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; Houston, Texas; 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.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $274.4 million or $1.95 per share in 1996, compared with $194.2 million or $1.42 per share in 1995 and $165.3 million or $1.19 per share in 1994. Results of operations in 1996 include the effects of the recently completed acquisitions (the "Acquisitions") of CalFarm Life Insurance Company ("CalFarm"), Ford Life Insurance Company ("Ford Life") and certain annuity contracts purchased from The Central National Life Insurance Company (the "Central National Annuity Contracts"). The acquisition of CalFarm was completed on December 29, 1995, the acquisition of Ford Life was completed on February 29, 1996 and the acquisition of the Central National Annuity Contracts was completed on April 1, 1996. 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 $33.5 million or $0.27 per share. Accordingly, net income amounted to $131.8 million or $0.92 per share in 1994.
PRETAX INCOME totaled $392.0 million in 1996, $279.6 million in 1995 and $240.0 million in 1994. The $112.4 million improvement in 1996 over 1995 primarily resulted from increased net investment income, fee income and surrender charges, partially offset by higher general and administrative expenses and additional amortization of deferred acquisition costs. The $39.6 million improvement in 1995 over 1994 primarily resulted from increased net investment income and fee income, partially offset by increased general and administrative expenses, additional amortization of deferred acquisition costs and higher net realized investment losses.
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 $492.8 million in 1996 from $365.6 million in 1995 and $294.5 million in 1994. These amounts represent 3.43% on average invested assets (computed on a daily basis) of $14.36 billion in 1996, 3.69% on average invested assets of $9.90 billion in 1995 and 3.30% on average invested assets of $8.92 billion in 1994. The invested assets associated with the Acquisitions were primarily high-grade corporate, government and government/agency bonds and cash and short-term investments, which are generally lower yielding than a significant portion of the invested assets that comprise the remainder of the Company's portfolio. As a result of the Acquisitions, net investment income as a percent of average invested assets in 1996 declined by 42 basis points.
The increase in investment yield in 1995 over 1994 reflects the higher interest rates prevailing during the latter half of 1994 and into fiscal 1995.
Total interest and dividend expense aggregated $761.5 million in 1996, $540.2 million in 1995 and $463.7 million in 1994. The average rate paid on all interest-bearing liabilities was 5.73% (5.34% on fixed annuity contracts and 6.43% on guaranteed investment contracts ("GICs")) in 1996, compared with 5.90% (5.48% on fixed annuity contracts and 6.68% on GICs) in 1995 and 5.60% (5.43% on fixed annuity contracts and 6.20% on GICs) in 1994. Interest-bearing liabilities averaged $13.29 billion during 1996, compared with $9.16 billion during 1995 and $8.27 billion during 1994.
The average rate paid on all interest-bearing liabilities in 1996 also reflects the impact of the Acquisitions. The interest-bearing liabilities associated with the Acquisitions are primarily single premium deferred annuities that carry a lower average crediting rate than the average crediting rate paid on the Company's other annuity liabilities. Assumption of these additional interest-bearing liabilities reduced the average rate paid on all interest-bearing liabilities and on fixed annuity contracts by 20 basis points in 1996. The favorable effects of the Acquisitions more than offset a small increase in the average crediting rate on the Company's remaining interest-bearing liabilities.
The increase in the average rate paid on all interest-bearing liabilities during 1995 primarily resulted from the increased average crediting rate on the Company's GICs. During 1996, 1995 and 1994, approximately 33%, 27% and 24%, respectively, of the Company's average GIC portfolio were variable-rate obligations that reprice periodically based upon certain defined indexes. At September 30, 1996, approximately 30% of the Company's GIC portfolio was composed of such obligations. In addition, in fiscal 1995, the Company increased its crediting rates on new fixed-rate GIC obligations relative to those issued during 1994 in response to higher prevailing interest rates. The average rate paid on all interest-bearing liabilities also increased in 1995 as a result of a modest increase in the average crediting rate on the Company's fixed annuity contracts.
GIC premiums decreased to $1.02 billion in 1996 from $1.77 billion in 1995 and $1.04 billion in 1994. The decline in GIC premiums in 1996 primarily resulted from planned reductions in sales of
The GICs issued by the Company generally guarantee the payment of principal and interest at a fixed rate for a fixed term of three to five years. In the case of GICs sold to pension plans, certain withdrawals may be made at book value in the event of circumstances specified in the plan document, such as employee retirement, death, disability, hardship withdrawal or employee termination. The Company generally imposes surrender penalties in the event of other withdrawals prior to maturity. Contracts purchased by banks or state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. Contracts purchased by asset management firms either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity.
NET REALIZED INVESTMENT LOSSES totaled $30.3 million in 1996, $33.0 million in 1995 and $21.1 million in 1994, and represent 0.21%, 0.33% and 0.24%, respectively, of average invested assets. Net realized investment losses include impairment writedowns of $34.9 million in 1996, $42.7 million in 1995 and $55.9 million in 1994. Therefore, net gains from sales of investments totaled $4.6 million in 1996, $9.7 million in 1995 and $34.8 million in 1994.
Net gains from sales of investments in 1996 include $11.8 million of net gains realized on sales of other invested assets, principally leveraged leases, $3.4 million of net gains realized on sales of common stocks and $11.9 million of net losses realized on sales of bonds. Net gains from sales of investments in 1995 include $20.9 million of net gains realized on sales of common stocks and $15.6 million of net losses realized on sales of bonds. Net gains from sales of investments in 1994 include $22.6 million of net gains realized on sales of common stocks and $27.0 million of net losses realized on sales of bonds. The Company also realized $35.1 million of net gains on sales of certain partnership interests in 1994. Sales of investments are generally made to maximize total return.
Impairment writedowns in 1996 include $22.3 million of additional provisions applied to defaulted bonds. 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.
VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $104.7 million in 1996, $84.6 million in 1995 and $79.5 million in 1994. Increases in variable annuity fees in 1996 and 1995 reflect growth in average variable annuity assets, principally due to increased market values and the receipt of variable annuity premiums, partially offset by surrenders. Variable annuity assets averaged $5.75 billion during 1996, $4.67 billion during 1995 and $4.43 billion during 1994. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $929.2 million in 1996, $571.4 million in 1995 and $759.3 million in 1994. The increase in premiums in 1996 may be attributed, in part, to a heightened demand for equity investments, principally as a result of generally improved market performance. The decline in premiums in 1995 may 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
LOAN SERVICING FEES are earned by the Company's subsidiary, Imperial Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment loans for borrowers to fund their property and casualty insurance premiums. These loans are secured by the unearned premium associated with the underlying insurance policies. Currently, Imperial sells most of the short-term loans it originates and earns fee income by servicing these sold loans. Such fee income totaled $23.8 million on average loans serviced of $457.8 million in 1996, compared with $19.8 million on average loans serviced of $438.3 million in 1995. Imperial's net assets were acquired on November 30, 1994, and, therefore, no such fee income was earned in fiscal 1994.
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 $16.7 million in 1996 (on an average of 201,800 trust accounts) from $15.4 million in 1995 (on an average of 196,000 trust accounts) and $11.9 million in 1994 (on an average of 148,500 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 Life Insurance Company.
SURRENDER CHARGES on fixed and variable annuities totaled $22.1 million in 1996 (including $11.1 million attributable to the Acquisitions), compared with $11.9 million in 1995 and $10.7 million in 1994. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of an annuity contract. Withdrawal payments, which include surrenders and lump- sum annuity benefits, totaled $1.42 billion (including $200.2 million attributable to the Acquisitions) in 1996, $1.31 billion in 1995 and $1.13 billion in 1994. These payments represent 11.1% (7.5% of average fixed annuity reserves associated with the Acquisitions), 14.8% and 13.2%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $108.2 million in 1996, $86.1 million in 1995 and $69.3 million in 1994. The increase in 1996 primarily reflects the amortization of the deferred acquisitions costs attributable to the Acquisitions, which aggregated $16.8 million. Amortization has also increased during the three-year period 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 $117.6 million in 1996, $85.4 million in 1995 and $74.7 million in 1994, representing effective tax rates of 30% in 1996 and 31% in both 1995 and 1994. These tax rates reflect the favorable impact of affordable housing tax credits.
INVESTED ASSETS at year end totaled $16.20 billion in 1996, compared with $10.81 billion in 1995. This $5.39 billion increase primarily resulted from the Acquisitions (with related invested assets aggregating $4.73 billion at the dates of acquisition) and sales of GICs and fixed annuity contracts, partially offset by a $26.5 million increase in net unrealized losses on debt and equity securities available for sale.
The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading
portfolio. Effective December 1, 1995, pursuant to guidelines issued by the Financial Accounting Standards Board, the Company determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. Accordingly, the Company no longer classifies a portion of its Bond Portfolio as held for investment.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair value by $75.6 million at September 30, 1996, compared with $12.6 million at September 30, 1995 (including net unrealized losses of $31.1 million on the portion of the portfolio that was designated as available for sale at September 30, 1995). The increase in net unrealized losses on the Bond Portfolio since September 30, 1995 principally reflects the higher relative prevailing interest rates at September 30, 1996 and their corresponding effect on the fair value of the Bond Portfolio.
The following table summarizes the Company's rated bonds by rating classification as of September 30, 1996 (dollars in thousands):
While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. Although, as a result of restrictive financial covenants, Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities, management believes that the risk of loss upon default for its Secured Loans is mitigated by their financial covenants and senior secured positions. The Company's Secured Loans are rated by S&P, Moody's, D&P, Fitch or by the Company or the NAIC, pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $1.65 billion at September 30, 1996 and consisted of 648 first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 34 states. Approximately 44% of the portfolio was multifamily residential, 20% was retail, 13% was manufactured housing, 5% was industrial, 5% was office and 13% was other types. At September 30, 1996, approximately 24% of the portfolio was secured by properties located in California, 10% by properties located in Texas and no more than 9% of the portfolio was secured by properties located in any other single state. At September 30, 1996, there were 32 loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 28% 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, 1996, approximately 17% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1999. During 1996, 1995 and 1994, loans delinquent more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the portfolio.
Approximately 29% of the mortgage loans in the portfolio at September 30, 1996 were seasoned loans underwritten to the Company's standards and purchased at or near par from the Resolution Trust Corporation or other financial institutions, many of which were downsizing their portfolios. 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 effects of general economic conditions on these commercial properties. However, due to the seasoned nature of the Company's mortgage loans, its emphasis on multifamily loans and its strict underwriting standards, the Company believes that it has reduced the risk attributable to its mortgage loan portfolio while maintaining attractive yields.
PARTNERSHIP investments totaled $1.07 billion at September 30, 1996, constituting investments in approximately 450 separate partnerships with an average size of approximately $2.4 million. This portfolio includes: (i) $498.5 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 440 separate issuers; (ii) $473.2 million of partnerships that make tax-advantaged investments in affordable housing, currently involving approximately 340 multifamily projects in 39 states; and (iii) $100.2 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1996, $427.0 million of the Company's partnerships was accounted for by using the cost method and $644.9 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 marketability of the tax credits they generate. The Company believes that these risks are acceptable in light of anticipated partnership returns and the contractual termination provisions contained in the partnership agreements.
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, 1996, the weighted average life of the Company's investments was approximately 5.2 years and the duration was approximately 3.3.
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, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1996, the Company had 23 outstanding Swap Agreements with an aggregate notional principal amount of $1.12 billion. These agreements mature in various years through 2002 and have an average remaining maturity of 39 months.
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 risks associated with Total Return Agreements are the credit risk on the underlying non-investment-grade bonds, the risk of potential loss due to bond market fluctuations and the risk associated with counterparty nonperformance. The primary risk associated with the Company's Dollar Rolls, Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Total Return Agreements, Dollar Rolls, Reverse Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. Counterparty risk associated with Dollar Rolls is further mitigated by the Company's participation in an MBS trading clearinghouse. The sell and buy transactions that are submitted to this clearinghouse are marked to market on a daily basis and each participant is required to over-collateralize its net loss position by 30% with either cash, letters of credit or government securities. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable-rate liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of its portfolio of debt securities. 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 making these reviews for bonds, management principally considers the adequacy of collateral (if any), 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.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $28.7 million at September 30, 1996 (at amortized cost, with a fair value of $25.8 million), including $16.7 million of bonds and notes and $12.0 million of mortgage loans. At September 30, 1996, defaulted investments constituted 0.2% of total invested assets. At September 30, 1995, defaulted investments totaled $61.8 million, including $34.4 million of bonds and notes and $27.4 million of mortgage loans. At September 30, 1995, defaulted investments constituted 0.6% of total invested assets.
During June and October 1995, respectively, the Parent purchased the common securities of SunAmerica Capital Trust I and SunAmerica Capital Trust II (the "Grantor Trusts") and issued an aggregate of $245.5 million of junior subordinated debentures (the "Debentures") to the Grantor Trusts in connection with the public issuance of preferred securities of the Grantor Trusts (see Note 8 of Notes to Consolidated Financial Statements).
The Parent's annual debt service with respect to its senior indebtedness, GIC obligations and Debentures totals $98.7 million for fiscal 1997, $118.9 million for fiscal 1998, $227.3 million for fiscal 1999, $92.1 million for fiscal 2000, $101.1 million for fiscal 2001 and $2.12 billion, in the aggregate, thereafter.
The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Parent has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. In fiscal 1996 the Company prospectively adopted the accounting provisions of EITF Consensus No. 94-1 for affordable housing investments made after May 1995, the date of the consensus. Accordingly, syndication compensation is recognized in income upon transfer of the partnerships and the remaining income is deferred and amortized over a 15-year period. Previously, a portion of the income was deferred to absorb estimated payments under the guarantees with the remainder recognized in income at the date of transfer. The adoption of the consensus did not have a material effect on net income in fiscal 1996, nor is it expected to materially affect future net income. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees.