The Company's principal office is 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, California and Torrance, California which is utilized for certain policy administration, recordkeeping and data processing functions.
The following is management's discussion and analysis of financial condition and results of operations of First SunAmerica Life Insurance Company (the "Company") for the three years in the period ended September 30, 1995.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $0.5 million in 1995, compared with $1.1 million in 1994 and $0.9 million in 1993. The cumulative effect of the change in accounting for income taxes resulting from the 1994 implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of $0.7 million. Accordingly, net income amounted to $0.4 million in 1994.
Total interest expense aggregated $5.0 million in 1995, $3.6 million in 1994 and $3.9 million in 1993. The average rate paid on fixed annuity contracts was 5.90% in 1995, compared with 5.41% in 1994 and 6.15% in 1993. Fixed annuity contracts averaged $85.5 million in 1995, compared with $67.2 million in 1994 and $64.1 million in 1993. The increase in the average rate paid on fixed annuities during 1995 primarily resulted from increased average crediting rates on the Company's new fixed annuity contracts relative to those issued in 1994 to maintain a generally competitive market rate in a higher interest rate environment. The decrease in the average rate paid on fixed annuities during 1994 was primarily due to a decline in prevailing interest rates that began during the latter half of fiscal 1992 and continued into the first half of fiscal 1994.
NET REALIZED INVESTMENT LOSSES totaled $1.3 million in 1995, compared with net realized investment gains of $0.4 million in 1994 and $1.9 million in 1993, and represent 1.31%, 0.53% and 2.34%, respectively, of average invested assets. Net realized investment losses in 1995 include $1.2 million of net losses realized on $46.3 million of sales of mortgage backed securities ("MBSs") that were made primarily to maximize total return. Net gains in 1994 and 1993 are also related to sales of MBSs that were made primarily to maximize total return.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.1 million in 1995, compared with $1.0 million in 1994 and $1.1 million in 1993. General and administrative expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets.
TOTAL ASSETS increased by $49.1 million to $163.2 million at September 30, 1995 from $114.1 million at September 30, 1994, principally due to a $42.3 million increase in invested assets and a $6.4 million increase in the separate accounts for variable annuities.
At September 30, 1995, the Bond Portfolio included $9.8 million (fair value, $8.4 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 5.9% of the Company's total assets and 8.0% of invested assets.
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 slightly in excess of three years.
There are risks associated with some of the techniques the Company uses to enhance its spread income and match its assets and liabilities. The primary risk associated with Reverse Repos is the risk associated with counterparty nonperformance. The Company believes, however, that the counterparties to its Reverse Repos are financially responsible and that the counterparty risk associated with those transactions is minimal. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase.
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. If needed, mortgage loan valuation allowances would be 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.