<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
For the Quarterly Period Ended June 30, 1998 Commission File Number 2-99959
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 incorporation (IRS Employer I.D. No.)
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 August 14, 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 -
June 30, 1998 and December 31, 1997 3
Statements of Operations -
Six Months Ended
June 30, 1998 and June 30, 1997 4
Statements of Operations -
Three Months Ended
June 30, 1998 and June 30, 1997 5
Statements of Capital Stock and Surplus -
Six Months Ended
June 30, 1998 and June 30, 1997 6
Statements of Cash Flows -
Six Months Ended
June 30, 1998 and June 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 14
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K 16
</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>
JUNE 30, DECEMBER 31,
(IN 000'S) 1998 1998
----------- ------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,957,581 $ 1,910,699
Common stocks 119,697 117,229
Mortgage loans on real estate 587,297 684,035
Properties acquired in satisfaction of debt 20,338 22,475
Investment real estate 77,744 78,426
Policy loans 41,193 40,348
Cash & short-term investments 198,390 544,418
Other invested assets 60,757 55,716
Life insurance premiums and annuity considerations due & uncollected 8,240 9,203
Investment income due and accrued 39,882 39,279
Receivable from parent, subsidiaries and affiliates 0 28,825
Funds withheld on reinsurance assumed 1,046,131 982,653
Other assets 2,540 1,841
----------- ------------
General account assets 4,159,790 4,515,147
Separate account assets
Unitized 10,877,558 9,068,021
Non-unitized 2,148,450 2,343,877
----------- ------------
TOTAL ADMITTED ASSETS $17,185,798 $15,927,045
----------- ------------
----------- ------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,246,492 $ 2,188,243
Supplementary contracts 2,234 2,247
Policy and contract claims 3,341 2,460
Provision for policyholders' dividends and coupons payable 35,500 32,500
Liability for premium and other deposit funds 1,169,266 1,450,705
Surrender values on cancelled policies 88 215
Interest maintenance reserve 36,877 33,830
Commissions to agents due or accrued 4,362 2,826
General expenses due or accrued 7,911 7,202
Transfers from Separate Accounts due or accrued (340,547) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 76 105
Federal income taxes due or accrued 58,642 58,073
Unearned investment income 27 34
Amounts withheld or retained by company as agent or trustee 496 47
Remittances and items not allocated 1,686 1,363
Borrowed money 0 110,142
Asset valuation reserve 46,224 47,605
Payable to parent, subsidiaries, and affiliates 31,879 0
Payable for securities 29,315 27,104
Other liabilities 8,973 1,959
----------- ------------
General account liabilities 3,342,842 3,682,582
Separate account liabilities
Unitized 10,877,377 9,067,891
Non-unitized 2,148,450 2,343,877
----------- ------------
TOTAL LIABILITIES 16,368,669 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 46,874 62,440
----------- ------------
Surplus 811,229 826,795
----------- ------------
Total common capital stock and surplus 817,129 832,695
----------- ------------
Total liabilities, capital stock and surplus $17,185,798 $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
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
INCOME 1998 1997
----------- ------------
<S> <C> <C>
Premiums and annuity considerations $ 136,133 $ 118,687
Deposit-type funds 996,025 1,160,500
Considerations for supplementary contracts without life contingencies and
dividend accumulations 1,144 550
Net investment income 99,731 141,330
Amortization of interest maintenance reserve 923 381
Net gain from operations from Separate Accounts Statement 3 0
Other income 53,379 46,389
----------- ------------
Total 1,287,338 1,467,837
----------- ------------
BENEFITS AND EXPENSES
Death benefits 15,833 6,370
Annuity benefits 73,077 70,927
Surrender benefits and other fund withdrawals 988,182 893,648
Interest on policy or contract funds 262 155
Payments on supplementary contracts without life contingencies and of dividend
accumulations 1,199 451
Increase in aggregate reserves for life and accident and health policies and
contracts 58,249 65,687
Decrease in liability for premium and other deposit funds (281,439) (226,178)
Increase (decrease) in reserve for supplementary contracts without life
contingencies and for dividend and coupon accumulations (14) 145
----------- ------------
Total 855,349 811,205
Commissions on premiums and annuity considerations (direct business only) 66,615 70,987
Commissions and expense allowances on reinsurance assumed 8,226 8,356
General insurance expenses 29,784 18,883
Insurance taxes, licenses and fees, excluding federal income taxes 3,730 4,477
Decrease in loading on and cost of collection in excess of loading on deferred
and uncollected premiums (233) (230)
Net transfers to Separate Accounts 257,318 473,070
----------- ------------
Total 1,220,789 1,386,748
----------- ------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT 66,549 81,089
Dividends to policyholders 19,908 16,113
----------- ------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT 46,641 64,976
Federal income tax expense (excluding tax on capital gains) 14,554 5,360
----------- ------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT AND BEFORE
REALIZED CAPITAL GAINS 32,087 59,616
----------- ------------
Net realized capital gains less capital gains tax and transferred to the IMR 3,115 2,019
----------- ------------
NET INCOME $ 35,202 $ 61,635
----------- ------------
----------- ------------
</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
(IN 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
INCOME 1998 1997
----------- ------------
<S> <C> <C>
Premiums and annuity considerations $ 65,351 $ 58,733
Deposit-type funds 527,433 605,977
Considerations for supplementary contracts without life contingencies and
dividend accumulations 846 182
Net investment income 50,128 69,346
Amortization of interest maintenance reserve 352 289
Net gain from operations from Separate Accounts Statement 2 0
Other income 27,377 24,512
----------- ------------
Total 671,489 759,039
----------- ------------
BENEFITS AND EXPENSES
Death benefits 7,890 3,859
Annuity benefits 38,039 36,058
Surrender benefits and other fund withdrawals 531,101 488,832
Interest on policy or contract funds 195 112
Payments on supplementary contracts without life contingencies and of dividend
accumulations 947 247
Increase in aggregate reserves for life and accident and health policies and
contracts 29,179 35,725
Decrease in liability for premium and other deposit funds (164,218) (136,251)
Decrease in reserve for supplementary contracts without life contingencies and
for dividend and coupon accumulations (82) (44)
----------- ------------
Total 443,051 428,538
Commissions on premiums and annuity considerations (direct business only) 36,837 36,979
Commissions and expense allowances on reinsurance assumed 3,984 4,314
General insurance expenses 17,770 10,079
Insurance taxes, licenses and fees, excluding federal income taxes 1,577 2,299
Decrease in loading on and cost of collection in excess of loading on deferred
and uncollected premiums (183) (152)
Net transfers to Separate Accounts 133,924 238,345
----------- ------------
Total 636,960 720,402
----------- ------------
NET GAIN FROM OPERATIONS BEFORE DIVIDENDS TO POLICYHOLDERS AND FIT 34,529 38,637
Dividends to policyholders 10,118 9,490
----------- ------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND BEFORE FIT 24,411 29,147
Federal income tax expense (excluding tax on capital gains) 6,435 5,765
----------- ------------
NET GAIN FROM OPERATIONS AFTER DIVIDENDS TO POLICYHOLDERS AND FIT AND BEFORE
REALIZED CAPITAL GAINS 17,976 23,382
Net realized capital gains less capital gains tax and transferred to the IMR 2,301 1,779
----------- ------------
NET INCOME $ 20,277 $ 25,161
----------- ------------
----------- ------------
</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 OF CAPITAL STOCK AND SURPLUS
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----------- ------------
<S> <C> <C>
CAPITAL AND SURPLUS, BEGINNING OF PERIOD $ 832,695 $ 567,143
----------- ------------
Net income 35,202 61,635
Change in net unrealized capital gains (1,755) 248
Change in non-admitted assets and related items (441) (31)
Change in asset valuation reserve 1,380 (3,248)
Other changes in surplus in Separate Accounts Statement 48 3
Dividends to stockholders (50,000) 0
----------- ------------
Net change in capital and surplus for the period (15,566) 58,607
----------- ------------
Capital and surplus, End of period $ 817,129 $ 625,750
----------- ------------
----------- ------------
</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>
SIX MONTHS ENDED JUNE 30,
1998 1997
----------- ------------
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit funds received $ 1,133,357 $ 1,288,821
Considerations for supplementary contracts and dividend accumulations received 1,144 550
Net investment income received 125,061 159,309
Other income received 55,654 38,671
----------- ------------
Total receipts 1,315,216 1,487,351
----------- ------------
Benefits paid (other than dividends) 1,077,539 970,455
Insurance expenses and taxes paid (other than federal income and capital gains
taxes) 109,174 102,669
Net cash transfers to Separate Accounts 313,788 531,492
Dividends paid to policyholders 16,908 13,613
Federal income tax payments (excluding tax on capital gains) 13,264 4,727
Other - net 262 155
----------- ------------
Total payments 1,530,935 1,623,111
----------- ------------
Net cash from operations (215,719) (135,760)
----------- ------------
Proceeds from long-term investments sold, matured or repaid (after deducting
taxes on capital gains of $721,800 for 1998, $1,722,195 for 1997) 757,516 604,144
Other cash provided 67,071 618,395
----------- ------------
Total cash provided 824,587 1,222,539
----------- ------------
CASH APPLIED
Cost of long-term investments acquired 710,436 421,879
Other cash applied 244,460 75,505
----------- ------------
Total cash applied 954,896 497,384
----------- ------------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS (346,028) 589,395
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF PERIOD 544,418 90,059
----------- ------------
END OF PERIOD $ 198,390 $ 679,454
----------- ------------
----------- ------------
</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 $6,401,000 and
$10,685,000 for the three and six month periods in 1998 and $4,189,000 and
$7,352,000 for the same periods in 1997.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of June 30, 1998 and 1997 for the six months then ended:
<TABLE>
<CAPTION>
(000's) 1998 1997
----------- ------------
<S> <C> <C>
Intangible assets 0 10,449
Other assets 1,264,155 1,527,141
Liabilities (1,144,451) (1,388,512)
----------- ------------
Total net assets 119,704 149,078
----------- ------------
----------- ------------
Total revenue 126,152 428,535
Operating expenses (124,389) (380,489)
Income tax expense (1,795) (21,641)
----------- ------------
Net income (32) 26,405
----------- ------------
----------- ------------
</TABLE>
The following is combined unaudited summarized financial information of the
subsidiaries as of June 30, 1998 and 1997 for the three months then ended:
<TABLE>
<CAPTION>
(000's) 1998 1997
----------- ------------
<S> <C> <C>
Total revenue 63,685 220,985
Operating expenses (64,453) (193,614)
Income tax expense (730) (12,082)
----------- ------------
Net income (1,498) 15,289
----------- ------------
----------- ------------
</TABLE>
In determining the equity in income of subsidiaries for the periods, the
Company has excluded expenses of approximately $868,000 and $1,973,000 for
the three and six month periods in 1998 and $9,167,000 and $16,624,000 for
the same periods in 1997, representing payables to the Company in lieu of
federal income taxes.
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").
8
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30 June 30
(000's) 1998 1997
--------- --------
<S> <C> <C>
Interest income from bonds 88,078 91,026
Income from investment in common stocks of affiliates 3,000 22,641
Interest income from mortgage loans 27,885 41,216
Real estate investment income 7,881 6,270
Interest income from policy loans 1,392 1,496
Other 242 (90)
--------- --------
Gross investment income 128,478 162,559
Interest on surplus notes and borrowed money 23,271 15,648
Investment expenses 5,476 5,581
--------- --------
99,731 141,330
--------- --------
--------- --------
Three Months Ended
------------------------
June 30 June 30
(000's) 1998 1997
--------- --------
Interest income from bonds 41,555 48,211
Income from investment in common stocks of affiliates 3,000 11,040
Interest income from mortgage loans 13,505 19,897
Real estate investment income 3,914 3,426
Interest income from policy loans 858 871
Other 433 (532)
--------- --------
Gross investment income 63,265 82,913
Interest on surplus notes and borrowed money 10,817 10,222
Investment expenses 2,320 3,345
--------- --------
50,128 69,346
--------- --------
--------- --------
</TABLE>
9
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
June 30, 1998
ASSETS
The general account invested assets declined by $390.3 million for the
six months ended June 30, 1998 due to maturities of pension and annuity
contracts exceeding fixed annuity sales net of dollar cost averaging
transfers to the separate accounts. The decrease in cash was due to the
deployment of the $250 million proceeds from surplus notes issued in December
1997 and the payment of a $46 million dividend to the Company's parent, Sun
Life of Canada (U.S.) Holdings, Inc. ("Life Holdco") and a short term note
repayment of $110 million to Sun Life Assurance Company of Canada
(U.S.)-Operations Holdings, Inc. ("U.S. Holdco").
The Company's bond holdings consist of a diversified portfolio of both
public and private issues. It is the Company's policy to acquire only
investment grade securities and the overall quality of the bond portfolio
remains high. At June 30, 1998, 4.9% of the Company's bond holdings were
rated below investment grade (i.e. below NAIC rating "1" or "2").
The mortgage loan portfolio of $587.3 million at June 30, 1998 represents
19.2% of cash and invested assets, slightly down from 19.8% at December 31,
1997. The Company underwrites commercial mortgages with a maximum loan to
value ratio of 75%. The Company, as a rule, invests in properties that are
almost fully leased. The portfolio is diversified by region and type. The
level of arrears in the portfolio remains substantially below the industry
average. At June 30, 1998, the Company's portfolio did not contain any
mortgage loans which were 60 days or more in arrears.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds. The liability for premium
and other deposits continues to decline due to net maturities exceeding sales
of the fixed contracts associated with these liabilities. During the first
quarter of 1998 the Company repaid its $110 million short-term note payable
to U.S. Holdco.
CAPITAL AND SURPLUS
The total capital stock and surplus of the Company at June 30, 1998 was
$817.1 million. The Company's management considers its surplus position to be
adequate.
During the second quarter of 1998 the Company declared a dividend of $50.0
million to Life Holdco, of which $46.0 million has been paid to date.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 meet
death and other maturing insurance and annuity contract obligations, to pay
out on contract terminations, to fund investment commitments and to pay
normal operating expenses and taxes. Cash outflows are met from the normal
net cash inflows.
The Company segments its general account business internally in order to
better manage projected cash inflows and outflows within each segment.
Targets for money market holdings are established for each segment, which in
the aggregate meet the day to day cash needs of the 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 56% 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME
Net income from operations after dividends and before federal income
taxes decreased by $18.4 million from $65.0 to $46.6 million, for the six
months ended June 30, 1998 as compared to the same period in 1997. Earnings
from the Company's surplus investment in subsidiaries decreased by $19.6
million primarily due to the transfer of the investment in Massachusetts
Financial Services Company ("MFS") to the Company's parent via a dividend in
December 1997. Dividends from other subsidiaries increased by $2.4 million in
1998 as compared to 1997 while results of operations for the same period in
1997 included dividends from MFS of $22.0 million. Net income associated
with the reinsurance agreements with SLOC decreased by $3.7 million in 1998
due to increased death claims. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The remaining earnings increase of
approximately $4.9 million is attributed to the Company's retirement products
and services lines of business, which markets combination fixed/variable
annuities. This increase in earnings reflects profits being generated from
the large in-force block of annuity business held in both the general account
and the separate accounts. The strong market performance of the separate
accounts in 1997 and the first half of 1998 coupled with strong sales
generated a significant increase in mortality and expense fees, which are
calculated as a percentage of net assets. The net assets held in the unitized
separate accounts increased by over 34% at the beginning of 1998 as compared
to the same period in 1997. These additional fees cover the increased general
expenses associated with growing the business. In addition, decreased sales
in 1998 result in lower strain which contributes to the increased earnings.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
INCOME
Total income decreased $180.5 million for the period ended June 30, 1998
as compared to the same period in 1997. During 1997 the Company introduced a
new variable life insurance product which resulted in an increase of $9.9
million of premiums and annuity considerations during 1998. Reinsurance had
the effect of increasing income by approximately $7.6 million due to
increased interest income on the funds withheld. Deposits from sales of
combination fixed/variable annuities decreased by $164.5 million, reflecting
the heightened competition of the dollar cost averaging program for
annuities. Several other insurance companies offer similar programs to that
of the Company's and some offer bonus rates of interest in excess of those
offered by the Company. Under the dollar cost averaging program, 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. Net investment income and amortization of the interest
maintenance reserve decreased by $41.1 million due to a decline in general
account invested assets, an increase in interest expense from surplus notes
of $7.6 million and a decrease of $19.6 million in dividends from
subsidiaries. General account invested assets decreased by $390.1 million
during the calendar year 1997 due to guaranteed interest contract and annuity
maturities exceeding fixed annuity sales. The issuance of $250 million of
8.625% surplus notes in December 1997 resulted in a net decrease in invested
assets of $140 million for the year. General account invested assets
decreased by $390.3 million in the first half of 1998 again due to maturities
of contracts exceeding fixed annuity sales. This trend is expected to
continue as current product sales are directed to the unitized and
non-unitized separate accounts.
BENEFITS AND EXPENSES
Benefits and expenses before dividends to policyholders and federal
income taxes decreased by $165.9 million from $1,386.7 to $1,220.8 million
for the period ended June 30, 1998 as compared to the same period in 1997.
Reinsurance had the effect of increasing benefits and expenses by $11.3
million, primarily death benefits on reinsurance assumed which increased
$8.8 million in 1998 as compared to 1997 due to a few large claims.
Deaths, annuity payments and surrender benefits and fund withdrawals
other than reinsurance increased by $96.2 million, reflecting surrenders and
withdrawals mostly from separate account contracts for which the surrender
charge period has expired. Sales of this particular annuity block of business
issued seven years prior totaled over $249 million. The decrease in aggregate
reserves for life contracts of $ 7.4 million was affected by the Company
changing its basis of valuation of its reinsured liabilities at December 31,
1997. This change results in lower reserve increases in 1998 and greater
earnings as compared to 1997. The change in the liability for premium and
other deposit funds decreased by $55.3 million, reflecting the increase in
surrenders of the contracts described above. Commissions decreased by $4.5
million, reflecting the decrease in total sales of combination fixed/variable
annuities. General insurance expenses increased by $10.9 million, reflecting
increased staff, rent expense, higher guaranty fund assessments and
allocations from SLOC associated with the growth in business and the
Company's system transition to be Year 2000 compliant (see below). Net
transfers to the separate accounts decreased by $215.7 million, reflecting
decreased exchange activity out of the general account into the separate
accounts due to the maturing block of annuity business as well as the
decrease in sales.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME
Net income from operations after dividends and before federal income
taxes decreased by $4.7 million from $24.4 to $29.1 million, for the three
months ended June 30, 1998 as compared to the same period in 1997. Earnings
from the Company's surplus investment in subsidiaries decreased by $8.0
million primarily due to the transfer of the investment in Massachusetts
Financial Services Company ("MFS") to the Company's parent via a dividend in
December 1997. The 1997 results of operations included dividends from MFS of
$11.0 million as compared to $3.0 million from other subsidiaries in 1998.
Net income associated with the reinsurance agreements with SLOC increased by
$1.5 million in 1998 due. The Company changed its basis of valuation of its
reinsured liabilities at December 31, 1997. This change results in lower
reserve increases in 1998 and greater earnings as compared to 1997. Prior to
reinsurance, earnings from the life line of business remained relatively
flat. The remaining earnings increase of approximately $1.8 million is
attributed to the Company's retirement products and services lines of
business, which markets combination fixed/variable annuities. This increase
in earnings reflects profits being generated from the large in-force block of
annuity business held in both the general account and the separate accounts.
The strong market performance of the separate accounts in 1997 and the first
half of 1998 coupled with strong sales generated a significant increase in
mortality and expense fees, which are calculated as a percentage of net
assets. These additional fees cover the increased general expenses
associated with growing the business.
INCOME
Total income decreased $87.5 million for the three months ended June 30,
1998 as compared to the same period in 1997 primarily due to the decrease in
deposits of $78.5 million from sales of combination fixed/variable annuities
which reflects the increased competition of the dollar cost averaging
program. Sales from the new variable life insurance product of $2.3 million
and purchases of payout annuities of $4.3 million increased premium and
annuity considerations. Reinsurance had the effect of increasing income by
approximately $1.6 million. Net investment income and amortization of the
interest maintenance reserve decreased by $19.2 million due to the decline in
general account invested assets described prior, increased interest expense
of $1.0 million from surplus notes and the decrease in dividends of $8.0
million received from subsidiaries.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
BENEFITS AND EXPENSES
Benefits and expenses decreased by $83.4 million from $720.4 million to
$637.0 million for the three months ended June 30, 1998 as compared to the
same period in 1997. Death benefits and surrenders on reinsurance assumed
increased by $ 4.5 million in 1998 as compared to 1997 due to a few large
claims while the decrease in reserve reflected the prior year reserve
adjustment causing no change in total to benefits for reinsurance. Deaths,
annuity payments and surrender benefits and other fund withdrawals prior to
reinsurance increased by $44.4 million, reflecting surrenders and withdrawals
from mostly separate account contracts for which the surrender charge period
has expired. Sales of this particular annuity block of business issued seven
years prior totaled over $145 million. The change in the liability for
premium and other deposit funds decreased by $28.0 million, reflecting the
increase in surrenders of the contracts described above. General insurance
expenses increased by $7.7 million, reflecting increased staff, rent expense,
higher guaranty fund assessments and allocations from SLOC associated with
the growth in business and cost of the systems transition related to Year
2000. Net transfers to the separate accounts decreased by $104.4 million,
reflecting decreased exchange activity out of the general account into the
separate accounts due to the maturing block of annuity business as well as
the decrease in sales.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations
could be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to
properly operate or manage dates beyond the year 1999. However, the Company
has investigated the nature and extent of the work necessary to render its
computer systems capable of processing beyond the turn of the century ("Year
2000 compliant"), and has made substantial progress toward achieving this
goal, including upgrading and/or replacing existing systems. The Company
expects that its principal systems will be Year 2000 compliant by the end of
1998, leaving 1999 for extensive testing. While it is believed that these
efforts do involve substantial costs, the Company closely monitors associated
costs and continues to evaluate associated risks based on actual testing.
Based on available information, the Company believes that it will be able to
manage its total Year 2000 transition without a material adverse effect on
its business operations, financial condition, or results of operations.
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 assets 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.
14
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK (continued)
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are pursued 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
June 30, 1998 of $2,909.6 million. A portion of the Company's general account
liabilities of $3,339.1 million are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,680.9
million and a fair value of $1,719.2 million at June 30, 1998. Using modeling
and analytical software, the Company performed sensitivity analysis of its
financial instruments at June 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 $119.0 million. A
corresponding decrease in the fair value of the liabilities categorized as
financial instruments is estimated to be $49.9 million at June 30, 1998.
15
<PAGE>
PART II: OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS
(a) The following exhibits are incorporated by reference unless otherwise
indicated:
EXHIBIT NO.
- -----------
27 FINANCIAL DATA SCHEDULE (filed herewith)
16
<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 August 14, 1998 /s/Margaret S. Mead
--------------------------------
Margaret S. Mead
Secretary
Date August 14, 1998 /s/Robert P. Vrolyk
-------------------------------
Robert P. Vrolyk
Vice President and Actuary
Chief Financial Officer
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,957,581
<DEBT-MARKET-VALUE> 2,078,833
<EQUITIES> 119,697
<MORTGAGE> 587,297
<REAL-ESTATE> 98,082
<TOTAL-INVEST> 3,062,997
<CASH> 198,390
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 17,185,798
<POLICY-LOSSES> 2,248,726
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,429
<POLICY-HOLDER-FUNDS> 1,169,266
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,900
<OTHER-SE> 811,229
<TOTAL-LIABILITY-AND-EQUITY> 17,185,798
1,133,302
<INVESTMENT-INCOME> 100,654
<INVESTMENT-GAINS> 3,115
<OTHER-INCOME> 53,379
<BENEFITS> 1,132,575
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 74,608
<INCOME-PRETAX> 49,756
<INCOME-TAX> 14,554
<INCOME-CONTINUING> 35,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,202
<EPS-PRIMARY> 0
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<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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