SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

xþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2003~~2004

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

Incorporated in Arizona 86-0198983 IRS Employer Identification No.


Incorporated in Arizona		86-0198983
		IRS Employer
		Identification No.

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

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

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

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON ~~NOVEMBER~~ MAY 14, ~~2003~~2004 WAS AS FOLLOWS:


Common Stock (par value $1,000 per share)		3,511 shares outstanding

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

TABLE OF CONTENTS

	BALANCE SHEET
		CONSOLIDATED BALANCE SHEET
	STATEMENT OF INCOME AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
	STATEMENT OF CASH FLOWS
		CONSOLIDATED STATEMENT OF CASH FLOWS
	NOTES TO FINANCIAL STATEMENTS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	CONTROLS & PROCEDURES
	Item 1. Legal Proceedings
OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submissions of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EXHIBIT 10.A
EXHIBIT 10.B
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

			Page
		Number(s)	~~Number(s)~~
Part I — Financial Information
	Balance Sheet (Unaudited) — September 30, 2003 and December 31, 2002			3-4
Consolidated Balance Sheet (Unaudited) — March 31, 2004 and December 31, 2003			3-4
	Statement of Income and Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2003 and 2002			5-6
Consolidated Statement of Operations and Comprehensive Income (Unaudited) — Three Months Ended March 31, 2004 and 2003			5-6
	Statement of Cash Flows (Unaudited) - Nine Months Ended September 30, 2003 and 2002			7-8
Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2004 and 2003			7-8
	Notes to Financial Statements (Unaudited)			9-10
Notes to Consolidated Financial Statements (Unaudited)			9-15
Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~		16-32	~~11-33~~
Quantitative and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~		33	34
	Controls and Procedures			35
Disclosure Controls and Procedures			33
Part II — Other Information			34	36
	Exhibits and Reports on Form 8-K			38-41
Exhibits and Reports on 8-K			36

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

		September 30,		December 31,
		2003		2002
		(in thousands)
ASSETS
Investments and cash:
	Cash and short-term investments	$	303,510	$	65,872
	Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: September 30, 2003, $5,547,707; December 31, 2002, $5,492,677)		5,714,691		5,528,569
	Mortgage loans		747,274		738,601
	Policy loans		202,894		215,846
	Separate account seed money		23,583		25,366
	Common stocks available for sale, at fair value (cost: September 30, 2003 and December 31, 2002, $4,111)		4,410		2,609
	Real estate		22,091		22,315
	Securities lending collateral		254,653		585,760
	Other invested assets		10,722		8,766
	Total investments and cash		7,283,828		7,193,704
Variable annuity assets held in separate accounts			17,136,593		14,758,642
Accrued investment income			82,764		75,326
Deferred acquisition costs			1,391,790		1,364,748
Income taxes currently receivable from Parent			67,379		100,123
Due from affiliates			—		26,304
Goodwill			4,603		4,603
Other assets			23,081		15,382
TOTAL ASSETS		$	25,990,038	$	23,538,832

(Unaudited)

See accompanying notes to financial statements


	March 31,		December 31,
	2004		2003
	(in thousands)
ASSETS
Investments and cash:
Cash and short-term investments	$	142,186	$	133,105
Bonds, notes and redeemable preferred stocks available for sale, at market value (amortized cost: March 31, 2004, $5,240,898; December 31, 2003, $5,351,183)		5,484,780		5,505,800
Mortgage loans		699,676		716,846
Policy loans		195,499		200,232
Mutual funds		21,913		21,159
Common stocks available for sale, at market value (cost: March 31, 2004, $1,625; December 31, 2003, $635)		1,632		727
Real estate		22,166		22,166
Securities lending collateral		668,717		514,145
Other invested assets		13,850		10,453

Total investments and cash		7,250,419		7,124,633

Variable annuity assets held in separate accounts		20,174,729		19,178,796
Accrued investment income		76,222		74,647
Deferred acquisition costs		1,339,331		1,345,332
Goodwill		14,038		14,038
Other assets		226,889		219,161

TOTAL ASSETS	$	29,081,628	$	27,956,607

See accompanying notes to consolidated financial statements.

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

			September 30,			December 31,
		March 31,			December 31,
			2003			2002
		2004			2003
		(in thousands)	~~(in thousands)~~
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts	~~Reserves for fixed annuity contracts~~	$	$4,170,479	~~4,437,537~~	$	$4,274,329	~~4,285,098~~
Reserves for universal life insurance contracts	~~Reserves for universal life insurance contracts~~		1,587,907	~~1,623,191~~		1,609,233	~~1,676,073~~
Reserves for guaranteed investment contracts	~~Reserves for guaranteed investment contracts~~		213,487	~~357,676~~		218,032	~~359,561~~
	Securities lending payable			254,653			585,760
Reserve for guaranteed benefits			72,123			12,022
	Modified coinsurance deposit liability			12,434			31,393
Securities lending payable			668,717			514,145
	Due to affiliates			13,418			—
Income taxes currently payable to Parent			64,755			5,038
	Payable to brokers			227,862			8,529
Modified coinsurance deposit liability			—			4,738
	Other liabilities			157,855			160,265
Due to affiliates			13,546			19,289
Total reserves, payables and accrued liabilities				7,084,626			7,106,679
Payable to brokers			12,420			1,140
Variable annuity liabilities related to separate accounts				17,136,593			14,758,642
Other liabilities			233,054			243,470
Deferred income taxes				338,358			351,872
Total reserves, payables and accrued liabilities			7,036,488			6,901,436
Total liabilities				24,559,577			22,217,193
Variable annuity liabilities related to separate accounts			20,174,729			19,178,796
Shareholder’s equity:
Subordinated notes payable to affiliates			41,520			41,520
	Common stock			3,511			3,511
Deferred income taxes			276,817			296,931
	Additional paid-in capital			1,125,753			1,125,753
Total liabilities			27,529,554			26,418,683
	Retained earnings			222,363			175,871
Shareholder’s equity:
	Accumulated other comprehensive income			78,834			16,504
Common stock			3,511			3,511
	Total shareholder’s equity			1,430,461			1,321,639
Additional paid-in capital			1,215,284			1,215,284
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY			$	25,990,038		$	23,538,832
Retained earnings			213,046			246,519
Accumulated other comprehensive income			120,233			72,610
Total shareholder’s equity			1,552,074			1,537,924
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY		$	29,081,628		$	27,956,607

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF ~~INCOME~~OPERATIONS AND COMPREHENSIVE INCOME For the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 (Unaudited)

			Three Months							Nine Months
		2004				2003
			2003				2002			2003			2002
		(in thousands)
							(In thousands)
REVENUES
REVENUES
Fee income:
	Fee income:
Variable annuity fees, net of reinsurance		$	91,004			$	64,406
	Variable annuity policy fees		$	74,490			$	67,999		$	207,516		$	229,758
Asset management fees			18,108				10,921
	Universal life insurance policy fees			8,192				8,544			26,540			26,799
Universal life insurance policy fees, net of reinsurance			9,192				8,970
Surrender charges	~~Surrender charges~~		6,999	~~6,895~~			7,570	~~9,143~~			~~21,249~~			~~24,001~~
Other fees	~~Other fees~~		3,621	—			3,337	~~932~~			—			~~2,964~~
Total fee income	~~Total fee income~~		128,924	~~89,577~~			95,204	~~86,618~~			~~255,305~~			~~283,522~~
Investment income	~~Investment income~~		87,170	~~99,845~~			96,908	~~98,633~~			~~300,116~~			~~289,853~~
Net realized investment losses	~~Net realized investment losses~~		(11,393	~~(17,940~~)	)		(3,272	~~(17,478~~)	)		~~(26,570~~	)		~~(31,192~~	)
Total revenues	~~Total revenues~~		204,701	~~171,482~~			188,840	~~167,773~~			~~528,851~~			~~542,183~~
BENEFITS AND EXPENSES
Interest expense:	~~Interest expense:~~
Fixed annuity contracts	~~Fixed annuity contracts~~		35,236	~~38,482~~			38,765	~~36,689~~			~~116,575~~			~~104,524~~
Universal life insurance contracts	~~Universal life insurance contracts~~		18,481	~~19,303~~			19,102	~~20,658~~			~~57,142~~			~~60,292~~
Guaranteed investment contracts	~~Guaranteed investment contracts~~		1,335	~~2,042~~			2,016	~~2,679~~			~~6,089~~			~~8,776~~
	Securities lending agreements			722				3,653			4,168			9,688
Subordinated notes payable			560				842
Total interest expense	~~Total interest expense~~		55,612	~~60,549~~			60,725	~~63,679~~			~~183,974~~			~~183,280~~
General and administrative expenses	~~General and administrative expenses~~		36,224	~~18,992~~			29,987	~~12,818~~			~~59,281~~			~~51,200~~
Amortization of deferred acquisition costs	~~Amortization of deferred acquisition costs~~		31,442	~~44,400~~			43,962	~~50,701~~			~~123,477~~			~~158,058~~
Annual commissions	~~Annual commissions~~		15,014	~~11,422~~			14,178	~~13,607~~			~~41,595~~			~~45,227~~
Claims on universal life contracts, net of reinsurance recoveries	~~Claims on universal life contracts, net of reinsurance recoveries~~		4,823	~~4,022~~			5,513	~~4,621~~			~~15,255~~			~~12,530~~
Guaranteed minimum death benefits, net of reinsurance recoveries	~~Guaranteed minimum death benefits, net of reinsurance recoveries~~		17,774	~~14,723~~			21,976	~~30,935~~			~~51,182~~			~~48,687~~
Total benefits and expenses			160,889	~~154,108~~			176,341	~~176,361~~			~~474,764~~			~~498,982~~
PRETAX INCOME (LOSS)				17,374				(8,588	)		54,087			43,201
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE			43,812				12,499
Income tax expense (benefit)				4,215				(2,544	)		7,595			5,225
Income tax expense			12,196				1,881
NET INCOME (LOSS)			$	13,159			$	(6,044	)	$	46,492		$	37,976
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE			31,616				10,618
Cumulative effect of accounting change, net of tax			(62,589	)			—
NET INCOME (LOSS)		$	(30,973	)		$	10,618

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF ~~INCOME~~OPERATIONS AND COMPREHENSIVE INCOME (Continued) For the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 (Unaudited)

	Three Months						Nine Months
	2004			2003
	2003			2002			2003			2002
	(in thousands)
				(In thousands)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Net unrealized gains on fixed maturity and equity securities available for sale identified in the current period less related amortization of deferred acquisition costs	$	65,852		$	18,520
Net unrealized (losses) gains on debt and equity securities available for sale identified in the current period	$	(17,432	)	$	50,111		$	79,494		$	70,898
Less reclassification adjustment for net realized losses included in net income		7,414			1,355
Less reclassification adjustment for net realized losses included in net income		11,645			12,631			16,400			23,462
Income tax expense		(25,643	)		(6,956	)
Change related to cash flow hedges		—			—			—			(2,218	)
OTHER COMPREHENSIVE INCOME		47,623			12,919
Income tax benefit (expense)		2,025			(21,960	)		(33,564	)		(32,250	)
COMPREHENSIVE INCOME	$	16,650		$	23,537
OTHER COMPREHENSIVE (LOSS) INCOME		(3,762	)		40,782			62,330			59,892
COMPREHENSIVE INCOME	$	9,397		$	34,738		$	108,822		$	97,868

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 (Unaudited)

				2003				2002
		2004				2003
				(In thousands)
		(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income				$	46,492			$	37,976
Net income (loss)		$	(30,973	)		$	10,618
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Interest credited to:
Cumulative effect of accounting change, net of tax			62,589				—
		Fixed annuity contracts			116,575				104,524
Interest credited to:
		Universal life insurance contracts			57,142				60,292
Fixed annuity contracts			35,236				38,765
		Guaranteed investment contracts			6,089				8,776
Universal life insurance contracts			18,481				19,102
	Net realized investment losses				26,570				31,192
Guaranteed investment contracts			1,335				2,016
	Amortization of net premiums on investments				5,079				185
Net realized investment losses			11,393				3,272
	Amortization of deferred acquisition costs				123,477				158,058
Amortization of premium (discount) on securities			(3,735	)			4,169
	Acquisition costs deferred				(187,519	)			(187,626	)
Amortization of deferred acquisition costs			31,442				43,962
	Provision for deferred income taxes				(47,077	)			113,116
Acquisition costs deferred			(76,225	)			(57,874	)
	Change in:
Depreciation of fixed assets			427				348
		Accrued investment income			(7,438	)			(10,822	)
Provision for deferred income taxes			(12,055	)			21,736
		Other assets			(7,699	)			51
Change in:
		Income taxes currently receivable from Parent			32,744				(53,341	)
Accrued investment income			(1,575	)			(8,018	)
		Due from/to affiliates			(10,278	)			(11,542	)
Other assets			(13,616	)			(12,070	)
		Other liabilities			6,680				13,293
Income taxes currently payable to Parent			59,718				(9,674	)
	Other, net				13,276				15,841
Due to affiliates			(5,743	)			(30,478	)
NET CASH PROVIDED BY OPERATING ACTIVITIES					174,113				279,973
Other liabilities			(6,917	)			9,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Other, net			4,771				6,388
Purchases of:
NET CASH PROVIDED BY OPERATING ACTIVITIES			74,553				41,871
	Bonds, notes and redeemable preferred stocks				(1,431,013	)			(1,679,989	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Mortgage loans				(42,859	)			(94,360	)
Purchases of:
	Other investments, excluding short-term investments				(14,970	)			(12,741	)
Bonds, notes and redeemable preferred stocks			(708,678	)			(855,046	)
Sales of:
Mortgage loans			—				(131	)
	Bonds, notes and redeemable preferred stocks				803,180				684,746
Other investments, excluding short-term investments			(88	)			(8,171	)
	Other investments, excluding short-term investments				269				609
Sales of:
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks			592,988				576,332
	Bonds, notes and redeemable preferred stocks				767,055				418,899
Other investments, excluding short-term investments			485				52
	Mortgage loans				35,215				71,964
Redemptions and maturities of:
	Other investments, excluding short-term investments				70,107				110,345
Bonds, notes and redeemable preferred stocks			224,361				259,602
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES				$	186,984			$	(500,527	)
Mortgage loans			17,469				11,213
Other investments, excluding short-term investments			4,818				54,973
Purchase of fixed assets			(45	)			(1,430	)
Sales of fixed assets			—				66
NET CASH PROVIDED BY INVESTING ACTIVITIES		$	131,310			$	37,460

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003 (Unaudited)

			2003				2002
		2004				2003
			(In thousands)
		(in thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity contracts	~~Fixed annuity contracts~~	$	$372,567	~~1,181,329~~		$	$428,057	~~1,259,701~~
Universal life insurance contracts	~~Universal life insurance contracts~~		11,252	~~34,176~~			11,310	~~36,658~~
Net exchanges from the fixed accounts of variable annuity contracts			(386,957	~~(735,617~~)	)		(58,019	~~(281,274~~)	)
Withdrawal payments on:
Fixed annuity contracts	~~Fixed annuity contracts~~		(104,031	~~(349,241~~)	)		(139,659	~~(392,719~~)	)
Universal life insurance contracts	~~Universal life insurance contracts~~		(17,414	~~(45,307~~)	)		(14,100	~~(52,433~~)	)
Guaranteed investment contracts	~~Guaranteed investment contracts~~		(5,583	~~(7,647~~)	)		(4,753	~~(83,119~~)	)
Claims and annuity payments on:
Fixed annuity contracts	~~Fixed annuity contracts~~		(28,281	~~(82,191~~)	)		(29,313	~~(72,794~~)	)
Universal life insurance contracts	~~Universal life insurance contracts~~		(31,097	~~(90,912~~)	)		(34,172	~~(76,362~~)	)
Net repayments of other short-term financings				(9,090	)			6,929
Net payment related to a modified coinsurance transaction			(4,738	)			(4,862	)
Net payment related to a modified coinsurance transaction				(18,959	)			(23,511	)
Dividend paid to Parent			(2,500	)			(10,187	)
Net cash and short-term investments transferred to the Parent in the distribution of Saamsun Holdings Corp.				—				(82,873	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			(196,782	)			144,302
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES				(123,459	)			238,203
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS			9,081				223,633
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS				237,638				17,649
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD			133,105				116,882
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD				65,872				200,064
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD		$	142,186			$	340,515
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD			$	303,510			$	217,713
SUPPLEMENTAL CASH FLOW INFORMATION:
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness		$	560			$	842
Interest paid on indebtedness			$	4,168			$	9,688
Income taxes paid to Parent		$	47,424			$	—
Net income taxes (paid to) refunded by Parent			$	(21,928	)		$	54,550

See accompanying notes to consolidated financial statements.

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

1. BASIS OF PRESENTATION

1.		BASIS OF PRESENTATION

		AIG SunAmerica Life Assurance Company (formerly Anchor National Life Insurance Company) (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”)(formerly AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services, retirement savings and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”).

		The Company changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, at which time it began doing business under its new name.

		Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $74,507,000. Pretax income from the asset management operation totaled $5,307,000 for the three months ended March 31, 2004. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $100,249,000 and $74,507,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the three months ended March 31, 2003 have been restated for the addition to pretax income of $120,000 to reflect the SAAMCo activity.

		SAAMCo comprises the Company’s asset management segment (see Note 6) along with its wholly owned distributors, SACS and SFS. These companies earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios.

		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of March 31, 2004 and December 31, 2003 and the results of its consolidated operations and its consolidated cash flows for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

2.		RECENTLY ISSUED ACCOUNTING STANDARDS

		In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon

AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company) (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG SunAmerica Inc. (“SAI”), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and retirement savings and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”) directed to the institutional marketplace.

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. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, at which time it began doing business under its new name.

In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s financial position as of September 30, 2003 and December 31, 2002, the results of its operations for the three months and nine months ended September 30, 2003 and 2002 and its cashflows for the nine months ended September 30, 2003 and 2002. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002, contained in the Company’s 2002 Annual Report on Form 10-K. Certain prior period items have been reclassified to conform to the current period’s presentation.

2. CONTINGENT LIABILITIES

The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at September 30, 2003 is $785,570,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $339,423,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates and related amounts of these commitments are as follows: $240,500,000 in 2004, $387,070,000 in 2005 and $158,000,000 in 2006. Management does not anticipate any material losses with respect to these commitments.

InAIG ~~the~~SUNAMERICA ~~third~~LIFE ~~quarter~~ASSURANCE ~~of 2002, the Company began issuing certain variable~~COMPANY ~~annuity~~NOTES ~~products~~TO ~~which~~CONSOLIDATED ~~offer~~FINANCIAL anSTATEMENTS ~~optional Guaranteed Minimum Account Value~~(Continued) (~~“GMAV”~~Unaudited) ~~living benefit. As of September 30, 2003, the premiums subject to~~ ~~guarantee totaled approximately $515,585,000 and the estimated fair values of~~ ~~the GMAV benefit included in the accompanying statement of income and~~ ~~comprehensive income were not material.~~

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

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

		adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.

		The Company issues variable annuities for which and the investment risk is generally borne by, the contract holder in all but the fixed-rate account options. For many of the Company’s variable annuities, the Company contractually guarantees to the contract holder either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances, no minimum returns), or (b) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), and guaranteed minimum account value benefits (“GMAV”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums.

		The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, and other services are included in variable annuity fees and changes in liabilities for minimum guarantees are included in guaranteed minimum death benefits, net of reinsurance in the consolidated statement of operations and comprehensive income. Separate account net investment income, net investment gains and losses, and the related liability changes are offset within the same line item in the consolidated statement of operations and comprehensive income.

		The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, a portion of the GMDB risk on approximately 18% of the account value with GMDB features had been reinsured.

		In addition to GMDB, the Company currently offers to a lesser extent GMIB. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements.

		The Company currently offers GMAV on its variable annuity products. The Company purchased put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of operations and comprehensive income.

		Details concerning the Company’s guaranteed benefits exposures as of March 31, 2004 are as follows:

2. RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The adoption of FIN 45 did not have a significant impact on the Company’s results of operations or financial condition.

In July 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts (“SOP-03-1”). This statement is effective for the Company as of January 1, 2004. Under SOP 03-1, variable annuity assets held in separate accounts will continue to be measured at fair value and reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s interest in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account structure. The adoption of SOP 03-1 will not have a material impact on the Company’s separate accounts or separate account seed money.

In addition, SOP 03-1 will require the Company to recognize a liability for guaranteed minimum death benefits, guaranteed minimum income benefits and enhanced earnings benefits and modify certain disclosures and financial statement presentations for these products. The Company continues to evaluate the provisions of SOP 03-1. Management currently expects the one-time cumulative accounting charge upon adoption to approximate $60 million after taxes, to be recorded in the first quarter of 2004, which is not material to the Company’s financial condition or liquidity.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~MANAGEMENT’S~~NOTES ~~DISCUSSION~~TO ~~AND~~CONSOLIDATED ~~ANALYSIS OF~~ FINANCIAL ~~CONDITION~~STATEMENTS ~~AND RESULTS OF OPERATIONS~~(Continued) (Unaudited)

~~Management’s~~2. ~~discussion~~RECENTLY ~~and~~ISSUED ~~analysis~~ACCOUNTING ofSTANDARDS ~~financial condition and results of operations of AIG SunAmerica Life Assurance Company~~ (~~FKA Anchor National Life Insurance Company~~Continued) (the “Company”) for the three months and nine months ended September 30, 2003 and September 30, 2002 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.


				Highest Specified
	Return of Net			Anniversary Account
	Deposits			Value Minus
	Plus a			Withdrawals Post
	Minimum Return			Anniversary
	(in thousands)
In the event of death (GMDB and EEB):
Account value	$	12,090,330		$	11,441,042
Net amount at risk (a)		1,169,208			1,504,131
Average attained age of contract holders		65			64
Range of guaranteed minimum return rates		0%-5	%		0	%
At annuitization (GMIB):
Account value	$	6,123,529
Net amount at risk (a)		704,002
Weighted average period remaining until expected annuitization	4.1 Years
Range of guaranteed minimum return rates		0%-6.5	%
Accumulation at specified date (GMAV):
Account value	$	938,147
Net amount at risk (a)		604
Range of guaranteed minimum return rates		0	%

~~Forward-looking~~(a) ~~statements~~Net ~~are~~amount ~~necessarily~~at ~~based~~risk onrepresents ~~estimates~~the ~~and assumptions~~guaranteed ~~that~~benefit ~~are inherently subject to significant business~~exposure, ~~economic~~in ~~and competitive~~excess ~~uncertainties and contingencies, many~~ of ~~which are beyond~~ the ~~Company’s~~ ~~control~~current ~~and~~account ~~many~~value, ofif ~~which~~all ~~are~~contract ~~subject~~holders todied, ~~change. These uncertainties and contingencies could cause actual results to differ materially from those expressed~~ in ~~any~~the ~~forward-looking~~case ~~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~~GMDB, ~~such as general economic conditions~~annuitized, ~~changes~~ in ~~tax~~ ~~law and changes in interest rates. Some may be related to~~ the ~~insurance industry~~case ~~generally,~~of ~~such as pricing competition~~GMIB, ~~regulatory~~or ~~developments~~reached ~~and industry consolidation. Others may relate to~~ the ~~Company~~specified ~~specifically~~date, ~~such~~in ~~as credit, volatility and other risks associated with~~ the ~~Company’s~~case ~~investment portfolio.~~of ~~Investors~~GMAV, ~~are~~at ~~also directed to consider other risks and uncertainties discussed in documents filed by~~ the ~~Company~~same ~~with~~balance ~~the~~sheet ~~SEC~~date. ~~The Company disclaims any obligation to update forward-looking information.~~

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

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:


	(in thousands)
Balance at January 1, 2004 (b)	$	65,423
Guaranteed benefits incurred		17,774
Guaranteed benefits paid		(11,074	)

Balance at March 31, 2004	$	72,123

~~VALUATION~~(b) OFIncludes ~~CERTAIN~~amounts ~~FINANCIAL~~from ~~INSTRUMENTS:~~the Gross unrealized losses on debt and equity securities available for sale amounted to $84.2 million at September 30, 2003 and $170.7 million at December 31, 2002. When a decline in fair value below amortized cost is deemed to be otherone-~~than-temporary,~~time ~~the Company~~cumulative ~~recognizes~~accounting anchange ~~impairment~~resulting ~~loss~~from in the ~~current~~adoption ~~period~~of ~~operating~~SOP ~~results~~ 03-1.

toAIG ~~the~~SUNAMERICA ~~extent~~LIFE ofASSURANCE ~~the~~COMPANY NOTES ~~decline~~TO ~~(See~~CONSOLIDATED ~~also~~FINANCIAL ~~discussion~~STATEMENTS ~~within “Capital Resources and~~(Continued) ~~Liquidity” herein~~(Unaudited).

~~Securities in our portfolio with a carrying value of approximately $1~~2.~~32 billion~~ atRECENTLY ~~September 30,~~ISSUED ~~2003~~ACCOUNTING doSTANDARDS ~~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~~Continued)~~. Otherwise,~~ weThe ~~use~~following ~~our~~assumptions ~~most recent purchases~~ and ~~sales~~methodology ofwere ~~similar~~used ~~unquoted securities, independent broker quotes or comparison~~ to ~~similar~~determine ~~securities with quoted prices when possible to estimate~~ the ~~fair~~GMDB ~~value~~liability ofat ~~those~~March 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 market31, 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. 2004:

~~AMORTIZATION~~• OFData ~~DEFERRED~~used ~~ACQUISITION~~was ~~COSTS:~~5,000 Westochastically ~~amortize~~generated ~~our~~investment ~~deferred acquisition~~performance ~~costs~~scenarios. ~~(“DAC”)~~• ~~based~~Mean oninvestment aperformance ~~percentage~~assumption ofwas ~~expected~~10%. ~~gross~~• ~~profits (“EGPs”)~~Volatility ~~over~~assumption ~~the~~was ~~life of the underlying policies~~16%. ~~EGPs~~• ~~are~~Mortality ~~computed~~was ~~based~~assumed ~~on assumptions related~~ to ~~the~~be ~~underlying~~64 ~~policies~~percent ~~written, including their anticipated duration, the growth rate~~ of the ~~separate~~75-80 ~~account~~ALB ~~assets~~table. ~~(with respect~~• toLapse ~~variable~~rates ~~annuities)~~vary orby ~~general~~contract ~~account~~type ~~assets (with respect to fixed annuities, fixed options of variable annuities~~ and ~~universal~~duration ~~life contracts) supporting the annuity obligations, the anticipated value of guaranteed minimum death benefits to be paid,~~ and ~~the~~range ~~level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized~~ from ~~its annuity policies are revised. Approximately 95~~1% ~~of the Company’s DAC balance at September 30, 2003 related~~ to ~~variable annuity products and 5~~30%. ~~related~~• toThe ~~fixed annuity~~discount ~~and~~rate ~~universal~~was ~~life~~approximately ~~products~~8%.

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

		The Company currently offers enhanced crediting rates or bonus payments to contract-holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $165.1 million from DAC to deferred sales inducements, which are reported in other assets on the consolidated balance sheet. For the three months ended March 31, 2004, sales inducements of $10.6 million were deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs on the consolidated statement of operations and comprehensive income. For the three months ended March 31, 2004, amortization of sales inducements was $5.5 million. Prior period consolidated balance sheet and consolidated statement of operations and comprehensive income presentation has been reclassified to conform to the new presentation.

3.		SUBORDINATED NOTES PAYABLE TO AFFILIATES

		Subordinated notes (including accrued interest of $560,000) payable to affiliates totaled $41,520,000 at interest rates ranging from 4.25% to 9.5% at March 31, 2004, and require principal payments of $3,000,000 in 2004 and $37,960,000 in 2005.

4.		CONTINGENT LIABILITIES

		The Company has entered into seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at March 31, 2004 is $557,775,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $222,524,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $21,930,000 in the remainder of 2004, $385,845,000 in 2005 and $150,000,000 in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.

		At March 31, 2004, the Company has a commitment to purchase approximately $25,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $16,000,000 in 2004 and $9,000,000 in 2006.

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

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

~~the~~AIG ~~mean~~SUNAMERICA ~~assumption~~LIFE isASSURANCE ~~common within the industry; however, the parameters~~COMPANY ~~used~~NOTES inTO ~~the~~CONSOLIDATED ~~methodology~~FINANCIAL ~~are~~STATEMENTS ~~subject to judgment and vary within the industry.~~(Continued) (Unaudited)

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

The Company has one business segment, annuity operations, which consists of the sale and administration of deposit-type insurance contracts, such as fixed and variable annuities and universal life insurance contracts. The Company focuses primarily on the marketing of variable annuity products. The variable annuity products offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and net investment spread on the fixed-rate account options.

On June 10, 2002, the Company entered into a profit sharing agreement with AIG SunAmerica Asset Management Corp. (“SAAMCO”), an affiliate, whereby SAAMCO will contribute to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement was retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $14.4 million for the third quarter of 2003 and $38.9 million for the nine months of 2003. Amounts paid to or accrued by the Company under this agreement totaled $12.6 million for the third quarter of 2002 and $42.4 million for the nine months of 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $13.2 million in the third quarter of 2003, compared to a net loss of $6.0 million in the third quarter of 2002. For the nine months, net income amounted to $46.5 million in 2003, compared to $38.0 million in 2002.

PRETAX INCOME totaled $17.4 million in the third quarter of 2003, compared to pretax loss of $8.6 million in the third quarter of 2002. For the nine months, pretax income totaled $54.1 million in 2003, compared to $43.2 million in 2002. The increase in the third quarter of 2003 primarily resulted from decreased guaranteed minimum death benefits, decreased amortization of deferred acquisition costs and increased variable annuity fee income, offset by increased general and administrative expenses. The increase in the nine months of 2003 primarily resulted from decreased amortization of deferred acquisition costs, increased investment income and decreased net realized investment losses, offset by decreased variable annuity fee income, increased general and administrative expenses and increased guaranteed minimum death benefits.

NET INVESTMENT SPREAD, which is the spread between the income earned on invested assets and the interest credited to fixed annuity contracts and paid on other interest-bearing liabilities, totaled $39.3 million in the third quarter of 2003, compared to $35.0 million in the third quarter of 2002. These amounts equal 2.27% on average invested assets (computed on a daily basis) of $6.93 billion in the third quarter of 2003 and 2.01% on average invested assets of $6.96 billion in the third quarter of 2002 on an

~~annualized~~AIG ~~basis.~~SUNAMERICA ~~For~~LIFE ~~the~~ASSURANCE ~~nine months, net investment spread increased to~~COMPANY ~~$116.1 million~~NOTES inTO ~~2003~~CONSOLIDATED ~~from~~FINANCIAL ~~$106.6 million~~STATEMENTS ~~in 2002, representing 2.18% of~~(Continued) ~~average invested assets of $7.12 billion in 2003 and 2.17% of average invested~~(Unaudited) ~~assets of $6.56 billion in 2002 on an annualized basis.~~

~~Growth~~6. inSEGMENT ~~average~~INFORMATION ~~invested assets resulted primarily from sales of the fixed account options of the Company’s variable annuity products~~ (~~“Fixed Annuity Deposits”~~Continued), and renewal deposits on its universal life product (“UL Deposits”), partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Sales of Fixed Annuity Deposits and UL Deposits totaled $389.3 million in the third quarter of 2003 and $456.4 million in the third quarter of 2002, $1.22 billion in the nine months of 2003 and $1.30 billion in the nine months of 2002, and are largely deposits for the fixed accounts of variable annuities. On an annualized basis, these deposits represent 25%, 34%, 27% and 33%, respectively, of the related reserve balances at the beginning of the respective periods.

Under accounting principles generally accepted in the United States of America, deposits collected on non-traditional life and annuity insurance products, such as those sold by the Company, are not reflected as revenues in the Company’s statement of income, as they are recorded directly upon receipt to reserves for fixed annuity and universal life contracts.


				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
THREE MONTHS ENDED MARCH 31, 2004:
REVENUES:
Fee income:
Variable annuity fees, net of reinsurance	$	88,210		$	2,794	$	91,004
Asset management fees		—			18,108		18,108
Universal life insurance fees, net of reinsurance		9,192			—		9,192
Surrender charges		6,999			—		6,999
Other fees		—			3,621		3,621

Total fee income		104,401			24,523		128,924
Investment income		86,993			177		87,170
Net realized investment losses		(11,393	)		—		(11,393	)

Total revenues		180,001			24,700		204,701

BENEFITS AND EXPENSES:
Interest expense		55,052			560		55,612
General and administrative expenses		27,328			8,896		36,224
Amortization of deferred acquisition costs		24,001			7,441		31,442
Annual commissions		15,014			—		15,014
Claims on universal life contracts, net of reinsurance recoveries		4,823			—		4,823
Guaranteed minimum death benefits, net of reinsurance recoveries		17,774			—		17,774

Total benefits and expenses		143,992			16,897		160,889

Pretax income before cumulative effect of accounting change	$	36,009		$	7,803	$	43,812

Total assets	$	28,902,900		$	178,728	$	29,081,628

Expenditures for long-lived assets	$	—		$	45	$	45

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 $245.4 million in the third quarter of 2003, compared to $110.5 million in the third quarter of 2002. For the nine months, average invested assets exceeded average interest-bearing liabilities by $252.9 million in 2003, compared with $87.6 million in 2002. The increase in 2003 reflected a $200.0 million capital contribution from the Parent in the third quarter of 2002. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities (the “Spread Difference”) was 2.14% in the third quarter of 2003, 1.96% in the third quarter of 2002, 2.05% in the nine months of 2003 and 2.11% in the nine months of 2002.

Investment income (and the related yields on average invested assets) totaled $99.8 million (5.76%) in the third quarter of 2003, $98.6 million (5.67%) in the third quarter of 2002, $300.1 million (5.62%) in the nine months of 2003 and $289.9 million (5.89%) in the nine months of 2002. The increase in the investment yield in the third quarter of 2003 is due to the impact of $1.6 million of seed money gains in 2003 versus $1.8 million of seed money losses in 2002. Excluding the impact of seed money investment gains/losses, investment returns would have been 5.66% in the third quarter of 2003 and 5.76% in the third quarter of 2002. The decrease in the investment yield in 2003 compared to 2002 primarily reflects a lower prevailing interest rate environment. Investment income has been reduced by expenses incurred to manage the investment portfolio of $0.6 million in the third quarter of 2003, $0.5 million in the third quarter of 2002, $1.7 million in the nine months of 2003 and $1.5 million in the nine months of 2002.

Interest expense totaled $60.5 million in the third quarter of 2003 and $63.7 million in the third quarter of 2002. For the nine months, interest expense aggregated $184.0 million in 2003, compared with $183.3 million in

~~2002.~~AIG ~~The~~SUNAMERICA ~~average~~LIFE ~~rate~~ASSURANCE ~~paid on all interest-bearing liabilities was 3.62% in~~COMPANY ~~the~~NOTES ~~third~~TO ~~quarter~~CONSOLIDATED ofFINANCIAL ~~2003,~~STATEMENTS ~~compared to 3.72% in the third quarter of 2002.~~(Continued) ~~For the nine months, the average rate paid on all interest-bearing liabilities~~(Unaudited) ~~was 3.57% in 2003 and 3.78% in 2002. Interest-bearing liabilities averaged~~ ~~$6.69 billion during the third quarter of 2003, $6.85 billion during the third~~ ~~quarter of 2002, $6.87 billion during the nine months of 2003 and $6.47 billion~~ ~~during the nine months of 2002. The decline in the overall rates paid in 2003 compared to 2002 resulted primarily from the impact of a declining interest rate environment.~~

NET REALIZED INVESTMENT LOSSES totaled $17.9 million in the third quarter of 2003 and $17.5 million in the third quarter of 2002 and include impairment writedowns of $20.3 million and $10.5 million, respectively. For the nine months, net realized investment losses totaled $26.6 ~~million in 2003, compared with $31~~.~~2 million~~ inSEGMENT ~~2002~~INFORMATION and include impairment writedowns of $35.9 million and $22.0 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $2.4 million in the third quarter of 2003, compared to net realized losses of $7.0 million in the third quarter of 2002. For the nine months, net realized gains from sales and redemptions of investments totaled $9.3 million in 2003, compared to net realized losses of $9.2 million in 2002. (Continued)

The Company sold or redeemed invested assets, principally bonds and notes, aggregating $265.4 million in the third quarter of 2003, $517.9 million in the third quarter of 2002, $1.62 billion in the nine months of 2003 and $1.22 billion in the nine months of 2002. 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, on an annualized basis, represent 0.14%, 0.40%, 0.17% and 0.19% of average invested assets in the third quarter of 2003, the third quarter of 2002, the nine months of 2003 and the nine months of 2002, 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.


				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
THREE MONTHS ENDED MARCH 31, 2003:
REVENUES:
Fee income:
Variable annuity fees, net of reinsurance	$	62,034		$	2,372	$	64,406
Asset management fees		—			10,921		10,921
Universal life insurance fees, net of reinsurance		8,970			—		8,970
Surrender charges		7,570			—		7,570
Other fees		—			3,337		3,337

Total fee income		78,574			16,630		95,204
Investment income		96,785			123		96,908
Net realized investment losses		(3,272	)		—		(3,272	)

Total revenues		172,087			16,753		188,840

BENEFITS AND EXPENSES:
Interest expense		59,883			842		60,725
General and administrative expenses		21,259			8,728		29,987
Amortization of deferred acquisition costs		38,821			5,141		43,962
Annual commissions		14,178			—		14,178
Claims on universal life contracts, net of reinsurance recoveries		5,513			—		5,513
Guaranteed minimum death benefits, net of reinsurance recoveries		21,976			—		21,976

Total benefits and expenses		161,630			14,711		176,341

Pretax income before cumulative effect of accounting change	$	10,457		$	2,042	$	12,499

Total assets	$	23,738,608		$	173,640	$	23,912,248

Expenditures for long-lived assets	$	—		$	2,128	$	2,128

Impairment writedowns include $20.3 million, $10.5 million, $35.9 million and $22.0 million of provisions applied to bonds, partnerships and other invested assets in the third quarter of 2003, the third quarter of 2002, the nine months of 2003 and the nine months of 2002, respectively. On an annualized basis, impairment writedowns represent 1.17%, 0.60%, 0.67% and 0.45% of average invested assets in the respective periods. For the twenty quarters ended September 30, 2003, impairment writedowns, as an annualized percentage of average invested assets, have ranged from 0.03% to 1.95% and have averaged 0.62%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events.

VARIABLE ANNUITY POLICY FEES are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled

~~$74.5 million~~AIG inSUNAMERICA ~~the~~LIFE ~~third~~ASSURANCE ~~quarter of 2003 and $68.0 million in the third~~COMPANY quarter of 2002 and are net of reinsurance premiums of $8.9 million and $6.1 million, respectively. These amounts include $15.7 million and $14.6 million attributable to the SAAMCO Agreement, respectively. For the nine months, variable annuity fees totaled $207.5 million in 2003, compared to $229.8 million in 2002 and are net of reinsurance premiums of $23.0 million and $15.8 million, respectively. These amounts include $43.8 million and $48.4 million attributable to the SAAMCO Agreement, respectively. The increased fees in the third quarter of 2003 as compared to 2002 reflect the improved equity market conditions during the period, and the resulting favorable impact on market values of assets in the separate accounts. The decreased fees in the nine months of 2003 as compared to the nine months of 2002 primarily reflect the unfavorable equity market conditions in 2002 and the early part of 2003, and the resulting unfavorable impact on market values of the assets in the separate accounts. On an annualized basis, variable annuity fees represent 1.8% of average variable annuity assets in all periods. Variable annuity assets averaged $16.88 billion, $15.14 billion, $15.68 billion and $17.03 billion during the respective periods. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $484.1 million and $236.5 million in the third quarters of 2003 and 2002, respectively. For the nine months, variable annuity deposits totaled $1.21 billion in 2003, compared with $873.2 million in 2002. On an annualized basis, these amounts represent 12%, 6%, 11% and 6% of separate account liabilities at the beginning of the respective periods. Transfers from the fixed accounts of the CompanyMANAGEMENT’sS ~~variable~~DISCUSSION ~~annuity~~AND ~~products to the separate~~ANALYSIS ~~accounts~~OF ~~are~~FINANCIAL ~~not~~CONDITION ~~classified~~AND asRESULTS ~~variable~~OF ~~annuity deposits. Accordingly, changes~~OPERATIONS ~~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~~Management’s ofdiscussion ~~variable annuity products (which include deposits allocated to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $863.2 million, $680.3 million, $2.39 billion~~ and ~~$2.13 billion~~analysis ~~in the third quarters~~ of ~~2003~~financial ~~and~~condition ~~2002~~ and ~~nine~~results ~~months~~ of ~~2003 and 2002, respectively. Such sales~~ ~~primarily~~operations ~~reflect those~~ of ~~the~~AIG ~~Company’s~~SunAmerica ~~Polaris,~~Life ~~Seasons~~Assurance ~~and Diversified Strategies variable annuity products. The~~ Company’s ~~variable~~(formerly ~~annuity~~Anchor ~~products~~National ~~are~~Life ~~multi-manager~~Insurance ~~variable~~Company) ~~annuities~~(the ~~that~~“Company”) ~~offer~~for ~~investors~~the athree ~~choice~~months ofended ~~several~~March 31, ~~variable~~2004 ~~funds~~(“2004”) asand ~~well~~March 31, as2003 a(“2003”) ~~number~~follows. ofCertain ~~guaranteed~~prior ~~fixed-rate funds. Investors~~period ~~can~~amounts ~~select~~have ~~from~~been areclassified ~~choice of 4~~ to 41conform ~~variable funds and up~~ to ~~7 guaranteed fixed-rate funds depending on~~ the ~~product.~~current ~~The increase in Variable Annuity Product Sales reflect improving market conditions as well as sales of the Company~~period’s ~~new products, primarily Polaris Platinum II~~presentation. ~~Introduced in late~~ ~~2002, Polaris Platinum II product sales totaled $222.4 million in the third~~ ~~quarter of 2003 and $538.8 million in the nine months of 2003.~~

~~The~~In ~~Company~~connection ~~has~~with ~~encountered~~the ~~increased~~“safe ~~competition~~harbor” inprovisions of the ~~variable~~Private ~~annuity~~Securities ~~marketplace~~Litigation ~~during~~Reform ~~recent~~Act ~~years~~of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and ~~anticipates~~in ~~that~~any other statements made by, or on behalf of, the ~~market~~Company, ~~will~~whether ~~remain~~or not in future filings with ~~highly~~the ~~competitive~~Securities ~~for~~and Exchange Commission (the ~~foreseeable~~“SEC”). Forward-looking statements are statements not based on historical information and which relate to future. operations, ~~Also~~strategies, ~~from~~financial ~~time~~results, toor ~~time~~other developments. Statements using verbs such as “expect,” “anticipate,” “believe” or words of similar ~~Federal~~import ~~initiatives~~generally ~~are~~involve ~~proposed~~forward-looking ~~that~~statements. ~~could~~Without ~~affect~~limiting the foregoing, ~~taxation~~forward-looking statements include statements which represent the Company’s beliefs concerning future levels of ~~annuities~~sales and redemptions of the ~~(see~~Company’s ~~“Regulation”)~~products, investment spreads and yields, or the earnings and profitability of the Company’s activities.

~~UNIVERSAL~~Forward-looking ~~LIFE~~statements ~~INSURANCE~~are ~~POLICY~~necessarily ~~FEES~~based ~~amounted~~on estimates and assumptions that are inherently subject to ~~$8.2 million~~significant inbusiness, ~~the~~economic ~~third~~and ~~quarter~~competitive uncertainties and contingencies, many of ~~2003~~which are beyond the Company’s control and $8many of which are subject to change.~~5 million~~ These uncertainties and contingencies could cause actual results to differ materially from those expressed in ~~the~~any ~~third~~forward-looking ~~quarter~~statements made by, or on behalf of, ~~2002~~the Company. ~~For~~Whether ~~the~~or ~~nine~~not actual results differ materially from forward-looking ~~months,~~statements ~~universal~~may ~~life~~depend ~~insurance~~on ~~policy~~numerous ~~fees~~foreseeable ~~totaled~~and ~~$26~~unforeseeable developments.~~5 million~~ Some may be national in ~~2003~~scope, ~~and~~such as general economic conditions, changes in ~~$26.8 million~~tax law and changes in ~~2002~~interest rates. ~~Universal~~Some ~~life~~may be related to the insurance industry ~~policy~~generally, ~~fees~~such ~~consist~~as ofpricing competition, regulatory developments and ~~mortality~~industry ~~charges~~consolidation. Others may relate to the Company specifically, ~~up-front~~such ~~fees~~as credit, ~~earned~~volatility onand ~~deposits~~other ~~received~~risks associated with the Company’s investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information.

CRITICAL ACCOUNTING POLICIES

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

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

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

~~administrative fees,~~these ~~net~~investments ofin ~~reinsurance~~a ~~premiums~~timely manner. ~~The~~Although ~~administrative~~the ~~fees~~Company ~~are~~believes ~~assessed based~~its onestimates ~~the~~reasonably ~~number~~reflect ofthe ~~policies~~fair invalue ~~force~~of asthose ofsecurities, the ~~end of each~~key ~~month.~~assumptions ~~The~~about ~~Company~~the ~~acquired~~risk-free ~~its~~interest ~~universal~~rates, ~~life~~risk ~~contracts~~premiums, asperformance ~~part~~ of ~~the~~ ~~acquisition~~underlying ofcollateral, ~~business~~if ~~from MBL Life Assurance Corporation on December 31~~any, ~~1998~~ and ~~does~~other ~~not~~factors ~~actively~~may ~~market~~not ~~such~~reflect ~~contracts.~~those ~~Such fees annualized represent 2.1%, 2.1%, 2.2% and 2.1%~~ of ~~average reserves for universal life~~an ~~insurance~~active ~~contracts in the respective periods~~market.

~~SURRENDER~~AMORTIZATION ~~CHARGES~~OF onDEFERRED ~~fixed~~ACQUISITION ~~annuity,~~COSTS: ~~variable~~The ~~annuity~~Company ~~and universal life~~amortizes ~~contracts~~deferred ~~totaled~~acquisition ~~$6.9 million~~costs in(“DAC”) ~~the~~based ~~third~~on ~~quarter~~a percentage of ~~2003~~expected ~~and~~gross profits ~~$9.1 million~~(“EGPs”) in over the ~~third~~life ~~quarter~~ of ~~2002. For~~ the ~~nine~~underlying ~~months~~policies, ~~such surrender charges totaled $21.2 million in 2003~~ and ~~$24.0 million~~for ~~in 2002. Surrender charge periods~~mutual ~~range~~funds, ~~from~~over ~~zero~~the toestimated ~~nine~~lives ~~years~~of ~~from~~ the ~~date~~fund deposits on a ~~deposit~~straight isline ~~received~~basis. ~~Surrender~~ ~~charges~~EGPs ~~generally~~ are ~~assessed~~computed based on ~~withdrawals~~assumptions atrelated ~~declining~~to ~~rates~~the ~~during~~underlying ~~the~~policies ~~first~~written, ~~seven~~including ortheir ~~nine~~anticipated ~~years~~duration, ~~following~~the ~~receipt~~growth rate of the ~~deposit. Withdrawal~~separate ~~payments,~~account ~~which~~assets ~~exclude~~(with ~~claims~~respect ~~and~~to ~~annuitization~~variable ~~benefits,~~annuities) ~~totaled~~or ~~$525.4 million~~general inaccount ~~the~~assets (with ~~third~~respect ~~quarter~~to offixed ~~2003~~annuities, ~~compared~~fixed tooptions ~~$630.1 million~~of invariable ~~the~~annuities ~~third~~and ~~quarter~~universal oflife ~~2002.~~contracts) ~~For~~supporting the ~~nine~~annuity ~~months~~obligations, ~~such~~costs ~~withdrawal payments totaled $1.57~~of ~~billion~~providing infor ~~2003~~policy guarantees and ~~$1.68 billion~~the inlevel ~~2002.~~of ~~Annualized,~~expenses ~~these~~necessary ~~payments~~to ~~when~~maintain ~~expressed~~the aspolicies. aThe ~~percentage~~Company ofadjusts ~~average~~DAC ~~related~~amortization ~~reserves~~(a ~~represent~~“DAC ~~9.3%,~~unlocking”) ~~12.3%,~~when ~~9.7%~~estimates ~~and 10.1% for the third quarters~~ of ~~2003~~current ~~and~~or ~~2002~~future ~~and~~gross ~~nine~~profits ~~months~~to ofbe ~~2003 and~~realized ~~2002, respectively. Withdrawals~~ from ~~the~~its ~~variable~~ annuity ~~separate~~ ~~accounts~~policies ~~totaled~~are ~~$408~~revised.~~7 million~~ ~~(annualized~~Approximately ~~representing 9.7~~95% of ~~average variable~~the ~~annuity~~Company’s ~~liabilities),~~DAC ~~$403.3 million~~balance ~~(annualized~~at ~~representing 10.7% of~~March ~~average variable annuity liabilities)~~31, ~~$1.18 billion~~2004 ~~(annualized~~related ~~representing 10.1%~~to ~~of average~~ variable annuity ~~liabilities)~~products and ~~$1.24 billion (annualized representing 9.7~~5% ofrelated ~~average~~to ~~variable~~fixed annuity ~~liabilities) in the third~~ ~~quarters~~ and ~~nine~~universal ~~months~~life ~~of 2003 and 2002, respectively~~products.

~~GENERAL~~DAC ~~AND~~amortization ~~ADMINISTRATIVE~~on ~~EXPENSES~~annuities ~~totaled~~is ~~$19.0 million~~sensitive into ~~the~~surrender ~~third~~rates, claims ~~quarter~~costs, ofand ~~2003~~the actual and ~~$12.8 million~~assumed infuture ~~the~~growth ~~third~~rate ~~quarter~~ of ~~2002.~~the ~~For~~assets supporting the ~~nine months,~~Company’s ~~general~~obligations ~~and~~under ~~administrative~~annuity ~~expenses totaled $59~~policies.~~3 million~~ inWith ~~2003~~respect ~~and~~to fixed ~~$51.2 million~~annuities, inthe ~~2002.~~growth ~~General~~rate ~~and~~depends ~~administrative~~on ~~expenses~~the ~~were~~yield ~~lower~~on in the ~~third~~ ~~quarter~~general ofaccount ~~2002~~assets supporting ~~primarily~~those ~~due~~annuities. toWith ~~lower~~respect ~~expenses relating~~ to ~~the~~variable ~~Company’s modified coinsurance transaction~~annuities, ~~certain~~the ~~premium tax refunds, and lower programming and other operating~~growth ~~expenses.~~rate ~~Current~~depends ~~quarter~~on ~~general~~the ~~and~~performance ~~administrative expenses are more indicative~~ of ~~ongoing~~the ~~operations.~~investment ~~General~~options ~~and~~available ~~administrative~~under ~~expenses remain closely controlled~~the ~~through~~annuity acontract ~~company-wide cost containment program~~ and ~~continue~~the toallocation ~~represent~~of ~~less than~~assets 1%among ofthese ~~average~~various ~~total assets~~investment options.

~~AMORTIZATION~~The OFassumption ~~DEFERRED~~the ~~ACQUISITION~~Company ~~COSTS~~uses ~~totaled~~for ~~$44.4 million~~the inlong-term annual net growth of the ~~third~~separate ~~quarter~~account assets in the determination of ~~2003,~~DAC ~~compared~~amortization with respect to ~~$50~~its variable annuity policies is 10% (the “long-term growth rate assumption”).~~7 million~~ inThe Company uses a “reversion to the ~~third~~mean” ~~quarter~~methodology that allows it to maintain this 10% long-term growth rate assumption, while also giving consideration to the effect of ~~2002~~short-term swings in the equity markets. For example, if performance was 15% during the ~~nine~~first ~~months~~year following the introduction of a product, ~~such~~the ~~amortization~~DAC ~~totaled~~model ~~$123.5 million~~would assume that market returns for the following five years (the “short-term growth rate assumption”) would be approximately 9%, resulting in ~~2003~~an average annual growth rate of 10% during the life of the product. Similarly, ~~compared~~following periods of below 10% performance, tothe ~~$158~~model will assume a short-term growth rate higher than 10%.~~1 million~~ inA ~~2002~~DAC unlocking will occur if management deems the short-term growth rate assumption (i.e., ~~The~~the ~~decrease~~growth inrate ~~amortization~~required into revert to the mean 10% growth rate over a ~~nine~~five-year ~~months~~period) to be unreasonable. The use of ~~2003~~a ~~was~~reversion ~~primarily~~to the mean ~~related~~assumption tois common within the ~~decreased~~industry; ~~variable~~however, ~~annuity~~the ~~policy~~parameters ~~fee~~used ~~income~~in the methodology are subject to judgment and ~~increased guaranteed~~vary ~~minimum~~within ~~death~~the ~~benefits~~industry.

~~ANNUAL~~RESERVE ~~COMMISSIONS~~FOR ~~totaled~~GUARANTEED ~~$11.4 million~~BENEFITS: inPursuant to the ~~third~~adoption ~~quarter~~of Statement of Position ~~2003~~03-1, ~~compared~~ to“Accounting ~~$13.6 million~~and inReporting ~~the~~by ~~third~~Insurance ~~quarter~~Enterprises offor ~~2002. For the nine months,~~Certain ~~annual~~Nontraditional ~~commissions~~Long-Duration ~~amounted~~Contracts toand ~~$41.6 million~~for inSeparate ~~2003~~Accounts” ~~and~~(“SOP ~~$45.2~~03-1”) on January ~~million~~1, in2004, ~~2002. Annual~~the ~~commissions~~Company ~~represent~~is ~~renewal~~required ~~commissions~~to ~~paid~~recognize ~~quarterly~~a inliability ~~arrears to~~for ~~maintain~~guaranteed ~~the~~minimum ~~persistency~~death ofbenefits ~~certain~~(“GMDB”) ofand ~~the~~other ~~Company’s~~guaranteed ~~variable~~benefits. ~~annuity~~In ~~contracts.~~calculating ~~Substantially~~the ~~all~~projected ofliability, ~~the~~five ~~Company’s~~thousand ~~currently~~stochastically ~~available variable~~generated ~~annuity~~investment ~~products~~performance ~~allow~~scenarios ~~for~~were andeveloped ~~annual~~with ~~commission~~a ~~payment~~mean ~~option in return for a~~investment ~~lower~~performance ~~immediate~~of ~~commission~~10%. ~~The~~Additional ~~vast~~assumptions ~~majority~~are ofmade ~~the~~for ~~Company’s~~mortality, ~~average balances~~lapse rates of ~~its~~return ~~variable~~and ~~annuity~~the ~~products~~volatility ~~are~~of ~~currently~~equity ~~subject to~~markets.

BUSINESS SEGMENTS

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

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

~~such~~of ~~annual commissions~~investment managers, as well as guaranteed fixed-rate account options. The ~~These~~Company ~~commissions~~earns ~~are~~fee ~~expected~~income toon ~~increase~~investments in ~~future~~the ~~periods~~variable account options and net investment spread on the fixed-rate account options.

~~CLAIMS~~The ONasset ~~UNIVERSAL~~management ~~LIFE~~operations ~~CONTRACTS,~~are ~~NET~~conducted OFby ~~REINSURANCE~~the ~~RECOVERIES~~Company’s ~~totaled~~registered ~~$4.0 million~~investment inadvisor ~~the~~subsidiary, ~~third~~SAAMCo, ~~quarter~~and ofits ~~2003,~~wholly ~~compared~~owned todistributors, $4SACS and SFS.~~6 million~~ inThese ~~the third~~companies ~~quarter~~earn offee ~~2002~~income ~~(net~~by ofdistributing ~~reinsurance~~and ~~recoveries~~managing a diversified family of ~~$9.0 million~~mutual infunds, ~~2003~~managing certain subaccounts within the ~~and~~Company’s ~~$12.1 million~~variable inannuity ~~2002).~~products ~~For~~and ~~the~~providing ~~nine~~professional ~~months~~management of individual, ~~such~~corporate ~~claims~~and ~~totaled~~pension ~~$15~~plan portfolios.3 Premiums from variable ~~million~~annuities insold ~~2003~~by ~~and~~the ~~$12.5 million~~Company are held in ~~2002~~trusts ~~(net~~that ofare ~~reinsurance~~owned ~~recoveries~~by ofthe Company, ~~$26.8 million~~with inthe ~~2003~~assets ~~and~~directly ~~$22.7 million~~supporting inpolicyholder ~~2002)~~obligations. ~~The~~SAAMCo ~~increase~~is ~~in such claims~~the ininvestment ~~2003~~advisor ~~resulted~~for ~~principally~~all ~~from~~of ~~increased~~the ~~mortality~~trusts ~~experience,~~as ~~which fluctuates~~well ~~and~~as ~~cannot~~trusts ~~necessarily~~owned beby ~~expected~~an affiliate, toFirst ~~continue~~SunAmerica inLife ~~future~~Insurance ~~periods~~Company.

~~GUARANTEED~~RESULTS ~~MINIMUM DEATH BENEFITS, NET~~ OF ~~REINSURANCE RECOVERIES (“Net~~OPERATIONS ~~GMDB”) on variable annuity contracts totaled $14.7 million in the third quarter~~ ~~of 2003, compared to $30.9 million in the third quarter of 2002 (net of~~ ~~reinsurance recoveries of $1.3 million in 2003 and $3.0 million in 2002). For~~ the nine months, Net GMDB amounted to $51.2 million in 2003 and $48.7 million in 2002 (net of reinsurance recoveries of $7.1 million in 2003 and $5.7 million in 2002). Net GMDB consists primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits, guaranteed minimum income benefits and guaranteed minimum account value benefits. These guarantees are described in more detail in the following paragraphs. The decrease in Net GMDB for the quarter, reflects the upturn in the equity markets in the second and third quarters of 2003. The increase in Net GMDB in 2003 reflects the downturn in the equity markets in 2002 and early part of 2003 partially offset by the upturn in the equity markets in the second and third quarters of 2003. Further downturns in the equity markets could increase these expenses.

ANET ~~majority~~LOSS oftotaled the Company’s variable annuity products are issued with a death benefit feature which provides that, upon the death of a contractholder, the contractholder’s beneficiary will receive the greater of (1) the contractholder’s account value, or (2) a guaranteed minimum death benefit that varies by product (the GMDB)$31. The Company bears the risk that death claims following a decline in the equity markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At September0 ~~30,~~million 2003, a portion of the GMDB risk on approximately 31% of the account value with such features had been reinsured. Approximately half of this reinsurance will cease at the time the modified coinsurance deposit liability is fully paid down, which is presently estimated to occur in ~~early~~ 2004~~. A substantial majority of all new contracts sold have reinsurance coverage. However~~, ~~the~~compared ~~Company does not currently have reinsurance coverage on contracts~~ to ~~be sold after 2003. Reinsurance coverage is subject to limitations such as caps and deductibles. GMDB-related contractholder benefits incurred,~~ net ofincome ~~related reinsurance, were $14.7 million (net~~ of ~~reinsurance recoveries of~~ $110.~~3 million) for the third~~6 ~~quarter of 2003 and $30.9~~ million ~~(net~~in of reinsurance recoveries of $3.0 million) for the third quarter of 2002. GMDB-related contractholder benefits incurred, net of related reinsurance, were $51.2 million (net of reinsurance recoveries of $7.1 million) for the nine months of 2003 ~~and $48~~.~~7 million (net~~ ~~of reinsurance recoveries of $5.7 million) for the nine months of 2002. In~~ ~~accordance with Generally Accepted Accounting Principles, the Company expenses~~ ~~such benefits in the period incurred, and therefore does not provide~~

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

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

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

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

ANNUITY OPERATIONS

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

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

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

~~reserves for~~ An ~~future~~analysis ~~benefits.~~of ~~However,~~net ~~effective~~investment ~~January 1,~~spread ~~2004,~~and ~~the~~a ~~Company~~reconciliation ~~will be required~~ to ~~record~~pretax aincome ~~liability~~is presented ~~for~~in ~~GMDBs~~the ~~(See~~following ~~Note 3 of Notes to Financial~~table: ~~Statements).~~

EARNINGS ENHANCEMENT BENEFIT (“EEB”): The Company issues certain variable annuity products that offer an optional Earnings Enhancement Benefit (EEB) feature. For contractholders who elect the feature, the EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The Company bears the risk that account values following favorable performance of the financial markets will result in greater EEB death claims and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At September 30, 2003, approximately 8% (calculated based on current account value) of in-force contracts include EEB coverage, with 97% of the EEB risk fully reinsured.


	Three months ended March 31,
	2004			2003
	(in thousands)
Investment income	$	86,993		$	96,785
Interest credited to fixed annuity contracts		(35,236	)		(38,765	)
Interest credited to universal life insurance contracts		(18,481	)		(19,102	)
Interest credited to guaranteed investment contracts		(1,335	)		(2,016	)

Net investment spread		31,941			36,902
Net realized investment losses		(11,393	)		(3,272	)
Fee income, net of reinsurance		104,401			78,574
General and administrative expenses, net of deferrals		(27,328	)		(21,259	)
Amortization of DAC		(24,001	)		(38,821	)
Annual commissions		(15,014	)		(14,178	)
Claims on UL contracts, net of reinsurance recoveries		(4,823	)		(5,513	)
Guaranteed minimum death benefits, net of reinsurance recoveries		(17,774	)		(21,976	)

Pretax income	$	36,009		$	10,457

~~GUARANTEED~~Net ~~MINIMUM~~investment ~~INCOME~~spread ~~BENEFIT~~totaled ~~(“GMIB”):~~$31.9 million ~~The~~in ~~Company~~2004 ~~issues~~and ~~certain variable annuity products that contain or offer a Guaranteed Minimum Income Benefit (GMIB)~~$36.9 ~~living~~million ~~benefit feature~~in 2003. ~~This~~These ~~feature~~amounts ~~provides~~equal a2.03% ~~minimum~~on ~~annuity payment~~average ~~guarantee~~invested ~~for~~assets ~~those~~(computed ~~contractholders~~on ~~who choose to receive fixed lifetime annuity payments after~~ a ~~seven, nine, or ten-year waiting period in~~ ~~their~~daily ~~deferred~~basis) ~~annuity~~of ~~contracts~~$6.28 billion ~~The~~in ~~Company~~2004 ~~bears the risk that the performance of the financial markets will not be sufficient for accumulated policyholder account balances to support GMIB benefits~~ and ~~that~~2.20% ~~the~~on ~~fees collected~~average ~~under~~invested ~~the~~assets ~~contract are insufficient to cover the costs~~ of ~~the benefit~~ ~~to be provided~~$6. ~~For contracts sold prior to September~~72 ~~30,~~billion in 2003,. ~~substantially all~~The ofdecrease ~~the~~in ~~Company’s~~net ~~products~~investment ~~containing~~spread ~~the~~in ~~GMIB~~2004 ~~feature~~from ~~have been reinsured;~~2003 ~~furthermore,~~resulted ~~substantially~~from ~~all~~a oflower ~~the~~prevailing ~~GMIB~~interest ~~risk~~rate ~~per individual reinsured contract has been transferred to the reinsurer~~environment.

GUARANTEED MINIMUM ACCOUNT VALUE (“GMAV”): In the third quarter of 2002, the Company began issuing certain variable annuity products that offer an optional Guaranteed Minimum Account Value (GMAV) living benefit. If elected by the policyholder at the time of contract issuance, this feature guarantees that the account value under the contract will equal or exceed the amount of the initial principal invested, adjusted for withdrawals, at the end of a ten-year waiting period. The ~~Company~~components ~~bears the risk that protracted under-performance~~ of ~~the~~net ~~financial~~investment ~~markets~~spread ~~could~~were ~~result~~as ~~in GMAV guarantees being higher than the~~follows: ~~underlying contractholder account balance and that the fees collected under~~ the contract are insufficient to cover the costs of the benefit to be provided. As of September 30, 2003, the premiums subject to guarantee totaled approximately $515 million, and the estimated fair values of the GMAV benefit included in the accompanying statement of income and comprehensive income were not material.

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


	Three months ended March 31,
	2004			2003
	(in thousands)
Net investment spread	$	31,941		$	36,902
Average invested assets		6,279,002			6,724,297
Average interest-bearing liabilities		(6,006,388	)		(6,455,839	)
Yield on average invested assets		5.54	%		5.76	%
Rate paid on average interest bearing liabilities		3.67			3.71

Difference between yield and interest rate paid		1.87	%		2.05	%

Net investment spread as a percentage of average invested assets		2.03	%		2.20	%

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

~~INCOME~~Investment ~~TAXES~~income ~~totaled~~(and ~~$4.2 million~~the ofrelated ~~tax~~yields ~~expense~~on inaverage ~~the~~invested ~~third quarter of~~assets) ~~2003,~~totaled $287.50 million of(5.54%) ~~tax~~and ~~benefit in the third quarter of 2002,~~ $796.68 million ~~of tax~~(5.76%) ~~expense~~ in ~~the nine months of~~ 2003 ~~and $5~~.~~2 million~~ ofThe ~~tax expense~~ decrease in the ~~nine~~ ~~months~~investment ofyield ~~2002,~~primarily ~~representing~~reflects ~~effective~~an ~~annualized~~overall ~~tax~~lower ~~rates~~prevailing ofinterest rate ~~24%,~~environment ~~30%, 14%~~as ~~and~~well ~~12%,~~as ~~respectively~~$4.2 million ~~The~~loss ~~increase~~from in the ~~tax~~mark ~~rate~~to inmarket ~~the third quarter~~ of ~~2003 is~~ the GMAV ~~result~~put ofoptions anand ~~adjustment~~embedded ~~increasing~~derivatives ~~the~~in ~~current~~2004, ~~estimated~~compared ~~annual tax rate due~~ to a$1.7 million ~~change~~ in ~~estimated permanent tax~~ ~~differences~~2003. ~~The~~Expenses ~~benefit~~incurred ~~recorded~~to inmanage the ~~third~~investment ~~quarter~~portfolio ofamounted ~~2002~~to ~~is the~~$0.7 ~~result~~million ofin an2004 ~~adjustment~~and ~~reducing~~$0.6 million ~~the~~in ~~current~~2003. ~~estimated~~These ~~annual~~expenses ~~tax~~are ~~rate~~included as a ~~result~~reduction of ~~lower~~investment ~~than~~income ~~expected~~in ~~relative~~the ~~pretax~~consolidated ~~income~~statement ~~without~~of ~~corresponding~~operations and ~~reductions~~comprehensive ~~in permanent tax differences~~income.

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

~~SHAREHOLDER’S~~NET ~~EQUITY~~REALIZED ~~increased~~INVESTMENT toLOSSES totaled $111.434 ~~billion~~million atin ~~September 30,~~2004 ~~2003~~and ~~from~~$3.3 million in 2003 and include impairment writedowns of $1.321 ~~billion~~million atand ~~December 31~~$5.2 million, ~~2002~~respectively. ~~The~~Thus, ~~increase~~net ~~reflected~~realized ~~net~~losses ~~income~~from sales and redemptions of investments totaled $4610.5 3 million in 2004 and ~~other~~net ~~comprehensive~~realized ~~income~~gains from sales and redemptions of investments totaled $621.39 million in 2003.

~~INVESTMENTS~~The ~~AND~~Company ~~CASH~~sold ator ~~September 30~~redeemed invested assets, ~~2003~~principally ~~totaled~~bonds ~~$7.28 billion,~~and ~~compared~~notes, toaggregating $7840.194 ~~billion~~million atin ~~December~~2004 and $837.3 ~~31,~~million ~~2002~~in 2003. ~~The~~Sales of investments result from the active management of the Company’s ~~invested~~investment portfolio. ~~assets~~Because redemptions of investments are generally involuntary and ~~managed~~sales byof ~~its~~investments ~~affiliates.~~are ~~The~~made ~~following~~in ~~table~~both ~~summarizes~~rising ~~the~~and ~~Company’s~~falling interest rate ~~portfolio~~environments, net gains and losses from sales and redemptions of ~~bonds~~investments fluctuate from period to period, ~~notes~~and represent 0.66% and ~~redeemable~~0.10% ~~preferred~~of ~~stocks~~average invested (assets for 2004 and 2003, respectively. Active portfolio management involves the ~~“Bond~~ongoing evaluation of asset sectors, individual securities within ~~Portfolio”)~~the investment portfolio and ~~other~~the reallocation of investments ~~and~~from ~~cash~~sectors atthat are ~~September 30,~~perceived ~~2003~~to ~~and~~be ~~December~~relatively overvalued to sectors that are perceived to be 31relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, ~~2002:~~taking into account credit, option, liquidity and interest-rate risk.

	September 30, 2003					December 31, 2002
	Carrying		Percent of			Carrying		Percent of
	Value		Portfolio			Value		Portfolio
Bond Portfolio:	(In thousands, except for percentages)
U.S. government securities	$	19,782		0.3	%	$	32,820		0.5	%
Mortgage-backed securities		1,242,252		17.1			1,547,568		21.5
Other bonds, notes and redeemable preferred stocks		4,452,657		61.1			3,948,181		54.9
Total Bond Portfolio		5,714,691		78.5			5,528,569		76.9
Mortgage loans		747,274		10.2			738,601		10.3
Common stocks		4,410		0.1			2,609		0.0
Cash and short-term investments		303,510		4.2			65,872		0.9
Other		513,943		7.0			858,053		11.9
Total investments and cash	$	7,283,828		100.0	%	$	7,193,704		100.0	%

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

~~The~~VARIABLE ~~Company’s~~ANNUITY ~~general~~FEES, ~~investment~~NET ~~philosophy~~OF isREINSURANCE toare ~~hold~~primarily ~~fixed-rate~~based on the market value of assets in separate accounts supporting variable annuity ~~for~~contracts. ~~long-term~~Such ~~investment~~fees totaled $88.2 million ~~Thus,~~in it2004 ~~does~~and ~~not~~$62.0 million ~~have~~in a2003 and ~~trading~~are ~~portfolio~~net of reinsurance premiums of $8.5 million and $6.4 million, ~~However~~respectively. The increased fees in 2004 compared to 2003 reflect the favorable equity market conditions in 2004 and the latter part of 2003, and the resulting ~~Company~~favorable ~~has~~impact ~~determined~~on ~~that~~market ~~all~~values of the ~~Bond~~assets ~~Portfolio~~in isthe ~~available~~separate toaccounts. beOn ~~sold~~an inannualized ~~response~~basis, tovariable ~~changes~~annuity fees represent 1.8% and 1.7% of average variable annuity assets in ~~market~~2004 ~~interest~~and ~~rates~~2003, ~~changes~~respectively. Variable inannuity ~~relative~~assets averaged $19.82 billion during 2004 and $14.48 billion ~~value~~during 2003. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of ~~asset~~variable ~~sectors~~annuity products, totaled $742.3 million in 2004 and ~~individual~~$328.4 million ~~securities~~in 2003. On an annualized basis, ~~changes~~these amounts represent 15% and 9% of separate account liabilities at the beginning of the respective periods. The increase in ~~prepayment~~variable ~~risk,~~annuity deposits in 2004 reflected increased ~~changes~~demand for variable annuity products due to the improved equity market conditions in 2004 and the ~~credit~~latter ~~quality~~part ~~outlook~~of ~~for~~2003. ~~certain~~Transfers ~~securities,~~from the fixed accounts of the Company’s variable annuity products to the separate accounts ~~need~~are ~~for~~not ~~liquidity~~classified ~~and~~as ~~other~~variable ~~similar~~annuity ~~factors~~deposits. Accordingly, changes in variable annuity deposits are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company’s variable annuity products.

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

~~THE~~variable ~~BOND~~annuity ~~PORTFOLIO,~~products ~~which~~are ~~constituted~~primarily ~~78%~~multi-manager ofvariable ~~the Company’s total~~annuities ~~investment~~that ~~portfolio~~offer atinvestors ~~September 30,~~a ~~2003,~~choice ~~had~~of anseveral ~~aggregate~~variable ~~fair~~funds ~~value~~as ~~that was~~well ~~$167.0 million~~as ~~greater~~a ~~than~~number ~~its amortized cost at September 30, 2003,~~of ~~compared~~guaranteed ~~with~~fixed-rate ~~$35~~funds.~~9 million~~ atInvestors ~~December 31,~~can ~~2002.~~select ~~The~~from ~~increase~~a inchoice ~~net~~of several ~~unrealized~~variable ~~gains~~funds onand ~~the~~up ~~Bond~~to ~~Portfolio~~7 ~~during~~guaranteed ~~2003~~fixed-rate ~~principally~~funds ~~reflected~~depending on the ~~impact~~product. ofThe ~~impairment~~increase ~~writedowns~~ in ~~2003~~Variable asAnnuity ~~well~~Product asSales ~~the~~reflects ~~decrease in prevailing~~improving ~~interest~~market ~~rates~~conditions ~~and~~since the ~~corresponding~~first ~~effect~~quarter ~~on the fair value~~ of ~~the Bond Portfolio at September 30,~~ 2003.

AtThe ~~September 30,~~Company ~~2003,~~has ~~the~~encountered ~~Bond~~increased ~~Portfolio~~competition ~~had~~in anthe ~~aggregate~~variable ~~carrying value~~annuity ~~(i.e.~~marketplace ~~fair~~during ~~value)~~recent ofyears ~~$5.71 billion~~ and ananticipates ~~aggregate~~that ~~amortized~~the ~~cost~~market ofwill ~~$5.55~~remain ~~billion.~~highly Atcompetitive ~~September 30,~~for ~~2003,~~ the ~~Bond~~foreseeable ~~Portfolio (excluding $1~~future.~~4 million~~ ~~of redeemable preferred stocks) included $5.45 billion of bonds rated by Standard & Poor’s (“S&P”)~~Also, ~~Moody’s~~from ~~Investors~~time ~~Service~~to ~~(“Moody’s”)~~time, ~~Fitch (“Fitch”) or the~~ ~~National~~Federal ~~Association~~initiatives ofare ~~Insurance~~proposed ~~Commissioners~~that ~~(“NAIC”),~~could ~~and~~affect ~~$265.3 million of bonds rated by~~ the ~~Company~~taxation ~~pursuant to statutory rating guidelines established by the NAIC. At September 30, 2003, approximately $5.37 billion~~ of ~~the Bond~~annuities ~~Portfolio was investment grade, including $1.12 billion of mortgage-backed securities~~ (See “~~MBS~~Regulation”) ~~and U~~.~~S. government/agency securities.~~

AtUNIVERSAL ~~September 30,~~LIFE ~~2003~~INSURANCE POLICY FEES, ~~the~~NET ~~Bond~~OF ~~Portfolio~~REINSURANCE ~~included~~amounted to $~~346.~~9 .2 million ofin ~~bonds that~~2004 ~~were~~and ~~not rated investment grade~~$9.0 million ~~These~~in ~~non-investment-grade~~2003 ~~bonds accounted~~and ~~for~~are ~~approximately~~net ~~1.3%~~ of ~~the~~reinsurance ~~Company’s~~premium ~~total~~of $8.1 million ~~assets~~ and ~~approximately~~ $8.4 million, respectively.8% ofUniversal ~~its~~life ~~invested~~insurance ~~assets. Non-investment-grade securities~~policy ~~generally~~fees ~~provide~~consist ~~higher~~of ~~yields~~mortality ~~and~~charges, ~~involve greater risks than investment~~up-~~grade securities~~front ~~because~~fees ~~their~~earned ~~issuers~~on ~~typically~~deposits ~~are more highly leveraged~~ received and ~~more vulnerable~~administrative ~~to adverse economic conditions than investment-grade issuers. In addition~~fees, ~~the~~net ~~trading~~of ~~market~~reinsurance ~~for these securities is usually more limited than for investment-grade securities~~premiums. AnThe ~~economic~~administrative ~~downturn could produce higher~~fees ~~than~~are ~~average~~assessed ~~issuer~~based ~~defaults~~ on the ~~non-investment-grade~~number ~~securities,~~of ~~which could~~policies ~~cause~~in ~~the~~force ~~Company’s~~as ~~investment~~of ~~returns~~the ~~and~~end ~~net~~of ~~income to decline~~each month. ~~At September 30,~~The ~~2003, the~~ Company’s ~~non-investment-grade~~acquired ~~portfolio~~its ~~consisted~~universal ~~of 100~~life ~~issues~~contracts ~~with~~as nopart ~~single issuer representing more than 10%~~ of the ~~total~~ ~~non-investment~~acquisition ~~grade portfolio. These non-investment-grade securities are comprised~~ of ~~bonds~~business ~~spanning~~from 11MBL ~~industries~~Life ~~with~~Assurance ~~21%~~Corporation ofon ~~these assets concentrated~~December 31, in1998 ~~financial~~and ~~institutions,~~does ~~18%~~not ~~concentrated~~actively inmarket ~~consumer~~such ~~goods,~~contracts. ~~17%~~Such ~~concentrated~~fees annualized inrepresent ~~communications, 15~~2.3% ~~concentrated in utilities~~ and 102.2% ~~concentrated~~of ~~in transportation.~~average Noreserves ~~other~~for ~~industry~~universal ~~concentration~~life ~~constituted~~insurance contracts ~~more~~in ~~than~~the ~~10%~~respective ~~of these assets~~periods.

~~The~~SURRENDER ~~table~~CHARGES on ~~the~~variable ~~following~~annuity ~~page~~and ~~summarizes~~universal ~~the~~life ~~Company’s~~contracts ~~rated bonds by~~totaled ~~rating~~$7.0 million ~~classification~~in as2004 ofand ~~September~~$7.6 ~~30,~~million in 2003. Surrender charge periods range from zero to nine years from the date a deposit is received. Surrender charges generally are assessed on withdrawals at declining rates during the first seven or nine years following receipt of the deposit.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.3 million in 2004 and $21.3 million in 2003. The increase in 2004 results from higher information technology costs and payroll related expenses. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $24.0 million in 2004, compared with $38.8 million in 2003. Prior year included accelerated amortization due to higher than anticipated surrenders on certain products with features which have been discontinued.

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

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

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

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

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

					Issues not rated by S&P/Moody's/
Issues rated by S&P/Moody's/Fitch					Fitch, by NAIC category						Total
															Percent
			Estimated		NAIC				Estimated				Estimated		of total
S&P/Moody's/Fitch	Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Category (1)	cost		value		(2)		Cost		value		cost		value		assets
AAA+ to A- (Aaa to A3) [AAA to A-]	$	2,993,707	$	3,106,116		1	$	597,308	$	613,412	$	3,591,015	$	3,719,528		51.06	%
BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-]		1,261,072		1,322,521		2		313,935		324,401		1,575,007		1,646,922		22.61	%
BB+ to BB- (Ba1 to Ba3) [BB+ to BB-]		176,359		159,152		3		40,072		40,905		216,431		200,057		2.75	%
B+ to B- (B1 to B3) [B+ to B-]		112,471		99,139		4		2,744		2,970		115,215		102,109		1.40	%
CCC+ to C (Caa to C) [CCC]		31,184		27,330		5		14,997		15,094		46,181		42,424		0.58	%
C1 to D [DD] {D}		—		—		6		2,482		2,274		2,482		2,274		0.03	%
TOTAL RATED ISSUES	$	4,574,793	$	4,714,258			$	971,538	$	999,056	$	5,546,331	$	5,713,314

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

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

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

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

ASSET MANAGEMENT OPERATIONS

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

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

ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SAAMCo. Such fees totaled $18.1 million on average assets managed of $9.64 billion in 2004 and $10.9 million on average assets managed of $7.38 billion in 2003. Asset management fees are not necessarily proportionate to average assets managed, principally due to changes in product mix. Mutual fund sales, excluding sales of money market accounts and private accounts, totaled $698.4 million in 2004, compared to $440.2 million in 2003. Redemptions of mutual funds, excluding redemptions

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

~~(1)~~ GENERAL, ~~S&P~~ADMINISTRATIVE ~~and~~AND ~~Fitch~~OTHER ~~rate~~EXPENSES ~~debt~~totaled ~~securities~~$8.9 million in ~~rating~~2004 and ~~categories~~$8.7 million ~~ranging from AAA (the highest) to D (~~in ~~payment default)~~2003. AGeneral ~~plus~~and ~~(+)~~administrative orexpenses ~~minus~~remain ~~(-)~~closely controlled ~~indicates~~through ~~the~~a ~~debt’s relative standing within the rating category. A security rated BBB~~company-wide orcost ~~higher~~containment isprogram ~~considered~~and ~~investment~~continue ~~grade. Moody’s rates debt securities in rating categories range from Aaa (the highest)~~ to represent Cless ~~(extremely~~than ~~poor prospects of ever attaining any real investment standing). The number~~ 1,% 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of ~~the~~average ~~S&P,~~total ~~Moody’s and Fitch ratings if rated by multiple agencies~~assets.

~~(2)~~ AMORTIZATION ~~Bonds~~OF ~~and~~DEFERRED ~~short-term~~ACQUISITION ~~promissory~~COSTS ~~instruments~~totaled ~~are~~$7.4 million ~~divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds~~ in ~~or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above~~2004, compared with ~~categories~~ $5.1 million ~~and~~in ~~2 considered investment grade~~2003. The ~~NAIC~~increase ~~categories~~in ~~include~~amortization ~~$265.3~~was ~~million~~primarily due ofto ~~assets~~additional ~~that~~mutual ~~were~~fund ~~rated~~sales bysince the ~~Company~~first ~~pursuant~~quarter toof ~~applicable NAIC rating guidelines~~2003.

CAPITAL RESOURCES AND LIQUIDITY

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

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


	March 31, 2004					December 31, 2003
	Fair		Percent of			Fair		Percent of
	Value		Portfolio			Value		Portfolio
	(in thousands, except for percentages)
Bond Portfolio:
U.S. government securities	$	127,326		1.8	%	$	24,292		0.3	%
Mortgage-backed securities		1,055,273		14.5			1,191,817		16.7
Securities of public utilities		148,743		2.1			365,150		5.1
Corporate bonds and notes		2,867,553		39.5			2,697,142		37.9
Redeemable preferred stocks		21,400		0.3			22,175		0.3
Other debt securities		1,264,485		17.4			1,205,224		16.9

Total Bond Portfolio		5,484,780		75.6			5,505,800		77.2
Mortgage loans		699,676		9.7			716,846		10.1
Common stocks		1,632		0.0			727		0.0
Cash and short-term investments		142,186		2.0			133,105		1.9
Securities lending collateral		668,717		9.2			514,145		7.2
Other		253,428		3.5			254,010		3.6

Total investments and cash	$	7,250,419		100.0	%	$	7,124,633		100.0	%

The Company’s general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of the Bond Portfolio is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company’s need for liquidity and other similar factors.

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

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

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

At March 31, 2004, the Bond Portfolio included $363.6 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1.2% of the Company’s total assets and approximately 5.0% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. An economic downturn could produce higher than average issuer defaults on the non-investment-grade securities, which could cause the Company’s investment returns and net income to decline. At March 31, 2004, the Company’s non-investment-grade portfolio consisted of 96 issues with no issuer representing more than 10% of the total non-investment grade portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 18% of these assets concentrated in financial institutions, 17% concentrated in utilities, 14% concentrated in telecommunications, 12% concentrated in noncyclical consumer products and 10% concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

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

RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)


Issues rated by S&P/Moody’s/Fitch					Issues not rated by S&P/Moody’s/ Fitch, by NAIC category						Total
															Percent
			Estimated		NAIC				Estimated				Estimated		of total
S&P/Moody’s/Fitch	Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Category(1)	cost		value		(2)		cost		value		cost		value		assets
AAA+ to A- (Aaa to A3) [AAA to A-]	$	2,904,370	$	3,048,820		1	$	445,057	$	459,585	$	3,349,427	$	3,508,405		48.74	%
BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-]		1,255,405		1,318,128		2		260,258		273,292		1,515,663		1,591,420		28.11	%
BB+ to BB- (Ba1 to Ba3) [BB+ to BB-]		116,845		120,695		3		31,826		35,603		148,671		156,298		2.17	%
B+ to B- (B1 to B3) [B+ to B-]		124,192		118,692		4		1,832		1,636		126,024		120,328		1.67	%
CCC+ to C (Caa to C) [CCC]		19,719		24,451		5		8,076		7,909		27,795		32,360		0.45	%
C1 to D [DD] {D}		—		—		6		53,177		54,571		53,177		54,571		0.76	%

TOTAL RATED ISSUES	$	4,420,531	$	4,630,786			$	800,226	$	832,596	$	5,220,757	$	5,463,382

Footnotes to the table of Rated Bonds by Rating Classification

(1)		S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories range from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.

(2)		Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $205.3 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

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

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

In general, a security is considered a candidate for impairment if it meets any of the following criteria:

•

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

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

•

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

Once a security has been identified as potentially impaired, the amount of such impairment is determined by reference to that security’s contemporaneous market price. ~~However, the market price following a significant credit event~~ ~~of any issuer may be volatile after such an event. Factors such as market~~ ~~liquidity, hedge fund activity, sensitivity to “headline” risk, and the~~ ~~widening of bid/ask spreads contribute to price volatility. Because of such volatility, the market price may not be indicative of the fair value or a reasonable estimate of realizable value.~~

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

As a result of these policies, the Company recorded pretax impairment writedowns of $351.91 million in the ~~nine~~2004 ~~months of 2003~~ and $225.02 million in ~~the~~2003. No individual ~~nine~~impairment ~~months~~loss exceeded 10% of ~~2002~~the Company’s net loss for the three months ended March 31, 2004.

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

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

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

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

At The ~~September 30,~~amortized ~~2003,~~cost of the ~~Company’s~~ Bond Portfolio ~~had~~in ~~gross~~an unrealized ~~gains~~ ofloss ~~$251.1 million~~position ~~and gross unrealized losses of $84.1~~at March ~~million.~~31, ~~One issuer~~2004, ~~accounted~~by ~~for~~contractual ~~11%~~maturity, ofis ~~unrealized~~shown ~~losses~~below. ~~No other single issuer~~ ~~accounted for more than 10% of unrealized losses.~~

At September 30, 2003, the fair value of the Company’s Bond Portfolio aggregated $5.71 billion. Of this aggregate fair value, approximately 1.4% represented securities trading at or below 75% of amortized cost. The impact of unrealized losses on net income will be further mitigated upon realization by the impact of the realized losses on DAC amortization and income taxes.


	Amortized
	Cost
	(in thousands)
Due in one year or less	$	26,586
Due after one year through five years		218,033
Due after five years through ten years		232,879
Due after ten years		178,903

Total	$	656,401

At The ~~September 30,~~aging ~~2003, approximately $918.0 million~~ of the Bond Portfolio ~~had~~ ~~gross~~in an unrealized ~~losses~~loss ofposition ~~$84.1 million.~~at ~~The gross unrealized losses in~~March ~~the~~31, ~~Bond~~2004 ~~Portfolio~~is ~~included~~shown ~~the following concentrations~~below:

	Gross
(dollars in	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
	Unrealized
thousands)	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
Concentration	Losses
	Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized
	(In thousands)
Months	Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items
Investment Grade:
Investment Grade Bonds
Finance companies	$	20,562
0-6	$	220,327	$	(3,625	)		28	$	—	$	—			—	$	—	$	—			—	$	220,327	$	(3,625	)		28
Non-corporate		14,690
7-12		93,963		(736	)		13		—		—			—		—		—			—		93,963		(736	)		13
Transportation		5,912
>12		209,648		(6,485	)		49		22,704		(6,136	)		3		—		—			—		232,352		(12,621	)		52
Other		1,564
Total	$	523,938	$	(10,846	)		90	$	22,704	$	(6,136	)		3	$	—	$	—			—	$	546,642	$	(16,982	)		93
Not Rated and Below Investment Grade:
Below Investment Grade Bonds
Finance companies		15,829
0-6	$	6,478	$	(87	)		4	$	987	$	(306	)		1	$	599	$	(469	)		1	$	8,064	$	(862	)		6
Non-corporate		4,896
7-12		8,651		(230	)		2		378		(116	)		1		—		—			—		9,029		(346	)		3
Transportation		11,208
>12		79,720		(8,642	)		14		12,946		(4,085	)		3		—		—			—		92,666		(12,727	)		17
Other		9,407
Total	$	94,849	$	(8,959	)		20	$	14,311	$	(4,507	)		5	$	599	$	(469	)		1	$	109,759	$	(13,935	)		26
Total Bonds
0-6	$	226,805	$	(3,712	)		32	$	987	$	(306	)		1	$	599	$	(469	)		1	$	228,391	$	(4,487	)		34
7-12		102,614		(966	)		15		378		(116	)		1		—		—			—		102,992		(1,082	)		16
>12		289,368		(15,127	)		63		35,650		(10,221	)		6		—		—			—		325,018		(25,348	)		69
Total	$	618,787	$	(19,805	)		110	$	37,015	$	(10,643	)		8	$	599	$	(469	)		1	$	656,401	$	(30,917	)		119

~~The~~ In ~~amortized~~2004, ~~cost~~the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio inwere an$10.9 million. ~~unrealized~~The ~~loss~~aggregate ~~position at~~fair ~~September~~value of securities sold was $74.7 30million, ~~2003,~~which bywas ~~contractual~~approximately ~~maturity,~~87.2% isof amortized ~~shown~~cost. The average period of time that securities sold at a loss during 2004 were trading continuously at a price below: amortized cost was approximately 20 months.

	Amortized
	Cost
	(In thousands)
Due in one year or less	$	7,070
Due after one year through five years		267,968
Due after five years through ten years		443,576
Due after ten years		283,433
Total	$	1,002,047

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

In the nine months ended September 30, 2003, the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio were $7.4 million. The aggregate fair value of securities sold was $265.3 million, which was approximately 97% of amortized cost. The average period of time that securities sold at a loss during 2003 were trading continuously at a price below amortized cost was approximately 13 months.

The aging of the Bond Portfolio in an unrealized loss position at September 30, 2003 is shown below:

	Amortized		Unrealized		Number of
	Cost		Losses		Items
	(In thousands)
Investment Grade:
0-6 months	$	190,852	$	4,277		19
7-12 months		66,949		1,257		14
>12 months		98,921		3,685		29
Below Investment Grade:
0-6 months	$	200,902	$	14,423		35
7-12 months		105,544		1,860		13
>12 months		338,879		58,566		59
Total:
0-6 months	$	391,754	$	18,700		54
7-12 months		172,493		3,117		27
>12 months		437,800		62,251		88

As stated previously, the valuation for the Company’s Bond Portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. The Company considers non-traded securities to mean certain fixed income investments, certain structured securities and limited partnerships. The aggregate carrying value of these securities at September 30, 2003 was approximately $1.32 billion.

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

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

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

Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $~~296~~314.37 million at ~~September~~March 3031, ~~2003~~2004. Secured Loans are senior to to subordinated debt and equity and are secured by assets of the issuer. At March ~~September 30~~31, ~~2003~~2004, Secured Loans consisted of $~~230~~210.20 million of privately ~~traded~~ traded securities and $66104.17 million of publicly traded securities. These ~~Secured~~ Secured Loans are composed of loans to 59 borrowers spanning 2010 industries, with 1125% of these assets concentrated in ~~food~~utilities, 17% concentrated in transportation, 16% concentrated in communications, 11% concentrated in cyclical consumer products and 10% concentrated in ~~media~~noncyclical consumer products. No other industry constituted more than 10% of these assets.

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

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

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

MORTGAGE LOANS aggregated $747.3 million at September 30, 2003 and consisted of 123 commercial first mortgage loans with an average loan balance of approximately $6.1 million, collateralized by properties located in 33 states. The properties collateralizing the portfolios were approximately 35% office, 18% multifamily residential, 15% manufactured housing, 10% industrial, 10% hotels, 5% retail, and 7% other types. At September 30, 2003, approximately 28%, 11% and 10% of this portfolio was secured by properties located in California, New York, and Massachusetts, respectively, and no more than 10% of this portfolio was secured by properties located in any other single state. At September 30, 2003, there were 16 mortgage loans with outstanding balances of $10 million or more, which collectively aggregated approximately 48% of the portfolio. At the time of their origination or purchase by the Company, virtually all mortgage loans had loan-to-value ratios of 75% or less. At September 30, 2003, approximately 24% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2006. During 2003 and 2002, loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio.

Substantially all of the mortgage loan portfolio has been originated by the Company under its underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the more immediate effects of general economic conditions on these commercial property types. However, due to the Company’s underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields.

~~POLICY~~ SECURITIES ~~LOANS~~LENDING COLLATERAL totaled $~~202~~668.97 million at ~~September~~March 3031, ~~2003~~2004, compared to $~~215~~514.81 million at December 31, ~~2002~~2003, and ~~primarily~~consisted ~~represent~~of ~~loans~~cash collateral ~~taken~~invested in highly rated short-term securities received in ~~against~~connection ~~universal~~with ~~life~~the ~~insurance~~Company’s ~~policies~~securities lending program. Although the cash collateral is currently invested in highly rated short-term securities, the applicable collateral agreements permit the cash collateral to be invested in highly liquid short and long-term investment portfolios. At least 75% of the portfolio’s short-term investments must have external issue ratings of A-1/P-1, one of the highest ratings for short-term credit quality. Long-term investments include corporate notes with maturities of five years or less and a credit rating by at least two nationally recognized statistical rating organizations (NRSRO), with no less than a S&P rating of A or equivalent by any other NRSRO.

SEPARATE ACCOUNT SEED MONEY totaled $23.6 million at September 30, 2003, compared to $25.4 million at December 31, 2002, and consists principally of seed money for mutual funds used as investment vehicles for the Company’s variable annuity separate accounts.

SECURITIES LENDING COLLATERAL totaled $254.7 million at September 30, 2003, compared to $585.8 million at December 31, 2002, and consisted of cash collateral invested in highly rated short-term securities received in connection with the Company’s securities lending program. Although the cash collateral is currently invested in highly rated short-term securities, the

applicable collateral agreements permit the cash collateral to be invested in highly liquid short and long-term investment portfolios. At least 75% of the portfolio’s short-term investments must have external issue ratings of A-1/P-1, one of the highest ratings for short-term credit quality. Long-term investments include corporate notes with maturities of five years or less and a credit rating by at least two nationally recognized statistical rating organizations (NRSRO), with no less than a S&P rating of A or equivalent by any other NRSRO.

ASSET-LIABILITY MATCHING is utilized by the Company in an effort to minimize the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company’s fixed-rate products incorporate surrender charges, market value adjustments or other restrictions in order to encourage persistency. Approximately 78% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at September 30, 2003.

As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting its investment operations to closely match the duration and cash flows of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability modeling included: 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 September 30, 2003, these assets had an aggregate fair value of $7.28 billion with an option-adjusted duration of 3.9. The Company’s fixed-rate liabilities included fixed annuity, universal life and GIC contracts. At September 30, 2003, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $6.61 billion with an option-adjusted duration of 3.5. The Company’s potential exposure due to a relative 10% decrease in prevailing interest rates from its September 30, 2003 levels is a loss of approximately $15.2 million, representing an increase in fair value of its fixed-rate liabilities that is not offset by an increase in fair value of its fixed-rate assets. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss.

~~5.0~~ ASSET-LIABILITY MATCHING is ~~expected~~utilized toby ~~decrease~~the Company in ~~value~~an byeffort ~~approximately~~to minimize 5%the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its fixed-rate liabilities should be ~~estimates~~backed ~~the~~by ~~option~~a portfolio principally composed of fixed-~~adjusted~~rate ~~duration~~investments that generate predictable rates of ~~its~~return. ~~assets~~The ~~and~~Company ~~liabilities~~does ~~using~~not have a specific ~~number~~target rate of ~~different~~return. Instead, its rates of return vary over time depending on the current interest rate ~~scenarios~~environment, ~~assuming~~the ~~continuation~~slope of ~~existing~~the yield curve, the ~~investment~~spread ~~and~~at ~~interest~~which ~~crediting~~fixed-rate ~~strategies~~investments are priced over the yield curve, ~~including~~default rates ~~maintaining~~and angeneral economic conditions. Its portfolio strategy is constructed ~~appropriate~~with ~~level~~a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. ~~Actual~~The ~~company~~Company’s ~~and~~fixed-rate ~~contract~~products ~~owner~~incorporate ~~behaviors~~surrender charges or ~~may~~other berestrictions ~~different~~in ~~than~~order ~~was~~to ~~assumed~~encourage inpersistency. ~~the~~Approximately ~~estimate~~62% of ~~option-adjusted duration~~the Company’s fixed annuity, universal life and ~~these~~GIC ~~differences~~reserves ~~may~~had besurrender penalties ~~material~~or other restrictions at March 31, 2004.

~~The~~ As ~~overall~~part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-~~credited~~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 ~~environment~~and ~~has~~conducting ~~continued~~its investment operations to ~~decline~~closely inmatch the duration ~~2003.~~and Acash ~~significant~~flows ~~portion~~of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s ~~fixed~~asset-liability ~~annuity~~modeling ~~contracts~~include: cash ~~(including~~and ~~the~~short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At March 31, 2004, these assets had an aggregate fair value of $6.58 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include fixed options of variable annuities, as well as universal life, fixed annuity and GIC contracts). At ~~has~~March 31, ~~reached~~2004, orthese isliabilities ~~near~~had ~~the~~an aggregate fair value (determined ~~minimum~~by discounting future contractual ~~guaranteed~~cash ~~rate~~flows ~~(generally~~by 3%related market rates of interest) of $6.13 billion ~~Continual~~with ~~declines~~an option-adjusted duration of 3.4 years. The Company’s potential exposure due to a relative 10% increase in prevailing interest rates ~~could~~from ~~cause~~its ~~the~~March 31, ~~spread~~2004 ~~between~~levels ~~the~~is ~~yield~~a onloss of approximately $2.2 million, representing a decrease in fair value of its fixed-rate assets that is not offset by a decrease in fair value of its fixed-rate liabilities. Because the ~~portfolio~~Company actively manages its assets and liabilities and has strategies in ~~the~~place to minimize its exposure to loss as interest rate ~~credited~~changes tooccur, ~~policyholders~~it expects tothat ~~deteriorate~~actual losses would be less than the estimated potential loss.

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

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

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


	Three months
	ended March 31,			Years ended December, 31
	2004			2003			2002			2001
10-year U.S. Treasury bond rate:		4.00	%		4.01	%		4.61	%		5.02	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.74			5.75			6.23			6.82
Rate paid on average interest-bearingliabilities		3.68			3.73			3.95			4.49

As a component of its asset-liability management strategy, the Company may utilize interest rate swap agreements (“Swap Agreements”) to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes.

The Company seeks to enhance its spread income with dollar roll repurchase agreements (“Dollar Roll Repos”). Dollar Roll Repos involve a sale of MBS by the Company and an agreement to repurchase substantially similar MBS at a later date at an agreed upon price. The Company also seeks to provide liquidity by investing in MBSs. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.

There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company’s Dollar Roll Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Dollar Roll Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company’s policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody’s. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company’s Swap Agreements are intended to hedge variable-rate assets or liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. As part of its decision to purchase such a security, the Company assesses the risk of prepayment by analyzing the security’s projected performance over an array of interest-rate scenarios. Once such a security is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return.

INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In conducting these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower’s recent financial performance, news reports and other externally generated information concerning the creditor’s affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.

The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to ~~fair~~net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. Impairment losses on securitized assets are recognized ~~if the fair value of the~~ ~~security is less than its book value, and the net present value of expected~~ ~~future cash flows is less than the net present value of expected future cash~~ ~~flows at the most recent (prior) estimation date.~~

DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $31.6 million of bonds at September 30, 2003, which constituted approximately 0.4% of total invested assets. At December 31, 2002, defaulted investments totaled $15.6 million ($8.9 million of bonds and $6.7 million of mortgage loans), which constituted approximately 0.2% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, Dollar Roll Repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows. At September 30, 2003, approximately $4.80 billion of the Company’s Bond Portfolio had an aggregate unrealized gain of $251.1 million, while approximately $918.0 million of the Bond Portfolio had an aggregate unrealized loss of $84.1 million. In addition, the Company’s investment portfolio currently provides approximately $51.3 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company’s annuity products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

~~duration~~if ~~to,~~the ~~and~~fair ~~higher~~value ~~yielding~~of ~~than,~~ the ~~liabilities~~security ~~assumed.~~is ~~The Company~~less ~~believes~~than ~~that~~its ~~liquidity~~book tovalue, ~~fund~~and ~~withdrawals~~the ~~would be available through~~net ~~incoming~~present ~~cash~~value ~~flow, the sale~~ of ~~short-term~~expected orfuture ~~floating-rate~~cash ~~instruments~~flows ~~or Dollar~~is ~~Roll~~less ~~Repos~~than on the ~~Company’s~~net ~~substantial~~present ~~MBS segment~~ value of ~~the~~expected ~~Bond Portfolio,~~future ~~thereby~~cash ~~avoiding~~flows at the ~~sale~~most ofrecent ~~fixed-rate~~(prior) estimation ~~assets in an unfavorable bond market~~date.

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

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

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

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

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

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

GUARANTEES AND OTHER COMMITMENTS

The Company has entered into ~~eight~~seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at ~~September~~March 3031, ~~2003~~2004 is $~~785~~557.68 million. Related to each of these agreements are participation agreements with the Company’s Parent, under which the Parent will share in $~~339~~222.45 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $~~240~~21.59 million in 2004, $~~387~~385.19 million in 2005 and $~~158~~150.0 million in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.

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

~~assets~~RECENTLY ~~held~~ISSUED inACCOUNTING ~~separate accounts will continue to be measured at fair value and reported~~STANDARDS ~~in summary total on the Company’s financial statements, with an equivalent~~ ~~summary total reported for related liabilities, if the separate account~~ ~~arrangement meets certain specified conditions. Assets underlying the~~ Company’s interest in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account structure. The adoption of SOP 03-1 will not have a material impact on the Company’s separate accounts or separate account seed money.

In ~~addition~~July 2003, ~~SOP 03-1 will require~~ the ~~Company~~American toInstitute ~~recognize~~of aCertified ~~liability~~Public Accountants ~~for~~issued ~~guaranteed~~Statement ~~minimum~~of ~~death~~Position ~~benefits~~03-1, ~~guaranteed~~“Accounting ~~minimum~~and ~~income~~Reporting ~~benefits~~by ~~and~~Insurance ~~enhanced~~Enterprises ~~earnings~~for ~~benefits~~Certain ~~and~~Nontraditional ~~modify~~Long-Duration ~~certain~~Contracts ~~disclosures~~ and ~~financial statement presentations~~ for ~~these products. The Company continues to evaluate~~Separate ~~the~~Accounts” ~~provisions of~~ (“SOP 03-1”). ~~Management~~(For ~~currently~~further ~~expects~~discussion ~~the~~see ~~one-time cumulative~~Note ~~accounting~~2 ~~charge~~of ~~upon~~Notes ~~adoption~~ to ~~approximate $60 million after~~ ~~taxes,~~Financial ~~to be recorded in the first quarter of 2004, which is not material to the Company’s financial condition or liquidity~~Statements.)

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~~ 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 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 onof securities for the benefit of policyholders, methods of accounting, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than security holders.

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

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

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

~~regulatory~~QUANTITATIVE ~~control.~~AND ~~The~~QUALITATIVE ~~statutory~~DISCLOSURES ~~capital~~ABOUT ~~and~~MARKET ~~surplus of the Company~~RISK ~~exceeded its RBC requirements as of September 30, 2003.~~

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in 2001 and established new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The ~~law~~quantitative ~~also requires financial institutions to fully disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress~~ and ~~several~~qualitative ~~states~~disclosures isabout ~~designed~~market torisk ~~provide further~~are ~~privacy~~contained ~~protections to consumers of financial products and services. These statutes and regulations may result~~ in ~~additional regulatory compliance costs, may limit~~ the ~~Company’s~~Asset-Liability ~~ability~~Matching tosection ~~market its products, and may otherwise constrain the nature or scope~~ of ~~the Company~~Management’s ~~insurance and financial services~~Discussion ~~operations. The Gramm-Leach-Bliley Act also allows combinations between insurance companies, banks~~ and ~~other~~Analysis 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~~Financial ~~companies~~Condition and ~~the~~Results ~~tax treatment~~ of ~~insurance~~ ~~and~~Operations ~~other~~on ~~investment~~pages ~~products.~~29 ~~Proposals made in recent years~~ to ~~limit~~ ~~the tax deferral of annuities or otherwise modify the tax rules related~~30 ~~to the treatment of annuities have not been enacted~~herein. ~~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.~~

DISCLOSURE CONTROLS & PROCEDURES

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

~~QUANTITATIVE~~PART ~~AND~~II ~~QUALITATIVE~~— ~~DISCLOSURES~~OTHER ~~ABOUT MARKET RISK~~INFORMATION

The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28 to 29 herein.

CONTROLS & PROCEDURES

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and the Principal Financial Officer have reviewed the effectiveness of its disclosure controls and procedures as of September 30, 2003 and have concluded that the disclosure controls and procedures are effective. There was no change in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

AIG SUNAMERICA LIFE ASSURANCE COMPANY OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

~~Exhibits are listed in the Exhibit Index beginning on page 38 herein~~ None.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended ~~September~~March 3031, ~~2003~~2004.

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SIGNATURES

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

	AIG SUNAMERICA LIFE ASSURANCE COMPANY Registrant	~~AIG SUNAMERICA LIFE ASSURANCE COMPANY Registrant~~
Date: November 14, 2003		/s/ N. SCOTT GILLIS N. Scott Gillis Senior Vice President and Director (Principal Financial Officer)
Date: May 14, 2004	/s/ N. SCOTT GILLIS
Date: November 14, 2003		/s/ Stewart Polakov Stewart Polakov Senior Vice President and Controller (Principal Accounting Officer)
	N. Scott Gillis
	Senior Vice President, Chief Financial Officer and Director



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

Exhibit Index

Exhibit
(31.1)		Rule 13a-14(a)/15d-14(a) Certifications
10(a)		Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 12, 2004, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2008 and adjusting the interest rate to 4% per annum for the unpaid principal under the Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 27, 2003, defining AIGRS’ rights with respect to the 4.25% notes due April 30, 2005.
(31.2)		Rule 13a-14(a)/15d-14(a) Certifications
10(b)		Fourth Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 12, 2004, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2008 and adjusting the interest rate to 4% per annum for the unpaid principal under the Third Amendment to Subordinated Loan Agreement for Equity Capital, dated February 27, 2003, defining AIGRS’ rights with respect to 4.25% notes due April 30, 2005.
(32)		Section 1350 Certifications
31.1		Rule 13a-14(a)/15d-14(a) Certifications
31.2		Rule 13a-14(a)/15d-14(a) Certifications
32		Section 1350 Certifications

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Filing Compare · SUNAMERICA ANNUITY & LIFE ASSURANCE CO