<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 0F 1934
<TABLE>
<CAPTION>
<S><C>
For the Quarterly Period Ended September 30, 1998 Commission File Number 2-99959
------------ ------------
</TABLE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
Delaware 04-2461439
- --------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
One Sun Life Executive Park, Wellesley Hills, MA 02481
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (781) 237-6030
NONE
- -------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
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.
(1) Yes |X| No |_|
(2) Yes |X| No |_|
Registrant has no voting stock outstanding held by non-affiliates.
Registrant has 5,900 shares of common stock outstanding on November 12, 1998,
all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I: Financial Information
Item 1: Financial Statements:*
Balance Sheets -
September 30, 1998 and December 31, 1997 3
Statements of Operations -
Nine Months Ended
September 30, 1998 and September 30, 1997 4
Statements of Operations -
Three Months Ended
September 30, 1998 and September 30, 1997 5
Statements of Capital Stock and Surplus -
Nine Months Ended
September 30, 1998 and September 30, 1997 6
Statements of Cash Flows -
Nine Months Ended
September 30, 1998 and September 30, 1997 7
Notes to Unaudited Financial Statements 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 17
</TABLE>
*The balance sheet at December 31, 1997 has been taken from the
audited financial statements at that date. All other statements
are unaudited.
2
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
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
<TABLE>
<CAPTION>
(IN 000'S)
SEPTEMBER 30, DECEMBER 31,
ADMITTED ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Bonds $ 1,878,905 $ 1,910,699
Common stocks 127,545 117,229
Mortgage loans on real estate 554,135 684,035
Properties acquired in satisfaction of debt 17,330 22,475
Investment real estate 78,040 78,426
Policy loans 42,149 40,348
Cash & short-term investments 197,542 544,418
Other invested assets 62,787 55,716
Life insurance premiums and annuity considerations due & uncollected 7,790 9,203
Investment income due and accrued 38,507 39,279
Receivable from parent, subsidiaries and affiliates 0 28,825
Funds withheld on reinsurance assumed 1,062,112 982,653
Other assets 23,923 1,841
------------- -------------
General account assets 4,090,765 4,515,147
Separate account assets
Unitized 10,091,576 9,068,021
Non-unitized 2,161,951 2,343,877
------------- -------------
TOTAL ADMITTED ASSETS $ 16,344,292 $ 15,927,045
------------- -------------
------------- -------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,283,326 $ 2,188,243
Supplementary contracts 1,787 2,247
Policy and contract claims 3,436 2,460
Provision for policyholders' dividends and coupons payable 37,000 32,500
Liability for premium and other deposit funds 1,080,881 1,450,705
Surrender values on cancelled policies 142 215
Interest maintenance reserve 38,409 33,830
Commissions to agents due or accrued 2,114 2,826
General expenses due or accrued 8,098 7,202
Transfers from Separate Accounts due or accrued (379,065) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 108 105
Federal income taxes due or accrued 61,628 58,073
Unearned investment income 26 34
Amounts withheld or retained by company as agent or trustee 342 47
Remittances and items not allocated 2,038 1,363
Borrowed money 0 110,142
Asset valuation reserve 43,359 47,605
Reinsurance in unauthorized companies 964 0
Payable to parent, subsidiaries, and affiliates 27,206 0
Payable for securities 23,404 27,104
Other liabilities 19,022 1,959
------------- -------------
General account liabilities 3,254,225 3,682,582
Separate account liabilities
Unitized 10,091,396 9,067,891
Non-unitized 2,161,951 2,343,877
------------- -------------
TOTAL LIABILITIES 15,507,572 15,094,350
------------- -------------
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 66,465 62,440
------------- -------------
Surplus 830,820 826,795
------------- -------------
Total common capital stock and surplus 836,720 832,695
------------- -------------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $ 16,344,292 $ 15,927,045
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited financial statements.
3
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in 000's)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
INCOME ----------------- -----------------
<S> <C> <C>
Premiums and annuity considerations $ 203,852 $ 181,809
Deposit-type funds 1,564,472 1,691,235
Considerations for supplementary contracts
without life contingencies and dividend accumulations 1,424 940
Net investment income 144,129 209,363
Amortization of interest maintenance reserve 1,504 813
Net gain from operations from Separate Accounts Statement 1 4
Other income 80,779 73,614
----------------- -----------------
Total 1,996,161 2,157,778
----------------- -----------------
BENEFITS AND EXPENSES
Death benefits 17,892 15,994
Annuity benefits 113,713 109,690
Surrender benefits and other fund withdrawals 1,466,827 1,388,459
Interest on policy or contract funds 461 194
Payments on supplementary contracts
without life contingencies and of dividend accumulations 1,946 766
Increase in aggregate reserves for life and accident and
health policies and contracts 95,083 92,567
Decrease in liability for premium and other deposit funds (369,825) (349,640)
Increase (decrease) in reserve for supplementary contracts
without life contingencies and for dividend and coupon
accumulations (461) 255
----------------- -----------------
Total 1,325,636 1,258,285
Commissions on premiums and annuity considerations
(direct business only) 102,544 104,650
Commissions and expense allowances on reinsurance assumed 13,032 12,858
General insurance expenses 42,788 31,150
Insurance taxes, licenses and fees, excluding federal income taxes 5,213 6,175
Decrease in loading on and cost of collection in excess of loading
on deferred and uncollected premiums (331) (286)
Net transfers to Separate Accounts 396,163 621,996
----------------- -----------------
Total 1,885,045 2,034,828
----------------- -----------------
Net gain from operations before dividends to
policyholders and FIT 111,116 122,950
Dividends to policyholders 31,019 24,227
----------------- -----------------
Net gain from operations after dividends to
policyholders and before FIT 80,097 98,723
Federal income tax expense (benefit) (excluding
tax on capital gains) 32,206 (833)
----------------- -----------------
Net gain from operations after dividends to policyholders
and FIT and before realized capital gains 47,891 99,556
Net realized capital gains less capital gains tax and
transferred to the IMR 4,807 5,183
----------------- -----------------
Net income $ 52,698 $ 104,739
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to unaudited statutory financial statements.
4
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(WHOLLY-OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.)
STATUTORY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in 000's)
Three Months Ended September 30,
1998 1997
INCOME ----------------- -----------------
<S> <C> <C>
Premiums and annuity considerations $ 67,719 $ 63,122
Deposit-type funds 568,447 530,735
Considerations for supplementary contracts
without life contingencies and dividend
accumulations 280 390
Net investment income 44,398 68,033
Amortization of interest maintenance reserve 581 432
Net gain from operations from Separate Accounts (2) 4
Statement
Other income 27,400 27,226
----------------- -----------------
Total 708,823 689,942
----------------- -----------------
BENEFITS AND EXPENSES
Death benefits 2,059 9,624
Annuity benefits 40,636 38,763
Surrender benefits and other fund withdrawals 478,645 494,811
Interest on policy or contract funds 199 39
Payments on supplementary contracts
without life contingencies and of dividend
accumulations 747 315
Increase in aggregate reserves for life and accident and 36,834 26,880
health policies and contracts
Decrease in liability for premium and other deposit funds (88,386) (123,462)
Increase (decrease) in reserve for supplementary
contracts without life contingencies and for dividend
and coupon accumulations (447) 110
----------------- -----------------
Total 470,287 447,080
Commissions on premiums and annuity considerations
(direct business only) 35,929 33,663
Commissions and expense allowances on reinsurance assumed 4,806 4,502
General insurance expenses 13,004 12,267
Insurance taxes, licenses and fees, excluding federal
income taxes 1,483 1,698
Decrease in loading on and cost of collection in excess
of loading on deferred and uncollected premiums (98) (56)
Net transfers to Separate Accounts 138,845 148,926
----------------- -----------------
Total 664,256 648,080
----------------- -----------------
Net gain from operations before dividends to
policyholders and FIT 44,567 41,862
Dividends to policyholders 11,111 8,114
----------------- -----------------
Net gain from operations after dividends to
policyholders and before FIT 33,456 33,748
Federal income tax expense (benefit) (excluding tax on
capital gains) 17,652 (6,193)
----------------- -----------------
Net gain from operations after dividends to policyholders
and FIT and before realized capital gains 15,804 39,941
Net realized capital gains less capital gains tax and
transferred to the IMR 1,692 3,164
----------------- -----------------
Net income $ 17,496 $ 43,105
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to unaudited statutory financial statements.
5
<PAGE>
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
<TABLE>
<CAPTION>
(in 000's)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------- -----------------
<S> <C> <C>
CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 832,695 $ 567,143
----------------- -----------------
Net income 52,698 104,739
Change in net unrealized capital gains (1,421) 2,329
Change in non-admitted assets and related items (581) 556
Change in liability for reinsurance in unauthorized companies (964) 0
Change in asset valuation reserve 4,245 (9,092)
Other changes in surplus in Separate Accounts Statement 48 0
Dividends to stockholders (50,000) 0
----------------- -----------------
Net change in capital and surplus for the period 4,025 98,532
----------------- -----------------
CAPITAL AND SURPLUS, END OF PERIOD $ 836,720 $ 665,675
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to unaudited statutory financial statements.
6
<PAGE>
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
<TABLE>
<CAPTION>
(in 000's) NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash Provided
Premiums, annuity considerations and deposit
funds received $ 1,770,069 $ 1,875,447
Considerations for supplementary contracts and
dividend accumulations received 1,424 940
Net investment income received 182,263 236,074
Other income received 82,206 73,614
----------------- -----------------
Total receipts 2,035,962 2,186,075
----------------- -----------------
Benefits paid (other than dividends) 1,599,475 1,513,599
Insurance expenses and taxes paid (other than federal income
and capital gains taxes) 166,425 147,956
Net cash transfers to Separate Accounts 491,151 683,534
Dividends paid to policyholders 26,519 20,477
Federal income tax payments (excluding tax on capital gains) 28,224 (317)
Other - net 461 194
----------------- -----------------
Total payments 2,312,255 2,365,443
----------------- -----------------
Net cash from operations (276,293) (179,368)
----------------- -----------------
Proceeds from long-term investments sold, matured or repaid
(after deducting taxes on capital gains of $428,228 for
1998, $374,528 for 1997) 1,075,039 820,973
Other cash provided (50,530) 607,676
----------------- -----------------
Total cash provided 1,024,509 1,428,649
----------------- -----------------
CASH APPLIED
Cost of long-term investments acquired 919,918 554,900
Other cash applied 175,174 135,425
----------------- -----------------
Total cash applied 1,095,092 690,325
----------------- -----------------
Net change in cash and short-term investments (346,877) 558,956
Cash and short-term investments:
Beginning of period 544,418 90,059
----------------- -----------------
End of period $ 197,542 $ 649,015
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to unaudited statutory financial statements.
7
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
In management's opinion all adjustments, which include only normal
recurring adjustments, necessary for a fair presentation of the financial
statements have been made.
(2) MANAGEMENT AND SERVICE CONTRACTS
The Company has an agreement with its ultimate parent, Sun Life Assurance
Company of Canada ('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 $2,879,000 and
$15,677,000 for the three and nine month periods in 1998 and $5,337,000 and
$13,871,000 for the same periods in 1997.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(000's) 1998 1997
<S> <C> <C>
Other assets $ 1,233,207 $ 1,190,951
Liabilities (1,105,654) (1,073,966)
----------- -----------
Total net assets $ 127,553 $ 116,985
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(000's) 1998 1997
<S> <C> <C>
Total revenue $ 175,856 $ 665,904
Operating expenses (173,093) (585,857)
Income tax expense (1,710) (36,944)
----------- -----------
Net income $ 1,053 $ 43,103
----------- -----------
----------- -----------
</TABLE>
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
(000's) 1998 1997
<S> <C> <C>
Total revenue $ 49,704 $ 237,369
Operating expenses (48,704) (205,368)
Income tax expense 85 (15,303)
---------- ------------
Net income $ 1,085 $ 16,698
---------- ------------
---------- ------------
</TABLE>
In determining the equity in income of subsidiaries for the periods, the
Company has excluded expenses of approximately $396,000 and $2,369,000 for
the three and nine month periods in 1998 and $11,819,000 and $28,443,000 for
the same periods in 1997, representing payables to the Company in lieu of
federal income taxes.
8
<PAGE>
On December 24, 1997, the Company transferred all of its shares of
Massachusetts Financial Services Company ("MFS") to its parent Sun Life of
Canada (U.S.) Holdings, Inc. ("Life Holdco").
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(000's) 1998 1997
<S> <C> <C>
Interest income from bonds $128,687 $141,610
Income from investment in common stocks of
affiliates 3,000 33,681
Interest income from mortgage loans 41,025 59,716
Real estate investment income 11,729 10,290
Interest income from policy loans 2,115 2,230
Other (264) (353)
-------- --------
Gross investment income 186,292 246,874
Interest on surplus notes and borrowed money 34,087 29,375
Investment expenses 8,076 8,136
-------- --------
$144,129 $209,363
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
(000's) 1998 1997
<S> <C> <C>
Interest income from bonds $40,609 $50,284
Income from investment in common stocks of
affiliates 0 11,040
Interest income from mortgage loans 13,140 18,500
Real estate investment income 3,848 4,020
Interest income from policy loans 723 734
Other (506) (263)
------- -------
Gross investment income 57,814 84,315
Interest on surplus notes and borrowed money 10,816 13,727
Investment expenses 2,600 2,555
------- -------
$44,398 $68,033
------- -------
------- -------
</TABLE>
(5) SUBSEQUENT EVENT
In October 1998, the Company entered into a definitive agreement to sell
its wholly-owned subsidiary, Massachusetts Casualty Insurance Company to
Centre Reinsurance Holdings, Ltd. This transaction is expected to be
completed by or near year-end 1998, subject to regulatory approvals. This
transaction is not expected to have a significant effect on the ongoing
operations of the Company.
9
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION - SEPTEMBER 30, 1998
Assets
Total admitted assets increased by $417.2 million to $16,344.3 million in the
nine months ended September 30, 1998. This increase reflected a decline of
$424.4 million in general account assets offset by an increase in separate
account assets of $841.6 million.
The major element of the decline in general account assets was a $494.9
million decrease in cash and invested assets. Partially offsetting this
decline was a $101.5 million increase in other assets. These changes are
discussed in more detail below.
Cash decreased during 1998, by $346.9 million partly as a result of the
deployment of $250.0 million of proceeds from the Company's surplus note
issued in December 1997. Cash also decreased as a result of the Company's
payment, in the first half of 1998, of $46.0 million of dividends to its
parent, Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco") and by its
repayment, in January 1998, of its $110.0 million short-term note to its
penultimate parent, Sun Life Assurance Company of Canada--U.S. Operations
Holdings, Inc. ("U.S. Holdco").
General account invested assets other than cash declined by $148.0 million.
The decline in general account invested assets during the first nine months
of 1998 was mostly evident in mortgages, which decreased by $129.9 million to
$554.1 million at September 30, 1998, mainly as a result of scheduled
maturities and early repayments. The decline is also reflected in the fact
that maturities of pension and fixed annuity contracts exceeded general
account fixed asset deposits. This trend resulted in part from the Company's
decision in 1997 to discontinue selling group pension and GIC contracts and
to focus its marketing efforts on its combination fixed/variable annuity
products. As a result, separate account assets have increased while general
account assets have decreased. The Company expects these trends to continue,
as sales of separate account products continue to be emphasized.
Other general account assets increased $101.5 million in the nine months
ended September 30, 1998, almost entirely reflecting an increase in funds
withheld for reinsurance assumed.
Liabilities
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds. Although total liabilities
increased by $413.2 million to $15,507.6 million in the nine months ended
September 30, 1998, general account liabilities decreased by $428.3 million
to $3,254.2 million. The liability for premium and other deposits decreased
$369.8 million over the first nine months of 1998. The Company expects this
declining trend in general account liabilities to continue, since net
maturities are expected to exceed sales for the fixed contracts associated
with these liabilities, particularly in view of the Company's decision in
1997 to discontinue selling group pension and GIC contracts and to focus its
marketing efforts on its combination fixed/variable annuity products. Also
contributing to this decline was the Company's repayment, during the first
quarter of 1998, of its $110.0 million short-term note payable to U.S. Holdco.
Capital and Surplus
Capital and surplus increased by $4.0 million to $836.7 million over the
first nine months of 1998. This net change primarily reflected net income
during the period of $52.7 million, offset in part by the Company's having
declared during the second quarter of 1998 a shareholder dividend of $50.0
million. As noted above, $46.0 million of this dividend has been paid
through September 30, 1998.
Liquidity
The Company's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment
principal, and sales of investments. The Company's cash outflow is primarily
to pay out death benefits and other maturing insurance and annuity contract
obligations, pay out on contract terminations, fund investment commitments,
and pay normal operating expenses and taxes. Cash outflows are met from the
normal net cash inflows.
The Company segments its general account business internally in order to
better manage projected cash inflows and outflows within each segment defined
to be an identifiable pool of assets. Targets for money market holdings are
established for each segment, which in the aggregate meet the day to day cash
needs of the Company. If greater liquidity is required, government issued
bonds, which are highly liquid, are sold to provide necessary funds.
Government and publicly traded bonds comprise 55.0% of the Company's
long-term bond holdings.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
10
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income
Net income decreased by $52.0 million from $104.7 million to $52.7 million,
for the nine months ended September 30, 1998 as compared to the same period
in 1997.
Three factors primarily affected the decrease in net income period over
period. First, a reorganization by the Company in December 1997 (discussed
below) resulted in lower earnings from subsidiaries (by $30.7 million) and
higher federal income taxes (by $33.0 million). Second, the growth in the
Company's direct business, primarily its fixed/variable annuity products,
resulted in higher net income, by approximately $10.1 million. (Increasing
annuity account balances, resulting from both strong market performance and
sales, has generated corresponding increases in annuity fee income.) Third,
the effects of reinsurance arrangements with its ultimate parent, Sun Life
Assurance Company of Canada ("SLOC"), resulted in higher net income of $1.6
million. These items are discussed in more detail below.
Income
Total income decreased by $161.6 million to $1,996.2 million for the first
nine months of 1998. This decrease mainly reflected lower premiums and
deposits, of $104.2 million, and lower net investment income of $65.2
million.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $13.7 million due to increased premiums of $8.0 million
resulting from policyholders using dividends to purchase "paid-up additions"
to their policies; and higher interest income of $5.8 million on the funds
withheld in conjunction with the reinsurance arrangements.
With respect to the company's direct business, deposits from sales of the
company's combination fixed/variable annuity products (net of annuitizations)
declined by $126.8 million in the first nine months of 1998 compared to the
same period in 1997, primarily as a result of lower deposits (approximately
$173.0 million) into these products' dollar cost averaging ("DCA") programs.
Under these programs, which were introduced 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 exchanged
to the variable portion of the contract in equal periodic installments. The
Company believes the decline in DCA deposits in 1998, in part, has resulted
from heightened competition, as other companies have introduced similar DCA
programs within the past year. In early 1998, the Company took steps to
diversify the marketing of its variable annuity business by offering variable
annuity funds managed by a variety of non-affiliated managers. Premiums and
annuity considerations increased by $22.0 million in the first nine months of
1998 compared to the same prior-year period partially as a result of the
introduction of a new corporate owned life insurance product.
11
<PAGE>
Net investment income decreased by $65.2 million period over period. This
decrease mainly reflected lower interest income on bonds and mortgages of
$31.6 million; and lower dividends from subsidiaries of $30.7 million. It
also reflected higher interest expense on surplus notes and borrowed money
(by $4.7 million).
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent other factors, the declining trend in general account invested
assets will continue and will have a corresponding effect on interest income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998, whereas in the first nine months
of 1997, the Company received $33.1 million of dividends from MFS. Dividends
from other subsidiaries, however, were higher by $2.4 million period over
period.
The increase in interest expense on surplus notes and borrowed money
reflected the higher surplus notes balance in 1998, resulting from the
Company's issuance, in December 1997, of a $250.0 million surplus note. It
also reflected interest expense related to the Company's $110 million note
payable, issued in December 1997 and repaid in January 1998 to U.S. Holdco.
Benefits & Expenses
Benefits and expenses decreased by $149.8 million from $2,034.8 to $1,885.0
million for the nine-month period ended September 30, 1998 as compared to the
same period in 1997.
Reinsurance arrangements with SLOC had the effect of increasing benefits and
expenses by $5.4 million. This increase mainly reflected higher death
benefits on reinsurance assumed of $4.4 million, resulting from the
occurrence of a small number of relatively large claims during 1998.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals increased by $78.8 million.
Partially offsetting this aggregate change was a greater decrease of $20.4
million in the liability for premium and other deposit funds in the first
nine months of 1998 compared to the same period in 1997. These changes mainly
reflected surrenders and withdrawals, primarily occurring in the first half
of 1998, related to separate account contracts issued at least seven years
previously, for which the surrender charge period has now expired.
Commissions decreased by $2.1 million reflecting the decrease in total sales
of combination fixed/variable annuities. General insurance expenses and
insurance taxes, licenses and fees, taken together, increased by $10.7
million. This increase mainly reflected increased investment in technology,
both to support the growth of the Company's in-force business, particularly
its fixed/variable annuities, and to assure that the Company's information
systems are Year 2000 compliant. (See below.) Net transfers to the separate
accounts decreased by $225.8 million due to the maturing block of annuity
business and to the decrease in annuity sales period over period.
Federal Income Taxes
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $33.0 million higher in the first nine months of 1998 than in the
same period in 1997.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income
Net income decreased by $25.6 million from $43.1 million to $17.5 million, for
the three months ended September 30, 1998 as compared to the same period in
1997.
Key factors affecting the decrease in net income period over period were:
lower earnings from subsidiaries (by $11.0 million) and higher federal income
taxes (by $23.8 million), mainly as a result of the Company's reorganization
in December 1997; the growth in the Company's direct business, primarily its
fixed/variable annuity products, resulting in higher net income
(approximately $3.9 million); and the effects of reinsurance arrangements
with SLOC, resulting in higher net income of $5.3 million. These items are
discussed in more detail below.
Income
Total income increased by $18.9 million to $708.8 million for the third
quarter of 1998 compared to the same period in 1997. This increase mainly
reflected higher premiums and deposits of $42.3 million, partially offset by
lower net investment income of $23.6 million.
With respect to the increase in premiums and deposits, annuity deposits
increased by $37.7 million overall, mainly from higher deposits into variable
accounts (approximately $50.0 million) while DCA deposits remained flat
overall. Fixed annuity deposits were down by $10.7 million. Corporate owned
life premiums were higher by $1.0 million quarter over quarter.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $6.2 million mainly due to increased premiums resulting from
policyholders using dividends to purchase "paid-up additions" to their
policies.
Net investment income decreased $23.6 million period over period. This
decrease mainly reflected lower interest income on bonds and mortgages of
$15.0 million; and lower earnings from subsidiaries of $11.0 million. Lower
interest expense on surplus notes and borrowed money (by $2.9 million)
partially offset these factors.
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent countervailing factors, the declining trend in general account
invested assets will continue and will have a corresponding effect on interest
income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998. In the third quarter of 1997,
the Company received $11.0 million of dividends from MFS.
Benefits & expenses
Benefits and expenses increased by $16.2 million to $664.3 million for the
three-months ended September 30, 1998 as compared to the same period in 1997.
13
<PAGE>
Reinsurance arrangements with SLOC had the effect of decreasing benefits and
expenses by $2.1 million. This increase mainly reflected lower death and
surrender benefits of $5.1 million on reinsurance assumed. The change in
aggregate reserves for life policies, however, increased by $2.8 million
reflecting growth in the underlying block of business.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals decreased by $16.7 million.
However, more than offsetting this aggregate change was a lower decrease of
$35.1 million in the liability for premium and other deposit funds in the
third quarter of 1998 compared to the same period in 1997. Commissions
increased by $2.3 million reflecting the increase in sales of combination
fixed/variable annuities.
Federal Income Taxes
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $23.8 million higher in the third quarter of 1998 than in the same
period in 1997.
Other
In October 1998, the Company entered into a definitive agreement to sell its
wholly-owned subsidiary, Massachusetts Casualty Insurance Company to Centre
Reinsurance Holdings, Ltd. This transaction is expected to be completed by or
near year-end 1998, subject to regulatory approvals. This transaction is not
expected to have a significant effect on the ongoing operations of the
Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company 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, remediation and testing are in process, and over
70% of Company applications have been certified as compliant. The Company's
goal is to complete the majority of the effort by the end of 1998. However, a
small number of tasks will be pushed into the first quarter of 1999 to
accommodate testing of vendor upgrades not available until late 1998,
re-testing interfaces once all systems are certified as compliant, and
re-testing of mission critical functions.
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. To date, approximately 90% of
these vendors have responded, and the project team is in the process of
reviewing these responses. In addition, the project team recently has opened
communications 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 will be tested in accordance with the Company's standard
Year 2000 test strategy, including building security, HVAC systems, and other
such systems. 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
completely achieved. Factors giving rise to this uncertainty include possible
loss of technical resources to perform the work, failure to identify all
susceptible systems, non-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 management, customers, 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.
By year-end 1998, the Company expects to have expended, cumulatively,
approximately $7 million on its Year 2000 effort, and it expects to incur a
further $4.8 million on this effort in 1999.
CAUTIONARY STATEMENT
Statements by the Company in the Form 10-Q and in other contexts that are not
historical fact are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These may include, among others,
forward-looking statements relating to Year 2000 compliance, volume growth,
market share, and financial goals. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements,
including but not limited to the following: (1) uncertainties relating to the
ability of the Company to identify and address Year 2000 issues successfully
and in a timely manner and at costs that are reasonably in line with the
Company's estimates, and the ability of the Company's vendors, suppliers,
other service providers, and customers to identify and address successfully
their own Year 2000 issues in a timely manner; (2) heightened competition,
particularly with respect to price, product features, and distribution
capability, which could constrain growth and profitability in the Company's
businesses; (3) significant changes in interest rates and market conditions;
and (4) regulatory and legislative uncertainties and developments.
14
<PAGE>
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risk and uncertainties.
Assets within the general account are segmented by product or groups of
products. This allows the Company to better manage assets relative to
liabilities. Asset management for each segment is conducted within the context
of any investment policy, reviewed each quarter with business unit
managers to ensure that investment policy remains appropriate, taking into
account a segment's liability characteristics. The review of investment policy
includes cash flow estimates, liquidity requirements and targets for asset mix,
duration and quality.
Market risks associated with investment portfolios supporting products that are
funded by separate accounts where results are not guaranteed and where the
policyholder assumes the risks are not included in this discussion.
All of the Company's fixed interest investments are held for other than
trading purposes and generally fixed interest rate liabilities are supported
by well diversified portfolios of fixed interest investments including
publicly issued and privately placed bonds and commercial mortgage loans.
Public bonds can include Treasuries, corporates, money market instruments,
Mortgage Backed Securities. Credit risk is managed by the Company's
underwriting standards which have resulted in high average quality
portfolios. For example, the Company does not purchase below investment grade
securities. Also, as a result of investment policy, there is no foreign
currency, commodity or equity price risk exposure in the portfolios. However,
changes in the level of domestic interest rates will impact the market value
of fixed interest assets and liabilities. The management of interest rate
risk exposure and immunization strategies are discussed below.
15
<PAGE>
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are deployed in segments where the bulk of the liabilities
arise from the sale of products containing interest rate guarantees for
certain terms. These strategies are supported by investment and asset
liability analytical software acquired from outside vendors. The significant
features of the immunization framework 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 price sensitivity; the use of
key rate durations (KRDs) to capture interest rate exposure to different
parts of the yield curve and manage non-parallel curve movements; and active
portfolio management, including the use of derivatives (e.g. interest rate
swaps) for portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the duration
reports for various portfolios, market conditions and forecasts, the committee
develops asset management strategies for interest sensitive portfolios. These
strategies may involve managing assets to small intentional mismatches, either
at the total effective duration level or at certain KRDs but, in any event, the
overall duration gap between interest sensitive assets and liabilities is
managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which, because
they are predictions about the future, contain a certain degree of uncertainty.
For example, there are algorithms for assumptions about policyholder behavior
and asset cash flows and consequently estimates of duration and market values
which may or may not represent what actually will occur. Also there is no
provision in the estimates to incorporate any management decisions which might
be taken to mitigate against adverse results. The company is sufficiently
comfortable with its interest rate risk management process to feel the exposure
to interest rate changes will not materially affect the near-term financial
position, results of operations or cash flows of the Company.
The Company's fixed interest investments had an aggregate fair value at
September 30, 1998 of $2,844.1 million. A portion of the Company's general
account liabilities of $3,254.2 million are categorized as financial
instruments. The portion of the liabilities so categorized had a carrying
value of $1,584.8 million and a fair value of $1,641.5 million at September
30, 1998. Using modeling and analytical software, the Company performed
sensitivity analysis of its financial instruments at September 30, 1998.
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical decrease in the fair value of the Company's assets is estimated
to be $118.8 million. A corresponding decrease in the fair value of the
liabilities categorized as financial instruments is estimated to be $50.8
million at September 30, 1998.
16
<PAGE>
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
- -----------
27 FINANCIAL DATA SCHEDULE (filed herewith)
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant 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)
Date November 13, 1998 /s/ Ellen B. King
--------------------------------
Ellen B. King
Secretary
Date November 13, 1998 /s/ Robert P. Vrolyk
-------------------------------
Robert P. Vrolyk
Vice President and Actuary
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operations found on pages 3 and 4 of the Company's form
10-Q for the year to date.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,878,905
<DEBT-MARKET-VALUE> 2,045,099
<EQUITIES> 127,545
<MORTGAGE> 554,135
<REAL-ESTATE> 95,370
<TOTAL-INVEST> 2,760,891
<CASH> 197,542
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 16,344,292
<POLICY-LOSSES> 2,285,113
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,578
<POLICY-HOLDER-FUNDS> 1,080,881
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,900
<OTHER-SE> 830,820
<TOTAL-LIABILITY-AND-EQUITY> 16,344,292
1,789,748
<INVESTMENT-INCOME> 145,633
<INVESTMENT-GAINS> 4,807
<OTHER-INCOME> 80,780
<BENEFITS> 1,752,818
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 115,245
<INCOME-PRETAX> 84,904
<INCOME-TAX> 32,206
<INCOME-CONTINUING> 52,698
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,698
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
