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 a two-for-one stock split, paid in the form of a stock dividend on August 30, 1996, and a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. 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, 1996 follow. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere 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 ("SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. In particular, 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 or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities.
Net investment income also includes the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. This excess amounted to $1.06 billion in 1996, $741.2 million in 1995 and $647.1 million in 1994. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 3.01% in 1996, 3.25% in 1995 and 2.90% in 1994. As a result of the Acquisitions, this difference declined by 24 basis points in 1996.
Investment income and the related yields on average invested assets totaled $1.25 billion or 8.74% in 1996, compared with $905.8 million or 9.15% in 1995 and $758.2 million or 8.50% in 1994. The $348.5 million increase in investment income recorded in 1996 and the related 41 basis point decline in yield that it represents both reflect the effects of the Acquisitions. In 1996, the investment income associated with the Acquisitions aggregated $191.6 million, and reduced the overall investment yield of the Company by 44 basis points.
In addition to increasing due to the effects of the Acquisitions, investment income rose during 1996, and during 1995, as a result of higher levels of average invested assets and additional partnership income. Partnership income increased to $178.6 million (representing a yield of 19.04% on related average assets of $937.8 million) in 1996, compared with $134.1 million (representing a yield of 18.17% on related average assets of $738.0 million) in 1995 and $63.7 million (representing a yield of 11.35% on related average assets of $560.9 million) in 1994. Partnership income includes income recognized by using the cost method of accounting, which amounted to $59.1 million, $106.9 million and $26.5 million in 1996, 1995 and 1994, respectively. Such income is based upon cash distributions received from limited partnerships, the operations of which the Company does not significantly 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.
The Company has historically enhanced investment yield through its use of dollar roll transactions ("Dollar Rolls"), whereby the proceeds from sales of mortgage-backed securities ("MBSs") are invested in short-term securities pending the contractual repurchase of substantially the same securities at discounted prices in the forward market. The Company has been able to engage in Dollar Rolls due to the market demand for MBSs for formation of collateralized mortgage obligations, but this demand has declined over the periods presented. The Company recorded $1.4 million of enhanced yield on such transactions during 1996, compared with $4.6 million during 1995 and $15.6 million during 1994. (See "Asset-Liability Matching" for additional discussion of Dollar Rolls.)
In addition, the Company has enhanced investment yield through total return corporate bond swap agreements (the "Total Return Agreements"). The Company recorded income of $32.5 million on the Total Return Agreements in 1996, compared with $13.0 million recorded during 1995 and $1.3 million recorded in 1994. The improved results in 1996 and in 1995 primarily reflect increases in the fair value of the underlying assets, resulting primarily from improved overall performance of the non-investment-grade bonds underlying the Total Return Agreements, and increases in the average
GROWTH IN AVERAGE INVESTED ASSETS since 1994 primarily reflects the impact of the Acquisitions. Average assets in 1996 include the invested assets of CalFarm for nine months, those of Ford Life for seven months and those associated with the Central National Annuity Contracts for six months. In the aggregate, the Acquisitions contributed $2.84 billion to the Company's average invested assets in 1996. The Company intends to continue to pursue a strategy of enhancing its internal growth with complementary acquisitions. On November 29, 1996, the Company entered into a definitive agreement to acquire John Alden Financial Corporation's annuity operations (which had approximately $5.00 billion of fixed annuity reserves at September 30, 1996) for approximately $240.0 million in cash. The acquisition is subject to customary conditions and required regulatory approvals, and is expected to be completed by the end of the first calendar quarter of 1997.
Average invested assets also increased in 1996 and in 1995 as a result of sales of the Company's fixed-rate products, consisting of both fixed annuities (including the fixed accounts of variable annuity products) and GICs, and $519.2 million of aggregate net proceeds from the issuances of Preferred Stock of the Company, preferred securities of a subsidiary grantor trust and long-term notes. Fixed annuity premiums totaled $993.4 million in 1996, compared with $944.7 million in 1995 and $230.0 million in 1994. These premiums include premiums for the fixed accounts of variable annuities totaling $782.6 million, $286.7 million and $140.6 million, respectively. The increase in aggregate fixed annuity premiums in 1996 reflects an increase in premiums for the fixed accounts of variable annuities in 1996, which resulted primarily from greater inflows into the one-year fixed account of the Company's Polaris product. Other fixed premiums declined during 1996 despite increases resulting from the Acquisitions, primarily reflecting lower prevailing interest rates. The $714.7 million increase in fixed annuity premiums during 1995 reflects higher market demand for fixed-rate products, due, in part, to the increase in prevailing long-term interest rates that began during the latter half of fiscal 1994 and continued into the first quarter of fiscal 1995.
short-term maturity products to asset management firms and in reductions of sales to banks. The increase in GIC sales during 1995 reflects the Company's broadening of its distribution channels and product line to increase its GIC client base. While GIC premiums declined, GIC surrenders also declined during 1996 to $708.7 million, compared with $1.16 billion in 1995 and $621.7 million in 1994 and the size of the Company's GIC reserves increased over the three-year period to $4.17 billion at September 30, 1996 from $2.22 billion at September 30, 1993.
competition in the variable annuity marketplace during recent years 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 $49.8 million in 1996, $33.7 million in 1995 and $29.9 million in 1994. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $12.78 billion in 1996, $7.41 billion in 1995 and $6.87 billion in 1994. The significant increases in sales and net retained commissions during 1996 reflect a greater number of registered representatives (largely due to the acquisition of Advantage Capital Corporation, a Houston-based broker-dealer, on January 3, 1996) and higher average production, combined with generally favorable market conditions. Increases in net retained commissions are not proportionate to increases in 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 by SunAmerica Asset Management Corp. Such fees totaled $25.4 million on average assets managed of $2.14 billion in 1996, $26.9 million on average assets managed of $2.07 billion in 1995 and $31.3 million on average assets managed of $2.39 billion in 1994. Asset management fees decreased slightly in 1996, despite a modest increase in average assets managed, principally due to changes in product mix. The decrease in asset management fees during 1995 principally resulted from the decline in average assets managed, primarily due to an excess of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $379.9 million in 1996, compared with $426.5 million in 1995 and $561.0 million in 1994. Sales of mutual funds, excluding sales of money market accounts, amounted to $223.4 million in 1996, compared with $140.2 million in 1995 and $342.6 million in 1994. Higher mutual fund sales and lower redemptions in 1996 both reflect the combined effects of additional advertising, the favorable performance records of certain of the Company's mutual funds and heightened demand for equity investments, principally as a result of improved market performance.
separate accounts totaling $637.0 million in 1996, $650.0 million in 1995 and $461.5 million in 1994. Excluding the effects of the Acquisitions, withdrawal payments as a percentage of related average fixed and variable annuity reserves in 1996 were 12.1%, lower than 1995 and 1994 levels, reflecting decreased fixed annuity withdrawal payments, slightly decreased variable annuity withdrawals and increased average fixed and variable annuity reserves. This decrease in fixed annuity withdrawals principally resulted from unusually high withdrawals in 1995 and in 1994 (mainly as a result of certain blocks of policies coming off surrender charge restrictions and greater volumes of surrenders on a closed block of business) and the success of the Company's retention efforts in 1996. Variable annuity surrenders increased in 1995 primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $212.7 million in 1996, compared with $166.5 million in 1995 and $132.7 million in 1994. General and administrative expenses in 1996 reflect the impact of the Acquisitions, including Advantage Capital Corporation, and include the expenses of Imperial for the full year, compared with ten months of such expenses recorded in 1995. In addition, 1996 and 1995 include expenses related to a national advertising campaign to increase the Company's brand name awareness. General and administrative expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets.
SHAREHOLDERS' EQUITY increased by $447.5 million to $1.66 billion at September 30, 1996 from $1.21 billion at September 30, 1995, primarily as a result of the $274.4 million of net income recorded in 1996 and the issuance of $248.0 million of the Company's Series E Preferred Stock. These favorable factors were partially offset by $61.7 million of dividends paid to shareholders and a $12.3 million increase in net unrealized losses on debt and equity securities available for sale charged directly to shareholders' equity.
BOOK VALUE PER SHARE amounted to $11.69 at September 30, 1996, compared with $8.89 at September 30, 1995 and $6.30 at September 30, 1994. Excluding net unrealized losses on debt and equity securities available for sale, book value per share amounted to $11.82 at September 30, 1996, $8.93 at September 30, 1995 and $7.53 at September 30, 1994.
TOTAL ASSETS increased by $6.89 billion to $23.73 billion from $16.84 billion at September 30, 1995, principally due to a $5.39 billion increase in invested assets and a $1.12 billion increase in the separate accounts for variable annuities.
All of the Bond Portfolio ($12.55 billion at amortized cost, excluding $108.4 million of redeemable preferred stocks) at September 30, 1996 was rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investor Service, Inc. ("Fitch") 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, 1996, approximately $11.31 billion of the Bond Portfolio (at amortized cost) was rated investment grade by one or more of these agencies or by the Company or the NAIC, pursuant to applicable NAIC guidelines, including $5.53 billion of U.S. government/agency securities and MBSs.
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 the proportion of its portfolio invested in 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, 1996.
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $1.54 billion at September 30, 1996. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1996, Secured Loans consisted of loans to 331 borrowers spanning 40 industries, with 15% of these assets (at amortized cost) concentrated in financial institutions, 15% concentrated in the leisure industry and 12% concentrated in utilities. No other industry concentration constituted more than 7% of these assets.
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-rate securities. The Company's fixed-rate
The Company also seeks to provide liquidity from time to time 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.
SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1996, approximately $5.66 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $177.6 million, while approximately $7.00 billion of the Bond Portfolio had an aggregate unrealized loss of $253.2 million. In addition, $577.5 million remains available to the Company to issue securities under a shelf registration statement filed in October 1996, subsequent to the Company's fiscal year end (see Note 9 of Notes to Consolidated Financial Statements). Further, the Company's investment portfolio currently provides approximately $138.7 million of monthly cash flow from scheduled principal and interest payments.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"), at September 30, 1996, had invested assets with a fair value of $1.05 billion and outstanding senior indebtedness of $573.3 million, comprising all of the Company's outstanding senior indebtedness. Additionally, as of
September 30, 1996, the Parent had three GICs purchased by local government entities which aggregated $239.1 million.
The Parent received dividends from its regulated life insurance subsidiaries of $94.3 million in fiscal 1996, $69.2 million in fiscal 1995 and $43.0 million in fiscal 1994. The Parent also received dividends of $16.0 million in fiscal 1996 and $2.4 million in fiscal 1994 from its other directly owned subsidiaries.