The Company's executive offices and the principal offices of its life insurance subsidiaries are in leased premises at 1 SunAmerica Center, Los Angeles, California. The Company's life insurance subsidiaries also lease office space in Torrance, California; Houston, Texas; and New York, New York. The Company's broker-dealers lease space in Phoenix, Arizona and New York, New York. The Company's asset management subsidiary leases offices in New York, New York, and the retirement trust services subsidiary occupies leased premises in Englewood, Colorado. The Company's premium finance subsidiary is headquartered in Sherman Oaks, California.
- ------------------------------ (1) In computing the ratio of earnings to fixed charges (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits), fixed charges consist of interest expense on senior and subordinated indebtedness and dividends paid on the preferred securities of a subsidiary grantor trust. Earnings are computed by adding interest incurred on senior and subordinated indebtedness and dividends paid on the preferred securities of a subsidiary grantor trust to pretax income.
NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest or dividends paid on fixed annuities and other interest-bearing liabilities, increased to $365.6 million in 1995 from $294.5 million in 1994 and $263.8 million in 1993. These amounts represent net investment spreads of 3.69% on average invested assets (computed on a daily basis) of $9.90 billion in 1995, 3.30% on average invested assets of $8.92 billion in 1994 and 3.15% on average invested assets of $8.38 billion in 1993. Net investment spreads include the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 3.25% in 1995, 2.90% in 1994 and 2.81% in 1993.
Investment income totaled $905.8 million in 1995, $758.2 million in 1994 and $754.4 million in 1993. Investment income increased in 1995 primarily as a result of an increase in investment yield on a higher level of average invested assets. The modest increase in investment income in 1994 over 1993 primarily resulted from an increase in earnings on a higher level of average invested assets, partially offset by a decline in investment yield. The yield on average invested assets increased to 9.15% in 1995 from 8.50% in 1994 and 9.00% in 1993. Over the last three fiscal years, the Company's quarterly investment yields on average invested assets have ranged from 8.32% to 9.54%; however, there can be no assurance that the Company will achieve similar yields in future periods.
Net gains in 1994 include $22.6 million of net gains realized on $17.6 million of sales of common stocks and $27.0 million of net losses realized on $3.25 billion of sales of bonds that were made primarily to maximize total return. The Company also realized $35.1 million of net gains on $105.4 million of sales of certain partnership interests.
Impairment writedowns in 1995 include $23.8 million of additional provisions applied to defaulted bonds and $6.6 million of provisions applied to mortgage loans. Impairment writedowns in 1994 include $35.0 million applied to real estate. During 1994, the Company decided to hold for sale all properties owned in Arizona, thereby changing its previous intention to hold such real estate for future development. Accordingly, the Company reappraised its Arizona properties and reduced their carrying values to estimated fair values. Impairment writedowns in 1994 also include $13.2 million of additional provisions applied to defaulted bonds and $2.5 million of reserves for mortgage loan losses resulting from the January 17, 1994 Los Angeles earthquake.
VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $84.6 million in 1995, $79.5 million in 1994 and $67.5 million in 1993. Variable annuity fees have increased over the three years principally due to asset growth from the receipt of variable annuity premiums and, during 1995, from increased market values. Variable annuity assets averaged $4.67 billion during 1995, $4.43 billion during 1994 and $3.65 billion during 1993. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $571.4 million in 1995, $759.3 million in 1994 and $796.9 million in 1993. These declines in premiums can be attributed, in part, to a heightened demand for fixed-rate investment options, including the fixed accounts of variable annuities (see "Growth in Average Invested Assets"). The Company has encountered increased competition in the variable annuity marketplace during 1995 and 1994 and anticipates that the market will remain highly competitive for the foreseeable future.
NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiaries, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $32.6 million in 1995, $28.0 million in 1994 and $23.7 million in 1993. Broker-dealer sales (mainly mutual funds, general securities and annuities) totaled $7.41 billion in 1995, $6.87 billion in 1994 and $6.40 billion in 1993. Net retained commissions are not proportionate to sales primarily due to differences in sales mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds and private accounts by SunAmerica Asset Management Corp. ("SunAmerica Asset Management"). Such fees totaled $26.9 million on average assets managed of $2.07 billion in 1995, $31.3 million on average assets managed of $2.39 billion in 1994 and $32.3 million on average assets managed of $2.46 billion in 1993. Asset management fees decreased over the three years principally due to declines in assets managed, primarily resulting from excesses of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market and other short-term accounts, amounted to $426.5 million in 1995, compared with $561.0 million in 1994 and $391.0 million in 1993. Sales of mutual funds, excluding sales of money market and other short-term accounts, amounted to $140.2 million in 1995, compared with $342.6 million in 1994 and $532.4 million in 1993.
TRUST FEES are earned by Resources Trust Company for providing administrative and custodial services primarily for individual retirement accounts, as well as for other qualified pension plans. Trust fees increased to $15.4 million in 1995 (on an average of 196,000 trust accounts), from $11.9 million in 1994 (on an average of 148,500 trust accounts) and $10.9 million in 1993 (on an average of 144,300 trust accounts). The increases in trust fees and the average number of trust accounts in 1995 principally resulted from the October 1, 1994 acquisition of the right to service certain individual retirement accounts from New England Mutual Life Insurance Company.
PROVISION FOR FUTURE GUARANTY FUND ASSESSMENTS totaled $22.0 million in 1993. No such provision was recorded in 1995 or in 1994. Guaranty associations of the states in which the Company sells annuities assess insurance companies to pay policyholder claims relating to insurer insolvencies. This provision represents management's best estimate, based upon available industry data, of the Company's ultimate exposure to future assessments anticipated as a result of certain large insurance company failures that occurred prior to fiscal 1994.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $80.8 million in 1995, $66.9 million in 1994 and $51.9 million in 1993. Such amortization has increased during the three-year period primarily due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other acquisition costs.
INCOME TAX EXPENSE totaled $85.4 million in 1995, $74.7 million in 1994 and $57.0 million in 1993, representing effective tax rates of 31% in all three years. These tax rates reflect the favorable impact of certain affordable housing tax credits.
SHAREHOLDERS' EQUITY increased by $252.0 million to $1.21 billion at September 30, 1995 from $961.1 million at September 30, 1994, primarily as a result of the $194.2 million of net income recorded in 1995 and a $145.5 million reduction of net unrealized losses on debt and equity securities available for sale charged directly to shareholders' equity. These favorable factors were partially offset by a reduction of outstanding preferred stock resulting from an exchange of $52.6 million of 9 1/4% Series B Preferred Stock for $52.6 million of preferred securities of SunAmerica Capital Trust I (the "Grantor Trust Preferred Securities"), a grantor trust and a wholly owned subsidiary of the Company (see Note 6 of Notes to Consolidated Financial Statements), and $50.3 million of dividends paid to shareholders.
INVESTED ASSETS at year end totaled $10.81 billion in 1995, compared with $9.28 billion in 1994. This $1.53 billion increase primarily resulted from sales of GICs and fixed annuity contracts and a $145.5 million decrease in net unrealized losses on debt and equity securities available for sale.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), at September 30, 1995, had an aggregate amortized cost that exceeded its fair value by $12.6 million (including net unrealized losses of $31.1 million on the Available for Sale Portfolio). The fair value of the Bond Portfolio was $321.0 million below its amortized cost at September 30, 1994 (including net unrealized losses of $329.0 million on the Available for Sale Portfolio). The decrease in net unrealized losses on the Bond
Portfolio since September 30, 1994 principally reflects the lower relative prevailing interest rates at September 30, 1995 and their corresponding effect on the fair value of the Bond Portfolio.
At September 30, 1995, the Bond Portfolio included $910.1 million (fair value, $887.3 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their September 30, 1995 amortized cost, these non-investment-grade bonds accounted for 5.4% of the Company's total assets and 8.4% of invested assets. In addition to its direct investment in non-investment-grade bonds, the Company has entered into Total Return Agreements with an aggregate notional principal amount of $305.8 million at September 30, 1995 (see "Asset-Liability Matching").
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. The Company intends that its holdings of such securities not exceed current levels, but its policies may change from time to time, including in connection with any possible acquisition. The Company had no material concentrations of non-investment-grade securities at September 30, 1995.
(1) S&P rates debt securities in eleven rating categories, 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 nine rating categories, from Aaa (the highest) to C (extremely poor prospects of attaining 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 higher of the S&P or Moody's rating if rated by both agencies.
SENIOR SECURED LOANS are included in the Bond Portfolio and their amortized cost aggregated $857.2 million at September 30, 1995. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1995, Secured Loans consisted of loans to 103 borrowers spanning 30 industries, with 22% of these assets (at amortized cost) concentrated in the leisure industry and with no other industry concentration constituting more than 14% of these assets.
MORTGAGE LOANS aggregated $1.54 billion at September 30, 1995 and consisted of 644 first mortgage loans with an average loan balance of approximately $2.4 million, collateralized by properties located in 26 states. Approximately 48% of the portfolio was multifamily residential, 22% was retail, 7% was industrial, 5% was office and 18% was other types. At September 30, 1995, approximately 28% of the portfolio was secured by properties located in California and no more than 12% of the portfolio was secured by properties in any other single state. At September 30, 1995, there were 28 loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 27% of the portfolio. At the time of their origination or purchase by the Company, virtually all mortgage loans had loan-to-value ratios of 75% or less. At September 30, 1995, approximately 22% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1998. At September 30, 1995, loans delinquent by more than 90 days totaled $27.4 million (1.8% of total mortgages). Loans foreclosed upon and transferred to real estate in the balance sheet totaled $17.3 million (1.1% of total mortgages) at September 30, 1995.
PARTNERSHIP investments totaled $774.4 million at September 30, 1995, constituting investments in approximately 300 separate partnerships with an average size of approximately $2.5 million. This portfolio includes: (i) $376.3 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 800 separate issuers; (ii) $263.8 million of partnerships that make tax-advantaged investments in affordable housing, currently involving approximately 265 multifamily projects in 34 states; and (iii) $134.3 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1995, $518.1 million of the Company's partnerships was accounted for by using the cost method and $256.3 million by using the equity method. The risks generally associated with partnerships include those related to their underlying investments (i.e. equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated for the affordable housing partnerships by the
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 annuity and GIC 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 maturities. The Company's fixed-rate products incorporate surrender charges, two-tiered interest rate structures or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 78% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1995.
As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. At September 30, 1995 the weighted average life of the Company's investments was approximately three-and-three-fourths years and the duration was approximately three-and-one- fourth years.
As a component of its investment strategy, the Company utilizes interest rate swap agreements ("Swap Agreements") to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1995, the Company had 22 outstanding Swap Agreements with an aggregate notional principal amount of $881.4 million. These agreements mature in various years through 2001 and have an average remaining maturity of 25 months.
The Company also seeks to provide liquidity by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs. It also seeks to enhance its spread income by using Reverse Repos, Dollar Rolls and Total Return Agreements. Reverse Repos involve a sale of securities and an agreement to repurchase the same securities at a later date at an agreed upon price and are generally over-collateralized. Dollar Rolls are similar to Reverse Repos except that the repurchase involves securities that are only substantially the same as the securities sold and the arrangement is not collateralized, nor is it governed by a repurchase agreement. Total Return Agreements effectively exchange a fixed rate of interest on the notional amount for the coupon income plus or minus the increase or decrease in the fair value of specified non-investment-grade corporate bonds. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.
The carrying values of bonds that are determined to have declines in value that are other than temporary are reduced to net realizable value and no further accruals of interest are made. The valuation allowances 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.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost) that are in default as to the payment of principal or interest, totaled $61.8 million at September 30, 1995, including $34.4 million (fair value, $23.9 million) of bonds and notes and $27.4 million of mortgage loans whose fair value was equal to their amortized cost. At September 30, 1995, defaulted investments constituted 0.6% of total invested assets at amortized cost. At September 30, 1994, defaulted investments totaled $56.2 million, including $10.3 million of bonds and notes and $45.9 million of mortgage loans. At September 30, 1994, defaulted investments constituted 0.6% of total invested assets at amortized cost and their fair value was equal to their amortized cost.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"), at September 30, 1995, had invested assets with a carrying value of $789.7 million and outstanding senior indebtedness of $524.8 million, comprising all of the Company's consolidated senior indebtedness. Additionally, as of September 30, 1995, the Parent had three GICs purchased by local government authorities that aggregated $250.4 million.
In connection with the issuance of the Grantor Trust Preferred Securities, and the related purchase by the Parent of the common securities of SunAmerica Capital Trust I (the "Grantor Trust"), the Parent issued $54.3 million of 9.95% junior subordinated debentures, due 2044 (the "Debentures"), to the Grantor Trust.
The Parent's annual debt service with respect to its senior indebtedness, GIC obligations and Debentures totals $79.9 million for fiscal 1996, $79.5 million for fiscal 1997, $99.6 million for fiscal 1998, $208.1 million for fiscal 1999, $72.9 million for fiscal 2000 and $1.23 billion, in the aggregate, thereafter.
The Parent and a subsidiary, SunAmerica Financial, Inc., have transferred certain of their interests in various partnerships that make tax-advantaged affordable housing investments to third-party investors. As part of the transactions, the Parent has guaranteed a minimum defined yield and funding of certain defined operating deficits in return for a fee. A portion of the fees received has been deferred to absorb any required payments with respect to these guarantees. Based on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose. Accordingly, management does not anticipate any material future losses with respect to these guarantees.
The Parent has guaranteed that its life insurance subsidiaries will receive the statutory carrying value of certain invested assets, primarily bonds and real estate, aggregating $176.5 million.
Additional financial statement schedules are included on pages S-3 through S-7 herein. Reference is made to the Index to Financial Statement Schedules on page S-1 herein.