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 Atlanta, Georgia; 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.
PRETAX INCOME totaled $240.0 million in 1994, $184.0 million in 1993 and $111.1 million in 1992. The $56.0 million improvement in 1994 primarily resulted from increased net investment income and fee income, partially offset by additional amortization of deferred acquisition costs. In addition, 1993 results include a $22.0 million provision for future guaranty fund assessments. The $72.9 million improvement in 1993 over 1992 primarily resulted from increased net investment income, decreased net realized investment losses and increased fee income, all of which were partially offset by the provision for future guaranty fund assessments.
These declines in yield resulted primarily from sales of higher-yielding securities and the reinvestment of sales proceeds in lower-yielding securities. The Company has principally made such sales to obtain certain mortgage-backed securities ("MBSs") that the market demands for the formation of collateralized mortgage obligations ("CMOs"). Ownership of these MBSs has permitted the Company to engage in dollar roll transactions ("Dollar Rolls"). The Company has also sold securities to take
advantage of changes in relative value between its portfolio sectors, and to more closely match assets and liabilities (see "Asset-Liability Matching"). In addition, investment yield has declined as the net cash provided by the Company's operating and financing activities, as well as the cash flows from redemptions and maturities of securities in the Company's investment portfolio, have been invested in lower-yielding securities due to the lower interest rate environment prevailing during 1993 and the first half of 1994.
Net gains in 1994 include $22.6 million of net gains on $17.6 million of sales of common stocks made primarily to maximize total return and $27.0 million of net losses on $3.25 billion of sales of bonds. These bond sales include approximately $1.43 billion of sales of MBSs made primarily to acquire other MBSs that were then used in Dollar Rolls. In addition, bond sales include $625.3 million of sales of high-yield investments and $569.9 million of sales of certain CMOs and asset-backed securities, which were primarily made to maximize total return. The Company also realized $35.1 million of net gains on sales of $105.9 million of certain limited partnership interests.
Net gains in 1992 include $52.9 million of net gains realized on $5.26 billion of sales of bonds. These bond sales include approximately $3.45 billion of sales of MBSs made primarily to acquire other MBSs for use in Dollar Rolls and $838.8 million of high-yield investments made primarily to improve the overall credit quality of the portfolio. In addition, bond sales in 1992 include $520.8 million of sales of Secured Loans that also were made primarily to improve the overall credit quality of the portfolio. Net gains in 1992 also include $9.5 million of net gains realized on the sales of $35.4 million of certain limited partnership interests.
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.
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. Such fees totaled $31.3 million on average assets managed of $2.39 billion in 1994, $32.3 million on average assets managed of $2.46 billion in 1993 and $25.3 million on average assets managed of $2.15 billion in 1992. Asset management fees decreased in 1994 primarily due to a decline in the market value of assets managed and increased redemptions, both a reflection of adverse market conditions for fixed-income and equity securities which can be attributed, in part, to rising interest rates during the latter half of fiscal 1994. Mutual fund sales in 1994 also were affected by these adverse market conditions. Sales of mutual funds, excluding sales of money market funds, totaled $342.6 million in 1994, compared with $532.4 million in 1993 and $827.6 million in 1992. The decline in mutual fund sales during 1993 resulted primarily from the Company's strategic decision to diversify its mutual fund product sales, and to reduce the percentage of sales derived from back-end loaded products.
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 $28.0 million in 1994, $23.7 million in 1993 and $18.9 million in 1992. Sales of nonproprietary products (mainly mutual funds and general securities) totaled $6.30 billion in 1994, $5.87 billion in 1993 and $4.70 billion in 1992. The increases in net retained commissions are not proportionate to the related changes in sales, primarily due to changes in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $10.7 million in 1994, compared with $9.8 million in 1993 and $14.3 million in 1992. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of the contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $1.13 billion in 1994, $824.5 million in 1993 and $901.1 million in 1992. These payments represent 13.2%, 10.0% and 11.6%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the separate accounts totaling $461.5 million in 1994, $314.6 million in 1993 and $306.6 million in 1992. Variable annuity surrenders have increased during 1994 primarily due to surrenders on a closed
PROVISION FOR FUTURE GUARANTY FUND ASSESSMENTS totaled $22.0 million in 1993. No such provision was recorded in 1994 or 1992. 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 during the past few years. Currently, management estimates that the remaining assessments will be primarily paid over the next four years.
AMORTIZATION OF DEFERRED ACQUISITION COSTS 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. Amortization of all deferred acquisition costs totaled $66.9 million in 1994, $51.9 million in 1993 and $48.4 million in 1992.
TOTAL ASSETS decreased by $611.2 million to $14.66 billion at September 30, 1994 from $15.27 billion at September 30, 1993, principally due to a decrease in invested assets, partially offset by an increase in the separate account for variable annuities, which increased by $318.1 million during 1994.
Approximately $6.65 billion or 99.6% of the Bond Portfolio (at amortized cost) at September 30, 1994 was rated by Standard and Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1994, approximately $5.66 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $4.20 billion of U.S. government/agency securities and MBSs.
The table on the following page summarizes the Company's rated bonds by rating classification as of September 30, 1994.
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. The majority of the Company's Secured Loans are not rated by S&P or Moody's. However, 92% of the Secured Loans (at amortized cost) are rated in NAIC categories 1 and 2. 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 generally the risk of loss upon default for its Secured Loans is mitigated by their three-year average lives, financial covenants and senior secured positions.
MORTGAGE LOANS aggregated $1.43 billion at September 30, 1994 and consisted of 666 first mortgage loans with an average loan balance of approximately $2.1 million, collateralized by properties located in 26 states. Approximately 51% of the portfolio was multifamily residential, 21% was retail, 8% was office, 7% was industrial and 13% was other types. At September 30, 1994, approximately 33% of the portfolio was secured by properties located in California and no more than 12% of the portfolio
At September 30, 1994, mortgage loans having an aggregate carrying value of $74.7 million had been restructured. Of this amount, $0.6 million was restructured during 1994 and $24.2 million was restructured during 1993.
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 Dollar Rolls, Reverse Repos and Swap Agreements is the risk associated with counterparty nonperformance. In addition, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements hedge variable-rate assets, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of the Swap Agreement would be offset by increased interest income earned on the variable-rate assets. The primary risks associated with Total Return Agreements are the risk of potential loss due to bond market fluctuation and counterparty risk. The Company believes, however, that the counterparties to its Dollar Rolls, Reverse Repos, Swap Agreements and Total Return 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. 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.
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.
The Parent; Sun Life of America; SunAmerica Financial, Inc.; and SunAmerica Asset Management Corp. have sold certain of their interests in various limited partnerships that make tax-advantaged affordable housing investments. As part of the sales 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.
Anchor has undertaken to dispose of $84.5 million (its statutory carrying value) of certain of its real estate located in the Phoenix, Arizona metropolitan area during the next one to three years, either to affiliated or nonaffiliated parties, and the Parent has guaranteed that Anchor will receive its statutory carrying value of these assets. The Parent has pledged certain marketable securities having an amortized cost of $40.3 million at September 30, 1994 to secure this guarantee. This real estate has a consolidated carrying value of approximately $45.5 million at September 30, 1994.