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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996 2-99959, 33-29851, 33-31711,
33-41858, 33-43008, 33-58853
AND 333-11699
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2461439
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SUN LIFE EXECUTIVE PARK,
WELLESLEY HILLS, MASSACHUSETTS 02181
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(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 237-6030
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------------ ------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
None
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(TITLE OF CLASS)
--------------
(TITLE OF CLASS)
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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 ____
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on March 28, 1997, all
of which are owned by
Sun Life Assurance Company of Canada.
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PART I
ITEM 1. BUSINESS.
The Registrant 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 02181, Tel. (617) 237-6030.
It has obtained authorization to do business in 48 states, the District of
Columbia and Puerto Rico and it is anticipated that it will be authorized to do
business in all states except New York. The Registrant's wholly-owned
subsidiaries include Sun Life Insurance and Annuity Company of New York, which
issues individual fixed and combination fixed/variable annuity contracts and
group life and long-term disability insurance in New York; Massachusetts
Casualty Insurance Company, a life and accident and health insurance company
which currently issues only individual disability insurance contracts; Sun
Investment Services Company, a registered broker-dealer and investment adviser;
New London Trust, F.S.B., a federally chartered savings bank; Sun Life Financial
Services Limited, which provides off-shore administrative services to the
Registrant and Sun Life Assurance Company of Canada; and Sun Benefit Services
Company, Inc., which receives renewal commissions on a disability product. Other
wholly-owned subsidiaries which are currently inactive include Sun Capital
Advisers, Inc., a registered investment adviser and Sun Life Finance
Corporation.
The Registrant owns 94.8% of the outstanding shares of Massachusetts Financial
Services Company (MFS). The Registrant previously owned 100% of the shares.
During 1996, MFS issued additional shares to officers of MFS, thereby reducing
the Registrant's ownership to 94.8%.
The Registrant is a 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 mutual life insurance company incorporated pursuant to
Act of Parliament of Canada in 1865 and currently transacts business in all of
the Canadian provinces and territories, all states except New York, the District
of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong,
Bermuda and the Philippines.
GENERAL
The Registrant is currently engaged in the sale of individual and group fixed
and variable annuities, and group pension contracts. These contracts are sold in
both the tax qualified and non-tax qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
broker-dealers.
The following table sets forth premiums and deposits by major product categories
for each of the last three years.
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
Individual insurance $ 207,740 $ 213,258 $ 244,748
Individual annuities 77,798 77,676 102,302
Group annuities 1,772,158 1,534,015 1,626,581
------------ ------------ ------------
$ 2,057,696 $ 1,824,949 $ 1,973,631
------------ ------------ ------------
------------ ------------ ------------
REINSURANCE
The Registrant has agreements with its parent company which provide that the
parent company will reinsure the mortality risks of the individual life
insurance contracts previously sold by the Registrant. Under these agreements
basic death benefits and supplementary benefits are reinsured on a yearly
renewable term basis and coinsurance basis, respectively. Reinsurance
transactions under these agreements in 1996 had the effect of decreasing net
income from operations by $1,603,000.
Effective January 1, 1991 the Registrant entered into an agreement with the
parent company under which certain individual life insurance contracts issued by
the parent were reinsured by the Registrant on a 90% coinsurance basis. Also
effective January 1, 1991 the Registrant entered into an agreement with the
parent which provides that the parent will reinsure the mortality risks in
excess of $500,000 per policy for the individual life insurance contracts
assumed by the Registrant in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis.
1
These agreements had the effect of increasing income from operations by
approximately $35,161,000 for the year ended December 31, 1996.
The life reinsurance assumed agreement requires the reinsurer to withhold funds
in amounts equal to the reserves assumed.
The Registrant also has executed a reinsurance agreement with an unaffiliated
company which provides reinsurance of certain individual life insurance
contracts on a modified coinsurance basis and under which all deficiency
reserves are ceded.
RESERVES
In accordance with the life insurance laws and regulations under which the
Registrant operates it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves 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 certain
assumed rates, will be sufficient to meet the Registrant's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Registrant's total assets of $13.8 billion at December 31, 1996, 65.6%
consisted of unitized and non-unitized separate account assets, 16.4% were
invested in bonds and similar securities, 6.8% in mortgages, 1.0% in
subsidiaries, .7% in real estate, and the remaining 9.5% in cash and other
assets.
COMPETITION
The Registrant 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 Registrant's excellent financial ratings are
an important part of its competitive position. Of the nearly 1,200 life/health
insurers rated by A.M. Best as of December, 1996, the Registrant and its parent
company, Sun Life Assurance Company of Canada, were among approximately 50
companies assigned A.M. Best's highest rating of A++ according to the 1996
Best's Insurance Reports for Life and Health Companies. Standard & Poor's and
Duff and Phelps have also assigned the Registrant and its parent company their
highest claims-paying ability ratings, AAA.
EMPLOYEES
The Registrant and Sun Life Assurance Company of Canada have entered into a
Service Agreement which provides that the latter will furnish the Registrant, as
required, with personnel as well as certain services and facilities on a cost
reimbursement basis. As of December 31, 1996 the Registrant had 269 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and at its Annuity Service Center in Boston, Massachusetts.
STATE REGULATION
The Registrant is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Registrant for
the preceding year and its financial condition on December 31st of such year.
Its books and records are subject to review or examination by the Commissioner
or his agents at any time and a full examination of its operations is conducted
at periodic intervals.
The Registrant is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, 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.
2
Each insurance company is required to file detailed annual reports with
supervisory agencies in each of the jurisdictions in which it does business and
its operations and accounts are subject to examination by such agencies at
regular intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Registrant, its parent 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
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Registrant under these laws cannot be reasonably estimated. However, most of
these laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and may also permit the deduction
of all or a portion of any such assessment from any future premium or similar
taxes payable.
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 its impact on the relative desirability of various
personal investment vehicles.
ITEM 2. PROPERTIES
The Registrant occupies office space owned by it and leased to its parent, Sun
Life Assurance Company of Canada, and certain unrelated parties for lease terms
not exceeding five years.
ITEM 3. LEGAL PROCEEDINGS
The Registrant and its subsidiaries are engaged in various kinds of routine
litigation, which, in management's judgment, is not of material importance to
their respective total assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Registrant to a vote of security holders during
the three months ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant is a wholly-owned subsidiary of Sun Life Assurance Company of
Canada and as such there is no market for its common stock.
No dividends were paid in 1994, 1995 or 1996.
3
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
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1996 1995 1994 1993 1992
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(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310 $ 1,339,282
Net investment income and
realized gains (losses)....... 312,870 315,966 312,583 311,322 292,746
-------------- -------------- -------------- -------------- --------------
2,444,809 2,199,867 2,310,108 2,754,632 1,632,028
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits 2,149,145 1,995,208 2,102,290 2,515,320 1,426,756
Other expenses 175,342 150,937 186,892 232,365 229,004
-------------- -------------- -------------- -------------- --------------
2,324,487 2,146,145 2,289,182 2,747,685 1,655,760
-------------- -------------- -------------- -------------- --------------
Operating gain (loss) 120,322 53,722 20,926 6,947 (23,732)
Federal income tax expense
(benefit) (2,702) 17,807 19,469 3,691 (15,360)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 123,024 $ 35,915 $ 1,457 $ 3,256 $ (8,372)
-------------- -------------- -------------- -------------- --------------
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Assets $ 13,759,005 $ 12,359,683 $ 10,117,822 $ 9,179,090 $ 7,474,407
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes $ 315,000 $ 650,000 $ 335,000 $ 335,000 $ 265,000
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SEE NOTE 1 TO FINANCIAL STATEMENTS FOR THE EFFECT OF THE REINSURANCE AGREEMENTS
ON NET INCOME.
SEE NOTE 1 TO FINANCIAL STATEMENTS FOR CHANGES IN ACCOUNTING PRINCIPLES AND
REPORTING.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(1) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
ASSETS
For management purposes it is the Registrant's practice to segment its general
account to facilitate the matching of assets and liabilities; however, all
general account assets stand behind all general account liabilities. A majority
of the Registrant's assets are income producing investments. Particular
attention is paid to the quality of these assets.
The Registrant's bond holdings consist of a diversified portfolio of both public
and private issues. It is the Registrant's policy to acquire only investment
grade securities. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Registrant's
bond portfolio remains high. At December 31, 1996, 5.0% of the Registrant's
holdings of bonds were rated below investment grade (i.e. below NAIC rating "1"
or "2"). Net unrealized gains on below investment grade bonds were $837,435 at
December 31, 1996.
The Registrant holds real estate primarily because such investments historically
have offered better yields over the long-term than fixed income investments.
Real estate investments are used to enhance the yield of products with long-term
liability durations. Properties for which market value is lower than cost
adjusted for depreciation (book value) are reported at market value. During
1996, the change in the difference between the market value and book value for
properties reported at market value was $4,624,000.
4
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Registrant had a mortgage portfolio
of $938,932,000 at December 31, 1996, representing 26.9% of cash and invested
assets. At December 31, 1995, mortgage loans represented 26.5% of cash and
invested assets. The Registrant underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Registrant as a rule invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1996, 0.45% of the Registrant's portfolio was
60 days or more in arrears, compared to the most recent industry delinquency
ratio published by the American Council of Life Insurance of 2.51%. The expense
in the year for the provision for losses and for losses on foreclosures was
$2,767,000.
During 1996, the Registrant purchased three limited partnership investments for
an aggregate total of $12,285,000 that were formed to own and operate apartment
complexes which qualify for low income tax credits. The credits are taken
annually over a ten year period, but are fully vested at the end of a fifteen
year compliance period. The Registrant also committed to an additional limited
partnership interest for $10,180,000 in 1995. These investments are classified
as other invested assets in the attached balance sheet.
In the normal course of business, the Registrant makes commitments to purchase
investments at a future date. As of December 31, 1996 the Registrant had
outstanding mortgage commitments of $9,800,000 which will be funded during 1997.
LIABILITIES
The majority of the Registrant's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Registrant was $567,143,000 at December
31, 1996. The Registrant issued surplus notes during 1995 totalling $315,000,000
to an affiliate, Sun Canada Financial Co. The Registrant repaid $335,000,000 of
surplus notes to its parent in 1996. During 1994, the Registrant reduced its
carrying value of MCIC, a wholly owned subsidiary, by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus. The Registrant's management considers its surplus position to
be adequate.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net income from operations after dividends and before federal income taxes
increased by $61.1 million for the year ending December 31, 1996 as compared to
December 31, 1995. Net income associated with the reinsurance agreements with
the parent increased by $23.9 million in 1996. The net income improvement in the
reinsured business results from improved mortality experience, improved
investment performance and fewer significant death claims in 1996 as compared to
1995. Prior to reinsurance, earnings from the life line of business remained
relatively flat. The remaining $37.2 million increase is attributable to the
Company's retirement products and services line of business, which market
combination fixed/variable annuities and group pension guaranteed investment
contracts. The decline in interest rates during 1995 resulted in the split of
these combination fixed/variable annuity sales to change from 45% fixed and 55%
variable in 1995 to 25% fixed and 75% variable in 1996. In addition, total gross
sales increased by $235.9 million in 1996 as compared to 1995. The declining
interest rate environment and strong market performance in 1995 resulted in
unrealized gains on assets held in the separate accounts, which generated a
substantial increase in fees calculated as a percentage of the separate account
net assets, which are then transferred to the general account. The declining
interest rates also resulted in increases in reserves due to the increase in the
market value adjustment provision of certain fixed annuities. The resultant
reserve increases were in excess of the unrealized gains causing strain on the
1995 earnings. In 1996, interest rates increased, resulting in a reduction in
the unrealized gains on assets held in the separate accounts and a corresponding
reduction in
5
reserves and a release of some of the reserve strain incurred in 1995. The
earnings on these market value adjusted products fluctuate as the change in the
market value of the assets do not move in tandem with the change in the market
value of the liabilities.
Total income increased by $239.4 million for the year ended December 31, 1996 as
compared to December 31, 1995. Sales of combination fixed/variable annuities
(net of annuitizations) increased by $282.7 million primarily due to an increase
in variable sales held in the separate accounts. This increase in variable sales
was driven by strong performance in the stock market. Reinsurance had the effect
of increasing income by approximately $9.4 million. Premiums and annuity
considerations increased by $8.2 million reflecting increased annuitizations.
Considerations from supplementary contracts increased by $1.2 million. Sales of
group pension guaranteed investment contracts decreased by $53 million as this
market remains highly competitive and sensitive to small changes in guaranteed
interest rates. Net investment income decreased by $9.1 million, reflecting a
decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended December
31, 1996 as compared to December 31, 1995. Reinsurance had the effect of
decreasing benefits and expenses by $14.5 million. Deaths, annuity payments and
surrender benefits and other funds withdrawals increased by $438.9 million as a
result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million, reflecting increased
annuitizations and increased reserves for minimum death benefit guarantees. The
decrease in liability for premium and other deposit funds of $405.9 million
reflects lower interest rates and higher surrenders of contracts described
above. Commissions increased by $21.8 million, reflecting the increase in total
sales of combination fixed/variable annuities. General expenses increased by
$2.6 million reflecting an increase in salaries due to staff increases and
retainer fees. Transfers to separate accounts increased by $126.8 million,
reflecting increased exchange activity out of the general account into the
separate accounts.
1995 COMPARED TO 1994
Net income from operations after dividends and before federal income taxes
increased by $23.7 million for the year ending December 31, 1995 as compared to
December 31, 1994. Reinsurance agreements with the parent had the effect of
increasing net income by $40.9 million from a loss of $9.6 million in 1994 to a
gain of $31.3 million in 1995. The increase in net income associated with the
reinsurance agreements is due to the lack of surplus strain associated with the
assumption of new contracts issued. No new contracts were assumed by the Company
beginning in 1994. The remaining decrease in net income from operations of $17.2
million is attributable to the Company's retirement products and services line
of business, which markets combination fixed/variable annuities and group
pension guaranteed investment contracts. The declining interest rate environment
in 1995 resulted in unrealized gains on assets held in the separate accounts,
which generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision. The resultant reserve
increases were in excess of the unrealized gains causing strain on the 1995
earnings. The earnings on these market value adjusted products fluctuate as the
change in the market value of the assets do not move in tandem with the change
in the market value of the liabilities.
Total income decreased by $119.2 million for the year ended December 31, 1995 as
compared to December 31, 1994. Reinsurance had the effect of decreasing income
by approximately $4.3 million. Premiums and annuity considerations decreased by
$5.5 million, reflecting decreased group pension lottery sales of $22.1 million
partially offset by increased annuitizations. Considerations from supplementary
contracts decreased by $1.8 million. Sales of combination fixed/variable (net of
annuitizations) decreased by $151.3 million, reflecting the decline in the
interest rate environment during 1995. Sales of group pension guaranteed
investment contracts increased by $49.2 million reflecting the transfer of the
parents' agent's pension fund from the parent to the Company. Net investment
income and amortization of the interest maintenance reserve decreased by $5.6
million, primarily due to capital losses incurred late in 1994, which were then
amortized through the interest maintenance reserve during 1995.
6
Benefits and expenses decreased by $143 million for the year ended December 31,
1994. Reinsurance had the effect of decreasing benefits and expenses by $45.2
million. Deaths, annuity payments and surrender benefits and other fund
withdrawals increased by $106.5 million as a result of increased surrenders of
fixed annuities for which interest rate guarantee periods have expired, as well
as withdrawals from the separate accounts. Policy reserves decreased by $16.7
million primarily resulting from increased reserves for minimum death benefit
guarantees. The increase in liability for premium and other deposit funds of
$83.1 million reflects fewer maturities of contracts for which the guarantee
periods have expired, and increased sales of group pension guaranteed investment
contracts described above. Commissions decreased by $5.5 million, reflecting the
decrease in total sales of combination fixed/variable annuities. General
expenses increased by $3.3 million, reflecting increased expenses allocated from
the parent and increased salaries due to staffing. Transfers to separate
accounts decreased by $268.8 million, reflecting less exchange activity out of
the separate accounts into the general account and fewer variable annuity sales
transferred to the separate accounts.
(2) LIQUIDITY
The Registrant's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment principal
and sales of investments. The Registrant's cash outflow is primarily to meet
death and other maturing insurance and annuity contract obligations, to pay out
on contract terminations, to fund investment commitments and to pay normal
operating expenses and taxes. Cash outflows are met from the normal net cash
inflows.
The Registrant segments its business internally and matches projected cash
inflows and outflows within each segment. Targets for money market holdings are
established for each segment, which in the aggregate meet the day to day cash
needs of the Registrant. If greater liquidity is required, government issued
bonds, which are highly liquid, are sold to provide the necessary funds.
Government and publicly traded corporate bonds comprise 65.9% of the
Registrant's long-term bond holdings.
Management believes that the Registrant's sources of liquidity are more than
adequate to meet its anticipated needs.
(3) NEW ACCOUNTING PRONOUNCEMENTS
During 1996, the Registrant received assurance from the Securities and Exchange
Commission that the Registrant, as a wholly-owned subsidiary of a mutual life
insurance company, would be permitted to file financial statements on the NAIC
statutory basis of accounting. Refer to notes 1 and 19 to the financial
statements filed as Item 8 below.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, in the form required by Regulation S-X, are set forth
below. The Registrant is not subject to the requirement to file supplementary
financial data specified by Item 302 of Regulation S-K.
7
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
(IN 000'S)
ADMITTED ASSETS
Bonds $ 2,258,858 $ 2,706,067
Preferred stock 0 1,149
Mortgage loans 938,932 1,066,911
Investments in subsidiaries 144,043 138,282
Real estate 100,385 95,574
Other invested assets 51,378 38,387
Policy loans 40,554 38,355
Cash 1,305 (20,280)
Investment income due and accrued 68,190 62,719
Funds withheld on reinsurance assumed 878,798 741,091
Due from separate accounts 220,999 148,675
Other assets 27,509 26,349
-------------- --------------
General account assets 4,730,951 5,043,279
Unitized separate account assets 6,919,219 5,275,808
Non-unitized separate account assets 2,108,835 2,040,596
-------------- --------------
Total Assets $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves $ 2,099,980 $ 1,937,302
Annuity and other deposits 1,898,309 2,290,656
Policy benefits in process of payment 2,677 5,884
Accrued expenses and taxes 57,719 44,114
Other liabilities 63,987 36,080
Due to (from) parent and affiliates--net (41,326) (130,502)
Interest maintenance reserve 28,676 25,218
Asset valuation reserve 53,911 42,099
-------------- --------------
General account liabilities 4,163,933 4,250,851
Unitized separate account liabilities 6,919,094 5,275,784
Non-unitized separate account liabilities 2,108,835 2,040,596
-------------- --------------
13,191,862 11,567,231
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital Stock Par value $1,000:
Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
Surplus 561,243 786,552
-------------- --------------
Total capital stock and surplus 567,143 792,452
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
8
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN 000'S)
Premiums and annuity considerations $ 282,466 $ 279,407 $ 316,008
Deposit-type funds 1,775,230 1,545,542 1,647,623
Considerations for supplementary
contracts without life contingencies
and dividend accumulations 2,340 1,088 2,906
Net investment income 303,753 312,872 315,433
Amortization of interest maintenance
reserve 1,557 1,025 4,128
Miscellaneous income 71,903 57,864 30,988
---------- ---------- ----------
Total 2,437,249 2,197,798 2,317,086
---------- ---------- ----------
Death benefits 12,394 15,317 4,836
Annuity benefits 146,654 140,497 135,256
Surrender benefits and other fund
withdrawals 1,507,263 1,074,396 965,186
Interest on policy or contract funds 2,205 739 572
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 2,120 1,888 2,334
Increase in aggregate reserves for life
and accident and health policies and
contracts 162,678 171,975 219,334
Increase in liability for premium and
other deposit funds (392,348) 13,553 (69,541)
Increase in reserve for supplementary
contracts without life contingencies
and for dividend and coupon
accumulations 327 (663) 714
---------- ---------- ----------
Total 1,441,293 1,417,702 1,258,691
Commissions on premiums and annuity
considerations (direct business only) 109,894 88,037 93,576
Commissions and expense allowances on
reinsurance assumed 18,910 22,012 59,085
General insurance expenses 37,206 34,580 31,243
Insurance taxes, licenses and fees,
excluding federal income taxes 8,431 7,685 5,638
Increase in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums 901 (1,377) (2,650)
Net transfers to Separate Account 678,663 551,784 820,671
---------- ---------- ----------
Total 2,295,298 2,120,423 2,266,254
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and federal
income tax 141,951 77,375 50,832
Dividends to policyholders 29,189 25,722 22,928
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and before federal
income tax 112,762 51,653 27,904
Federal income taxes incurred (excluding
tax on capital gains) (2,702) 17,807 19,469
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and federal income tax
and before realized capital gains or
(losses) 115,464 33,846 8,435
Net realized capital gains or (losses)
less capital gains tax and transferred
to the interest maintenance reserve 7,560 2,069 (6,978)
---------- ---------- ----------
NET INCOME $ 123,024 $ 35,915 $ 1,457
---------- ---------- ----------
---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
9
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN 000'S)
CAPITAL AND SURPLUS, BEGINNING OF YEAR $ 792,452 $ 455,489 $ 483,188
---------- ---------- ----------
Net income 123,024 35,915 1,457
Change in net unrealized capital gains or (losses) (1,715) 2,009 (671)
Change in non-admitted assets and related items 67 (2,270) (1,485)
Change in asset valuation reserve (11,812) (13,690) (8,376)
Other changes in surplus in Separate Accounts Statement 100 (4,038) (227)
Increase (decrease) in surplus notes (335,000) 315,000 0
Miscellaneous gains and losses in surplus 27 4,037 (18,397)
---------- ---------- ----------
Net change in capital and surplus for the year (225,309) 336,963 (27,699)
---------- ---------- ----------
Capital and surplus, end of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
10
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN 000'S)
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,059,577 $ 1,826,456 $ 2,287,695
Considerations for supplementary
contracts and dividend accumulations
received 2,340 1,088 2,906
Net investment income received 324,914 374,398 351,058
Other income received 88,295 25,348 30,989
----------- ----------- -----------
Total receipts 2,475,126 2,227,290 2,672,648
----------- ----------- -----------
Benefits paid (other than dividends) 1,671,483 1,231,936 1,326,223
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 172,015 150,463 187,699
Net cash transfers to Separate Accounts 755,605 568,188 963,127
Dividends paid to policyholders 22,689 17,722 13,303
Federal income tax (recoveries)
payments (excluding tax on capital
gains) (15,363) (20,655) 2,976
Other--net 2,205 739 572
----------- ----------- -----------
Total payments 2,608,634 1,948,393 2,493,900
----------- ----------- -----------
Net cash from operations (133,508) 278,897 178,748
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$1,554,873 for 1996, $8,610,951 for
1995 and $19,271,876 for 1994) 1,768,147 1,658,655 1,508,156
Issuance (repayment) of surplus notes (335,000) 315,000
Other cash provided 147,956 419,446 26,512
----------- ----------- -----------
Total cash provided 1,581,103 2,393,101 1,534,668
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 1,318,880 1,749,714 1,442,155
Other cash applied 235,982 796,207 264,233
----------- ----------- -----------
Total cash applied 1,554,862 2,545,921 1,706,388
----------- ----------- -----------
Net change in cash and short-term
investments (107,267) 126,077 7,028
Cash and short-term investments:
Beginning of year 197,326 71,249 64,221
----------- ----------- -----------
End of year $ 90,059 $ 197,326 $ 71,249
----------- ----------- -----------
----------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
11
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual fixed
and variable annuities, group fixed and variable annuities and group pension
contracts. The Company also underwrites a block of individual life insurance
business through a reinsurance contract with its parent. Sun Life Assurance
Company of Canada (the "parent company") is a mutual life insurance company.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, that has changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position and results of operations
and capital in conformity with generally accepted accounting principles. (See
Note 19 for further discussion relative to the Company's basis of financial
statement presentation.) The effects on the financial statements of the
variances between the statutory basis of accounting and GAAP, although not
reasonably determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans at the amounts of the unpaid balances.
Real estate investments are carried at the lower of cost adjusted for
accumulated depreciation or appraised value, less encumbrances. Short-term
investments are carried at amortized cost, which approximates 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.
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
12
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED):
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. 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
contract holders are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market values.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience, not
applicable to contract owners, are transferred to (from) the general account.
Accumulated gains (losses) that have not been transferred are recorded as a
payable (receivable) to (from) the general account. Amounts payable to the
general account of the Company were $220,999,000 in 1996 and $148,675,000 in
1995.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
During 1996, the Company changed its method of accounting and reporting for
deposits withdrawals, and benefits with respect to unitized separate accounts.
Previously, deposits were recorded as direct increases in liabilities of the
separate accounts while withdrawals and benefits were recorded as direct
decreases in that liability. Effective for 1996, the Company recorded: deposits
as revenue in the general account; withdrawals and benefits as expenses in the
general account; and the transfer of those funds between the general account and
the separate account are reflected as an expense (income) item. Amounts
presented for the years ended December 31, 1995 and 1994 have been restated to
conform to this presentation. The effect of this change was to increase revenues
and expenses by $1.4 billion in 1996, $878 million in 1995, and $988 million in
1994; there is no impact on net income of the general account. This new method
of reporting is consistent with the accounting treatment for deposits and
withdrawals and benefits of the non-unitized separate account of the Company,
and is consistent with prescribed statutory accounting practices.
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995 and $1.4 million
greater than the Annual Statement in 1994. Effective for 1996, the Company
changed its method of accounting for investments in subsidiaries to conform with
the prescribed statutory accounting practices used in the preparation of its
Annual Statement. As a result of the change, $5.7 million in undistributed
losses of subsidiaries are reported directly as a separate component of
unassigned surplus rather than being included in net income for the year ended
December 31, 1996. The amounts as reported in prior years have not been
restated.
13
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED):
The Company has also revised the form of its statutory statements of operations,
changes in capital stock and surplus, and cash flow in order to match more
exactly the presentation used in the preparation of its Annual Statement. As a
result, reclassifications have been made in the amounts reported in 1995 and
1994 audited financial statements to conform to the presentation used for the
1996 amounts. Other than as described in the preceding paragraph, none of the
changes have impacted net income or statutory surplus as reported in the 1995
and 1994 audited financial statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York (Sun Life (N.Y.)), Massachusetts Casualty Insurance Company
(MCIC), Sun Investment Services Company (Sunesco), New London Trust, F.S.B.
(NLT), Sun Life Financial Services Limited, Inc. (SLFSL), Sun Benefit Services
Company, Inc. (Sunbesco), Sun Capital Advisers, Inc. (Sun Capital), and Sun Life
Finance Corporation (Sunfinco).
The Company owns 94.8% of the outstanding shares of Massachusetts Financial
Services Company (MFS). The Company previously owned 100% of the shares. During
1996, MFS issued additional shares to officers of MFS, thereby reducing the
Company's ownership to 94.8%.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC is a life insurance company which issues only individual disability
income policies. Sunesco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank. SLFSL serves as the marketing
administrator for the distribution of the Parent company's offshore products.
Sun Capital, a registered investment adviser, Sunfinco, and Sunbesco are
currently inactive.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds and certain mutual funds and separate accounts
established by the Company, and, through a subsidiary, provides investment
advice to substantial private clients.
In 1994, the Company reduced its carrying value of MCIC by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus.
On December 31, 1996, the Company issued to the parent a $58,000,000 note which
is scheduled for repayment on February 15, 1997 at an interest rate of 5.70%.
Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at
an interest rate of 5.76% due on demand on or after March 1, 1997. On December
31, 1996 and 1995 the Company had an additional $20,000,000 in notes issued by
MFS, scheduled to mature in 2000. All of these notes are reported as due from
parent and affiliates.
During 1996, 1995 and 1994, the Company contributed capital in the following
amounts to its subsidiaries:
1996 1995 1994
-------------- ------------ ------------
MCIC $ 10,000,000 $ 6,000,000 $ 6,000,000
SLFSL 1,500,000 0 0
14
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. INVESTMENTS IN SUBSIDIARIES: (CONTINUED):
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1996, 1995 and 1994 and for the years then ended, follows:
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
Intangible assets $ 9,646 $ 12,174 $ 13,485
Other assets 1,376,014 1,233,372 1,165,595
Liabilities (1,241,617) (1,107,264) (1,044,273)
------------ ------------ ------------
Total net assets $ 144,043 $ 138,282 $ 134,807
------------ ------------ ------------
------------ ------------ ------------
Total revenues $ 717,280 $ 570,794 $ 495,097
Operating expenses (624,199) (504,070) (425,891)
Income tax expense (42,820) (31,193) (29,374)
------------ ------------ ------------
Net income $ 50,261 $ 35,531 $ 39,832
------------ ------------ ------------
------------ ------------ ------------
3. BONDS:
The amortized cost and estimated fair value of investments in debt securities
are as follows:
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 (0) 2,273
Foreign governments 18,812 1,351 (0) 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,025 7,912 (472) 297,465
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,104 102,728 (27,361) 2,245,471
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 0 0 88,754
------------ ----------- ----------- ------------
$ 2,258,858 $ 102,728 $ (27,361) $ 2,334,225
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
15
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS: (CONTINUED):
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ------------ ------------
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 467,597 $ 22,783 $ (443) $ 489,937
States, provinces and political subdivisions 2,252 81 (0) 2,333
Foreign governments 38,303 4,551 (6) 42,848
Public utilities 513,704 45,466 (203) 558,967
Transportation 215,786 22,794 (2,221) 236,359
Finance 225,074 13,846 (84) 238,836
All other corporate bonds 1,025,745 67,371 (7,415) 1,085,701
------------ ----------- ------------ ------------
Total long-term bonds 2,488,461 176,892 (10,372) 2,654,981
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 217,606 0 0 217,606
------------ ----------- ------------ ------------
$ 2,706,067 $ 176,892 $ (10,372) $ 2,872,587
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
The amortized cost and estimated fair value of bonds at December 31, 1996 and
1995 are shown below by contractual maturity. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call and/or prepayment penalties.
DECEMBER 31, 1996
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN 000'S)
Maturities:
Due in one year or less $ 314,130 $ 315,507
Due after one year through five years 743,215 751,858
Due after five years through ten years 268,376 280,153
Due after ten years 714,504 775,051
------------ ------------
$ 2,040,225 $ 2,122,569
Mortgage-backed securities 218,633 211,656
------------ ------------
$ 2,258,858 $ 2,334,225
------------ ------------
------------ ------------
DECEMBER 31, 1995
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN 000'S)
Maturities:
Due in one year or less $ 558,775 $ 561,119
Due after one year through five years 824,446 846,230
Due after five years through ten years 256,552 269,549
Due after ten years 884,187 1,000,908
------------ ------------
2,523,960 2,677,806
Mortgage-backed securities 182,107 194,781
$ 2,706,067 $ 2,872,587
------------ ------------
------------ ------------
16
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS: (CONTINUED):
Proceeds from sales and maturities of investments in debt securities during
1996, 1995, and 1994 were $1,554,016,000, $1,510,553,000, and $1,390,974,000,
gross gains were $16,975,000, $24,757,000, and $15,025,000 and gross losses were
$10,885,000, $5,742,000, and $30,041,000 , respectively.
Bonds included above with an amortized cost of approximately $2,060,000 and
$2,059,000 at December 31, 1996 and 1995, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $51,537,000 and $250,729,000 and the income
resulting from this program was $137,000, $2,000 and $26,000 at December 31,
1996, 1995 and 1994, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
provisions have been made. In those cases where, in management's judgement, the
mortgage loans' values are impaired, appropriate losses are recorded.
The following table shows the geographical distribution of the mortgage
portfolio.
DECEMBER 31,
------------------------
1996 1995
---------- ------------
(IN 000'S)
California $ 154,272 $ 153,811
Massachusetts 79,929 83,999
Michigan 57,119 69,125
New York 67,742 81,480
Ohio 75,405 83,915
Pennsylvania 115,584 141,468
Washington 75,819 91,900
All other 313,062 361,213
---------- ------------
$ 938,932 $ 1,066,911
---------- ------------
---------- ------------
The Company has restructured mortgage loans totalling $29,261,000, and
$49,846,000 at December 31, 1996 and 1995, respectively, against which there are
provisions of $5,893,000 and $8,799,000 at December 31, 1996 and 1995,
respectively.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $9,800,000 and
$13,100,000 at December 31, 1996 and 1995, respectively.
17
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INVESTMENTS GAINS AND LOSSES:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN 000'S)
Net realized gains (losses)
Bonds $ 5,631 $ 3,935 $ (858)
Mortgage loans 763 292 (5,689)
Real estate 599 391 (334)
Other assets 567 (2,549) (97)
--------- --------- ---------
$ 7,560 $ 2,069 $ (6,978)
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (5,739) $ 0 $ 0
Mortgage loans (600) (1,574) 0
Real estate 4,624 3,583 (671)
--------- --------- ---------
$ (1,715) $ 2,009 $ (671)
--------- --------- ---------
--------- --------- ---------
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve (IMR) and amortized into income over the remaining contractual life of
the security sold. The gross realized capital gains and losses credited or
charged to the interest maintenance reserve were a credit of $7,710,000 in 1996,
a credit of $12,714,000 in 1995, and a charge of $14,070,000 in 1994. All gains
and losses are transferred net of applicable taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN 000'S)
Interest income from bonds $ 178,695 $ 205,445 $ 200,338
Income from investment in common stock of affiliates 50,408 35,403 39,577
Interest income from mortgage loans 92,591 99,766 106,404
Real estate investment income 16,249 14,979 12,950
Interest income from policy loans 2,790 2,777 2,669
Other 1,710 2,672 1,212
---------- ---------- ----------
Gross investment income 342,443 361,042 363,150
Interest on surplus notes (23,061) (31,813) (31,150)
Investment expenses (15,629) (16,357) (16,567)
---------- ---------- ----------
$ 303,753 $ 312,872 $ 315,433
---------- ---------- ----------
---------- ---------- ----------
18
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocates gains (losses) to specific hedged
assets or liabilities, gains ( losses) are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1996 and December 31,
1995 there were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
SWAPS OUTSTANDING
AT DECEMBER 31, 1995
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
Conventional interest rate swaps $ 367,000 $ 3,275
Foreign currency swap 2,745 290
Forward spread lock swaps 50,000 112
The market value is the estimated amount that the Company would receive or pay
on termination or sale, taking into account current interest rates and the
current creditworthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged 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 9.75 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.
19
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. LEVERAGED LEASES: (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
YEARS ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN 000'S)
Lease contracts receivable $ 101,244 $ 111,611
Less non-recourse debt 101,227 (111,594)
---------- ----------
17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (11,501) (13,132)
---------- ----------
Investment in leveraged leases 29,666 28,035
Less fees (188) (213)
---------- ----------
Net investment in leveraged leases $ 29,478 $ 27,822
---------- ----------
---------- ----------
The net investment is classified as other invested assets in the accompanying
statements of admitted assets, liabilities, capital stock and surplus.
10. REINSURANCE:
The Company has agreements with the parent company which provide that the parent
company will reinsure the mortality risks of the individual life insurance
contracts sold by the Company. Under these agreements basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively. Reinsurance transactions under these agreements
had the effect of decreasing income from operations by approximately $1,603,000,
$2,184,000, and $2,138,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Effective January 1, 1991, the Company entered into an agreement with the parent
company under which certain individual life insurance contracts issued by the
parent company were reinsured by the Company on a 90% coinsurance basis. Also,
effective January 1, 1991, the Company entered into an agreement with the parent
company which provides that the parent company 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 agreements had
the effect of increasing income from operations by approximately $35,161,000 and
$11,821,000 for the years ended December 31, 1996 and 1995, respectively, and
decreasing income by approximately $29,188,000 for the year ended December 31,
1994. The life reinsurance assumed agreement requires the reinsurer to withhold
funds in amounts equal to the reserves assumed.
20
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. REINSURANCE: (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1996, 1995 and 1994 before the effect of
reinsurance transactions with the parent company.
PRO-FORMA RESULTS PRE-REINSURANCE
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
Income:
Premiums, annuity deposits and other revenues $ 1,858,145 $ 1,619,337 $ 2,053,408
Net investment income and realized gains 312,870 315,967 312,582
------------ ------------ ------------
Subtotal 2,171,015 1,935,304 2,365,990
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 1,928,720 1,760,917 2,183,282
Other expenses 155,531 130,302 130,456
------------ ------------ ------------
Subtotal 2,084,251 1,891,219 2,313,738
------------ ------------ ------------
Income from operations $ 86,764 $ 44,085 $ 52,252
------------ ------------ ------------
------------ ------------ ------------
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $46,000 in 1996, and by
$1,599,000 in 1995, and increasing income from operations by $1,854,404 in 1994.
21
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
Withdrawal characteristics of general account and separate account annuity
reserves and deposits:
DECEMBER 31, 1996
----------------------------
AMOUNT % OF TOTAL
-------------- ------------
(IN 000'S)
Subject to discretionary withdrawal-with adjustment
--with market value adjustment $ 3,547,683 30.44%
--at book value less surrender charges (surrender charge >5%) 5,626,117 48.27
--at book value (minimal or no charge or adjustment) 1,264,586 10.85
Not subject to discretionary withdrawal provision 1,218,157 10.44
-------------- ------
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100.00%
-------------- ------
-------------- ------
DECEMBER 31, 1995
----------------------------
AMOUNT % OF TOTAL
-------------- ------------
(IN 000'S)
Subject to discretionary withdrawal-with adjustment
--with market value adjustment $ 3,796,596 36.36%
--at book value less surrender charges (surrender charge >5%) 4,066,126 38.94
--at book value (minimal or no charge or adjustment) 1,278,215 12.24
Not subject to discretionary withdrawal provision 1,301,259 12.46
-------------- ------
Total annuity actuarial reserves and deposit liabilities $ 10,442,196 100.00%
-------------- ------
-------------- ------
12. RETIREMENT PLANS:
The Company participates with its parent company in a non-contributory defined
benefit pension plan covering essentially all employees. The benefits are based
on years of service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA. The Company is charged for
its share of the pension cost based upon its covered participants. Pension plan
assets consist principally of separate accounts of the parent company.
The Company's share of the group's accrued pension cost at December 31, 1996,
1995 and 1994 was $446,000, $420,000, and $417,000, respectively. The Company's
share of net periodic pension cost was $27,000, $3,000, and $417,000, for 1996,
1995 and 1994, respectively.
The Company also participates with its parent and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $233,000, $185,000 and $152,000 for the years ended December
31, 1996, 1995, and 1994, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS:
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees 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.
22
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. RETIREMENT PLANS: (CONTINUED):
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Post-retirement Benefits
Other than Pensions.' SFAS No. 106 requires the Company to accrue the estimated
cost of retiree benefit payments during the years the employee provides
services. SFAS No. 106 allows recognition of the cumulative effect of the
liability in the year of adoption or the amortization of the obligation over a
period of up to 20 years. The Company has elected to recognize this obligation
of approximately $400,000 over a period of ten years. The Company's cash flows
are not affected by implementation of this standard, but implementation
decreased net income by $209,000, $142,000, and $114,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Effective June 5, 1996, the
Company made certain changes regarding eligibility and benefits to its post-
retirement health benefits plans for retirees on or after that date. The impact
of these changes is a decrease of 1996 post-retirement benefit costs of
$599,000. The Company's post-retirement health care plans currently are not
funded.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
ASSETS
Bonds $ 2,258,858 $ 2,339,126
Mortgages 938,932 958,909
LIABILITIES
Insurance reserves 122,606 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
DECEMBER 31, 1995
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
ASSETS
Bonds $ 2,706,067 $ 2,872,586
Mortgages 1,066,911 1,111,895
LIABILITIES
Insurance reserves 124,066 124,066
Individual annuities 434,261 431,263
Pension products 2,227,882 2,265,386
Derivatives -- 3,387
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
23
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED):
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
taking into account prices for publicly traded bonds of similar credit risk and
maturity and repayment and liquidity characteristics.
The fair values of the Company's general account reserves and liabilities 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. Those contracts that are deemed to have short-term
guarantees have a carrying amount equal to the estimated market value.
The fair values of mortgages 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.
The fair values of derivative financial instruments are estimated using the
process described in Note #8.
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
1996 1995
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
Balance, beginning of year $ 42,099 $ 25,218 $ 28,409 $ 18,140
Realized investment gains (losses), net of tax 3,160 5,011 (1,524) 7,977
Amortization of investment (gains) losses 0 (1,557) 0 (899)
Unrealized investment gains (losses) 1,502 0 3,650 0
Required by formula 7,150 4 11,564 0
--------- --------- --------- ---------
Balance, end of year $ 53,911 $ 28,676 $ 42,099 $ 25,218
--------- --------- --------- ---------
--------- --------- --------- ---------
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $19,264,000, $12,429,000 and
$43,200,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
16. SURPLUS NOTES AND NOTE RECEIVABLE:
The Company had issued and outstanding surplus notes to its parent with an
aggregate carrying value of $335,000,000 during the period 1982 through January
16, 1996 at interest rates between 7.25% and 10%. The Company repaid all
principal and interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totalling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007, and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes; and, in the case
of principal repayments, with the consent of the Delaware Insurance
Commissioner. In addition, with regard to surplus notes outstanding through
January 16, 1996, subsequent to December 31, 1994 interest payments required the
consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 also requires the consents of the Delaware
Insurance Commissioner and Canadian Office of the Superintendent of Financial
Institutions.
During 1996, 1995 and 1994, the Company obtained the required consents, and
expensed $23,061,000, $31,813,000 and $31,150,000 in respect of interest on
surplus notes for the years 1996, 1995 and 1994, respectively.
On December 19, 1995, the parent borrowed $120,000,000 at 5.6% through a
short-term note from the Company maturing on January 16, 1996. The note, which
is included in due from parent and affiliates at December 31, 1995, was repaid
in full by the parent at maturity.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with its parent company which provides that the
parent company will furnish, as requested, personnel as well as certain services
and facilities on a cost-reimbursement basis. Expenses under this agreement
amounted to approximately $20,192,000 in 1996, $20,293,000 in 1995, and
$18,452,000 in 1994.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1996
and 1995.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices, which prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the
25
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
19. ACCOUNTING POLICIES AND PRINCIPLES: (CONTINUED):
Company's surplus. Changes in the net equity value of the common stock of all
other subsidiaries are directly reflected in the Company's Investment Valuation
Reserves. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: Statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP-- deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices than under GAAP. Actuarial assumptions and reserving
methods differ under statutory accounting practices and GAAP. Premiums for
universal life and investment type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of the Company has determined that the cost
of complying with Statement No. 120 would exceed the benefits that the Company,
or the users of its financial statements would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
26
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1996 and 1995, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1996. These
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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 signficant 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.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of Dcember 31, 1996
and 1995, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1996 on the basis of accountng
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1996 and 1995 or the results of its operations or its cash flow for each of
the three years in the period ended Decemeber 31, 1996.
In our previous report dated February 7, 1996, we expressed an opinion that the
1995 and 1994 financial statements, prepared using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
presented fairly, in all material respects, the financial position of Sun Life
Assurance Company of Canada (U.S.) as of December 31, 1995, and the results of
its operations, and its cash flow for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles. As described in
Notes 1 and 19 to the financial statements, pursuant to the provisions of
Statement of Financial Accounting Standards No. 120, ACCOUNTING AND REPORTING BY
MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN
LONG-DURATION PARTICIPATING CONTRACTS, financial statements of mutual life
insurance enterprises (and stock life insurance companies that are wholly owned
subsidiaries of mutual life insurance companies) for periods ending on or before
December 15, 1996, prepared using accounting practices prescribed or permitted
by insurance regulators, are not considered presentations in conformity with
generally accepted accounting principles when presented for comparative purposes
with the enterprise's financial statements for periods subsequent to the
effective date of Statement No. 120. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
As management as stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
February 3, 1997
27
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and principal officers of the Registrant 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, the directors and officers
of the Registrant 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.
Richard B. Bailey, 70, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds.
A. Keith Brodkin, 61, Director (1990*)
500 Boylston Street
Boston, Massachusetts 02116
He is Chairman and a Director of Massachusetts Financial Services Company; a
Director of Sun Life Insurance and Annuity Company of New York; and a
Director/Trustee and/or Officer of certain Funds in the MFS Family of Funds.
M. Colyer Crum, 64, Director (1986*)
Harvard Business School
104 West Cliff Street
Weston, MA 02163
He is a Professor Emeritus of the Harvard Business School and a Director of Sun
Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of New
York, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Natural Resources Trust, Merrill Lynch Ready Assets Trust, Merrill
Lynch Special Value Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, MuniVest California Insured Fund, Inc.,
MuniVest Florida Fund, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniYield Florida
Insured Fund, MuniYield Insured Fund II, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund
III, Inc., MuniYield Pennsylvania Fund, Cambridge Bancorp and Cambridge Trust
Company. Prior to July 1996 he was a professor at the Harvard Business School.
John S. Lane, 62, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of Canada
and a Director of Sun Investment Services Company, Sun Life Insurance and
Annuity Company of New York and Sun Capital Advisers, Inc.
- ---------
* Year Elected Director
28
David D. Horn, 55, Senior Vice President and General Manager
and Director (1970, 1985*)
One Sun Life Executive Park Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Chairman and President and a Director of Sun
Investment Services Company; President and a Director of Sun Benefit Services
Company, Inc., Sun Canada Financial Co., and Sun Life Financial Services
Limited; Senior Vice President and a Director of Sun Life Insurance and Annuity
Company of New York; Vice President and a Director of Sun Growth Variable
Annuity Fund, Inc.; a Director of Sun Capital Advisers, Inc; a Director of
Massachusetts Casualty Insurance Company; 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, Total Return Variable Account, Managed Sectors
Variable Account and World Governments Variable Account.
Angus A. MacNaughton, 65, Director (1985*)
950 Tower Lane, Metro Tower, Suite 1170
Foster City, California 94404
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Stelco Inc. and Varian Associates, Inc.
John D. McNeil, 63, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and Sun
Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; President and a Director of Sun Growth Variable
Annuity Fund, Inc.; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman 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, Total Return Variable Account, Managed
Sectors Variable Account and World Governments Variable Account; and a Director
of Shell (Canada) Limited and Canadian Pacific, Ltd.
Donald A. Stewart, 50, President and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada, Sun Life
Insurance and Annuity Company of New York; a Director of Massachusetts Casualty
Insurance Company, Massachusetts Financial Services Company, Spectrum United
Holdings, Inc., Sun Life Investment Management Limited and Sun Life of Canada UK
Holdings plc.
Robert A. Bonner, 52, Vice President, Pensions (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Pensions for the United States of Sun Life Assurance
Company of Canada.
Robert E. McGinness, 55, Vice President and Counsel (1983)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
- ---------
* Year Elected Director
29
He is Vice President and Counsel for the United States of Sun Life Assurance
Company of Canada; Vice President and Counsel and a director of Sun Investment
Services Company and Sun Benefit Services Company, Inc.; and a Director of New
London Trust, F.S.B. and Massachusetts Casualty Insurance Company.
S. Caesar Raboy, 60, Senior Vice President and Deputy General Manager and
Director (1991)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States of
Sun Life Assurance Company of Canada; Senior Vice President of Sun Life
Insurance and Annuity Company of New York; and Vice President and Director of
Sun Life Financial Services Limited.
C. James Prieur, 45, Vice President, Investments (1993)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Investments for the United States of Sun Life Assurance
Company of Canada; Vice President, Investments of Sun Investment Services
Company; Sun Life Insurance and Annuity Company of New York; and Massachusetts
Casualty Insurance Company; and a Director of Sun Capital Advisers, Inc., New
London Trust, F.S.B. and Sun Canada Financial Co.
L. Brock Thomson, 55, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Investment
Services Company, Sun Benefit Services Company, Inc., Sun Life Insurance and
Annuity Company of New York and Sun Capital Advisers, Inc.; and Assistant
Treasurer of Massachusetts Casualty Insurance Company.
Robert P. Vrolyk, 43, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance for the United States of Sun Life Assurance
Company of Canada; Vice President, Controller and Actuary of Sun Life Insurance
and Annuity Company of New York; Vice President and a Director of Sun Canada
Financial Co.; and a Director of Massachusetts Casualty Insurance Company.
Margaret Sears Mead, 46, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, MA 02181
She is Assistant Vice President and Counsel for the United States of Sun Life
Assurance Company of Canada and Assistant Vice President and Secretary of Sun
Life Insurance and Annuity Company of New York.
The directors, officers and employees of the Company, are covered under a
commercial blanket bond and a liability policy.
- ---------
* Year Elected Director
30
ITEM 11. EXECUTIVE COMPENSATION.
All of the executive officers of the Registrant also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Registrant. Allocations have been made as to such officers time devoted to
duties as executive officers of the Registrant and its subsidiaries. The
allocated cash compensation of all executive officers of the Registrant as a
group for services rendered in all capacities to the Registrant and its
subsidiaries during 1996, totalled $936,945. The allocated compensation of the
named executive officers is as follows:
ALLOCATED COMPENSATION
------------------------------- OTHER ALLOCATED
NAME/POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------ --------- --------- --------- -----------------
John D. McNeil 1996 $ 55,205 $ 49,859
Chairman 1995 $ 76,854 $ 29,344
1994 $ 59,189 $ 12,284
David D. Horn 1996 $ 172,243 $ 59,630 $ 5,787
Senior Vice President 1995 $ 176,800 $ 52,728
and General Manager 1994 $ 68,985 $ 22,995
Robert A. Bonner 1996 $ 144,516 $ 38,751 $ 9,892
Vice President, Pensions 1995 $ 134,227 $ 24,824
1994 $ 111,632 $ 15,706
C. James Prieur 1996 $ 96,609 $ 26,889
Vice President, Investments 1995 $ 95,416 $ 36,650
1994 $ 82,918 $ 17,398
Robert Leach 1996 $ 146,500 $ 35,825
Vice President, Individual 1995 $ 138,500 $ 25,371
Annuities 1994 $ 132,248 $ 13,500
Directors of the Registrant 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. Messrs. Bailey, Crum and MacNaughton receive compensation in the
amount of $5,000 per year, plus $800 for each board or committee meeting
attended, plus expenses.
No shares of the Registrant are owned by any executive officer or director. The
Registrant is a wholly-owned subsidiary of Sun Life Assurance Company of Canada,
150 King Street West, Toronto, Ontario, Canada.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is not applicable since the Registrant is 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 Registrant has an agreement with its parent company which provides that the
parent company will furnish, as requested, personnel as well as certain services
and facilities on a cost reimbursement basis. Expenses under this agreement
amounted to approximately $20,192,000 in 1996.
LEASES
The Registrant leases office space to the parent company under lease agreements
with terms expiring in September, 1999 and options to extend the terms for each
of thirteen 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 Registrant
under the leases for 1996 amounted to approximately $6,108,000.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements (set forth in Item 8):
-- Statutory Statements of Admitted Assets, Liabilities and Capital Stock
and Surplus as of December 31, 1996 and December 31, 1995.
-- Statutory Statements of Operations for each of the three years ended
December 31, 1996, December 31, 1995 and December 31, 1994.
-- Statutory Statements of Capital Stock and Surplus for each of the
three years ended December 31, 1996, December 31, 1995 and December 31,
1994.
-- Statutory Statements of Cash Flows for each of the three years ended
December 31, 1996, December 31, 1995 and December 31, 1994.
-- 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 VI--Reinsurance.
-- Independent Auditors' Report.
Financial Statement Schedules not included in this Form 10-K have been omitted
because the required information either is not applicable or is presented in the
consolidated financial statements or notes thereto.
32
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE I
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
AMOUNT AT WHICH SHOWN IN
TYPE OF INVESTMENT COST VALUE THE BALANCE SHEET*
- -------------------------------------------------------- ------------ ------------ --------------------------
Fixed maturities:
Bonds:
United States government and government agencies and
authorities $ 267,756 $ 271,101 $ 267,756
States, municipalities and political subdivisions 2,253 2,273 2,253
Foreign governments 18,812 20,163 18,812
Public utilities 415,641 439,146 415,641
Transportation 167,937 179,801 167,937
Finance 290,025 297,465 290,025
All other corporate bonds 1,007,680 1,035,522 949,680
------------ ------------ -----------
Total fixed maturities 2,107,104 2,245,471 2,112,104
------------ ------------ -----------
Mortgage loans on real estate 938,932 -- 938,932
Real estate 83,032 -- 76,994*
Real estate acquired in satisfaction of debt 24,348 -- 23,391*
Other invested assets 51,378 -- 51,378
Policy loans 40,554 -- 40,554
Short-term investments 88,754 -- 88,754
Total investments $ 3,397,102 $ 2,245,471 $ 3,332,107
------------ ------------ -----------
------------ ------------ -----------
- ---------
*Net of provision for unrealized loses of $6,994
33
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
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, 1996 $ 1,225,073 $ 6,134,462 $ 11,400,640 $ 5,266,178 216.5%
------------ --------------- ----------------- ------------ -----
December 31, 1995 $ 1,277,888 $ 6,580,848 $ 12,011,507 $ 6,708,547 179.0%
------------ --------------- ----------------- ------------ -----
December 31, 1994 $ 1,342,863 $ 6,957,308 $ 12,584,516 $ 6,970,071 180.6%
------------ --------------- ----------------- ------------ -----
LIFE INSURANCE PREMIUMS (IN 000'S)
December 31, 1996 $ 5,686 $ 12,054 $ 214,099 $ 202,045 106.0%
------------ --------------- ----------------- ------------ -----
December 31, 1995 $ 6,051 $ 10,258 $ 217,449 $ 213,242 101.9%
------------ --------------- ----------------- ------------ -----
December 31, 1994 $ 6,490 $ 8,327 $ 246,571 $ 244,734 100.8%
------------ --------------- ----------------- ------------ -----
34
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 statutory statements of admitted assets, liabilities, and
capital stock and surplus of Sun Life Assurance Company of Canada (U.S.)
(wholly-owned subsidiary of Sun Life Assurance Company of Canada) as of December
31, 1996 and 1995 and the related statutory statements of operations, changes in
capital stock and surplus and cash flow for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 3, 1997 (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. 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 therein set forth.
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 1997
35
(A) 3 AND (C). EXHIBITS:
The following Exhibits are incorporated herein by reference unless otherwise
indicated:
EXHIBIT NO.
- ---------------
1 Underwriting Agreement (filed as Exhibit 1 to Registration Statement on Form S-1 (Reg. No. 2-99959)
and as Exhibit 1 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-2 (Reg. No.
33-29851)).
3 Certificate of incorporation and by-laws (filed as Exhibits 3(a) and 3(b) to the Registration
Statements on Form S-1 (Reg. Nos. 2-99959 and 33-29851)).
4 Combination Fixed/Variable Group Annuity Contracts and Certificates (filed as Exhibit 4 to Amendment
No. 2 to Registration Statement on Form S-1 (Reg. No. 2-99959); as Exhibit 4 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form S-2 (Reg. No. 33-29851); as Exhibit 4 to the
Registration Statement on Form S-2 (Reg. No. 33-43008); as Exhibit 4 to Post-Effective Amendment No.
3 to the Registration Statement on Form S-2 (Reg. No. 33-43008); and as Exhibit 4 to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4 on Sun Life of Canada Variable Account F
(Reg. No. 333-05227)).
5 Opinion re: Legality (filed as Exhibit 5 to Amendment No. 1 to Registration Statement on Form S-1
(Reg. No. 2-99959); Exhibit 5 to Pre-Effective Amendment No. 2 to the Registration Statement on Form
S-2 (Reg. No. 33-29851); Exhibit 5 to the Registration Statement on Form S-2 (Reg. No. 33-31711); as
Exhibit 5 to the Registration Statement on Form S-2 (Reg. No. 33-43008) and as Exhibit 5 to the
Registration Statement on Form S-2 (Reg. No. 333-11699).
8 Opinion re: Tax Matters (filed as Exhibit No. 8 to Amendment No. 1 to Registration Statement on Form
S-1 (Reg. No. 2-99959).
10 Service Agreement dated January 18, 1971, between Sun Life Assurance Company of Canada and Company
(filed as Exhibit 9(a) to Registration Statement on Form N-8B-2 of Sun Life of Canada (U.S.) Variable
Account D).
22 Subsidiaries of the Registrant (filed herewith).
24 Powers of attorney (filed herewith).
27 Financial Data Schedule (filed herewith)
(B) REPORTS ON FORM 8-K
No reports have been filed on Form 8-K.
(D) NO ADDITIONAL FINANCIAL STATEMENTS ARE REQUIRED TO BE FILED.
36
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/ JOHN D. MCNEIL
--------------------------------------
John D. McNeil,
CHAIRMAN
Date: March 27, 1997
--------------------------------------
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.
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------- ------------------------
*/s/ JOHN D. MCNEIL
------------------------------------------- Chairman and Director Date: March 27, 1997
John D. McNeil (Principal Executive Officer)
/s/ ROBERT P. VROLYK Vice President and Actuary
------------------------------------------- (Principal Financial & Date: March 27, 1997
Robert P. Vrolyk Accounting Officer)
*/s/ RICHARD B. BAILEY
------------------------------------------- Director Date: March 27, 1997
Richard B. Bailey
*/s/ A. KEITH BRODKIN
------------------------------------------- Director Date: March 27, 1997
A. Keith Brodkin
*/s/ DAVID D. HORN
------------------------------------------- Senior Vice President and Date: March 27, 1997
David D. Horn General Manager and Director
- ---------
* By Margaret Sears Mead pursuant to Power of Attorney filed herewith.
37
*/s/ JOHN S. LANE
- ------------------------------------------- Director Date: March 27, 1997
John S. Lane
*/s/ ANGUS A. MACNAUGHTON
- ------------------------------------------- Director Date: March 27, 1997
Angus A. MacNaughton
*/s/ DONALD A. STEWART
- ------------------------------------------- President and Director Date: March 27, 1997
Donald A. Stewart
*/s/ M. COLYER CRUM
- ------------------------------------------- Director Date: March 27, 1997
M. Colyer Crum
*/s/ S. CAESAR RABOY
- ------------------------------------------- Senior Vice President and Date: March 27, 1997
S. Caesar Raboy Deputy General Manager
- ---------
* By Margaret Sears Mead pursuant to Power of Attorney filed herewith.
38