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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 33-5014 FIRST SUNAMERICA LIFE INSURANCE COMPANY Incorporated in New York
    
    06-0992729I.R.S. EmployerIdentification No.
 733 Third Avenue, 4th Floor, New York, New York 10017
Registrants telephone number, including area code: (800) 996-9786 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 IN 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 300 SHARES OF COMMON STOCK, $10,000 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 DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERSITEM 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-10.AEX-31.1EX-31.2EX-32    Table of Contents  
 PART I 
 ITEM 1. BUSINESS GENERAL DESCRIPTION First SunAmerica Life Insurance Company (the Company) was incorporated under the laws of the
State of New York on December 5, 1978. 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 one employee, 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 700 of whom perform services for the Company as well as for certain of its
affiliates. Founded in 1978, the Company is licensed in the States of New York, New Mexico and Nebraska
and issues a portfolio of single-premium fixed and flexible-premium variable annuity contracts.
The Companys fixed annuity products offer investors a broad spectrum of fixed-fund alternatives.
The Companys variable annuity products offer investors a broad spectrum of fund alternatives, with
a choice of investment managers, as well as guaranteed fixed-rate options (Fixed Options). The Company is a life insurance company principally engaged in the business of issuing fixed
and variable annuity contracts for retirement savings. 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
annuity contracts increased from $155 billion to $267 billion. Benefiting from continued strong growth of the retirement services market, industry sales of
tax-deferred savings products have represented, for a number of years, a significantly larger
source of new premiums for the U.S. life insurance industry than have traditional life insurance
products. Recognizing the growth potential of this market, the Company focuses its operations on
the sale of annuity contracts. Substantially all of the Companys revenues are derived from the State of New York. Products
are marketed through financial institutions, full-service securities firms, independent general
insurance agents, as well as affiliated and independent broker-dealers. In total, approximately
10,600 independent sales representatives are licensed to sell the Companys annuity products in
three states. Two financial institutions represented approximately 13% and 11% of deposits in the
year ended December 31, 2004. One financial institution represented approximately 16% and one
independent broker-dealer represented approximately 15% of deposits in the year ended December 31,
2003. One financial institution represented approximately 19% of deposits in the year ended December
31, 2002. No other independent selling organization was responsible for more than 10% of deposits for
any such periods. 1




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For the year ended December 31, 2004, the Companys investment income and net realized
investment losses and fee income by primary product line or service are as follows: INVESTMENT AND FEE INCOME Amount
    
    
    Percent
    
    
    Primary Product or Service(in thousands, except for percentages)Fee income:Variable annuity policy fees
    
    $
    8,903
    
    
    
    4.7
    %
    
    Variable annuity contractsUniversal life insurance policy
fees, net of reinsurance
    
    
    5,354
    
    
    
    2.8
    
    
    Universal life productsPremium on reinsurance contract
    
    
    6,586
    
    
    
    3.5
    
    
    Life productsSurrender charges
    
    
    2,999
    
    
    
    1.6
    
    
    Fixed and variable annuity contractsTotal fee income
    
    
    23,842
    
    
    
    12.6Investment income
    
    
    167,371
    
    
    
    88.8
    
    
    Fixed annuity contracts and Fixed OptionsNet realized investment losses
    
    
    (2,655
    )
    
    
    (1.4
    )
    
    Fixed annuity contracts and Fixed OptionsTotal
    
    $
    188,558
    
    
    
    100.0
    %
 ANNUITY OPERATIONS  GENERAL ACCOUNT Approximately $444.9 million of the Companys deposits were for fixed annuity contracts in
2004 representing 82% of all deposits. The Companys general account obligations are fixed-rate
products, including fixed annuity contracts as well as universal life insurance contracts issued in
prior years and Fixed Options (collectively Fixed-Rate Products). The Company offers
single-premium and flexible-premium deferred annuity contracts that provide interest rate
guarantees of certain periods ranging up to ten years. The Company also offers Fixed Options with
similar guarantees. Although the Companys annuity contracts remain in force an average of seven
to ten years, approximately 93% of the Fixed-Rate Products, 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.
Its fixed annuity products offer many of the same features as conventional certificates of deposit
from financial institutions, giving investors a choice of interest period and yield as well as
additional advantages particularly applicable to retirement planning, such as tax-deferred
accumulation and flexible payout options (including the option of payout over the life of the
annuitant). The average size of a new single-premium fixed annuity contract sold by the Company in
2004 was approximately $41,000. The Company designs its Fixed-Rate Products and conducts its investment operations in order to
closely match the duration 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/or other restrictions in order to
encourage persistency. Approximately 83% of the Companys reserves for Fixed-Rate Products had
incentives, surrender penalties and/or other restrictions at December 31, 2004. ANNUITY OPERATIONS  SEPARATE ACCOUNT The variable annuity products of the Company offer investors a broad spectrum of fund
alternatives, with a choice of investment managers, as well as Fixed Options. The Company earns
fees on the 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. 2




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At December 31, 2004, total variable product liabilities were $805.6 million, of which $488.0
million were held in separate accounts and $317.6 million were the liabilities of the Fixed
Options, which are held in the general account. The Companys variable annuity products
incorporate incentives, surrender charges and/or other restrictions to encourage persistency. At
December 31, 2004, 82% of the Companys variable annuity liabilities held in the 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 $79,000. INVESTMENT OPERATIONS The Company believes a portfolio principally composed of fixed-rate investments that generate
predictable rates of return should back its 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. 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 and its products are governed by federal agencies, including the SEC, the Internal Revenue Service and the self-regulatory organization, the National
Association of Securities Dealers, Inc. (NASD). Federal legislation and administrative policies
in several areas, including financial services regulation, pension regulation and federal taxation,
can significantly and adversely affect the life 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. 3




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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 adopted could have an impact on the business of the Company. COMPETITION The businesses conducted by the Company are highly competitive. The Company competes with
other life insurers, and also competes for customers funds with a variety of investment products
offered by financial services companies, other than life insurance companies, such as banks,
investment advisors, mutual fund companies and other financial institutions. In 2003, net annuity
premiums written among the top 100 companies ranged from approximately $79 million to
approximately $20 billion annually. In 2003, 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 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 733 Third
Avenue, 4th Floor, New York, New York 10017. The Company, through an affiliate, also
leases office space in Los Angeles and Woodland Hills, California. The Company believes that such properties, including the equipment located therein, are
suitable and adequate to meet the requirements of its business. 
 ITEM 3. LEGAL PROCEEDINGS Various lawsuits against the Company have arisen in the ordinary course of business.
Contingent liabilities arising from litigation, income taxes and other matters are not considered
material in relation to the financial position, results of operations of cash flows of the Company. 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 There were no matters submitted to a vote of security holders during the fourth quarter of 2004. 
 PART II 
  ITEM 5.
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable. 
 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company should be read in conjunction with the
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. 4




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Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)RESULTS OF OPERATIONSFee income, net of reinsurance
    
    $
    23,842
    
    
    $
    15,110
    
    
    $
    17,133
    
    
    $
    15,997
    
    
    $
    19,979Investment income
    
    
    167,371
    
    
    
    119,730
    
    
    
    97,327
    
    
    
    100,952
    
    
    
    119,729Net realized investment gains (losses)
    
    
    (2,655
    )
    
    
    2,417
    
    
    
    (10,025
    )
    
    
    (19,266
    )
    
    
    (20,779
    )Total revenues
    
    
    188,558
    
    
    
    137,257
    
    
    
    104,435
    
    
    
    97,683
    
    
    
    118,929Interest expense
    
    
    101,025
    
    
    
    76,707
    
    
    
    58,675
    
    
    
    63,135
    
    
    
    77,460Amortization of bonus interest
    
    
    2,411
    
    
    
    1,038
    
    
    
    248
    
    
    
    38
    
    
    
    33General and administrative expenses
    
    
    7,711
    
    
    
    6,036
    
    
    
    8,112
    
    
    
    4,341
    
    
    
    4,945Amortization of deferred acquisition
costs and other deferred expenses
    
    
    31,772
    
    
    
    19,526
    
    
    
    16,119
    
    
    
    11,591
    
    
    
    19,366Annual commissions
    
    
    1,554
    
    
    
    1,038
    
    
    
    771
    
    
    
    724
    
    
    
    619Commissions on reinsurance contract
    
    
    3,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Claims on universal life insurance
contracts, net of reinsurance
recoveries
    
    
    3,905
    
    
    
    3,098
    
    
    
    2,985
    
    
    
    2,415
    
    
    
    4,897Claims on reinsurance contract
    
    
    2,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Guaranteed benefits
    
    
    1,193
    
    
    
    816
    
    
    
    1,735
    
    
    
    546
    
    
    
    4Total benefits and expenses
    
    
    155,221
    
    
    
    108,259
    
    
    
    88,645
    
    
    
    82,790
    
    
    
    107,324Pretax income before cumulative
effect of accounting change
    
    
    33,337
    
    
    
    28,998
    
    
    
    15,790
    
    
    
    14,893
    
    
    
    11,605Income tax expense
    
    
    7,899
    
    
    
    12,081
    
    
    
    9,032
    
    
    
    6,180
    
    
    
    4,325Income before cumulative effect of
accounting change
    
    
    25,438
    
    
    
    16,917
    
    
    
    6,758
    
    
    
    8,713
    
    
    
    7,280Cumulative effect of accounting
change, net of tax
    
    
    (2,013
    )
    
    
    
    
    
    
    
    
    
    
    (520
    )
    
    
    NET INCOME
    
    $
    23,425
    
    
    $
    16,917
    
    
    $
    6,758
    
    
    $
    8,193
    
    
    $
    7,280
 In 2004, the Company adopted Statement of Position 03-1, Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts, the effect of which was recorded as a cumulative effect of
accounting change. In 2001, the Company adopted Emerging Issue Task Force Issue 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets, the effect of which was recorded as
a cumulative effect of accounting change. The results of operations for 2004, 2003 and 2002 are affected by the agreement with AIG
SunAmerica Asset Management Corp. (See Notes 12 of the Notes to Financial Statements). 5




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December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)FINANCIAL POSITIONInvestments and cash
    
    $
    3,824,390
    
    
    $
    3,167,646
    
    
    $
    1,707,804
    
    
    $
    1,367,698
    
    
    $
    1,486,247Variable annuity assets held in
separate
accounts
    
    
    488,046
    
    
    
    438,224
    
    
    
    399,017
    
    
    
    514,203
    
    
    
    565,547Deferred acquisition costs and other deferred expenses
    
    
    176,868
    
    
    
    177,926
    
    
    
    104,459
    
    
    
    100,182
    
    
    
    124,451Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,947
    
    
    
    7,914Other assets
    
    
    41,519
    
    
    
    30,686
    
    
    
    28,106
    
    
    
    14,573
    
    
    
    30,214TOTAL ASSETS
    
    $
    4,530,823
    
    
    $
    3,814,482
    
    
    $
    2,239,386
    
    
    $
    1,998,603
    
    
    $
    2,214,373Reserves for fixed annuity contracts
    
    $
    2,863,048
    
    
    $
    2,490,145
    
    
    $
    1,290,702
    
    
    $
    1,024,830
    
    
    $
    1,186,996Reserves for universal life insurance
contracts
    
    
    226,133
    
    
    
    232,271
    
    
    
    237,862
    
    
    
    248,161
    
    
    
    249,987Variable annuity liabilities related
to
separate accounts
    
    
    488,046
    
    
    
    438,224
    
    
    
    399,017
    
    
    
    514,203
    
    
    
    565,547Other payables and accrued liabilities
    
    
    551,991
    
    
    
    262,422
    
    
    
    68,373
    
    
    
    17,830
    
    
    
    24,215Deferred income taxes
    
    
    25,092
    
    
    
    41,895
    
    
    
    30,394
    
    
    
    
    
    
    
    Shareholders equity
    
    
    376,513
    
    
    
    349,525
    
    
    
    213,038
    
    
    
    193,579
    
    
    
    187,628TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    4,530,823
    
    
    $
    3,814,482
    
    
    $
    2,239,386
    
    
    $
    1,998,603
    
    
    $
    2,214,373
 
  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 First
SunAmerica Life Insurance 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
life 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 6




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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. The Company has one business segment, annuity operations, which consist of the sale and
administration of deposit-type insurance contracts, such as fixed and variable annuity contracts
and universal life insurance contracts. The Company focuses primarily on the marketing of fixed
annuity contracts. The Companys variable annuity products offer investors a broad spectrum of
fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate options
(Fixed Options). On February 1, 2004, the Company entered into an administrative services agreement with its
affiliate AIG SunAmerica Asset Management Corp. (SAAMCo), whereby SAAMCo pays to the Company a
fee based on a percentage on all assets invested through the Companys variable annuity products in
exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve as
investment options for the Companys variable annuity products. Amounts paid or accrued to the
Company under this agreement totaled $1.5 million in 2004 and are included in variable annuity
policy fees in the statement of income and comprehensive income. A fee of $0.2 million, $1.6
million and $1.8 million in 2004, 2003 and 2002, respectively, was paid under a different agreement
that expired in early 2004. On November 1, 2004 the Company entered a contract to reinsure credit life and health
insurance policies. The Company receives a share of premium for the reinsured policies and will
indemnify the reinsured for a proportionate share of these liabilities while the reinsured retains
the assets and corresponding reserve liabilities. The contract is considered modified coinsurance
and as such the reinsurance claims payable is offset against reinsurance premiums receivable and
included in other assets on the balance sheet. The treaty is for one year with the option to renew
annually and may be terminated by either party with 180 days advance notice. 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 valuation of 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 $13.5 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 bond portfolio with a carrying value of approximately $464.7
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 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. The Company amortizes DAC and other deferred expenses
based on a percentage of expected gross profits (EGPs) over the life of the underlying policies
over the estimated lives of the fund deposits on a straight-line basis. EGPs are computed based on
assumptions related to the underlying policies written, including their anticipated duration, net
spreads earned during the life of the contracts, costs of providing policy guarantees, assumed
future growth rates of variable annuity assets and the level of expenses necessary to maintain the
policies. 7




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##### Table of Contents



The Company adjusts amortization of DAC and other deferred expenses (a DAC unlocking) when
estimates of future gross profits to be realized on its annuity policies are revised. Increases in
future EGPs may result from higher interest spread and/or lower surrender rate assumptions, while
decreases in future EGPs may result from lower interest spread and/or higher surrender rate
assumptions. DAC amortization for the current period is reduced when future EGPs are increased and
amortization is increased when future EGPs are decreased. Approximately 69% of the Companys DAC
balance at December 31, 2004 related to fixed annuity contracts and universal life insurance
contracts and 31% related to variable annuity contracts. 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 best estimates. These
assumptions included, among others, mean equity return and volatility, mortality rates and lapse
rates. The estimation of cash flow and the determination of the assumptions used require judgment,
which can, at times, be subjective. RESULTS OF OPERATIONS NET INCOME totaled $23.4 million in 2004, compared with $16.9 million in 2003 and $6.8 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 $2.0 million, net of tax, which is recognized in
the 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 $33.3 million in 2004,
compared with $29.0 million in 2003 and $15.8 million in 2002. The increase in 2004 compared to
2003 was primarily due to growth in average invested assets from the sales of annuity products and
effective management of interest crediting rates in response to the lower investment yields
available in a declining interest rate environment, partially offset by higher DAC amortization and
net realized investment losses. The increase in 2003 compared to 2002 was primarily due to
decreased net realized investment losses. INCOME TAX EXPENSE totaled $7.9 million in 2004, $12.1 million in 2003 and $9.0 million in
2002, representing effective tax rates of 24%, 42% and 57%, respectively. The tax expense in 2004
included the benefit of $6.6 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 44% in 2004. See Note 11 of the Notes to Financial Statements for a reconciliation of income
tax expense to the federal statutory rate. NET INVESTMENT SPREAD, a non-GAAP measure, represents investment income less interest credited
to fixed-rate products, including fixed annuity contracts as well as universal life insurance
contracts issued in prior years and Fixed Options (collectively Fixed-Rate Products) is a key
measurement used by the Company in evaluating the profitability of its annuity business.
Accordingly, the Company presents an analysis of net investment spread because the Company has
determined this measure to be useful and meaningful. In evaluating its investment yield and net investment spread, the Company calculates average
invested assets using the amortized cost of bonds, notes and redeemable preferred stocks. This
basis does not include unrealized gains and losses, which are reflected in the carrying value
(i.e., fair value) of those investments pursuant to Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. In the calculation of
average invested assets, the Company excludes 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. An analysis of net investment spread and reconciliation to pretax income before cumulative
effect of accounting change is presented in the following table: 8




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##### Table of Contents



Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Investment income
    
    $
    167,371
    
    
    $
    119,730
    
    
    $
    97,327Interest credited to fixed annuity contracts
    
    
    (90,167
    )
    
    
    (65,631
    )
    
    
    (47,186
    )Interest credited to universal life insurance contracts
    
    
    (10,858
    )
    
    
    (11,076
    )
    
    
    (11,489
    )Net investment spread
    
    
    66,346
    
    
    
    43,023
    
    
    
    38,652Net realized investment gains (losses)
    
    
    (2,655
    )
    
    
    2,417
    
    
    
    (10,025
    )Fee income, net of reinsurance
    
    
    23,842
    
    
    
    15,110
    
    
    
    17,133Amortization of bonus interest
    
    
    (2,411
    )
    
    
    (1,038
    )
    
    
    (248
    )General and administrative expenses
    
    
    (7,711
    )
    
    
    (6,036
    )
    
    
    (8,112
    )Amortization of DAC
    
    
    (31,772
    )
    
    
    (19,526
    )
    
    
    (16,119
    )Annual commissions
    
    
    (1,554
    )
    
    
    (1,038
    )
    
    
    (771
    )Commissions on reinsurance contract
    
    
    (3,034
    )
    
    
    
    
    
    
    Claims on UL contracts, net of reinsurance recoveries
    
    
    (3,905
    )
    
    
    (3,098
    )
    
    
    (2,985
    )Claims on reinsurance contract
    
    
    (2,616
    )
    
    
    
    
    
    
    Guaranteed benefits
    
    
    (1,193
    )
    
    
    (816
    )
    
    
    (1,735
    )Pretax income before cumulative effect of accounting
change
    
    $
    33,337
    
    
    $
    28,998
    
    
    $
    15,790
 Net investment spread totaled $66.3 million in 2004, $43.0 million in 2003 and $38.7 million
in 2002. These amounts equal 2.11% on average invested assets (computed on a daily basis) of $3.14
billion in 2004, 2.04% on average invested assets of $2.11 billion in 2003 and 2.68% on average
invested
assets of $1.44 billion in 2002. The increase in the net investment spread rate was
primarily due to the decline in overall rates paid in 2004 compared to 2003, as the Company issued
new fixed annuity contracts at rates below the prior year average rates. The components of net investment spread were as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Net investment spread
    
    $
    66,346
    
    
    $
    43,023
    
    
    $
    38,652Average invested assets
    
    
    3,141,750
    
    
    
    2,112,881
    
    
    
    1,443,812Average interest-bearing liabilities
    
    
    2,964,236
    
    
    
    1,999,701
    
    
    
    1,335,113Yield on average invested assets
    
    
    5.33
    %
    
    
    5.67
    %
    
    
    6.74
    %Rate paid on average interest-bearing liabilities
    
    
    3.41
    
    
    
    3.84
    
    
    
    4.39Difference between yield and interest rate paid
    
    
    1.92
    
    
    
    1.83
    
    
    
    2.35Net investment spread as a percentage of average
invested assets
    
    
    2.11
    %
    
    
    2.04
    %
    
    
    2.68
    %
 Growth in average invested assets resulted primarily from sales of Fixed Options since the
latter half of 2003. Sales of fixed annuity contracts and Fixed
Options totaled $444.9 million in
2004, $1.29 billion in 2003 and $400.0 million in 2002, and are primarily deposits on fixed annuity
contracts. On an annualized basis, these deposits represent 17%, 84% and 31%, respectively, of the
related reserve balances at the beginning of the respective periods. The Companys sales of fixed
annuity contracts have declined throughout 2004 as new competitors entered the bank annuity market.
New competitors often accept low returns to gain market share, but often increase their spreads as
the volume strains their capital and they return to more rational pricing targets. We expect our
market share in New York to increase as these competitors offer rationally priced products. 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- 9




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bearing liabilities by $177.5 million in 2004, compared with $113.2 million in 2003 and $108.7
million in 2002. The difference between the Companys yield on average invested assets and the
rate paid on average interest-bearing liabilities was 1.92% in 2004, 1.83% in 2003 and 2.35% in
2002. Investment income (and the related yields on average invested assets) totaled $167.4 million
(5.33%) in 2004, compared with $119.7 million (5.67%) in 2003 and $97.3 million (6.74%) in 2002.
The decrease in the investment yield in 2004 compared to 2003 primarily reflects the reinvestment
of maturing investments in the historically low prevailing interest rate environment that has
persisted throughout 2003 and 2004. Expenses incurred to manage the investment portfolio amounted
to $1.5 million in 2004, $0.7 million in 2003 and $0.6 million in 2002. These expenses are
included as a reduction of investment income in the statement of income and comprehensive income. Interest expense (and the related rate paid on average interest-bearing liabilities) totaled
$101.0 million (3.41%) in 2004, $76.7 million (3.84%) in 2003 and $58.7 million (4.39%) in 2002.
Interest-bearing liabilities averaged $2.96 billion during 2004, $2.00 billion during 2003 and
$1.34 billion during 2002. The decline in overall rates paid in 2004 compared to 2003 resulted
primarily from the impact of a lower interest rate environment, as the Company issued and renewed
new fixed annuity contracts at rates substantially below the prior year average rates. NET REALIZED INVESTMENT GAINS (LOSSES) totaled $2.7 million of losses in 2004, compared with
$2.4 million of gains in 2003 and $10.0 million of losses in 2002 and include impairment writedowns
of $0.8 million, $3.1 million and $9.5 million, respectively. Thus, net realized losses from sales
and redemptions of investments totaled $1.9 million in 2004, compared with net realized gains of
$5.5 million in 2003 and $0.5 million of losses in 2002. The Company sold or redeemed invested assets, principally bonds and notes, aggregating $630.1
million in 2004, $715.0 million in 2003 and $370.9 million 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 0.06%, 0.26% and 0.04% 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 $0.8 million, $3.1 million and $9.5 million of provisions
principally applied to bonds in 2004, 2003 and 2002, respectively. Impairment writedowns represent
0.02%, 0.15% and 0.66% 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 0.02% to 1.23% and have averaged 0.65%. 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 are generally based on the market value of assets in the separate
accounts supporting variable annuity contracts. Such fees totaled $8.9 million in 2004, $8.1
million in 2003 and $9.0 million in 2002. 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 assets in the separate accounts. Variable annuity
policy fees represent 2.0%, 2.0% and 1.9% of average variable annuity assets in 2004, 2003 and
2002, respectively. Variable annuity assets averaged $449.4 million, $410.1 million and $462.3
million during the respective periods. Variable annuity deposits which include the Fixed Options
totaled $97.3 million, $142.6 million and $101.3 million in 2004, 2003 and 2002, respectively. The
decrease in 2004 is due to lower sales on certain products with features that have been
discontinued. The Company has encountered increased competition in the variable annuity marketplace during
recent years and anticipates that the market will remain highly competitive for the foreseeable
future. Also, from time to time, federal initiatives are proposed that could affect the taxation
of annuities (see Regulation). UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $5.4 million in 2004,
$5.3 million in 2003 and $6.3 million in 2002 and are net of reinsurance premiums of $7.3 million,
$7.1 million and $6.1 million, respectively. Universal life insurance policy fees consist of
mortality charges, up-front 10




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##### Table of Contents



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 July 1, 1999 and does not actively market such
contracts. Such fees represent 2.35%, 2.26% and 2.59% of average reserves for universal life
insurance contracts in the respective periods. The decrease in fees in 2003 resulted primarily
from increased reinsurance premiums ceded. PREMIUMS ON REINSURANCE CONTRACT totaled $6.6 million in 2004 as compared to no premiums in 2003
and 2002. The increase in 2004 was due to the Company entering into a reinsurance contract
effective November 1, 2004. SURRENDER CHARGES on fixed annuity, variable annuity and universal life insurance contracts
totaled $3.0 million in 2004, $1.7 million in 2003 and $1.9 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 $7.7 million in 2004, $6.0 million in 2003 and
$8.1 million in 2002. The increase in 2004 results from administrative expenses related to
significantly larger blocks of fixed 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 totaled
$31.8 million
in 2004, compared with $19.5 million in 2003 and $16.1 million in 2002. The increase in
amortization in 2004 was primarily related to the increase in investment spread from a growing
block of fixed annuity contracts, partially offset by the decrease in amortization related to the
higher net realized investment losses. ANNUAL
COMMISSIONS totaled $1.6 million in 2004, compared with
$1.0 million in 2003 and $0.8 million in 2002. Annual
commissions generally represent renewal commissions to maintain the persistency of certain of the
Companys products. Substantially all of the Companys currently available annuity products allow
for an annual commission payment option in return for a lower immediate commission. COMMISSIONS ON REINSURANCE CONTRACT totaled $3.0 million in 2004, compared to no commissions
in 2003 and 2002. The increase in 2004 was due to the Company entering into a reinsurance contract
effective November 1, 2004 CLAIMS ON UNIVERSAL LIFE INSURANCE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $3.9
million in 2004, compared with $3.1 million in 2003 and $3.0 million in 2002 (net of reinsurance
recoveries of $8.9 million in 2004, $3.6 million in 2003 and $4.2 million in 2002). The change in
such claims resulted principally from changes in mortality experience and the reinsurance
recoveries there on. With respect to its reinsurance agreements, the Company could become liable for all
obligations of the reinsured policies if the reinsurers were to become unable to meet the
obligations assumed under the respective reinsurance agreements. The Company monitors its credit
exposure with respect to these agreements. Due to the high credit ratings and periodic monitoring
of these ratings of the reinsurers, such risks are considered to be minimal. CLAIMS ON REINSURANCE CONTRACT totaled $2.6 million in 2004 as compared to no claims in 2003
and 2002. The increase in 2004 was due to the Company entering into a reinsurance contract
effective November 1, 2004. GUARANTEED BENEFITS on variable annuity contracts totaled $1.2 million in 2004, compared with
$0.8 million in 2003 and $1.7 million in 2002. These guaranteed benefits consist primarily of
guaranteed minimum death benefits. 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 11




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a liability for GMDB (see Note 2 of Notes to Financial Statements) pursuant to adoption of a
new accounting standard, SOP 03-1. Guaranteed minimum account value (GMAV) is a feature the Company began offering on certain
variable annuity products in June of 2004. 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 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. In 2004, variable
annuity deposits with the GMAV option were approximately $16.3 million. CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS EQUITY increased to $376.5 million at December 31, 2004 from $349.5 million at
December 31, 2003, due to $23.4 million of net income and $3.6 million increase in unrealized
gains, net of the effect on taxes and DAC and other deferred expenses. INVESTMENTS AND CASH at December 31, 2004 totaled $3.82 billion, compared with $3.17 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
    
    $
    19,358
    
    
    
    0.5
    %
    
    $
    18,054
    
    
    
    0.6
    %Mortgage-backed securities
    
    
    771,642
    
    
    
    20.2
    
    
    
    587,080
    
    
    
    18.5Securities of public utilities
    
    
    125,369
    
    
    
    3.3
    
    
    
    120,480
    
    
    
    3.8Corporate bonds and notes
    
    
    1,624,383
    
    
    
    42.5
    
    
    
    1,414,062
    
    
    
    44.6Other debt securities
    
    
    430,673
    
    
    
    11.3
    
    
    
    518,136
    
    
    
    16.4Total Bond Portfolio
    
    
    2,971,425
    
    
    
    77.8
    
    
    
    2,657,812
    
    
    
    83.9Mortgage loans
    
    
    276,859
    
    
    
    7.2
    
    
    
    215,521
    
    
    
    6.8Common stocks
    
    
    705
    
    
    
    0.0
    
    
    
    295
    
    
    
    0.0Cash and short-term investments
    
    
    24,858
    
    
    
    0.6
    
    
    
    104,011
    
    
    
    3.3Securities lending collateral
    
    
    517,644
    
    
    
    13.5
    
    
    
    154,756
    
    
    
    4.9Policy loans
    
    
    32,899
    
    
    
    0.9
    
    
    
    35,251
    
    
    
    1.1Total investments and cash
    
    $
    3,824,390
    
    
    
    100.0
    %
    
    $
    3,167,646
    
    
    
    100.0
    %
 The Companys general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company has determined that
all of the Bond Portfolio is available to be sold in response to changes in market interest rates,
changes in relative value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Companys need for liquidity and
other similar factors. THE BOND PORTFOLIO, which constituted 78% of the Companys total investment portfolio at
December 31, 2004, had an aggregate fair value that was $52.1 million greater than its amortized
cost at December 31, 2004, compared with $40.2 million at December 31, 2003. The increase in net
unrealized gains on the Bond Portfolio during 2004 principally reflects the decline in prevailing
interest rates and the corresponding effect on the fair value of the Bond Portfolio at December 31,
2004. 12




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##### Table of Contents



At December 31, 2004, the Bond Portfolio had an aggregate fair value of $2.97 billion and an
aggregate amortized cost of $2.92 billion. At December 31, 2004, the Bond Portfolio included $2.54
billion of bonds rated by Standard & Poors (S&P), Moodys Investors Services (Moodys) or
Fitch (Fitch) and $427.6 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 $2.86 billion of the Bond Portfolio was investment
grade, including $791.0 million of mortgage-backed securities (MBS) and U.S. government/agency
securities. At December 31, 2004, the Bond Portfolio included $108.0 million of bonds that were not
investment grade. These non-investment-grade bonds accounted for approximately 2.4% of the
Companys total assets and approximately 2.8% of its invested assets. Non-investment-grade
securities generally provide higher yields and involve greater risks than investment-grade
securities because their issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. An economic downturn
could produce higher than average issuer defaults on the non-investment-grade securities, which
could cause the Companys investment returns and net income to decline. At December 31, 2004, the
Companys non-investment-grade portfolio consisted of 49 issues with two issuers representing more
than 10% of the total non-investment-grade bond portfolio. These non-investment-grade securities
are comprised of bonds spanning 10 industries with 31%, 19%, 13% and 12% concentrated in
telecommunications, cyclical consumer products, transportation, and financial service industries,
respectively. No other industry concentration constituted more than 10% of these assets. The following summarizes the Companys rated bonds by rating classification as of December 31,
2004. 13




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##### Table of Contents



RATED BONDS BY RATING CLASSIFICATION
(dollars in thousands) Issues not rated by S&P/Moody's/Issues rated by S&P/Moody's/Fitch
    
    Fitch, by NAIC category
    
    TotalPercent ofEstimated
    
    NAIC
    
    
    
    
    
    Estimated
    
    
    
    
    
    Estimated
    
    totalS&P/Moody's/Fitch
    
    Amortized
    
    fair
    
    category
    
    Amortized
    
    fair
    
    Amortized
    
    fair
    
    investedCategory (1)
    
    Cost
    
    value
    
    (2)
    
    Cost
    
    value
    
    Cost
    
    value
    
    assetsAAA+ to A-
(Aaa to A3)
[AAA to A-]
    
    $
    1,816,937
    
    
    $
    1,846,768
    
    
    
    1
    
    
    $
    193,352
    
    
    $
    197,135
    
    
    $
    2,010,289
    
    
    $
    2,043,903
    
    
    
    53.44
    %BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
    
    
    598,568
    
    
    
    612,806
    
    
    
    2
    
    
    
    202,662
    
    
    
    206,765
    
    
    
    801,230
    
    
    
    819,571
    
    
    
    21.43
    %BB+ to BB-
(Bal to Ba3)
[BB+ to BB-]
    
    
    48,192
    
    
    
    49,417
    
    
    
    3
    
    
    
    20,952
    
    
    
    20,806
    
    
    
    69,144
    
    
    
    70,223
    
    
    
    1.84
    %B+ to B-
(B1 to B3)
[B+ to B-]
    
    
    28,638
    
    
    
    27,122
    
    
    
    4
    
    
    
    1,600
    
    
    
    2,024
    
    
    
    30,238
    
    
    
    29,146
    
    
    
    0.76
    %CCC+ to CCC-
(Caal to Caa3)
[CCC+ to CCC-]
    
    
    7,843
    
    
    
    6,756
    
    
    
    5
    
    
    
    -
    
    
    
    -
    
    
    
    7,843
    
    
    
    6,756
    
    
    
    0.18
    %CC to D
(Ca to C)
[CC to D]
    
    
    380
    
    
    
    960
    
    
    
    6
    
    
    
    155
    
    
    
    866
    
    
    
    535
    
    
    
    1,826
    
    
    
    0.05
    %TOTAL RATED
ISSUES
    
    $
    2,500,558
    
    
    $
    2,543,829
    
    
    
    
    
    
    $
    418,721
    
    
    $
    427,596
    
    
    $
    2,919,279
    
    
    $
    2,971,425
 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 $30.7 million of assets that were rated by the Company
pursuant to applicable NAIC rating guidelines. 14




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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 $0.8
million, $3.1 million and $9.5 million in 2004, 2003 and 2002, respectively. No individual
impairment loss, net of DAC and taxes, 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 $2.97 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 $2.13 billion, at amortized cost, of the Bond Portfolio
had a fair value of $2.20 billion resulting in an aggregate unrealized gain of $65.6 million. At
December 31, 2004, approximately $786.3 million, at amortized cost, of the Bond Portfolio had a
fair value of $772.8 million resulting in an aggregate unrealized loss of $13.5 million. One
issuer accounted for 14% of unrealized losses. No other single issuer accounted for more than 10%
of unrealized losses. Approximately 42%, 16%, and 15% of unrealized losses were in the financial
services, transportation, and telecommunications industries, respectively. No other industry
accounted for more than 10% of unrealized losses. 15




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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
    
    $
    29Due after one year through five years
    
    
    279,863Due after five years through ten years
    
    
    245,343Due after ten years
    
    
    261,074Total
    
    $
    786,309
 The aging of the Bond Portfolio in an unrealized loss position at December 31, 2004 is shown
below: (dollars in
    
    
    Less than or Equal to 20%
    
    
    Greater than 20% to 50%
    
    
    Greater than 50%thousands)
    
    
    of Amortized Cost
    
    
    of Amortized Cost
    
    
    of Amortized Cost
    
    
    TotalAmortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    UnrealizedMonths
    
    
    
    
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    Items
    
    
    Cost
    
    
    Loss
    
    
    ItemsInvestment
Grade
Bonds0-6
    
    
    $
    238,308
    
    
    $
    (1,384
    )
    
    
    59
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    238,308
    
    
    $
    (1,384
    )
    
    
    597-12
    
    
    
    397,398
    
    
    
    (5,065
    )
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,398
    
    
    
    (5,065
    )
    
    
    69>12
    
    
    
    84,794
    
    
    
    (2,093
    )
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,794
    
    
    
    (2,093
    )
    
    
    21Total
    
    $
    720,500
    
    
    $
    (8,542
    )
    
    
    149
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    720,500
    
    
    $
    (8,542
    )
    
    
    149Below Investment
Grade Bonds0-6
    
    
    $
    5,067
    
    
    $
    (794
    )
    
    
    3
    
    
    $
    1,106
    
    
    $
    (318
    )
    
    
    1
    
    
    $
    29
    
    
    $
    (29
    )
    
    
    4
    
    
    $
    6,202
    
    
    $
    (1,141
    )
    
    
    87-12
    
    
    
    26,034
    
    
    
    (559
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,034
    
    
    
    (559
    )
    
    
    4>12
    
    
    
    24,858
    
    
    
    (1,208
    )
    
    
    3
    
    
    
    8,715
    
    
    
    (2,046
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,573
    
    
    
    (3,254
    )
    
    
    5Total
    
    $
    55,959
    
    
    $
    (2,561
    )
    
    
    10
    
    
    $
    9,821
    
    
    $
    (2,364
    )
    
    
    3
    
    
    $
    29
    
    
    $
    (29
    )
    
    
    4
    
    
    $
    65,809
    
    
    $
    (4,954
    )
    
    
    17Total Bonds0-6
    
    
    $
    243,375
    
    
    $
    (2,178
    )
    
    
    62
    
    
    $
    1,106
    
    
    $
    (318
    )
    
    
    1
    
    
    $
    29
    
    
    $
    (29
    )
    
    
    4
    
    
    $
    244,510
    
    
    $
    (2,525
    )
    
    
    677-12
    
    
    
    423,432
    
    
    
    (5,624
    )
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,432
    
    
    
    (5,624
    )
    
    
    73>12
    
    
    
    109,652
    
    
    
    (3,301
    )
    
    
    24
    
    
    
    8,715
    
    
    
    (2,046
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,367
    
    
    
    (5,347
    )
    
    
    26Total
    
    $
    776,459
    
    
    $
    (11,103
    )
    
    
    159
    
    
    $
    9,821
    
    
    $
    (2,364
    )
    
    
    3
    
    
    $
    29
    
    
    $
    (29
    )
    
    
    4
    
    
    $
    786,309
    
    
    $
    (13,496
    )
    
    
    166
 In 2004, the pretax realized loss incurred with respect to the sale of fixed-rate
securities in the Bond Portfolio was $4.2 million. The aggregate fair value of securities sold was
$165.0 million, which was approximately 97% 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 15 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 $464.7 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 16




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##### Table of Contents



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
$113.1 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 $60.7
million of privately traded securities and $52.4 million of publicly traded securities. These
Secured Loans are composed of loans to borrowers spanning 8 industries, with 62% of these assets
concentrated in the utilities industry, including one single issuer comprising 13%. No other
industry concentration or single issuer 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 $276.9 million at December 31, 2004 and consisted of 78 commercial
first mortgage loans with an average loan balance of approximately $3.5 million, collateralized by
properties located in 27 states. Approximately 36% of this portfolio was office, 27% was
multifamily residential, 15% was industrial, 15% was retail and 7% was other types. At December
31, 2004, approximately 25% and 12% of this portfolio was secured by properties located in
California and New York, respectively. No more than 10% of this portfolio was secured by
properties located in any other single state. At December 31, 2004, six mortgage loans had an
outstanding balance of $10 million or more, which collectively aggregated approximately 33% of this
portfolio. At December 31, 2004, approximately 24% 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 restructured loans have not been significant in relation to
the total mortgage loan portfolio. At December 31, 2004, approximately 12% of the mortgage loans were seasoned loans underwritten
to the Companys standards and purchased at or near par from other financial institutions. Such
loans generally have higher average interest rates than loans that could be originated today. The
balance of the mortgage loan portfolio has been originated by the Company under strict 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 seasoned nature of the Companys mortgage loan portfolio and its strict
underwriting standards, the Company believes that it has prudently managed the risk attributable to
its mortgage loan portfolio while maintaining attractive yields. POLICY LOANS totaled $32.9 million at December 31, 2004, compared to $35.3 million at December
31, 2003, and primarily represent loans taken against universal life insurance policies. SECURITIES LENDING COLLATERAL totaled $517.6 million at December 31, 2004, compared to $154.8
million at December 31, 2003, and consisted of cash collateral invested in highly rated short-term
securities received in connection with the Companys securities lending program. 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 liabilities for Fixed-Rate
Products should be backed by a portfolio principally composed of fixed-rate investments that
generate predictable rates of return. The Company does not 17




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##### Table of Contents



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 83% 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 and
policy loans. At December 31, 2004, these assets had an aggregate fair value of $3.31 billion with
an option-adjusted duration of 4.7 years. The Companys fixed-rate liabilities include fixed
annuity contracts, Fixed Options and universal life insurance 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 $2.96 billion with an option-adjusted duration of 5.4
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 $1.7 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 holder 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 contract holders to deteriorate. The Company has had the ability, limited by minimum interest rate guarantees, to respond to
the generally declining interest rate environment in the last five years by lowering crediting
rates in response to lower investment returns. See the earlier discussion under Managements
Discussion and Analysis of Financial Condition and Results of Operations for additional
information on the calculation of investment yield and net investment spread used by the Companys
management as a key component in evaluating the profitability of its annuity business. The trends
experienced during 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
    %First SunAmerica Life Insurance Company:Average yield on Bond Portfolio
    
    
    5.33
    
    
    
    5.77
    
    
    
    6.98Rate paid on average interest-bearing liabilities
    
    
    3.41
    
    
    
    3.84
    
    
    
    4.39
 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 in the Results of Operations section. 18




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##### Table of Contents



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 is counterparty risk. The Company believes, however, that the
counterparties to its Dollar Roll Repos 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.
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. 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 $1.7 million of bonds at December 31, 2004, and constituted
approximately 0.04% of total invested assets. At December 31, 2003, defaulted investments totaled
$0.2 million of bonds, which constituted less than 0.01% 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 $2.20 billion of the Bond Portfolio had an aggregate unrealized gain of $65.6
million, while approximately $772.8 million of the Bond Portfolio had an aggregate unrealized loss
of $13.5 million. In addition, the Companys investment portfolio currently provides approximately
$24.3 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 19




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##### Table of Contents



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. 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 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 17 to 19 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
Financial Statements on page F-1 herein. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 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 the 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. 20




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Directors are elected for one year terms at the annual meeting of the
shareholder. Directors not otherwise employed by the Company or its affiliates
in an executive officer capacity are entitled to $1,500 for each board meeting
and each meeting of a committee of the board of directors. Directors in an
executive officer capacity with the Company or its affiliates do not receive
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 First SunAmerica Life
Insurance 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 LastName
    
    Age
    
    Present Position
    
    Position
    
    Five Years **
    
    From - To
    
    Director SinceJay S. Wintrob *
    
    
    48
    
    
    President and Chief Executive
    
    
    2001
    
    
    President, AIGRS
    
    2000-
    
    1989Officer
    
    
    
    
    
    Chief Executive Officer, AIGRS,
    
    2001-AIGSunAmerica Life AssuranceCompany (AIGSLAC) &SunAmerica Life InsuranceCompany (SALIC)Chief Operating Officer, AIGRS
    
    1998-2000Vice Chairman, AIGRS
    
    1995-2000(Joined AIGRS in 1986)Michael J. Akers
    
    
    55
    
    
    Senior Vice President
    
    
    2003
    
    
    Senior Vice President, AIGRS
    
    2002-Chief Actuary, AIGRS
    
    2003-Senior Vice President and Chief
    
    1999-2002Actuary, The Variable AnnuityLife Insurance Company(VALIC)Vice President, American General
    
    1998-1999Corporation (AGC)Bruce R. Abrams *
    
    
    54
    
    
    Senior Vice President
    
    
    2002
    
    
    President and Chief Executive
    
    2004-
    
    2003Officer, VALICDirector,
    
    1998-President and
    
    2001-Chief Executive Officer, AIG
    
    2004-Annuity Insurance Company(AIGA)Executive Vice President and
    
    1997-1998Chief Marketing Officer, AIGAM. Bernard Aidinoff *
    
    
    76
    
    
    Director
    
    
    2002
    
    
    Partner,
    
    1963-1986Sullivan & Cromwell LLP (currently retired)James R. Belardi *
    
    
    48
    
    
    Senior Vice President
    
    
    2002
    
    
    Executive Vice President, AIGRS
    
    1995-
    
    1993President, SALIC
    
    2002-(Joined AIGRS in 1986)Kurt W. Bernlohr
    
    
    43
    
    
    Vice President
    
    
    2002
    
    
    Vice President, Strategic
    
    2004-Marketing, VALICAssociate General Counsel,
    
    2000-2004VALICDirector, Compliance
    
    1998-2000Nationwide Financial Services,Inc.Marion E. Fajen *
    
    
    84
    
    
    Director
    
    
    2002
    
    
    Executive Officer, AIG (Currently retired)
    
    1965-1986
 21




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##### Table of Contents



Year
    
    Other Positions and OtherAssumed
    
    Business Experience Within LastName
    
    Age
    
    Present Position
    
    Position
    
    Five Years **
    
    From - To
    
    Director SincePatrick J. Foley *
    
    
    74
    
    
    Director
    
    
    2002
    
    
    Attorney, AIG (currently retired)
    
    1963-1996Marc H. Gamsin *
    
    
    49
    
    
    Senior Vice President
    
    
    1999
    
    
    Executive Vice President, AIGRS
Senior Vice President, AIGRS
Executive Vice President
SunAmerica Investments, Inc.
(SAII)
    
    2001-
1998-2000
1998-
    
    2000 (outside director 94-96)Cecil
C. Gamwell III *
    
    
    80
    
    
    Director
    
    
    2002
    
    
    Insurance Executive, Various
    
    1947-1989AIG subsidiary life insurance companies (currently retired)N. Scott Gillis *
    
    
    51
    
    
    Senior Vice President and
    
    
    2000
    
    
    Senior Vice President and
    
    2002-
    
    2000Chief Financial Officer
    
    
    2003
    
    
    Chief Financial Officer, AIGRS
    
    2003-Controller, AIGRS
    
    2000-Vice President, AIGRS
    
    1998-2002Senior Vice President and
    
    1994-1999Controller, AIGSLAC and theCompany (Joined AIGRS in 1985)Jana W. Greer *
    
    
    53
    
    
    Senior Vice President
    
    
    1994
    
    
    President, AIGSLAC
    
    2002-
    
    1988Executive Vice President, AIGRS
    
    2001-President, SunAmerica Retirement
    
    1996-Markets, Inc.(Joined AIGRS in 1974)Jack R. Harnes *
    
    
    82
    
    
    Director
    
    
    2002
    
    
    Medical Doctor, AIG (currently retired)
    
    1969-1990David L. Herzog*
    
    
    45
    
    
    Director
    
    
    2003
    
    
    Vice President, Life Insurance,
    
    2003-
    
    2004AIGChief Operating Officer & ChiefFinancial Officer,AGC
    
    2000-2003Vice President, General American
    
    1991-2000Life, GenAmerica HoldingJohn
I. Howell *
    
    
    88
    
    
    Director
    
    
    2002
    
    
    J. Henry Schroder Bank & Trust
    
    1948-1978Company (currently retired)Christine A. Nixon *
    
    
    40
    
    
    Senior Vice President,
    
    
    2003
    
    
    Vice President,
    
    2000-
    
    2000General Counsel &
    
    
    
    
    
    Secretary and Deputy Chief Legal
    
    2002-Secretary

    
    
    
    
    
    Counsel, AIGRSSenior Vice President, General
    
    2003-Counsel and Secretary, SALIC &AIGSALACAssociate General Counsel,
    
    1997-2000AIGRS(Joined AIGRS in 1993)Gregory M Outcalt
    
    
    42
    
    
    Senior Vice President
    
    
    2000
    
    
    Senior Vice President, SALIC and
    
    2000-AIGSALACVice President, AIGSLAC and
    
    1993-2000SALICVice President, SAII(Joined AIGRS in 1986)
    
    2002-
 22




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##### Table of Contents



Year
    
    Other Positions and OtherAssumed
    
    Business Experience Within LastName
    
    Age
    
    Present Position
    
    Position
    
    Five Years **
    
    From - To
    
    Director SinceErnest T. Patrikis*
    
    
    61
    
    
    Director
    
    
    2002
    
    
    Senior Vice President and General
    
    1999-
    
    2003Counsel, AIGStewart Polakov
    
    
    45
    
    
    Senior Vice President and
    
    
    2003
    
    
    Senior Vice President and
    
    2003-Controller
    
    
    
    
    
    Controller, AIGSLAC and SALICSenior Vice President, AIG
    
    2003-SunAmerica FinancialVice President, AIGSLAC and
    
    2000-2003FSAVice President, AIG SunAmerica
    
    1997-2003Financial(Joined AIGRS in 1991)Michelle H. Powers
    
    
    34
    
    
    Vice President
    
    
    2002
    
    
    Vice President, AIGA
    
    1996-Edwin R. Raquel
    
    
    47
    
    
    Senior Vice President and
    
    
    1995
    
    
    Senior Vice President and Chief
    
    1995-Chief Actuary
    
    
    
    
    
    Actuary, AIGSLAC and SALIC(Joined AIGRS in 1990)Malary L. Reznik
    
    
    36
    
    
    Vice President
    
    
    2005
    
    
    Associate General Counsel,
    
    1998-AIGRSVice President
    
    2005-Stephen J. Stone
    
    
    46
    
    
    Vice President
    
    
    2005
    
    
    Vice President
    
    2005-Marketing, Risk Management,
    
    2004-AIGRSSr. Portfolio Manager, Allstate
    
    1989-2004Insurance CompanyEdward T. Texeria
    
    
    40
    
    
    Vice President
    
    
    2003
    
    
    Vice President, AIGSLAC and
    
    2003-SALICVice President, AIG SunAmerica
    
    2003-FinancialAssistant Controller, AIGRS
    
    2003-Assistant Controller, AIGSLAC
    
    2000-2003and SALICSr. Manager, Assurance and
    
    1994-2000Advisory Business Services, Ernst& Young LLP
   *
    
    Serves as a director The Company does have an audit committee as required under New York state regulations applicable
to insurance companies. The committee does not include a designated financial expert. The
Company relies on the Audit Committee of the Board of Directors of AIG for this expertise. 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 23




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##### Table of Contents



(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 and its
affiliates. Allocations have been made to the Company based upon each
individuals time devoted to his or her duties to the Company. 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 for the years ended December
31, 2004, 2003 and 2002. The four other highly compensated executive officers
each had allocable compensation of less than $100,000. SUMMARY COMPENSATION TABLE Long TermCompensationSecurities
    
    
    
    
    
    
    
    
    
    
    SICO LTIPAnnual Compensation
    
    
    Underlying
    
    
    LTIP
    
    
    All Other
    
    
    AwardsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus (1)
    
    
    Other Annual Compensation
    
    
    (#)(2)
    
    
    Payouts (3)
    
    
    Compensation (4)
    
    
    (5)Jay S. Wintrob
    
    
    2004
    
    
    $
    13,000
    
    
    $
    16,000
    
    
    $
    3,320
    
    
    
    1,000
    
    
    $
    29,927
    
    
    $
    773
    
    
    $
    52,536President and Chief
Executive
    
    
    2003
    
    
    
    19,875
    
    
    
    16,500
    
    
    
    4,230
    
    
    
    2,400
    
    
    
    42,315
    
    
    
    702
    
    
    
    Officer
    
    
    2002
    
    
    
    6,450
    
    
    
    4,400
    
    
    
    1,160
    
    
    
    400
    
    
    
    14,694
    
    
    
    50,089
    
    
    
    18,512
  (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 2000-2001
Five-Year Deferred Bonus Plan. Awards were granted under this plan in
2000 and 2001. 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 amount shown for Mr.
Wintrob includes an allocated retention bonus awarded in conjunction
with the acquisition of SunAmerica Inc. by AIG consumated 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). 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 individual named in the Summary Compensation Table
and the four additional most highly compensated executive officers. OPTION GRANTS IN 2004 Percentage ofNumber of
    
    
    Total Options
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value* atSecurities
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
    Assumed Annual Rates ofDate
    
    
    Underlying
    
    
    AIG Employees
    
    
    Price
    
    
    Expiration
    
    
Stock Appreciation for Option TermName
    
    of Grant
    
    
    Options (1)
    
    
    During 2004 (2)
    
    
    Per Share
    
    
    Date
    
    
    5 Percent (3)
    
    
    10 Percent (4)Jay S. Wintrob
    
    
    12/16/2004
    
    
    
    1,000
    
    
    
    0.03
    %
    
    $
    64.47
    
    
    
    12/16/14
    
    
    $
    40,540
    
    
    $
    102,750Jana W. Greer
    
    
    12/16/2004
    
    
    
    138
    
    
    
    0.00
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    5,595
    
    
    
    14,180N. Scott Gillis
    
    
    12/16/2004
    
    
    
    726
    
    
    
    0.02
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    29,432
    
    
    
    74,597Christine A. Nixon
    
    
    12/16/2004
    
    
    
    931
    
    
    
    0.03
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    37,743
    
    
    
    95,660James R. Belardi
    
    
    12/16/2004
    
    
    
    184
    
    
    
    0.01
    %
    
    
    64.47
    
    
    
    12/16/14
    
    
    
    7,459
    
    
    
    18,906
   *
    
    Options would have no realizable value if there were no appreciation
or if there were depreciation 24




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##### Table of Contents



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 four additional highly
compensated executive officers and the allocable unexercised options to purchase AIG
common stock held by such individuals at December 31, 2004 based on the
allocation described above. 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
    
    
    3,246
    
    
    $
    210,470
    
    
    
    14,637
    
    
    
    3,275
    
    
    $
    688,358
    
    
    $
    15,182Jana W. Greer
    
    
    1,082
    
    
    
    67,667
    
    
    
    5,293
    
    
    
    1,258
    
    
    
    236,031
    
    
    
    1,790N. Scott Gillis
    
    
    466
    
    
    
    20,765
    
    
    
    4,958
    
    
    
    3,641
    
    
    
    112,147
    
    
    
    12,406Christine A. Nixon
    
    
    1,645
    
    
    
    94,634
    
    
    
    6,016
    
    
    
    4,339
    
    
    
    175,057
    
    
    
    16,061James R. Belardi
    
    
    2,164
    
    
    
    137,910
    
    
    
    12,146
    
    
    
    2,787
    
    
    
    536,346
    
    
    
    5,089
   (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 Long-Term Incentive Plan which were granted
during 2002 (with respect to the 2003-02004 period) to the individual named in
the Summary Compensation Table and the four additional highly compensated
executive officers. SICO LONG-TERM INCENTIVE PLANS (1) Name
    
    Number of Units
    
    Unit Award Period
    
    Estimated Future PayoutsJay S. Wintrob
    
    325
    
    Two years
    

5,200
sharesJana W. Greer
    
    882
    
    Two years
    
    10,584 sharesN. Scott Gillis
    
    216
    
    Two years
    
    2,592 sharesChristine A. Nixon
    
    123
    
    Two years
    
    984 sharesJames R. Belardi
    
    585
    
    Two years
    

7,020
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 25




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##### Table of Contents



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. 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
has also approved a Supplemental Executive Retirement Plan
(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
 26




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##### Table of Contents



AverageFinal Compensation
    
    
    10 Years
    
    
    15 Years
    
    
    20 Years
    
    
    25 Years
    
    
    30 Years
    
    
    35 Years
    
    
    40 Years$
    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
 Each
of the individuals named in the Summary Compensation Table and the four
additional highly compensated executive officers each 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  $13,000; Ms. Greer  $6,728; Mr. Gillis  $28,463;
Ms. Nixon  $42,750; Mr. Belardi  $13,000. 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)
    
    
    2,087,506Bruce R. Abrams (4)
    
    
    122,773M. Bernard Aidinoff
    
    
    70,162James R. Belardi
    
    
    861,222Marion E. Fajen
    
    
    41,776Patrick J. Foley
    
    
    33,899Marc H. Gamsin
    
    
    140,616Cecil C. Gamwell III
    
    
    48,946N. Scott Gillis
    
    
    47,439Jana W. Greer
    
    
    304,877Jack R. Harnes
    
    
    8,200David L. Herzog (4)
    
    
    75,540John I. Howell
    
    
    182,302Christine A. Nixon
    
    
    33,003Ernest T. Patrikis (4)
    
    
    64,980All Directors and Executive Officers
    
    
    4,123,241as a Group
   (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; and Ms. Greer -  39, 105
shares with co-trustee. 27




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##### Table of Contents



(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. Abrams  114,259;
Mr. Aidinoff  34,093; Mr. Belardi  305,397;
Mr.  Gamsin  140,216; Mr.
Gillis  46,575; Ms. Greer  265,772; Mr. Herzog
 69,201; Mr. Howell  50; Ms. Nixon  32,790;
Mr. Patrikis  64,187; and all directors and executive officers as a
group  1,814,410.(4)
    
    Each of Mr. Wintrob, Mr. Abrams, Mr. Herzog and Mr. Patrikis hold
equity securities of C.V. Starr & Co., Inc. as follows: Mr. Wintrob  750 shares of
Common Stock Class B and 3,750 shares of various series of Preferred
Stock; Mr. Abrams  125 shares of Common Stock. Mr. Herzog -
125 shares of Common Stock Class B and 250 shares of Preferred
Stock; and Mr. Patrikis  125 shares of Common Stock Class B and 500
shares of Preferred Stock.(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; Mr. Aidinoff  2,364 shares held by his spouse;
and Mr. Foley  3,750 shares held by his spouse. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Beginning in
2004, the company is 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s products may be sold by nine affiliated companies:
SunAmerica Securities, Inc.; Advantage Capital Corporation; Financial Service
Corporation; Sentra Securities Corporation; Spelman & Co. Inc.; Royal Alliance
Associates, Inc.; VALIC Financial Advisors Inc.; American General Equity
Services Corporation; and American General Securities Incorporated. Commissions
paid to these broker-dealers totaled $996,000 in 2004. 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 $7,925,000 in 2004. AIG Annuity Insurance Company, an affiliate, is responsible for the
administration of the Companys fixed annuity contracts and is reimbursed for
the cost of administration. Costs charged to the Company to administer these
policies were approximately $1,138,000 in 2004. Additionally, costs charged to
the Company for marketing such policies amounted to $1,605,000 in 2004. The majority of the Companys invested assets are managed by an affiliate
of the Company. The investment management fees incurred were $2,223,000 in 2004.
Additionally the Company incurred $629,000 of management fees to an affiliate of
the Company to administer its securities lending program in 2004. On February 1, 2004, the Company entered into an administrative services
agreement with its affiliate AIG SunAmerica Asset Management Corp. (SAAMCo),
whereby SAAMCo will pay to the Company a fee based on a percentage on all assets
invested through the Companys variable annuity products in exchange for
services performed. SAAMCo is the investment advisor for certain trusts that
serve as investment options for the Companys variable annuity products. Amounts
earned by the Company under this agreement totaled $1,537,000 in 2004. 28




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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.
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 $272,000 and $229,000
were paid to PricewaterhouseCoopers LLP for professional services for the audits of our
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. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K EXHIBITS ExhibitNo
    
    Description2(a)
    
    Purchase and Sale Agreement, dated as of July 15, 1998, by and among the Company,
SunAmerica Inc. (SAI), Anchor National Life Insurance Company and MBL Life Assurance
Corporation, is incorporated herein by reference to Exhibit 2(e) to SAIs 1998 Annual
Report on Form 10-K, filed December 21, 1998.3(a)
    
    Agreement and Plan of Merger and Amended and Restated Certificate of Incorporation are
incorporated herein by reference to Exhibit 3(a) of the Companys 1997 Annual Report on
Form 10-K, filed September 22, 1997.3(b)
    
    Certificate of Amendment of the Amended and Restated Charter, dated May 30, 2003, filed
with the State of New York Department of Insurance, effective as of June 13, 2003, is
incorporated herein by reference to Exhibit 3(a) to the Companys quarterly report on Form
10-Q for quarter ended June 30, 2003, filed August 14, 2003.3(c)
    
    Bylaws, as amended January 1, 1996, are incorporated herein by reference to Exhibit 3(b)
of the Companys annual report on Form 10-Q for the quarter ended March 31, 1996, dated
May 14, 1996.3(d)
    
    Bylaws, as amended May 9, 2003, are incorporated herein by reference to Exhibit 3(b) to
the Companys quarterly report on Form 10-Q for quarter ended June 30, 2003, filed August
14, 2003.4(a)
    
    Agreement and Plan of Merger and Amended and Restated Certificate of Incorporation,
filed with the State of New York, Insurance Department, effective as of October 31, 1997.
See Exhibit 3(a).4(b)
    
    Certificate of Amendment of the Amended and Restated Charter, dated May 30, 2003, filed
with the State of New York Department of Insurance, effective as of June 13, 2003. See
Exhibit 3(b).4(c)
    
    Bylaws, as amended May 9, 2003. See Exhibit 3(d).10(a)
    
    Administrative Services Agreement, dated February 1, 2004, between the Company and AIG SunAmerica Asset Management Corp.31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    Section 1350 Certifications
 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the index set forth on page F-1 of this report. 29




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##### Table of Contents



REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the three months ended December 31, 2004. 
 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. FIRST SUNAMERICA LIFE INSURANCE COMPANYBy/s/ N. SCOTT GILLISN. Scott GillisSenior Vice President,Chief Financial Officerand Director
 April 15, 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

Jay S. Wintrob
    
    Chief Executive Officer
and Director (Principal
Executive Officer)
    
    April 15, 2005/s/ N. SCOTT GILLIS

N. Scott Gillis
    
    Senior Vice President,
Chief Financial Officer
and Director (Principal
Financial Officer)
    
    April 15, 2005/s/ STEWART POLAKOV

Stewart Polakov
    
    Senior Vice President and
Controller (Principal
Accounting Officer)
    
    April 15, 2005/s/ JAMES R. BELARDI

James R. Belardi
    
    Senior Vice President
and Director
    
    April 15, 2005/s/ MARC H. GAMSIN

Marc H. Gamsin
    
    Senior Vice President
and Director
    
    April 15, 2005/s/ JANA W. GREER

Jana W. Greer
    
    President and Director
    
    April 15, 2005/s/ DAVID L. HERZOG

David L. Herzog
    
    Director
    
    April 15, 2005/s/ ERNEST T. PATRIKIS

Ernest T. Patrikis
    
    Director
    
    April 15, 2005/s/ M. BERNARD AIDINOFF

M. Bernard Aidinoff
    
    Director
    
    April 15, 2005/s/ EDWIN R. RAQUEL

Edwin R. Raquel
    
    Senior Vice President
and Chief Actuary
    
    April 15, 2005
 30




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY INDEX TO FINANCIAL STATEMENTS PageNumber(s)Report of Independent Registered Public Accounting Firm
    
    F-2Balance Sheet - December 31, 2004 and December 31, 2003
    
    F-3Statement of Income and Comprehensive Income - Years Ended
December 31, 2004, December 31, 2003, and
December 31, 2002
    
    F-4 to F-5Statement of Cash Flows - Years Ended December 31, 2004,
December 31, 2003, and December 31, 2002
    
    F-6 to F-7Notes to Financial Statements
    
    F-8 to F-25
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company: In our opinion, the accompanying balance sheet and the related statements of income and
comprehensive income and of cash flows, in all material respects, the financial position of First
SunAmerica Life Insurance Company (the Company), an indirect wholly owned subsidiary of
American International Group, Inc., at December 31, 2004 and 2003, and the results of its
operations and its 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 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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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET December 31,
    
    
    December 31,2004
    
    
    2003(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    24,858
    
    
    $
    104,011Bonds, notes and redeemable preferred stocks available
for sale, at fair value (amortized cost: December 31,
2004, $2,919,279;
December 31, 2003, $2,617,647)
    
    
    2,971,425
    
    
    
    2,657,812Mortgage loans
    
    
    276,859
    
    
    
    215,521Policy loans
    
    
    32,899
    
    
    
    35,251Common stocks available for sale, at fair value
(cost: December 31,
2004, $700; December 31, 2003, $291)
    
    
    705
    
    
    
    295Securities lending collateral
    
    
    517,644
    
    
    
    154,756Total investments and cash
    
    
    3,824,390
    
    
    
    3,167,646Variable annuity assets held in separate accounts
    
    
    488,046
    
    
    
    438,224Accrued investment income
    
    
    32,486
    
    
    
    27,577Deferred acquisition costs
    
    
    157,729
    
    
    
    161,828Other deferred expenses
    
    
    19,139
    
    
    
    16,098Income taxes currently receivable from Parent
    
    
    
    
    
    
    1,360Other assets
    
    
    9,033
    
    
    
    1,749TOTAL ASSETS
    
    $
    4,530,823
    
    
    $
    3,814,482LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity contracts
    
    $
    2,863,048
    
    
    $
    2,490,145Reserves for universal life insurance contracts
    
    
    226,133
    
    
    
    232,271Income taxes currently payable to Parent
    
    
    2,540
    
    
    
    Securities lending payable
    
    
    517,644
    
    
    
    154,756Payable to brokers
    
    
    
    
    
    
    40,852Other liabilities
    
    
    31,807
    
    
    
    66,814Total reserves, payables and accrued liabilities
    
    
    3,641,172
    
    
    
    2,984,838Variable annuity liabilities related to separate
accounts
    
    
    488,046
    
    
    
    438,224Deferred income taxes
    
    
    25,092
    
    
    
    41,895Total liabilities
    
    
    4,154,310
    
    
    
    3,464,957Shareholders equity:Common stock
    
    
    3,000
    
    
    
    3,000Additional paid-in capital
    
    
    259,428
    
    
    
    259,428Retained earnings
    
    
    92,082
    
    
    
    68,657Accumulated other comprehensive income
    
    
    22,003
    
    
    
    18,440Total shareholders equity
    
    
    376,513
    
    
    
    349,525TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    4,530,823
    
    
    $
    3,814,482
 See accompanying notes to financial statements. F-3




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)REVENUESFee income:Variable annuity policy fees
    
    $
    8,903
    
    
    $
    8,077
    
    
    $
    9,003Universal life insurance policy fees,
net of reinsurance
    
    
    5,354
    
    
    
    5,289
    
    
    
    6,276Premiums on reinsurance contract
    
    
    6,586
    
    
    
    
    
    
    
    Surrender charges
    
    
    2,999
    
    
    
    1,744
    
    
    
    1,854Total fee income
    
    
    23,842
    
    
    
    15,110
    
    
    
    17,133Investment income
    
    
    167,371
    
    
    
    119,730
    
    
    
    97,327Net realized investment gains (losses)
    
    
    (2,655
    )
    
    
    2,417
    
    
    
    (10,025
    )Total revenues
    
    
    188,558
    
    
    
    137,257
    
    
    
    104,435BENEFITS AND EXPENSESInterest expense:Fixed annuity contracts
    
    
    90,167
    
    
    
    65,631
    
    
    
    47,186Universal life insurance contracts
    
    
    10,858
    
    
    
    11,076
    
    
    
    11,489Total interest expense
    
    
    101,025
    
    
    
    76,707
    
    
    
    58,675Amortization of bonus interest
    
    
    2,411
    
    
    
    1,038
    
    
    
    248General and administrative expenses
    
    
    7,711
    
    
    
    6,036
    
    
    
    8,112Amortization of deferred acquisition costs
    
    
    31,772
    
    
    
    19,526
    
    
    
    16,119Annual commissions
    
    
    1,554
    
    
    
    1,038
    
    
    
    771Commissions on reinsurance contract
    
    
    3,034
    
    
    
    
    
    
    
    Claims on universal life insurance contracts,
net of reinsurance recoveries
    
    
    3,905
    
    
    
    3,098
    
    
    
    2,985Claims on reinsurance contract
    
    
    2,616
    
    
    
    
    
    
    
    Guaranteed benefits
    
    
    1,193
    
    
    
    816
    
    
    
    1,735Total benefits and expenses
    
    
    155,221
    
    
    
    108,259
    
    
    
    88,645PRETAX INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    33,337
    
    
    
    28,998
    
    
    
    15,790Income tax expense
    
    
    7,899
    
    
    
    12,081
    
    
    
    9,032INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    25,438
    
    
    
    16,917
    
    
    
    6,758Cumulative effect of accounting change,
net of tax
    
    
    (2,013
    )
    
    
    
    
    
    
    NET INCOME
    
    $
    23,425
    
    
    $
    16,917
    
    
    $
    6,758
 See accompanying notes to financial statements F-4




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued) Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)OTHER COMPREHENSIVE INCOME,
NET OF TAX:Net unrealized gains on debt and equity
securities available for sale identified in the current
period less related amortization of deferred
acquisition costs and other deferred expenses
    
    $
    4,118
    
    
    $
    8,750
    
    
    $
    16,123Less reclassification adjustment for net realized (gains)
losses included in net income
    
    
    1,364
    
    
    
    (1,719
    )
    
    
    3,417Income tax expense
    
    
    (1,919
    )
    
    
    (2,461
    )
    
    
    (6,839
    )OTHER COMPREHENSIVE INCOME
    
    
    3,563
    
    
    
    4,570
    
    
    
    12,701COMPREHENSIVE INCOME
    
    $
    26,988
    
    
    $
    21,487
    
    
    $
    19,459
 See accompanying notes to financial statement F-5




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    23,425
    
    
    $
    16,917
    
    
    $
    6,758Adjustments to reconcile net income to net cash provided by
operating activities:Cumulative effect of accounting change, net of tax
    
    
    2,013
    
    
    
    
    
    
    
    Interest credited to:Fixed annuity contracts
    
    
    90,167
    
    
    
    65,631
    
    
    
    47,186Universal life insurance contracts
    
    
    10,858
    
    
    
    11,076
    
    
    
    11,489Net realized investment (gains) losses
    
    
    2,655
    
    
    
    (2,417
    )
    
    
    10,025Amortization of net premiums/(accretion of net discounts) on
investments
    
    
    5,730
    
    
    
    (2,493
    )
    
    
    (1,241
    )Amortization of deferred acquisition costs and other deferred
expenses
    
    
    34,183
    
    
    
    20,564
    
    
    
    16,367Acquisition costs deferred
    
    
    (35,395
    )
    
    
    (79,439
    )
    
    
    (26,952
    )Other expenses deferred
    
    
    (6,037
    )
    
    
    (13,192
    )
    
    
    (3,393
    )Provision for deferred income taxes
    
    
    (17,639
    )
    
    
    9,040
    
    
    
    25,503Change in:Accrued investment income
    
    
    (4,909
    )
    
    
    (11,728
    )
    
    
    (3,537
    )Income taxes currently receivable from / payable to Parent
    
    
    3,900
    
    
    
    8,471
    
    
    
    (13,550
    )Other assets
    
    
    (7,284
    )
    
    
    (348
    )
    
    
    860Other liabilities
    
    
    (8,200
    )
    
    
    16,035
    
    
    
    3,788Other, net
    
    
    3,754
    
    
    
    3,922
    
    
    
    (350
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    97,221
    
    
    
    42,039
    
    
    
    72,953CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (952,300
    )
    
    
    (1,883,889
    )
    
    
    (604,280
    )Mortgage loans
    
    
    (82,533
    )
    
    
    (53,070
    )
    
    
    (45,944
    )Common stock
    
    
    
    
    
    
    
    
    
    
    (845
    )Other investments, excluding short-term investments
    
    
    
    
    
    
    (771
    )
    
    
    (417
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    388,143
    
    
    
    399,240
    
    
    
    219,856Other investments, excluding short-term investments
    
    
    112
    
    
    
    1,522
    
    
    
    49Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    217,009
    
    
    
    284,025
    
    
    
    121,967Mortgage loans
    
    
    21,413
    
    
    
    30,846
    
    
    
    25,833Other investments, excluding short-term investments
    
    
    1,513
    
    
    
    1,572
    
    
    
    1,709NET CASH USED IN INVESTING ACTIVITIES
    
    $
    (406,643
    )
    
    $
    (1,220,525
    )
    
    $
    (282,072
    )
 See accompanying notes to financial statements F-6




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued) Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity contracts
    
    $
    444,942
    
    
    $
    1,278,022
    
    
    $
    390,423Universal life insurance contracts
    
    
    9,419
    
    
    
    9,436
    
    
    
    9,712Net exchanges to (from) the fixed accounts of
variable annuity contracts
    
    
    (15,532
    )
    
    
    427
    
    
    
    23,546Withdrawal payments on:Fixed annuity contracts
    
    
    (151,329
    )
    
    
    (114,000
    )
    
    
    (137,007
    )Universal life insurance contracts
    
    
    (8,261
    )
    
    
    (7,522
    )
    
    
    (10,740
    )Claims and annuity payments, net of reinsurance, on:Fixed annuity contracts
    
    
    (31,615
    )
    
    
    (24,551
    )
    
    
    (37,837
    )Universal life insurance contracts
    
    
    (17,355
    )
    
    
    (12,270
    )
    
    
    (20,005
    )Capital contributions
    
    
    
    
    
    
    115,000
    
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    230,269
    
    
    
    1,244,542
    
    
    
    218,092NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS
    
    
    (79,153
    )
    
    
    66,056
    
    
    
    8,973CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD
    
    
    104,011
    
    
    
    37,955
    
    
    
    28,982CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD
    
    $
    24,858
    
    
    $
    104,011
    
    
    $
    37,955SUPPLEMENTAL CASH FLOW INFORMATION:Income taxes paid to Parent
    
    $
    (21,639
    )
    
    $
    (5,430
    )
    
    $
    (2,922
    )
 See accompanying notes to financial statements F-7




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS  1.
    BASIS OF PRESENTATIONFirst SunAmerica Life Insurance Company (the Company) is a direct wholly owned subsidiary of
SunAmerica Life Insurance Company (the Parent), which is a wholly owned subsidiary of AIG
Retirement Services, Inc. (AIGRS)(formerly AIG SunAmerica Inc.), a wholly owned subsidiary of
American International Group, Inc. (AIG). AIG is a holding company, which through its
subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial
services, and retirement services and asset management. The Company is a New York-domiciled life
insurance company principally engaged in the business of writing fixed and variable annuity
contracts for retirement savings in the State of New York.Substantially all of the Companys revenues are derived from the State of New York. Products are
marketed through affiliated and independent broker-dealers, full-service securities firms and
financial institutions. Two financial institutions represented
approximately 13% and 11% of deposits
in the year ended December 31, 2004. One financial institution represented approximately 16% and
one independent broker-dealer represented approximately 15% of
deposits in the year ended December 31,
2003. One financial institution represented approximately 19% of deposits in the year ended December
31, 2002. No other independent selling organization was responsible for more than 10% of deposits for
any such periods.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.2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBASIS OF PRESENTATION: The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles 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 amounts 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 and redeemable
preferred stocks and common stocks are reduced to estimated net fair value when declines in value
are considered to be other than temporary. Estimates of net fair value are subjective and actual
realization will be dependent upon future events. F-8




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses.
Policy loans are carried at unpaid balances.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
$507,000,000 and $151,000,000 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 balance sheet as of December 31, 2004 and 2003, respectively. The affiliated lending agent
receives primarily cash collateral in an amount in excess of the market value of the securities
loaned. The Company 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 statement of income and comprehensive income.Realized gains and losses on the sale of investments are recognized in income at the date of sale
and are determined by using the specific cost identification method. Premiums and discounts on
investments are amortized to investment income by using the interest method over the contractual
lives of the investments.The Company regularly reviews its investments for possible impairment based on criteria including
economic conditions, market prices, past experience and other issuer-specific developments among
other factors. If there is a decline in a securitys net realizable value, a determination is made
as to whether that decline is temporary or other than temporary. If it is believed that a
decline in the value of a particular investment is temporary, the decline is recorded as an
unrealized loss in accumulated other comprehensive income. If it is believed that the decline is
other than temporary, the Company writes down the carrying value of the investment and records a
realized loss in the statement of income and comprehensive income.
Impairment writedowns totaled $ 759,000, $ 3,139,000 and $ 9,515,00
in the years ending December 31, 2004, 2003 and 2002.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 policies. 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 annuity contracts, 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 F-9




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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 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 expense.OTHER DEFERRED EXPENSES: The annuity operations currently offer enhanced crediting rates or bonus
payments to contract holders on certain of its products. Such amounts are deferred and amortized
over the life of the policy using the same methodology and assumptions used to amortize DAC. The
Company previously deferred these expenses as part of DAC and reported the amortization of such
amounts as part of DAC amortization. Upon implementation of 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 $16,098,000 of these
expenses from DAC to other deferred expenses, which is reported on the balance sheet. The
prior period balance sheet and statements of income and comprehensive
income presentation has been reclassified to conform to the new presentation. See Recently Issued
Accounting Standards below.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 statement
of income and comprehensive income.RESERVES FOR FIXED ANNUITY AND UNIVERSAL LIFE INSURANCE CONTRACTS: Reserves for fixed annuity and
universal life insurance 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
statement of income and comprehensive income, as they are recorded directly to contract holder
liabilities upon receipt.RESERVE FOR GUARANTEED BENEFITS: Reserve for guaranteed minimum death benefits (GMDB) is
accounted for in accordance with SOP 03-1 and is included in other liabilities on the balance
sheet. See Note 7.FEE INCOME: Fee income includes variable annuity policy fees, universal life insurance fees and
surrender charges. Variable annuity policy fees are generally based on the market value of assets
in the separate accounts F-10




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) supporting the variable annuity contracts. 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 is earned. INCOME TAXES:
Prior to 2004, the Company was included in a consolidated federal
income tax return with its Parent.
Beginning in 2004, the Company is included in the consolidated federal income tax return
of its ultimate parent, AIG. Income taxes have been calculated as if the Company
filed a separate return. Deferred income tax assets and liabilities are recognized based on the
difference between financial statement carrying amounts and income tax basis of assets and
liabilities using enacted income tax rates and laws RECENTLY ISSUED ACCOUNTING STANDARDS: 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 $2,013,000 ($3,098,000 pre-tax) to reflect the liability and the
related impact of DAC as of January 1, 2004.  3.
    INVESTMENTS The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by
major category follow: Amortized Cost
    
    
    Estimated Fair Value(in thousands)AT DECEMBER 31, 2004:U.S. government securities
    
    $
    18,743
    
    
    $
    19,358Mortgage-backed securities
    
    
    753,378
    
    
    
    771,642Securities of public utilities
    
    
    120,769
    
    
    
    125,369Corporate bonds and notes
    
    
    1,599,497
    
    
    
    1,624,383Other debt securities
    
    
    426,892
    
    
    
    430,673Total
    
    $
    2,919,279
    
    
    $
    2,971,425
 F - 11




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued): Amortized Cost
    
    
    Estimated Fair Value(in thousands)AT DECEMBER 31, 2003:U.S. government securities
    
    $
    17,671
    
    
    $
    18,054Mortgage-backed securities
    
    
    619,800
    
    
    
    634,640Securities of public utilities
    
    
    126,229
    
    
    
    131,158Corporate bonds and notes
    
    
    1,226,035
    
    
    
    1,248,590Other debt securities
    
    
    627,912
    
    
    
    625,370Total
    
    $
    2,617,647
    
    
    $
    2,657,812
 At December 31, 2004, bonds and notes included $107,951,000 not rated investment grade. These
non-investment-grade securities are comprised of bonds spanning 10 industries with 31%, 19%, 13%
and 12% concentrated in telecommunications, cyclical consumer products, transportation and
financial services 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 27 states, with
loans totaling approximately 25% and 12% of the aggregate carrying value of the portfolio secured
by properties located in California and New York, respectively. No more than 10% of the portfolio
was secured by properties located 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 $1,700,000. At December 31, 2004, $613,000 of bonds, at amortized cost, was on deposit with regulatory
authorities in accordance with statutory requirements. The Company had no investments in any one entity or its affiliates exceeding 10% of the Companys
shareholders equity at December 31, 2004. The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by
contractual maturity, as of December 31, 2004, follow: Amortized Cost
    
    
    Estimated Fair Value(in thousands)Due in one year or less
    
    $
    53,983
    
    
    $
    54,926Due after one year through five years
    
    
    849,786
    
    
    
    864,360Due after five years through ten years
    
    
    916,487
    
    
    
    925,955Due after ten years
    
    
    345,645
    
    
    
    354,542Mortgage-backed securities
    
    
    753,378
    
    
    
    771,642Total
    
    $
    2,919,279
    
    
    $
    2,971,425
 Actual maturities of bonds, notes and redeemable preferred stocks may differ from
those shown above due to prepayments and redemptions. F - 12




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued): Gross unrealized gains and losses on bonds, notes and redeemable preferred stocks by major category
follow: Gross Unrealized
    
    
    Gross UnrealizedGains
    
    
    Losses(in thousands)AT DECEMBER 31, 2004:U.S. government securities
    
    $
    634
    
    
    $
    (19
    )Mortgage-backed securities
    
    
    20,512
    
    
    
    (2,248
    )Securities of public utilities
    
    
    4,873
    
    
    
    (273
    )Corporate bonds and notes
    
    
    33,360
    
    
    
    (8,474
    )Other debt securities
    
    
    6,263
    
    
    
    (2,482
    )Total
    
    $
    65,642
    
    
    $
    (13,496
    )AT DECEMBER 31, 2003:U.S. government securities
    
    $
    383
    
    
    $
    Mortgage-backed securities
    
    
    20,483
    
    
    
    (5,643
    )Securities of public utilities
    
    
    5,258
    
    
    
    (329
    )Corporate bonds and notes
    
    
    30,773
    
    
    
    (8,217
    )Other debt securities
    
    
    7,294
    
    
    
    (9,837
    )Total
    
    $
    64,191
    
    
    $
    (24,026
    )
 Gross unrealized gains on equity securities aggregated $5,000 and $9,000 at December 31, 2004 and
2003, respectively. Gross unrealized losses on equity securities aggregated $0 and $5,000 at
December 31, 2004 and 2003, respectively. 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
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2004
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    ItemsU.S. government
securities
    
    $
    2,001
    
    
    $
    (19
    )
    
    
    1
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    2,001
    
    
    $
    (19
    )
    
    
    1Mortgage-backed
securities
    
    
    152,192
    
    
    
    (1,887
    )
    
    
    31
    
    
    
    13,802
    
    
    
    (362
    )
    
    
    7
    
    
    
    165,994
    
    
    
    (2,249
    )
    
    
    38Securities of
public utilities
    
    
    22,303
    
    
    
    (273
    )
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,303
    
    
    
    (273
    )
    
    
    6Corporate bonds and
notes
    
    
    385,522
    
    
    
    (4,043
    )
    
    
    85
    
    
    
    72,370
    
    
    
    (4,430
    )
    
    
    12
    
    
    
    457,892
    
    
    
    (8,473
    )
    
    
    97Other debt
securities
    
    
    97,774
    
    
    
    (1,926
    )
    
    
    17
    
    
    
    26,848
    
    
    
    (556
    )
    
    
    7
    
    
    
    124,622
    
    
    
    (2,482
    )
    
    
    24Total
    
    $
    659,792
    
    
    $
    (8,148
    )
    
    
    140
    
    
    $
    113,020
    
    
    $
    (5,348
    )
    
    
    26
    
    
    $
    772,812
    
    
    $
    (13,496
    )
    
    
    166
 F - 13




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  3.
    INVESTMENTS (Continued): Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2003
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    Items
    
    
    Fair Value
    
    
    Loss
    
    
    ItemsMortgage-backed
securities
    
    $
    183,577
    
    
    $
    (5,643
    )
    
    
    37
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    183,577
    
    
    $
    (5,643
    )
    
    
    37Securities of
public utilities
    
    
    15,013
    
    
    
    (329
    )
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,013
    
    
    
    (329
    )
    
    
    6Corporate bonds
and notes
    
    
    388,358
    
    
    
    (8,204
    )
    
    
    69
    
    
    
    56
    
    
    
    (13
    )
    
    
    1
    
    
    
    388,414
    
    
    
    (8,217
    )
    
    
    70Other debt
securities
    
    
    219,407
    
    
    
    (8,357
    )
    
    
    44
    
    
    
    3,521
    
    
    
    (1,480
    )
    
    
    1
    
    
    
    222,928
    
    
    
    (9,837
    )
    
    
    45Total
    
    $
    806,355
    
    
    $
    (22,533
    )
    
    
    156
    
    
    $
    3,577
    
    
    $
    (1,493
    )
    
    
    2
    
    
    $
    809,932
    
    
    $
    (24,026
    )
    
    
    158
 Realized investment gains and losses on the sales of investments are as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)BONDS, NOTES AND REDEEMABLE PREFERRED
STOCKS:Realized gains
    
    $
    2,903
    
    
    $
    9,001
    
    
    $
    8,522Realized losses
    
    
    (4,245
    )
    
    
    (3,315
    )
    
    
    (8,623
    )COMMON STOCKS:Realized gains
    
    
    1
    
    
    
    202
    
    
    
    Realized losses
    
    
    (180
    )
    
    
    (20
    )
    
    
    (38
    )
 The sources and related amounts of investment income are as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Short-term investments
    
    $
    428
    
    
    $
    848
    
    
    $
    1,441Bonds and notes and redeemable preferred stocks
    
    
    149,869
    
    
    
    103,197
    
    
    
    80,518Mortgage loans
    
    
    15,161
    
    
    
    13,552
    
    
    
    13,000Policy loans
    
    
    2,682
    
    
    
    2,819
    
    
    
    2,160Securities lending
    
    
    689
    
    
    
    55
    
    
    
    788Gross investment income
    
    
    168,829
    
    
    
    120,471
    
    
    
    97,907Less: investment expenses
    
    
    (1,458
    )
    
    
    (741
    )
    
    
    (580
    )Total investment income
    
    $
    167,371
    
    
    $
    119,730
    
    
    $
    97,327
 F - 14




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued) 3. INVESTMENTS (Continued): Investment income was attributable to the following products: Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Fixed annuity contracts
    
    $
    137,906
    
    
    $
    91,169
    
    
    $
    65,606Variable annuity contracts
    
    
    17,055
    
    
    
    14,564
    
    
    
    14,062Universal life insurance contracts
    
    
    12,410
    
    
    
    13,997
    
    
    
    17,659Total
    
    $
    167,371
    
    
    $
    119,730
    
    
    $
    97,327
  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 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 INVESTMENTS: 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. COMMON STOCKS: Fair value is based principally on independent pricing services, broker quotes and
other independent information. VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are carried at the
market value of the underlying securities. F - 15




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  4.
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned a fair value equal
to current net surrender value. Annuitized contracts are valued based on the present value of
future cash flows at current pricing rates. 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. SECURITIES LENDING COLLATERAL/PAYABLE: Carrying value is considered to be a reasonable estimate of
fair value. 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 Value
    
    
    Fair Value(in thousands)AT DECEMBER 31, 2004:ASSETS:Cash and short-term investments
    
    $
    24,858
    
    
    $
    24,858Bonds, notes and redeemable preferred stocks
    
    
    2,971,425
    
    
    
    2,971,425Mortgage loans
    
    
    276,859
    
    
    
    284,054Policy loans
    
    
    32,899
    
    
    
    32,899Common stock
    
    
    705
    
    
    
    705Securities lending collateral
    
    
    517,644
    
    
    
    517,644Variable annuity assets held in separate accounts
    
    
    488,046
    
    
    
    488,046LIABILITIES:Reserves for fixed annuity contracts
    
    $
    2,863,048
    
    
    $
    2,827,611Securities lending payable
    
    
    517,644
    
    
    
    517,644Variable annuity liabilities related to separate accounts
    
    
    488,046
    
    
    
    488,046
 F - 16




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  4.
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Carrying Value
    
    
    Fair Value(in thousands)AT DECEMBER 31, 2003:ASSETS:Cash and short-term investments
    
    $
    104,011
    
    
    $
    104,011Bonds, notes and redeemable preferred stocks
    
    
    2,657,812
    
    
    
    2,657,812Mortgage loans
    
    
    215,521
    
    
    
    230,022Policy loans
    
    
    35,251
    
    
    
    35,251Common stock
    
    
    295
    
    
    
    295Securities lending collateral
    
    
    154,756
    
    
    
    154,756Variable annuity assets held in separate accounts
    
    
    438,224
    
    
    
    438,224LIABILITIES:Reserves for fixed annuity contracts
    
    $
    2,490,145
    
    
    $
    2,419,705Securities lending payable
    
    
    154,756
    
    
    
    154,756Variable annuity liabilities related to separate accounts
    
    
    438,224
    
    
    
    438,224
  5.
    DEFERRED ACQUISITION COSTSThe following table summarizes the activity in deferred acquisition costs: Years Ended December 31,2004
    
    
    2003(in thousands)Balance at beginning of year
    
    $
    161,828
    
    
    $
    100,571Acquisition costs deferred
    
    
    35,395
    
    
    
    79,439Effect of net unrealized (gains) losses on securities
    
    
    (5,915
    )
    
    
    1,344Amortization charged to income
    
    
    (31,772
    )
    
    
    (19,526
    )Cumulative effect of SOP 03-1
    
    
    (1,807
    )
    
    
    Balance at end of year
    
    $
    157,729
    
    
    $
    161,828
 F-17




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  6.
    OTHER DEFERRED EXPENSESThe following table summarizes the activity in other deferred expenses: Years Ended December 31,2004
    
    
    2003(in thousands)Balance at beginning of year
    
    $
    16,098
    
    
    $
    3,888Expenses deferred
    
    
    6,037
    
    
    
    13,192Effect of
net unrealized (gains) lesses on securities
    
    
    (585
    )
    
    
    56Amortization charged to income
    
    
    (2,411
    )
    
    
    (1,038
    )Balance at end of year
    
    $
    19,139
    
    
    $
    16,098
  7.
    GUARANTEED BENEFITSThe 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-rate account options.
For many of the Companys variable annuity contracts, the Company offers contractual guarantees in
the event of death or at specified dates during the accumulation period. Such benefits are
referred to as GMDB and guaranteed minimum account value (GMAV), respectively.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 in the statement of income and comprehensive income. Changes in liabilities for
minimum guarantees are included in guaranteed benefits in the 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 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, if actual experience or other evidence suggests that earlier assumptions should be
revised.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 subsequent withdrawals, at the end of a ten-year waiting period. GMAVs are considered to be
derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, and are recognized at fair
value in the balance sheet and through investment income in the statement of income and
comprehensive income. The Company began offering the GMAV option in 2004. F-18




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued) 7.
    GUARANTEED BENEFITS (Continued) Details concerning the Companys guaranteed benefit exposures as of December 31, 2004 are as
follows: Highest SpecifiedAnniversaryAccount ValueMinusReturn of Net
    
    
    Withdrawals PostDeposits
    
    
    Anniversary(dollars in thousands)In the event of death (GMDB):Account value
    
    $
    148,283
    
    
    $
    649,952Net amount at risk (a)
    
    $
    348
    
    
    $
    57,713Average attained age of contract holders
    
    
    65
    
    
    
    62Range of guaranteed minimum return rates
    
    
    0
    %
    
    
    0
    %Accumulation at specified date (GMAV):Account value
    
    $
    16,314
    
    
    $
    Net amount at risk (b)
    
    $
    
    
    
    $
    Weighted average period remaining until guaranteed payment
    
    9.8 Years
    
    
    
    (a)
    Net amount at risk represents the guaranteed benefit exposure in excess of the current
account value, if all contract holders died at the same balance sheet date.(b)
    Net amount at risk represents the guaranteed benefit exposure in excess
of the current account value, if all contract holders reached the specified date at the same balance sheet
date. The following summarizes the reserves for guaranteed benefits on variable contracts reflected in
the general account: (in thousands)Balance at January 1, 2004 (c)
    
    $
    1,640Guaranteed benefits incurred
    
    
    1,193Guaranteed benefits paid
    
    
    (934
    )Balance at December 31, 2004
    
    $
    1,899
    (c)
    Includes amounts from the one-time cumulative accounting change resulting from the
adoption of SOP 03-1 F-19




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  7.
    GUARANTEED BENEFITS (Continued)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.
    REINSURANCEReinsurance 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.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. Universal
life insurance fees are presented net of reinsurance premiums of $7,275,000, $7,132,000 and
$6,078,000 in 2004, 2003 and 2002, respectively. Reinsurance recoveries recognized as a reduction
of claims on universal life insurance contracts amounted to $8,855,000, $3,645,000 and $4,247,000
in 2004, 2003 and 2002, respectively.In 2004, the Company entered a contract to reinsure credit life and credit accident and health
insurance policies. The Company receives a share of premium for the reinsured policies and will
indemnify the reinsured for a proportionate share of these liabilities while the reinsured retains
the assets and corresponding reserve liabilities. The treaty is for one year with the
option to renew annually and may be terminated by either party with 180 days advance notice.9.
    COMMITMENTS AND CONTINGENT LIABILITIESAt December 31, 2004, the Company has commitments to purchase approximately $5,000,000 of asset
backed securities in the ordinary course of business. These commitments expire in total in 2007.Various lawsuits against the Company have arisen in the ordinary course of business. Contingent
liabilities arising from litigation, income taxes and regulatory and other matters are not
considered material in relation to the financial position, results of operations or cash flows of
the Company.10.
    SHAREHOLDERS EQUITYThe Company is authorized to issue 300 shares of its $10,000 par value Common Stock. At December
31, 2004 and December 31, 2003, 300 shares were outstanding. F-20




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued) 10.
    SHAREHOLDERS EQUITY (Continued) Changes in shareholders equity are as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)ADDITIONAL PAID-IN CAPITAL:Beginning balances
    
    $
    259,428
    
    
    $
    144,428
    
    
    $
    144,428Capital contributions by Parent
    
    
    
    
    
    
    115,000
    
    
    
    Ending balances
    
    $
    259,428
    
    
    $
    259,428
    
    
    $
    144,428RETAINED EARNINGS:Beginning balances
    
    $
    68,657
    
    
    $
    51,740
    
    
    $
    44,982Net income
    
    
    23,425
    
    
    
    16,917
    
    
    
    6,758Ending balances
    
    $
    92,082
    
    
    $
    68,657
    
    
    $
    51,740ACCUMULATED OTHER COMPREHENSIVE
INCOME:Beginning balances
    
    $
    18,440
    
    
    $
    13,870
    
    
    $
    1,169Change in net unrealized gains
on debt securities available for sale
    
    
    11,981
    
    
    
    5,138
    
    
    
    29,401Change in net unrealized gains (losses)
on equity securities available for sale
    
    
    1
    
    
    
    493
    
    
    
    (161
    )Change in adjustment to deferred
acquisition costs and other deferred expenses
    
    
    (6,500
    )
    
    
    1,400
    
    
    
    (9,700
    )Tax effects of net changes
    
    
    (1,919
    )
    
    
    (2,461
    )
    
    
    (6,839
    )Ending balances
    
    $
    22,003
    
    
    $
    18,440
    
    
    $
    13,870
 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
    
    $
    65,647
    
    
    $
    64,200Gross unrealized losses
    
    
    (13,496
    )
    
    
    (24,031
    )Adjustment
to DAC and other deferred expenses
    
    
    (18,300
    )
    
    
    (11,800
    )Deferred income taxes
    
    
    (11,848
    )
    
    
    (9,929
    )Accumulated other comprehensive income
    
    $
    22,003
    
    
    $
    18,440
 F-21




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  10.
    SHAREHOLDERS EQUITY (Continued)On September 30, 2003 and December 31, 2003, the Company received cash capital contributions from
the Parent of $40,000,000 and $75,000,000, respectively.Dividends that the Company may pay to its shareholder in any year without prior approval of the New
York Department of Insurance are limited by statute. The maximum amount of dividends which can be
paid to stockholders by a life insurance company domiciled in the State of New York without
obtaining the prior approval of the Superintendent of Insurance is limited to the lesser of the
Companys net gain from operations of the preceding years statutory annual statement or 10% of
preceding years statutory surplus. Dividends of $25,870,000 can be paid to the shareholder during
2005 without prior approval of the New York Superintendent of Insurance.Under statutory accounting principles utilized in filings with insurance regulatory authorities,
the Companys net income for the year ended December 31, 2004 was approximately $41,524,000 and
net loss for years ended December 31, 2003 and 2002 were $28,065,000, and $1,416,000, respectively.
The Companys statutory capital and surplus totaled approximately $261,706,000 at December 31,
2004, $213,084,000 at December 31, 2003 and $123,141,000 at December 31, 2002.11.
    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
    
    $
    25,539
    
    
    $
    3,041
    
    
    $
    (16,471
    )Deferred
    
    
    (17,640
    )
    
    
    9,040
    
    
    
    25,503Total income tax expense
    
    $
    7,899
    
    
    $
    12,081
    
    
    $
    9,032
  Income taxes computed at the United States federal income tax rate of 35% and income tax expenses
reflected in the statement of income and comprehensive income differ as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Amount computed at statutory rate
    
    $
    11,668
    
    
    $
    10,149
    
    
    $
    5,527Increases (decreases) resulting from:State income taxes, net of federal
tax benefit
    
    
    3,250
    
    
    
    1,447
    
    
    
    2,103Dividends received deduction
    
    
    (386
    )
    
    
    (315
    )
    
    
    (144
    )Adjustment to prior year tax liability (a)
    
    
    (6,633
    )
    
    
    
    
    
    
    Other, net
    
    
    
    
    
    
    800
    
    
    
    1,546Total income tax expense
    
    $
    7,899
    
    
    $
    12,081
    
    
    $
    9,032
 F - 22




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  11.
    INCOME TAXES (Continued)  (a)
    In 2004, the Company revised its estimate of tax contingency amount for prior year
based on additional information that became available.  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: Years Ended December 31,2004
    
    
    2003(in thousands)DEFERRED TAX ASSETS:Investments
    
    $
    959
    
    
    $
    Contract holder reserves
    
    
    27,931
    
    
    
    14,994Other assets
    
    
    7,477
    
    
    
    11,510Total deferred tax assets
    
    
    36,367
    
    
    
    26,504DEFERRED TAX LIABILITIES:Investments
    
    $
    
    
    
    $
    (2,637
    )Deferred
acquisition costs and other deferred expenses
    
    
    (49,383
    )
    
    
    (52,448
    )Other liabilities
    
    
    (228
    )
    
    
    (3,385
    )Net unrealized gains on debt and
equity securities available for sale
    
    
    (11,848
    )
    
    
    (9,929
    )Total deferred tax liabilities
    
    
    (61,459
    )
    
    
    (68,399
    )Deferred income taxes
    
    $
    (25,092
    )
    
    $
    (41,895
    )
  The Company has concluded that the deferred tax asset will be fully realized and no valuation
allowance is necessary12.
    RELATED-PARTY MATTERSOn 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 $5,000,000. This commitment
expires on October 28, 2005. There was no outstanding balance under this agreement at December 31,
2004.On January 20, 2004, the Company entered into a short-term financing arrangement with the Parent
whereby the Company has the right to borrow up to $15,000,000 from the Parent and vice versa. Any
advances made under this agreement must be repaid within 30 days. There was no outstanding balance
under this agreement at December 31, 2004.On February 15, 2004, the Company entered into a short-term financing arrangement with an
affiliate, AIG SunAmerica Life Assurance Company (AIG SALAC) whereby the Company has the right to
borrow up to $15,000,000 from AIG SALAC and vice versa. Any advances made under this arrangement
must be repaid within 30 days. There was no outstanding balance under this agreement at December
31, 2004.On February 15, 2004, the Company entered into a short-term financing arrangement with SunAmerica
Investments, Inc. (SAII) whereby the Company has the right to borrow up to $15,000,000 from SAII
and vice versa. Any F - 23




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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  12.
    RELATED-PARTY MATTERS (Continued)advances made under this arrangement must be repaid within 30 days. There was no outstanding
balance under this agreement at December 31, 2004.The Companys products may be sold by nine affiliated companies: SunAmerica Securities, Inc.;
Advantage Capital Corporation; Financial Service Corporation; Sentra Securities Corporation;
Spelman & Co. Inc.; Royal Alliance Associates, Inc.; VALIC Financial Advisors Inc.; American
General Equity Services Corporation; and American General Securities Incorporated. Commissions
paid to these broker-dealers totaled $996,000, $1,063,000 and $1,143000 in the years ended December
31, 2004, 2003 and 2002, respectively. These affiliated broker-dealers represent 3%, 1% and 5% of
annuity deposits in the years ended December 31, 2004, 2003 and 2002, respectively.Pursuant to a cost allocation agreement, the Company purchases administrative, investment
management, accounting, legal, marketing and data processing services from its Parent and from
certain AIG affiliates. Amounts paid for such services totaled $7,925,000 for the year ended
December 31, 2004, $5,250,000 for the year ended December 31, 2003 and $8,399,000 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 $2,138,000, $3,855,000 and $3,305,000, in 2004,
2003 and 2002 respectively, and is deferred and amortized as part of DAC. The other components of
these costs are included in general and administrative expenses in the statement of income and
comprehensive income.AIG Annuity Insurance Company, an affiliate, is responsible for the administration of the
Companys fixed annuity contracts and is reimbursed for the cost of administration. Costs charged
to the Company to administer these policies were approximately $1,138,000 in 2004, $841,000 in
2003 and $107,000 in 2002. Additionally, costs charged to the Company for marketing such policies
amounted to $1,605,000 in 2004, $4,010,000 in 2003 and $1,021,000 in 2002 and are deferred and
amortized as part of DAC. The Company believes these costs are less than the Company would have
incurred to administer these policies internally.The majority of the Companys invested assets are managed by an affiliate of the Company. The
investment management fees incurred were $2,223,000, $1,232,000 and $793,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.The Company incurred $629,000, $106,000 and $7,000 of management fees to an affiliate of the
Company to administer its securities lending program (see Note 2) for the year ended December 31,
2004, 2003 and 2002, respectively.On February 1, 2004, the Company entered into an administrative services agreement with its
affiliate AIG SunAmerica Asset Management Corp. (SAAMCo), whereby SAAMCo will pay to the Company
a fee based on a percentage on all assets invested through the Companys variable annuity products
in exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve
as investment options for the Companys variable annuity products. Amounts earned by the Company
under this agreement totaled $1,537,000 in 2004 and are included in variable annuity policy fees in
the 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.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
contract holders 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 F - 24




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FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)  12.
    RELATED-PARTY MATTERS (Continued)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. F - 25