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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, 1998 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 02481
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(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 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
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None
Securities registered pursuant to Section 12(g) of the Act:
None
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(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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. _X_
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on March 30, 1999,
all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
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PART I
ITEM 1. BUSINESS.
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office mailing address is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481, Tel. (781) 237-6030. 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 Company's wholly-owned subsidiaries include Sun Life Insurance and
Annuity Company of New York, which issues individual fixed and variable annuity
contracts and group life and long-term disability insurance in New York; Sun
Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services
Company), a registered broker-dealer and investment adviser; Clarendon Insurance
Agency, Inc., a registered broker-dealer; New London Trust, F.S.B., a federally
chartered savings bank; Sun Life Financial Services Limited which serves as the
marketing administrator for the distribution of certain offshore products of Sun
Life Assurance Company of Canada; Sun Life of Canada (U.S.) SPE 97-1 organized
for the purpose of engaging in activities incidental to securitizing mortgage
loans and Sun Capital Advisers, Inc., a registered investment adviser. On
September 28, 1998 the Company formed Sun Life Information Services Ireland Ltd.
as an offshore technology center for the purpose of completing systems projects
for affiliates. Other wholly-owned subsidiaries which are currently inactive
include Sun Benefit Services Company Inc. and Sun Life Finance Corporation.
On February 5, 1999, the Company finalized the sale of Massachusetts
Casualty Insurance Company, a wholly-owned subsidiary that issued only
individual disability insurance contracts, to Centre Solutions (U.S.) Limited, a
wholly-owned subsidiary of Centre Reinsurance Holdings Limited for approximately
$34 million. The impact of this sale to the ongoing operations of the Company is
not expected to be material.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of Sun
Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On December 18, 1997, Life
Holdco became a wholly-owned subsidiary of the Sun Life Assurance Company of
Canada -- U.S. Operations Holdings, Inc. ("US Holdco"). US Holdco is a
wholly-owned subsidiary of Sun Life Assurance Company of Canada ("SLOC"), 150
King Street West, Toronto, Ontario, Canada. SLOC is a mutual life insurance
company incorporated pursuant to a Special Act of Parliament of Canada in 1865
and currently transacts business in all of the Canadian provinces and
territories, all states except New York, the District of Columbia, Puerto Rico,
the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda, Barbados,
Philippines, and Indonesia.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding
shares of Massachusetts Financial Services Company ("MFS"). On December 24,
1997, the Company transferred all of its shares of MFS to its parent, Life
Holdco, in the form of a dividend. On December 31, 1997, the Company purchased
all of the outstanding shares of Clarendon Insurance Agency, Inc. from MFS.
On January 27, 1998, SLOC announced that its Board of Directors requested
management world-wide to develop a plan to convert from a mutual life insurance
company into a publicly traded stock company through demutualization worldwide.
Management has put in place a full time task force which, together with a
worldwide team of actuarial, financial and legal advisers, has begun work. The
Board will decide later this year whether to proceed with demutualization,
following the completion of the plan. Demutualization would require regulatory
and policyholder approval. Based on information known to date, the potential
demutualization of SLOC is not expected to have any significant impact on the
Company.
GENERAL
The Company is engaged in the sale of individual variable life insurance and
individual and group fixed and variable annuities. 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.
1
The following table sets forth premiums and deposits by major product
categories for each of the last three years. See notes to financial statements
for industry segment information.
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
Individual insurance products $ 155,907 $ 204,671 $ 207,845
Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327
------------ ------------ ------------
$ 2,350,802 $ 2,409,364 $ 2,042,172
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REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure
the mortality risks of the individual life insurance contracts previously 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 in 1998 had the
effect of decreasing net income from operations by $2,128,000.
Effective January 1, 1991 the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. Also effective January 1,
1991 the Company entered into an agreement with SLOC which provides that SLOC
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. Death benefits are reinsured on a yearly renewable
term basis. The life reinsurance assumed agreement requires the reinsurer to
withhold funds in an amount equal to the reserves assumed. These agreements had
the effect of increasing income from operations by approximately $24,579,000 for
the year ended December 31, 1998. The Company terminated these agreements,
effective October 1, 1998 resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company 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 Company'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 Company's total assets of $16.9 billion at December 31, 1998, 82.7%
consisted of unitized and non-unitized separate account assets, 10.4% were
invested in bonds and similar securities, 3.2% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 2.4% in cash and other
assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1998 statistical study, published
by A.M. Best, the Company ranked 37th among North American life insurance
companies based upon total assets as of December 31, 1997. Its ultimate parent
company, SLOC, ranked
2
21st. A.M. Best has assigned the Company and SLOC its highest classification,
A++, as of December 31, 1997. Standard & Poor's and Duff & Phelps each have
assigned the Company and SLOC their AAA rating, their highest ratings for
insurer financial strength and claims-paying ability, respectively. Moody's
Investor Service, Inc. has assigned the Company an unsolicited rating of Aa2 for
financial strength, which is their third highest rating level.
EMPLOYEES
The Company and SLOC have entered into a service agreement which provides
that the latter will furnish the Company, as required, with personnel as well as
certain services and facilities on a cost reimbursement basis. As of December
31, 1998 the Company had 407 direct employees who are employed at its Principal
Executive Office in Wellesley Hills, Massachusetts and its Retirement Products &
Services Division in Boston, Massachusetts.
STATE REGULATION
The Company 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 Company 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 Company 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. 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
Company, SLOC 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 Company 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 the subsequent impact on the relative desirability of
various personal investment vehicles.
ITEM 2. PROPERTIES
The Company occupies office space owned by it and leased to SLOC, and
certain unrelated parties for lease terms not exceeding five years.
3
ITEM 3. LEGAL PROCEEDINGS
The Company 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 Company to a vote of security holders
during the three months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc.; there is no market for its common stock.
During 1998 the Company declared and paid $50,000,000 in dividends to its
parent, Life Holdco.
On December 24, 1997, the Company transferred all of its shares of MFS to
its parent, Life Holdco, in the form of a dividend valued at $159,722,000.
No dividends were paid in 1996.
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
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1998 1997 1996 1995 1994
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(IN THOUSANDS)
Revenues
Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525
Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583
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2,768,671 2,921,750 2,525,494 2,199,867 2,310,108
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Benefits and expenses
Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290
Other expenses 214,607 206,065 175,342 150,937 186,892
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2,631,557 2,785,169 2,407,870 2,146,145 2,289,182
----------- ----------- ----------- ----------- -----------
Operating gain 137,114 136,581 117,624 53,722 20,926
Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469
----------- ----------- ----------- ----------- -----------
Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000
----------- ----------- ----------- ----------- -----------
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See Item 1 for the effect of the reinsurance agreements on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion in Management's Discussion and Analysis.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
CAUTIONARY STATEMENT
This Form 10-K includes forward looking statements by the Company under the
Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- - - The Company's ability to identify and address Year 2000 issues successfully,
in a timely manner, and at reasonable cost. They also may concern the ability
of the Company's vendors, suppliers, other service providers, and customers to
successfully address their own Year 2000 issues in a timely manner.
- - - Heightened competition, particularly in terms of price, product features, and
distribution capability, which could constrain the Company's growth and
profitability.
- - - Changes in interest rates and market conditions.
- - - Regulatory and legislative developments.
- - - Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of $26.3
million in net realized capital gains. (In the following discussion, "income
from operations" refers to the statutory statement of operations line item, net
gain from operations after dividends to policyholders and federal income tax and
before realized capital gains.)
Income from operations increased from $102.5 million in 1997 to $125.0
million in 1998, mainly as a result of the following factors:
- - - A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Retirement Products and Services segment. (This
is discussed in the "Retirement Products and Services Segment" section below.)
- - - The effect of terminating certain reinsurance agreements with the Company's
ultimate parent. The termination of these agreements was the predominant
factor in the $71.1 million increase in income from operations for the
Company's Individual Insurance segment.
- - - The effects of the Company's December 1997 reorganization (described in the
"Corporate & Other Segment" section below), as a result of which MFS was no
longer a subsidiary of the Company. As a result of this reorganization,
dividends from subsidiaries were lower in 1998 than in 1997 and certain
subsidiary tax benefits were no longer available to the Company. Also
affecting income from operations for the Corporate segment in 1998 was that
income earned on the proceeds of a December 1997 issuance of a $250 million
surplus note was lower than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to $0.4
million in 1998. This change also reflected the Company's reorganization, as a
result of which the Company had a realized capital gain of $21.2 million in
1997.
Net income increased by $6.2 million to $129.2 million in 1997, as compared
to 1996 reflecting a decrease of $15.6 million in income from operations and an
increase of $21.8 million in net realized capital gains.
5
Income from operations decreased from $118.2 million in 1996 to $102.5
million in 1997, mainly as a result of the following factors:
- - - A $7.6 million decrease, to $14.7 million, in income from operations from the
Company's Retirement Products and Services segment. (This is discussed in the
"Retirement Products and Services Segment" section below.)
- - - An increase of $6.5 million, compared to 1996, in the effects of the
reinsurance arrangements between the Company and its ultimate parent.
- - - A decrease, by approximately $9 million, in dividends from subsidiaries, as
well as higher taxes and expenses in the Corporate segment.
As noted above, the $21.9 million increase in net realized capital gains,
from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the
December 1997 company reorganization, as a result of which the Company had a
realized capital gain of $21.2 million in 1997.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary.
Income from Operations by Segment*
($ in millions)
% CHANGE
--------------------------
1998 1997 1996 1998/1997 1997/1996
--------- --------- --------- ------------ ------------
Individual Insurance 89.1 18.0 11.5 395.0% 56.5%
Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)%
Corporate 4.5 69.8 84.4 (93.6)% (17.3)%
--------- --------- --------- ----- -----
125.0 102.5 118.2 22.0% (13.3)%
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--------- --------- --------- ----- -----
*Before realized capital gains
These results are discussed more fully below.
RETIREMENT PRODUCTS AND SERVICES SEGMENT
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the fixed account are subject to market
value adjustment. In the variable accounts, the contract holder can choose from
a range of investment options and styles. The return depends upon investment
performance of the options selected. Investment funds available under Regatta
are managed by MFS, an affiliate of the Company. Investment funds available
under Futurity products are managed by several investment managers, including
MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers; a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are distributed through a dedicated wholesaler
network, including Sun Life of Canada (US) Distributors, Inc., that services
similar distribution channels.
6
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting the Retirement Products and
Services segment results compared to the prior year.
1998 COMPARED TO 1997:
- - - A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27 million,
or 1%, to $2.2 billion in 1998. Fixed annuity account deposits were lower by
approximately 7% in 1998, while deposits into variable annuity accounts have
been increasing in total and as a proportion of total annuity deposits. These
trends reflected market conditions and competitive factors.
Deposits into the Dollar Cost Averaging (DCA) programs, a feature of the
Company's combination fixed/variable annuity products, were a significant
element of account deposits. Under these programs, which were redesigned in
late 1996, deposits are made into the fixed portion of the annuity contract
and receive a bonus rate of interest for the policy year. During the year,
the fixed deposit is systematically transferred to the variable portion of
the contract in equal periodic installments. DCA deposits overall were flat
in 1998 compared to 1997. This pattern resulted, in part, from heightened
competition, as other companies introduced similar DCA programs within the
past year. During the 4th quarter of 1998, the Company introduced a higher
DCA rate and a new six-month DCA program. DCA deposits for that quarter were
higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's variable
annuity products. The continuing strong equity markets, low interest rate
environment, and demographic trends, among other factors, have increased the
demand and market for wealth accumulation products in the U.S., particularly
for variable annuities. These factors have contributed to the growth in the
Company's variable account deposits in 1998, despite heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Retirement
Products and Services segment in 1998, reflecting this recent introduction.
The Company expects that sales for the Futurity product will continue to
increase in the future, based on its beliefs that market demand is growing
for multi-manager variable annuity products, such as Futurity; that the
productivity of Futurity's wholesale distribution network, established in
1998, will continue to grow; and that the marketplace will respond favorably
to future introductions of new Futurity products and product enhancements.
- - - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The
main factors driving this growth in account balances have been market
appreciation and net deposit activity. This growth has generated corresponding
increases in fee income, since fees are determined based on the average assets
held in these accounts. Fee income increased by approximately $43 million, or
39%, in 1998.
- - - WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL ACCOUNT,
NET INVESTMENT INCOME HAS DECLINED. Net investment income reflects only income
earned on invested assets of the general account. In 1998, net investment
income for the Retirement Products and Services segment decreased by about $40
million, or 20%, compared to 1997, mainly as a result of the decline in
average invested assets in the Company's general account. This decline in
average general account assets mainly reflected the shift in deposits in
recent years from the fixed account to variable accounts. It also reflected
the Company's decision in 1997 to no longer market group pension and GIC
products.
- - - LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY
COMPARED TO 1997. During 1997 and into the first half of 1998, surrender and
withdrawal activity was high. This activity primarily related to a block of
separate account contracts that had been issued seven or more years previously
and for which
7
the surrender charge periods had expired. While variable account surrenders
have continued to rise, general account surrenders have declined. As a result
of this pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major elements)
increased in 1997 and were lower in 1998. The company expects that as the
separate account block of business continues to grow, and as a higher
proportion of it is no longer subject to surrender charges, surrenders will
tend to increase.
- - - INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY OPERATIONS. As
a result of these investments, operational expenses increased by approximately
$12 million, or 25%, in 1998 compared to 1997. These increases reflected three
main factors:
- Higher volumes of annuity business, requiring greater administrative
support. The Company expects that increases in the volume of its annuity
business will continue to have a similar effect on expenses in the near
term.
- Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities. The Company expects to continue
to invest in its systems and technology in the future. The extent and
nature of these investments will depend on the Company's assessments of
the relative costs and benefits of given projects.
- Costs associated with the product design and implementation of the new
Futurity multi-manager annuity product and the development of a new
product within the Regatta product line. The Company expects to continue
to invest in further product enhancements in the future.
1997 COMPARED TO 1996:
- - - STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were
approximately $650 million, or 240%, higher than in 1996. This increase
resulted mainly from the Company's redesign of its DCA programs in late 1996.
The Company benefited at the time from the popularity of its DCA program
features and from the absence of major competitors offering similar features.
- - - IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%, LOWER THAN
IN 1996. THIS TREND REFLECTED HEIGHTENED COMPETITION, UNCERTAINTIES IN THE
MARKETPLACE REGARDING THE ATTRACTIVENESS OF VARIABLE ANNUITIES, AND CUSTOMER
PREFERENCES FOR DEPOSITING INTO THE DCA PROGRAMS RATHER THAN DIRECTLY INTO THE
VARIABLE ACCOUNTS.
- - - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The
main factors driving this growth in account balances were market appreciation
and net deposit activity. This growth generated corresponding increases in fee
income, since fees are determined based on the average assets held in these
accounts.
- - - DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET INVESTMENT
INCOME. In 1997, net investment income for the Retirement Products and
Services segment decreased by about 16%, mainly as a result of a decline in
average invested assets in the Company's general account. This decline in
average general account assets mainly reflected the Company's decision in 1997
to no longer market group pension and GIC products.
- - - HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY IN
1997. As noted above, surrender and withdrawal activity was high in 1997. This
activity primarily related to a block of separate account contracts that had
been issued seven or more years previously and for which the surrender charge
period had expired. As a result of this pattern of activity, policyholder
benefits (of which surrenders and withdrawals, the related changes in the
liability for premium and other deposit funds, and related separate account
transfers are the major elements) were unusually high in 1997 compared to
1996.
- - - HIGHER COMMISSIONS. Commissions increased by approximately $22 million, or
20%, in 1997, directly reflecting higher sales of combination fixed/variable
annuity products in 1997 compared to 1996.
8
- - - HIGHER OPERATIONAL EXPENSES. Operational expenses increased by approximately
$5 million, or 13%, as a result of the additional staffing needed to
administer higher volumes of business and because of non-recurring costs of
moving the Retirement Products and Services operations to a new facility.
INDIVIDUAL INSURANCE SEGMENT
The Individual Insurance segment comprises two main elements, internal
reinsurance and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with its
ultimate parent, SLOC. In some of these arrangements, SLOC has reinsured the
mortality risks of individual life policies sold in prior years by the Company.
In another agreement, which became effective January 1, 1991 and terminated
October 1, 1998, the Company reinsured certain individual life insurance
contracts issued by SLOC. The latter agreement had a significant effect on net
income in both 1997 and 1998. The former agreements, in the aggregate, also
affected net income in those years, but to a much lesser extent. The effects of
these agreements on the Company's net income are summarized in the following
table.
INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES
($ IN MILLIONS)
1998 1997 1996
--------- --------- ---------
1991 Agreement
Effect on operations $ 24.6 $ 37.1 $ 35.2
Effect of termination 65.7
Other Agreements
Effect on operations (2.1) (1.4) (1.6)
--------- --------- ---------
Total $ 88.2 $ 35.7 $ 33.6
--------- --------- ---------
--------- --------- ---------
Because the 1991 agreement was in effect only through the first nine months
of 1998, related net income was correspondingly lower in 1998 than in 1997. Also
contributing to the lower 1998 net income from operations from this agreement
were proportionately higher death claims in 1998. The effect of terminating this
agreement was to further increase 1998 net income by $65.7 million. Neither the
net income effect of this agreement's operations nor that of its termination
will recur. The termination-related increase in 1998 represents a reasonable
approximation of the value of the stream of future earnings that the agreement
would have generated had it not been terminated.
VARIABLE LIFE PRODUCTS
This business includes the sale of individual variable life insurance
products, primarily the Company's variable universal life product for the
company-owned life insurance ("COLI") market. This product was introduced in
late 1997. The Company expects the variable life business to grow and become
more significant in the future.
CORPORATE SEGMENT
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Retirement
Products and Services and Individual Insurance segments. In 1998, income from
operations decreased by $65.3 million to $4.5 million for this segment. This
decrease reflected two main factors:
- - - Dividends from subsidiaries were lower than in 1997 by $37.5 million. This
decrease mainly resulted from a December 1997 reorganization, in which the
Company transferred its ownership of MFS to its parent company. As a result of
this reorganization, the Company received no dividends from MFS in 1998. By
comparison, it received $33.1 million of MFS dividends in 1997.
9
- - - Net investment income other than dividends from subsidiaries, was lower than
in 1997 by $5.9, reflecting the effect of the Company's December 1997 issuance
of a $250 million surplus note to its upstream holding company. Interest
expense exceeded investment earnings on the related funds.
In 1997, income from operations for this segment decreased by $14.6 million
to $69.8 million. This decrease mainly reflected a decrease, by approximately $9
million, in dividends from subsidiaries. It also reflected higher taxes and
expenses.
FINANCIAL CONDITION & LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The Company manages the assets
of this fixed separate account according to general account investment
policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances during
1998 and 1997. The changes are discussed below.
ASSETS % CHANGE
1998 1997 1996 1998/1997 1997/1996
----------- ----------- ----------- ------------ ------------
($ IN MILLIONS)
General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)%
Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15%
----------- ----------- ----------- ----- ------
$ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31%
Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06%
----------- ----------- ----------- ----- ------
Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91%
----------- ----------- ----------- ----- ------
----------- ----------- ----------- ----- ------
General account and fixed separate account assets, taken together, decreased
by 25% in 1998; but variable separate account assets increased by 30% that year.
In 1997, growth in the general account and fixed separate account was low;
variable separate account assets increased by 31%. This growth in variable
accounts relative to the general and fixed accounts reflects two main factors:
appreciation of the funds held in the variable separate accounts has exceeded
that of the funds held in the general and fixed separate accounts; and annuity
deposits into variable accounts have increased, while annuity deposits into
fixed accounts have slowed. The Company believes this pattern has reflected a
shift in the preferences of policyholders, which is largely attributable to the
strong performance of equity markets in general and of the Company's variable
account funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash and invested assets, which
represented 98.7% of general account assets at year-end 1998. Major types of
invested asset holdings included bonds,
10
mortgages, real estate and common stock. The Company's bond holdings comprised
60.9% of the Company's portfolio at year-end 1998. Bonds included both public
and private issues. It is the Company's policy to acquire only investment-grade
securities. As a result, the overall quality of the bond portfolio is high. At
year-end 1998, only 5.3% were rated below-investment-grade; i.e., they had
National Association of Insurance Commissioners ("NAIC") ratings lower than "1"
or "2." The Company's mortgage holdings amounted to $535.0 million at year-end
1998, representing 18.5% of the total portfolio. All mortgage holdings at
year-end 1998 were in good standing. The Company believes that the high quality
of its mortgage portfolio is largely attributable to its stringent underwriting
standards. At year-end 1998, investment real estate amounted to $78.0 million,
representing about 2.7% of the total portfolio. The Company invests in real
estate to enhance yields and, because of the long-term nature of these
investments, the Company uses them for purposes of matching with products having
long-term liability durations. Common stock holdings amounted to $128.4 million,
representing about 4.4% of the portfolio. These holdings comprised the Company's
ownership shares in subsidiaries.
Other general account assets decreased by $1,021.4 million in 1998. This
change primarily reflected the effect of terminating the internal reinsurance
agreement with the Company's ultimate parent, discussed in "Internal
Reinsurance," above.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
In December 1997, the Company borrowed $110.0 million from Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"),
an upstream holding company. The Company repaid this note during the first
quarter of 1998.
The termination of the internal reinsurance agreement discussed above
resulted in a $1.0 billion decrease in liabilities as compared to 1997.
CAPITAL MARKETS RISK MANAGEMENT
See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk,"
in this Annual Report on Form 10-K for a discussion of the Company's capital
markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies sets capital requirements related
to asset, insurance, interest rate, and business risks. According to the RBC
calculation, the Company's capital was well in excess of its required capital at
year-end 1998.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
11
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
OTHER MATTERS
DEMUTUALIZATION
On January 27, 1998, SLOC announced that its Board of Directors requested
management world-wide to develop a plan to convert from a mutual life insurance
company into a publicly traded stock company through demutualization worldwide.
Management has put in place a full time task force which, together with a
worldwide team of actuarial, financial and legal advisers, has begun work. The
Board will decide later this year whether to proceed with demutualization,
following the completion of the plan. Demutualization would require regulatory
and policyholder approval. Based on information known to date, the potential
demutualization of SLOC is not expected to have any significant impact on the
Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company, its ultimate parent and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company This team, which works with dedicated personnel
from all business units and with the legal and audit departments, reports
directly to the Company's senior management on a monthly basis. In addition, the
Company's Year 2000 project is periodically reviewed by internal and external
auditors.
To date, relevant systems have been identified and their components
inventoried, needed resolutions have been documented, timelines and project
plans have been developed, and remediation and testing are in process. Over 90%
of the components have been remediated, tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of this year.
In mid-1997, the project team contacted all key vendors to obtain either
their certification for the products and services provided or their plan to make
those products and services compliant. Approximately 95% of these vendors have
responded and the project team has reviewed the responses and validated and
conducted tests with the vendors where appropriate. In addition, the project
team continues to work with critical business partners, such as third-party
administrators, investment property managers, investment mortgage
correspondents, and others, with the goal that these partners will continue to
be able to support the Company's objective of assuring Year 2000 compliance.
Non-IT applications, including building security, HVAC systems, and other
such systems, will be tested. Compliant client server and mainframe environments
have been built which allow for testing of critical dates such as December
31,1999, January 1, 2000, February 28, 2000, February 29, 2000 and March 1, 2000
without impact to current production.
Although the Company expects all critical systems to be Year 2000 compliant
before the end of 1999, there can be no assurance that this result will be
achieved. Factors giving rise to this uncertainty include possible loss of
technical resources to perform the work, failure to identify all susceptible
systems, non-
12
compliance by third-parties whose systems and operations affect the Company, and
other similar uncertainties. A possible worst-case scenario might include one or
more of the Company's significant systems being non-compliant. Such a scenario
could result in material disruption to the Company's operations. Consequences of
such disruptions could include, among other possibilities, the inability to
update customers' accounts, process payments and other financial transactions;
and report accurate data to customers, management, regulators, and others.
Consequences also could include business interruptions or shutdowns,
reputational harm, increased scrutiny by regulators, and litigation related to
Year 2000 issues. Such potential consequences, depending on their nature and
duration, could have a material impact on the Company's results of operations
and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from failure to achieve planned Year 2000
compliance, the Company has established contingency planning at the business
unit and corporate levels. Each business unit has ranked its applications as
being of high, medium or low business risk to ensure that the most critical are
addressed first. The business units also have developed alternate plans of
action where possible, and established dates for the alternate plans to be
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan, by identifying minimum requirements for facilities,
computing, staffing, and other factors; and it is developing a plan to support
those requirements.
As of year-end 1998, the Company expended, cumulatively, approximately $4.2
million on its Year 2000 effort, and it expects to incur a further $1.3 million
on this effort in 1999.
SALE OF SUBSIDIARY
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, Massachusetts Casualty Insurance Company (MCIC) to Centre Solutions
(U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings,
Limited for approximately $34 million. MCIC sold individual disability insurance
throughout the U.S. This transaction is not expected to have a significant
effect on the operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1998,
investment real estate holdings represented approximately 3% of its total
general account portfolio.) The management of interest rate risk exposure is
discussed below.
13
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities (MBS) and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
government agencies and to collateralized mortgage obligations, which are
expected to exhibit relatively low volatility. The Company does not engage in
leveraged transactions and it does not invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity;
- the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed
income investments supporting those liabilities had a fair value of $2,710.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $46.3
million and the corresponding assets would show a net decrease of $113.2
million.
By comparison, liabilities categorized as financial instruments and held in
the Company's general account at December 31, 1997 had a fair value of $1,986.4
million. Fixed income investments supporting those liabilities had a fair value
of $3,276.2 million at that date. The Company performed a sensitivity analysis
on these interest-sensitive liabilities and assets at December 31, 1997. The
analysis showed that if there were an immediate increase of 100 basis points in
interest rates, the fair value of the liabilities would show a net decrease of
$56.0 million and the corresponding assets would show a net decrease of $108.0
million.
14
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism; that
is, it will tend to cause the models to produce estimates that are generally
worse than one might actually expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, in the form required by Regulation S-X, are set forth
below. The Company is not subject to the requirement to file supplementary
financial data specified by Item 302 of Regulation S-K.
15
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
1998 1997
-------------- --------------
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
-------------- --------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
-------------- --------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total liabilities 15,992,697 15,092,662
-------------- --------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
-------------- --------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
-------------- --------------
Surplus 904,024 826,795
-------------- --------------
Total common capital stock and surplus 909,924 832,695
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
16
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996
---------- ---------- ----------
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
17
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
1998 1997 1996
---------- ----------- -----------
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation
basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate
Accounts during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
18
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996
----------- ----------- -----------
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
19
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
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, which 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, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
20 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
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 mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
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 are carried 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.
20
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
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.
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 value as determined
by quoted market prices of the underlying investments.
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 of the
separate accounts, 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 $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory 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.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
21
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
MFS. On December 24, 1997, the Company transferred all of its shares of MFS to
Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
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.
Sundisco 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 offshore
products of Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
22
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
23
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
------------ ----------- ----------- ------------
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
24
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1998 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, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, 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
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
25
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED):
The following table shows the geographical distribution of the mortgage loan
portfolio.
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
26
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED):
Realized capital gains and losses on bonds and mortgages and interest rate swaps
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 net realized capital gains
credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000
in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of
applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
8. DERIVATIVES
The Company uses derivative instruments for interest rate 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 allocate gains or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 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 the IMR and amortized over the shorter of the remaining life of
the hedged asset sold 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.
27
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED):
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of nonperformance 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.
28
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
The net investment is included in "other invested assets" on the balance sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC 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 $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
29
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
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 increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
30
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
DECEMBER 31, 1998
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
-------------- ---
-------------- ---
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100
-------------- ---
-------------- ---
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
31
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. SEGMENT INFORMATION (CONTINUED):
The following amounts pertain to the various business segments:
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES INCOME TAXES ASSETS
- - --------------------------------------------------- ------------ ------------- ---------- ---------- --------------
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ ------------- ---------- ---------- --------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ ------------- ---------- ---------- --------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ ------------- ---------- ---------- --------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ ------------- ---------- ---------- --------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ ------------- ---------- ---------- --------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ ------------- ---------- ---------- --------------
- - ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory 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; currently, the plan is
fully funded. 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 SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
The Company also participates with SLOC 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 $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, 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.
32
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of 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 obligation of approximately $455,000 is recognized 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 $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
33
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
For measurement purposes, a 10.1% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 (5.7% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
1998 1997 1998 1997
---------- --------- --------- ---------
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
34
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. 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, 1998 and 1997:
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
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
by 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 insurance 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.
35
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. 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 table shown below presents changes in the major elements of the AVR and IMR.
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
16. 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 $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling $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
semiannually.
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 with the
consent of the Delaware Insurance Commissioner.
36
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC 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 Company under the leases
for 1998 amounted to approximately $6,856,000.
19. 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,
1998, 1997 and 1996.
20. 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 Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. 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 nonadmitted 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 and 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.
37
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
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 Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds 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.
38
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
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.) (the "Company") as of December 31, 1998 and 1997, 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, 1998.
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 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 is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory 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 December
31, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory 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, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, 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, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, 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.
February 5, 1999
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE.
No events have occurred which are required to be reported by Item 304 of
Regulation S-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and principal officers of the Company 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 Company 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.
JOHN D. MCNEIL, 65, Director (1982*)
He was Chairman of the Company until May 14, 1998. He is Chairman and a
Director of Sun Life Assurance Company of Canada and a Director of Sun Life
Insurance and Annuity Company of New York and Massachusetts Financial Services
Company; 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, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account; and a Director of Shell (Canada)
Limited and Canadian Pacific, Ltd.
DONALD A. STEWART, 53, Chairman and Director (1996*)
He became Chairman of the Company on May 14, 1998. He is President, Chief
Executive Officer and a Director of Sun Life Assurance Company of Canada,
Chairman and a Director of Sun Life Insurance and Annuity Company of New York;
and a Director of Massachusetts Financial Services Company, Massachusetts
Casualty Insurance Company and Sun Life Financial Services Limited.
DAVID D. HORN, 57, Director (1985*)
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in November, 1997. He
is a Director of Sun Life Insurance and Annuity Company of New York; a Trustee
of MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 67, Director (1985*)
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., Varian Associates, Inc., Diversified Collection
Services, Inc., San Francisco Opera, and Vice Chairman and a Director of Barrick
Gold Corporation.
JOHN S. LANE, 64, Director (1991*)
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 72, Director (1983*)
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.
M. COLYER CRUM, 66, Director (1986*)
He is 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, Cambridge Bancorp, Cam-bridge Trust, Merrill Lynch Global Growth Fund,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill
40
Lynch U.S. Treasury Money Fund, MuniVest Florida Fund, MuniYield Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Michigan Insured
Fund, Inc., MuniYield New Jersey Insured Fund, Inc. and Chairman and Director of
Phaeton International N.V.
S. CAESAR RABOY, 62, Director (1996*)
He was Senior Vice President and Deputy General Manager of the Company until
February 4, 1999. He was Senior Vice President and Deputy General Manager for
the United States of Sun Life Assurance Company of Canada until December 31,
1998. Effective January 1, 1999, he became a consultant to the Company.
Effective February 4, 1999, he retired as Senior Vice President and Deputy
General Manager for Sun Life Insurance and Annuity Company of New York and will
remain a Director of that Company; Vice President and a Director of Sun Life
Financial Services Limited, and a Director of Sun Life of Canada (U.S.)
Distributors, Inc. and Clarendon Insurance Agency, Inc.
C. JAMES PRIEUR, 47, President and Director (1998*)
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Chairman and Director of Sun Life of Canada
(U.S.) Distributors, Inc. and Sun Capital Advisers, Inc.; President and Director
of Sun Life Insurance and Annuity Company of New York, of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life Assurance Company of Canada -- U.S. Operations
Holdings, Inc., Sun Life of Canada (U.S.) Financial Services Holdings, Inc., Sun
Canada Financial Co., Sun Life of Canada (U.S.) SPE 97-1, Inc. and Sun Benefit
Services Company, a Director of Clarendon Insurance Agency, Inc., Sun Life
Information Services Ireland Limited and Massachusetts Casualty Insurance
Company; Chairman of the Board and Executive Vice President of Sun Capital
Advisers Trust.
L. BROCK THOMSON, 57, Vice President and Treasurer (1974)
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Life of Canada
(U.S.) Distributors, Inc., Sun Benefit Services Company, Inc. and Sun Life
Insurance and Annuity Company of New York; and Assistant Treasurer of
Massachusetts Casualty Insurance Company.
ROBERT P. VROLYK, 45, Vice President and Actuary (1986)
He is Vice President, Finance of Sun Life Assurance Company of Canada; Vice
President, Actuary and Controller of Sun Life Insurance and Annuity Company of
New York; Vice President and Director of Sun Life of Canada (U.S.) Holdings,
Inc., Sun Life of Canada (U.S.) Financial Services Holdings, Inc., Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc., Sun Life of Canada
(U.S.) Distributors, Inc. and Sun Canada Financial Co.; Vice President,
Treasurer and Director of Sun Capital Advisers, Inc.; Treasurer and Director of
Sun Life of Canada (U.S.) SPE 97-1, Inc.; and a Director of Clarendon Insurance
Agency, Inc., Sun Benefit Services Company Inc., and Sun Life Information
Services Ireland Ltd.
JAMES M.A. ANDERSON, 49, Vice President Investments (1998)
He is Vice President, Investments of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; Chairman of Sun Capital
Advisers Trust; President and Director of Sun Capital Advisers, Inc., Vice
President, and a Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life
of Canada (U.S.) Financial Services Holdings, Inc. and Sun Life Assurance
Company of Canada -- U.S. Operations Holdings, Inc.; Vice President of Sun Life
of Canada (U.S.) Distributors, Inc. and Sun Canada Financial Co.; and a Director
of Clarendon Insurance Agency, Inc. and Sun Benefit Services Company Inc. He has
been affiliated with Sun Life Assurance Company of Canada since 1977.
PETER FREDRIK DEMUTH, 40, Vice President and Chief Counsel, (1998)
He is Vice President and Chief Counsel of U.S. Operations for Sun Life
Assurance Company of Canada; Vice President and Chief Counsel for Sun Life
Insurance and Annuity Company of New York; a Director of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services Holdings,
Inc. and Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc.
Prior to February, 1998, he was a member of the firm of Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C.
41
ELLEN BLOOMER KING, 42, Secretary (1998)
She is Assistant Counsel for the United States of Sun Life Assurance Company
of Canada; Secretary of Sun Life Insurance and Annuity Company of New York, Sun
Life of Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., Sun Life Assurance Company of Canada -- U.S. Operations
Holdings, Inc., Sun Life of Canada (U.S.) SPE 97-1, Inc., Sun Canada Financial
Co. and Sun Benefit Services Company, Inc.
ROBERT K. LEACH, 43, Vice President, Finance and Product, (1996)
He has been an officer of the Company since January, 1987 in various
management positions. In July, 1996 he was appointed Vice President, Annuities.
Prior to 1987 he was a 2nd Vice President at New England Life Insurance Company.
EDWARD J. RONAN, 45, Vice President, Retirement Products and Services,(1997)
He has been an officer of the Company since August, 1997. From June, 1987 to
July, 1997 he was Vice President, Division Manager at First Data Investor
Services Group.
JANE M. MANCINI, 39, President and Director, Sun Life of Canada (U.S.)
Distributors, Inc. (1997)
She is President and Director of Sun Life of Canada (U.S.) Distributors,
Inc. a wholly-owned subsidiary of the Registrant. From September, 1996 to
August, 1997 she was a Managing Director of Cypress Holding Company; from
January, 1988 to September, 1996 she was Senior Vice President at Massachusetts
Financial Services Company. She is President and Director of Clarendon Insurance
Agency, Inc.
All individuals who were directors of Massachusetts Casualty Insurance
Company resigned their positions on February 5, 1999.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy.
* First year elected.
42
ITEM 11. EXECUTIVE COMPENSATION
Some of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1998
totalled $1,112,000.
ALLOCATED COMPENSATION
--------------------------------- ALL OTHER
NAME/POSITION YEAR SALARY BONUS COMPENSATION
- - -------------------------------------------------------------- --------- ---------- ---------- ----------------
John D. McNeil* 1998 $ 52,084 $ 37,203
Chairman and CEO until May 14, 1998 1997 $ 53,465 $ 40,030
1996 $ 55,205 $ 49,859
Donald A. Stewart* 1998 $ 34,913 $ 17,857
President and Chairman 1997
1996
C. James Prieur* 1998 $ 110,960 $ 28,606 $ 1,929(1)
Senior Vice President 1997 $ 154,784 $ 34,633
and General Manager 1996 $ 96,609 $ 26,889
Robert K. Leach 1998 $ 175,000 $ 45,400 $ 5,233(2)
Vice President, 1997 $ 160,000 $ 40,800
Finance and Product 1996 $ 146,500 $ 35,825
Edward J. Ronan 1998 $ 180,000 $ 30,000 $ 4,103(3)
Vice President, 1997 $ 67,601
Retirement Products 1996
Jane M. Mancini 1998 $ 200,000 $ 0 $ 2,407(4)
President, 1997 $ 200,000 $ 200,000
Distributors, Inc. 1996
- - ------------------------
* Allocated compensation.
1. All other compensation for Mr. Prieur for the year ended 1998 includes Group
Term Life insurance payments and 401K company contributions of $470 and
$1,459, respectively.
2. All other compensation for Mr. Leach for the year ended 1998 includes Group
Term Life insurance payments and 401K company contributions of $433 and
$4,800, respectively.
3. All other compensation for Mr. Ronan for the year ended 1998 includes Group
Term Life insurance payments and 401K company contributions of $765 and
$3,338, respectively.
4. All other compensation for Ms. Mancini for the year ended 1998 includes
Group Term Life insurance payments and 401K company contributions of $330
and $2,077, respectively.
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Messrs. Bailey, Crum, Horn and MacNaughton received compensation in
the amount of $7,000 per year and $1,000 plus expenses for each meeting attended
for the year ended December 31, 1998.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada-U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
Assurance Company of Canada.
43
LONG TERM INCENTIVE COMPENSATION
In 1998, Sun Life Assurance Company of Canada introduced a long-term
incentive compensation plan for certain Officers of Sun Life Assurance Company
of Canada holding a position of Vice-President or higher in the Company,
effective January 1, 1998. The Unit Value Appreciation Plan provides eligible
officers with value appreciation units designed to reward growth in the value of
the Company over a multi-year period. For purposes of this plan, the value of
the Company is determined by applying predefined multiples to the net income
earned in the various businesses. The value of units granted under the plan will
reflect growth in the value of the Company. When the plan was introduced
participants were awarded two allotments of units -- a three-year grant and a
four-year grant, representing grants for 1998 and 1999 respectively. The
three-year grant will reward increases in the value of the Company from January
1, 1998 to December 31, 2000. The four-year grant will reward increases in the
value of the Company from January 1, 1998 to December 31, 2001. Awards are
payable in cash following the performance period. Termination of employment
results in forfeiture of awards, except that awards will be prorated in the
event of death, long-term disability, or retirement for employees meeting
certain age and service requirements.
PERFORMANCE OR
OTHER PERIOD
NUMBER OF UNTIL MATURATION ESTIMATED
NAME UNITS* OR PAYOUT FUTURE PAYMENTS**
- - -------------------- ----------- ---------------------- -------------------
John D. McNeil 10,640 December 31, 2000 51,965
10,640 December 31, 2001 72,832
Donald A. Stewart 7,277 December 31, 2000 35,543
8,512 December 31, 2001 58,266
C. James Prieur 12,920 December 31, 2000 63,099
19,608 December 31, 2001 134,219
Robert K. Leach 9,000 December 31, 2000 43,955
9,000 December 31, 2001 61,606
Edward J. Ronan 9,000 December 31, 2000 43,955
9,000 December 31, 2001 61,606
Jane M. Mancini -- December 31, 2000 --
-- December 31, 2001 --
* Only units allocated to services rendered to the Company are shown.
** Future payouts are not determinable. The estimate assumes a 10% compounded
annual growth rate for net income for Sun Life Assurance Company of Canada,
using the same formula used to determine unit values. There are no minimum
or maximum payouts.
ESTIMATED ANNUAL BENEFITS PAYABLE UPON RETIREMENT FOR EXECUTIVE OFFICERS IN THE
UNITED STATES
The following table illustrates the total annual pension for Company
employees in the United States who are eligible to participate in the Sun Life
of Canada U.S. Employees' Retirement Income Plan and accompanying Trust (the
"Plan"). Under the plan, income is payable for the life of the eligible
employee. The normal form of pension for single employees is a life annuity; for
married individuals it is the actuarially reduced 50% joint and survivor
benefit.
Pensionable earnings for this purpose are calculated using the highest
average of base earnings and officer incentive payment, up to target, earned
over the highest consecutive 36 month period in the last 120 months. The pension
benefit is determined by years of service (maximum of 30) multiplied by 50% of
the pensionable earnings, plus .5% of pensionable earnings for service in excess
of 30 years (maximum 40). Compensation allocated to the Company covered by the
Plan for 1998 was as follows: Mr. Prieur $144,973, Mr. Ronan $228,600, Mr. Leach
$218,750 and Ms. Mancini $200,000. As of December 31, 1998, the number of years
of credited services was as follows: Mr. Prieur 6 years, Mr. Ronan 2 years, Mr.
Leach 12 years and Ms. Mancini 2 years.
In no event can the pension benefit exceed $125,000 at the normal retirement
age as defined by the United States Social Security Office. The maximum
pensionable earnings that can be used to determine this
44
benefit is $160,000. The table does not reflect these limits. The Company has
adopted a plan that is not a tax-qualified plan to provide the benefits that
would have been provided under the Company's retirement plan but for these
limits.
PENSIONABLE YEARS OF SERVICE
EARNINGS (US$) 15 20 25 30 35
- - --------------- --------- --------- --------- --------- ---------
125,000 31,250 41,667 52,083 62,500 65,625
150,000 37,500 50,000 62,500 75,000 78,750
175,000 43,750 58,333 72,917 87,500 91,875
200,000 50,000 66,667 83,333 100,000 105,000
225,000 56,250 75,000 93,750 112,500 118,125
250,000 62,500 83,333 104,167 125,000 131,250
300,000 75,000 100,000 125,000 150,000 157,500
350,000 87,500 116,667 145,833 175,000 183,750
400,000 100,000 133,333 166,667 200,000 210,000
450,000 112,500 150,000 187,500 225,000 236,250
500,000 125,000 166,667 208,333 250,000 262,500
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is not applicable since the Company 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 Company has an agreement with SLOC which provides that SLOC will
furnish, as requested, personnel as well as certain services and facilities on a
cost reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998.
LEASES
The Company leases office space to SLOC 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 Company under the leases
for 1998 amounted to approximately $6,856,000.
45
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, 1998 and December 31, 1997.
-- Statutory Statements of Operations for each of the three years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
-- Statutory Statements of Capital Stock and Surplus for each of the
three years ended December 31, 1998, December 31, 1997 and December
31, 1996.
-- Statutory Statements of Cash Flow for each of the three years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
-- Notes to Financial Statements.
-- Independent Auditors' Report.
(a) (2) Financial statement schedules (set forth below):
-- Schedule I--Summary of Investments, Other than Investments in Related
Parties.
-- Schedule III--Supplementary Insurance Information.
-- Schedule VI--Reinsurance.
46
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 $ 140,417 $ 147,874 $ 140,417
States, municipalities and political subdivisions 16,632 18,851 16,632
Public utilities 397,670 436,172 397,670
Transportation 197,207 219,670 197,207
Finance 144,958 157,006 144,958
All other corporate bonds 866,584 910,980 866,584
------------ ------------ -----------
Total fixed maturities 1,763,468 1,890,533 1,763,468
------------ ------------ -----------
Mortgage loans on real estate 535,003 -- 535,003
Real estate 80,820 -- 78,021*
Real estate acquired in satisfaction of debt 17,622 -- 17,207*
Other invested assets 64,177 -- 64,177
Policy loans 41,944 -- 41,944
Short-term investments 263,400 -- 263,400
------------ ------------ -----------
Total investments $ 2,766,434 $ 1,890,533 $ 2,763,220
------------ ------------ -----------
------------ ------------ -----------
- - ------------------------
*Net of provision for unrealized losses of $3,214
47
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FUTURE POLICY
BENEFITS, OTHER POLICY
LOSSES, CLAIMS AND CLAIMS AND
SEGMENT LOSS EXPENSES BENEFITS PAYABLE
- - ----------------------------------------------------------------------- ---------------------- -------------------
INDIVIDUAL INSURANCE
1998 144,797 369
1997 1,127,909 2,460
RETIREMENT PRODUCTS AND SERVICES
1998 2,074,070 --
1997 2,545,787 --
CORPORATE
1998 -- --
1997 -- --
BENEFITS CLAIMS, OTHER
PREMIUM NET INVESTMENT LOSSES, AND OPERATING
REVENUE INCOME (1) SETTLEMENT EXPENSES EXPENSES
------------ --------------- --------------------- -------------
INDIVIDUAL INSURANCE
1998 157,993 1,552 129,523 15,277
1997 206,285 1,949 251,658 20,675
1996 210,185 (2,590) 233,499 22,347
RETIREMENT PRODUCTS AND SERVICES
1998 2,194,895 160,153 2,287,427 196,289
1997 2,204,693 200,970 2,327,446 180,145
1996 1,834,328 238,987 1,999,028 152,098
CORPORATE
1998 -- 25,110 -- 3,042
1997 -- 68,495 -- 5,244
1996 -- 68,912 -- 898
(1) Net investment income is allocated based on segmented assets by line of
business.
48
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, 1998 $ 1,359,883 $ 1,006,310 $ 0 $ 353,573 0.0%
------------ --------------- ----------------- ------------ -----
December 31, 1997 $ 1,197,181 $ 5,690,525 $ 10,781,852 $ 6,288,508 171.5%
------------ --------------- ----------------- ------------ -----
December 31, 1996 $ 1,225,073 $ 6,146,096 $ 11,400,640 $ 6,479,617 175.9%
------------ --------------- ----------------- ------------ -----
LIFE INSURANCE PREMIUMS (IN 000'S)
December 31, 1998 $ 18,750 $ 11,763 $ 159,787 $ 166,774 95.8%
------------ --------------- ----------------- ------------ -----
December 31, 1997 $ 5,823 $ 13,180 $ 210,101 $ 202,744 103.6%
------------ --------------- ----------------- ------------ -----
December 31, 1996 $ 5,686 $ 12,054 $ 214,099 $ 207,731 103.1%
------------ --------------- ----------------- ------------ -----
49
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
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 of Canada (U.S.) Holdings, Inc.) as of
December 31, 1998 and 1997, 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, 1998, and have issued our report thereon dated
February 4, 1999 (which report is included elsewhere in this Form 10-K). Our
audits also included the financial statement schedules listed in Item 14(a)2 in
this Form 10-K. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information therein set forth.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
50
(A) 3 AND (C). EXHIBITS:
The following Exhibits are incorporated herein be reference unless otherwise
indicated:
EXHIBIT NO.
- - -------------
3 Certificate of Incorporation and by-laws (filed as Exhibit 6 to the Registration Statement on
Form N-4 (Registration No. 333-37903), filed October 14, 1997)
4 (a)(i) Form of Single Payment Combination Fixed/Variable Group Annuity Contract (filed as
Exhibit 4(a) to Post-Effective Amendment No. 9 to the Registration Statement on Form
N-4 (Registration No. 33-29852), filed April 16, 1998)
(a)(ii) Form of Certificate to be issued in connection with Contract filed as Exhibit
4(a)(i) hereto (filed as Exhibit 4(b) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-4 (Registration No. 33-29852), filed April 16,
1998)
(b)(i) Form of Flexible Payment Deferred Combination Variable and Fixed Group Annuity
Contract (filed as Exhibit 4(a) to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-4 (Registration No. 333-05227), filed April 10,
1998)
(b)(ii) Form of Certificate to be issued in connection with the Contract filed as Exhibit
4(b)(i) hereto (filed as Exhibit 4(b) to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-4 (Registration No. 333-05227), filed April 10,
1998)
(c)(i) Form of Flexible Payment Combination Fixed/Variable Group Annuity Contract (filed as
Exhibit 4(a) to Post-Effective Amendment No. 9 to the Registration Statement on Form
N-4 (Registration No. 33-41628), filed March 2, 1998)
(c)(ii) Form of Certificate to be issued in connection with the Contract filed as Exhibit
4(c)(i) hereto (filed as Exhibit 4(b) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-4 (Registration No. 33-41628), filed March 2, 1998)
(d)(i) Form of Flexible Payment Deferred Combination Variable and Fixed Group Annuity
Contract (filed as Exhibit 4(a) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-4 (Registration No. 2-99958), filed April 17, 1998)
(d)(ii) Form of Certificate to be issued in connection with the Contract filed as Exhibit
4(e)(i) hereto (filed as Exhibit 4(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-4 (Registration No. 2-99958), filed April 17, 1998)
(e)(i) Form of Flexible Payment Combination Fixed/Variable Group Annuity Contract (filed as
Exhibit 4(a) to the Registration Statement on Form N-4 (Registration No. 333-37907),
filed October 14, 1997)
(e)(ii) Form of Certificate to be issued in connection with the Contract filed as Exhibit
4(e)(i) hereto (filed as Exhibit 4(b) to the Registration Statement on Form N-4
(Registration No. 333-37907), filed October 14, 1997)
(f)(i) Form of Single Payment Deferred Fixed Individual Annuity Contract (filed as Exhibit
4(a) to the Registration Statement on Form S-2 (Registration No. 333-62837), filed
September 3, 1998)
(f)(ii) Form of Single Payment Deferred Fixed Group Annuity Contract (filed as Exhibit 4(b)
to the Registration Statement on Form S-2 (Registration No. 333-62837), filed
September 3, 1998)
(f)(iii) Form of Certificate to be used in connection with Contract filed as Exhibit (f) (ii)
(filed as Exhibit 4(c) to the Registration Statement on Form S-2 (Registration No.
333-62837), filed September 3, 1998)
21 Subsidiaries of the Company (filed herewith)
EXHIBIT NO.
- - -------------
24 Powers of Attorney (filed herewith)
27 Financial Data Schedule (filed herewith)
(B) REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1998.
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/ C. James Prieur
-----------------------------------
C. James Prieur
PRESIDENT
Date: March 31, 1999
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
*/s/ C. James Prieur President and Director
- - ----------------------------------- (Principal Executive
C. James Prieur Officer) March 31, 1999
*/s/ Robert P. Vrolyk Vice President and
- - ----------------------------------- Actuary (Principal
Robert P. Vrolyk Financial & Accounting
Officer) March 31, 1999
*/s/ Richard B. Bailey Director
- - -----------------------------------
Richard B. Bailey March 31, 1999
*/s/ M. Colyer Crum Director
- - -----------------------------------
M. Colyer Crum March 31, 1999
*/s/ David D. Horn Director
- - -----------------------------------
David D. Horn March 31, 199
*/s/ John S. Lane Director
- - -----------------------------------
John S. Lane March 31, 1999
*/s/ Angus A. MacNaughton Director
- - -----------------------------------
Angus A. MacNaughton March 31, 1999
*/s/ S. Caesar Raboy Director
- - -----------------------------------
S. Caesar Raboy March 31, 1999
*/s/ Donald A. Stewart Chairman and Director
- - -----------------------------------
Donald A. Stewart March 31, 1999
- - ------------------------
* By Ellen B. King pursuant to Power of Attorney filed herewith.