The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein. Per-share amounts have been restated to reflect to reflect a three-for-two stock split, paid in the form of a stock dividend on August 29, 1997. In addition, certain items have been reclassified to conform to the current year's presentation.
Management's discussion and analysis of financial condition and results of operations of SunAmerica Inc. (the "Company") for the three years in the period ended September 30, 1997 follows. 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.
PRETAX INCOME totaled $537.1 million in 1997, $392.0 million in 1996 and $279.6 million in 1995. The 37.0% improvement in 1997 over 1996 and the 40.2% improvement in 1996 over 1995 primarily resulted from increased net investment income and fee income, which were partially offset by higher general and administrative expenses and increased amortization of deferred acquisition costs.
Partnership income increased to $241.5 million (a yield of 21.00% on related average assets of $1.15 billion) in 1997, compared with $178.6 million (a yield of 19.04% on related average assets of $937.8 million) in 1996 and $134.1 million (a yield of 18.17% on related average assets of $738.0 million) in 1995. Partnership income includes income recognized by using the cost method of accounting, which amounted to $71.7 million, $59.1 million and $106.9 million in 1997, 1996 and 1995, respectively. Such income is based upon cash distributions received from limited partnerships, the operations of which the Company does not influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future.
Total interest and dividend expense equalled $1.12 billion in 1997, $761.5 million in 1996 and $540.2 million in 1995. The average rate paid on all interest-bearing liabilities was 5.66% in 1997, compared with 5.73% in 1996 and 5.90% in 1995. Interest-bearing liabilities averaged $19.71 billion during 1997, compared with $13.29 billion during 1996 and $9.16 billion during 1995. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1994, the average rate paid on all interest-bearing liabilities would have been 5.62% in 1997, 5.55% in 1996 and 5.45% in 1995. These increases in overall rates paid reflect year-over-year increases in the percentage of average interest-bearing liabilities composed of senior debt, guaranteed investment contracts ("GICs") and preferred securities of subsidiary grantor trusts, which, though the average rates have declined on these liabilities since 1995, generally bear higher interest rates than that of the Company's interest-bearing liabilities on average.
Average invested assets also increased as a result of sales of the Company's fixed-rate products, consisting of both fixed annuity premiums (including those for the fixed accounts of variable annuity products) and GIC premiums, and $1.44 billion of aggregate net proceeds from the issuances of Common Stock, preferred securities of subsidiary grantor trusts and long-term notes. Fixed annuity premiums totaled $1.49 billion in 1997, compared with $993.4 million in 1996 and $944.7 million in 1995. These premiums include premiums for the fixed accounts of variable annuities totaling $1.17 billion, $782.6 million and $286.7 million, respectively, which have increased primarily because of increased sales of the Company's Polaris product and greater inflows into the one-year fixed account of that product.
GIC premiums increased to $2.08 billion in 1997 from $1.02 billion in 1996 and $1.77 billion in 1995. The increase in GIC premiums in 1997 reflects an expansion of the GIC client base due, in part, to a broadening of the Company's products and distribution channels, including its AAA-rated and its AAA/Aaa-rated credit-enhanced GIC products. This increase also reflects increased sales of longer-maturity products to banks, asset management firms for their long-term portfolios and certain trusts. The decline in GIC premiums in 1996 primarily resulted from planned reductions of sales of short-term maturity products to asset management firms and from reductions of sales to banks. While GIC premiums declined, GIC surrenders and maturities also declined during 1996 to $708.7 million, compared with $1.16 billion in 1995. GIC surrenders and maturities were $1.01 billion in 1997. The size of the Company's GIC reserves increased over the three-year period to $5.55 billion at September 30, 1997 from $2.78 billion at September 30, 1994.
Impairment writedowns primarily have been applied to defaulted bonds and mortgage loans. Impairment writedowns, on an annualized basis, represent 0.31%, 0.24% and 0.43% of average invested assets for 1997, 1996 and 1995, respectively. For the five years ended September 30, 1997, impairment writedowns as a percentage of average invested assets have ranged from 0.24% to 1.36% and have averaged 0.60%. Such writedowns are based upon estimates of the net realizable value of the applicable assets. Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $141.2 million in 1997, $104.7 million in 1996 and $84.6 million in 1995. These increased fees reflect growth in average variable annuity assets, principally due to the receipt of variable annuity premiums, increased market values and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders. Variable annuity assets averaged $7.66 billion during 1997, $5.75 billion during 1996 and $4.67 billion during 1995. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $1.31 billion in 1997, $929.2 million in 1996 and $571.4 million in 1995. Sales of variable annuity products (which include premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $2.47 billion, $1.71 billion and $858.1 million in 1997, 1996 and 1995, respectively. Increases in Variable Annuity Product Sales are due, in part, to market share gains through enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed income and guaranteed fixed account investment choices. 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.
SURRENDER CHARGES on fixed and variable annuities totaled $35.2 million (including $24.5 million attributable to the Acquisitions) in 1997, compared with $22.1 million in 1996 (including $11.1 million attributable to the Acquisitions) and $11.9 million in 1995. 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 $2.28 billion (including $1.00 billion attributable to the Acquisitions) in 1997, compared with $1.42 billion (including $245.8 million attributable to the Acquisitions) in 1996 and $1.31 billion in 1995. These payments represent 12.0% (15.0% of average fixed annuity reserves associated with the Acquisitions), 11.1% (9.3% of average fixed annuity reserves associated with the 1996 Acquisitions) and 14.8%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity withdrawals from the separate accounts totaling $827.3 million in 1997, $637.0 million in 1996 and $650.0 million in 1995. Consistent with the assumptions used in connection with the John Alden Acquisition, management anticipates that the level of withdrawal payments will continue to reflect higher relative withdrawal rates in the near future because of higher surrenders on the annuity business acquired in the John Alden Acquisition.
Excluding the effects of the Acquisitions, withdrawal payments represented 10.4% of related average fixed and variable annuity reserves in 1997 and 11.6% in 1996. These lower surrender rates reflect the continued decrease in the percentage of non-acquisition-related annuity contracts that are free of surrender charges.
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 by SunAmerica Asset Management Corp. Such fees totaled $25.8 million on average assets managed of $2.34 billion in 1997, $25.4 million on average assets managed of $2.14 billion in 1996 and $26.9 million on average assets managed of $2.07 billion in 1995. Asset management fees are not proportionate to average assets managed, principally due to changes in product mix. Sales of mutual funds, excluding sales of money market accounts, amounted to $454.8 million in 1997, compared with $223.4 million in 1996 and $140.2 million in 1995. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $412.8 million in 1997, $379.9 million in 1996 and $426.5 million in 1995. The significant increases in sales during 1997 principally resulted from the introduction in November 1996 of the Company's Style Select Series product. Higher mutual fund sales and lower redemptions in 1996 both reflect enhanced marketing efforts and the favorable performance records of certain of the Company's mutual funds, and heightened consumer demand for equity investments generally.
LOAN SERVICING FEES are earned by 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 loans it originates and earns fee income by servicing the sold loans. Such fee income totaled $24.3 million on average loans serviced of $490.5 million in 1997, compared with $23.8 million on average loans serviced of $457.8 million in 1996, and $19.8 million on average loans serviced of $438.3 million in 1995. Although average loans serviced have increased during 1997, loan servicing fees have not increased proportionately, largely due to increased competition in the premium finance marketplace.
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 retirement plans. Trust fees increased to $17.9 million in 1997 (on an average of 204,400 trust accounts) from $16.7 million in 1996 (on an average of 201,800 trust accounts) and $15.4 million in 1995 (on an average of 196,000 trust accounts).
material future expenses associated with this project. 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 $165.1 million in 1997, compared with $108.2 million in 1996 and $86.1 million in 1995. The increases in amortization primarily reflect the amortization of the deferred acquisition costs attributable to the Acquisitions, which aggregated $65.2 million in 1997 and $16.8 million in 1996. 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 direct selling costs.
INCOME TAX EXPENSE totaled $158.0 million in 1997, compared with $117.6 million in 1996 and $85.4 million in 1995, representing effective tax rates of 29% in 1997, 30% in 1996 and 31% in 1995. These tax rates reflect the favorable impact of tax credits associated with tax-advantaged investments in affordable housing partnerships owned by the Company.
SHAREHOLDERS' EQUITY increased 55.6% to $2.58 billion at September 30, 1997 from $1.66 billion at September 30, 1996, primarily due to $577.3 million of net proceeds realized from the issuance of additional Common Stock, $379.1 million of net income recorded in 1997 and $209.9 million of net unrealized gains on debt and equity securities available for sale (credited directly to shareholders' equity), versus $17.0 million of net unrealized losses on such securities recorded at September 30, 1996. These favorable factors were partially offset by a $136.5 million aggregate reduction in outstanding preferred stock resulting from the redemption of Series B Preferred Stock and Adjustable Rate Cumulative Preferred Stock, Series C (see Note 9 of Notes to Consolidated Financial Statements) and $67.8 million of dividends paid to shareholders.
INVESTED ASSETS at year end totaled $24.41 billion in 1997, compared with $16.20 billion at year-end 1996. This 50.7% increase primarily resulted from the John Alden Acquisition (with related invested assets aggregating $5.00 billion at the date of acquisition). Other factors contributing to this increase include sales of GICs; net proceeds from the issuance of Common Stock; $559.3 million of net proceeds from the issuance of long-term notes and debentures; the $462.5 million net unrealized gain recorded on debt and equity securities available for sale at September 30, 1997, versus the $39.1 million net unrealized loss recorded on such securities at September 30, 1996; and a $257.4 million net increase in preferred securities of subsidiary grantor trusts.
The Company manages most of its invested assets internally. 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 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 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 comprises 76% of the Company's total investment portfolio (at amortized cost), had an aggregate fair value that exceeded its amortized cost by $398.8 million at September 30, 1997. At September 30, 1996, the amortized cost exceeded the fair value of the Bond Portfolio by $75.6 million. The net unrealized gains on the Bond Portfolio since September 30, 1996 principally reflect the lower prevailing interest rates at September 30, 1997 and the corresponding effect on the fair value of the Bond Portfolio.
Portfolio was investment grade, including $7.27 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs").
(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 nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $707.2 million (at amortized cost) of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.
Senior Secured Loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $2.46 billion at September 30, 1997. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1997, Secured Loans consisted of loans to 338 borrowers spanning 45 industries, with 21% of these assets (at amortized cost) concentrated in financial institutions and 14% concentrated in utilities. No other industry concentration constituted more than 5% of these assets.
MORTGAGE LOANS aggregated $3.14 billion at September 30, 1997 and consisted of 1,267 commercial first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 45 states. Approximately 29% of this portfolio was multifamily residential, 27% was retail, 15% was office, 9% was manufactured housing, 7% was industrial and 13% was other types. At September 30, 1997, approximately 18%, 11%, 9% and 8% of this portfolio was secured by properties located in California, New York, Florida and Texas, respectively, and no more than 5% of this portfolio was secured by properties located in any other single state. At September 30, 1997, there were 51 mortgage loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 30% of this 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, 1997, approximately 34% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2000. During 1997, 1996 and 1995, 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 September 30, 1997, the mortgage loan portfolio included $808.6 million of commercial mortgage loans obtained as part of the John Alden Acquisition. During 1997, the Company sold $333.8 million of single-family residential mortgage loans obtained as part of the John Alden Acquisition.
At September 30, 1997, approximately 45% 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, its emphasis on multifamily loans 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.
PARTNERSHIP investments totaled $1.29 billion at September 30, 1997, constituting investments in approximately 550 separate partnerships with an average size of approximately $2.3 million. This portfolio includes: (i) $664.6 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 3,500 separate issuers; (ii) $516.2 million of partnerships that make tax-advantaged investments in affordable housing properties, currently involving approximately 525 multifamily projects in 43 states; and (iii) $106.0 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1997, $725.5 million of the Company's partnerships was accounted for by using the cost method and $561.3 million by using the equity method. The risks generally associated with partnerships include those related to their underlying investments (i.e. equity securities, debt
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 stress-test 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 of the fixed-rate assets to that of its fixed-rate liabilities. The Company's fixed-rate assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; and investments in limited partnerships that invest primarily in fixed-rate securities and are accounted for by using the cost method. At September 30, 1997, these assets had an aggregate fair value of $23.06 billion with a duration of 3.5. The Company's fixed-rate liabilities include: fixed annuities; GICs; trust deposits; long-term notes and debentures; and preferred securities of subsidiary grantor trusts. At September 30, 1997, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $21.43 billion with a duration of 3.0. The Company's potential exposure due to a relative 10% increase in interest rates prevalent at September 30, 1997 is a loss of approximately $98.3 million in fair value of its fixed-rate assets that is not offset by an increase in the fair value of its fixed-rate liabilities. 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.
Duration is a common option-adjusted measure for the price sensitivity of a fixed-maturity portfolio to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio if interest rates change by 100 basis points, recognizing the changes in cash flows resulting from embedded options such as policy surrenders, investment prepayments and bond calls. It also incorporates the assumption that the Company will continue to utilize its existing strategies of pricing its fixed annuity and GIC products, allocating its available cash flow amongst its various investment portfolio sectors and maintaining sufficient levels of liquidity. Because the calculation of duration involves estimation and incorporates assumptions, potential changes in portfolio value indicated by the portfolio's duration will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material.
with an aggregate notional principal amount of $1.62 billion. These agreements mature in various years through 2003 and have an average remaining maturity of 38 months.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $38.5 million at September 30, 1997 (at amortized cost after impairment writedowns, with a fair value of $38.0 million), including $15.6 million of bonds and notes and
During November 1996 and October 1995, respectively, the Parent purchased the common securities of SunAmerica Capital Trust III and SunAmerica Capital Trust II (collectively, the "Grantor Trusts") and issued an aggregate of $511.9 million of junior subordinated debentures (the "Debentures") to the Grantor Trusts in connection with the public issuance of the preferred securities of the Grantor Trusts (see Note 8 of Notes to Consolidated Financial Statements).
The Parent's annual debt service (principal and interest payments) with respect to its senior indebtedness (including the 6.75% Notes), GIC obligations and Debentures totals $183.6 million for fiscal 1998, $292.0 million for fiscal 1999, $574.6 million for fiscal 2000, $139.0 million for fiscal 2001, $297.4 million for fiscal 2002 and $4.27 billion, in the aggregate, thereafter. On or before October 31, 1999, the Company is contractually scheduled to receive $431.3 million upon delivery of 17.3 million or fewer shares of the Company's Common Stock in accordance with the terms of the Company's 8 1/2% Premium Equity Redemption Cumulative Security Units.
The Parent received dividends from its regulated life insurance subsidiaries totaling $118.7 million in April 1997, $94.3 million in March 1996 and $69.2 million in March 1995. The Parent also received dividends of $17.5 million in fiscal 1997 and $16.0 million in fiscal 1996 from its other directly owned subsidiaries. The ability of the Company's life insurance subsidiaries to pay dividends is limited by statute. There are no dividends available to the Parent from its regulated life insurance subsidiaries for the remainder of calendar year 1997.