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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file numbers
DECEMBER 31, 2000 2-99959, 33-29851,
33-31711, 33-41858,
33-43008, 33-58853
AND 333-11699
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
DELAWARE 04-2461439
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SUN LIFE EXECUTIVE PARK,
WELLESLEY HILLS, MASSACHUSETTS 02481
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (781) 237-6030
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(TITLE OF CLASS)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. __
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 6,437 shares of common stock outstanding on March 30, 2001, all
of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
ITEM 1. BUSINESS.
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office mailing address is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481, Tel. (781) 237-6030. As of December 31, 2000, the
Company was authorized to do business in 48 states, the District of Columbia and
Puerto Rico. Effective January 31, 2001, the Company became authorized to do
business in 49 states. In addition, the Company's wholly-owned insurance
subsidiary, Sun Life Insurance and Annuity Company of New York, is authorized to
do business in the State of New York.
The Company's wholly-owned subsidiaries include: Sun Life Insurance and Annuity
Company of New York, which issues individual fixed and variable annuity
contracts and group life and long-term disability insurance in New York; Sun
Life of Canada (U.S.) Distributors, Inc., a registered broker-dealer and
investment adviser; Clarendon Insurance Agency, Inc., a registered
broker-dealer; Sun Life Financial Services Limited, which serves as the
marketing administrator for the distribution of certain offshore products of Sun
Life Assurance Company of Canada, an affiliate; Sun Life of Canada (U.S.) SPE
97-1, organized for the purpose of engaging in activities incidental to
securitizing mortgage loans; Sun Capital Advisers, Inc., a registered investment
adviser; and Sun Life of Canada (U.S.) Holdings General Partner, Inc., the sole
general partner of Sun Life of Canada (U.S.) Limited Partnership I.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., which is an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada, 150 King Street West, Toronto, Ontario, Canada. Sun Life Assurance
Company of Canada is a life insurance company incorporated pursuant to a Special
Act of Parliament of Canada in 1865 and currently transacts business in all of
the Canadian provinces and territories, all of the United States (except New
York), the District of Columbia, Puerto Rico, the Virgin Islands, Great Britain,
Ireland, Hong Kong, Bermuda, Barbados, Philippines, and Indonesia. On March 22,
2000, Sun Life Assurance Company of Canada reorganized from a mutual life
insurance company to a stock life insurance company. See Demutualization below.
DEMUTUALIZATION
On January 27, 1998, Sun Life Assurance Company of Canada announced that its
Board of Directors had requested that management develop a plan to demutualize,
which involves converting from a mutual structure, with ownership by
policyholders, to a shareholder-owned company. In a demutualization the
ownership interest held by policyholders is distributed to them in the form of
shares, without affecting their interests as policyholders. In September 1999,
the Board of Directors of Sun Life Assurance Company of Canada approved the
demutualization plan developed by management. On December 6, 1999, Sun Life
Assurance Company of Canada received approval for its demutualization plan from
the Michigan Commissioner of Insurance. At a Special Meeting on December 15,
1999, eligible policyholders of Sun Life Assurance Company of Canada voted in
favor of the plan to demutualize. On March 22, 2000, the reorganization from a
mutual company to a stock company was complete and Sun Life Financial Services
of Canada Inc., a new holding company, became the ultimate parent of Sun Life
Assurance Company of Canada and the Company. The demutualization of Sun Life
Assurance Company of Canada did not have any significant impact on the Company.
- 2 -
GENERAL
The Company and its subsidiaries are engaged in the sale of individual and group
variable life insurance, individual and group fixed and variable annuities,
group pension contracts, guaranteed investment contracts, group life and
disability insurance, and other asset management services. These products are
distributed through individual insurance agents, financial planners, insurance
brokers and broker-dealers to both the tax qualified and non-tax qualified
markets.
The following table sets forth, for each of the last three years, (i) total
statutory premiums and deposits, which is the premium the Company and its
subsidiaries report on the annual statements filed with insurance regulators,
and (ii) reserves for each major operating segment using accounting principles
generally accepted in the United States of America ("GAAP"). Statutory premiums
and deposits differ from GAAP premiums. GAAP requires that premiums on variable
and universal life insurance products be accounted for using deposit accounting,
which excludes from revenue the premiums received on these products and
generally includes as revenue the fees earned from the same products. See Item
7, Management's Discussion and Analysis, and Notes to Financial Statements for
additional industry segment information and discussion.
2000 1999 1998
(IN THOUSANDS)
Total Statutory Premiums and Deposits:
Wealth Management $4,548,326 $2,694,190 $2,281,605
Individual Protection 97,283 16,619 156,035
Group Protection 856,851 15,610 14,155
---------- ---------- ----------
$5,502,460 $2,726,419 $2,451,795
========== ========== ==========
GAAP Reserves:
Wealth Management $3,849,030 $3,712,354 $4,234,223
Individual Protection 152,163 138,000 139,706
Group Protection 20,559 17,748 14,995
---------- ---------- ----------
$4,021,752 $3,868,102 $4,388,924
========== ========== ==========
REINSURANCE
In accordance with normal industry practice, the Company reinsures portions of
its life insurance and disability income exposure with both affiliated and
unaffiliated companies using traditional indemnity reinsurance agreements. The
Company also reinsures on a stop-loss basis with unaffiliated companies the
guaranteed minimum death benefit exposure with respect to a portion of the
Company's variable annuity business. The Company, as the ceding company, remains
responsible for the portion of the policies reinsured under each of its existing
agreements in the event the reinsurance companies are unable to pay their
portion of any reinsured claim.
- 3 -
RESERVES
The Company has established and reported liabilities for future policy benefits
in accordance with GAAP in order to meet its obligations on its outstanding
contracts. Liabilities for variable annuity contracts, deferred fixed annuity
contracts, guaranteed investment contracts, variable life insurance and
universal life insurance policies are equal to the account values of the
contracts as of December 31, 2000. Account values of the contracts include
deposits plus credited interest, less expense and mortality fees and
withdrawals. Reserves for individual life, group life and group disability
contracts are based on mortality tables in general use in the United States and
are computed to equal amounts that, with additions from premiums to be received,
and with interest on such reserves compounded annually at assumed rates, will be
sufficient to meet the Company's policy obligations.
INVESTMENTS
Of the Company's consolidated total assets of $24.1 billion at December 31,
2000, 74.3% consisted of unitized and non-unitized separate account assets,
15.6% were invested in bonds and similar securities, 3.5% in mortgages, 0.3% in
real estate, and the remaining 6.3% in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
marketing insurance products. The Company's management believes that through a
combination of a strong and reputable brand name, exceptional customer service,
a wide array of innovative financial solutions and strong financial ratings, the
Company stands out as an industry leader. A.M. Best has assigned the Company and
its subsidiary, Sun Life Insurance and Annuity Company of New York, its highest
classification, A++. Fitch has assigned the Company and Sun Life Insurance and
Annuity Company of New York its highest rating, AAA, indicating exceptionally
strong for financial strength. Standard & Poor's has assigned the Company and
Sun Life Insurance and Annuity Company of New York each a rating of AA+,
indicating very strong for financial strength. Moody's Investor Service, Inc.
has assigned the Company an unsolicited rating of Aa2 for financial strength,
which is their third highest rating level.
EMPLOYEES
The Company and its subsidiaries have entered into service agreements with Sun
Life Assurance Company of Canada which provide that the latter will furnish the
Company and its subsidiaries, as required, with personnel as well as certain
services and facilities on a cost reimbursement basis. As of December 31, 2000
the Company and its subsidiaries had 475 direct employees who are employed at
its Principal Executive Office in Wellesley Hills, Massachusetts, its Wealth
Management Division in Boston, Massachusetts, and its New York operations in New
York, New York.
- 4 -
REGULATION
The Company and its insurance subsidiary, Sun Life Insurance and Annuity Company
of New York, are subject to supervision and regulation by the insurance
authorities in each jurisdiction in which they transact business. Sun Life
Insurance and Annuity Company of New York operates only in the State of New
York. The laws of the various jurisdictions address such issues as licensing,
overseeing trade practices, licensing agents, approving policy forms,
establishing reserve requirements, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender values,
prescribing the form and content of required financial statements and regulating
the type and amount of investments permitted. On or before March 1st each year,
the Company and Sun Life Insurance and Annuity Company of New York file annual
statements relating to their operations for the preceding year and their
financial condition at the end of such year with state insurance regulatory
authorities in each jurisdiction where the entity is licensed. The annual
statements include financial statements and exhibits in conformity with
statutory accounting principles, which differ from GAAP. The books and records
of the Company and Sun Life Insurance and Annuity Company of New York are
subject to review or examination by their respective state departments of
insurance at any time and a full examination of their operations is conducted
at periodic intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Company, Sun Life Assurance Company of Canada and its affiliates, under
insurance holding company legislation. Under such laws, inter-company transfers
of assets and dividend payments from insurance subsidiaries may be subject to
prior notice or approval, depending on the size of such transfers and payments
in relation to the financial positions of the companies involved. Under
insurance guaranty fund laws in most states, insurers doing business in a given
state can be assessed (up to prescribed limits) for policyholder losses incurred
by insolvent companies. However, most of these laws provide that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength and many also permit the deduction of all or a portion of any such
assessment from any future premium or similar taxes. See Note 15 for additional
information.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business and
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and the subsequent impact on the relative desirability of
various personal investment vehicles. The current proposals regarding estate
taxes may also impact the desirability of the Company's joint survivor life
insurance products if enacted.
ITEM 2. PROPERTIES
The Company's home office consists of three buildings located in Wellesley
Hills, Massachusetts. The Company owns this facility and leases it to Sun Life
Assurance Company of Canada (and certain unrelated parties) for lease terms not
exceeding five years. The operations of the Wealth Management segment are
primarily conducted from office space in Boston, Massachusetts, which is leased
by the Company from certain unrelated parties. The home office of Sun Life
Insurance and Annuity Company of New York consists of office space in New York,
New York, and is leased from an unrelated party.
- 5 -
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various kinds of routine
litigation, which, in management's judgment, is not expected to have a material
impact on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of security holders during
the year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc.; there is no market for its common stock.
During 2000, 1999, and 1998, the Company declared and paid $10,000,000,
$80,000,000, and $50,000,000, respectively, in dividends to its parent, Sun Life
of Canada (U.S.) Holdings, Inc. There are legal limitations governing the
extent to which the Company may pay dividends as described in Note 14 of the
consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain selected historical financial data. For
the year ended December 31, 1999, the Company filed its Annual Report on Form
10-K using audited statutory financial statements prepared in accordance with
accounting practices prescribed or permitted by the Insurance Department of the
State of Delaware, which is a comprehensive basis of accounting other than GAAP.
The Company changed its basis of accounting to GAAP and has restated the
financial statements for the prior years ended December 31, 1999, 1998 and 1997.
The GAAP Selected Financial Data table below includes data for the three years
ended December 31, 2000 which have been derived from the audited consolidated
financial statements and notes thereto included elsewhere in this Form 10-K. The
GAAP Selected Financial Data table also includes information for the year ended
December 31, 1997 which has been derived from audited consolidated financial
statements not included herein. The Statutory Selected Financial Data table
includes information for the five years ended December 31, 2000 which has been
taken from the annual statements filed with insurance regulatory authorities and
has been prepared in accordance with applicable statutory accounting practices.
- 6 -
GAAP SELECTED FINANCIAL DATA:
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998 1997
------------- ------------- ------------- -------------
(IN THOUSANDS)
Revenues
Premiums and other revenue $ 342,662 $ 262,576 $ 382,469 $ 406,884
Net investment income and
realized gains 267,807 367,296 464,226 552,380
------------- ------------- ------------- -------------
610,469 629,872 846,695 959,264
------------- ------------- ------------- -------------
Benefits and expenses
Policyholder benefits 338,327 334,864 588,109 672,350
Other expenses 333,389 212,197 233,713 190,105
------------- ------------- ------------- -------------
671,716 547,061 821,822 862,455
------------- ------------- ------------- -------------
Operating gain (loss) (61,247) 82,811 24,873 96,809
Federal income tax expense (benefit) (63,778) 29,079 10,767 35,339
------------- ------------- ------------- -------------
Net income from continuing operations $ 2,531 $ 53,732 $ 14,106 $ 61,470
============= ============= ============= =============
Assets $ 24,057,668 $ 21,484,913 $ 18,248,262 $ 17,335,516
============= ============= ============= =============
Long-term debt payable to affiliates $ 565,000 $ 565,000 $ 565,000 $ 565,000
============= ============= ============= =============
Partnership Capital Securities $ 607,826 $ -- $ -- $ --
============= ============= ============= =============
STATUTORY SELECTED FINANCIAL DATA:
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
Revenues
Premiums, annuity
deposits and other
revenue $5,718,472 $2,869,250 $2,581,463 $ 2,623,629 $ 2,215,322
Net investment income
and realized gains 148,836 190,844 187,208 298,121 310,172
-------------------------------------------------------------------------
$5,867,308 $3,060,094 $2,768,671 $ 2,921,750 $2,525,494
-------------------------------------------------------------------------
Benefits and expenses
Policyholder benefits 5,545,754 2,706,121 2,416,950 2,579,104 2,232,528
Other expenses 339,862 239,136 214,607 206,065 175,342
-------------------------------------------------------------------------
5,885,616 2,945,257 2,631,557 2,785,169 2,407,870
-------------------------------------------------------------------------
Operating gain (18,308) 114,837 137,114 136,581 117,624
Federal income tax expense
(benefit) (18,072) 24,479 11,713 7,339 (5,400)
-------------------------------------------------------------------------
Net income $(236) $90,358 $ 125,401 $ 129,242 $ 123,024
=========================================================================
Assets $22,067,296 $19,948,155 $16,902,621 $15,925,357 $13,621,952
=========================================================================
Surplus notes $565,000 $565,000 $565,000 $565,000 $315,000
=========================================================================
- 7 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cautionary Statement
This discussion includes forward-looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
volume growth, market share, market risk and financial goals. It is important to
understand that these forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those that the statements anticipate. These risks and uncertainties may concern,
among other things:
- - Heightened competition, particularly in terms of price, product features,
and distribution capability, which could constrain the Company's growth and
profitability.
- - Changes in interest rates and market conditions.
- - Regulatory and legislative developments.
- - Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO 1999:
NET INCOME
Net income decreased by $39.9 million to $2.5 million in 2000, reflecting a
decrease of $51.2 million in income from continuing operations and a decrease of
$1.0 million in income from discontinued operations offset by the 1999 $12.3
million after-tax net loss from the sales of Massachusetts Casualty Insurance
Company and New London Trust F.S.B.
NET INCOME FROM OPERATIONS BY SEGMENT
The Company's net income from operations reflects the operations of its four
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
The following table provides a summary of net income from operations by segment,
which is discussed more fully below.
% CHANGE
2000 1999 1998 2000/1999 1999/1998
---- ---- ---- --------- ---------
WEALTH MANAGEMENT $ (6.9) $ 73.0 $ 74.7 (109.5%) (2.28%)
INDIVIDUAL PROTECTION (0.2) 0.2 (45.1) (200.0%) 100.4%
GROUP PROTECTION 1.2 0.6 1.4 100.0% (57.1%)
CORPORATE 8.4 (20.1) (16.9) 141.8% 18.9%
----------- ----------- ----------- ----------- -----------
$ 2.5 $ 53.7 $ 14.1 (95.3%) 280.9%
=========== =========== =========== =========== ===========
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WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs of
individuals preparing for retirement or who have already retired and on the
marketing of guaranteed investment contracts ("GICs") to unrelated third parties
in overseas markets. In the U.S. it primarily markets to upscale consumers,
selling individual and group fixed and variable annuities. Its major product
lines, "Regatta" and "Futurity," are combination fixed/variable annuities. In
these combination annuities, contractholders have the choice of allocating
payments either to a fixed account, which provides a guaranteed rate of return,
or to variable accounts. Withdrawals from the fixed account are subject to
market value adjustment. In the variable accounts, the contractholder can choose
from a range of investment options and styles. The return depends upon
investment performance of the options selected. Investment funds available under
Regatta products are managed by Massachusetts Financial Services Company
("MFS"), an affiliate of the Company. Investment funds available under Futurity
products are managed by several investment managers, including MFS and Sun
Capital Advisers, Inc., a subsidiary of the Company.
The Company sells its annuity products via two affiliated wholesale distribution
organizations, Massachusetts Financial Distributors (Regatta products) and Sun
Life of Canada (U.S.) Distributors, Inc., a subsidiary of the Company (Futurity
products). The annuity products are then distributed through a variety of
unaffiliated retail organizations including securities brokers (51%), financial
institutions (15%), and insurance agents and financial advisors (34%).
Although new pension products are not currently sold in the U.S., there is a
substantial block of U.S. group retirement business in-force, including GICs,
pension plans and group annuities. A significant portion of these pension
contracts are non-surrenderable, with the result that the Company's liquidity
exposure is limited. GICs were marketed directly in the U.S. through independent
managers. In 1997, the Company decided to no longer market group pension and GIC
products in the U.S. Beginning in the second quarter of 2000, the Company began
marketing GICs to unrelated third parties in overseas markets.
The Wealth Management segment had a net loss of $6.9 million for the year ended
December 31, 2000 as compared to net income of $73.0 million for the year ended
December 31, 1999. The $79.9 million decrease in earnings was primarily due to
three factors: 1) increased strain associated with the successful introduction
of new products which credit the policyholder with a bonus upon receipt of the
deposit; 2) changes in the market values of derivatives used to manage Wealth
Management liabilities; 3) increased amortization of deferred acquisition costs
on annuity products. The bonus credits on the new products are expensed as they
are credited to the policyholders' account values. The changes in market values
of derivative instruments are included in investment income. Changes in
estimated future gross profit assumptions used to amortize deferred acquisition
costs result in cumulative adjustments that are included with current period
amortization. Following are additional details of the major factors affecting
the Wealth Management segment's results for the year ended December 31, 2000 as
compared to the same period in 1999.
- - Fee income increased primarily as a result of higher variable annuity
account balances. Fee income for the year 2000 was higher than 1999 by
approximately $60.0 million. Market appreciation and net deposit activity
have been key factors in the growth in the account balances. This growth
has generated corresponding increases in fee income, since fees are
determined based on the average assets held in these accounts. Variable
annuity assets have increased by approximately $4.6 billion since January
1, 1999. During 2000 these variable annuity assets increased by only $0.8
billion due to unfavorable stock market results. Net deposits of annuity
products increased by $1.0 billion compared with 1999. The increase in net
deposits results primarily from the successful introduction of new products
during 2000. As noted above, new
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products that credit the policyholder with a bonus upon receipt have been
introduced. Other new products that provide policyholders with greater
choices in the product features have also been introduced. These new
product introductions lead to significantly increased gross and net sales.
Annuity surrenders also increased in 2000 by $248 million, primarily due to
older products which are no longer actively marketed. The Company expects
that as the separate account block of business continues to grow, from both
net deposits and asset appreciation, and as an increasing number of
accounts are no longer subject to surrender charges, surrenders will tend
to increase.
Total new deposits of fixed and variable annuities increased by $1.3
billion to $4.0 billion for the year ended December 31, 2000. Deposits in
the Futurity line of products represented $844 million of total annuity
deposits for the year 2000, an increase of $503 million as compared to
1999. The Company expects that sales of the Futurity product will continue
to increase in the future, based on management's beliefs (i) that market
demand is growing for multi-manager variable annuity products, (ii) that
the productivity of Futurity's wholesale distribution network, established
in 1998, will continue to grow; and (iii) that the marketplace will
continue to respond favorably to introductions of new Futurity products and
product enhancements.
- - Net investment income and realized gains for the Wealth Management segment
decreased by $96 million for the year ended December 31, 2000 as compared
to 1999. The main driver of the decrease in net investment income is the
change in the value of the various derivative instruments which the Company
uses as part of its asset-liability management programs. Net investment
income from derivatives decreased by approximately $67 million for the year
ended December 31, 2000, as compared to increasing earnings by
approximately $18 million for the year ended December 31, 1999. In
addition, there has been a shift in demand from general account annuity
products to variable account annuity products. As a consequence, there has
been a decline in average general account invested assets and, in turn, net
investment income has declined. Net investment income reflects only income
earned on invested assets of the general account. The decline in average
general account assets also reflects the Company's 1997 decision to no
longer market group pension and GIC products in the U.S. As a consequence,
the block of in-force business declines as U.S. issued GICs mature and are
surrendered. The introduction of GIC products marketed to unrelated third
parties in overseas markets, generated $551 million of new deposits for the
ended December 31 2000. The Company expects the new GIC products to result
in an increase in general account assets in the future as additional
deposits are received. In addition to the decline in assets,
- - Policyholder benefits (the major elements of which are interest credited to
contractholder deposits and annuity benefits) increased by approximately
$16.5 million for the year ended December 31, 2000, as compared to 1999.
The surrenders of maturing GIC contracts on which the Company earns a
positive spread are being partially replaced by sales of annuities under
the Company's Dollar Cost Averaging ("DCA") programs. Under these programs,
deposits are made into the fixed portion of the annuity contract and
receive a bonus rate of interest for the policy year. In addition, the
bonus payments credited to policyholder deposits upon receipt under the new
products noted above totaled over $44 million during the year 2000 and are
included in annuity payments. Another contributing factor to the increase
in policyholder benefits is the increase in interest credited to
contractholders on sales of the new GIC products. The interest credited on
these new contracts was $11.1 million.
- - Underwriting, acquisition and other operating expenses increased by $30.5
million in the year ended December 31, 2000 as compared to the same period
in 1999, reflecting the increased volumes of both new business and in-force
business.
- 10 -
- - Amortization of deferred policy acquisition costs increased by $65.3
million in the year ended December 31, 2000 as compared to the same period
in 1999. The increase is due primarily to cumulative adjustments to
amortization as a result of unfavorable changes in estimated future gross
profit assumptions used to calculate amortization of DAC on the annuity
products. In addition, the business in-force at the beginning of the year
has increased profits and therefore increased amortization.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets variable life insurance products. These products
include variable universal life products marketed to the corporate-owned life
insurance ("COLI") market, which were first introduced in late 1997. In
September 1999, the Company introduced a new variable life product as part of
the Futurity product portfolio. The Company's management expects the variable
life business to grow and become more significant in the future.
Earnings from the Individual Protection segment decreased by $0.4 million from
net income of $0.2 million for the year ended December 31, 1999 to a net loss of
$0.2 million for the year ended December 31, 2000, due primarily to net realized
investment losses incurred during 2000. During 2000, the Company received $850
million of deposits to its new privately placed COLI variable life products.
This resulted in increased fee income of $17 million that was offset by
increased acquisition costs associated with the sale.
GROUP PROTECTION SEGMENT
The Group Protection segment focuses on providing life and disability insurance
to small and medium size employers as part of those companies' employee benefit
plans. This segment operates only in the state of New York through a subsidiary.
Net income from the Group Protection segment increased by $0.6 million for the
year ended December 31, 2000 as compared to 1999 due to improved claims
experience and increased net investment income. The business grew only slightly
in 2000.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its debt
financing, and items not otherwise attributable to the other segments.
Earnings on the Corporate segment increased $28.5 million from a $20.1 million
loss in 1999 to net income of $8.4 million in 2000. This reflects an income tax
benefit related to issues in tax years which have been examined by the Internal
Revenue Service.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998:
NET INCOME
Net income increased by $28.2 million to $42.4 million in 1999, reflecting an
increase of $39.6 million in income from continuing operations, an increase of
$.9 million in income from discontinued operations, and a $12.3 million
after-tax loss from the sales of Massachusetts Casualty Insurance Company and
New London Trust which occurred in 1999.
INCOME FROM CONTINUING OPERATIONS BY SEGMENT
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The Company's income from operations reflects the operations of its four
business segments: the Wealth Management segment, the Individual Protection
segment, the Group Protection segment and the Corporate segment.
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs of
individuals preparing for retirement or who have already retired. It primarily
markets to upscale consumers in the U.S., selling individual and group fixed and
variable annuities. Its major product lines, "Regatta" and "Futurity," are
combination fixed/variable annuities. In these combination annuities,
contractholders have the choice of allocating payments either to a fixed
account, which provides a guaranteed rate of return, or to variable accounts.
Withdrawals from the fixed account are subject to market value adjustment. In
the variable accounts, the contractholder can choose from a range of investment
options and styles. The return depends upon investment performance of the
options selected. Investment funds available under Regatta products are managed
by Massachusetts Financial Services Company ("MFS"), an affiliate of the
Company. Investment funds available under Futurity products are managed by
several investment managers, including MFS and Sun Capital Advisers, Inc., a
subsidiary of the Company.
The Company distributes its annuity products through a variety of channels. For
the Regatta products, about half are sold through securities brokers; a further
one-fourth through financial institutions, and the remainder through insurance
agents and financial planners. The Futurity products, introduced in February
1998, are primarily distributed through a dedicated wholesaler network,
including Sun Life of Canada (U.S.) Distributors, Inc., a subsidiary.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Net income decreased by $1.7 million to $73.0 million in 1999 as compared to
1998. Increased fee and other income was partially offset by higher operating
expenses, both as a result of the increased business. In addition, the loss of
earnings from the GICs, which block of business is declining, contributes to the
minor decline in earnings. Following are the major factors affecting the Wealth
Management segment's results in 1999 as compared to 1998.
- - Fee and other income increased primarily as a result of higher variable
annuity account balances. Fee income was higher by approximately $37
million in 1999 compared to 1998. Market appreciation and net deposit
activity have been key factors in the growth in the account balances. This
growth has generated corresponding increases in fee income, since fees are
determined based on the average assets held in these accounts. Variable
annuity assets have increased by approximately $3.8 billion or 31% since
January 1, 1999.
- - Net deposits of annuity products increased by $53 million to $290 million
compared with 1998. The increase in net deposits results primarily from
significant increases in new deposits offset by increased variable annuity
surrenders in 1999. Management believes the increase in new deposits is
mainly a result of the success of the Company's introduction, during the
fourth quarter of 1998, of a higher Dollar Cost Averaging ("DCA") rate and
a new six-month DCA program. Under these programs, which were redesigned in
late 1996, deposits are made into the fixed portion of the annuity contract
and receive a bonus rate of interest for the policy year. During the year,
the fixed
- 12 -
deposit is systematically transferred to the variable portion of the
contract in equal periodic installments. While fixed annuity account
deposits increased, deposits directly into variable accounts in 1999. The
Company believes this decline was a consequence of the heightened interest
in the DCA programs in 1999.
Total new deposits to fixed and variable annuities increased by $479 million
to $2,746 million in 1999. Sales of the Futurity line of products
represented $341 million or 12% of total annuity deposits in 1999, an
increase of $219 million from 1998. The Company expects that sales of the
Futurity product will continue to increase in the future, based on
management's beliefs that market demand is growing for multi-manager
variable annuity products, such as Futurity; that the productivity of
Futurity's wholesale distribution network, established in 1998, will
continue to grow; and that the marketplace will continue to respond
favorably to introductions of new Futurity products and product
enhancements.
The surrenders are primarily related to older products which are no longer
actively marketed. The Company expects that as the separate account block of
business continues to grow, from both net deposits and asset appreciation,
and as an increasing number of accounts are no longer subject to surrender
charges, surrenders will tend to increase. The Company is implementing a
conservation program with the aim of improving asset retention.
- - There has been a shift in demand to variable account products from general
account products. As a consequence, there has been a decline in average
general account invested assets and, in turn, net investment income has
declined. Net investment income reflects only income earned on invested
assets of the general account. Net investment income and realized gains for
the Wealth Management segment decreased by approximately $28 million in
1999 as compared to 1998. This decline in average general account assets
primarily reflects the Company's decision in 1997 to no longer market group
pension and GIC products and as a consequence, a declining block of
in-force business as GICs mature and are surrendered.
- - Policyholder benefits (the major elements of which are interest credited to
contractholder deposits and annuity benefits) decreased by approximately
$12.6 million in 1999 as compared to 1998. This is less than the decrease
in investment income as the surrenders of maturing GIC contracts on which
the Company earns a positive spread are being partially replaced by sales
of annuities under the Company's Dollar Cost Averaging ("DCA") programs.
Under these programs, deposits are made into the fixed portion of the
annuity contract and receive a bonus rate of interest for the policy year.
During the year, the fixed deposit is systematically transferred to the
variable portion of the contract in equal periodic installments.
- - Underwriting, acquisition and other operating expenses increased by $9.0
million reflecting the increased volumes of both new business and inforce
business.
- - Amortization of deferred policy acquisition costs increased by $6.8 million
primarily reflecting the impact of the increased variable annuity gross
profits due to significant asset appreciation during 1999, and the
resulting increase in fee income.
INDIVIDUAL PROTECTION SEGMENT
The Company currently markets individual variable life insurance products. These
products include a variable universal life product marketed to the company-owned
life insurance ("COLI") market, which product was introduced in late 1997. In
September 1999, the Company introduced a new variable life
- 13 -
product as part of the Futurity product portfolio. The Company's management
expects that the Company's variable life business will grow and become more
significant in the future.
Prior to 1999 the Protection segment comprised two main elements, internal
reinsurance and other life products.
Internal Reinsurance
In recent years, the Company has had various reinsurance agreements with Sun
Life Assurance Company of Canada. In some of these arrangements, Sun Life
Assurance Company of Canada has reinsured the mortality risks of individual life
policies sold in prior years by the Company. These agreements, in the aggregate,
had an immaterial effect on net income in the years 1998 and 1999. Under another
reinsurance agreement, which became effective January 1, 1991 and terminated
October 1, 1998, the Company reinsured certain individual life insurance
contracts issued by Sun Life Assurance Company of Canada. This agreement had the
effect of increasing income from operations prior to its termination by
approximately $16.5 million in 1998. In addition, the effect of terminating this
agreement was to decrease 1998 net income by approximately $64.0 million as the
termination payment made was greater than the net reserves (reserves assumed
less deferred policy acquisition costs) held under the agreement. Because this
agreement terminated in 1998, it had no effect on income from operations in
1999.
Other Life Products
Net income associated with the other life products directly issued by the
Company from the Individual Protection segment decreased by approximately $.5
million from 1998.
GROUP PROTECTION SEGMENT
The Group Protection segment focuses on providing life and disability insurance
to small and medium size employers as part of those companies' employee benefit
plans. This segment operates only in the state of New York through a subsidiary.
Net income from the Group Protection segment decreased by $.8 million from 1998
primarily due to unfavorable claims experience in the group life product.
CORPORATE SEGMENT
The Corporate segment includes the unallocated capital of the Company, its debt
financing, and items not otherwise attributable to the other segments.
Net income for the Corporate segment decreased by $3.2 million to ($20.1)
million. This decrease reflected lower net investment income, mainly from lower
assets due to dividend payments in 1999 of $80 million and in 1998 of $50
million and increased operational expenses. Income taxes in 1999 reflected an
income tax benefit associated with tax operating losses with subsidiaries not
allocated to the operating segments.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and those
held in its separate accounts. General account assets support general account
liabilities. Separate accounts are investment vehicles for the Company's
variable life and annuity contracts. Policyholders may choose
- 14 -
from among various investment options offered under these contracts according to
their individual needs and preferences. Policyholders assume the investment
risks associated with these choices. Separate account assets are not available
to fund the liabilities of the general account.
The following table summarizes significant changes in asset balances during the
year 2000. The changes are discussed below.
ASSETS
($ IN MILLIONS)
% CHANGE
DECEMBER 31, 2000 DECEMBER 31, 1999 2000/1999
----------------- ----------------- -------------
GENERAL ACCOUNT ASSETS $ 6,183.5 $ 5,361.6 15.3
SEPARATE ACCOUNT ASSETS 17,874.2 16,123.3 10.9
---------------------------------------------------------------
TOTAL ASSETS $ 24,057.7 $ 21,484.9 12.0
===============================================================
General account assets increased by 15.3% in 2000, while variable separate
account assets increased by 10.9%. The growth in general account assets is
due to the introduction of new GIC products marketed to foreign investors
which had net deposits of $561 million during the year 2000 and to the $600
million investment in affiliated subordinated debentures which were received
as a result of the transfer of 100% ownership in Sun Life of Canada (U.S.)
Holdings General Partner, Inc. to the Company from the Company's parent. See
further discussion under the "Corporate Restructuring" section of "Other
Matters." The growth in variable separate accounts as compared to the
general account reflects two main factors: appreciation of the funds held in
the variable separate accounts has exceeded that of the funds held in the
general accounts; and deposits into variable accounts, including transfers
under the DCA programs, have increased, while deposits into fixed annuity
accounts have slowed. The Company believes this pattern has reflected a shift
in the preferences of policyholders, which is largely attributable to the
strong performance of equity markets in general and of the Company's variable
accounts funds in particular over the past few years.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash, invested assets, and deferred
policy acquisition costs, which represented essentially all of general account
assets at December 31, 2000. Major types of invested asset holdings included
fixed maturity securities, short-term investments, mortgages, real estate and
other invested assets. The Company's fixed maturity securities, totaling
$3,749.6 million, comprised 76.5% of the Company's portfolio of invested assets
at December 31, 2000, and included both public and private issues as well as
$600 million of subordinated debentures from the Company's parent. It is the
Company's policy to acquire only investment-grade securities in the general
account. As a result, the overall quality of the fixed maturity portfolio is
high. At December 31, 2000, only 2.2% of the fixed maturity portfolio was rated
below-investment-grade. Short-term investments in fixed maturity securities of
$112.1 million represented 2.3% of the total portfolio. The Company's mortgage
holdings amounted to $846.4 million at December 31, 2000 representing 17.3% of
the total portfolio. All mortgage holdings at December 31, 2000 were in good
standing. The Company believes that the high quality of its mortgage portfolio
is largely attributable to its stringent underwriting standards. At December 31,
2000, investment real estate amounted to $77.7 million, representing about 1.6%
of the total portfolio. The Company invests in real estate to enhance yields
and, because of the long-term nature of these investments, the Company uses them
for purposes of matching with products having long-term liability durations.
Other invested assets amounted to $74.6 million, representing about 1.5% of the
portfolio. These holdings comprised mainly leveraged lease investments. Policy
loans represent the remaining 0.8% of invested assets.
- 15 -
LIABILITIES
As with assets, the proportion of variable separate account liabilities to total
liabilities has been increasing. Most of the Company's liabilities comprise
reserves for life insurance and for annuity contracts and deposit funds. The
Company expects the declining proportional trend in general account liabilities
as compared to separate account liabilities to continue, because it believes
that net deposits to variable products will continue to exceed net deposits for
the fixed contracts associated with these liabilities. The introduction of the
new GIC products has resulted in an absolute dollar increase in general account
liabilities.
General account liabilities also increased over 1999 due to the $607.8
million of Partnership Capital Securities which were acquired as a result of
the transfer of 100% ownership in Sun Life of Canada (U.S.) Holdings General
Partner, Inc. to the Company from the Company's parent. See further discussion
under the "Corporate Restructuring" section of "Other Matters."
CAPITAL MARKETS RISK MANAGEMENT
See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in
this Annual Report on Form 10-K for a discussion of the Company's capital
markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted regulations
at the end of 1993 that established minimum capitalization requirements for
insurance companies, based on risk-based capital ("RBC") formulas applied to
statutory surplus. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at December 31, 2000 and 1999.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from operations.
The Company's main uses of funds are to pay out death benefits and other
maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account assets in relation to its liabilities, the
Company has segmented these assets by product or by groups of products. The
Company manages each segment's assets based on an investment policy that it has
established for that segment. Among other matters, this investment policy
considers liquidity requirements and provides cash flow estimates. The Company
reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its day-to-day
cash requirements. On a quarterly basis, the Company compares its total
"liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%. Based on its ongoing liquidity analyses, the Company believes
that its available liquidity is more than sufficient to meet its liquidity
needs.
- 16 -
OTHER MATTERS
DEMUTUALIZATION
The Company's ultimate parent as of December 31, 1999, Sun Life Assurance
Company of Canada, completed its demutualization on March 22, 2000. As a result
of the demutualization, a new holding company, Sun Life Financial Services of
Canada Inc., is now the ultimate parent of Sun Life Assurance Company of Canada
and the Company. Sun Life Financial Services of Canada Inc., a corporation
organized in Canada, is a reporting company under the Securities Exchange Act of
1934, as amended, with common shares listed on the Toronto, New York, London,
and Manila stock exchanges.
SALE OF SUBSIDIARIES
On June 1, 2000, the Company sold all of the outstanding shares of Sun Life
Information Services Ireland Limited to Sun Life Assurance Company of Canada.
Sun Life Information Services Ireland Limited provides information systems
development services to Sun Life Assurance Company of Canada and its
subsidiaries. The Company realized a post-tax gain of approximately $293,000 on
this transaction.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance Company
("MCIC"), a disability insurance company. The net proceeds of this sale were $34
million and the Company realized a post-tax loss of $25.5 million.
On October 29, 1999, the Company sold New London Trust F.S.B. ("NLT") for
approximately $30 million and realized a post-tax gain of $13.2 million. The net
income of NLT for the year ended December 31, 1999 is reflected in net income
from discontinued operations.
CORPORATE RESTRUCTURING
On December 21, 2000, the Company's parent, Sun Life of Canada (U.S.)
Holdings, Inc., transferred its 100% ownership in Sun Life of Canada (U.S.)
Holdings General Partner, Inc. to the Company in exchange for 537 shares of
the Company's common stock totaling $537,000 plus $65,520,000 of additional
paid in capital. There was no gain or loss realized on this transaction. Sun
Life of Canada (U.S.) Holdings General Partner, Inc. is the sole general
partner of Sun Life of Canada (U.S.) Limited Partnership I which holds as an
investment, the $600 million of subordinated debentures of Sun Life of Canada
(U.S.) Holdings, Inc., the Company's parent. Sun Life of Canada (U.S.)
Limited Partnership I also has $607.8 million of Partnership Capital
Securities issued to an affiliated business trust, representing the limited
partner interest.
On December 21, 2000, the Company's parent, Sun Life of Canada (U.S.) Holdings,
Inc., transferred its $350,000,000 Sun Life Assurance Company of Canada
subordinated note to Sun Canada Financial Co., an affiliate, in the form of
additional capitalization. On the same day, Sun Canada Financial Co. transferred
its ownership in the Company's surplus notes totaling $315,000,000 to Sun Life
of Canada (U.S.) Holdings, Inc. in the form of a dividend. As a result, the
Company had $565,000,000 of surplus notes issued to its parent, Sun Life of
Canada (U.S.) Holdings Inc., as of December 31, 2000.
- 17 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This discussion covers market risks associated with investment portfolios that
support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the Company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's management believes that stringent underwriting standards and
practices have resulted in high-quality portfolios and have the effect of
limiting credit risk. It is the Company's policy, for example, not to purchase
below-investment-grade securities. Also, as a matter of investment policy, the
Company assumes no foreign currency or commodity risk, nor does it assume equity
price risk except to the extent that it holds real estate in its portfolios. (At
December 31, 2000, investment real estate holdings represented approximately
1.6% of the Company's total general account portfolio.) The management of
interest rate risk exposure is discussed below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well-diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these
interest bearing investments can include publicly issued and privately placed
bonds and commercial mortgage loans. Public bonds can include Treasury bonds,
corporate bonds, and money market instruments. The Company's fixed income
portfolios also hold securitized assets, including mortgage-backed securities
("MBS") and asset-backed securities. These securities are subject to the same
standards applied to other portfolio investments, including relative value
criteria and diversification guidelines. In portfolios backing
interest-sensitive liabilities, the Company's policy is to limit MBS holdings to
less than 10% of total portfolio assets. In all portfolios, the Company
restricts MBS investments to pass-through securities issued by U.S. government
agencies and to collateralized mortgage obligations, which are expected to
exhibit relatively low volatility. The Company does not engage in leveraged
transactions and it does not routinely invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches. As a result of the 2000 securitization transaction discussed
in Note 3 of the Consolidated Financial Statements, the Company retained a Class
B subordinated interest certificate as well as a Class I interest only
certificate.
Changes in the level of domestic interest rates affect the market value of fixed
interest assets and liabilities. Segments whose liabilities mainly arise from
the sale of products containing interest rate guarantees for certain terms are
sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from
- 18-
wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- - an economic or market value basis for both assets and liabilities;
- - an option pricing methodology;
- - the use of effective duration and convexity to measure interest rate
sensitivity; and
- - the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate swaps
to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 2000 had a fair value of $4,368.9 million. Fixed
income investments supporting those liabilities had a fair value of $5,084.2
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets on December 31, 2000. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $133.0
million and the corresponding assets would show a net decrease of $180.0
million.
By comparison, liabilities categorized as financial instruments and held in the
Company's general account at December 31, 1999 had a fair value of $3,634.4
million. Fixed income investments supporting those liabilities had a fair value
of $4,339.5 million at that date. The Company performed a sensitivity analysis
on these interest-sensitive liabilities and assets at December 31, 1999. The
analysis showed that if there were an immediate increase of 100 basis points in
interest rates, the fair value of the liabilities would show a net decrease of
$63.8 million and the corresponding assets would show a net decrease of $118.0
million.
The Company produced these estimates using computer models. Since these models
reflect assumptions about the future, they contain an element of uncertainty.
For example, the models contain assumptions about future policyholder behavior
and asset cash flows. Actual policyholder behavior and asset cash flows could
differ from what the models show. As a result, the models' estimates of duration
and market values may not reflect what actually will occur. The models are
further limited by the fact that they do not provide for the possibility that
management action could be taken to mitigate adverse results. The Company
believes that this limitation is one of conservatism; that is, it will tend to
cause
- 19 -
the models to produce estimates that are generally worse than one might
actually expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company's management believes its exposure to interest rate changes will not
materially affect its near-term financial position, results of operations, or
cash flows.
EQUITY AND FOREIGN CURRENCY EXCHANGE RISK
The Company's new GIC product introduced exposure to equity and foreign currency
exchange risk. This is in addition to the traditional interest rate risk
discussed previously. All of this exposure has been hedged via interest rate,
currency, and equity swaps. The terms of each GIC such as interest rate,
interest payment dates, maturity and redemption dates, and currency denomination
are identical to the terms of the swaps. The GIC (liability) is swapped back to
a US dollar fixed liability through the requisite derivative contracts. All
foreign currency is swapped back to fixed US dollars, all floating rate payments
are swapped to fixed rate payments, and any equity returns that the Company is
required to pay (receive) on the GIC are received from (paid to) the swap. These
interest rate, equity linked and currency exchange swaps effectively hedge the
Company's exposure to interest, equity and foreign currency risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements in the form required by Regulation S-X, are set forth
below. The Company is not subject to the requirement to file supplementary
financial data specified by Item 302 of Regulation S-K.
- 20 -
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------------- --------------- ---------------
Revenues
Premiums and annuity considerations $ 44.8 $ 45.1 $ 203.3
Net investment income 287.7 365.0 455.9
Net realized investment gains (losses) (19.9) 2.3 8.4
Fee and other income 297.8 217.5 179.1
--------------- --------------- ---------------
Total revenues 610.4 629.9 846.7
--------------- --------------- ---------------
Benefits and expenses
Policyowner benefits 338.3 334.9 588.1
Other operating expenses 164.9 101.1 100.0
Amortization of deferred policy acquisition costs 123.8 67.8 88.8
--------------- --------------- ---------------
Total benefits and expenses 627.0 503.8 776.9
--------------- --------------- ---------------
Income (loss) from operations (16.6) 126.1 69.8
Interest expense 44.7 43.3 44.9
--------------- --------------- ---------------
Income (loss) before income tax expense and discontinued
operations (61.3) 82.8 24.9
--------------- --------------- ---------------
Income tax expense (benefit):
Federal (61.7) 28.8 10.9
State (2.1) 0.3 (0.1)
--------------- --------------- ---------------
Income tax expense (benefit) (63.8) 29.1 10.8
--------------- --------------- ---------------
Net income from continuing operations 2.5 53.7 14.1
Net loss on disposal of subsidiaries, after tax - (12.3) -
Discontinued operations - 1.0 0.1
--------------- --------------- ---------------
Net income $ 2.5 $ 42.4 $ 14.2
=============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
21
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(in millions except per share data)
December 31, 2000 and 1999
ASSETS 2000 1999
---------------- ----------------
Investments
Available-for-sale fixed maturities at fair value (amortized cost
of $2,454.5 and $2,685.4 in 2000 and 1999, respectively) $ 2,501.4 $ 2,677.3
Trading fixed maturities at fair value (amortized cost of $635.5 and
$1.0 in 2000 and 1999, respectively) 648.2 1.0
Held-to-maturity fixed maturities at amortized cost 600.0 -
Short-term investments 112.1 177.2
Mortgage loans 846.4 931.4
Real estate 77.7 95.1
Policy loans 41.5 40.7
Other invested assets 74.6 67.9
---------------- ----------------
Total investments 4,901.9 3,990.6
Cash and cash equivalents 390.0 550.3
Accrued investment income 64.9 50.5
Deferred policy acquisition costs 762.0 686.3
Outstanding premiums 3.0 2.7
Other assets 61.7 81.2
Separate account assets 17,874.2 16,123.3
---------------- ----------------
Total assets $ 24,057.7 $ 21,484.9
================ ================
LIABILITIES
Future contract and policy benefits $ 714.7 $ 729.3
Contractholder deposit funds and other policy liabilities 3,313.0 3,144.8
Unearned revenue 4.5 7.1
Accrued expenses and taxes 52.7 98.8
Deferred federal income taxes 41.4 77.7
Long-term debt payable to affiliates 565.0 565.0
Partnership Capital Securities 607.8 -
Other liabilities 123.2 67.7
Separate account liabilities 17,874.2 16,123.3
---------------- ----------------
Total liabilities 23,296.5 20,813.7
---------------- ----------------
Commitments and contingencies - Note 15
STOCKHOLDER'S EQUITY
Common stock, $1,000 par value - 10,000 shares authorized; 6,437 and
5,900 shares issued and outstanding in 2000 and 1999, respectively $ 6.4 $ 5.9
Additional paid-in capital 264.9 199.4
Accumulated other comprehensive income 38.6 7.1
Retained earnings 451.3 458.8
---------------- ----------------
Total stockholder's equity 761.2 671.2
---------------- ----------------
Total liabilities and stockholder's equity $ 24,057.7 $ 21,484.9
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
22
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
For the years ended December 31, 2000, 1999, and 1998
2000 1999 1998
Net income $ 2.5 $ 42.4 $ 14.2
------------- ------------- -------------
Other comprehensive income
Net unrealized holding gains (losses) on available-for-sale
securities, net of tax 31.4 (68.6) (4.3)
Other 0.1 (0.2) -
------------- ------------- --------------
31.5 (68.8) (4.3)
------------- ------------- --------------
Comprehensive income $ 34.0 $ (26.4) $ 9.9
============= ============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in millions)
For the years ended December 31, 2000, 1999, and 1998
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
CAPITAL INCOME EARNINGS EQUITY
--------------- --------------- ----------------- -------------- ----------------
Balance at December 31, 1997 $ 5.9 $ 199.4 $ 80.2 $ 532.2 $ 817.7
Net income 14.2 14.2
Other comprehensive income (4.3) (4.3)
Dividends to stockholder (50.0) (50.0)
--------------- --------------- ----------------- -------------- ----------------
Balance at December 31, 1998 5.9 199.4 75.9 496.4 777.6
Net income 42.4 42.4
Other comprehensive income (68.8) (68.8)
Dividends to stockholder (80.0) (80.0)
--------------- --------------- ----------------- -------------- ----------------
Balance at December 31, 1999 5.9 199.4 7.1 458.8 671.2
Net income 2.5 2.5
Other comprehensive income 31.5 31.5
Common shares issued 0.5 0.5
Additional paid-in-capital 65.5 65.5
Dividends to stockholder (10.0) (10.0)
--------------- --------------- ----------------- -------------- ----------------
Balance at December 31, 2000 $ 6.4 $ 264.9 $ 38.6 $ 451.3 $ 761.2
=============== =============== ================= ============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------- ---------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 2.5 $ 53.7 $ 14.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discount and premiums (0.8) (0.5) 0.2
Depreciation and amortization 2.8 3.7 2.2
Net realized (gains) losses on investments 19.9 (2.3) (8.4)
Net unrealized gains on trading fixed maturities (12.7) - -
Interest credited to contractholder deposits 195.5 216.4 238.7
Deferred federal income taxes (53.1) 14.5 (8.6)
Cash dividends from subsidiaries - 19.3 -
Changes in assets and liabilities:
Deferred acquisition costs (83.0) (88.4) 208.7
Accrued investment income (5.7) 11.4 31.1
Other assets 15.0 (75.3) 78.5
Future contract and policy benefits (14.5) (7.5) (1,124.0)
Other, net 38.7 72.3 896.6
---------------- ---------------- -------------
Net cash provided by operating activities 104.6 217.3 329.1
---------------- ---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and repayments of:
Available-for-sale fixed maturities 1,001.9 1,240.9 1,665.6
Trading fixed maturities 186.9 - -
Subsidiaries - 57.5 0.6
Other invested assets - - 0.9
Mortgage loans 208.5 385.7 316.9
Real estate 36.0 2.8 6.0
Purchases of:
Available-for-sale fixed maturities (738.3) (615.2) (1,346.7)
Trading fixed maturities (821.3) - -
Equity securities - - (0.2)
Other invested assets (2.2) (7.4) (11.4)
Mortgage loans (121.9) (344.9) (123.0)
Real estate (15.0) (1.6) (1.1)
Changes in other investing activities, net 2.8 3.1 (14.4)
Net change in policy loans (0.8) 1.9 (1.6)
Net change in short-term investments 34.9 155.9 (38.2)
---------------- ---------------- -------------
Net cash provided by (used in) investing activities (228.5) 878.7 453.4
---------------- ---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to contractholder deposit funds 1,962.3 1,536.8 910.8
Withdrawals from contractholder deposit funds (1,988.7) (2,267.2) (1,803.2)
Repayment of long-term debt and borrowed funds - - (110.1)
Dividends paid to stockholder (10.0) (80.0) (50.0)
---------------- ---------------- -------------
Net cash provided by (used in) financing activities (36.4) (810.4) (1,052.5)
---------------- ---------------- -------------
Net change in cash and cash equivalents (160.3) 285.6 (270.0)
Cash and cash equivalents, beginning of year 550.3 264.7 534.7
---------------- ---------------- -------------
Cash and cash equivalents, end of year $ 390.0 $ 550.3 $ 264.7
================ ================ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 43.3 $ 43.3 $ 40.5
Income taxes paid 63.7 5.5 50.6
NON-CASH TRANSACTION
On December 21, 2000, the Company's parent, Sun Life of Canada (U.S.) Holdings,
Inc., transferred its 100% ownership in Sun Life of Canada (U.S.) Holdings
General Partner, Inc. to the Company in exchange for 537 shares of the Company's
common stock totaling $537,000 plus $65,520,000 of additional paid in capital.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
25
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") was
incorporated in 1970 as a life insurance company domiciled in the state of
Delaware. As of December 31, 2000, the Company was licensed in 48 states
and certain other territories. Effective January 31, 2001, the Company
became authorized to do business in 49 states. In addition, the Company's
wholly-owned insurance subsidiary, Sun Life Insurance and Annuity Company
of New York, is licensed in New York. The Company and its subsidiaries are
engaged in the sale of individual and group variable life insurance,
individual fixed and variable annuities, group fixed and variable
annuities, group pension contracts, guaranteed investment contracts, group
life and disability insurance, and other asset management services.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc., which is an indirect wholly-owned subsidiary of Sun Life
Assurance Company of Canada. Sun Life Assurance Company of Canada is a life
insurance company domiciled in Canada which reorganized from a mutual life
insurance company to a stock life insurance company on March 22, 2000. As a
result of the demutualization, a new holding company, Sun Life Financial
Services of Canada Inc. ("SLC"), is now the ultimate parent of Sun Life
Assurance Company of Canada and the Company.
BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
stockholder-owned life insurance companies.
For the year ended December 31, 1999, the Company filed its Annual Report
on Form 10-K using audited statutory financial statements prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department of the State of Delaware, which is a comprehensive
basis of accounting other than GAAP. During 2000 the Company changed its
basis of accounting to GAAP and has restated the financial statements for
the prior years ended December 31, 1999 and 1998 to conform with GAAP. See
Note 13 for a reconciliation of statutory surplus to GAAP equity and
statutory net income to GAAP net income.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. The Company owns all of the outstanding shares of Sun
Life Insurance and Annuity Company of New York, Sun Life of Canada (U.S.)
Distributors, Inc., Sun Life Financial Services Limited, Sun Benefit
Services Company, Inc., Sun Capital Advisers, Inc., Sun Life Finance
Corporation, Sun Financial Group Advisers, Inc., Sun Life of Canada (U.S.)
SPE 97-1, Inc., Sun Life of Canada (U.S.) Holdings General Partner, Inc.,
and Clarendon Insurance Agency, Inc. The results are also consolidated with
Sun Life of Canada Funding, LLC, which is owned by a trust sponsored by the
Company and Sun Life of Canada (U.S.) Limited Partnership I, for which
Sun Life of Canada (U.S.) Holdings General Partner, Inc. is the sole
general partner. All significant intercompany transactions have been
eliminated in consolidation.
26
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Sun Life Insurance and Annuity Company of New York is engaged in the sale
of individual fixed and variable annuity contracts and group life and
disability insurance contracts in its state of domicile, New York. Sun Life
of Canada (U.S.) Distributors, Inc. is a registered investment adviser and
broker-dealer. Sun Life Financial Services Limited serves as the marketing
administrator for the distribution of the offshore products of Sun Life
Assurance Company of Canada (Bermuda), an affiliate. Sun Capital Advisers,
Inc. is a registered investment adviser. Sun Life of Canada (U.S.) SPE 97-1
was organized for the purpose of engaging in activities incidental to
securitizing mortgage loans. Sun Life of Canada (U.S.) Holdings General
Partner, Inc. is the sole general partner of Sun Life of Canada (U.S.)
Limited Partnership I. Clarendon Insurance Agency, Inc. is a registered
broker-dealer that acts as the general distributor of certain annuity
and life insurance contracts issued by the Company and its affiliates.
Sun Benefit Services Company, Inc., Sun Life Finance Corporation and
Sun Financial Group Advisers, Inc. are currently inactive. Sun Life of
Canada Funding, LLC. was organized for the purpose of engaging in
activities incidental to establishing the new guaranteed investment
products of the Company. Sun Life of Canada (U.S.) Limited Partnership I
was established to purchase subordinated debentures issued by the
Company's parent, Sun Life of Canada (U.S.) Holdings, Inc., and to issue
Partnership Capital Securities to an affiliated business trust, Sun Life
of Canada (U.S.) Capital Trust I.
In June 2000, the Company sold Sun Life Information Services Ireland,
Limited to Sun Life Assurance Company of Canada. Sun Life Information
Services Ireland, Limited provides information systems development services
to Sun Life Assurance Company of Canada and its subsidiaries.
During 1999, the Company sold two of its subsidiaries, Massachusetts
Casualty Insurance Company ("MCIC") (sold February 1999) and New London
Trust F.S.B. ("NLT") (sold October 1999). MCIC is a life insurance company
that issues only individual disability income policies. NLT is a federally
chartered savings bank, which grants commercial, residential real estate
and installment loans. The results of operations of MCIC and NLT are
reported as discontinued operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The most significant
estimates are those used in determining deferred policy acquisition costs,
investment allowances and the liabilities for future policyholder benefits.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2000 presentation.
FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including cash and cash
equivalents, investments such as fixed maturities, mortgage loans and
equity securities, off balance sheet financial instruments, debt, loan
commitments and financial guarantees. These instruments involve credit risk
and also may be subject to risk of loss due to interest rate fluctuation.
The Company evaluates and monitors each financial instrument individually
and, when appropriate, obtains collateral or other security to minimize
losses. Financial instruments are more fully described in Note 6.
27
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
CASH AND CASH EQUIVALENTS
Cash and cash equivalents primarily include cash, commercial paper, money
market investments, and short-term bank participations. All such
investments have maturities of three months or less and are considered cash
equivalents for purposes of reporting cash flows.
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." At the time of purchase, fixed maturity
securities are classified based on intent, as held-to-maturity, trading, or
available-for-sale. In order for the security to be classified as held-to-
maturity, the Company must have positive intent and ability to hold the
securities to maturity. Securities held-to-maturity are stated at cost
adjusted for amortization of premiums, and accretion of discounts.
Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading. Securities that do not
meet this criterion are classified as available-for-sale. Available-for-
sale securities are carried at aggregate fair value with changes in
unrealized gains or losses reported net of policyholder related amounts and
of deferred income taxes in a separate component of other comprehensive
income. Trading securities are carried at aggregate fair value with changes
in unrealized gains or losses reported as a component of net investment
income. Fair values for publicly traded securities are obtained from
external market quotations. For privately placed fixed maturities, fair
values are estimated by taking into account prices for publicly traded
securities of similar credit risk, maturities repayment and liquidity
characteristics. All security transactions are recorded on a trade date
basis. The Company's accounting policy for impairment requires recognition
of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, for securities
expected to be sold, an other than temporary impairment charge is
recognized if the Company does not expect the fair value of a security to
recover to cost or amortized cost prior to the expected date of sale. Once
an impairment charge has been recorded, the Company then continues to
review the other than temporarily impaired securities for additional
impairment, if necessary.
Mortgage loans are stated at unpaid principal balances, net of provisions
for estimated losses. Mortgage loans acquired at a premium or discount are
carried at amortized values net of provisions for estimated losses.
Mortgage loans, which include primarily commercial first mortgages, are
diversified by property type and geographic area throughout the United
States. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the properties' value at the time that
the original loan is made.
28
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
A loan is recognized as impaired when it is probable that the principal or
interest is not collectible in accordance with the contractual terms of the
loan. Measurement of impairment is based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at
the loan's observable market price. A specific valuation allowance is
established if the fair value of the impaired loan is less than the
recorded amount. Loans are also charged against the allowance when
determined to be uncollectible. The allowance is based on a continuing
review of the loan portfolio, past loss experience and current economic
conditions, which may affect the borrower's ability to pay. While
management believes that it uses the best information available to
establish the allowance, future adjustments to the allowance may become
necessary if economic conditions differ from the assumptions used in making
the evaluation.
Real estate investments are held for the production of income or held-for-
sale. Real estate investments held for the production of income are carried
at the lower of cost adjusted for accumulated depreciation or fair value.
Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property,
generally 40 to 50 years. Real estate investments held-for-sale are
primarily acquired through foreclosure of mortgage loans. The cost of real
estate that has been acquired through foreclosure is the estimated fair
value less estimated costs to dispose at the time of foreclosure. Real
estate investments are diversified by property type and geographic area
throughout the United States.
Policy loans are carried at the amount of outstanding principal balance not
in excess of net cash surrender values of the related insurance policies.
Other invested assets consist primarily of leveraged leases and tax credit
partnerships.
The Company uses derivative financial instruments including swaps and
options as a means of hedging exposure to interest rate, currency and
equity price risk.
Investment income is recognized on an accrual basis. Realized gains and
losses on the sales of investments are recognized in operations at the date
of sale and are determined using the specific cost identification method.
When an impairment of a specific investment or a group of investments is
determined to be other than temporary, a realized investment loss is
recorded. Changes in the provision for estimated losses on mortgage loans
and real estate are included in net realized investment gains and losses.
Interest income on loans is recorded on the accrual basis. Loans are placed
in a non-accrual status when management believes that the borrower's
financial condition, after giving consideration to economic and business
conditions and collection efforts, is such that collection of principal and
interest is doubtful. When a loan is placed in non-accrual status, all
interest previously accrued is reversed against current period interest
income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to principal and interest, have
performed on a sustained basis for a reasonable period of time, and when,
in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
29
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting and other costs,
which vary with and are primarily related to the production of new
business. Acquisition costs related to investment-type contracts, primarily
deferred annuity and guaranteed investment contracts, and universal and
variable life products are deferred and amortized with interest in
proportion to the present value of estimated gross profits to be realized
over the estimated lives of the contracts. Estimated gross profits are
composed of net investment income, net realized investment gains and
losses, life and variable annuity fees, surrender charges and direct
variable administrative expenses. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of
current or future gross profits to be realized from this group of products,
including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance
products are deferred and amortized; generally in proportion to the ratio
of annual revenue to the estimated total revenues over the contract periods
based upon the same assumptions used in estimating the liability for future
policy benefits. Deferred acquisition costs for each life product are
reviewed to determine if they are recoverable from future income, including
investment income. If such costs are determined to be unrecoverable, they
are expensed at the time of determination. Although realization of deferred
policy acquisition costs is not assured, the Company believes it is more
likely than not that all of these costs will be realized. The amount of
deferred policy acquisition costs considered realizable, however, could be
reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any
of the estimates discussed above are revised.
OTHER ASSETS
Property, equipment, leasehold improvements and capitalized software costs
which are included in other assets are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided
using the straight-line or accelerated method over the estimated useful
lives of the related assets, which generally range from 3 to 30 years.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the term of the leases or the estimated useful
life of the improvements. Reinsurance receivables from reinsurance ceded
are also included in other assets.
30
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. Future policy benefits
for individual life insurance and annuity policies are computed using
interest rates ranging from 4.5% to 5.5% for life insurance and 6.0% to
11.3% for annuities. The liabilities associated with traditional life
insurance, annuity and disability insurance products are computed using the
net level premium method based on assumptions about future investment
yields, mortality, morbidity and persistency. The assumptions used are
based upon both the Company and its affiliates' experience and industry
standards. Estimated liabilities are established for group life and health
policies that contain experience-rating provisions.
Contractholder deposit funds consist of policy values that accrue to the
holders of universal life-type contracts and investment-related products
such as deferred annuities and guaranteed investment contracts. The
liabilities are determined using the retrospective deposit method and
consist of net deposits and investment earnings less administrative
charges. The liability is before the deduction of any applicable surrender
charges.
Other policy liabilities include liabilities for policy and contract
claims. These amounts consist of the estimated amount payable for claims
reported but not yet settled and an estimate of claims incurred but not
reported. The amount reported is based upon historical experience, adjusted
for trends and current circumstances. Management believes that the recorded
liability is sufficient to provide for the associated claims adjustment
expenses. Revisions of these estimates are included in operations in the
year such refinements are made.
REVENUE AND EXPENSES
Premiums for traditional individual life and annuity products are
considered revenue when due. Premiums related to group life and group
disability insurance are recognized as revenue pro-rata over the contract
period. The unexpired portion of these premiums is recorded as unearned
premiums. Revenue from universal life-type products and investment-related
products includes charges for cost of insurance (mortality), initiation and
administration of the policy and surrender charges. Revenue is recognized
when the charges are assessed except that any portion of an assessment that
relates to services to be provided in future years is deferred and
recognized over the period during which the services are provided.
Benefits and expenses, other than deferred policy acquisition costs,
related to traditional life, annuity, and disability contracts, including
group policies, are recognized when incurred in a manner designed to match
them with related premium revenue and spread income recognition over
expected policy lives. For universal life-type and investment-type
contracts, benefits include interest credited to policyholders' accounts
and death benefits in excess of account values, which are recognized as
incurred.
31
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
INCOME TAXES
The Company and its subsidiaries participate in a consolidated federal
income tax return with Sun Life Assurance Company of Canada - U.S.
Operations Holdings, Inc. and other affiliates. Deferred income taxes are
generally recognized when assets and liabilities have different values for
financial statement and tax reporting purposes, and for other temporary
taxable and deductible differences as defined by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". These
differences result primarily from policy reserves, policy acquisition
expenses and unrealized gains or losses on investments, and are generally
not chargeable with liabilities that arise from any other business of the
Company.
SEPARATE ACCOUNTS
The Company has established separate accounts applicable to various classes
of contracts providing for variable benefits. Separate account assets are
subject to general account claims only to the extent the value of such
assets exceeds the separate account liabilities. Contracts for which funds
are invested in separate accounts include variable life insurance and
individual and group qualified and non-qualified variable annuity
contracts. Assets and liabilities of the separate accounts, representing
net deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, are shown as separate
captions in the financial statements. Assets held in the separate accounts
are carried at market value and the investment risk of such securities is
retained by the contractholder.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities including fair value hedges and cash flow hedges.
All derivatives, whether designated in hedging relationships or not, will
be required to be recorded on the balance sheet at fair value. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No.
133 for all fiscal quarters until fiscal years beginning after June 15,
2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amended SFAS
No. 133. SFAS No. 138 amended SFAS No. 133 so that for interest rate
hedges, a company may designate as the hedged risk, the risk of changes
only in a benchmark interest rate. Also, credit risk is newly defined as
the company-specific spread over the benchmark interest rate and may be
hedged separately from, or in combination with, the benchmark interest
rate.
32
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Initial application of SFAS No. 133, as amended, for the Company will begin
January 1, 2001. The Company estimates that at January 1, 2001, it will
record $8,600,000 as a cumulative transition adjustment that will increase
earnings relating to derivatives not designated as hedges prior to adoption
of SFAS 133.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP provides guidance for determining whether costs of software developed
or obtained for internal use should be capitalized or expensed as incurred.
In the past, the Company has expensed such costs as they were incurred. The
adoption of SOP 98-1, resulted in an increase in pre-tax income of
$6,232,000 for the year ended December 31, 1999.
In July 2000, the Emerging Issues Task Force (EITF) reached consensus on
Issue No. 99-20, "Recognition of Interest Income and Impairment on Certain
Investments". This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective
basis and to evaluate these securities for an other-than-temporary decline
in value. This consensus is effective for financial statements with fiscal
quarters beginning after December 15, 2000. While the Company is currently
in the process of quantifying the impact of EITF No. 99-20, the consensus
provisions are not expected to have a material impact on the Company's
financial condition or results of operations.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which
replaces SFAS No. 125, "Accounting for Transfers and Services of Financial
Assets and Extinguishment of Liabilities". This standard revises the
methods for accounting for securitizations and other transfers of financial
assets and collateral as outlined in SFAS No. 125, and requires certain
additional disclosures. For transfers and servicing of financial assets and
Extinguishment of liabilities, this standard will be effective for the
Company's June 30, 2001 unaudited financial statements. However, for
disclosures regarding securitizations and collateral, as well as
recognition and reclassification of collateral, this standard will be
effective for the Company's December 31, 2000 financial statements. The
Company is currently evaluating the financial statement impact of the
adoption of this standard, however, it does not expect the adoption of this
standard to have a material effect on its financial position or results of
operations.
33
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES
Effective October 1, 1998, the Company terminated a reinsurance agreement
with Sun Life Assurance Company of Canada resulting in a decrease in income
from operations to the Company of approximately $64,000,000 in 1998.
On February 11, 1999, two notes previously issued to the Company by
Massachusetts Financial Services Company ("MFS"), an affiliate, were
combined into a new note with a February 11, 2000 maturity date. The
original notes were each issued for $110,000,000. One note was issued on
February 11, 1998 at an interest rate of 6.0% and a due date of February
11, 1999. The other note was issued on December 22, 1998 at an interest
rate of 5.55% and a due date of February 11, 1999. These two notes and an
additional $10,000,000 were combined into a new note of $230,000,000 with a
floating interest rate based on the six-month LIBOR rate plus 25 basis
points. The $230,000,000 note was repaid to the Company on December
21,1999.
On December 31, 1998, the Company had an additional $20,000,000 investment
in notes issued by MFS, scheduled to mature in 2000. These notes were
repaid to the Company on December 21, 1999.
On January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
On November 1, 2000, MFS repaid $100,000,000 of these notes.
On February 5, 1999, the Company sold MCIC to an unaffiliated company. The
net proceeds of this sale were $33,965,000. The Company realized a loss of
$25,465,000 net of a $14,482,000 tax benefit.
On October 29, 1999, the Company sold NLT to an unaffiliated company for
$30,254,000. The Company realized a gain of $13,170,000 after taxes of
$10,186,000.
On December 22, 1999, the Company acquired twenty-eight mortgages from Sun
Life Assurance Company of Canada for a total cost of $118,092,000.
On June 27, 2000, the Company sold Sun Life Information Services Ireland,
Limited to Sun Life Assurance Company of Canada. The Company realized a
pretax gain of $451,000 on the sale.
On December 21, 2000, the Company's parent, Sun Life of Canada (U.S.)
Holdings, Inc., transferred its ownership in all 200 shares issued and
outstanding of Sun Life of Canada (U.S.) Holdings General Partner, Inc. to
the Company in exchange for 537 shares of the Company's common stock
totaling $537,000 plus $65,520,000 of additional paid in capital.
As a result of the acquisition of Sun Life of Canada (U.S.) Holdings
General Partner, Inc. on December 21, 2000, and its ownership interest in
Sun Life of Canada (U.S.) Limited Partnership I, the Company became the
owner of a $600,000,000 8.526% subordinated debenture due May 6, 2027
issued by the Company's parent, Sun Life of Canada (U.S.) Holdings, Inc.
The Company also assumed the liability of the partnership capital
securities issued to Sun Life of Canada (U.S.) Capital Trust I, a Delaware
business Trust sponsored by the Company's parent. Partnership capital
securities issued of $600,010,000 accrue interest at 8.526% and have no
scheduled maturity date. These partnership capital securities, which
represent the limited partner interest of Sun Life (U.S.) Limited
Partnership I, may be redeemed on or after May 6, 2027. The Company is
accounting for the acquisition of Sun Life of Canada (U.S.) General
Partner, Inc. using the purchase method of accounting. The attached
proforma statements of income for the years ended December 31, 2000 and
1999 illustrate the Company's results of operations as if the acquisition
of Sun Life of Canada (U.S.) Holdings General Partner, Inc. took place at
the beginning of the year, respectively.
34
Proforma Proforma
2000 1999
--------------- --------------
Revenues
Premiums and annuity considerations $ 44.8 $ 45.1
Net investment income 338.8 419.8
Net realized investment gains (losses) (19.9) 2.3
Fee and other income 297.9 217.5
--------------- --------------
Total revenues 661.6 684.7
--------------- --------------
Benefits and expenses
Policyowner benefits 338.3 334.9
Other operating expenses 164.9 101.1
Amortization of deferred policy acquisition costs 123.8 67.8
--------------- --------------
Total benefits and expenses 627.0 503.8
--------------- --------------
Income (loss) from operations 34.6 180.9
Interest expense 94.5 94.5
--------------- --------------
Income (loss) before income tax expense and discontinued
operations (59.9) 86.4
--------------- --------------
Income tax expense (benefit):
Federal (61.7) 30.0
State (2.1) 0.4
--------------- --------------
Income tax expense (benefit) (63.8) 30.4
--------------- --------------
Net income from continuing operations 3.9 56.0
Net loss on disposal of subsidiaries, after tax - (12.3)
Discontinued operations - 1.0
--------------- --------------
Net income $ 3.9 $ 44.7
=============== ==============
35
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)
Dividends in the amounts of $10,000,000, $80,000,000, and $50,000,000, were
declared and paid by the Company to its parent, Sun Life of Canada (U.S.)
Holdings, Inc. during 2000, 1999, and 1998, respectively. The Company and
its subsidiaries have management services agreements with Sun Life
Assurance Company of Canada which provide that Sun Life Assurance Company
of Canada will furnish, as requested, personnel as well as certain services
and facilities on a cost-reimbursement basis. Expenses under these
agreements amounted to approximately $31,857,416 in 2000, $30,745,000 in
1999, and $17,381,000 in 1998.
As more fully described in Note 7, the Company has been involved in several
reinsurance transactions with Sun Life Assurance Company of Canada.
The Company has accrued $4,259,000 for unpaid interest on surplus notes at
December 31, 2000 and 1999, respectively. The Company expensed $43,266,000,
$43,266,000, and $44,903,000 for interest on surplus notes and notes
payable for the years ended December 31, 2000, 1999 and 1998, respectively.
On December 21, 2000, the Company's parent, Sun Life of Canada (U.S.)
Holdings, Inc., transferred its $350,000,000 Sun Life Assurance Company of
Canada subordinated note to Sun Canada Financial Co., an affiliate, in the
form of additional capitalization. On the same day, Sun Canada Financial
Co. transferred its ownership in the Company's surplus notes totaling
$315,000,000 to Sun Life of Canada (U.S.) Holdings, Inc. in the form of a
dividend. As a result, the Company had $565,000,000 of surplus notes issued
to its parent, Sun Life of Canada (U.S.) Holdings Inc., as of December 31,
2000. The following table lists the details of the surplus notes
outstanding (in 000's):
MATURITY PRINCIPAL RATE
----------------------------------
Sun Life of Canada (U.S.) Holdings, Inc. 12/15/07 $150,000 6.625%
Sun Life of Canada (U.S.) Holdings, Inc. 12/15/15 150,000 7.250%
Sun Life of Canada (U.S.) Holdings, Inc. 12/15/15 7,500 6.125%
Sun Life of Canada (U.S.) Holdings, Inc. 12/15/07 7,500 5.750%
Sun Life of Canada (U.S.) Holdings, Inc. 11/06/27 250,000 8.625%
------------
Total $565,000
============
36
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of fixed maturities were as follows (in
000's):
DECEMBER 31, 2000
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
Available-for-sale fixed maturities:
United States treasury securities, U.S. Government
and agency securities $ 183,733 $ 8,286 $ (68) $ 191,951
States, provinces and political subdivisions 22,515 653 - 23,168
Mortgage-backed securities 123,113 2,132 (317) 124,928
Public utilities 286,744 12,805 (5,914) 293,635
Transportation 245,675 13,406 (3,821) 255,260
Finance 299,440 8,141 (5,761) 301,820
Corporate 1,293,302 52,597 (35,271) 1,310,628
------------------------------------------------------------
Total available-for-sale fixed maturities $ 2,454,522 $ 98,020 $ (51,152) $ 2,501,390
============================================================
Trading fixed maturities:
United States treasury securities, U.S. Government
and agency securities $ 500 $ 1 $ - $ 501
Mortgage-backed securities 18,281 556 (156) 18,681
Public utilities 30,918 1,293 (243) 31,968
Transportation 97,900 3,218 (266) 100,852
Finance 159,250 5,470 (348) 164,372
Corporate 328,662 9,116 (5,975) 331,803
------------------------------------------------------------
Total trading fixed securities $ 635,511 $ 19,654 $ (6,988) $ 648,177
============================================================
Held-to-maturity fixed maturities:
Sun Life of Canada (U.S.) Holdings, Inc.,
8.526% subordinated debt, due 2027 $ 600,000 $ - $ (53,888) $ 546,112
------------------------------------------------------------
Total held-to-maturity fixed maturities $ 600,000 $ - $ (53,888) $ 546,112
============================================================
DECEMBER 31, 1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
Available-for-sale fixed maturities:
United States treasury securities, U.S. Government
and agency securities $ 107,272 $ 2,104 $ (3,191) $ 106,185
States, provinces and political subdivisions 32,593 15 (161) 32,447
Mortgage-backed securities 98,903 1,225 (541) 99,587
Public utilities 360,672 7,954 (9,780) 358,846
Transportation 327,544 8,585 (4,258) 331,871
Finance 281,303 4,632 (6,935) 279,000
Corporate 1,477,105 22,851 (30,556) 1,469,400
------------------------------------------------------------
Total available-for-sale fixed maturities $ 2,685,392 $ 47,366 $ (55,422) $ 2,677,336
============================================================
Trading fixed maturities:
United States treasury securities, U.S. Government
and agency securities $ 1,000 $ 2 $ - $ 1,002
------------------------------------------------------------
Total trading fixed securities $ 1,000 $ 2 $ - $ 1,002
============================================================
37
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value by maturity periods for fixed
maturity investments are shown below (in 000's). Actual maturities may
differ from contractual maturities on mortgage-backed securities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties, or the Company may have the right to put or
sell the obligations back to the issuers.
DECEMBER 31, 2000
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------------------------------
Maturities of available-for-sale fixed securities:
Due in one year or less $ 190,837 $ 187,267
Due after one year through five years 949,281 959,260
Due after five years through ten years 537,068 563,360
Due after ten years 777,336 791,503
-------------------------------------
$ 2,454,522 $ 2,501,390
=====================================
Maturities of trading fixed securities:
Due in one year or less $ 500 $ 501
Due after one year through five years 186,541 190,300
Due after five years through ten years 266,573 270,476
Due after ten years 181,897 186,900
-------------------------------------
$ 635,511 $ 648,177
=====================================
Maturities of held-to-maturity securities:
Due after ten years $ 600,000 $ 546,112
=====================================
Gross gains of $9,056,000, $12,496,000 and $25,752,000 and gross losses of
$24,018,000, $7,646,000, and $1,439,000 were realized on the voluntary sale
of fixed maturities for the years ended December 31, 2000, 1999, and 1998,
respectively.
Fixed maturities with an amortized cost of approximately $2,991,000 and
$3,009,000 at December 31, 2000 and 1999 respectively, were on deposit with
Federal and State governmental authorities as required by law.
No fixed maturities have been pledged to collateralize various liabilities
at December 31, 2000 and 1999, respectively.
38
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3 INVESTMENTS (CONTINUED)
As of December 31, 2000 and 1999, 98% and 94%, respectively, of the
Company's fixed maturities were investment grade. Investment grade
securities are those that are rated "BBB" or better by nationally
recognized rating agencies. During 2000, the Company incurred realized
losses totalling $14,956,000 for other than temporary impairment of value
of some of its fixed maturities after determining that not all of the year
2000 unrealized losses are temporary in nature. Also in 2000, the Company
stopped accruing income on its holdings of an issuer that declared
bankruptcy. $243,000 of interest income on these holdings was not accrued.
All of the Company's securities were income producing for the years ended
December 31, 1999 and 1998.
MORTGAGE LOANS AND REAL ESTATE
The Company invests in commercial first mortgage loans and real estate
throughout the United States. Investments are diversified by property type
and geographic area. Mortgage loans are collateralized by the related
properties and generally are no more than 75% of the properties' value at
the time that the original loan is made. Real estate investments classified
as held-for-sale have been obtained primarily through foreclosure. The
carrying value of mortgage loans and real estate investments net of
applicable reserves and accumulated depreciation on real estate were as
follows (in 000's):
DECEMBER 31,
2000 1999
---------------------------------------
Total mortgage loans $ 846,439 $ 931,351
=======================================
Real estate:
Held-for-sale 7,483 7,804
Held for production of income 70,239 87,290
---------------------------------------
Total real estate $ 77,722 $ 95,094
=======================================
Accumulated depreciation on real estate was $14,879,000 and $18,529,000 at
December 31, 2000 and 1999, respectively.
39
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
The Company monitors the condition of the mortgage loans in its portfolio.
In those cases where mortgages have been restructured, mortgage loans'
values are impaired or mortgage loans' values are impaired but they are
performing, appropriate allowances for losses have been made. The Company
has restructured mortgage loans, impaired mortgage loans and impaired but
performing mortgage loans totaling $18,165,000 and $33,577,000 at December
31, 2000 and 1999, respectively, against which there are allowances for
losses of $4,675,000 and $7,750,000, respectively. During 2000, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $1,500,000.
The investment valuation allowances, which have been deducted in arriving
at investment carrying values as presented in the consolidated balance
sheets, were as follows (in 000's):
BALANCE AT BALANCE AT
JANUARY 1, ADDITIONS SUBTRACTIONS DECEMBER 31,
---------------------------------------------------------------
2000
Mortgage loans $ 7,750 $ 3,837 $ (6,912) $ 4,675
Real estate 1,723 - (1,723) -
1999
Mortgage loans $ 6,600 $ 4,045 $ (2,895) $ 7,750
Real estate 1,250 1,379 (906) 1,723
Mortgage loans and real estate investments comprise the following property
types and geographic regions (in 000's):
DECEMBER 31,
2000 1999
-------------------------------
Property Type:
Office building $ 328,976 $ 357,466
Residential 47,805 58,546
Retail 379,326 433,970
Industrial/warehouse 153,580 156,204
Other 19,149 29,732
Valuation allowances (4,675) (9,473)
-------------------------------
Total $ 924,161 $ 1,026,445
===============================
40
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
DECEMBER 31,
2000 1999
-------------------------------
Geographic region:
Arizona $ 19,809 $ 16,155
California 87,607 117,355
Colorado 8,636 13,019
Connecticut 38,401 25,229
Delaware 15,131 15,919
Florida 36,179 43,718
Georgia 46,895 52,178
Indiana 13,496 19,174
Kentucky 14,941 12,225
Maryland 20,849 10,826
Massachusetts 98,377 99,661
Michigan 45,948 69,545
Nevada 5,308 5,532
New Jersey 16,653 18,806
New York 69,529 65,107
North Carolina 11,009 10,111
Ohio 35,966 43,947
Pennsylvania 132,615 159,328
Tennessee 12,889 13,385
Texas 22,380 17,924
Utah 11,171 11,583
Virginia 20,911 21,731
Washington 60,560 68,657
All other 83,576 104,803
Valuation allowances (4,675) (9,473)
-------------------------------
Total $ 924,161 $ 1,026,445
===============================
41
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
At December 31, 2000, scheduled mortgage loan maturities were as follows
(000's):
2001 $ 81,373
2002 53,711
2003 31,245
2004 50,392
2005 89,651
Thereafter 540,067
-------------------
Total $ 846,439
===================
Actual maturities could differ from contractual maturities because
borrowers may have the right to prepay obligations with or without
prepayment penalties and loans may be refinanced. The Company has made
commitments of mortgage loans on real estate and other loans into the
future. The outstanding commitments for these mortgages amount to
$45,119,000 and $15,911,000 at December 31, 2000 and 1999, respectively.
During 2000, the Company sold commercial mortgage loans in a securitization
transaction. In the transaction, the Company retained servicing
responsibilities, a Class B and a Class I interest only certificate. The
Class B certificate is a subordinated interest. The Company receives annual
servicing fees, before expenses, of 0.1 percent of the outstanding balance
and rights to future cash flows arising after the investors in the
securitization trust have received the return for which they contracted.
The investors in the securitization trust have no recourse to the Company's
other assets for failure of debtors to pay when due. The value of the
Company's retained interest is subject to credit, and interest rate risk on
the transferred financial assets. The Company recognized a pretax gain of
$763,000 on the securitization transaction.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during the
year were as follows:
CLASS B CLASS I
Prepayment speed 0 0
Weighted average life in years 7.25 4.54
Expected credit losses 0 0
Residual cash flows discount rate 7.798 8.844
Treasury rate interpolated for average life 4.97 4.96
Spread over treasuries 2.83% 3.88%
Duration in years 5.201 3.611
42
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
Key economic assumptions and the sensitivity of the current fair value of
cash flows in those assumptions are as follows (in 000's):
COMMERCIAL MORTGAGES
CLASS B CLASS I
---------- ----------
Carrying amount of retained
interests $ 2,737 $ 1,634
Fair value of retained interests 2,875 1,716
Weighted average life in years 7.254 4.543
EXPECTED CREDIT LOSSES
Impact on fair value of .025% of adverse change 4 36
Impact on fair value of .05% of adverse change 8 73
RESIDUAL CASH FLOWS DISCOUNT RATE
Impact on fair value of .5% of adverse change 75 31
Impact on fair value of 1% of adverse change 150 62
The total principal amount of the commercial mortgage loans was $32,035,000
at December 31, 2000, none of which were 60 days or more past due. There
were no net credit losses incurred relating to the commercial mortgage
loans at the date of the securitization and at December 31, 2000.
SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this program. There
were no securities out on loan at December 31, 2000 and 1999, respectively.
The Company requires collateral at 102% of the value of securities loaned.
As of December 31, 2000 and 1999, the Company had received no collateral
for securities on loan. The income resulting from this program was $48,000,
$37,000 and $135,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
LEVERAGED LEASES
The Company is a lessor in a leverage lease agreement entered into on
October 21, 1994, under which equipment having an estimated economic life
of 25-40 years was leased for a term of 9.78 years. The Company's equity
investment represented 22.9% of the purchase price of the equipment. The
balance of the purchase price was furnished by third-party long-term debt
financing, collateralized by the equipment and non-recourse to the Company.
At the end of the lease term, the master Lessee may exercise a fixed price
purchase option to purchase the equipment. The Company's net investment in
leveraged leases is composed of the following elements (in 000's):
43
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
YEAR ENDED DECEMBER 31,
2000 1999
--------------- ---------------
Lease contracts receivable $ 57,623 $ 69,766
Less: non-recourse debt (57,607) (69,749)
--------------- ---------------
Net Receivable 16 17
Estimated residual value of leased assets 41,150 41,150
Less: unearned and deferred income (6,718) (7,808)
--------------- ---------------
Investment in leverage lease 34,448 33,359
Less: fees (88) (113)
--------------- ---------------
Net investment in leverage leases $ 34,360 $ 33,246
=============== ===============
DERIVATIVES
The Company uses derivative financial instruments for risk management
purposes to hedge against specific interest rate risk, to alter investment
rate exposures arising from mismatches between assets and liabilities, and
to minimize the Company's exposure to fluctuations in interest rates,
foreign currency exchange rates and general market conditions. The
derivative financial instruments used by the Company include swaps and
options. The Company does not hold or issue any derivative instruments for
trading purposes.
SWAPS
Swap agreements are contracts with other parties to exchange at specified
intervals, the difference between fixed and floating rate interest amounts
based upon a notional principal amount. No cash is exchanged at the outset
of the contract and no principal payments are made by either party. A
single net payment is usually made by one counter-party at each interest
payment date. The Company enters into interest rate swap agreements to
hedge against exposure to interest rate fluctuations. Because the
underlying principal is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged. The net
payable/receivable is recognized over the life of the swap contract as an
adjustment to net investment income.
In 2000, the Company launched a new guaranteed investment contract program.
The purpose of the program was to increase market place and interest for
these products. Each deal is highly individualized but typically involves
the issuance of foreign currency denominated contracts backed by cross
currency swaps or equity linked cross currency swaps. The combination of
these swaps with interest rate swaps allows the Company to lock in U.S.
dollar fixed rate payments for the life of the note.
The net increase (decrease) in net investment income related to interest
rate swaps was $166,000, ($2,513,000) and ($1,686,000) for the years ended
December 31, 2000, 1999 and 1998, respectively. The Company did not employ
hedge accounting treatment in 2000, 1999 and 1998. As a result, the
unrealized gains and losses were realized immediately in those years and
the deferred balances as of the year ended December 31, 1997 were realized
during 1998.
44
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
3. INVESTMENTS (CONTINUED):
The Company recognized gross realized gains on swaps of $3,924,000,
$4,735,000, and $6,568,000 in 2000, 1999, and 1998, respectively, as well
as gross realized losses of $1,156,000, $1,789,000, and $20,538,000 during
2000, 1999, and 1998, respectively.
The Company's primary risks associated with these transactions are exposure
to potential credit loss in the event of non-performance by counter-parties
and market risk. The Company regularly assesses the strength of the
counter-parties and generally enters into transactions with counter-parties
rated "A" or better by nationally recognized ratings agencies. Management
believes that the risk of incurring losses related to credit risk is
remote. As of December 31, 2000 and 1999, the Company's derivatives had no
significant concentration of credit risk. The Company does not require
collateral or other security to support derivative financial instruments
with credit risk.
OPTIONS
Options are legal contracts that give the contractholder the right to buy
or sell a specific amount of the underlying interest at a strike price upon
exercise of the option. Cash is exchanged to purchase the option and
through the exercise date, the holder can elect to exercise the option or
allow it to expire. The Company also utilizes options to hedge against
stock market exposure inherent in the mortality and expense risk charges
and guaranteed minimum death benefit features of the Company's variable
annuities.
The Company's underlying notional or principal amounts associated with open
derivatives positions were as follows (in 000's):
OUTSTANDING AT
DECEMBER 31, 2000
---------------------------------
NOTIONAL
PRINCIPAL UNREALIZED GAIN
AMOUNTS (LOSS)
Interest rate swaps $1,308,496 $ (40,432)
Currency swaps 370,554 1,839
Equity swaps 162,576 (16,883)
---------------------------------
Total $1,841,626 $ (55,476)
=================================
OUTSTANDING AT
DECEMBER 31, 1999
---------------------------------
NOTIONAL
PRINCIPAL UNREALIZED GAIN
AMOUNTS (LOSS)
Interest rate swaps $ 368,000 $ 9,522
Currency swaps 1,700 295
---------------------------------
Total $ 369,700 $ 9,817
=================================
At December 31, 2000, the unrealized gains (losses) on derivatives are included
with other liabilities on the financial statements. The unrealized gains
(losses) on derivatives are included with other assets at December 31, 1999.
45
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
4. NET REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains (losses) consisted of the following (in
000's):
2000 1999 1998
---------------------------------------------
Fixed maturities $ (14,962) $ 4,846 $ 24,268
Mortgage and other loans 2,057 1,981 36
Real estate 5,211 (742) 499
Derivative instruments 2,768 2,945 (13,970)
Short term investments (22) 4 24
Write-down of fixed maturities (14,956) (6,689) (2,481)
---------------------------------------------
Total $ (19,904) $ 2,345 $ 8,376
=============================================
5. NET INVESTMENT INCOME
Net investment income consisted of the following (in 000's):
2000 1999 1998
---------------------------------------------
Fixed maturities $ 265,608 $ 254,390 $ 295,167
Equity securities - (33) 37
Mortgage and other loans 77,807 90,638 103,804
Real estate 8,868 6,829 7,844
Policy loans 3,047 3,172 2,934
Derivatives (66,773) 17,671 (11,880)
Income on funds withheld under reinsurance - - 67,045
Other 4,664 (1,416) (817)
---------------------------------------------
Gross investment income 293,221 371,251 464,134
Less: Investment expenses 5,510 6,273 8,277
---------------------------------------------
Net investment income $ 287,711 $ 364,978 $ 455,857
=============================================
46
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 "Disclosure about Fair Value of Financial Instruments" excludes
certain insurance liabilities and other non-financial instruments from its
disclosure requirements. The fair value amounts presented herein do not
include the expected interest margin (interest earnings over interest
credited) to be earned in the future on investment-type products or other
intangible items. Accordingly, the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value
information presented herein.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2000 and 1999 (in
000's):
DECEMBER 31, 2000 DECEMBER 31, 1999
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 390,049 $ 390,049 $ 550,265 $ 550,265
Fixed maturities 3,749,567 3,695,679 2,678,340 2,678,340
Short-term investments 112,077 112,077 177,213 177,213
Mortgages 846,439 886,384 931,351 933,725
Derivatives (55,476) (55,476) 9,817 9,817
Policy loans 41,459 41,459 40,660 40,660
Other invested assets 74,551 74,551 67,938 67,938
Financial liabilities:
Guaranteed investment contracts $ 1,002,865 $ 998,544 $ 677,265 $ 665,830
Contractholder deposit funds 2,129,758 2,090,197 2,279,413 2,213,896
Fixed annuity contracts 102,637 98,337 112,794 105,845
Interest sensitive life insurance 114,198 116,900 116,999 119,659
Long-term debt 565,000 510,962 565,000 529,212
Partnership capital securities 607,826 553,938 - -
47
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The fair values of cash and cash equivalents are estimated to be cost plus
accrued interest which approximates fair value. The fair values of
short-term bonds are estimated to be the amortized cost. The fair values of
publicly traded fixed maturities are based upon market prices or dealer
quotes. For privately placed fixed maturities, fair values are estimated by
taking into account prices for publicly traded securities of similar credit
risk, maturity, repayment and liquidity characteristics. The fair values of
mortgage and other loans are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Policy loans are stated at unpaid principal balances, which approximate fair
value.
The fair values of the Company's general account insurance reserves and
contractholder deposits under investment-type contracts (insurance, annuity
and pension contracts that do not involve mortality or morbidity risks) are
estimated using discounted cash flow analyses or surrender values based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for all contracts being valued. Those
contracts that are deemed to have short-term guarantees have a carrying
amount equal to the estimated market value.
The fair values of other deposits with future maturity dates are estimated
using discounted cash flows.
The fair value of notes payable and other borrowings are estimated using
discounted cash flow analyses based upon the Company's current incremental
borrowing rates for similar types of borrowings. The carrying amount of all
other assets is assumed to approximate fair value.
7. REINSURANCE
INDIVIDUAL INSURANCE
The Company had several agreements with Sun Life Assurance Company of
Canada, which provided that Sun Life Assurance Company of Canada would
reinsure the mortality risk and certain ancillary benefits under various
individual life insurance contracts sold by the Company. Under these
agreements, basic death benefits and supplementary benefits were reinsured
on a yearly renewable term basis and coinsurance basis, respectively. The
effective dates of these agreements were June 1, 1982, November 1, 1986, and
January 1, 1987. These agreements were terminated on December 31, 2000.
Effective January 1, 1991, the Company entered into an agreement with Sun
Life Assurance Company of Canada under which certain individual life
insurance contracts issued by Sun Life Assurance Company of Canada were
reinsured by the Company on a 90% coinsurance basis. Also effective January
1, 1991, the Company entered into an agreement with Sun Life Assurance
Company of Canada which provides that Sun Life Assurance Company of Canada
will reinsure the mortality risks in excess of $500,000 per policy for the
individual life insurance contracts assumed by the Company in the
reinsurance agreement described above. Such death benefits are reinsured on
a yearly renewable term basis. These two agreements were terminated
effective October 1, 1998.
48
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
7. REINSURANCE (CONTINUED):
The Company had an agreement with an unrelated company which provided
reinsurance of a small block of individual life insurance contracts on a
modified coinsurance basis. This agreement was terminated on
December 31, 2000.
The Company has agreements with Sun Life Assurance Company of Canada and
with other unrelated companies which provide for reinsurance of certain
mortality risks associated with the individual and corporate owned life
insurance (COLI) contracts. These amounts are reinsured on a yearly
renewable term basis.
GROUP INSURANCE
The Company has an agreement with Sun Life Assurance Company of Canada
whereby Sun Life Assurance Company of Canada reinsures the mortality risks
of the group life insurance contracts. Under this agreement, certain death
benefits are reinsured on a yearly renewable term basis.
The Company has an agreement with an unrelated company whereby the unrelated
company reinsures the morbidity risks of the group long-term disability
contracts. Under this agreement, certain long-term disability benefits are
reinsured on a yearly renewable term basis.
The effects of reinsurance were as follows (in 000's):
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------------------
Insurance premiums:
Direct $ 51,058 $ 54,662 $ 58,940
Assumed - - 159,787
Ceded 6,255 9,595 15,414
----------------------------------------------------
Net premiums $ 44,803 $ 45,067 $ 203,313
====================================================
Insurance and other individual policy benefits
and claims:
Direct $ 346,411 $ 342,284 $ 352,968
Assumed - - 248,664
Ceded 8,077 7,433 13,523
----------------------------------------------------
Net policy benefits and claims $ 338,334 $ 334,851 $ 588,109
====================================================
The Company is contingently liable for the portion of the policies reinsured
under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured
claim. Management believes that any liability from this contingency is
unlikely. However, to limit the possibility of such losses, the Company
evaluates the financial condition of its reinsurers and monitors
concentration of credit risk.
49
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
8. RETIREMENT PLANS:
PENSION PLAN
The Company and its subsidiaries participate with Sun Life Assurance Company
of Canada in a non-contributory defined benefit pension plan covering
essentially all employees. Benefits under all plans are based on years of
service and employees' average compensation. The Company's funding policies
for the pension plans are to contribute amounts which at least satisfy the
minimum amount required by the Employee Retirement Income Security Act of
1974 ("ERISA"); currently the plans are fully funded. Most pension plan
assets consist of separate accounts of Sun Life Assurance Company of Canada
or other insurance company contracts.
The following table sets forth the change in the pension plan's projected
benefit obligations and assets, as well as the plan's funded status at
December 31, 2000, 1999, and 1998 (in 000's):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at beginning of $ 99,520 $ 110,792 $ 79,684
year
Service cost 5,242 5,632 4,506
Interest cost 7,399 6,952 6,452
Actuarial loss (gain) 579 (21,480) 21,975
Benefits paid (3,065) (2,376) (1,825)
----------------------------------------------------------
Projected benefit obligation at end of year $ 109,675 $ 99,520 $ 110,792
==========================================================
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at beginning of year $ 158,271 $ 151,575 $ 136,610
Actual return on plan assets 8,218 9,072 16,790
Benefits paid (3,285) (2,376) (1,825)
----------------------------------------------------------
Fair value of plan assets at end of year $ 163,204 $ 158,271 $ 151,575
==========================================================
Funded status $ 53,529 $ 58,752 $ 40,783
Unrecognized net actuarial loss (12,620) (20,071) (2,113)
Unrecognized transition obligation (20,561) (22,617) (24,674)
Unrecognized prior service cost 6,501 7,081 7,661
----------------------------------------------------------
Prepaid benefit cost $ 26,849 $ 23,145 $ 21,657
==========================================================
50
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
8. RETIREMENT PLANS (CONTINUED):
The following table sets forth the components of the net periodic pension
cost for the years ended December 31, 2000, 1999, and 1998 (in 000's).
YEAR ENDED DECEMBER 31,
2000 1999 1998
-----------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 5,242 $ 5,632 $ 4,506
Interest cost 7,399 6,952 6,452
Expected return on plan assets (13,723) (12,041) (10,172)
Amortization of transition obligation asset (2,056) (2,056) (2,056)
Amortization of prior service cost 580 580 580
Recognized net actuarial gain (1,146) (554) (677)
-----------------------------------------------------
Net periodic benefit cost $ (3,704) $ (1,487) $ (1,367)
=====================================================
The Company's share of net periodic benefit cost $ 805 $ 736 $ 586
=====================================================
The projected benefit obligations were based on calculations that utilize
certain assumptions. The assumed weighted average discount rate was 7.5% for
the years ended December 31, 2000 and 1999. The expected return on plan
assets for 2000 and 1999 was 8.75% and the assumed rate of compensation
increase for both 2000 and 1999 was 4.50%.
The Company and certain subsidiaries also participate with Sun Life
Assurance Company of Canada and certain affiliates in a 401(k) savings plan
for which substantially all employees are eligible. Under the various plans
the Company matches, up to specified amounts, employees' contributions to
the plan. The Company's contributions were $354,000, $284,000, and $231,000
for the years ended December 31, 2000, 1999, and 1998, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company and certain subsidiaries
provide certain health, dental, and life insurance benefits ("postretirement
benefits") for retired employees and dependents. Substantially all employees
of the participating companies may become eligible for these benefits if
they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount. The following table
sets forth the change in other postretirement benefit plans' obligations and
assets, as well as the plans' funded status at December 31, 2000 and 1999
(in 000's).
51
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
8. RETIREMENT PLANS (CONTINUED):
YEAR ENDED DECEMBER 31,
2000 1999 1998
-----------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 12,217 $ 10,419 $ 9,845
Service cost 529 413 240
Interest cost 1,139 845 673
Actuarial loss 3,665 1,048 308
Benefits paid (465) (508) (647)
-----------------------------------------------------
Benefit obligation at end of year $ 17,085 $ 12,217 $ 10,419
=====================================================
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at beginning of year $ - $ - $ -
Employer contributions 465 508 647
Benefits paid (465) (508) (647)
-----------------------------------------------------
Fair value of plan assets at end of year $ - $ - $ -
=====================================================
Funded Status $ (17,085) $ (12,217) $ (10,419)
Unrecognized net actuarial loss 4,914 1,469 586
Unrecognized transition obligation 95 140 185
-----------------------------------------------------
Prepaid (accrued) benefit cost $ (12,076) $ (10,608) $ (9,648)
=====================================================
52
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
8. RETIREMENT PLANS (CONTINUED):
The following table sets forth the components of the net periodic
postretirement benefit costs for the years ended December 31, 2000, 1999,
and 1998 (in 000's).
2000 1999 1998
----------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 529 $ 413 $ 240
Interest cost 1,139 845 673
Amortization of transition obligation(asset) 45 45 45
Recognized net actuarial loss (gain) 219 164 (20)
----------------------------------------------------------
Net periodic benefit cost $ 1,932 $ 1,467 $ 938
==========================================================
The Company's share of net periodic benefit cost $ 219 $ 185 $ 95
==========================================================
In order to measure the postretirement benefit obligation at December 31, 2000
the Company assumed a 10.9% annual rate of increase in the per capita cost of
covered health care benefits (5.5% for dental benefits). These rates were
assumed to decrease gradually to 5.0% for 2006 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. For example, increasing the
health care cost trend rate assumptions by one percentage point in each year
would increase the accumulated postretirement benefit obligation at December 31,
2000 by $3.4 million, and the aggregate of the service and interest cost
components of net periodic postretirement benefit expense for 2000 by $405
thousand. Conversely, decreasing assumed rates by one percentage point in each
year would decrease the accumulated postretirement benefit obligation at
December 31, 2000 by $2.8 million, and the aggregate of the service and interest
cost components of net periodic postretirement benefit expense for 2000 by $320
thousand. The assumed weighted average discount rate used in determining the
postretirement benefit obligation for both 2000 and 1999 was 7.50%.
53
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
9. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return with Sun Life Assurance Company of Canada - U.S. Operations Holdings,
Inc. as previously described in Note 1. Federal income taxes are calculated
as if the Company was filing a separate federal income tax return. A summary
of the components of federal income tax expense (benefit) in the
consolidated statements of income for the years ended December 31, 2000,
1999 and 1998 was as follows (in 000's):
2000 1999 1998
----------- ------------- -------------
Federal income tax expense (benefit):
Current $ (8,536) $ 18,570 $ 19,476
Deferred (53,145) 10,210 (8,551)
---------- ------------ ------------
Total $ (61,681) $ 28,780 $ 10,925
========== ============ ============
Federal income taxes attributable to the consolidated operations are
different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate of 35%. The Company's
effective rate differs from the federal income tax rate as follows:
2000 1999 1998
----------- ------------- -------------
Expected federal income tax expense $ (21,455) $ 28,969 $ 9,405
Low income housing credit (5,805) (6,348) (4,446)
Additional tax provision (35,897) 6,851 5,423
Other 1,476 (692) 543
---------- ------------ ------------
Federal income tax expense $ (61,681) $ 28,780 $ 10,925
========== ============ ============
The deferred income tax (asset) liability represents the tax effects of
temporary differences between the carrying amounts of assets and liabilities
used for financial reporting purposes and the amounts used for income tax
purposes. The components of the Company's deferred tax (assets) and
liabilities as of December 31, 2000 and 1999 were as follows (in 000's):
2000 1999
----------------- -----------------
Deferred tax assets:
Actuarial liabilities $ 177,709 $ 136,560
Other 845 943
----------------- -----------------
Total deferred tax assets $ 178,554 $ 137,503
Deferred tax liabilities:
Deferred policy acquisition costs (189,447) (193,238)
Investments, net (30,513) (21,940)
----------------- -----------------
Total deferred tax liabilities $ (219,960) $ (215,178)
----------------- -----------------
Net deferred tax liabilities $ (41,406) $ (77,675)
================= =================
54
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
9. FEDERAL INCOME TAXES (CONTINUED)
The Company makes payments under the tax sharing agreements as if it were
filing as a separate company.
The Company's federal income tax returns are routinely audited by the
Internal Revenue Service ("IRS"), and provisions are made in the
consolidated financial statements in anticipation of the results of these
audits. The Company is currently under audit by the IRS for the years 1994
and 1995. In the Company's opinion, adequate tax liabilities have been
established for all years and any adjustments that might be required for the
years under audit will not have a material effect on the Company's financial
statements. However, the amounts of these tax liabilities could be revised
in the future if estimates of the Company's ultimate liability are revised.
10. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment expenses
related to the group life and group disability products is summarized below
(in 000's):
2000 1999
---------------------------------------
Balance at January 1 $ 17,755 $ 15,002
Less reinsurance recoverables (4,036) (3,232)
---------------------------------------
Net balance at January 1 13,719 11,770
---------------------------------------
Incurred related to:
Current year 10,670 12,187
Prior years (14) (1,487)
---------------------------------------
Total incurred 10,656 10,700
---------------------------------------
Paid losses related to:
Current year (5,473) (6,755)
Prior years (3,395) (1,996)
---------------------------------------
Total paid (8,868) (8,751)
---------------------------------------
Net balance at December 31 20,574 17,755
Plus reinsurance recoverables (5,067) (4,036)
---------------------------------------
Balance at December 31 $ 15,507 $ 13,719
=======================================
The Company regularly updates its estimates of liabilities for unpaid claims
and claims adjustment expenses as new information becomes available and
further events occur which may impact the resolution of unsettled claims for
its individual and group disability lines of business. Changes in prior
estimates are recorded in results of operations in the year such changes are
determined to be needed.
55
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
11. DEFERRED POLICY ACQUISITION COSTS
The following illustrates the changes to the deferred policy acquisition
costs (in 000's):
2000 1999
----------------- ----------------
Balance at January 1 $ 686,278 $ 523,872
Acquisition costs deferred 206,869 156,228
Amortized to expense during the year (123,832) (67,815)
Adjustment for unrealized investment gains (losses) during the year (7,327) 73,993
----------------- ----------------
Balance at December 31 $ 761,988 $ 686,278
================= ================
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and
variable annuities, guaranteed investment contracts, retirement plan
services, and life insurance on an individual and group basis, as well as
disability insurance on a group basis. Within these areas, the Company
conducts business principally in three operating segments and maintains a
corporate segment to provide for the capital needs of the three operating
segments and to engage in other financing related activities. Net
investment income is allocated based on segmented assets by line of
business.
The Individual Protection segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of life
insurance. The products include whole life, universal life and variable
life products.
The Group Protection segment markets and administers group life and
long-term disability insurance to small and mid-size employers in the State
of New York.
The Wealth Management segment markets and administers individual and group
variable annuity products, individual and group fixed annuity products
which include market value adjusted annuities, and other retirement benefit
products. The Company began offering guaranteed investment contracts to
unrelated third parties in overseas markets during the second quarter of
2000. These contracts may contain any of a number of features including
variable or fixed interest rates and equity index options and may be
denominated in foreign currencies. The Company uses derivative instruments
to manage the risks inherent in the contract options.
The Corporate segment includes the unallocated capital of the Company, its
debt financing, and items not otherwise attributable to the other segments.
Management evaluates the results of the operating segments on an after-tax
basis. The Company does not materially depend on one or a few customers,
brokers or agents.
56
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments (in 000's):
YEAR ENDED DECEMBER 31, 2000
PRETAX
TOTAL TOTAL INCOME NET OPERATING TOTAL
REVENUES EXPENDITURES (LOSS) INCOME (LOSS) ASSETS
-------------- ----------------- ------------ ----------------- ----------------
Individual Protection $ 44,206 $ 44,477 $ (271) $ (176) $ 1,242,549
Group Protection 17,194 15,350 1,844 1,199 30,514
Wealth Management 533,517 556,864 (23,347) (6,911) 22,094,736
Corporate 15,552 55,025 (39,473) 8,419 689,869
-------------- ----------------- ------------ ----------------- ----------------
Total $ 610,469 $ 671,716 $ (61,247) $ 2,531 $ 24,057,668
============== ================= ============ ================= ================
YEAR ENDED DECEMBER 31, 1999
Individual Protection $ 17,625 $ 18,001 $ (376) $ 198 $ 302,100
Group Protection 16,415 15,541 874 568 27,286
Wealth Management 563,836 460,788 103,048 73,002 20,911,529
Corporate 31,996 52,731 (20,735) (20,036) 243,998
-------------- ----------------- ------------ ----------------- ----------------
Total $ 629,872 $ 547,061 $ 82,811 $ 53,732 $ 21,484,913
============== ================= ============ ================= ================
YEAR ENDED DECEMBER 31, 1998
Individual Protection $ 232,193 $ 300,478 $ (68,285) $ (45,186) $ 365,397
Group Protection 15,259 13,023 2,236 1,433 23,297
Wealth Management 560,643 457,483 103,160 74,662 17,572,436
Corporate 38,600 50,838 (12,238) (16,803) 287,132
-------------- ----------------- ------------ ----------------- ----------------
Total $ 846,695 $ 821,822 $ 24,873 $ 14,106 $ 18,248,262
============== ================= ============ ================= ================
13. REGULATORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Statutory surplus differs
from shareholder's equity reported in accordance with GAAP for stock life
insurance companies primarily because policy acquisition costs are expensed
when incurred, reserves are based on different assumptions, investments are
valued differently, post-retirement benefit costs are based on different
assumptions and reflect a different method of adoption, and income tax
expense reflects only taxes paid or currently payable.
57
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
13. REGULATORY FINANCIAL INFORMATION (CONTINUED):
The following information reconciles statutory net income and statutory
surplus with net income and equity on a GAAP basis (in 000's):
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------------- -------------- ----------------
Statutory net income $ (236) $ 90,358 $ 125,401
Adjustments to GAAP for life insurance companies:
Statutory interest maintenance reserve 4,341 3,956 2,925
Investment income and realized gains (losses) (90,373) 13,803 (4,532)
Policyowner premiums and benefits (36,572) (135,416) (178,973)
Deferred policy acquisition costs 83,037 88,413 60,527
Deferred income taxes 45,358 (13,615) 8,886
Other, net (3,024) (5,057) -
-------------- -------------- ----------------
GAAP net income $ 2,531 $ 42,442 $ 14,234
============== ============== ================
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- -----------------------
Statutory capital stock and surplus $ 940,335 $ 886,342
Adjustments to GAAP for life insurance companies:
Valuation of investments (37,011) 3,697
Deferred policy acquisition costs 761,988 686,278
Future policy benefits and
Contractholder deposit funds (388,946) (350,181)
Deferred income taxes (41,406) (77,675)
Statutory interest maintenance reserve 39,979 42,325
Statutory asset valuation reserve 45,376 45,281
Surplus notes (565,000) (565,000)
Other, net 5,848 178
----------------------- -----------------------
GAAP equity $ 761,163 $ 671,245
======================= =======================
The NAIC has codified statutory accounting practices, which are expected to
constitute the only source of prescribed statutory accounting practices
effective January 1, 2001. The codification has resulted in changes to many
of the prescribed accounting practices that insurance companies use to
prepare their statutory financial statements. The effect of the changes to
accounting practices as a result of codification in 2001 is estimated to be
an increase in the Company's statutory surplus of $24 million, primarily
from the establishment of deferred tax assets.
58
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
14. DIVIDEND RESTRICTIONS
The Company and its insurance subsidiary's ability to pay dividends are
subject to certain restrictions. Delaware and New York have enacted laws
governing the payment of dividends to stockholders by insurers. These laws
affect the dividend paying ability of the Company and Sun Life Insurance
and Annuity Company of New York. Pursuant to Delaware's statute, the
maximum amount of dividends and other distributions that an insurer may pay
in any twelve-month period, without prior approval of the Delaware
Commissioner of Insurance, is limited to the greater of (i) 10% of its
statutory surplus as of the preceding December 31, or (ii) the individual
company's statutory net gain from operations for the preceding calendar
year (if such insurer is a life company), or its net income (not including
realized capital gains) for the preceding calendar year (if such insurer is
not a life company). Any dividends to be paid by an insurer, whether or not
in excess of the aforementioned threshold, from a source other than
statutory surplus, would also require the prior approval of the Delaware
Commissioner of Insurance. Dividends in the amounts of $10,000,000,
$80,000,000 and $50,000,000 were declared and paid by the Company to its
parent, Sun Life of Canada (U.S.) Holdings, Inc. during 2000, 1999, and
1998. These dividends were approved by the Board of Directors.
On September 20, 2000, New York insurance law was amended to permit a
domestic stock life insurance company to distribute a dividend to its
shareholders, without notice to the Superintendent of Insurance of the
State of New York, where the aggregate amount of such dividend in any
calendar year does not exceed the lesser of: (1) ten percent of its surplus
to policyholders as of the immediately preceding calendar year; or (2) its
net gain from operations for the immediately preceding calendar year, not
including realized capital gains. Under the previous law, domestic stock
life insurers were prohibited from distributing any dividends to
shareholders unless the insurer filed a notice of its intention to declare
a dividend and its amount with the Superintendent at least 30 days in
advance of the proposed declaration, and such proposed distribution was not
disapproved by the Superintendent. Dividends in the amount of $4,700,000,
$6,500,000, and $3,000,000 were declared and paid during 2000, 1999, and
1998, respectively, by the Sun Life Insurance and Annuity Company of New
York to the Company. These dividends were approved by the Board of
Directors and the State of New York Insurance Department.
59
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
15. COMMITMENTS AND CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may
result in an increase in mandatory assessments by state guaranty funds, or
voluntary payments by solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory
assessments, which are subject to statutory limits, can be partially
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments. Under insurance guaranty fund laws in each state,
the District of Columbia and Puerto Rico, insurers licensed to do business
can be assessed by state insurance guaranty associations for certain
obligations of insolvent insurance companies to policyholders and claimants.
Recent regulatory actions against certain large life insurers encountering
financial difficulty have prompted various state insurance guaranty
associations to begin assessing life insurance companies for the deemed
losses. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's solvency and further
provide annual limits on such assessments. Part of the assessments paid by
the Company and its subsidiaries pursuant to these laws may be used as
credits for a portion of the associated premium taxes. The Company incurred
guaranty fund assessments of approximately $4,000,000, $3,500,000, and
$3,500,000 in 2000, 1999 and 1998, respectively.
LITIGATION
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages
have been asserted. Although there can be no assurance, management, at the
present time, does not anticipate that the ultimate liability arising from
such pending and threatened litigation will have a material effect on the
financial condition or operating results of the Company.
LINES OF CREDIT
The Company has syndicated two lines of credit each in the amount of $250
million. There are 14 banks in the syndicate of lenders, which is led by
Chase Bank, New York. The banks have committed to lend funds of up to
$500 million when requested by the Company at prevailing rates determined in
accordance with the line of credit agreements. One line of credit terminates
October, 2001, the other in October, 2003. As of December 31, 2000, no
amounts have been borrowed.
LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
with terms of up to 25 years. As of December 31, 2000, minimum future lease
payments under such leases are as follows (in 000's):
2001 $4,090,800
2002 4,144,350
2003 3,090,600
2004 2,575,500
Thereafter -
------------
Total $13,901,250
============
Total rental expense for the years ended December 31, 2000, 1999 and 1998
was $4,582,913, $4,656,000, and $4,139,000, respectively.
60
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2000, 1999 and 1998
16. DISCONTINUED OPERATIONS
During 1999, the Company discontinued its individual disability segment and
its banking and trust segment. These segments were composed of MCIC and NLT,
which were both sold during 1999 to separate, unaffiliated parties. Net
proceeds on the sale of MCIC were approximately $33,965,000 and the Company
realized a net loss after taxes of $25,465,000. Net proceeds on the sale of
NLT were approximately $30,000,000; the Company realized a net gain after
taxes of $13,170,000. Immediately before the sale date of NLT, the Company
received a $19 million dividend distribution from NLT.
There were no results from discontinued operations in 2000. Income from
discontinued operations for the years ended December 31, 1999 and 1998 were
as follows (in 000's):
1999 1998
------------------- ------------------
Revenue $ 22,667 $ 104,225
Expenses 21,430 104,593
Provision for income taxes 203 (445)
------------------- ------------------
Income from discontinued operations $ 1,034 $ 77
=================== ==================
61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Sun Life Assurance Company of
Canada (U.S.):
We have audited the accompanying consolidated balance sheets of Sun Life
Assurance Company of Canada (U.S.) and its subsidiaries (the "Company") as of
December 31, 2000 and 1999, and the related consolidated statements of income,
stockholder's equity, comprehensive income and of cash flows for each of the
three years in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sun Life Assurance Company of
Canada (U.S.) and its subsidiaries as of December 31, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
February 7, 2001
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No events have occurred which are required to be reported by Item 304 of
Regulation S-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Our directors and executive officers are listed below, together with information
as to their ages, dates of election, and principal business occupations during
the last five years (if other than their present business occupations). Except
as otherwise indicated, those directors and officers who are associated with Sun
Life Assurance Company of Canada and/or its subsidiaries have been associated
with Sun Life Assurance Company of Canada for more than five years either in the
position shown or in other positions. The asterisks below denote the year of
election.
DONALD A. STEWART, 54, Chairman and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and Chief Executive Officer and a Director of Sun Life Financial
Services of Canada Inc. and Sun Life Assurance Company of Canada; Chairman and
a Director of Sun Life Insurance and Annuity Company of New York; and a Director
of Sun Life of Canada (U.S.) Financial Services Holdings, Inc. and Massachusetts
Financial Services Company.
C. JAMES PRIEUR, 49, Vice Chairman and Director (1998*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and Chief Operating Officer of Sun Life Financial Services of
Canada Inc. and Sun Life Assurance Company of Canada. He formerly held the
positions of Senior Vice President and General Manager for the United States and
Vice President, Investments for the United States for Sun Life Assurance Company
of Canada. He currently is Vice Chairman and a Director of Sun Life Insurance
and Annuity Company of New York; Chairman and a Director of Sun Capital
Advisers, Inc.; Chairman of the Board and Executive Vice President and Trustee,
Sun Capital Advisers Trust; President and a Director of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life Financial (Japan), Inc., and Sun Life Assurance
Company of Canada - U.S. Operations Holdings, Inc.; and a Director of Sun Life
of Canada (U.S.) Financial Services Holdings, Inc. and Massachusetts Financial
Services Company.
JAMES A. MCNULTY, III, 58, President and Director (1999*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Executive Vice President, U.S. Operations for Sun Life Financial Services
of Canada Inc. and Sun Life Assurance Company of Canada; President and Director
of Sun Life Insurance and Annuity Company of New York; and Chairman and Director
of Sun Life of Canada (U.S.) Distributors, Inc. He is President and a Director
of Sun Life of Canada (U.S.) SPE 97-I, Inc., Sun Benefit Services Company, Inc.,
Sun Life of Canada (U.S.) Holdings General Partner, Inc., Sun Life Financial
Services Limited, and Sun Canada Financial Co.; Senior Vice President and a
Director of Sun Life Assurance Company of Canada - U.S. Operations Holdings,
Inc., Sun Life of Canada (U.S.) Holdings, Inc., and Sun Life Financial (Japan),
Inc.; and a Director of Clarendon Insurance Agency, Inc., Sunesco Insurance
Agency, Inc., and the Support Committee for Battered Women.
63
JAMES C. BAILLIE, 62, Director (2000*)
Torys, Suite 3000, Maritime Life Tower
Toronto, Ontario, Canada M5K 1N2
He is Counsel to the law firm Torys where he was formerly a Partner with a
strong emphasis in the business law area. He is a Director of Sun Life Insurance
and Annuity Company of New York and Sun Life Assurance Company of Canada, Sun
Life Financial Services of Canada Inc., and Corel Corporation and FPI Ltd.
DAVID D. HORN, 59, Director (1985*)
257 Lake Street
P.O. Box 24
New Vineyard, Maine 04956
He was formerly Senior Vice President and General Manager for the United States
of Sun Life Assurance Company of Canada, retiring in December 1997. He is a
Director of Sun Life Insurance and Annuity Company of New York; a Trustee of
MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, Global Governments
Variable Account, Total Return Variable Account, and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 69, Director (1985*)
481 Kingswood Lane
Danville, California 94506
He is President of Genstar Investment Corporation since 1987 and a former
Director of Sun Life Financial Services of Canada Inc. and Sun Life Assurance
Company of Canada. He is a Director of Sun Life Insurance and Annuity Company of
New York, Canadian Pacific Ltd., Varian Semiconductor Equipment Associates, and
Diversified Collection Services, Inc.; Vice-Chairman and a Director of Barrick
Gold Corporation; a Trustee of the World Affairs Council of Northern California;
and a Director of the San Francisco Opera and the Bay Area Council, Boy Scouts
of America.
S. CAESAR RABOY, 64, Director (1997*)
220 Boylston Street
Boston, Massachusetts 02110
He is a former Senior Vice President and Deputy General Manager for the United
States of Sun Life Assurance Company of Canada; and a Director of Sun Life
Insurance and Annuity Company of New York.
WILLIAM W. STINSON, 67, Director (2000*) Canadian Pacific Limited 1800 Bankers
Hall, East Tower 855 - 2nd Street S.W.
Calgary, Alberta Canada T2P 4Z5
He is Lead Director of Sun Life Assurance Company of Canada, and a Director of
Sun Life Financial Services of Canada Inc. and Sun Life Insurance and Annuity
Company of New York. In addition, he is a Director of Pan Canadian Petroleum,
Massachusetts Financial Services Company, United Dominion Industries, Grant
Forest Products, Inc., and Westshore Terminals Income Fund. In May 1996,
Mr. Stinson retired as Chairman and Chief Executive Officer of Canadian Pacific
Limited after a 45-year career.
64
JAMES M.A. ANDERSON, 51, Vice President, Investments (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Investments of Sun Life Assurance Company of Canada, and
Sun Life Insurance and Annuity Company of New York; President and Chief
Executive Officer and Trustee of Sun Capital Advisers Trust; President and Chief
Investment Officer and Director of Sun Capital Advisers, Inc.; Vice President
and a Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life Assurance
Company of Canada - U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.)
Holdings General Partner, Inc., Sun Life Financial (Japan), Inc., and Sun Canada
Financial Co.; Vice President, Investments and Director of Sun Life of Canada
(U.S.) Distributors, Inc.; and a Director of Clarendon Insurance Agency, Inc.,
Sunesco Insurance Agency, Inc., and Sun Benefit Services Company, Inc.
DAVEY S. SCOON, 54, Vice President, Finance and Treasurer (1999*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President and Chief Financial Officer for Sun Life Assurance Company
of Canada; Vice President, Finance, Controller, and Treasurer of Sun Life
Insurance and Annuity Company of New York; Vice President and Treasurer and
Director of Sun Benefit Services Company, Inc., Sun Life of Canada (U.S.)
Distributors, Inc., Sun Life Financial (Japan), Inc, Sun Life of Canada (U.S.)
SPE 97-I, Inc., and Sunesco Insurance Agency, Inc.; Vice President and Director
of Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc., Sun
Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Holdings General
Partner, Inc., Sun Life Financial Services Limited, and Sun Canada Financial
Co.; Treasurer and Director of Clarendon Insurance Agency, Inc. and Senior Vice
President and Treasurer and Director of Sun Capital Advisers, Inc.; Regular
Trustee of Sun Life of Canada (U.S.) Capital Trust I; Assistant Treasurer of Sun
Capital Advisors Trust; and Chairman and Director of Tufts Associated Health
Plan, and Lead Director of Tufts Associated Health Maintenance Organization. He
is a member of the Board of Directors for Managed Comp. Prior to October 1999,
he was Executive Vice President and Chief Operating Officer of Liberty Funds
Group.
ROBERT P. VROLYK, 47, Vice President and Actuary (1986*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is the former Vice President, Finance and Treasurer of Sun Life Assurance
Company of Canada (U.S.). He currently is the Vice President and Chief Actuary
of Sun Life Assurance Company of Canada; Vice President and Actuary of Sun Life
Insurance and Annuity Company of New York; Vice President and Director of Sun
Life of Canada - U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.)
Holdings, Inc., Sun Canada Financial Co., and Sun Life of Canada (U.S.) Holdings
General Partner, Inc.; Vice President and Director of Sun Life of Canada (U.S.)
SPE 97-I, Inc.; a Director of Sun Benefit Services Company, Inc.; and a Regular
Trustee of Sun Life of Canada (U.S.) Capital Trust I.
PETER F. DEMUTH, 42, Vice President and Chief Counsel (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President and Chief Counsel of U.S. Operations for Sun Life Assurance
Company of Canada; Vice President and Chief Counsel for Sun Life Insurance and
Annuity Company of New York; a Director of Sun Life of Canada (U.S.) Holdings,
Inc., Sun Life Financial (Japan), Inc., and Sun Life Assurance Company of
Canada - U.S. Operations Holdings, Inc.; and a Regular Trustee of Sun Life of
Canada (U.S.) Capital Trust I. Prior to February 1998, he was a Shareholder at
the firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
65
ELLEN B. KING, 44, Senior Counsel and Secretary (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
She is Senior Counsel for Sun Life Assurance Company of Canada; Senior Counsel
and Secretary for Sun Life Insurance and Annuity Company of New York; and
Secretary of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life Assurance
Company of Canada - U.S. Operations Holdings, Inc., Sun Benefit Services
Company, Inc., Sun Life of Canada (U.S.) SPE 97-I, Inc., Sun Canada Financial
Co., Sun Life Financial (Japan), Inc. and Sun Life of Canada (U.S.) Holdings
General Partner, Inc.
RONALD J. FERNANDES, 43, Vice President, Retirement Products and Services
(1999*)
One Copley Place
Boston, Massachusetts 02116
He is Vice President, Retirement Products and Services of Sun Life Insurance and
Annuity Company of New York and Sun Life Assurance Company of Canada. He is also
a Director of Clarendon Insurance Agency, Inc., Sunesco Insurance Agency, Inc.,
and Sun Life of Canada (U.S.) Distributors, Inc. Prior to October 1999,
Mr. Fernandes was Senior Vice President and Director, Retirement Products and
Services of Wheat First Union in Richmond, Virginia.
Our directors, officers, and employees are covered under a commercial blanket
bond and a liability policy. The directors, officers, and employees of Clarendon
Insurance Agency, Inc. are covered under a fidelity bond.
ITEM 11. EXECUTIVE COMPENSATION
Some of the executive officers of the Company also serve as officers of Sun Life
Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries.
OTHER ANNUAL ALL OTHER
NAME/POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
---- ------ ----- ------------ ------------
James A. McNulty, III-President and Director* 2000 171,187 63,024 16,279 10,188
C. James Prieur - Vice Chairman and Director* 2000 42,966 4,410 6,820 0
C. James Prieur - President * 1999 48,826 36,813 6,652 4,703
C. James Prieur - President * 1998 104,208 28,606 1,672 1,929
Donald A. Stewart - President and Chairman * 1998 34,913 17,857 0 0
1. Ronald J. Fernandes ** 2000 320,000 40,000 119,742 1,742
Vice President, Retirement Products and Services 1999 300,000 0 110,000 255
1998 0 0 0
2. Michael R. Winterfield *** 2000 207,846 33,300 41,300 627
Vice President, Product 1999 185,000 0 9,869 0
1998 0 0 0
3. Edward J. Ronan 2000 206,240 61,200 1,690 5,747
Vice President, Retirement Products & Services 1999 193,000 52,000 1,647 5,423
1998 180,000 30,000 2,865 4,103
4. Thomas A. Woislaw 2000 178,765 42,100 0 5,670
Assistant Vice President, Systems 1999 165,000 50,000 0 5,104
1998 88,846 0 50,000 0
* Allocated Salary.
** Annualized salary. Date of hire is 10/4/99.
*** Annualized salary. Date of hire is 9/7/99
66
Other compensation for Mr. McNulty for the year ended 2000 includes
Group Term Life and Individual Life insurance payments of $1,044 and $4,044,
respectively; 401K company contributions of $5,100; spouse travel of
$10,980; a car allowance of $2,861; and other compensation of $2,438.
1. Other compensation for Mr. Fernandes for the year ended 2000 includes
Group Term insurance payments of $1,003; 401K company contributions of $738;
sign-on bonus of $75,000; taxable relocation of $41,398; and a car allowance
of $3,345.
2. Other compensation for Mr. Winterfield for the year ended 2000 includes
Group Term insurance payments of $627; sign-on bonus of $25,000; and taxable
relocation of $16,300.
3. Other compensation for Mr. Ronan for the year ended 2000 includes Group
Term Life insurance payments of $647, respectively; 401K company
contributions of $5,100; and club dues of $1,690.
4. Other compensation for Mr. Woislaw for the year ended 2000 includes
Group Term Life insurance payments of $570 and 401K company contributions
of $5,100.
Directors of the Company who are also officers of Sun Life Assurance Company of
Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Outside directors for the year 2000 received $8,000 annual fees plus
$1,000 for board meetings and $1,000 for committee meetings.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada-U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
Assurance Company of Canada. Sun Life Financial Services of Canada is the
ultimate parent of the Company.
LONG-TERM INCENTIVE COMPENSATION
Sun Life Assurance Company of Canada has a long term incentive compensation plan
for certain officers of Sun Life Assurance Company of Canada holding positions
at the level of Vice President or higher. The Unit Value Appreciation Plan (the
"UVA Plan") provides eligible officers with value appreciation units ("Value
Appreciation Units") designed to reward management for growth in the value of
the Company over a multi-year period. For purposes of the UVA Plan, the value of
the Company is determined by applying predefined multiples to the net income
earned in the Company's various businesses. When the UVA Plan was introduced,
participants were awarded two allotments of Value Appreciation Units --- a
three-year grant and a four-year grant, representing grants for 1998 and 1999,
respectively. The three-year grant will reward increases in the value of the
Company from January 1, 1998 to December 31, 2000. The four-year grant will
reward increases in the Company from January 1998 to December 31, 2001
b. The starting value of the Value Appreciation Units at the time of
these grants was established by reference to the Company's 1997 financial
results, adjusted for certain items. Additional units issued effective
January 1, 2001 were awarded to eligible participants in allotments under the
UVA Plan. This new three-year grant will reward increases in the value of the
Company from January 1, 2000 to December 31, 2002. Awards are payable in cash
and are based on the increase in the value of Value Appreciation Units over the
performance period. The UVA Plan does not establish minimum thresholds, targets
or maximum payouts.
LONG-TERM INCENTIVE PLAN - AWARDS IN MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth information concerning the award of Value
Appreciation Units under the Company's UVA Plan in the year ended December 31,
2000 in respect of the Named Executive Officers:
NAME UNITS PERFORMANCE PERIOD
- ---- ----- ------------------
Ronald J. Fernandes 50,000 2000 - 3 Year Grant
Ronald J. Fernandes 4,000 1999 - 4 Year Grant
Ronald J. Fernandes 4,000 1998 - 3 Year Grant
67
ESTIMATED ANNUAL BENEFITS PAYABLE UPON RETIREMENT FOR EXECUTIVE OFFICERS IN THE
UNITED STATES
The following table illustrates the total annual pension for the Company
employees in the United States who are eligible to participate in the Sun Life
of Canada U.S. Employees' Retirement Income Plan and accompanying Trust (the
"Plan"). Under the Plan, income is payable for the life of the eligible
employee. The normal form of pension for single employees is a life annuity; for
married individuals it is the actuarially reduced 50% joint and survivor
benefit.
Pensionable earnings for this purpose are calculated using the highest average
of base earnings and officer incentive payment, up to target, earned over the
highest consecutive 36 month period in the last 120 months. The pension benefit
is determined by years of service (maximum of 30) multiplied by 50% of the
pensionable earnings, plus .5% of pensionable earnings in excess of 30 years
(maximum 40). Compensation allocated to the Company covered by the Plan for 2000
was as follows: Mr. McNulty $600,542, Mr. Fernandes $347,692, Mr. Winterfield
$219,088, Mr. Ronan $258,350 and Mr. Woislaw $211,765. As of December 31, 2000,
the number of years of credited services was as follows: Mr. McNulty 11 years,
Mr. Fernandes 1 year, Mr. Winterfield 1 year, Mr. Ronan 4 years and Mr. Woislaw
3 years.
In no event can the pension benefit exceed 140,000 at the normal retirement age
as defined by the United States Social Security Office. The maximum pensionable
earnings that can be used to determine this benefit is $170,000. The table does
not reflect these limits. The Company has adopted a plan that is not a
tax-qualified plan to provide the benefits that would have been provided under
the Company's retirement plan but for these limits.
PENSIONABLE YEARS OF SERVICE
EARNINGS (US$) 15 20 25 30 35
200,000 50,000 66,667 83,333 100,000 105,000
225,000 56,250 75,000 93,750 112,500 118,125
250,000 62,500 83,333 104,167 125,000 131,250
300,000 75,000 100,000 125,000 150,000 157,500
400,000 100,000 133,333 166,667 200,000 210,000
600,000 150,000 200,000 250,000 300,000 315,000
750,000 187,500 250,000 312,500 375,000 393,750
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is not applicable since the Company is indirectly wholly-owned by Sun
Life Assurance Company of Canada.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REINSURANCE
See discussion of Reinsurance in Item 1.
SERVICE CONTRACT
The Company and its subsidiaries have agreements with Sun Life Assurance Company
of Canada which provides that Sun Life Assurance Company of Canada will furnish,
as requested, personnel as well as certain services and facilities on a cost
reimbursement basis. Expenses under these agreements amounted to approximately
$31,857,000 in 2000.
LEASES
The Company leases office space to Sun Life Assurance Company of Canada under
lease agreements with terms expiring in September, 2004 and options to extend
the terms for each of twelve successive five year terms at fair market rental
not to exceed 125% of the fixed rent for the term which is ending. Rent received
by the Company under the leases for 2000 amounted to approximately $7,976,000.
68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial statements (set forth in Item 8):
-- Consolidated Statements of Income for each of the three years ended
December 31, 2000, December 31, 1999 and December 31, 1998.
-- Consolidated Balance Sheets at December 31, 2000 and December 31,
1999.
-- Consolidated Statements of Comprehensive Income for each of the
three years ended December 31, 2000, December 31, 1999 and
December 31, 1998.
-- Consolidated Statements of Stockholder's Equity for each of the
three years ended December 31, 2000, December 31, 1999 and
December 31, 1998.
-- Consolidated Statements of Cash Flow for each of the three years
ended December 31, 2000, December 31, 1999 and December 31, 1998.
-- Notes to Financial Statements.
-- Independent Auditors' Report.
(a) (2) Financial statement schedules (set forth below):
-- Schedule I--Summary of Investments, Other than Investments in
Related Parties.
-- Schedule III--Supplementary Insurance Information.
-- Schedule VI--Reinsurance.
69
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
SCHEDULE I
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN 000'S)
Amount at which shown in
Type of Investment Cost Value the balance sheet
- ---------------------------------------------------- -------------- -------------- --------------------------
Available-for-sale fixed maturities:
United States government and government
Agencies and authorities $ 183,733 $ 191,951 $ 191,951
States, municipalities and political subdivisions 22,515 23,168 23,168
Mortgage-backed securities 123,113 124,928 124,928
Public utilities 286,744 293,635 293,635
Transportation 245,675 255,260 255,260
Finance 299,440 301,820 301,820
Corporate 1,293,302 1,310,628 1,310,628
-------------- -------------- ------------------------
Total available-for-sale fixed maturities 2,454,522 2,501,390 2,501,390
Trading fixed maturities:
United States government and government
Agencies and authorities $ 500 $ 501 $ 501
Mortgage-backed securities 18,281 18,681 18,681
Public utilities 30,918 31,968 31,968
Transportation 97,900 100,852 100,852
Finance 159,250 164,372 164,372
Corporate 328,662 331,803 331,803
-------------- -------------- ------------------------
Total trading fixed maturities 635,511 648,177 648,177
Held-to-maturity fixed maturities:
Sun Life of Canada (U.S.) Holdings, Inc.,
8.526% subordinated debt, due 2027 $ 600,000 $ 546,112 $ 600,000
Mortgage loans on real estate 846,439 - 846,439
Real estate 77,722 - 77,722
Other invested assets 74,551 - 74,551
Policy loans 41,459 - 41,459
Short-term investments 112,077 - 112,077
-------------- ------------------------
Total investments $4,842,281 $4,901,815
============== ========================
70
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN 000'S)
DEFERRED FUTURE POLICY BENEFITS, OTHER POLICY
ACQUISITION COSTS LOSSES, CLAIMS AND CLAIMS AND
SEGMENT LOSS EXPENSES BENEFITS PAYABLE(1)
INDIVIDUAL PROTECTION
2000 $ 15,068,976 155,876 998
1999 10,609,876 142,760 913
GROUP PROTECTION
2000 -- 23,300 3,092
1999 -- 19,625 2,182
WEALTH MANAGEMENT
2000 746,919,000 3,848,515 162
1999 675,668,000 3,711,759 49
CORPORATE
2000 -- -- --
1999 -- -- --
BENEFITS CLAIMS, AMORTIZATION OTHER
NET INVESTMENT LOSSES, AND OF DEFERRED OPERATING
INCOME (2) SETTLEMENT EXPENSES ACQUISITION COSTS EXPENSES
INDIVIDUAL PROTECTION
2000 13,515 7,261 168 37,048
1999 10,347 8,685 2,662 6,654
1998 81,854 251,404 37,258 11,816
GROUP PROTECTION
2000 1,633 10,482 -- 4,868
1999 1,254 10,753 -- 4,788
1998 1,172 8,786 -- 4,237
WEALTH MANAGEMENT
2000 259,090 320,584 123,663 112,617
1999 351,399 315,426 65,153 80,209
1998 394,264 327,919 51,536 78,028
CORPORATE
2000 13,473 -- -- 55,025
1999 1,978 -- -- 52,731
1998 (21,443) -- -- 50,838
(1) Other claims and benefits are included in Future Policy Benefits, Losses,
Claims and Loss Expenses
(2) Net investment income is allocated based on segmented assets by line of
business.
71
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.
SCHEDULE VI
REINSURANCE
% AMOUNT
ASSUMED
CEDED TO OTHER ASSUMED FROM TO NET
DIRECT COMPANIES OTHER COMPANIES NET AMOUNT AMOUNT
LIFE INSURANCE IN-FORCE (IN 000'S)
December 31, 2000 $ 14,686,694 $ 8,579,849 $ 0 $6,106,845 0.0%
December 31, 1999 $ 6,586,143 $ 2,057,388 $ 0 $4,528,755 0.0%
December 31, 1998 $ 5,904,874 $ 2,017,182 $ 0 $3,887,692 0.0%
LIFE INSURANCE PREMIUMS (IN 000'S)
December 31, 2000 $ 45,706 $ 5,277 $ 0 $ 40,429 0.0%
December 31, 1999 $ 49,839 $ 8,739 $ 0 41,100 0.0%
December 31, 1998 $ 54,691 $ 14,590 $ 159,787 $ 199,888 79.9%
ACCIDENT AND HEALTH PREMIUMS (IN 000'S)
December 31, 2000 $ 5,352 $ 978 $ 0 $ 4,374 0.0%
December 31, 1999 $ 4,823 $ 856 $ 0 3,967 0.0%
December 31, 1998 $ 4,249 $ 824 $ 0 $ 3,425 0.0%
72
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER
Sun Life Assurance Company of Canada (U.S.)
Wellesley Hills, Massachusetts
We have audited the consolidated balance sheets of Sun Life Assurance Company of
Canada (U.S.) and its subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholder's equity,
comprehensive income and of cash flows for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated February 7,
2001 (which report is included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules listed in Item 14(a)2 in this Form
10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 2001
73
(a) 3 AND (c). EXHIBITS:
The following Exhibits are incorporated herein by reference unless
otherwise indicated:
EXHIBIT NO.
- -----------
3 Certificate of Incorporation and by-laws (filed as Exhibit 6 to the
Registration Statement on Form N-4 (Registration No. 333-37903),
filed October 14, 1997)
4(a) Form of Flexible Payment Combination Fixed/Variable Group Annuity
Contract (filed as Exhibit 4(a)(i) to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-4 (Registration
No. 333-82957), filed September 29, 1999).
(b) Form of Certificate to be used in connection with the Contract
filed as Exhibit 4(a) hereto (filed as Exhibit 4(b)(i) to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-4 (Registration No. 333-82957), filed September 29, 1999).
(c) Form of Flexible Payment Combination Fixed/Variable Individual
Annuity Contract (filed as Exhibit 4(c)(i) to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4
(Registration No. 333-82957), filed September 29, 1999).
(d) Form of Flexible Premium Combination Fixed and Variable Life
Insurance Policy (filed as Exhibit 1.A(5) to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-6
(Registration No. 333-68601), filed August 12, 1999).
21 Subsidiaries of the Company
Sun Life of Canada (U.S.) Distributors, Inc. (Delaware)
Sun Benefit Services Company, Inc. (Delaware)
Sun Life Insurance and Annuity Company of New York (New York)
Sun Capital Advisers, Inc. (Delaware)
Clarendon Insurance Agency, Inc. (Massachusetts)
Sun Life Financial Services Limited (Bermuda)
Sun Life of Canada (U.S.) Holdings General Partner, Inc. (Delaware)
Sun Life of Canada (U.S.) SPE 97-1, Inc. (Delaware)
Sun Life Finance Corporation (Delaware)
27 Financial Data Schedule (filed herewith)
(a) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the year ended
December 31, 2000.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, Sun Life Assurance Company of Canada (U.S.), has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
By: /s/ James McNulty, III
------------------------------------
James McNulty, III
PRESIDENT
Date: March 30, 2001
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ James McNulty, III President and Director
- ------------------------------- (Principal Executive Officer) March 30, 2001
James McNulty, III
/s/ Davey S. Scoon Vice President, Finance and
- ------------------------------- Treasurer (Principal
Davey S. Scoon Financial & Accounting March 30, 2001
Officer)
/s/ James C. Baillie Director
- -------------------------------
James C. Baillie March 30, 2001
/s/ David D. Horn Director
- -------------------------------
David D. Horn March 30, 2001
/s/ Angus A. MacNaughton Director
- -------------------------------
Angus A. MacNaughton March 30, 2001
/s/ C. James Prieur Director
- -------------------------------
C. James Prieur March 30, 2001
/s/ S. Caesar Raboy Director
- -------------------------------
S. Caesar Raboy March 30, 2001
75
/s/ Donald A. Stewart Director
- -------------------------------
Donald A. Stewart March 30, 2001
/s/ William W. Stinson Director
- -------------------------------
William W. Stinson March 30, 2001
76