SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

For the quarterly period ended March 31, 2004

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

1 SunAmerica Center, Los Angeles, California 90067-6022
Registrant’s telephone number, including area code: (310) 772-6000

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes x     No o

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED BY RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934). Yes o     No x

     THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON MAY 14, 2004 WAS AS FOLLOWS:

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

Table of Contents

AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements.

3

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)

See accompanying notes to consolidated financial statements.

4

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003
(Unaudited)

See accompanying notes to consolidated financial statements.

5

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
For the three months ended March 31, 2004 and 2003
(Unaudited)

See accompanying notes to consolidated financial statements.

6

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2004 and 2003
(Unaudited)

See accompanying notes to consolidated financial statements.

7

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 2004 and 2003
(Unaudited)

See accompanying notes to consolidated financial statements.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		BASIS OF PRESENTATION
		AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”)(formerly AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services, retirement savings and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”).
		The Company changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, at which time it began doing business under its new name.
		Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $74,507,000. Pretax income from the asset management operation totaled $5,307,000 for the three months ended March 31, 2004. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $100,249,000 and $74,507,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the three months ended March 31, 2003 have been restated for the addition to pretax income of $120,000 to reflect the SAAMCo activity.
		SAAMCo comprises the Company’s asset management segment (see Note 6) along with its wholly owned distributors, SACS and SFS. These companies earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios.
		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of March 31, 2004 and December 31, 2003 and the results of its consolidated operations and its consolidated cash flows for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
2.		RECENTLY ISSUED ACCOUNTING STANDARDS
		In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
		adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.
		The Company issues variable annuities for which and the investment risk is generally borne by, the contract holder in all but the fixed-rate account options. For many of the Company’s variable annuities, the Company contractually guarantees to the contract holder either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances, no minimum returns), or (b) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), and guaranteed minimum account value benefits (“GMAV”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums.
		The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, and other services are included in variable annuity fees and changes in liabilities for minimum guarantees are included in guaranteed minimum death benefits, net of reinsurance in the consolidated statement of operations and comprehensive income. Separate account net investment income, net investment gains and losses, and the related liability changes are offset within the same line item in the consolidated statement of operations and comprehensive income.
		The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, a portion of the GMDB risk on approximately 18% of the account value with GMDB features had been reinsured.
		In addition to GMDB, the Company currently offers to a lesser extent GMIB. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements.
		The Company currently offers GMAV on its variable annuity products. The Company purchased put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of operations and comprehensive income.
		Details concerning the Company’s guaranteed benefits exposures as of March 31, 2004 are as follows:

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.

RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

(a)

Net amount at risk represents the guaranteed benefit exposure, in excess of the current account value, if all contract holders died, in the case of GMDB, annuitized, in the case of GMIB, or reached the specified date, in the case of GMAV, at the same balance sheet date.

The following summarizes the liability for guaranteed benefits on variable contracts reflected in the general account:

(b)

Includes amounts from the one-time cumulative accounting change resulting from the adoption of SOP 03-1.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
		The following assumptions and methodology were used to determine the GMDB liability at March 31, 2004:

	•		Data used was 5,000 stochastically generated investment performance scenarios.
	•		Mean investment performance assumption was 10%.
	•		Volatility assumption was 16%.
	•		Mortality was assumed to be 64 percent of the 75-80 ALB table.
	•		Lapse rates vary by contract type and duration and range from 1% to 30%.
	•		The discount rate was approximately 8%.

		The Company currently offers enhanced crediting rates or bonus payments to contract-holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $165.1 million from DAC to deferred sales inducements, which are reported in other assets on the consolidated balance sheet. For the three months ended March 31, 2004, sales inducements of $10.6 million were deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs on the consolidated statement of operations and comprehensive income. For the three months ended March 31, 2004, amortization of sales inducements was $5.5 million. Prior period consolidated balance sheet and consolidated statement of operations and comprehensive income presentation has been reclassified to conform to the new presentation.
3.		SUBORDINATED NOTES PAYABLE TO AFFILIATES
		Subordinated notes (including accrued interest of $560,000) payable to affiliates totaled $41,520,000 at interest rates ranging from 4.25% to 9.5% at March 31, 2004, and require principal payments of $3,000,000 in 2004 and $37,960,000 in 2005.
4.		CONTINGENT LIABILITIES
		The Company has entered into seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at March 31, 2004 is $557,775,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $222,524,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $21,930,000 in the remainder of 2004, $385,845,000 in 2005 and $150,000,000 in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.
		At March 31, 2004, the Company has a commitment to purchase approximately $25,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $16,000,000 in 2004 and $9,000,000 in 2006.
		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.		CONTINGENT LIABILITIES (Continued)
		On April 5, 2004, a purported class action captioned NIKITA Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.
		The Company’s insurance policy obligations are guaranteed by American Home Assurance Company (“American Home”), a subsidiary of AIG, and a member of an AIG intercompany pool. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home.
		The Company has a support agreement in effect between the Company and AIG (the “Support Agreement”), pursuant to which AIG has agreed that AIG will cause the Company to maintain a policyholder’s surplus of not less than $1,000,000 or such greater amount as shall be sufficient to enable the Company to perform its obligations under any policy issued by it. The Support Agreement also provides that if the Company needs funds not otherwise available to it to make timely payment of its obligations under policies issued by it, AIG will provide such funds at the request of the Company. The Support Agreement is not a direct or indirect guarantee by AIG to any person of any obligations of the Company. AIG may terminate the Support Agreement with respect to outstanding obligations of the Company only under circumstances where the Company attains, without the benefit of the Support Agreement, a financial strength rating equivalent to that held by the Company with the benefit of the Support Agreement. Policyholders have the right to cause the Company to enforce its rights against AIG and, if the Company fails or refuses to take timely action to enforce the Support Agreement or if the Company defaults in any claim or payment owed to such policyholder when due, have the right to enforce the Support Agreement directly against AIG.
		American Home does not publish financial statements, although it files statutory annual and quarterly reports with the New York State Insurance Department, where such reports are available to the public. AIG is a reporting company under the Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and quarterly reports on Form 10-Q, which are available from the Securities and Exchange Commission.
5.		RELATED-PARTY MATTERS
		On October 31, 2003, the Company entered into an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of $60,000,000. This commitment expires on October 30, 2004. There was no outstanding balance under this agreement at March 31, 2004.
6.		SEGMENT INFORMATION
		As of January 1, 2004, the Company conducted its business through two business segments, annuity operations and asset management operations. Prior to January 1, 2004, the Company conducted its business through one segment: annuity operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuities, universal life insurance contracts and GICs. Asset management operations, which includes the distribution and management of mutual funds, is conducted by SAAMCo and its subsidiary and distributor, SACS. Following is selected information pertaining to the Company’s business segments.

13

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.

SEGMENT INFORMATION (Continued)

14

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.

SEGMENT INFORMATION (Continued)

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Management’s discussion and analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (the “Company”) for the three months ended March 31, 2004 (“2004”) and March 31, 2003 (“2003”) follows. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

     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.

     Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company’s investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information.

CRITICAL ACCOUNTING POLICIES

     The Company considers among its most critical accounting policies those policies with respect to valuation of certain financial instruments, amortization of deferred acquisition costs and valuation of reserves for guaranteed benefits. In the implementation of each of the aforementioned policies, management is required to exercise its judgment on both a quantitative and qualitative basis. Further explanation of how management exercises that judgment follows.

     VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $30.9 million at March 31, 2004. In determining if and when a decline in fair value below amortized cost is other than temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for investments in debt and equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according to the contractual terms of the obligation. When such a decline in value is deemed to be other than temporary, the Company recognizes an impairment loss in the current period operating results to the extent of the decline (See also discussion within “Capital Resources and Liquidity” herein).

     Securities in the Company’s portfolio with a carrying value of approximately $1.16 billion at March 31, 2004 do not have readily determinable market prices. For these securities, the Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, the Company uses its most recent purchases and sales of similar unquoted securities, independent broker quotes or comparison to similar securities with quoted prices when possible to estimate the fair value of those securities. All such securities are classified as available for sale. The Company’s ability to liquidate its positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and may not be able to dispose of

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these investments in a timely manner. Although the Company believes its estimates reasonably reflect the fair value of those securities, the key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral, if any, and other factors may not reflect those of an active market.

     AMORTIZATION OF DEFERRED ACQUISITION COSTS: The Company amortizes deferred acquisition costs (“DAC”) based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies, and for mutual funds, over the estimated lives of the fund deposits on a straight line basis. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable annuities) or general account assets (with respect to fixed annuities, fixed options of variable annuities and universal life contracts) supporting the annuity obligations, costs of providing for policy guarantees and the level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised. Approximately 95% of the Company’s DAC balance at March 31, 2004 related to variable annuity products and 5% related to fixed annuity and universal life products.

     DAC amortization on annuities is sensitive to surrender rates, claims costs, and the actual and assumed future growth rate of the assets supporting the Company’s obligations under annuity policies. With respect to fixed annuities, the growth rate depends on the yield on the general account assets supporting those annuities. With respect to variable annuities, the growth rate depends on the performance of the investment options available under the annuity contract and the allocation of assets among these various investment options.

     The assumption the Company uses for the long-term annual net growth of the separate account assets in the determination of DAC amortization with respect to its variable annuity policies is 10% (the “long-term growth rate assumption”). The Company uses a “reversion to the mean” methodology that allows it to maintain this 10% long-term growth rate assumption, while also giving consideration to the effect of short-term swings in the equity markets. For example, if performance was 15% during the first year following the introduction of a product, the DAC model would assume that market returns for the following five years (the “short-term growth rate assumption”) would be approximately 9%, resulting in an average annual growth rate of 10% during the life of the product. Similarly, following periods of below 10% performance, the model will assume a short-term growth rate higher than 10%. A DAC unlocking will occur if management deems the short-term growth rate assumption (i.e., the growth rate required to revert to the mean 10% growth rate over a five-year period) to be unreasonable. The use of a reversion to the mean assumption is common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the industry.

     RESERVE FOR GUARANTEED BENEFITS: Pursuant to the adoption of Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) on January 1, 2004, the Company is required to recognize a liability for guaranteed minimum death benefits (“GMDB”) and other guaranteed benefits. In calculating the projected liability, five thousand stochastically generated investment performance scenarios were developed with a mean investment performance of 10%. Additional assumptions are made for mortality, lapse rates of return and the volatility of equity markets.

BUSINESS SEGMENTS

     Effective January 1, 2004, SunAmerica Life Insurance Company (the “Parent”) contributed to the Company 100% of the outstanding capital stock of its then wholly owned subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”), which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) and AIG SunAmerica Fund Services, Inc. (“SFS”). This capital contribution increased the Company’s shareholder’s equity by approximately $74.5 million (see Note 1 of Notes to Consolidated Financial Statements). Effective January 1, 2004, the Company’s earnings includes the asset management operations of SAAMCo, SACS and SFS. Prior year results have been restated to account for this contribution.

     The Company has two business segments: annuity operations and asset management operations. The annuity operations consists of the sale and administration of deposit-type insurance contracts, such as variable and fixed annuities and universal life insurance contracts. The Company focuses primarily on the marketing of variable annuity products. The variable annuity products offer investors a broad spectrum of fund alternatives, with a choice

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of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and net investment spread on the fixed-rate account options.

     The asset management operations are conducted by the Company’s registered investment advisor subsidiary, SAAMCo, and its wholly owned distributors, SACS and SFS. These companies earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios. Premiums from variable annuities sold by the Company are held in trusts that are owned by the Company, with the assets directly supporting policyholder obligations. SAAMCo is the investment advisor for all of the trusts as well as trusts owned by an affiliate, First SunAmerica Life Insurance Company.

RESULTS OF OPERATIONS

     NET LOSS totaled $31.0 million in 2004, compared to net income of $10.6 million in 2003.

     CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption of SOP 03-1 on January 1, 2004. The Company recorded a loss of $62.6 million, net of tax, which is recognized in the consolidated statement of operations and comprehensive income as a cumulative effect of accounting change for the quarter ended March 31, 2004.

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $43.8 million in 2004, compared with $12.5 million in 2003. The increase in 2004 compared to 2003 was primarily due to higher variable annuity and asset management fee income and lower amortization of deferred acquisition costs.

     INCOME TAX EXPENSE totaled $12.2 million in 2004, compared to income tax benefit of $1.9 million in 2003, representing effective tax rates of 28% and 15% in 2004 and 2003, respectively. The increase in 2004 is due primarily to higher pretax income in 2004 without corresponding increase in permanent tax differences.

     As discussed above and in Note 1 of Notes of Consolidated Financial Statements, effective January 1, 2004, the Company has two business segments, annuity operations and asset management operations.

ANNUITY OPERATIONS

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $36.0 million in 2004, compared with $10.5 million in 2003. The increase in 2004 compared to 2003 was primarily due to higher variable fee income and lower amortization of deferred acquisition costs partially offset by higher net realized investment losses.

     NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment income earned on invested assets less interest credited to fixed annuity contracts, universal life insurance contracts and guaranteed investment contracts is a key measurement used by the Company in evaluating the profitability of its business. Accordingly, the Company presents an analysis of net investment spread because the Company has determined this measure to be useful and meaningful.

     In evaluating its investment yield and net investment spread, the Company calculates average invested assets using the amortized cost of bonds, notes and redeemable preferred stocks. This basis does not include unrealized gains and losses, which are reflected in the carrying value (i.e., fair value) of those investments pursuant to Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. In the calculation of average invested assets, the Company excludes cash collateral received from the securities lending program, which is offset by a securities lending payable in the same amount. The Company participates in a securities lending program with an affiliated agent, pursuant to which it lends its securities and primarily takes cash as collateral with respect to the securities lent. Participation in securities lending agreements provides additional net investment income for the Company, resulting from investment income earned on the collateral, less interest paid on the securities lending agreements and the related management fees paid to an affiliate to administer the program.

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     An analysis of net investment spread and a reconciliation to pretax income is presented in the following table:

     Net investment spread totaled $31.9 million in 2004 and $36.9 million in 2003. These amounts equal 2.03% on average invested assets (computed on a daily basis) of $6.28 billion in 2004 and 2.20% on average invested assets of $6.72 billion in 2003. The decrease in net investment spread in 2004 from 2003 resulted from a lower prevailing interest rate environment.

     The components of net investment spread were as follows:

     The decline in average invested assets principally resulted from net exchanges from fixed accounts into the separate accounts of variable annuity contracts, partially offset by sales of the fixed account options of the Company’s variable annuity products (“Fixed Annuity Deposits”). Sales of fixed annuities and universal life product totaled $383.8 million in 2004 and $439.4 million in 2003, and are largely deposits for the fixed accounts of variable annuities. On an annualized basis, these deposits represent 26% and 31%, respectively, of the related reserve balances at the beginning of the respective periods.

     Net investment spreads include the effect of income earned or interest paid on the difference between average invested assets and average interest-bearing liabilities. Average invested assets exceeded average interest-bearing liabilities by $272.6 million in 2004, compared with $268.5 million in 2003. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 1.87% in 2004 and 2.05% in 2003.

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     Investment income (and the related yields on average invested assets) totaled $87.0 million (5.54%) and $96.8 million (5.76%) in 2003. The decrease in the investment yield primarily reflects an overall lower prevailing interest rate environment as well as $4.2 million loss from the mark to market of the GMAV put options and embedded derivatives in 2004, compared to $1.7 million in 2003. Expenses incurred to manage the investment portfolio amounted to $0.7 million in 2004 and $0.6 million in 2003. These expenses are included as a reduction of investment income in the consolidated statement of operations and comprehensive income.

     Interest expense totaled $55.1 million in 2004 and $59.9 million in 2003. The average rate paid on all interest-bearing liabilities was 3.67% in 2004, compared with 3.71% in 2003. Interest-bearing liabilities averaged $6.01 billion during 2004 and $6.46 billion during 2003. Despite a lower interest rate environment, interest rates did not decline significantly because many contracts were already at or near their contractual minimum rates.

     NET REALIZED INVESTMENT LOSSES totaled $11.4 million in 2004 and $3.3 million in 2003 and include impairment writedowns of $1.1 million and $5.2 million, respectively. Thus, net realized losses from sales and redemptions of investments totaled $10.3 million in 2004 and net realized gains from sales and redemptions of investments totaled $1.9 million in 2003.

     The Company sold or redeemed invested assets, principally bonds and notes, aggregating $840.4 million in 2004 and $837.3 million in 2003. Sales of investments result from the active management of the Company’s investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.66% and 0.10% of average invested assets for 2004 and 2003, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

     Impairment writedowns include $1.1 million and $5.2 million of provisions principally applied to bonds in 2004 and 2003, respectively. On an annualized basis, impairment writedowns represent 0.07% and 0.31% of average invested assets for 2004 and 2003, respectively. For the twenty quarters ended March 31, 2004, impairment writedowns as an annualized percentage of average invested assets have ranged from 0.07% to 1.95% and have averaged 0.66%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events.

     VARIABLE ANNUITY FEES, NET OF REINSURANCE are primarily based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $88.2 million in 2004 and $62.0 million in 2003 and are net of reinsurance premiums of $8.5 million and $6.4 million, respectively. The increased fees in 2004 compared to 2003 reflect the favorable equity market conditions in 2004 and the latter part of 2003, and the resulting favorable impact on market values of the assets in the separate accounts. On an annualized basis, variable annuity fees represent 1.8% and 1.7% of average variable annuity assets in 2004 and 2003, respectively. Variable annuity assets averaged $19.82 billion during 2004 and $14.48 billion during 2003. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $742.3 million in 2004 and $328.4 million in 2003. On an annualized basis, these amounts represent 15% and 9% of separate account liabilities at the beginning of the respective periods. The increase in variable annuity deposits in 2004 reflected increased demand for variable annuity products due to the improved equity market conditions in 2004 and the latter part of 2003. Transfers from the fixed accounts of the Company’s variable annuity products to the separate accounts are not classified as variable annuity deposits. Accordingly, changes in variable annuity deposits are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company’s variable annuity products.

     Sales of variable annuity products (which include deposits allocated to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $1.11 billion and $754.8 million in 2004 and 2003, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity products. The Company’s

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variable annuity products are primarily multi-manager variable annuities that offer investors a choice of several variable funds as well as a number of guaranteed fixed-rate funds. Investors can select from a choice of several variable funds and up to 7 guaranteed fixed-rate funds depending on the product. The increase in Variable Annuity Product Sales reflects improving market conditions since the first quarter of 2003.

     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. Also, from time to time, Federal initiatives are proposed that could affect the taxation of annuities (See “Regulation”).

     UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $9.2 million in 2004 and $9.0 million in 2003 and are net of reinsurance premium of $8.1 million and $8.4 million, respectively. Universal life insurance policy fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of reinsurance premiums. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life contracts as part of the acquisition of business from MBL Life Assurance Corporation on December 31, 1998 and does not actively market such contracts. Such fees annualized represent 2.3% and 2.2% of average reserves for universal life insurance contracts in the respective periods.

     SURRENDER CHARGES on variable annuity and universal life contracts totaled $7.0 million in 2004 and $7.6 million in 2003. Surrender charge periods range from zero to nine years from the date a deposit is received. Surrender charges generally are assessed on withdrawals at declining rates during the first seven or nine years following receipt of the deposit.

     GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.3 million in 2004 and $21.3 million in 2003. The increase in 2004 results from higher information technology costs and payroll related expenses. 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 $24.0 million in 2004, compared with $38.8 million in 2003. Prior year included accelerated amortization due to higher than anticipated surrenders on certain products with features which have been discontinued.

     ANNUAL COMMISSIONS totaled $15.0 million in 2004, compared with $14.2 million in 2003. Annual commissions represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the Company’s average balances of its variable annuity products are currently subject to such annual commissions.

     CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $4.8 million in 2004, compared to $5.5 million in 2003 (net of reinsurance recoveries of $9.3 million in 2004 and $10.8 million and 2003). The change in such claims resulted principally from changes in the mortality experience.

     GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (“Net GMDB”) on variable annuity contracts totaled $17.8 million in 2004, compared with $22.0 million in 2003 (net of reinsurance recoveries of $2.1 million in 2004 and $3.0 million in 2003). Net GMDB consists primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits and guaranteed minimum income benefits. These guarantees are described in more detail in the following paragraphs. The decrease in Net GMDB in 2004 reflects the upturn in the equity markets in 2004 and 2003. Downturns in the equity markets could increase these expenses.

     A majority of the Company’s variable annuity products are issued with a death benefit feature which provides that, upon the death of a contractholder, the contractholder’s beneficiary will receive the greater of (1) the contractholder’s account value, or (2) a guaranteed minimum death benefit that varies by product. The Company bears the risk that death claims following a decline in the equity markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be

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provided. At March 31, 2004, a portion of the GMDB risk on approximately 18% of the account value with such features had been reinsured. In 2004, a substantial majority of contracts sold have reinsurance coverage. However, the Company does not currently have reinsurance coverage on the majority of the contracts to be sold after December 2004. Reinsurance coverage is subject to limitations such as caps and deductibles. On January 1, 2004, the Company recorded a liability for GMDBs (See Note 2 of Notes to Consolidated Financial Statements) pursuant to adoption of a new accounting standard, SOP 03-1.

     EARNINGS ENHANCEMENT BENEFIT (“EEB”): The Company issues certain variable annuity products that offer an optional EEB feature. For contract-holders who elect the feature, the EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The Company bears the risk that account values following favorable performance of the financial markets will result in greater EEB death claims and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At March 31, 2004, approximately 8% (calculated based on current account value) of in-force contracts include EEB coverage, with 91% of the EEB risk fully reinsured.

     GUARANTEED MINIMUM INCOME BENEFIT (“GMIB”): The Company issues certain variable annuity products that contain or offer a GMIB feature. This feature provides a minimum annuity payment guarantee for those contract-holders who choose to receive fixed lifetime annuity payments after a seven, nine, or ten-year waiting period in their deferred annuity contracts. The Company bears the risk that the performance of the financial markets will not be sufficient for accumulated policyholder account balances to support GMIB benefits and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. Substantially all of the Company’s products containing the GMIB feature have been reinsured. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004.

     GUARANTEED MINIMUM ACCOUNT VALUE (“GMAV”): In the third quarter of 2002, the Company began issuing certain variable annuity products that offer an optional GMAV. If elected by the policyholder at the time of contract issuance, this feature guarantees that the account value under the contract will at least equal the amount of the initial principal invested, adjusted for withdrawals, at the end of a ten-year waiting period. The Company bears the risk that protracted under-performance of the financial markets could result in GMAV benefits being higher than the underlying contractholder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company purchased put options on the S&P 500 index to partially offset this risk. Changes in the market value of both the GMAV benefit and the put options are recorded in investment income in the accompanying consolidated statement of operations and comprehensive income.

     With respect to its reinsurance agreements, the Company could become liable for all obligations of the reinsured policies if the reinsurers were to become unable to meet the obligations assumed under the respective reinsurance agreements. The Company monitors its credit exposure with respect to these agreements. Due to the high credit ratings and periodic monitoring of these ratings of the reinsurers, such risks are considered to be minimal.

ASSET MANAGEMENT OPERATIONS

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $7.8 million in the 2004 compared to a loss of $2.0 million in 2003. The increase in 2004 from 2003 resulted from increased asset management fees, partially offset by decreased DAC amortization.

     VARIABLE ANNUITY FEES totaled $2.8 million in 2004, compared to $2.4 million in 2003. The increase in variable annuity fees in 2004 principally reflects the improved equity market conditions since 2003.

     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 SAAMCo. Such fees totaled $18.1 million on average assets managed of $9.64 billion in 2004 and $10.9 million on average assets managed of $7.38 billion in 2003. Asset management fees are not necessarily proportionate to average assets managed, principally due to changes in product mix. Mutual fund sales, excluding sales of money market accounts and private accounts, totaled $698.4 million in 2004, compared to $440.2 million in 2003. Redemptions of mutual funds, excluding redemptions

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of money market accounts, amounted to $362.9 million in 2004 and $422.9 million in 2003, which, annualized, represent 18.6% and 30.8%, respectively, of average related mutual fund assets. The increase in sales in 2004 principally reflects increasing demand for equity products, due to the improving stock market conditions over the past year.

     GENERAL, ADMINISTRATIVE AND OTHER EXPENSES totaled $8.9 million in 2004 and $8.7 million in 2003. 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 $7.4 million in 2004, compared with $5.1 million in 2003. The increase in amortization was primarily due to additional mutual fund sales since the first quarter of 2003.

CAPITAL RESOURCES AND LIQUIDITY

     SHAREHOLDER’S EQUITY increased to $1.55 billion at March 31, 2004 from $1.54 billion at December 31, 2003. The increase reflected other comprehensive income of $47.6 million and a net loss of $31.0 million, respectively.

     INVESTMENTS AND CASH at March 31, 2004 totaled $7.25 billion, compared with $7.12 billion at December 31, 2003. The Company’s invested assets are managed by a subsidiary of AIG. The following table summarizes the Company’s Bond Portfolio and other investments and cash at March 31, 2004 and December 31, 2003:

     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 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 constituted 76% of the Company’s total investment portfolio at March 31, 2004, had an aggregate fair value that was $243.9 million greater than its amortized cost at March 31, 2004,

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compared with $154.6 million at December 31, 2003. The increase in net unrealized gains on the Bond Portfolio during 2004 principally reflected the impact of the decrease in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at March 31, 2004.

     At March 31, 2004, the Bond Portfolio had an aggregate fair value of $5.48 billion and an aggregate amortized cost of $5.24 billion. At March 31, 2004, the Bond Portfolio (excluding $21.4 million of redeemable preferred stocks) included $5.26 billion of bonds rated by Standard & Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”), Fitch (“Fitch”) or the National Association of Insurance Commissioners (“NAIC”), and $205.3 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At March 31, 2004, approximately $5.10 billion of the Bond Portfolio was investment grade, including $1.18 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

     At March 31, 2004, the Bond Portfolio included $363.6 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1.2% of the Company’s total assets and approximately 5.0% of its invested assets. 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. An economic downturn could produce higher than average issuer defaults on the non-investment-grade securities, which could cause the Company’s investment returns and net income to decline. At March 31, 2004, the Company’s non-investment-grade portfolio consisted of 96 issues with no issuer representing more than 10% of the total non-investment grade portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 18% of these assets concentrated in financial institutions, 17% concentrated in utilities, 14% concentrated in telecommunications, 12% concentrated in noncyclical consumer products and 10% concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

     The table on the next page summarizes the Company’s rated bonds by rating classification as of March 31, 2004.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

Footnotes to the table of Rated Bonds by Rating Classification

(1)		S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories range from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.
(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 non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $205.3 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

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     The valuation of invested assets involves obtaining a fair value for each security. The source for the fair value is generally from market exchanges, with the exception of non-traded securities.

     Another aspect of valuation pertains to impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary decline in value and the amount of any loss recognition requires the judgment of the Company’s management and a continual review of its investments. In general, a security is considered a candidate for impairment if it meets any of the following criteria:

•

Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time;

•

The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under the bankruptcy laws or similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or

•

In the opinion of the Company’s management, it is unlikely the Company will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

     Once a security has been identified as potentially impaired, the amount of such impairment is determined by reference to that security’s contemporaneous market price.

     The Company has the ability to hold any security to its stated maturity. Therefore, the decision to sell reflects the judgment of the Company’s management that the security sold is unlikely to provide, on a relative value basis, as attractive a return in the future as alternative securities entailing comparable risks. With respect to distressed securities, the sale decision reflects management’s judgment that the risk-discounted anticipated ultimate recovery is less than the value achieved on sale.

     As a result of these policies, the Company recorded pretax impairment writedowns of $1.1 million in the 2004 and $5.2 million in 2003. No individual impairment loss exceeded 10% of the Company’s net loss for the three months ended March 31, 2004.

     Excluding the impairments noted above, the changes in fair value for the Company’s Bond Portfolio, which constitutes the vast majority of the Company’s investments, were recorded as a component of other comprehensive income in shareholder’s equity as unrealized gains or losses.

     At March 31, 2004, the Company’s Bond Portfolio had gross unrealized gains of $274.8 million and gross unrealized losses of $30.9 million. At December 31, 2003, the Company’s Bond Portfolio had gross unrealized gains of $214.7 million and gross unrealized losses of $60.1 million. One issuer accounted for 16% of unrealized losses. No other single issuer accounted for more than 10% of unrealized losses.

     At March 31, 2004, the fair value of the Company’s Bond Portfolio aggregated $5.48 billion. Of this aggregate fair value, approximately 0.3% represented securities trading at or below 75% of amortized cost. The impact of unrealized losses on net income will be further mitigated upon realization, because realization will result in current decreases in the amortization of certain deferred acquisition costs and decreases in income taxes.

     At March 31, 2004, approximately $656.4 million, at amortized cost, of the Bond Portfolio had a fair value of $625.5 million resulting in an aggregate unrealized loss of $30.9 million. Unrealized losses for the Bond Portfolio and equity securities did not reflect any significant industry concentrations.

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     The amortized cost of the Bond Portfolio in an unrealized loss position at March 31, 2004, by contractual maturity, is shown below.

     The aging of the Bond Portfolio in an unrealized loss position at March 31, 2004 is shown below:

     In 2004, the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio were $10.9 million. The aggregate fair value of securities sold was $74.7 million, which was approximately 87.2% of amortized cost. The average period of time that securities sold at a loss during 2004 were trading continuously at a price below amortized cost was approximately 20 months.

     As stated previously, the valuation for the Company’s Bond Portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. The Company considers non-traded securities to mean certain fixed income investments, certain structured securities and limited partnerships. The aggregate fair value of these securities at March 31, 2004 was approximately $1.16 billion.

     The methodology used to estimate fair value of non-traded fixed income investments is by reference to traded securities with similar attributes and using a matrix pricing methodology. This technique takes into account such factors as the industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer and other relevant factors. The change in fair value is recognized as a component of other comprehensive income.

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     For certain structured securities, the carrying value is based on an estimate of the security’s future cash flows pursuant to the requirements of Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The change in carrying value is recognized in income.

     Each of these investment categories is regularly tested to determine if impairment in value exists. Various valuation techniques are used with respect to each category in this determination.

     Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $314.7 million at March 31, 2004. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At March 31, 2004, Secured Loans consisted of $210.0 million of privately traded securities and $104.7 million of publicly traded securities. These Secured Loans are composed of loans to 59 borrowers spanning 10 industries, with 25% of these assets concentrated in utilities, 17% concentrated in transportation, 16% concentrated in communications, 11% concentrated in cyclical consumer products and 10% concentrated in noncyclical consumer products. No other industry constituted more than 10% of these assets.

     While the trading market for the Company’s privately traded Secured Loans is more limited than for publicly traded issues, participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company’s Secured Loans are rated by S&P, Moody’s, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC.

     MORTGAGE LOANS aggregated $699.7 million at March 31, 2004 and consisted of 105 commercial first mortgage loans with an average loan balance of approximately $6.7 million, collateralized by properties located in 31 states. Approximately 34% of this portfolio was office, 18% was multifamily residential, 16% was manufactured housing, 11% was industrial, 11% was hotels, 5% was retail, and 5% was other types. At March 31, 2004, approximately 11%, 10% and 10% of this portfolio were secured by properties located in California, New York and Massachusetts, respectively. No more than 10% of this portfolio was secured by properties located in any other single state. At March 31, 2004, 16 mortgage loans have an outstanding balance of $10 million or more, which collectively aggregated approximately 52% of this portfolio. At March 31, 2004, approximately 26% of the mortgage loan portfolio consisted of loans with balloon payments due before April 1, 2007. During 2004 and 2003, loans delinquent by more than 90 days, foreclosed loans and structured loans have not been significant in relation to the total mortgage loan portfolio.

     Substantially all of the mortgage loan portfolio has been originated by the Company under its 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 Company’s underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields.

     SECURITIES LENDING COLLATERAL totaled $668.7 million at March 31, 2004, compared to $514.1 million at December 31, 2003, and consisted of cash collateral invested in highly rated short-term securities received in connection with the Company’s securities lending program. Although the cash collateral is currently invested in highly rated short-term securities, the applicable collateral agreements permit the cash collateral to be invested in highly liquid short and long-term investment portfolios. At least 75% of the portfolio’s short-term investments must have external issue ratings of A-1/P-1, one of the highest ratings for short-term credit quality. Long-term investments include corporate notes with maturities of five years or less and a credit rating by at least two nationally recognized statistical rating organizations (NRSRO), with no less than a S&P rating of A or equivalent by any other NRSRO.

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     ASSET-LIABILITY MATCHING is utilized by the Company in an effort to minimize the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company’s fixed-rate products incorporate surrender charges or other restrictions in order to encourage persistency. Approximately 62% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at March 31, 2004.

     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 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 and cash flows of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability modeling include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At March 31, 2004, these assets had an aggregate fair value of $6.58 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include fixed options of variable annuities, as well as universal life, fixed annuity and GIC contracts. At March 31, 2004, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $6.13 billion with an option-adjusted duration of 3.4 years. The Company’s potential exposure due to a relative 10% increase in prevailing interest rates from its March 31, 2004 levels is a loss of approximately $2.2 million, representing a decrease in fair value of its fixed-rate assets that is not offset by a decrease in 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.

     Option-adjusted duration is a common measure for the price sensitivity of a fixed-maturity portfolio to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5.0 is expected to decrease in value by approximately 5%. The Company estimates the option-adjusted duration of its assets and liabilities using a number of different interest rate scenarios, assuming continuation of existing investment and interest crediting strategies, including maintaining an appropriate level of liquidity. Actual company and contract owner behaviors may be different than was assumed in the estimate of option-adjusted duration and these differences may be material.

     The overall interest-credited rate environment has continued to decline in 2004. A significant portion of the Company’s fixed annuity contracts (including the fixed option of variable contracts) has reached or is near the minimum contractual guaranteed rate (generally 3% or 4%). Continual declines in interest rates could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate.

     The Company has had the ability, limited by minimum interest rate guarantees, to respond to the generally declining interest rate environment in the last five years by lowering crediting rates in response to lower investment returns. See the earlier discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the calculation of investment yield and net investment spread used by the Company’s management as a key component in evaluating the profitability of its annuity business. The trends experienced during the three months ended March 31, 2004 and the three years ended December 31, 2003 in the Company’s yield on average invested assets and rate of interest credited on average interest-bearing liabilities, compared to the market trend in long-term interest rates as illustrated by the average ten-year U.S. Treasury bond rate, are presented in the following table:

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     As a component of its asset-liability management strategy, the Company may utilize 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 seeks to enhance its spread income with dollar roll repurchase agreements (“Dollar Roll Repos”). Dollar Roll Repos involve a sale of MBS by the Company and an agreement to repurchase substantially similar MBS at a later date at an agreed upon price. The Company also seeks to provide liquidity by investing in MBSs. 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.

     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 risk associated with the Company’s Dollar Roll Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Dollar Roll Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company’s policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody’s. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company’s Swap Agreements are intended to hedge variable-rate assets or 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. As part of its decision to purchase such a security, the Company assesses the risk of prepayment by analyzing the security’s projected performance over an array of interest-rate scenarios. Once such a security is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return.

     INVESTED ASSETS EVALUATION is routinely conducted by the Company. 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 conducting these reviews for bonds, management principally considers the adequacy of any collateral, 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. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.

     The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are 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. Impairment losses on securitized assets are recognized

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if the fair value of the security is less than its book value, and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date.

     DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $42.4 million of bonds at March 31, 2004, which constituted approximately 0.6% of total invested assets. At December 31, 2003, defaulted investments totaled $49.6 million, which constituted approximately 0.7% of total invested assets.

     SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows. At March 31, 2004, approximately $4.86 billion of the Company’s Bond Portfolio had an aggregate unrealized gain of $274.8 million, while approximately $625.5 million of the Bond Portfolio had an aggregate unrealized loss of $30.9 million. In addition, the Company’s investment portfolio currently provides approximately $48.0 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company’s annuity products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

     Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company’s average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or repos on the Company’s substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.

     In a declining rate environment, the Company’s cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities. Should increased liquidity be required for withdrawals, the Company believes that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market.

     If a substantial portion of the Company’s Bond Portfolio diminished significantly in value and/or defaulted, the Company would need to liquidate other portions of its investment portfolio and/or arrange financing. Such events that may cause such a liquidity strain could be the result of economic collapse or terrorist acts.

     Management believes that the Company’s liquid assets and its net cash provided by operations will enable the Company to meet any foreseeable cash requirements for at least the next twelve months.

GUARANTEES AND OTHER COMMITMENTS

     The Company has entered into seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at March 31, 2004 is $557.8 million. Related to each of these agreements are participation agreements with the Company’s Parent, under which the Parent will share in $222.5 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $21.9 million in 2004, $385.9 million in 2005 and $150.0 million in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.

     At March 31, 2004, the Company held reserves for GICs with maturity dates as follows: $185.3 million in 2005 and $28.2 million in 2006 and thereafter.

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RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). (For further discussion see Note 2 of Notes to Financial Statements.)

REGULATION

     The Company, in common with other insurers, is subject to regulation and supervision by the states and jurisdictions in which it does business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than security holders.

     Risk-based capital (“RBC”) standards are designed to measure the adequacy of an insurer’s statutory capital and surplus in relation to the risks inherent in its business. The standards are intended to help identify inadequately capitalized companies and require specific regulatory actions in the event an insurer’s RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer’s size, but also on the risk profile of the insurer’s operations. The RBC Model Law provides four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The statutory capital and surplus of the Company exceeded its RBC requirements as of March 31, 2004.

     The federal government does not directly regulate the business of insurance, however, the Company and its products are governed by federal agencies, including the SEC, the Internal Revenue Service, and the self-regulatory organization, National Association of Securities Dealers, Inc. (“NASD”). Federal legislation and administrative policies in several areas, including financial services regulation, pension regulation and federal taxation, can significantly and adversely affect the insurance industry. The federal government has from time to time considered legislation relating to the deferral of taxation on the accretion of value within certain annuities and life insurance products, changes in ERISA regulations, the alteration of the federal income tax structure and the availability of Section 401(k) and individual retirement accounts. Although the ultimate effect of any such changes, if implemented, is uncertain, both the persistency of our existing products and our ability to sell products may be materially impacted in the future.

     Recently there has been a significant increase in federal and state regulatory activity relating to financial services companies, particularly mutual fund companies and life insurers issuing variable annuity products. These inquiries have focused on a number of issues including, among other items, after-hours trading, short-term trading (sometimes referred to as market timing), revenue sharing arrangements and greater transparency regarding compensation arrangements. There are several rule proposals pending at the SEC, the NASD and on a federal level, which, if passed, could have an impact on the business of the Company and/or its subsidiaries.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 29 to 30 herein.

DISCLOSURE CONTROLS & PROCEDURES

     The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures provide reasonable assurance of effectiveness as of the end of the period covered by this report. In addition, there has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

On April 5, 2004, a purported class action captioned NIKITA Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

Item 2. Changes in Securities and Use of Proceeds

     Not applicable.

Item 3. Defaults Upon Senior Securities

     Not applicable.

Item 4. Submissions of Matters to a Vote of Security Holders

     Not applicable.

Item 5. Other Information

     Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

     None.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended March 31, 2004.

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AIG SUNAMERICA LIFE ASSURANCE COMPANY Registrant
Date: May 14, 2004	/s/ N. SCOTT GILLIS
	N. Scott Gillis
	Senior Vice President, Chief Financial Officer and Director

Date: May 14, 2004	/s/ STEWART POLAKOV
	Stewart Polakov
	Senior Vice President and Controller (Principal Accounting Officer)

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Exhibit Index

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