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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM 10-K (Mark One)

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
	EXCHANGE ACT OF 1934 [No Fee Required]

For the transition period from                to Commission File No. 33-47472 ANCHOR NATIONAL LIFE INSURANCE COMPANY

 

Common Stock (par value $1,000 per share)

3,511 shares

PART I ITEM 1.  BUSINESS GENERAL DESCRIPTION       Anchor National Life Insurance Company, including its wholly owned subsidiaries, (the "Company") is an indirect wholly-owned subsidiary of American International Group, Inc. ("AIG"), an international insurance and financial services holding company.  At December 31, 1998, the Company was a wholly owned indirect subsidiary of SunAmerica Inc., a Maryland Corporation. On January 1, 1999, SunAmerica Inc. merged with and into AIG in a tax-free reorganization that has been treated as a pooling of interests for accounting purposes.  Thus, SunAmerica Inc. ceased to exist on that date. However, immediately prior to the date of the merger, substantially all of the net assets of SunAmerica Inc. were contributed to a newly formed subsidiary of AIG named SunAmerica Holdings, Inc., a Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its name to SunAmerica Inc. ("SunAmerica").       The Company is incorporated in Arizona and maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000.  The Company has no employees; however, employees of SunAmerica and its other subsidiaries perform various services for the Company.  SunAmerica had approximately 2,400 employees at December 31, 2000, approximately 1,700 of whom perform services for the Company as well as for certain of its affiliates.       The Company is a life insurance company and conducts its business through three segments:  annuity operations, asset management operations, and broker-dealer operations.  Annuity operations focus primarily on the marketing, sale and administration of fixed and variable annuity products, the universal life business acquired from MBL Life in 1998 (See Note 4 of Notes to Consolidated Financial Statements) and guaranteed investment contracts ("GICs").  The Company's variable annuity products offer investors a broad spectrum of fund alternatives, with a choice 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 income on the fixed-rate account options.  Asset management operations, which include the sale and management of mutual funds, are conducted by SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), the Company's registered investment advisor subsidiary and its related distributor, SunAmerica Capital Services, Inc. ("SACS").  SunAmerica Asset Management earns fee income by managing a diversified family of mutual funds and certain subaccounts within the Company's variable annuity products and by providing professional management of individual, corporate and pension plan portfolios.  SACS earns commissions and distribution fees by selling proprietary mutual funds and variable annuities.  Broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products.  Net retained commissions are derived from the commissions on the sales of these products after deducting the substantial portion of such commissions that is passed on to registered representatives.

The Company ranks among the largest U.S. issuers of variable annuities.  At December 31, 2000, the Company managed $33.81 billion of assets  through  its  fixed-rate  business and asset  management operations, consisting of $27.19 billion of assets on its balance sheet and $6.62 billion of  assets managed in mutual funds.  Its asset management operations provide a broad range of financial planning and investment services through more than 8,600 independent registered representatives nationwide.  The Company also distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms, independent general insurance agents, major financial institutions and, in the case of its GICs, by marketing directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups.       The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products.  According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 grew from 46 million to 60 million during the 1990s, making this age group the fastest-growing segment of the U.S. population.  Between 1989 and 1999, annual industry premiums from fixed and variable annuities and fund deposits increased from $113.8 billion to $270.2 billion.  During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $125.34 billion to $1.27 trillion.       Benefiting from continued strong growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs.       In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based products such as variable annuities and mutual funds, resulting in significantly increased fee income.  Fee income has also expanded through the receipt of broker-dealer net retained commissions, resulting primarily from increased demand for long-term investment products.  The Company's fee-generating businesses entail no portfolio credit risk and require significantly less capital support than its fixed-rate business, which generates net investment income.       The Company and its affiliates have made significant investments in technology over the past several years in order to lower operating costs and enhance their marketing efforts.  Its use of optical disk imaging and artificial intelligence has substantially reduced the more traditional paper-intensive life insurance processing procedures, reducing annuity processing and servicing costs and improving customer service.  This has also enabled the Company to more efficiently assimilate acquired business. The Company has also implemented technology to interface with its wholly owned or affiliated broker-dealers, which enables the Company to more effectively market its products and help the affiliated financial professionals to better serve their clients.

The following table shows the Company's net investment income (including net realized investment losses) and fee income for the year ended December 31, 2000 by business segment:

For additional financial information on the Company's business segments, see "Notes to Consolidated Financial Statements - Note 13, Business Segments".       ANNUITY OPERATIONS       Founded in 1965, the Company is an Arizona-chartered company licensed in 49 states and the District of Columbia which markets flexible-premium variable annuities and GICs.  It has a "AAA" (Extremely Strong) financial strength rating from Standard & Poor's ("S&P"), a "Aaa" (Exceptional) rating from Moody's Investors Service ("Moody's"), a "AAA" (Exceptionally Strong) rating from Fitch ("Fitch") and an "A++" (Superior) rating from industry analyst A.M. Best Company.       In addition to distributing its variable annuity products through its six wholly-owned or affiliated broker-dealers, the Company distributes its products through over 900 independent broker-dealers, full-service securities firms and financial institutions as well as through independent general insurance agents.  In total, more than 52,000 independent sales representatives nationally are licensed to sell the Company's annuity products.        On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation ("MBL Life"), via a 100% coinsurance transaction.  The Company assumed reserves in this acquisition totaling $5,793,256,000, including $3,460,503,000 of fixed annuity  contracts,  $2,308,742,000  of  universal  life insurance contracts and

$24,011,000 of  guaranteed  investment  contracts.  Policyholders of MBL annuity products were required to transfer their funds into an existing product of the Company or  one  of its affiliates by December 31, 1999 in order to receive the policy enhancements due under the MBL Life rehabilitation agreement. Over 92% of the deferred annuity reserves had either been transferred or surrendered by December 31, 1999.       Included in the block of business acquired from MBL Life were policies whose owners are residents of New York State (the "New York Business").  On July 1, 1999, the New York Business was acquired by the Company's New York affiliate, First SunAmerica Life Insurance Company ("FSA"), via an assumption reinsurance agreement, and the remainder of the business converted to assumption reinsurance, which superseded the coinsurance agreement.  As part of this transfer, invested assets equal to $678,272,000, universal life reserves equal to $282,247,000, group pension reserves equal to $406,118,000, and other net assets of $10,093,000 were transferred to FSA.       VARIABLE ANNUITIES       The variable annuity products of the Company offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options.  The Company earns fee income through the sale, administration and management of the variable account options of its variable annuity products.  The Company also earns investment income on monies allocated to the fixed-rate account options of these products.  Variable annuities offer retirement planning features similar to those offered by fixed annuities, but differ in that the contractholder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation fund selected by the contractholder.  Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities.       The Company's flagship Polaris variable annuity products are multimanager variable annuities that offer investors a choice of more than 30 variable funds and a number of guaranteed fixed-rate funds.  Polaris sales have increased significantly in recent years due to enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed-income and guaranteed fixed account investment choices.         At December 31, 2000, total variable product reserves were $22.43 billion, of which $20.39 billion were held in separate accounts and $2.04 billion were the liabilities of the fixed-rate account options which are held in the general accounts.  The Company's variable annuity products incorporate surrender charges to encourage persistency.  At December 31, 2000, 81% of the Company's variable annuity reserves held in the separate accounts were subject to surrender penalties or other restrictions.  The Company's variable annuity products also generally limit the number of transfers made in a specified period between account options without the assessment of a fee.  The average size of a new variable annuity contract sold by the Company in 2000 was approximately $58,000.

FIXED ANNUITIES AND GICs       The Company's general account obligations are fixed-rate products, including fixed annuities issued in prior years, universal life insurance contracts assumed in the Acquisition and fixed-rate options of its variable annuity contracts.  Such fixed-rate account options on its variable annuity contracts provide interest rate guarantees of one, two, three, five, seven or ten years.  Although the Company's annuity contracts remain in force an average of seven to ten years, a majority (approximately 81% at December 31, 2000) of the annuity contracts, as well as the universal life contracts, reprice  annually  at  discretionary  rates  determined  by the Company.  In repricing, the Company takes into account yield characteristics of its investment portfolio, surrender assumptions and competitive industry pricing, among other factors.       The Company augments its retail annuity business with the sale of institutional products.  At December 31, 2000, the Company had $591.4 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indexes and $19.3 million of fixed-maturity, fixed-rate GICs acquired from MBL Life.  Of the total GIC portfolio at December 31, 2000, approximately 92% was sold to asset management firms, 5% was sold to state and local government entities and 3% was sold to corporations.       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 fixed annuity, universal life 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 annuity and universal life products incorporate surrender charges and its GIC products incorporate other restrictions in order to encourage persistency. Approximately 82% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2000.       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 a variety of factors, including 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. The Company manages most of its invested assets internally.  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.       As  part  of  its  asset-liability  matching  discipline, the  Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used  stress-test  interest  rate scenarios.  With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting investment operations to closely match the duration of the fixed-rate assets to that of

 

its fixed-rate liabilities.  The Company's  fixed-rate  assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; and investments in limited partnerships that invest primarily in fixed-rate securities.  At December 31, 2000, these assets  had an aggregate fair value of $5.20 billion with a duration of 2.9. See further discussion of duration under Financial Condition and Liquidity - Asset Liability Matching section.  The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes.  At December 31, 2000, these liabilities had  an  aggregate  fair value (determined by discounting future contractual cash flows by related market rates of interest) of $4.77 billion with a  duration of 3.2. For the years ended December 31, 2000, December 31, 1999 and September 30, 1998, the Company's yields on average invested assets were 7.15%, 6.95% and 8.42%, respectively; its average rates paid on all interest-bearing liabilities were 4.96%, 4.98% and 5.45%, respectively; it realized net investment spreads of 2.35%, 2.08% and 3.25%, respectively; on average invested assets. Net realized investment losses were 0.28% and 0.27% of average invested assets in 2000 and 1999 respectively.  Net realized investment gains were 0.77% of average invested assets in 1998.       The Company's general investment philosophy is to hold fixed-rate assets for long-term investment.  Thus, it does not have a trading portfolio.  However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in credit quality outlook for certain securities, and the Company's need for liquidity and other similar factors.       The following table summarizes the Company's investment portfolio at December 31, 2000:

 

At December 31, 2000, the Bond Portfolio (excluding $1.4 million of redeemable preferred stocks) included $3.94 billion of bonds rated by S&P, Moody's, Fitch or the National Association of Insurance Commissioners ("NAIC"), and $65.7 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC.  At December 31, 2000, approximately $3.74 billion of the Bond Portfolio was investment grade, including $1.66 billion of the U.S. government/agency securities and mortgage-backed securities.       At December 31, 2000, the Bond Portfolio included $267.9 million of bonds that were not investment grade.  These non-investment-grade bonds accounted for approximately 1.0% of the Company's total assets and approximately 5.1% of its invested assets.       Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $255.8 million at December 31, 2000.  Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer.  At December 31, 2000, Secured Loans consisted of loans to 48 borrowers spanning 14 industries, with 19% of these assets concentrated in utilities, 9% concentrated in financial institutions and 9% concentrated in technology.  No other industry constituted more than 8% of these assets.       Mortgage loans aggregated $684.2 million at December 31, 2000 and consisted of 130 commercial first mortgage loans with an average loan balance of approximately $5.3 million, collateralized by properties located in 30 states.  Approximately 31% of this portfolio was office, 18% was multifamily residential, 17% was manufactured housing, 10% was hotels, 9% was industrial, 5% was retail and 10% was other types.  At December 31, 2000, approximately 33% and 10% of this portfolio were secured by properties located in California and New York, respectively, and no more than 8% of this portfolio was secured by properties located in any other single state.       At December 31, 2000, the carrying value (after impairment writedowns) of all investments in default as to the payment of principal or interest totaled $11.2 million, which constituted less than 1% of total invested assets.       For more information concerning the Company's investments, including the risks inherent in such investments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity."       ASSET MANAGEMENT OPERATIONS       Through its registered investment advisor subsidiary, SunAmerica Asset Management, and its related distributor, SACS, the Company earns fee income by distributing and managing a diversified family of mutual funds and by providing professional management of individual, corporate and pension plan portfolios.  The Company offers investors an array of equity, fixed-income, money market and tax-exempt mutual funds.  Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $8.98 billion of assets at December 31, 2000, including mutual fund assets, private accounts and  certain of the variable annuity assets of the Company and its affiliates.  SACS acts as a distributor for the Company's  proprietary  mutual   funds and variable  annuities  and does not sell to the public.

 

 

Sales growth in recent years is primarily due to sales of the Company's "Style Select Series" product, which was introduced in November 1996.  The "Style Select Series" is a group of mutual funds that are each managed by three industry-recognized fund managers.  Several "Focus Portfolios in the "Style Select Series" were added in 1999 and 2000 bringing the total number of "style select series" portfolios to eleven.  The Focus Portfolios utilize three leading independent money managers, each of whom manages one-third of the portfolio by choosing ten favorite stocks.  In 2000, the Company introduced the Focused TechNet Portfolio.  This portfolio, along with the three existing Focus Portfolios,  climbed to over $2.30 billion in assets.        The SunAmerica mutual funds are distributed nationally through a network of approximately 400 financial institutions and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiary and affiliated broker-dealers.       BROKER-DEALER OPERATIONS       Broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal, which sells proprietary annuities and mutual funds, as well as a full range of non-proprietry investment products. Net retained commissions are derived from the commissions on the sales of these products after deducting the substantial portion of such commissions that is passed on to registered representatives.  Royal currently has a network of approximately 2,900 representatives. Royal, along with the Company's five affiliated broker-dealers, comprise the largest network of independent registered representatives in the nation and the fifth-largest securities sales force, based on industry data.  Its wholly-owned or affiliated broker-dealers accounted for approximately one-third of the Company's total annuity sales in 2000.        REGULATION       The Company, in common with other insurers, is subject to regulation and supervision by the states and other 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 on 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 RBC  standards consist of formulas that

establish capital requirements relating to asset, insurance, interest rate risks and business.  The standards are intended to help identify companies which  are  under-capitalized 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 statutory capital and surplus of the Company exceeded its RBC requirements by a considerable margin as of December 31, 2000.        In 1998, the NAIC adopted the codification of statutory accounting principles ("Codification") which replaced the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting, effective January 1, 2001.  Codification changes prescribed statutory accounting practices and will result in changes to the accounting practices that the Company uses to prepare its statutory basis financial statements.  Codification has been adopted by all fifty states as the prescribed basis of accounting, including Arizona.  The impact of any Codification on the Company's statutory surplus has not yet been determined.       Federal legislation has been enacted allowing combinations between insurance companies, banks and other entities.  It is not yet known what effect this legislation will have on insurance companies.  In addition, from time to time, Federal initiatives are proposed that could affect the  Company's businesses.  Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted.  While certain of such proposals, if implemented, could have an adverse effect on the Company's sales of affected products, and, consequently, on its results of operations, the Company believes these proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them.       SunAmerica Asset Management, a subsidiary of the Company, is registered with the Securities and Exchange Commission ("SEC") as an investment adviser under the Investment Advisers Act of 1940.  The mutual funds that it markets are subject to regulations under the Investment Company Act of 1940.  SunAmerica Asset Management and the mutual funds are also subject to regulation and examination by the SEC.  In addition, variable annuities and the related separate accounts of the Company are subject to regulation by the SEC under the Securities Act of 1933 and the Investment Company Act of 1940.       The Company's broker-dealer subsidiaries are subject to regulation and supervision by the states in which they transact business, as well as by the SEC and the National Association of Securities Dealers ("NASD").  The SEC and the NASD have broad administrative and supervisory powers relative to all aspects of business and may examine each subsidiary's business and accounts at any time.  The SEC also has broad jurisdiction to oversee various activities of the Company and its other subsidiaries.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA (Continued)

		At December 31,									At September 30,
			2000			1999		1998				1998			1997			1996
		(In thousands)
FINANCIAL POSITION
Investments		$	5,262,734		$	5,554,701		$	8,306,943		$	2,734,742		$	2,608,301		$	2,329,232
Variable annuity assets held
	in separate accounts		20,393,820			19,949,145			13,767,213			11,133,569			9,343,200			6,311,557
Deferred acquisition costs			1,286,456			1,089,979			866,053			539,850			536,155			443,610
Deferred income taxes			---			53,445			---			---			---			---
Other assets			246,468			227,224			206,124			142,107			85,573			144,578
TOTAL ASSETS		$	27,189,478		$	26,874,494		$	23,146,333		$	14,550,268		$	12,573,229		$	9,228,977
Reserves for fixed annuity
	contracts	$	2,778,229		$	3,254,895		$	5,500,157		$	2,189,272		$	2,098,803		$	1,789,962
Reserves for universal life
	insurance contracts		1,832,667			1,978,332			2,339,194			---			---			---
Reserves for guaranteed
	investment contracts		610,672			305,570			306,461			282,267			295,175			415,544
Variable annuity liabilities
	related to separate accounts		20,393,820			19,949,145			13,767,213			11,133,569			9,343,200			6,311,557
Other payables and accrued
	liabilities		304,324			413,610			171,143			157,551			157,546			120,638
Subordinated notes payable to
	affiliates		55,119			37,816			209,367			39,182			36,240			35,832
Deferred income taxes			85,978			---			105,772			95,758			67,047			70,189
Shareholder's equity			1,128,669			935,126			747,026			652,669			575,218			485,255
TOTAL LIABILITIES AND
	SHAREHOLDER'S EQUITY	$	27,189,478		$	26,874,494		$	23,146,333		$	14,550,268		$	12,573,229		$	9,228,977

 

The financial position of the Company as of December 31, 1998 and thereafter is affected by the acquisition of business from MBL Life (See Note 4 of the accompanying consolidated financial statements).

ITEM 7.  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 Anchor National Life Insurance Company (the "Company") for the three years ended December 31, 2000 and 1999 and September 30, 1998 follows.  Effective December 31, 1998, the Company changed its fiscal year end from September 30 to December 31.  Accordingly, the three-month period ended December 31, 1998 was a transition period.  Certain prior period amounts have been restated 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 associates 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.       RESULTS OF OPERATIONS       The Company has three business segments, as descrubed in Note 13 of Notes to Consolidated Financial Statements: annuity operations, asset management operations and broker-dealer operations.  Annuity operations consist of the sale and administration of deposit-type insurance contracts, such as fixed and variable annuities, universal life insurance contracts and guaranteed investment contracts. The operations focus primarily on the marketing of variable annuity products and the administration of the universal  life  business  acquired  from  MBL  Life  Assurance  Corporation ("MBL Life") in 1998 (See Note 4 of Notes to Consolidated Financial Statements).

The  variable  annuity  products  offer  investors  a broad spectrum of fund alternatives,  with a choice 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 income on the fixed-rate account options.       The asset management operations are conducted by the Company's registered investment advisor subsidiary, SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), and its related distributor. 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.        The broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products through approximately 2,900 independent registered representatives.  Royal is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers.       NET INCOME totaled $215.6 million in 2000, compared with $184.7 million in 1999 and $138.6 million in 1998.  On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation (the "Acquisition").  Since the Acquisition was accounted for under the purchase method of accounting, results of operations include those of the Acquisition only from its date of acquisition.  Consequently, the operating results for 2000 and 1999 are not comparable with those of 1998.  On a pro forma basis, using the historical financial information of the acquired business and assuming that the Acquisition had been consummated on October 1, 1997, the beginning of the prior-year period discussed herein, net income would have been $162.6 million for the year ended September 30, 1998.       PRETAX INCOME totaled $324.0 million in 2000, $287.7 million in 1999 and $209.7 million in 1998.  The 12.6% improvement in 2000 over 1999 primarily resulted from increased fee income from the Company's variable annuity and asset management operations, partially offset by increased operating expenses and amortization of related deferred acquisition costs. The 37.2% improvement in 1999 over 1998 primarily resulted from increased fee income from variable annuities and mutual funds and higher net investment income resulting from the Acquisition.  These were partially offset by increased general and administrative expenses, increased amortization of deferred acquisition costs and net realized investment losses.       INCOME TAX EXPENSE totaled $108.4 million in 2000, $103.0 million in 1999 and $71.1 million in 1998, representing effective tax rates of 33% in 2000, 36% in 1999 and 34% in 1998.       ANNUITY OPERATIONS       PRETAX INCOME totaled $266.2 million in 2000, $252.0 million in 1999 and  $183.2  million  in  1998.  The  increase  in  2000 over 1999 primarily resulted from increased variable annuity fee income, partially offset by increased amortization of deferred acquisition costs, lower net investment income, increased  general  & administative  expenses  and  increased annual commissions.

The  37.6%  improvement  in 1999 over 1998 primarily resulted from increased fee income and higher net investment income, partially offset by net realized investment losses sustained in 1999, increased general and administrative expenses and increased amortization of deferred acquisition costs.  As a result of the Acquisition, the results of operations for 2000 and 1999 are not comparable to those of 1998.  On a pro forma basis, using the historical financial information of the acquired business and assuming  that the Acquisition had been consummated on October 1, 1997, the beginning of the prior year periods discussed herein, pretax income would have been $220.0 million for the year ended September 30, 1998.       NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, totaled $127.7 million in 2000, $151.7 million in 1999 and $82.9 million in 1998.  These amounts equal 2.35% on average invested assets (computed on a daily basis) of $5.43 billion in 2000, 2.08% on average invested assets of $7.28 billion in 1999, and 3.25% on average invested assets of $2.55 billion in 1998.  On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1997, net investment income on related average invested assets would have been 1.28% on average invested assets of $7.80 billion in 1998.  The improvement in the 1999 net investment yield over the 1998 pro forma amount reflects a redeployment of assets received in the Acquisition into higher yielding investment categories.       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 $169.9 million in 2000, $159.2 million in 1999 and 128.8 million in 1998.  The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.19% in 2000, 1.97% in 1999 and 2.97% in 1998.  On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1997, the Spread Difference would have been 1.15% for 1998, reflecting primarily the effect of the lower yielding assets received in the Acquisition.       Investment income (and the related yields on average invested assets) totaled $388.4 million (7.15%) in 2000, compared with $506.0 million (6.95%) in 1999 and $214.9 million (8.42%) in 1998.  The decrease in investment income in 2000 compared to 1999 resulted primarily from the surrender or rollover into a variable product of most of the fixed annuities received in the Acquisition.  The increase in the investment yield in 2000 compared to 1999 is due primarily to a generally increasing interest rate environment. Both the significant increase in investment income and the decrease in the related yield in 1999 as compared to 1998 principally resulted from the Acquisition.  The invested assets acquired in the Acquisition included high-grade corporate, government and government/agency bonds and cash and short-term investments, which are lower yielding than a significant portion of the invested assets that comprised the remainder of the Company's portfolio.  On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1997, the yield on related average invested assets would have been 6.54% in 1998.

Expenses  incurred  to manage the  investment  portfolio  amounted  to  $7.1 million in 2000, $6.0 million in 1999 and $3.2 million in 1998.  These expenses are included as a reduction to investment income in the income statement.  Investment expenses were significantly higher in 2000 and 1999 due to the increase in the size of the portfolio as a result of the Acquisition.       Total interest expense equaled $260.7 million in 2000, $354.3 million in  1999 and $132.0 million in 1998. The average rate paid on all interest-bearing liabilities was 4.96% in 2000, compared with 4.98% in 1999 and 5.45% in 1998. Interest-bearing liabilities averaged $5.26 billion during 2000, compared with $7.12 billion during 1999 and $2.42 billion during 1998.  On a pro forma basis, assuming the Acquisition had been consummated on October 1, 1997, the average rate paid on all interest-bearing liabilities would have been 5.39% and interest-bearing liabilities would have averaged $7.62 billion in 1998.  The decreases in the overall rates paid in 1999 result primarily from a generally lower interest rate environment in 1999.       DECLINE IN AVERAGE INVESTED ASSETS largely results from the surrenders and rollovers to variable products of the fixed annuity liabilities related to the Acquisition.  Changes in average invested assets also reflect sales of fixed annuities and the fixed account options of the Company's variable annuity products ("Fixed Annuity Premiums"), and renewal premiums on its universal life product ("UL Premiums") acquired in the Acquisition, partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts.  Fixed Annuity Premiums and UL Premiums totaled $1.82 billion in 2000, $2.10 billion in 1999 and $1.51 billion in 1998, and are largely premiums for the fixed accounts of variable annuities.  These premiums represent 35%, 27% and 72%, respectively, of the related reserve balances at the beginning of the respective periods. The  lower levels of 2000 and 1999 premiums when expressed as a percentage of related reserve balances results from the impact of the Acquisition.  When premium and reserve balances resulting from the Acquisition are excluded, the resulting premiums represent 66% and 94% of the beginning fixed annuity reserve balances in 2000 and 1999.       Guaranteed investment contract ("GIC") premiums totaled $350.0 million in 2000 and $5.6 million in 1998.  There were no GIC premiums in 1999.  GIC surrenders and maturities totaled $78.3 million in 2000, $19.7 million in 1999 and $36.3 million in 1998.  The GICs issued by the Company are generally variable rate contracts which guarantee the payment of principal and interest for a term of three to five years.  GICS that are purchased by banks for their long-term portfolios or by state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement.  GICs purchased by asset management firms for their short-term portfolios either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days.  In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity.       NET REALIZED INVESTMENT LOSSES totaled $15.2 million in 2000 and $19.6 million in 1999, compared with net realized investment gains of $19.6 million in 1998 and include impairment writedowns of $20.6 million in 2000, $6.1 million in 1999 and $13.1 million in 1998. Thus, net realized gains (losses) from sales and redemptions of investments included $5.4 million of gains in 2000,  $13.5  million  of losses in 1999 and $32.7 million of gains in 1998.

The Company  sold or redeemed  invested assets,  principally bonds and notes, aggregating $1.14 billion in 2000, $4.43 billion in 1999 and $2.23 billion in 1998.  Sales of investments result from the active management of the Company's investment portfolio, including assets received as part of the Acquisition.  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 0.10%, 0.19%, and 1.28% of average invested assets for 2000, 1999 and 1998, 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 $20.6 million and $6.1 million of provisions applied to bonds in 2000 and 1999, respectively, and $9.4 million of provisions applied to partnerships and $3.7 million applied to bonds in 1998.  Impairment writedowns represent 0.38%, 0.08% and 0.51% of average invested assets for 2000, 1999 and 1998, respectively.  For the five years ended December 31, 2000, impairment writedowns as a percentage of average invested assets have ranged from 0.10% to 0.80% and have averaged 0.42%.  Such writedowns are based upon estimates of the net realizable value of the applicable assets.  Actual realization will be dependent upon future events.       VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts.  Such fees totaled $385.4 million in 2000, $296.1 million in 1999 and $195.9 million in 1998. The increased fees reflect growth in average variable annuity assets, principally due to the receipt of variable annuity premiums and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders and decreases in market values.  Variable annuity fees represent 1.8% of average variable annuity assets in all periods presented.  Variable annuity assets averaged $21.07 billion in 2000, $16.15 billion during 1999 and $10.70 billion during 1998.  Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $1.88 billion in 2000, $1.70 billion in 1999 and $1.82 billion in 1998.  These amounts represent 9%, 12% and 19% of variable annuity reserves at the beginning of the respective periods.  Transfers from the fixed accounts of the Company's variable annuity products to the separate accounts (see "Decline in Average Invested Assets") are not classified as variable annuity premiums.  Accordingly, changes in variable annuity premiums 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 premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $3.64 billion, $3.66 billion and $3.33 billion in 2000, 1999 and 1998, respectively.  Variable Annuity Product Sales primarily reflect sales of the Company's flagship variable annuity line, Polaris. Polaris is a multi-manager variable annuity that offers investors a choice of more than 30 variable funds and a number of guaranteed fixed-rate funds.

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 variable annuities and annuities generally (See "Regulation" in Item 1).       UNIVERSAL LIFE INSURANCE FEES, NET result from the universal life insurance contract reserves acquired in the Acquisition and the ongoing receipt of renewal premiums on such contracts, and consist of mortality changes, up-front fees earned on premiums received and administrative fees, net of the excess mortality expense on these contracts.  The Company does not actively market universal life insurance contracts.  Universal life insurance fees amounted to $20.3 million and $28.9 million in 2000 and 1999, respectively.  Such fees represent 1.08% and 1.34% of average reserves for universal life insurance contracts in the respective periods.  The decrease in fees in 2000 as compared to 1999 result principally from the ceding to an affiliate on July 1, 1999 of approximately 12.2% of the universal life reserves received in the Acquisition.  Since the Acquisition occurred on December 31, 1998, there were no such fees earned in 1998.       SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $21.0 million in 2000, $17.1 million in 1999 (including $1.6 million attributable to the Acquisition) and $7.4 million in 1998.  Surrender charges generally are assessed on withdrawals at declining rates during the first seven years of a contract.  Withdrawal payments, which exclude claims and lump-sum annuity benefits, totaled $2.22 billion in 2000, $3.12 billion in 1999 (including $1.58 billion attributable to the Acquisition) and $1.14 billion in 1998.  These payments when expressed as a percentage of average fixed and variable annuity and universal life reserves represent 8.7%, 16.2% (7.9% attributable to the Acquisition) and 9.0% for 2000, 1999 and 1998, respectively.  The very high surrender rate in 1999 was due to the Acquisition, which occurred on July 1, 1999 and provided these policyholders the ability to surrender their policies without a moratorium fee for the first time since 1991.  Withdrawal rates in this block of business continued to be relatively high for the remainder of 1999.  Withdrawals include variable annuity payments from the separate accounts totaling $1.76 billion (8.4% of average variable annuity reserves), $1.34 billion (8.3% of average variable annuity reserves) and $952.1 million (8.9% of average variable annuity reserves) in 2000, 1999 and 1998, respectively.  Management anticipates that withdrawal rates will gradually rise for the foreseeable future.       GENERAL AND ADMINISTRATIVE EXPENSES totaled $95.3 million in 2000,  $93.4 million in 1999 and $49.7 million in 1998.  The increases in 2000 over 1999 and 1998 principally reflect the expenses related to managing the Company's growing block of variable annuity policies.  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 $125.0 million in 2000 (including $11.9 million attributable to the Acquisition), compared with $94.9 million (including $8.9 million attributable to the Acquisition) in 1999 and $58.8 million in 1998.  The increases in amortization were primarily due to additional fixed and variable annuity sales and the subsequent amortization of related deferred commissions and other direct selling costs.

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.  Annual commissions totaled $56.5 million in 2000, $40.8 million in 1999 and $18.2 million in 1998. The increases in annual commissions since 1998 reflect increased sales of annuities that offer this commission option and gradual expiration of the initial fifteen-month periods before such payments begin.  The Company estimates that approximately 58% of the average balances of its variable annuity products is currently subject to such annual commissions.  Based on current sales, this percentage is expected to increase in future periods.       ASSET MANAGEMENT OPERATIONS       PRETAX INCOME totaled $28.3 million in 2000, $15.1 million in 1999 and $4.1 million in 1998.  The 87.9% improvement in 2000 over 1999 primarily resulted from substantial increases in asset management and variable annuity  fee income, partially offset by corresponding increases in related and administrative expenses and amortization of deferred acquisition costs.  The significant improvement in 1999 over 1998 also resulted principally from increased asset management fee income, and higher net investment income, partially offset by increased amortization of deferred acquisition costs and increased general and administrative expenses.       VARIABLE ANNUITY FEES totaled $15.1 million in 2000, $10.3 million in 1999 and $4.9 million in 1998.  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.  SunAmerica Asset Management is the investment advisor for all of the trusts as well as trusts owned by an affiliate, First SunAmerica Life Insurance Company.  SunAmerica Asset Management also serves as the subadvisor for several of these trusts, for which it receives variable annuity fees which are direct expenses of the trusts.       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.  Such fees totaled $73.9 million on average assets managed of $6.62 billion in 2000, $43.5 million on average assets managed of $4.19 billion in 1999 and $29.6 million on average assets managed of $2.89 billion in 1998.  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, totaled $2.89 billion in 2000, compared with $1.48 billion in 1999 and $853.6 million in 1998.  The increase in sales in 2000 and 1999 principally resulted from increased sales of the Company's "Style Select Series" product.  The "Style Select Series" is a group of mutual funds that are each managed by three industry-recognized fund managers.  Additional "Focus Portfolios" in the Style Select Series were added in 1999 and 2000.   The Focus Portfolios utilize three leading independent money managers, each of whom manages one-third of the portfolio by choosing ten favorite stocks.  Sales of the "Style Select Series" products totaled $2.05 billion in 2000, compared to $938.5 million in 1999 and $550.6 million in 1998.  Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $819.9 million in 2000, $571.5 million in 1999 and $402.5 million in 1998, which represent 14.3%, 16.8% and 17.5%, respectively, of average related mutual fund assets.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $44.3 million in 2000, compared  with $24.9 million in 1999 and $18.6 million in 1998.  The consecutive increases in expenses principally reflect the higher costs  related to servicing the Company's rapidly growing blocks of mutual funds, as well as certain costs of marketing such products.       AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $33.0 million in 2000, compared with $21.9 million in 1999 and $13.9 million in 1998.  The increases in amortization were primarily due to additional mutual fund sales and the subsequent amortization of related deferred commissions and other direct selling costs.       BROKER DEALER OPERATIONS       PRETAX INCOME totaled $29.5 million in 2000, $20.6 million in 1999 and $22.4 million in 1998.  The 43.2% improvement in 2000 over 1999 primarily resulted from increased net retained commissions, partially offset by increased general and administrative expenses.  The 8.0% decrease in 1999 as compared to 1998 resulted from increased general and administrative expenses and lower net investment income, offset by increased fee income.       NET RETAINED COMMISSIONS are derived from commissions on the sales of proprietary and nonproprietary investment products, after deducting the substantial portion of such commissions that is passed on to registered representatives.  Approximately 90% of commission payments Royal receives is paid to its registered representatives.  Net retained commissions totaled $58.3 million in 2000, $49.0 million in 1999 and $46.9 million in 1998.  Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $13.25 billion in 2000, $13.40 billion in 1999 and $14.37 billion in 1998.  Fluctuations in net retained commissions may not be proportionate to fluctuations in sales primarily due to changes in sales mix.       GENERAL AND ADMINISTRATIVE EXPENSES totaled $32.1 million in 2000, compared with $28.4 million in 1999 and $24.6 million in 1998.  The  increases in 2000 over 1999 and in 1999 over 1998 principally reflect  increases in marketing expenses and technology expenses.       FINANCIAL CONDITION AND LIQUIDITY       SHAREHOLDER'S EQUITY increased to $1.13 billion at December 31, 2000 from $935.1 million at December 31, 1999, due principally to $215.6 million of net income recorded in 2000 and a $47.0 million decrease in accumulated other comprehensive loss, offset by a $69.0 million dividend paid to the Parent.       INVESTED  ASSETS at  December 31, 2000  totaled  $5.26  billion, compared with $5.55 billion at December 31, 1999.  The Company manages most of its invested assets internally.  The Company's general investment philosophy is to hold fixed-rate assets for long-term investment.  Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities,  changes  in  prepayment  risk,  changes  in  the credit quality outlook for certain securities, the Company's need for liquidity and other similar factors.

THE BOND PORTFOLIO, which constituted 76% of the Company's total investment portfolio at December 31, 2000, had an amortized cost that was $122.7 million greater than its aggregate fair value at December 31, 2000 and $202.6 million greater than its aggregate fair value at December 31, 1999.  The decrease in net unrealized losses on the Bond Portfolio during 2000 principally reflects the decline in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at December 31, 2000.       At December 31, 2000, the Bond Portfolio (excluding $1.4 million of redeemable preferred stocks) included $3.94 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 $65.7 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC.  At December 31, 2000, approximately $3.74 billion of the Bond Portfolio was investment grade, including $1.66 billion of U.S. government/agency securities and mortgage-backed securities ("MBS").       At December 31, 2000, the Bond Portfolio included $267.9 million of bonds that were not investment grade.  These non-investment-grade bonds accounted for approximately 1.0% of the Company's total assets and approximately 5.1% 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.  The Company had no material concentrations of non-investment-grade securities at December 31, 2000.       The table on the next page summarizes the Company's rated bonds by rating classification as of December 31, 2000.