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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

 

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

3,511 shares

PART I ITEM 1.  BUSINESS GENERAL DESCRIPTION       AIG SunAmerica Life Assurance Company (DBA Anchor National Life Insurance Company), including its wholly owned subsidiaries, (the "Company") is an indirect wholly-owned subsidiary of SunAmerica Inc. ("SunAmerica"), which is a wholly-owned subsidiary of American International Group, Inc. ("AIG"), a holding company, which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services, retirement services and asset management. The Company changed its name to SunAmerica National Life Insurance Company on October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. However, the Company is continuing to do business as Anchor National Life Insurance Company. It is currently anticipated that the Company will seek regulatory approval in each state in which it does business to change its name to AIG SunAmerica Life Assurance Company effective sometime in the first quarter of 2003.       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 2,300 employees at December 31, 2001, approximately 1,600 of whom perform services for the Company as well as for certain of its affiliates.       Founded in 1965, the Company is an Arizona-chartered company licensed in 49 states and the District of Columbia. 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 deposit-type insurance contracts such as fixed and variable annuity products, guaranteed investment contracts ("GICs") and the administration of a closed block of universal life business (See Note 3 of Notes to Consolidated Financial Statements). 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"). 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. SACS earns commissions and distribution fees by selling proprietary mutual funds. Broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal Alliance"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products. Net retained commissions are derived from commissions on the sales of these products after deducting approximately 90% of such commissions that is passed on to registered representatives.

The Company has declared a distribution to its Parent, effective January 1, 2002, of 100% of the outstanding capital stock of its consolidated subsidiary Saamsun Holdings Corp ("Saamsun"). This distribution was declared subject to the approval of the Arizona Department of Insurance. Saamsun is comprised of both the Company's asset management and broker-dealer segments. Upon approval of this distribution, the company will conduct its business through only one segment, Annuity operations (see Note 13 of Notes to consolidated financial statements).       The Company ranks among the largest U.S. issuers of variable annuities. At December 31, 2001, the Company managed $34.92 billion of assets through its fixed-rate business and asset management operations, consisting of $26.94 billion of assets on its balance sheet and $7.97 billion of assets managed in mutual funds. Its asset management operations provide a broad range of financial planning and investment services through more than 10,700 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 62 million from 1990 to 2000, making this age group the fastest-growing segment of the U.S. population. Between 1990 and 2000, annual industry premiums from fixed and variable annuities and fund deposits increased from $129.3 billion to $303.8 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $149.1 billion to $1.63 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. 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 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.

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 Acquisition"). 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.       The following table shows the Company's net investment income and net realized investment losses and fee income for the year ended December 31, 2001 by business segment:

For additional financial information on the Company's business segments, see Note 12 of Notes to Consolidated Financial Statements.

ANNUITY OPERATIONS - 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 and Seasons variable annuity products are multimanager variable annuities that offer investors a choice of 4 to 37 variable funds and up to 10 guaranteed fixed-rate funds. Seasons 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.       In addition to distributing its variable annuity products through its eight wholly-owned or affiliated broker-dealers, the Company distributes its products through a vast network of independent broker-dealers, full-service securities firms and financial institutions as well as through independent general insurance agents. In total, more than 60,000 independent sales representatives nationally are licensed to sell the Company's annuity products.        At December 31, 2001, total variable product liabilities were $21.36 billion, of which $18.53 billion were held in separate accounts and $2.83 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, 2001, 80% of the Company's variable annuity liabilities 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 2001 was approximately $70,000.       ANNUITY OPERATIONS - FIXED ANNUITIES AND GICs The Company's general account obligations are fixed-rate products, including fixed annuities and universal life contracts issued in prior years 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 84% at December 31, 2001) of the annuity contracts, as well as all of 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, 2001, the Company had $477.9 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indices and $6.0 million of fixed-maturity, fixed-rate GICs. Of the total GIC portfolio at December 31, 2001, approximately 92% was sold to asset management firms, 7% was sold to state and local government entities and 1% 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 75% of the Company's fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2001.       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. 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; policy loans, and investments in limited partnerships that invest primarily in fixed-rate securities. At December 31, 2001, these assets had an aggregate fair value of $6.21 billion with a duration of 3.3 (See further discussion of duration under Capital Resources and Liquidity - Asset Liability Matching). The Company's fixed-rate liabilities include fixed annuity, GIC and universal life reserves and subordinated notes. At December 31, 2001, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $5.83 billion with a duration of 2.7. For the years ended December 31, 2001, 2000, and 1999, the Company's yields on average invested assets were 6.63%, 7.15% and 6.95%, respectively; its average rates paid on all interest-bearing liabilities were 4.48%, 4.96% and 4.98%, respectively; and it realized net investment spreads on average invested assets of 2.18%, 2.35% and 2.08%, respectively. Net realized investment losses were 0.76%, 0.28% and 0.27% of average invested assets, respectively.

At December 31, 2001, the Bond Portfolio (excluding $21.5 million of redeemable preferred stocks) included $4.49 billion of bonds rated by S&P, Moody's, Fitch or the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), and $31.3 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 2001, approximately $4.31 billion of the Bond Portfolio was investment grade, including $1.57 billion of mortgage-backed securities and U.S. government/agency securities.       At December 31, 2001, the Bond Portfolio included $215.5 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 0.8% of the Company's total assets and approximately 3.2% of its invested assets.

 

BROKER-DEALER OPERATIONS       Broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance, which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products. Net retained commissions are derived from commissions on the sales of these products after deducting approximately 90% of such commissions that is passed on to registered representatives. Royal Alliance currently has a network of approximately 2,600 representatives. Royal Alliance, along with the Company's six 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 2001.       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 a state 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 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 by a considerable margin as of December 31, 2001.

In 1998, the NAIC adopted the codification of statutory accounting principles ("Codification") which replaced the NAIC's previous primary guidance on statutory accounting, which became effective January 1, 2001. Codification changed prescribed statutory accounting practices and has resulted 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 adoption of Codification resulted in an increase to the Company's statutory surplus of approximately $92.4 million.       Privacy provisions of the Gramm-Leach-Bliley Act are fully effective in 2001 and establish new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The law also requires financial institutions to disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress and several states is designed to provide further privacy protections to consumers of financial products and services. These statutes and regulations may result in additional regulatory compliance costs, may limit the Company's ability to market its products, and may otherwise constrain the nature or scope of the Company's insurance and financial services operations. The Gramm-Leach-Bliley Act also allows combinations between insurance companies, banks and other entities. 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 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.       Royal Alliance is subject to regulation and supervision by the states in which its representatives 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 broker-dealer 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)

		Years Ended December 31,								Three Months Ended				Years Ended September 30,
		2001			2000			1999		December 31, 1998				1998			1997
		(In thousands)
FINANCIAL POSITION
Investments and cash		$	6,751,326		$	5,262,734		$	5,554,701		$	8,306,943		$	2,734,742		$	2,608,301
Variable annuity assets
	held in separate
	accounts		18,526,413			20,393,820			19,949,145			13,767,213			11,133,569			9,343,200
Deferred acquisition costs			1,419,498			1,286,456			1,089,979			866,053			539,850			536,155
Deferred income taxes			---			---			53,445			---			---			---
Other assets			244,351			246,468			227,224			206,124			142,107			85,573
TOTAL ASSETS		$	26,941,588		$	27,189,478		$	26,874,494		$	23,146,333		$	14,550,268		$	12,573,229
Reserves for fixed
	annuity contracts	$	3,498,917		$	2,778,229		$	3,254,895		$	5,500,157		$	2,189,272		$	2,098,803
Reserves for universal life
	insurance contracts		1,738,493			1,832,667			1,978,332			2,339,194			---			---
Reserves for guaranteed
	investment contracts		483,861			610,672			305,570			306,461			282,267			295,175
Variable annuity liabilities
	related to separate
	accounts		18,526,413			20,393,820			19,949,145			13,767,213			11,133,569			9,343,200
Other payables and
	accrued liabilities		830,124			304,324			413,610			171,143			157,551			157,546
Subordinated notes payable
	to affiliates		58,814			55,119			37,816			209,367			39,182			36,240
Deferred income taxes			210,970			85,978			---			105,772			95,758			67,047
Shareholder's equity			1,593,996			1,128,669			935,126			747,026			652,669			575,218
TOTAL LIABILITIES AND
	SHAREHOLDER'S EQUITY	$	26,941,588		$	27,189,478		$	26,874,494		$	23,146,333		$	14,550,268		$	12,573,229

 

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 3 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 AIG SunAmerica Life Assurance Company (DBA Anchor National Life Insurance Company) (the "Company") for the three years ended December 31, 2001 ("2001"), 2000 ("2000") and 1999 ("1999") 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.       RESULTS OF OPERATIONS       The Company has three business segments, as presented in Note 12 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 ("GICs"). Annuity operations focus primarily on the marketing of variable annuity products and the administration of a closed block of universal life business. 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, SunAmerica Capital Services, Inc. ("SACS"). Deposits 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 its affiliates, Variable Annuity Life Insurance Company, AIG Life Insurance Company and First SunAmerica Life Insurance Company ("FSA"). SunAmerica Asset Management and SACS 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. Effective January 1, 2001, the asset management operations also included SA Affordable Housing LLC ("SAAH LLC"). SAAH LLC was previously a direct wholly owned subsidiary of SunAmerica Life Insurance Company, the Company's direct Parent, until January 1, 2001 at which time all of SAAH LLC's ownership interests were contributed to the Company. All of SAAH LLC's ownership interests were subsequently contributed by the Company to SunAmerica Asset Management. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low income housing credits and passive losses. Realized tax credits are recognized by its direct Parent, SunAmerica Asset Management (see Note 9 of Notes to Consolidated Financial Statements).       The broker-dealer operations are conducted by the Company's broker-dealer subsidiary, Royal Alliance Associates, Inc. ("Royal Alliance"), which sells proprietary annuities and mutual funds, as well as a full range of non-proprietary investment products through approximately 2,600 independent registered representatives. Royal Alliance earns income from commissions on sales of these products, net of the portion that is passed on to the registered representatives. Royal Alliance is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers. The Company considers among its most critical accounting policies those policies with respect to valuation of certain financial instruments and amortization of deferred acquisition costs. 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 $109.6 million at December 31, 2001. In determining if and when a decline in fair value below amortized cost is other-than-temporary, we evaluate at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in debt and marketable 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, we recognize an impairment loss in the current period operating results to the extent of the decline.

Securities in our portfolio with a carrying value of approximately $841.2 million at December 31, 2001 do not have readily determinable market prices. For these securities, we estimate their fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, we use our 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. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our 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: We amortize our deferred acquisition costs (DAC) based on a percentage of our expected gross profits ("EGPs") over the life of the underlying policies. Our estimated EGPs are computed based on assumptions related to the underlying policies written, including the anticipated duration of the underlying policies, growth rate of the assets supporting the liabilities (management currently estimates a rate of 10% in projecting expected EGPs), and level of expenses necessary to maintain the policies over their entire life. We amortize deferred policy acquisition costs by estimating the present value of the EGPs over the lives of the insurance policies and then calculate a percentage of the policy acquisition cost deferred as compared to the present value of the EGPs. That percentage is used to amortize the deferred policy acquisition cost such that the amount amortized over the life of the policies results in a constant percentage of amortization when related to the actual and future gross profits.       Because the EGPs are only an estimate of the profits we expect to recognize from these policies, the EGPs are adjusted at each balance sheet date to take into consideration the actual gross profits to date and any changes in the remaining expected future gross profits. When EGPs are adjusted, we also adjust the DAC amount on the balance sheet, with a corresponding charge or credit to current period operating results, to reflect our revised estimate of DAC amortization.       NET INCOME totaled $90.4 million in 2001, compared with $215.6 million in 2000 and $184.7 million in 1999. 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"). The results of operations for 2001, 2000 and 1999 include the impact of the Acquisition.       CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflects the adoption of EITF 99-20. The Company recorded a loss of $10,342,000, net of tax, which is recognized in the consolidated statement of income and comprehensive income as a cumulative effect of accounting change for the year ended December 31, 2001 (see Note 2 of Notes to Consolidated Financial Statements).       PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $121.6 million in 2001, compared with $324.0 million in 2000 and $287.7 million in 1999. The decline in 2001 from 2000 primarily resulted from increased amortization of deferred acquisition costs, decreased fee income and increased net realized investment losses in the annuity operations. 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 amortization of deferred acquisition costs, increased operating expenses and decreased net investment income in the annuity operations.

INCOME TAX EXPENSE totaled $20.9 million in 2001, $108.4 million in 2000 and $103.0 million in 1999, representing effective tax rates of 17%, 33% and 36% in 2001, 2000 and 1999, respectively. The lower tax rate in 2001 is due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SunAmerica Asset Management which reduced the effective tax rate by approximately 13% (see Note 9 of Notes to Consolidated Financial Statements). ANNUITY OPERATIONS       PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $142.8 million in 2001, compared with $258.0 million in 2000 and $246.4 million in 1999. The decline in 2001 from 2000 primarily resulted from increased net realized investment losses, decreased variable annuity fee income, increased guaranteed minimum death benefits and increased amortization of deferred acquisition costs. The increase in 2000 over 1999 primarily resulted from increased variable annuity fee income, partially offset by increased amortization of deferred acquisition costs and decreased net investment income.       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 $118.2 million in 2001, $127.7 million in 2000 and $151.7 million in 1999. These amounts equal 2.18% on average invested assets (computed on a daily basis) of $5.43 billion in 2001, 2.35% on average invested assets of $5.43 billion in 2000 and 2.08% on average invested assets of $7.28 billion in 1999.       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 $32.3 million in 2001, compared with $169.9 million in 2000 and $159.2 million in 1999. The decrease in 2001 reflects the impact of $94.1 million in dividends paid to SunAmerica Life Insurance Company (the "Parent") in the second quarter of 2001 and realized investment losses of $59.8 million in 2001. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.15% in 2001, 2.19% in 2000 and 1.97% in 1999.       Investment income (and the related yields on average invested assets) totaled $359.7 million (6.63%) in 2001, compared with $388.4 million (7.15%) in 2000 and $506.0 million (6.95%) in 1999. The decrease in the investment yield in 2001 compared to 2000 is due to a lower prevailing interest rate environment in 2001. The increase in the investment yield in 2000 compared to 1999 was due primarily to a generally increasing interest rate environment. The decrease in investment income in 2000 compared to 1999 resulted primarily from the reduction in average invested assets.       Expenses incurred to manage the investment portfolio amounted to $5.0 million in 2001, $7.1 million in 2000 and $6.0 million in 1999. These expenses are included as a reduction to investment income in the consolidated statement of income and comprehensive income.

Interest expense totaled $241.4 million in 2001, $260.7 million in 2000 and $354.3 million in 1999. The average rate paid on all interest-bearing liabilities was 4.48% in 2001, compared with 4.96% in 2000 and 4.98% in 1999. Interest-bearing liabilities averaged $5.39 billion during 2001, $5.26 billion during 2000 and $7.12 billion during 1999. The declines in the overall rates paid in 2001 compared to 2000 resulted primarily from the impact of a declining interest rate environment during 2001.       The change in average invested assets in 2001 largely resulted from the surrenders of certain closed blocks of fixed annuity policies, as well as the impact of $94.1 million in dividends paid to the Parent and realized investment losses of $59.8 million. The decline in average invested assets in 2000 largely resulted from surrenders or rollovers of fixed annuities received in the Acquisition into variable annuity products. Changes in average invested assets also reflect net exchanges from fixed accounts into the separate accounts of variable annuity contracts, partially offset by sales of fixed annuities and the fixed account options of the Company's variable annuity products ("Fixed Annuity Deposits"), and renewal deposits on its universal life product ("UL Deposits"). Fixed Annuity Deposits and UL Deposits totaled $2.33 billion in 2001, $1.82 billion in 2000 and $2.10 billion in 1999, and are largely deposits for the fixed accounts of variable annuities. These deposits represent 51%, 35% and 27%, respectively, of the related reserve balances at the beginning of the respective periods. Fixed annuity deposits increased in 2001 due primarily to a one-month promotion on the Company's Advisor product which generated approximately $500 million in additional deposits during the third quarter.       GIC deposits totaled $40.0 million in 2001 and $350.0 million in 2000. No GIC deposits were received in 1999. GIC surrenders and maturities totaled $191.9 million in 2001, $78.3 million in 2000 and $19.7 million in 1999. 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 purchased by asset management firms for their short-term portfolios (which represent 92% of the Company's GIC liabilities) either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. 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. In pricing GIC, 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 $59.8 million in 2001, compared with $15.2 million in 2000 and $19.6 million in 1999 and include impairment writedowns of $68.0 million, $20.6 million and $6.1 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $8.2 million in 2001 and $5.4 million in 2000, compared with $13.5 million of net realized losses in 1999.       The Company sold or redeemed invested assets, principally bonds and notes, aggregating $1.77 billion in 2001, $1.14 billion in 2000 and $4.43 billion in 1999. Sales and redemptions in 1999 reflect the redeployment of $5.72 billion of assets received in the Acquisition. 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 0.15%, 0.10% and 0.19% of average invested assets for 2001, 2000 and 1999, 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 $68.0 million, $20.6 million and $6.1 million of provisions principally applied to bonds in 2001, 2000 and 1999, respectively. Impairment writedowns represent 1.25%, 0.38% and 0.08% of average invested assets for 2001, 2000 and 1999, respectively. For the five years ended December 31, 2001, impairment writedowns as a percentage of average invested assets have ranged from 0.06% to 1.25% and have averaged 0.52%. Such writedowns are based upon estimates of the net realizable 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. The Company recorded $15.9 million ($10.3 million, net of tax) of additional impairments in 2001 pursuant to the implementation of EITF 99-20 (see Note 2 of Notes to Consolidated Financial Statements). This adjustment was recorded as a cumulative effect of accounting change in the accompanying consolidated statement of income and comprehensive income for 2001.       VARIABLE ANNUITY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $350.4 million in 2001, $385.4 million in 2000 and $296.1 million in 1999. The decreased fees in 2001 reflect the recent state of the equity markets, which have been in decline throughout much of 2000 and 2001, and the resulting impact on market values of assets in the separate accounts. The increased fees in 2000 reflect growth in average variable annuity assets, principally due to the receipt of variable annuity deposits and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders and declines in market values. Variable annuity fees represent 1.9% of average variable annuity assets in 2001 and 1.8% of average variable annuity assets in 2000 and 1999. Variable annuity assets averaged $18.87 billion, $21.07 billion and $16.15 billion during 2001, 2000 and 1999, respectively. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $1.41 billion in 2001, $1.88 billion in 2000 and $1.70 billion in 1999. These amounts represent 7%, 9% and 12% of variable annuity liabilities at the beginning of the respective periods. The decrease in variable annuity deposits in 2001 reflected lower demand for the variable account options of the Company's variable annuity products due to the unfavorable equity market conditions discussed above. 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 $3.69 billion, $3.64 billion and $3.66 billion in 2001, 2000 and 1999, respectively. Such sales primarily reflect those of the Company's Polaris, Seasons and Advisor variable annuity product lines. The Company's variable annuity products are 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 4 to 37 variable funds and up to 10 guaranteed fixed-rate funds depending on the product.       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 amounted to $18.9 million, $20.3 million and $28.9 million in 2001, 2000 and 1999, respectively. Universal life insurance fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of the excess mortality expense on these contracts. 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 and does not actively market such contracts. Such fees represent 1.06%, 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 resulted principally from the ceding to an affiliate of approximately 12.2% of the universal life reserves received in the Acquisition (see Note 3 of Notes to Consolidated Financial Statements).       SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $24.9 million in 2001, $21.0 million in 2000 and $17.1 million in 1999. 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 $2.10 billion in 2001, compared with $2.22 billion in 2000 and $3.65 billion in 1999 (including $1.58 billion attributable to the Acquisition). These payments when expressed as a percentage of average fixed and variable annuity and universal life reserves represent 9.0%, 8.7% and 16.2% (7.9% attributable to the Acquisition) for 2001, 2000, and 1999, respectively. The very high surrender rate in 1999 was due to the end of the coinsurance period of 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. Withdrawals include variable annuity payments from the separate accounts totaling $1.73 billion (9.2% of average variable annuity liabilities), $1.76 billion (8.4% of average variable annuity liabilities) and $1.34 billion (8.3% of average variable annuity liabilities) in 2001, 2000, and 1999, respectively. Management anticipates that withdrawal rates will gradually increase for the foreseeable future.       GENERAL AND ADMINISTRATIVE EXPENSES totaled $89.3 million in 2001, $101.9 million in 2000 and $93.9 million in 1999. General and administrative expenses decreased in 2001 due to lower costs associated with servicing its fixed annuities and universal life policies. The increase in 2000 over 1999 principally reflects 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 $144.3 million in 2001, compared with $125.0 million in 2000 and $94.9 million in 1999. The increases in amortization were primarily related to lower estimates of future gross profits on variable annuity contracts in light of the recent downturn in the equity markets, and additional fixed and variable annuity sales and the subsequent amortization of related deferred commissions and other direct selling costs.       ANNUAL COMMISSIONS totaled $58.3 million in 2001, compared with $56.5 million in 2000 and $40.8 million in 1999. The increase in 2000 from 1999 reflect increased sales of annuities that offer this commission option. 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 Company estimates that approximately 52% 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.       GUARANTEED MINIMUM DEATH BENEFITS totaled $21.6 million in 2001, compared with $1.6 million in 2000 and $0.4 million in 1999. Guaranteed minimum death benefits represent the additional death benefits paid to fund minimum policy benefits in excess of the policyholder's separate account balance. The increases in guaranteed minimum death benefits paid pursuant to the Company's variable annuity separate account contracts reflect the recent downturn in the equity markets. Further downturns in the equity markets could increase these payments. ASSET MANAGEMENT OPERATIONS       PRETAX (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled ($38.9) million in 2001, $36.5 million in 2000 and $20.7 million in 1999. The decrease in 2001 from 2000 primarily resulted from increased amortization of deferred acquisition costs, increased net realized investment losses and a reduction in fee income. The improvement in 2000 over 1999 primarily resulted from an increase in fee income, partially offset by corresponding increases in amortization of deferred acquisition costs and operating expenses.       NET REALIZED INVESTMENT LOSSES totaled $32.9 million in 2001 and represent impairment writedowns applied to limited partnerships held by SAAH LLC (See Note 9 of Notes to Consolidated Financial Statements). There were no realized investment losses in 2000 or 1999. Such writedowns are recorded when the Company has determined that declines in net realizable value of the applicable assets are considered to be other than temporary. Actual realization will be dependent upon future events.       VARIABLE ANNUITY FEES totaled $11.5 million in 2001, compared with $15.1 million in 2000 and $10.3 million in 1999. The decreased fees in 2001 reflect a decline in average variable annuity assets under management, principally resulting from a decline in market values. The increase in fees in 2000 as compared to 1999 represented the growth in variable annuity assets.

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 $63.5 million on average assets managed of $6.74 billion in 2001, $73.9 million on average assets managed of $6.62 billion in 2000 and $43.5 million on average assets managed of $4.19 billion in 1999. 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 $1.83 billion in 2001, compared with $2.89 billion in 2000 and $1.48 billion in 1999. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $1.17 billion in 2001, $819.9 million in 2000 and $571.5 million in 1999, which represent 20.5%, 14.3% and 16.8%, respectively, of average related mutual fund assets. The decrease in sales and the increase in redemptions in 2001 principally reflect lower demand for growth-oriented mutual funds, which have been out of favor with investors due to unfavorable equity market conditions during 2001. The increase in sales in 2000 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. Sales of the "Style Select Series" products totaled $1.09 billion in 2001, $2.05 billion in 2000 and $938.5 million in 1999.       GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.4 million in 2001, compared with $36.1 million in 2000 and $24.0 million in 1999. The decrease in expenses in 2001 principally reflects lower sales of mutual funds and related marketing costs. The increase in expenses in 2000 is consistent with the increased sales of mutual funds.       AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $76.0 million in 2001, compared with $33.0 million in 2000 and $21.9 million in 1999. The increase in amortization in 2001 is principally due to a $34.0 million writedown of deferred acquisition costs which was required following the recent downturn in the equity markets, so that deferred costs would not exceed the estimated distribution fee and contingent deferred sales charge revenues on certain mutual fund contracts. The remaining increase in amortization in 2001 and the increase in amortization in 2000 compared to 1999 was primarily due to increased mutual fund sales and the impact of a full year of subsequent amortization of such related deferred commissions and other direct selling costs. BROKER DEALER OPERATIONS       PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $17.7 million in 2001, $29.5 million in 2000 and $20.6 million in 1999. The decline in 2001 from 2000 primarily resulted from a decline in net retained commissions. The increase in 2000 over 1999 primarily resulted from increased net retained commissions, partially offset by increased operating expenses.       NET RETAINED COMMISSIONS totaled $45.4 million in 2001, $58.3 million in 2000 and $49.0 million in 1999. Net retained commissions are derived from commissions on the sales of proprietary and nonproprietary investment products, after deducting approximately 90% of such commissions that is passed on to registered representatives. Such commissions have declined as a result of lower sales in 2001. Fluctuations in net retained commissions may not necessarily be related to fluctuations in sales primarily due to changes in sales mix. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $9.78 billion in 2001, $13.25 billion in 2000 and $13.40 billion in 1999. The decreases in broker-dealer sales in 2001 and 2000 reflected lower demand for mutual funds and other investments due to unfavorable equity market conditions.