    
    76,415
    
    
    
    80,021Guaranteed investment contracts
    
    
    6,034
    
    
    
    7,534
    
    
    
    11,267Net realized investment losses
    
    
    23,807
    
    
    
    30,354
    
    
    
    65,811Accretion of net discounts on investments
    
    
    (1,277
    )
    
    
    (9,378
    )
    
    
    (2,412
    )Loss on other invested assets
    
    
    572
    
    
    
    2,859
    
    
    
    3,932Amortization of deferred acquisition costs and
other expenses
    
    
    168,007
    
    
    
    179,882
    
    
    
    238,761Acquisition costs deferred
    
    
    (246,033
    )
    
    
    (212,251
    )
    
    
    (204,833
    )Other expenses deferred
    
    
    (62,906
    )
    
    
    (70,158
    )
    
    
    (77,602
    )Depreciation of fixed assets
    
    
    1,619
    
    
    
    1,718
    
    
    
    860Provision for deferred income taxes
    
    
    49,337
    
    
    
    (129,591
    )
    
    
    106,044Change in:Accrued investment income
    
    
    878
    
    
    
    679
    
    
    
    13,907Other assets
    
    
    4,416
    
    
    
    (12,349
    )
    
    
    4,736Income taxes currently payable to/ receivable
from Parent
    
    
    5,157
    
    
    
    148,898
    
    
    
    (43,629
    )Due from/to affiliates
    
    
    2,366
    
    
    
    (36,841
    )
    
    
    (7,743
    )Other liabilities
    
    
    7,485
    
    
    
    10,697
    
    
    
    (7,143
    )Other, net
    
    
    2,284
    
    
    
    14,885
    
    
    
    10,877NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    381,471
    
    
    
    250,519
    
    
    
    367,516CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (964,705
    )
    
    
    (2,078,310
    )
    
    
    (2,403,362
    )Mortgage loans
    
    
    (31,502
    )
    
    
    (44,247
    )
    
    
    (128,764
    )Other investments, excluding short-term investments
    
    
    (33,235
    )
    
    
    (20,266
    )
    
    
    (65,184
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    383,695
    
    
    
    1,190,299
    
    
    
    849,022Other investments, excluding short-term investments
    
    
    22,283
    
    
    
    12,835
    
    
    
    825Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    898,682
    
    
    
    994,014
    
    
    
    615,798Mortgage loans
    
    
    125,475
    
    
    
    67,506
    
    
    
    82,825Other investments, excluding short-term investments
    
    
    10,915
    
    
    
    72,970
    
    
    
    114,347NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    $
    411,608
    
    
    $
    194,801
    
    
    $
    (934,493
    )
 See accompanying notes to consolidated financial statements. F - 7




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)CASH FLOW FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity and fixed accounts of
variable annuity contracts
    
    $
    1,360,319
    
    
    $
    1,553,000
    
    
    $
    1,731,597Universal life insurance contracts
    
    
    45,183
    
    
    
    45,657
    
    
    
    49,402Net exchanges from the fixed accounts of
variable annuity contracts
    
    
    (1,332,240
    )
    
    
    (1,108,030
    )
    
    
    (503,221
    )Withdrawal payments on:Fixed annuity and fixed accounts of
variable annuity contracts
    
    
    (458,052
    )
    
    
    (464,332
    )
    
    
    (529,466
    )Universal life insurance contracts
    
    
    (69,185
    )
    
    
    (61,039
    )
    
    
    (68,444
    )Guaranteed investment contracts
    
    
    (8,614
    )
    
    
    (148,719
    )
    
    
    (135,084
    )Claims and annuity payments, net of
reinsurance, on:Fixed annuity and fixed accounts of
variable annuity contracts
    
    
    (108,691
    )
    
    
    (109,412
    )
    
    
    (98,570
    )Universal life insurance contracts
    
    
    (105,489
    )
    
    
    (111,380
    )
    
    
    (100,995
    )Net receipts from (repayments of) other
short-term financings
    
    
    (41,060
    )
    
    
    14,000
    
    
    
    Net payment related to a modified
coinsurance transaction
    
    
    (4,738
    )
    
    
    (26,655
    )
    
    
    (30,282
    )Capital contribution received from Parent
    
    
    
    
    
    
    
    
    
    
    200,000Dividends paid to Parent
    
    
    (2,500
    )
    
    
    (12,187
    )
    
    
    (10,000
    )NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES
    
    
    (725,067
    )
    
    
    (429,097
    )
    
    
    504,937NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS
    
    
    68,012
    
    
    
    16,223
    
    
    
    (62,040
    )CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD
    
    
    133,105
    
    
    
    116,882
    
    
    
    178,922CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD
    
    $
    201,117
    
    
    $
    133,105
    
    
    $
    116,882SUPPLEMENTAL CASH FLOW FORMATION:Interest paid on indebtedness
    
    $
    2,081
    
    
    $
    2,628
    
    
    $
    3,868Net income
taxes (received) paid to Parent
    
    $
    (47,749
    )
    
    $
    10,989
    
    
    $
    5,856
 See accompanying notes to consolidated financial statements. F - 8




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    BASIS OF PRESENTATION AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (the
Company) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the Parent),
which is a wholly owned subsidiary of AIG Retirement Services, Inc. (AIGRS) (formerly AIG
SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (AIG). AIG is
a holding company which through its subsidiaries is engaged in a broad range of insurance and
insurance-related activities, financial services, retirement services and asset management. The
Company is an Arizona-domiciled life insurance company principally engaged in the business of
writing variable annuity contracts directed to the market for tax-deferred, long-term savings
products. The Company changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The
Company continued to do business as Anchor National Life Insurance Company until February 28, 2003,
at which time it began doing business under its new name. Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital
stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (SAAMCo) (formerly
SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica
Capital Services, Inc. (SACS) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica
Fund Services, Inc. (SFS) (formerly SunAmerica Fund Services, Inc.). Pursuant to this
contribution, SAAMCo became a direct wholly owned subsidiary of the Company. Assets, liabilities
and shareholders equity at December 31, 2003 were restated
to include $190,605,000, $39,952,000
and $150,653,000 respectively, of SAAMCo balances. Similarly, the results of operations and cash
flows for the years ended December 31, 2003 and 2002 have been restated for the addition and
subtraction to pretax income of $16,345,000 and $4,464,000 to reflect
the SAAMCo activity. Prior to this capital contribution to the
Company, SAAMCo distributed certain investments with a tax effect of
$49,100,000 which was indemnified by its then parent, SALIC. See
Note 10 of the Notes to Consolidated Financial Statements. SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS,
are included in the Companys asset management segment (see Note 13). These companies earn fee
income by managing, distributing and administering a diversified family of mutual funds, managing
certain subaccounts offered within the Companys variable annuity products and providing
professional management of individual, corporate and pension plan portfolios. 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 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. 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 24.8% of deposits in the
year ended December 31, 2004, 14.6% of deposits in the year ended December 31, 2003 and 11.9% of
deposits in the year ended December 31, 2002. No other independent selling organization was
responsible for 10% or more of deposits for any such period. One independent selling organization
in the asset management operations represented 16.0% of deposits in the year ended December 31,
2004 and 10.8% of deposits in the year ended December 31, 2003. No other independent selling
organization was responsible for 10% or more of deposits for any such period. F - 9




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). 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. Certain prior period items have been reclassified to conform to
the current periods presentation. 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 deferred acquisition costs,
deferred other expenses and income 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. Mutual funds consist 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 fair value of securities pledged under
the securities lending agreement were $862,481,000 and $502,885,000 as of December 31, 2004 and
2003, respectively, and represents securities included in bonds, notes and redeemable preferred
stocks available for sale caption in the consolidated balance sheet as of December 31, 2004 and
2003, respectively. 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 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 and Guaranteed Minimum Withdrawal (GMWB) benefits (see Note 7). Limited
partnerships are carried at cost. 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.   F - 10




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Impairments
writedowns totaled $21,050,000, $54,092,000 and $57,273,000 in the years ending December 31, 2004,
2003 and 2002. 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 contract values. 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 component of accumulated other comprehensive income in shareholders equity. 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 that offer an optional GMAV and GMWB living
benefit. If elected by the contract holder at the time of contract issuance, the GMAV 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. If elected
by the contract holder at the time of contract issuance, the GMWB feature guarantees an annual
withdrawal stream, regardless of market performance, equal to deposits invested during the first
ninety days, adjusted for any subsequent withdrawals. There is a separate charge to the contract
holder for these features. The Company bears the risk that protracted under-performance of the
financial markets could result in GMAV and GMWB benefits being higher than the underlying contract
holder account balance and that the fees collected under the contract are insufficient to cover the
costs of the benefit to be provided. Under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities(FAS 133), the GMAV and GMWB
benefits are considered embedded derivatives that are bifurcated and
marked to market and recorded in other liabilities in the
consolidated balance sheet. Changes in
the market value of the estimated GMAV and GMWB benefits are recorded through investment income. F - 11




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) DEFERRED ACQUISITION COSTS (DAC): Policy acquisition costs are deferred and amortized over the
estimated lives of the annuity and universal life insurance contracts. Policy acquisition costs
include commissions and other costs that vary with, and are primarily related to, the production or
acquisition of new business. DAC is amortized based on a percentage of expected gross profits (EGPs) over the life of the
underlying contracts. EGPs are computed based on assumptions related to the underlying contracts,
including their anticipated duration, the growth rate of the separate account assets (with respect
to variable options of the variable annuity contracts) or general account assets (with respect to
fixed options of variable annuity contracts (Fixed Options) and universal life insurance
contracts) supporting the annuity obligations, costs of providing for contract guarantees and the
level of expenses necessary to maintain the contracts. The Company adjusts amortization of DAC and
other deferred expenses (a DAC unlocking) when estimates of future gross profits to be realized
from its annuity contracts are revised. 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 contracts is
10% (the long-term growth rate assumption). The Company uses a reversion to the mean
methodology that 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. As debt and equity securities available for sale are carried at aggregate fair value, an adjustment
is made to DAC equal to the change in 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 debt 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. 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 amortization expense on the consolidated statement of
income and comprehensive income. OTHER DEFERRED EXPENSES: The annuity operations currently offers enhanced crediting rates or bonus
payments to contract holders on certain of its products. Such amounts are deferred and amortized
over the life of the contract using the same methodology and assumptions used to amortize DAC. The
Company previously deferred these expenses as part of DAC and reported the amortization of such
amounts as part of DAC amortization. Upon implementation of Statement of Position 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts (SOP 03-1), the Company reclassified $155,695,000 of these
expenses from DAC to other deferred expenses, which is reported on the consolidated balance sheet.
The prior period consolidated balance sheet and consolidated statements of income and comprehensive
income presentation has been reclassified to conform to the new presentation. See Recently Issued
Accounting Standards below. F - 12




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The asset management operations defer distribution costs that are directly related to the sale of
mutual funds that have a 12b-1 distribution plan and/or contingent deferred sales charge feature
(collectively, Distribution Fee Revenue). The Company amortizes these deferred distribution
costs on a straight-line basis, adjusted for redemptions, over a period ranging from one year to
eight years depending on share class. Amortization of these deferred distribution costs is
increased if at any reporting period the value of the deferred amount exceeds the projected
Distribution Fee Revenue. The projected Distribution Fee Revenue is impacted by estimated future
withdrawal rates and the rates of market return. Management uses historical activity to estimate
future withdrawal rates and average annual performance of the equity markets to estimate the rates
of market return. The Company reviews the carrying value of other deferred expenses on at least an annual basis.
Management considers estimated future gross profit margins as well as expected mortality, interest
earned, credited rates, persistency, withdrawal rates, rates of market return 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 annuity policy fees in the
consolidated statement of income and comprehensive income. GOODWILL: Goodwill amounted to $14,038,000 (net of accumulated amortization of $18,838,000) at
December 31, 2004 and 2003. 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, 2004 and 2003, and
has determined that no impairment provision is necessary. RESERVES FOR FIXED ANNUITY CONTRACTS, FIXED ACCOUNTS OF VARIABLE ANNUITY CONTRACTS, UNIVERSAL LIFE
INSURANCE CONTRACTS AND GICs: Reserves for fixed annuity, Fixed Options, 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). 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 contract holders liabilities upon receipt. RESERVES FOR GUARANTEED BENEFITS: Reserves for guaranteed minimum death benefits (GMDB),
earnings enhancement benefit and guaranteed minimum income benefits are accounted for in accordance
with SOP 03-1. See Recently Issued Accounting Standards below. FEE INCOME: Fee income includes variable annuity policy fees, asset management fees,
universal life insurance fees, commissions and surrender charges. Variable annuity policy fees are
generally based on the market value of assets in the separate accounts supporting the variable
annuity contracts. Asset management fees include investment advisory fees and 12b-1 distribution
fees and are based on the market value of assets managed in mutual funds and certain variable
annuity portfolios by SAAMCo. Universal life insurance policy fees consist of mortality charges,
up-front fees earned on deposits received and administrative fees, net of reinsurance premiums.
Surrender charges are assessed on withdrawals occurring during the surrender charge period. All
fee income is recorded as income when earned with net retained commissions are recognized as income
on a trade date basis. F - 13




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES:
Prior to 2004, the Company was included in
a consolidated federal income tax return with its Parent. Also, prior
to 2004, SAAMCO, SFS, and SACS were included in a separate
consolidated federal income tax return with their Parent, Saamsun
Holdings Corporation. Beginning in 2004, all of these companies are
included in the consolidated federal income tax return of the their
ultimate parent, AIG. Income taxes have been calculated as if each
entity files 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: In July 2003, the American Institute of Certified Public
Accountants issued SOP 03-1. This statement was effective as of January 1, 2004, and requires the
Company to recognize a liability for GMDB and certain living benefits related to its variable
annuity contracts, account for enhanced crediting rates or bonus payments to contract holders and
modifies certain disclosures and financial statement presentations for these products. In addition,
SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and
amortization of certain other expenses. The Company reported for the first quarter of 2004 a
one-time cumulative accounting charge upon adoption of $62,589,000 ($96,291,000 pre-tax) to reflect
the liability and the related impact on DAC and reinsurance as of January 1, 2004. F - 14




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS The 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, 2004:U.S. government securities
    
    $
    28,443
    
    
    $
    30,300Mortgage-backed securities
    
    
    926,274
    
    
    
    956,567Securities of public utilities
    
    
    321,381
    
    
    
    332,038Corporate bonds and notes
    
    
    2,797,943
    
    
    
    2,902,829Redeemable preferred stocks
    
    
    20,140
    
    
    
    21,550Other debt securities
    
    
    913,687
    
    
    
    917,743Total
    
    $
    5,007,868
    
    
    $
    5,161,027
 Amortized
    
    
    EstimatedCost
    
    
    Fair Value(in thousands)AT DECEMBER 31, 2003:U.S. government securities
    
    $
    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
 At December 31, 2004, bonds, notes and redeemable preferred stocks included $386,426,000 that were
not rated investment grade. These non-investment-grade securities are comprised of bonds spanning
10 industries with 19%, 16%, 16% and 10% concentrated in telecommunications, utilities, financial
institutions and noncyclical consumer products industries, respectively. No other industry
concentration constituted more than 10% of these assets. At December 31, 2004, mortgage loans were collateralized by properties located in 30 states, with
loans totaling approximately 27%, 11% and 10% of the aggregate carrying value of the portfolio
secured by properties located in California, Michigan and Massachusetts, respectively. No more
than 10% of the portfolio was secured by properties in any other single state. At December 31, 2004, the carrying value, which approximates its estimated fair value, of all
investments in default as to the payment of principal or interest totaled $40,051,000 of bonds. F - 15




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued) As a component of its asset and liability management strategy, the Company utilizes interest rate
swap agreements to match assets more closely to liabilities. Interest rate swap agreements
exchange interest rate payments of differing character (for example, variable-rate payments
exchanged for fixed-rate payments) with a counterparty, 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, 2004, $10,505,000 of bonds, at amortized cost, were on deposit with regulatory
authorities in accordance with statutory requirements. At December 31, 2004, no investments in any one entity or its affiliates exceeded 10% of the
Companys shareholders equity. The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by
contractual maturity, as of December 31, 2004, follow: Amortized
    
    
    EstimatedCost
    
    
    Fair Value(in thousands)Due in one year or less
    
    $
    278,939
    
    
    $
    281,954Due after one year through five years
    
    
    2,076,145
    
    
    
    2,138,574Due after five years through ten years
    
    
    1,299,345
    
    
    
    1,339,499Due after ten years
    
    
    427,165
    
    
    
    444,433Mortgage-backed securities
    
    
    926,274
    
    
    
    956,567Total
    
    $
    5,007,868
    
    
    $
    5,161,027
 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, 2004:U.S. government securities
    
    $
    1,857
    
    
    $
    Mortgage-backed securities
    
    
    32,678
    
    
    
    (2,385
    )Securities of public utilities
    
    
    11,418
    
    
    
    (761
    )Corporate bonds and notes
    
    
    118,069
    
    
    
    (13,183
    )Redeemable preferred stocks
    
    
    1,410
    
    
    
    Other debt securities
    
    
    14,871
    
    
    
    (10,815
    )Total
    
    $
    180,303
    
    
    $
    (27,144
    )
 F - 16




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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, 2003:U.S. government securities
    
    $
    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
    )
 Gross unrealized gains on equity securities aggregated $26,000 at December 31, 2004 and $112,000 at
December 31, 2003. There were no unrealized losses on equity securities at December 31, 2004 and
gross unrealized losses on equity securities aggregated $20,000 at December 31, 2003. The following tables summarize 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, 2004 and 2003 (dollars in thousands). Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    ItemsDecember 31, 2004Mortgage-backed
securities
    
    $
    125,589
    
    
    $
    (1,282
    )
    
    
    23
    
    
    $
    40,275
    
    
    $
    (1,103
    )
    
    
    9
    
    
    $
    165,864
    
    
    $
    (2,385
    )
    
    
    32Securities of
public utilities
    
    
    46,249
    
    
    
    (761
    )
    
    
    9
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    46,249
    
    
    
    (761
    )
    
    
    9Corporate bonds
and notes
    
    
    487,923
    
    
    
    (7,418
    )
    
    
    86
    
    
    
    87,194
    
    
    
    (5,765
    )
    
    
    15
    
    
    
    575,117
    
    
    
    (13,183
    )
    
    
    101Other debt
securities
    
    
    207,378
    
    
    
    (4,062
    )
    
    
    36
    
    
    
    79,782
    
    
    
    (6,753
    )
    
    
    12
    
    
    
    287,160
    
    
    
    (10,815
    )
    
    
    48Total
    
    $
    867,139
    
    
    $
    (13,523
    )
    
    
    154
    
    
    $
    207,251
    
    
    $
    (13,621
    )
    
    
    36
    
    
    $
    1,074,390
    
    
    $
    (27,144
    )
    
    
    190
 F - 17




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued) Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    ItemsDecember 31, 2003Mortgage-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
and 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
    
    $
    826,788
    
    
    $
    (55,234
    )
    
    
    165
    
    
    $
    84,986
    
    
    $
    (4,882
    )
    
    
    16
    
    
    $
    911,774
    
    
    $
    (60,116
    )
    
    
    181
 Realized investment gains and losses on sales of investments are as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:Realized gains
    
    $
    12,240
    
    
    $
    30,896
    
    
    $
    25,013Realized losses
    
    
    (12,623
    )
    
    
    (11,818
    )
    
    
    (32,865
    )COMMON STOCKS:Realized gains
    
    
    5
    
    
    
    561
    
    
    
    Realized losses
    
    
    (247
    )
    
    
    (117
    )
    
    
    (169
    )
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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued) The sources and related amounts of investment income are as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Short-term investments
    
    $
    2,483
    
    
    $
    1,363
    
    
    $
    5,447Bonds, notes and redeemable preferred stocks
    
    
    293,258
    
    
    
    321,493
    
    
    
    305,480Mortgage loans
    
    
    50,825
    
    
    
    53,951
    
    
    
    55,417Partnerships
    
    
    417
    
    
    
    (478
    )
    
    
    12,344Policy loans
    
    
    17,130
    
    
    
    15,925
    
    
    
    18,796Real estate
    
    
    (202
    )
    
    
    (331
    )
    
    
    (276
    )Other invested assets
    
    
    2,149
    
    
    
    13,308
    
    
    
    (7,496
    )Less: investment expenses
    
    
    (2,466
    )
    
    
    (2,308
    )
    
    
    (2,357
    )Total investment income
    
    $
    363,594
    
    
    $
    402,923
    
    
    $
    387,355
 Investment income was attributable to the following products: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Fixed annuity contracts
    
    $
    34,135
    
    
    $
    37,762
    
    
    $
    41,856Variable annuity contracts
    
    
    222,660
    
    
    
    239,863
    
    
    
    201,766Guaranteed investment contracts
    
    
    13,191
    
    
    
    20,660
    
    
    
    28,056Universal life insurance
contracts
    
    
    92,645
    
    
    
    100,019
    
    
    
    105,878Asset management
    
    
    963
    
    
    
    4,619
    
    
    
    9,799Total
    
    $
    363,594
    
    
    $
    402,923
    
    
    $
    387,355
 F - 19




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  4.
    FAIR VALUE OF FINANCIAL INSTRUMENTS The 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 non-financial 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 that do not have
readily determinable market prices, the fair value is estimated with internally prepared valuations
(including those based on estimates of future profitability).Otherwise, the most recent purchases
and sales of similar unquoted securities, independent broker quotes or comparison to similar
securities with quoted prices when possible is used 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. POLICY LOANS: Carrying value is considered a reasonable estimate of fair value. MUTUAL FUNDS: 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. 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 AND FIXED ACCOUNTS OF VARIABLE 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 LENDING COLLATERAL/PAYABLE: Carrying value is considered to be a reasonable estimate of
fair value. 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 INSTRUMENTS (Continued) 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. SUBORDINATED NOTES TO/FROM AFFILIATES: Fair value is estimated based on the quoted market prices
for similar issues. The estimated fair values of the Companys financial instruments at December 31, 2004 and 2003
compared with their respective carrying values, are as follows: Carrying
    
    
    FairValue
    
    
    Value(in thousands)DECEMBER 31, 2004:ASSETS:Cash and short-term investments
    
    $
    201,117
    
    
    $
    201,117Bonds, notes and redeemable preferred stocks
    
    
    5,161,027
    
    
    
    5,161,027Mortgage loans
    
    
    624,179
    
    
    
    657,828Policy loans
    
    
    185,958
    
    
    
    185,958Mutual funds
    
    
    6,131
    
    
    
    6,131Common stocks
    
    
    4,902
    
    
    
    4,902Partnerships
    
    
    1,084
    
    
    
    1,084Securities lending collateral
    
    
    883,792
    
    
    
    883,792Put options
hedging guaranteed benefits
    
    
    37,705
    
    
    
    37,705Variable annuity assets held in separate accounts
    
    
    22,612,451
    
    
    
    22,612,451LIABILITIES:Reserves for fixed annuity and fixed accounts of
variable annuity contracts
    
    $
    3,948,158
    
    
    $
    3,943,265Reserves for guaranteed investment contracts
    
    
    215,331
    
    
    
    219,230Securities lending payable
    
    
    883,792
    
    
    
    883,792Variable annuity liabilities related to separate accounts
    
    
    22,612,451
    
    
    
    22,612,451
 F - 21




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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, 2003:ASSETS:Cash and short-term investments
    
    $
    133,105
    
    
    $
    133,105Bonds, notes and redeemable preferred stocks
    
    
    5,505,800
    
    
    
    5,505,800Mortgage loans
    
    
    716,846
    
    
    
    774,758Policy loans
    
    
    200,232
    
    
    
    200,232Mutual funds
    
    
    21,159
    
    
    
    21,159Common stocks
    
    
    727
    
    
    
    727Partnerships
    
    
    1,312
    
    
    
    1,685Securities lending collateral
    
    
    514,145
    
    
    
    514,145Put options
hedging guaranteed benefits
    
    
    9,141
    
    
    
    9,141Variable annuity assets held in separate accounts
    
    
    19,178,796
    
    
    
    19,178,796LIABILITIES:Reserves for fixed annuity and fixed accounts of
variable 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
    
    
    
    19,178,796Subordinated note payable to affiliate
    
    
    40,960
    
    
    
    40,960
  5.
    DEFERRED ACQUISITION COSTS The following table summarizes the activity in deferred acquisition costs: Years Ended December 31,2004
    
    
    2003(in thousands)Balance at beginning of year
    
    $
    1,268,621
    
    
    $
    1,224,101Acquisition costs deferred
    
    
    246,033
    
    
    
    212,250Effect of net unrealized gains (losses) on securities
    
    
    267
    
    
    
    (30,600
    )Amortization charged to income
    
    
    (126,142
    )
    
    
    (137,130
    )Cumulative
effect of SOP 03-1
    
    
    (39,690
    )
    
    
    Balance at end of year
    
    $
    1,349,089
    
    
    $
    1,268,621
 F - 22




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  6.
    OTHER DEFERRED EXPENSES The annuity operations defer enhanced crediting rates or bonus payments to contract holders on
certain of its products (Bonus Payments). The asset management operations defer distribution
costs that are directly related to the sale of mutual funds that have a 12b-1 distribution plan
and/or contingent deferred sales charge feature. The following table summarizes the activity in
these deferred expenses: Bonus
    
    
    DistributionPayments
    
    
    Costs
    
    
    Total(in thousands)YEAR ENDED DECEMBER 31, 2004Balance at beginning of year
    
    $
    155,695
    
    
    $
    81,011
    
    
    $
    236,707Expenses deferred
    
    
    36,732
    
    
    
    26,175
    
    
    
    62,906Effect of net unrealized
gains (losses) on securities
    
    
    33
    
    
    
    
    
    
    
    33Amortization charged in income
    
    
    (10,357
    )
    
    
    (31,508
    )
    
    
    (41,865
    )Balance at end of year
    
    $
    182,103
    
    
    $
    75,678
    
    
    $
    257,781YEAR ENDED DECEMBER 31, 2003Balance at beginning of year
    
    $
    140,647
    
    
    $
    72,053
    
    
    $
    212,700Expenses deferred
    
    
    38,224
    
    
    
    31,934
    
    
    
    70,159Effect of net unrealized
gains (losses) on securities
    
    
    (3,400
    )
    
    
    
    
    
    
    (3,400
    )Amortization charged in income
    
    
    (19,776
    )
    
    
    (22,976
    )
    
    
    (42,752
    )Balance at end of year
    
    $
    155,695
    
    
    $
    81,011
    
    
    $
    236,707
 F - 23




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    GUARANTEED BENEFITS The Company issues variable annuity contracts for which the investment risk is generally borne by
the contract holder, except with respect to amounts invested in the Fixed Options. For many of the
Companys variable annuity contracts, the Company offers contractual guarantees in the event of
death, at specified dates during the accumulation period, upon certain withdrawals or at
annuitization. Such benefits are referred to as GMDB, GMAV, GMWB and guaranteed minimum income
benefits (GMIB), respectively. The Company also issues certain variable annuity products that
offer an optional earnings enhancement benefit (EEB) feature that provides an additional death
benefit amount equal to a fixed percentage of earnings in the contract, subject to certain
maximums. The assets supporting the variable portion of variable annuity contracts are carried at fair value
and reported as summary total variable annuity assets held in separate accounts with an
equivalent summary total reported for liabilities. Amounts assessed against the contract holders
for mortality, administrative, other services and certain features are included in variable annuity
policy fees, net of reinsurance, in the consolidated statement of income and comprehensive income.
Changes in liabilities for minimum guarantees are included in guaranteed benefits, net of
reinsurance, in the consolidated statement of income and comprehensive income. Separate account net
investment income, net investment gains and losses and the related liability charges are offset
within the same line item in the consolidated statement of income and comprehensive income. The Company offers GMDB options that guarantee for virtually all contract holders, that upon death,
the contract holders beneficiary will receive the greater of (1) the contract holders account
value, or (2) a guaranteed minimum death benefit that varies by product and election by policy
owner. The GMDB liability is determined each period end by estimating the expected value of death
benefits in excess of the projected account balance and recognizing the excess ratably over the
accumulation period based on total expected assessments. The Company regularly evaluates estimates
used and adjusts the additional liability balance, with a related charge or credit to guaranteed
benefits, net of reinsurance recoveries, if actual experience or other evidence suggests that
earlier assumptions should be revised. EEB is a feature the Company offers on certain variable annuity products. For contract holders who
elect the feature, the EEB provides an additional death benefit amount equal to a fixed percentage
of earnings in the contract, subject to certain maximums. The Company bears the risk that account
values following favorable performance of the financial markets will result in greater EEB death
claims and that the fees collected under the contract are insufficient to cover the costs of the
benefit to be provided. If available and elected by the contract holder, GMIB provides a minimum fixed annuity payment
guarantee after a seven, nine or ten-year waiting period. As there is a waiting period to
annuitize using the GMIB, there are no policies eligible to receive this benefit at December 31,
2004. The GMIB liability is determined each period end by estimating the expected value of the
annuitization benefits in excess of the projected account balance at the date of annuitization and
recognizing the excess ratably over the accumulation period based on total expected assessments.
The Company regularly evaluates estimates used and adjusts the additional liability balance, with a
related charge or credit to guaranteed benefits, net of reinsurance recoveries, if actual
experience or other evidence suggests that earlier assumptions should be revised. F - 24




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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    GUARANTEED BENEFITS (Continued) GMAV is a feature offered on certain variable annuity products. If available and elected by the
contract holder at the time of contract issuance, GMAV guarantees that the account value under the
contract will at least equal the amount of deposits invested during the first ninety days, adjusted
for any subsequent withdrawals, at the end of a ten-year waiting period. The Company purchases put
options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives
under FAS 133, and are recognized at fair value in the consolidated balance sheet and through
investment income in the consolidated statement of income and comprehensive income. GMWB is a feature offered on certain variable annuity products. If available and elected by the
contract holder at the time of contract issuance, this feature provides a guaranteed annual
withdrawal stream, regardless of market performance, equal to deposits invested during the first
ninety days adjusted for any subsequent withdrawals (Eligible Premium). These guaranteed annual
withdrawals of up to 10% of Eligible Premium are available after either a three-year or a five-year
waiting period as elected by the contract holder at time of contract issuance, without reducing the
future amounts guaranteed. If no withdrawals have been made during the waiting period of three or
five years, the contract holder will realize an additional 10% or 20%, respectively, of Eligible
Premium after all other amounts guaranteed under this benefit have been paid. GMWBs are considered
to be derivatives under FAS 133 and are recognized at fair value in the consolidated balance sheet
and through investment income in the consolidated statement of income and comprehensive income. F - 25




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    GUARANTEED BENEFITS (Continued) Details concerning the Companys guaranteed benefit exposures as of December 31, 2004 are as
follows: Highest SpecifiedAnniversaryReturn of Net
    
    
    Account ValueDeposits Plus a
    
    
    Minus WithdrawalsMinimum Return
    
    
    Post Anniversary(dollars in millions)In the event of death (GMDB and EEB):Account value
    
    $
    12,883
    
    
    $
    12,890Net amount at risk (a)
    
    $
    933
    
    
    $
    1,137Average attained age of contract holders
    
    
    67
    
    
    
    64Range of guaranteed minimum return rates
    
    
    0%-5
    %
    
    
    0
    %At annuitization (GMIB):Account value
    
    $
    6,942Net amount at risk (b)
    
    $
    3Weighted average period remaining until earliest annuitization
    
    3.8 YearsRange of guaranteed minimum return rates
    
    
    0%-6.5
    %Accumulation at specified date (GMAV):Account value
    
    $
    1,533Net amount at risk (c)
    
    $
    Weighted average period remaining until guaranteed payment
    
    9.0 YearsAnnual withdrawals at specified date (GMWB):Account value
    
    $
    294Net amount at risk (d)
    
    $
    Weighted average period remaining until expected payout
    
    13.9 Years
   (a)
    Net amount at risk represents the guaranteed benefit exposure in excess of the current account value, net of
reinsurance, if all contract holders died at the same balance sheet date. The net amount at risk does not take
into account the effect of caps and deductibles from the various reinsurance treaties.(b)
    Net amount at risk represents the present value of the expected annuitization payments at the expected
annuitization dates in excess of the present value of the expected account value at the expected annuitization
dates, net of reinsurance.(c)
    Net amount at risk represents the guaranteed benefit exposure in excess of the current account value, if all
contract holders reached the specified date at the same balance sheet date.(d)
    Net amount at risk represents the guaranteed benefit exposure in excess of the current account value if all
contract holders exercise the maximum withdrawal benefits at the same balance sheet date. If no withdrawals have
been made during the waiting period of 3 or 5 years, the contract holder will realize an additional 10% or 20% of
Eligible Premium, respectively, after all other amounts guaranteed under this benefit have been paid. The
additional 10% or 20% enhancement increases the net amount at risk by $26.3 million and is payable no sooner than
13 or 15 years from contract issuance for the 3 or 5 year waiting periods, respectively. F - 26




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    GUARANTEED BENEFITS (Continued) The following summarizes the reserve for guaranteed benefits, net of reinsurance, on variable
contracts reflected in the general account: (in thousands)Balance at January 1, 2004 before reinsurance (e)
    
    $
    92,873Guaranteed benefits incurred
    
    
    61,472Guaranteed benefits paid
    
    
    (49,947
    )Balance at December 31, 2004 before reinsurance
    
    
    104,398Less reinsurance
    
    
    (27,449
    )Balance at December 31, 2004, net of reinsurance
    
    $
    76,949
   (e)
    Includes amounts from the one-time cumulative accounting change
resulting from the adoption of SOP 03-1. The following assumptions and methodology were used to determine the reserve for guaranteed
benefits at December 31, 2004:  
    Data used was 5,000 stochastically generated investment performance scenarios.
    Mean investment performance assumption was 10%.
    Volatility assumption was 16%.
    Mortality was assumed to be 64% of the 75-80 ALB table.
    Lapse rates vary by contract type and duration and range from 0% to 40%.
    The discount rate was approximately 8%.  8.
    REINSURANCE Reinsurance contracts do not relieve the Company from its obligations to contract holders. 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. The Company has no
reinsurance recoverable or related concentration of credit risk greater than 10% of shareholders
equity. Variable policy fees are net of reinsurance premiums of $28,604,000, $30,795,000 and $22,500,000 in
2004, 2003 and 2002, respectively. Universal life insurance fees are net of reinsurance premiums
of $34,311,000, $33,710,000 and $34,098,000 in 2004, 2003 and 2002, respectively. The Company has a reinsurance treaty under which the Company retains no more than $100,000 of risk
on any one insured life in order to limit the exposure to loss on any single insured. Reinsurance
recoveries recognized as a reduction of claims on universal life insurance contracts amounted to
$34,163,000, $34,036,000 and $29,171,000 in 2004, 2003 and 2002, respectively. Guaranteed benefits
were reduced by reinsurance recoveries of $2,716,000, $8,042,000 and $8,362,000 in 2004, 2003 and
2002, respectively. F - 27




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  9.
    COMMITMENTS AND CONTINGENT LIABILITIES The Company has six agreements outstanding in which it has provided liquidity support for certain
short-term securities of municipalities and non-profit organizations by agreeing to purchase such
securities in the event there is no other buyer in the short-term marketplace. In return the
Company receives a fee. In addition, the Company guarantees the payment of these securities upon
redemption. The maximum liability under these guarantees at December 31, 2004 is $195,442,000.
These commitments have contractual maturity dates in 2005. Related to each of these agreements are
participation agreements with the Parent under which the Parent will share in $62,590,000 of these
liabilities in exchange for a proportionate percentage of the fees received under these agreements.
The Internal Revenue Service has completed its examinations into the transactions underlying these
commitments, including the Companys role in the transactions. The examination did not result in a
material loss to the Company. At December 31, 2004, the Company has commitments to purchase a total of approximately $10,000,000
of asset- backed securities in the ordinary course of business. The expiration dates of these
commitments are as follows: $2,000,000 in 2005 and $8,000,000 in 2007. Various federal, state and other regulatory agencies are reviewing certain transactions and
practices of the Company and its subsidiaries in connection with industry-wide and other inquiries.
In the opinion of the Companys management, based on the current status of these inquiries, it is
not likely that any of these inquiries will have a material adverse effect on the Companys
consolidated financial position, results of operations or cash flows of the Company. Various lawsuits against the Company and its subsidiaries have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and regulatory and other
matters are not considered material in relation to the consolidated financial position, results of
operations or cash flows of the Company. On April 5, 2004, a purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta
Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit
Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain
improprieties in conjunction with alleged market timing activities. The probability of any
particular outcome cannot be reasonably estimated at this time. The
Company cannot estimate a range because the litigation has not
progressed beyond the preliminary stage. F - 28




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    SHAREHOLDERS EQUITYThe Company is authorized to issue 4,000 shares of its $1,000 par value Common Stock. At
December 31, 2004 and 2003, 3,511 shares were outstanding.Changes in shareholders equity are as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)ADDITIONAL PAID-IN CAPITAL:Beginning balances
    
    $
    709,246
    
    
    $
    709,246
    
    
    $
    509,246Capital contributions by Parent
    
    
    49,100
    
    
    
    
    
    
    
    200,000Ending balances
    
    $
    758,346
    
    
    $
    709,246
    
    
    $
    709,246RETAINED EARNINGS:Beginning balances
    
    $
    828,423
    
    
    $
    730,321
    
    
    $
    669,103Net income
    
    
    142,502
    
    
    
    93,530
    
    
    
    31,689Dividends paid to Parent
    
    
    (2,500
    )
    
    
    (12,187
    )
    
    
    (10,000
    )Adjustment for tax benefit of distributed subsidiary
    
    
    287
    
    
    
    16,759
    
    
    
    39,529Tax effect on a distribution of investment
    
    
    (49,100
    )
    
    
    
    
    
    
    Ending balances
    
    
    919,612
    
    
    $
    828,423
    
    
    $
    730,321ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):Beginning balances
    
    $
    72,610
    
    
    $
    16,504
    
    
    $
    (29,272
    )Change in net unrealized gains (losses)
on debt securities available for sale
    
    
    (1,459
    )
    
    
    118,725
    
    
    
    98,718Change in net unrealized gains (losses)
on equity securities available for sale
    
    
    (65
    )
    
    
    1,594
    
    
    
    (1,075
    )Change in net unrealized gains on foreign currency
    
    
    1,170
    
    
    
    
    
    
    
    Change in adjustment to deferred acquisition costs
and other deferred expenses
    
    
    300
    
    
    
    (34,000
    )
    
    
    (25,000
    )Net change related to cash flow hedges
    
    
    
    
    
    
    
    
    
    
    (2,218
    )Tax effects of net changes
    
    
    19
    
    
    
    (30,213
    )
    
    
    (24,649
    )Ending balances
    
    $
    72,575
    
    
    $
    72,610
    
    
    $
    16,504
 F - 29




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    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 31,2004
    
    
    2003(in thousands)Gross unrealized gains
    
    $
    180,329
    
    
    $
    214,845Gross unrealized losses
    
    
    (27,144
    )
    
    
    (60,136
    )Unrealized gain on foreign currency
    
    
    1,170
    
    
    
    Adjustment to DAC and other deferred
expenses
    
    
    (42,700
    )
    
    
    (43,000
    )Deferred income taxes
    
    
    (39,080
    )
    
    
    (39,099
    )Accumulated other comprehensive income
    
    $
    72,575
    
    
    $
    72,610
 On October 30, 2002, the Company received a capital contribution of $200,000,000 in cash from the
Parent. F - 30




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  10.
    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 the shareholder in the year 2005 without obtaining prior approval is $83,649,000. Dividends of
$2,500,000 were paid in 2004. Prior to the capital contribution of SAAMCo to the Company, SAAMCo
paid dividends to its parent, SunAmerica Life Insurance Company, of $12,187,000 and $10,000,000 in
2003 and 2002, respectively.Under statutory accounting principles utilized in filings with insurance regulatory authorities,
the Companys net income totaled $99,288,000 for the year ended December 31, 2004, net income of
$89,071,000 and net loss of $180,737,000 for the years ended December 31, 2003 and 2002,
respectively. The Companys statutory capital and surplus totaled $840,001,000 at December 31,
2004 and $602,348,000 at December 31, 2003.11.
    INCOME TAXESThe components of the provisions for income taxes on pretax income consist of the
following: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Current
expense (benefit)
    
    $
    (42,927
    )
    
    $
    127,655
    
    
    $
    (105,369
    )Deferred
expense (benefit)
    
    
    49,337
    
    
    
    (97,408
    )
    
    
    105,529Total income tax expense
    
    $
    6,410
    
    
    $
    30,247
    
    
    $
    160
 F - 31




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  11.
    INCOME TAXES (Continued)Income taxes computed at the United States federal income tax rate of 35% and income tax expenses
reflected in statement of income and comprehensive income provided differ as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Amount computed at statutory rate
    
    $
    74,025
    
    
    $
    43,322
    
    
    $
    11,147Increases (decreases) resulting from:State income taxes, net of federal tax benefit
    
    
    4,020
    
    
    
    2,273
    
    
    
    (567
    )Dividends received deduction
    
    
    (19,058
    )
    
    
    (15,920
    )
    
    
    (10,117
    )Tax credits
    
    
    (4,000
    )
    
    
    
    
    
    
    Adjustment to prior year tax liability (a)
    
    
    (39,730
    )
    
    
    
    
    
    
    Other, net
    
    
    (8,847
    )
    
    
    572
    
    
    
    (303
    )Total income tax expense
    
    $
    6,410
    
    
    $
    30,247
    
    
    $
    160
   (a)
    In 2004, the Company revised its estimate of tax contingency amount for prior year
based on additional information that became available. Under prior federal income tax law, one-half of the excess of a life insurance companys income
from operations over its taxable investment income was not taxed, but was set aside in a special
tax account designated as policyholders surplus. At December 31, 2004, the Company had
approximately $14,300,000 of policyholders surplus on which no deferred tax liability has been
recognized, as federal income taxes are not required unless this amount is distributed as a
dividend or recognized under other specified conditions. The American Jobs Creation Act of 2004 modified federal income
tax law to allow life insurance companies to distribute amounts from policyholders surplus during
2005 and 2006 without incurring federal income tax on the distributions. The Company eliminated
its policyholders surplus balance in January 2005. At December 31, 2004, the Company
had net operating carryforwards, capital loss carryforwards and tax credit
carryforwards for Federal income tax purposes of $15,515,000,
$63,774,000 and $44,604,000, respectively, arising
from affordable housing investments no longer owned by SAAMCo. Such
carryforwards expire in 2018, 2006 to 2008 and 2018, respectively. F - 32




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  11.
    INCOME TAXES (Continued)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. The significant components of the liability for deferred income taxes are
as follows: December 31,
    
    
    December 31,2004
    
    
    2003(in thousands)DEFERRED TAX LIABILITIES:Deferred acquisition costs and other deferred expenses
    
    $
    432,868
    
    
    $
    473,387State income taxes
    
    
    10,283
    
    
    
    5,744Other liabilities
    
    
    15,629
    
    
    
    350Net unrealized gains on debt and equity securities
available for sale
    
    
    39,080
    
    
    
    39,098Total deferred tax liabilities
    
    
    497,860
    
    
    
    518,579DEFERRED TAX ASSETS:Investments
    
    
    (28,915
    )
    
    
    (25,213
    )Contract holder reserves
    
    
    (122,691
    )
    
    
    (158,112
    )Guaranty fund assessments
    
    
    (3,402
    )
    
    
    (3,408
    )Deferred income
    
    
    (5,604
    )
    
    
    (3,801
    )Other assets
    
    
    (1,068
    )
    
    
    (7,446
    )Net
operating loss carryforward
    
    
    (5,430
    )
    
    
    Capital loss
carryforward
    
    
    (22,321
    )
    
    
    (20,565
    )Low income
housing credit carryforward
    
    
    (44,604
    )
    
    
    (36,600
    )Partnership income/loss
    
    

    (6,293
    )
    
    
    (20,878
    )Total deferred tax assets
    
    
    (240,328
    )
    
    
    (276,023
    )Deferred income taxes
    
    $
    257,532
    
    
    $
    242,556
  The Company has concluded that the deferred tax asset will be fully realized and no valuation
allowance is necessary.12.
    RELATED-PARTY MATTERSAs of December 31, 2004, subordinated notes payable to affiliates were paid off except for accrued
interest totaling $460,000 which is included in other liabilities on the consolidated balance
sheet.On February 15, 2004, the Company entered into a short-term financing arrangement with the Parent
whereby the Company has the right to borrow up to $500,000,000 from the Parent and vice versa. Any
advances made under this arrangement must be repaid within 30 days. There were no balances
outstanding under this agreement at December 31, 2004. F - 33




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  12.
    RELATED-PARTY MATTERS (Continued)On February 15, 2004, the Company entered into a short-term financing arrangement with its
affiliate, First SunAmerica Life Insurance Company (FSA), whereby the Company has the right to
borrow up to $15,000,000 from FSA and vice versa. Any advances made under this arrangement must be
repaid within 30 days. There were no balances outstanding under this agreement at December 31,
2004.On December 19, 2001, the Company entered into a short-term financing arrangement with AIGRS
whereby AIGRS has the right to borrow up to $500,000,000. Any advances made under this arrangement
must be repaid within 30 days. There were no balances outstanding under this agreement at December
31, 2004.On December 19, 2001, the Company entered into a short-term financing arrangement with SunAmerica
Investments, Inc. (SAII), whereby SAII has the right to borrow up to $500,000,000 from the
Company. Any advances made under this agreement must be repaid within 30 days. There were no
balances outstanding under this agreement at December 31, 2004.On September 26, 2001, the Company entered into a short-term financing arrangement with AIGRS.
Under the terms of this agreement, the Company has immediate access of up to $500,000,000. Any
advances made under this arrangement must be repaid within 30 days. There were no balances
outstanding under this agreement at December 31, 2004.On September 26, 2001, the Company entered into a short-term financing arrangement with SAII,
whereby the Company has the right to borrow up to $500,000,000. Any advances made under this
agreement must be repaid within 30 days. At December 31, 2004 and 2003, the Company owed $0 and
$14,000,000, respectively, under this agreement, which was included in due to affiliates.On October 31, 2003, the Company became a party to an existing credit agreement under which the
Company agreed to make loans to AIG in an aggregate amount of up to $60,000,000. This commitment
expires on October 28, 2005. There were no balances outstanding under this agreement at December
31, 2004.For the years ended December 31, 2004, 2003 and 2002, the Company paid commissions totaling
$60,674,000, $51,716,000 and $59,058,000, respectively, 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 Equity Securities Corporation and American General Securities Inc. These affiliated
broker-dealers distribute a significant portion of the Companys variable annuity products
amounting to approximately 23%, 24% and 31% of deposits for each of the respective years. Of the
Companys mutual fund sales, approximately 25%, 23% and 28% were distributed by these affiliated
broker-dealers for the years ended December 31, 2004, 2003 and 2002, respectively.On February 1, 2004, SAAMCo entered into an administrative services agreement with FSA whereby
SAAMCo will pay to FSA a fee based on a percentage of all assets invested through FSAs variable
annuity products in exchange for services performed. SAAMCo is the investment advisor for certain
trusts that serve as investment options for FSAs variable annuity products. Amounts incurred by
the Company under this agreement totaled $1,537,000 in 2004 and are included in the Companys
consolidated statement of income and comprehensive income. A fee of $150,000, $1,620,000 and
$1,777,000 was paid under a different agreement in 2004, 2003 and 2002, respectively.On October 1, 2001, SAAMCo entered into two administrative services agreements with business trusts
established by its affiliate, The Variable Annuity Life Insurance Company (VALIC), whereby the
trust pays to SAAMCo a fee based on a percentage of average daily net assets invested through
VALICs annuity products in exchange for services performed. Amounts earned by SAAMCo under this
agreement totaled $9,074,000, $7,587,000 and $7,614,000 in 2004, 2003 and 2002, respectively, and
are net of certain administrative costs incurred by VALIC of F - 34




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  12.
    RELATED-PARTY MATTERS (Continued)$2,593,000, $2,168,000 and $2,175,000, respectively. The net amounts earned by SAAMCo are included
in other fees in the consolidated statement of income and comprehensive income.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. Contract holders 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
contract holder when due, have the right to enforce the Support Agreement directly against AIG.The Companys insurance policy obligations are guaranteed by American Home Assurance Company
(American Home), a subsidiary of AIG, and a member of an AIG intercompany pool. This guarantee
is unconditional and irrevocable, and the Companys contract holders have the right to enforce the
guarantee directly against American Home. While American Home does not publish financial
statements, it does file 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.The Companys ultimate parent, AIG, has announced that
it has delayed filing its Annual Report on Form 10-K for the year
ended December 31, 2004 to allow AIGs Board of Directors
and new management adequate time to complete an extensive review of
AIGs books and records. The review includes issues arising from
pending investigations into non-traditional insurance products and
certain assumed reinsurance transactions by the Office of the Attorney
General for the State of New York and the SEC and from AIGs
decision to review the accounting treatment of certain additional
items. Circumstances affecting AIG can have an impact on the Company.
For example, the recent downgrades and ratings actions taken by the
major rating agencies with respect to AIG, resulted in corresponding
downgrades and ratings actions being taken with respect to the
Companys ratings. Accordingly, we can give no assurance that
any further changes in circumstances for AIG will not impact
us. While the outcome of this investigation is not determinable at
this time, management believes that the ultimate outcome will not
have a material adverse effect on Company operating results, cash
flows or financial position.Pursuant to a cost allocation agreement, the Company purchases administrative, investment
management, accounting, legal, 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 $148,554,000 for the year ended December 31, 2004, $126,531,000 for the year
ended December 31, 2003 and $119,981,000 for the year ended December 31, 2002. The component of
such costs that relate to the production or acquisition of new business during these periods
amounted to $60,183,000, $48,733,000 and $49,004,000 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 majority of the Companys invested assets are managed by an affiliate of the Company. The
investment management fees incurred were $3,712,000, $3,838,000 and $3,408,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.The Company incurred $1,113,000, $500,000 and $790,000 of management fees to an affiliate of the
Company to administer its securities lending program for the years ended December 31, 2004, 2003
and 2002, respectively (see Note 2).In December 2003, the Company purchased an affiliated bond with a carrying value of $37,129,000.
At December 31, 2004, the affiliated bond has a market value of $34,630,000. F - 35




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  13.
    BUSINESS SEGMENTSThe Company conducts its business through two business segments, annuity operations and asset
management operations. Annuity operations consists of the sale and administration of deposit-type
insurance contracts, including fixed and variable annuity contracts, universal life insurance
contracts and GICs. Asset management operations, which includes the managing, distributing and
administering a diversified family of mutual funds, managing certain subaccounts offered within the
Companys variable annuity products and providing professional management of individual, corporate
and pension plan portfolios, is conducted by SAAMCo and its subsidiary and distributor, SACS, and
its subsidiary and servicing administrator, SFS. Following is selected information pertaining to
the Companys business segments. AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)YEAR ENDED DECEMBER 31, 2004:REVENUES:Fee income:Variable
annuity policy fees, net of reinsurance
    
    $
    369,141
    
    
    $
    
    
    
    $
    369,141Asset management fees
    
    
    
    
    
    
    89,569
    
    
    
    89,569Universal
life insurance policy fees, net of reinsurance
    
    
    33,899
    
    
    
    
    
    
    
    33,899Surrender charges
    
    
    26,219
    
    
    
    
    
    
    
    26,219Other fees
    
    
    
    
    
    
    15,753
    
    
    
    15,753Total fee income
    
    
    429,259
    
    
    
    105,322
    
    
    
    534,581Investment income
    
    
    362,631
    
    
    
    963
    
    
    
    363,594Net realized investment gains (losses)
    
    
    (24,100
    )
    
    
    293
    
    
    
    (23,807
    )Total revenues
    
    
    767,790
    
    
    
    106,578
    
    
    
    874,368BENEFITS AND EXPENSES:Interest expense
    
    
    220,668
    
    
    
    2,081
    
    
    
    222,749Amortization of bonus interest
    
    
    10,357
    
    
    
    
    
    
    
    10,357General and administrative expenses
    
    
    93,188
    
    
    
    38,424
    
    
    
    131,612Amortization of deferred acquisition
costs
and other deferred expenses
    
    
    126,142
    
    
    
    31,508
    
    
    
    157,650Annual commissions
    
    
    64,323
    
    
    
    
    
    
    
    64,323Claims on universal life contracts,
net of reinsurance recoveries
    
    
    17,420
    
    
    
    
    
    
    
    17,420Guaranteed benefits, net of
reinsurance recoveries
    
    
    58,756
    
    
    
    
    
    
    
    58,756Total benefits and expenses
    
    
    590,854
    
    
    
    72,013
    
    
    
    662,867Pretax income before cumulative
effect of accounting change
    
    $
    176,936
    
    
    $
    34,565
    
    
    $
    211,501Total assets
    
    $
    31,323,462
    
    
    $
    217,155
    
    
    $
    31,540,617Expenditures for long-lived assets
    
    $
    
    
    
    $
    132
    
    
    $
    132
 F - 36




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  13.
    BUSINESS SEGMENTS (Continued) AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)YEAR ENDED DECEMBER 31, 2003:REVENUES:Fee income:Variable
annuity policy fees, net of reinsurance
    
    $
    281,359
    
    
    $

    
    
    
    $
    281,359Asset management fees
    
    
    
    
    
    
    66,663
    
    
    
    66,663Universal life insurance policy
fees, net of reinsurance
    
    
    35,816
    
    
    
    
    
    
    
    35,816Surrender charges
    
    
    27,733
    
    
    
    
    
    
    
    27,733Other fees
    
    
    
    
    
    
    15,520
    
    
    
    15,520Total fee income
    
    
    344,908
    
    
    
    82,183
    
    
    
    427,091Investment income
    
    
    398,304
    
    
    
    4,619
    
    
    
    402,923Net realized investment losses
    
    
    (30,354
    )
    
    
    
    
    
    
    (30,354
    )Total revenues
    
    
    712,858
    
    
    
    86,802
    
    
    
    799,660BENEFITS AND EXPENSES:Interest expense
    
    
    237,585
    
    
    
    2,628
    
    
    
    240,213Amortization of bonus interest
    
    
    19,776
    
    
    
    
    
    
    
    19,776General and administrative expenses
    
    
    83,013

    
    
    
    36,080
    
    
    
    119,093Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    137,130
    
    
    
    22,976
    
    
    
    160,106Annual commissions
    
    
    55,661
    
    
    
    
    
    
    
    55,661Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    17,766
    
    
    
    
    
    
    
    17,766Guaranteed benefits, net of
reinsurance recoveries
    
    
    63,268
    
    
    
    
    
    
    
    63,268Total benefits and expenses
    
    
    614,199
    
    
    
    61,684
    
    
    
    675,883Pretax income before cumulative
effect of accounting change
    
    $
    98,659
    
    
    $
    25,118
    
    
    $
    123,777Total assets
    
    $
    27,781,457
    
    
    $
    190,270
    
    
    $
    27,971,727Expenditures for long-lived assets
    
    $
    
    
    
    $
    2,977
    
    
    $
    2,977
 F - 37




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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. BUSINESS SEGMENTS (Continued) AssetAnnuity
    
    
    ManagementOperations
    
    
    Operations
    
    
    Total(in thousands)YEAR ENDED DECEMBER 31, 2002:REVENUES:Fee income:Variable
annuity policy fees, net of reinsurance
    
    $
    286,919
    
    
    $
    
    
    
    $
    286,919Asset management fees
    
    
    
    
    
    
    66,423
    
    
    
    66,423Universal
life insurance policy fees, net of reinsurance
    
    
    36,253
    
    
    
    
    
    
    
    36,253Surrender charges
    
    
    32,507
    
    
    
    
    
    
    
    32,507Other fees
    
    
    3,304
    
    
    
    18,596
    
    
    
    21,900Total fee income
    
    
    358,983
    
    
    
    85,019
    
    
    
    444,002Investment income
    
    
    377,556
    
    
    
    9,799
    
    
    
    387,355Net realized investment losses
    
    
    (65,811
    )
    
    
    
    
    
    
    (65,811
    )Total revenues
    
    
    670,728
    
    
    
    94,818
    
    
    
    765,546BENEFITS AND EXPENSES:Interest expense
    
    
    234,261
    
    
    
    3,868
    
    
    
    238,129Amortization of bonus interest
    
    
    16,277
    
    
    
    
    
    
    
    16,277General and administrative expenses
    
    
    79,287
    
    
    
    35,923
    
    
    
    115,210Amortization of deferred
acquisition costs
and other deferred expenses
    
    
    171,583
    
    
    
    50,901
    
    
    
    222,484Annual commissions
    
    
    58,389
    
    
    
    
    
    
    
    58,389Claims on universal life
contracts, net of
reinsurance recoveries
    
    
    15,716
    
    
    
    
    
    
    
    15,716Guaranteed benefits, net of
reinsurance recoveries
    
    
    67,492
    
    
    
    
    
    
    
    67,492Total benefits and expenses
    
    
    643,005
    
    
    
    90,692
    
    
    
    733,697Pretax income before cumulative
effect of accounting change
    
    $
    27,723
    
    
    $
    4,126
    
    
    $
    31,849Total assets
    
    $
    23,538,832
    
    
    $
    214,157
    
    
    $
    23,752,989Expenditures for long-lived assets
    
    $
    
    
    
    $
    7,297
    
    
    $
    7,297
 F - 38